Threats to Social gains
The present global economic recession has been described as the worse since the Great Depression of the 1930s. While it is not the first economic crisis of a global magnitude it is unique in character, as the present situation represents a recession that is linked to a financial crisis. It is reported that these types of recessions tend to be particularly severe, last longer, with recovery also tending to be typically slow. (Terrones, Scott and Kannan, 2009). The speed with which the present crisis has spread underscores how closely connected and interdependent the world has become in the face of increased globalization. Additionally, the present situation comes on the heels of a global food crisis and energy prices that reached unprecedented levels in 2007 and 2008. This means for many countries they face the dual crisis of unacceptable levels of inflation and unemployment concurrently.
According to the IMF, global economic activity is projected to decline by around 1½ percent in 2009, the weakest performance in 60 years, with only a modest raise projected for 2010. It has however been widely acknowledged that the full impact of the recession has not yet been felt. In the interim it is expected that financial markets will remain under stress. The slowdown of economic activity and the resulting reduction in world trade has already begun to have its impact on emerging and developing economies with declines being experienced in key export sectors including tourism.
The crisis is projected to pose a serious threat to the social gains that have been achieved over the last decade as it is projected to push an additional 46 million below the poverty line over and above the 130-155 million who were there in 2008 (Harper et al, 2009). This comes in the midst of initiatives at expanded commitment to global health and accelerating the achievement of the Millennium Development Goals.
Emergence of recession related morbidities
World Bank estimates an increase of between 200,000 to 400,000 deaths annually if the crisis continues for developing countries. During times of economic recessions it is well documented that the most vulnerable are the hardest hit, the poor, women and children are therefore likely to once again feel the brunt of this impact.
Based on the last economic downturn a 1% decrease in per capita GDP was linked to an increase in infant mortality of between 17 and 44 per thousand children. The success rate of addressing childhood and related indicators in the MDGs will be further compromised. Caribbean countries has had mixed ratings on these indicators due largely to resource constraints. The gains achieved in MDGs are likely to be stalled in times of economic crisis
Effect on economies of the Region
Based on previous experience these global shocks are likely to work their way through the Region through several channels: (i) a tightening of external financing conditions; (ii) lower demand for Regional exports; and (iii) a severe drop in the terms of trade. The effects of these shocks are likely to be exacerbated by the existing and inherent volatility of Caribbean territories. This is largely driven by the small size of our economies, our dependence on exports as the key source of foreign exchange and hence our increased reliance on international trade, and the “monocrop” nature of our export sectors. The latter is reflected in the fact that for most countries the exports earnings are dependent on one staple, this may range from Oil & Gas and Bauxite in the larger territories or Tourism in the smaller islands. These traits highlight economies that are price takers and are therefore vulnerable to external shocks, whether that is in the form of price fluctuations, of reduced market access, or global economic tremors.
By far the sector through which Caribbean economies will be most affected by the economic crisis is Tourism. Ranked among the most tourism-dependent in the world, this sector contributes as much as 50 percent of GDP for some territories. The impact of the crisis is therefore not only going to impact directly on the employment and foreign exchange earning of this sector, but also indirectly on the construction, transportation and other related sectors.
It is projected that receipts from Tourism will fall in 2009 by roughly 15 percent (IMF, 2009). This reduced performance by this sector is expected to impact negatively on the Region’s overall economic performance; the overall projected decline in GDP estimated to be ½ percent for 2009. (IMF, 2009). In addition the direct and indirect effects of the fall in tourism receipts is expected to be reflected in an increase in layoffs and reduced profit margins in the tourism and related sectors. This is, in turn, likely to result in increased pressure being brought to bear on fiscal positions at both the national and wider Regional levels.
Presently growth of the CARICOM’s economies has slowed and while the foreign exchange reserves of some of the Region’s central banks have remained robust other Caribbean countries have begun to reel under the crisis.
Reduction in AID to the Region
In the face of a global recession, fiscal pressures are likely to see a falloff in financial flows to countries. These typically take the form of: a) Official development assistance (ODA); b) Investment flows which includes foreign direct investment (FDI); c) Trade credits; and d) Flows of remittances.
The estimated decline in overall financial resources to all developing countries has been estimated at between US$300 billion to US$400 billion. (Naude, 2009). In terms of ODA, a number of advanced countries which pledged to support developing nations in 2002 are today unable to meet these commitments. For those countries who have received aid, the real volume of this aid would have fallen as the value if the dominant currencies fall. FDI flows are also estimated to fall as a direct result of the economic crisis reversing a pattern of significant growth over the past seven years. The fall in 2008 is estimated at 10 percent (UNCTAD, 2008). A fall in remittances has also been reported as production cuts in the advanced countries have seen a reduction in employment opportunities for migrants. The effect of this on remittances to the Latin American and Caribbean Region was reflected in a 2 percent drop in the fourth quarter of 2008 against the same period in 2007. (IDB, 2009) For individual countries larger reductions were reported over both this quarter, as well as the month of January 2009.
