Towards a More Resilient Society:Lessons from Economic Crises

Report of the Social Resilience Project
October 2010

Coordinated by
Japan National Committee for Pacific Economic Cooperation (JANCPEC)Published in Japan in 2010 October by
The Japan Institute of International Affairs (JIIA)
Kasumigaseki Building 11F
3-2-5 Kasumigaseki Chiyoda-ku, Tokyo 100-6011 Japan
Tel: +81-3-3503-7744 Fax: +81-3-3503-6707
http://www.jiia.or.jp/
All rights reserved. No Part of this publication may be reproduced, stored in a retrieval system,or transmitted in any form or by any means, electronic, mechanical, photocopying, recordingor otherwise, without the prior permission of the Japan Institute of International Affairs.
The responsibility for facts and opinions in this publication rests exclusively with the authors
and their interpretations do not necessarily reflect the views or the policy of JANCPEC,PECC or their supporters.
ISBN978-4-8193-0210-4

Contents
Foreword
Executive Summary······················································································································· 7

1. Pension System(1) Making Pension Promises More Credible in Asia-Pacific Economies································ 25
Prof. Mukul G. Asher(2) Social Resilience, Means-testing, and Capital Taxation –Reflections on Economic Paradigms ·················································································· 45
Dr. Cagri Kumru and Dr. John Piggott(3) Social Issues and Policy Agendas in Korea ········································································ 57
Dr. Hyungpyo Moon
(4) Development of Pension Arrangements and Future Pension Policy Issues in Japan··········· 71
Prof. Noriyuki Takayama

2. Medicare System(1) The Medical Insurance System in Japan············································································· 85
Dr. Miho Sekimoto and Prof. Masako Ii(2) Insuring the no- or low-income population and balancing the income inequality:
the National Health Insurance program as the base of Japan’s social security·················· 107
Dr. Etsuji Okamoto(3) Health System Reforms in China: Is Universal Coverage Enough to Solvethe Problems?··················································································································· 121
Ms. Hiroko Uchimura

3. Unemployment Insurance System(1) Employment Structure and Unemployment Insurance in East Asia:
Establishing Social Protection for Inclusive and Sustainable Growth ······························ 153
Dr. Yasuhiro Kamimura(2) Unemployment Insurance in Thailand: Rationales for the Early Introduction
in a Second-Tier Newly Industrializing Economy ···························································· 171
Prof. Yasuhito Asami(3) Employment Insurance and Active Labor Market Policies in Chinese Taipei··················· 197
Dr. Ke-Jeng Lan and Dr. Wen-Chi Chou
(4) Employment insurance system in Korea and recent revision············································ 245
Dr. Myoung-Jung Kim(5) Employment Insurance and Active Labor Market Programs in Japan ······························ 283
Prof. Naoki Mitani

4. Macro Analysis(1) The Determinants of Saving Rates in the Developed and Developing Economies:
The Impact of Social Safety Nets ····················································································· 309
Prof. Charles Yuji Horioka(2) Uncertainty of Public Pension and Precautionary Saving in Japan —Evidence from the Micro Data of Close-to-retirement Households ·································· 337
Prof. Wataru Suzuki and Dr. Yanfei Zhou

Foreword

Two major economic crises have hit the Asia-Pacific region in the past 13 years. Oursociety has to be resilient against these economic shocks. To facilitate discussions on thedevelopment of social safety nets in this region, the Japan National Committee for Pacific
Economic Cooperation (JANCPEC) launched the Social Resilience Research Project (SR Project)in 2009 as a PECC international project.
The SR Project consists of four teams – pensions, medical insurance, unemployment
insurance, and macro analysis of savings/consumption – and each team comprises two to sevenresearch members. This is the first time that PECC has addressed these particular social issues;
heretofore it has been exclusively concerned with measures to liberalize and promote trade andinvestment.
JANCPEC held the PECC International Workshop on the Social Resilience Research
Project on March 4-5, 2010 to compile an interim report for this project. Attended by a hundred
people from industry, government, and academia, the workshop was successful in soliciting
comments from various perspectives and further deepening and refining our research activities.
This report, including policy recommendations and individual research papers, is the final
output of the SR Project’s first year. The report’s findings will be reported to the 19th PECC
General Meeting, and might also be reflected in the policy recommendations considered during
APEC 2010 Yokohama.
In 2010 APEC will be meeting in Japan for the first time in 15 years. The international
community has high expectations of Japanese leadership, and JANCPEC would thus