These impacts are likely to manifest themselves in greater demand for social safety networks by those affected back at home. With the fall in resources that would have been traditionally allocated toward poverty reduction and social support strategies, more emphasis will be placed at the individual and household level on providing basic needs: food, clothing shelter . If this pattern is left unchecked the health, education and poverty reduction goals as set out in the MDGs at likely to be further compromised with children and women the most likely targets once again. Key health status indicators are likely to be affected, including maternal mortality, child mortality and morbidity alongside declines in school attendance, etc. The resulting depletion in quality of life and its impact on human capital formation are likely to reinforce those structural factors that will see higher levels of poverty and deprivation in subsequent cycles for our Region.
Possible mitigating measures
The policy prescription identified and articulated by the international agencies in response to the economic crisis has been largely concentrated on the financial sector and on returning stability and confidence to the system. They range from short term measures which speak to containment of the financial panic via the recapitalization of banks and guaranteeing of bank loans and deposits, to longer term measures that focus on reforming the financial architecture (Naude, 2009). It is our firm belief that these policy prescriptions have however failed to address the core strategies that are required in response to the crisis and have instead focused on tools that can bring only short term relief to what is a chronic problem that continues to put developing countries and small island developing states in particular at increased risk and vulnerability to these cyclical events.
To begin to address these measures one must begin with a clear statement of what is the ultimately goal of these policies. Bringing stability to the international financial system is unfortunately not the goal, it is but one key activity in the larger plan; the ultimate goal is the achievement of sustainable development, and central to the attainment of this goal is the improvement in the quality of human lives in general, and particularly that of the less fortunate. The achievement of fiscal and monetary stability and the role of financial stability in this effort are therefore means to an end. Any strategy that is geared toward achieving the larger goal of sustainable development must have as its central pillar the improvement of the quality and wellbeing of the human resource. It is therefore critical that the health and education sectors be central to any strategy that seeks to achieve this super goal.
The Health/Development nexus which is embedded in the endogenous growth models is most clearly seen during these times of economic crisis; while it is clear that the success of any health response will depend on how well the fiscal system performs, it is also worth noting that the health system also impacts on the fiscal system. In times of crisis high levels of morbidity and mortality will demand a health response and divert resources away from their alternative uses, thereby impacting on saving and investment targets. The negative impact on GDP will therefore affect the national and Regional fiscal standing. The argument for investment in health and education in times of economic crisis is therefore clear. These are the only sectors that are capable of enhancement and deepening of the human capital base, foreign exchange earnings as a productive sector on its own, and performing the function of a key response sector in times of emergency, in the case of health.
The Health and Education sectors are therefore key to the strategies that are required to respond to the increasing challenges of globalization and the present economic crisis. If increased productivity is the key to re-energising economic growth and attaining fiscal stability, then the roles of the Health, Education and related Social Sectors are key in ensuring that our principle resource (our Human Resource) is equipped and capable of being a significant net contributor and not a net drain to the Region’s fiscal position. These sectors must be seen as key to the engine of growth and development and more than mere “Response Sectors”. The present circumstances tell us that it cannot be business as usual where these issues are concerned. The required response for these sectors should be formulated as comprising three key platforms:
- An Institutional/Information platform
- An Attitudinal platform
- A Fiscal platform
The Institutional/Information platform is located at the level of the sector with the focus on the reorientation of infrastructure spending and the modernization of administrative systems. This will require for example, that health systems should put emphasis on the quality of infrastructure and on workforce development. It also implies a need to implement Information Systems for tracking of costs, service utilization and quality of service.
The Attitudinal platform is located at the level of the community, and this entails a process of inculcating more pragmatic attitudes on the part of providers, patients and administrators in such cost and quality-sensitive areas like the use of generic drugs; the use of facilities; the number of tests required by physicians; and the length of stay at institutions.
On the fiscal side, this platform is located at the level of the state and focuses in such areas as the need for greater effort at reducing extent of tax slippage; the move to greater transparency and accountability in the public sector and an understanding that not spending and saving are not always the same thing.
These interventions are seen as key to ensuring that the key growth drivers are capable of bringing the required returns in the form of an enhanced, empowered and educated human resource pool that can ultimately ensure that the profit making potential of physical capital and investments, and the utility maximising potential of consumption are both are maximized.
References
Harper, Caroline, Nicola Jones, Andy Mc Kay and Jessica Espey. (2009). Children in times of Economic Crisis: Past Lessons, Future Policies. London, Overseas Development Institute.
IADB. 2009. IDB sees Remittances to Latin America and the Caribbean declining in 2009.http://www.iadb.org/news/detail.cfm?artid=5160&language=English&id=5160&CFID=3
Naude, Wim. 2009. The Financial Crisis of 2008 and the Developing Countries. Discussion Paper No. 2009/01. UNU-WIDER. The World Institute for Development Economics Research. United Nations University. Helsinki. Finland.
Shamika Sirimanne. 2009. The gender perspectives of the financial crisis. Presented at The United Nations, Commission on the Status of Women fifty-third session, 2 – 13 March 2009. The United Nations. New York.
Terrones, Marco E., Alasdair Scott and Prakash Kannan April 2009. : From Recession to Recovery: How Soon and How Strong? World Economic Outlook, IMF. Washington.
UNCTAD. 2008. World Development Report 2009. Geneva. United Nations.
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* Mr Roger McLean is Senior Research Fellow at the Centre for Health Economics at the University of the West Indies (UWI) St Augustine Campus, Trinidad and Tobago
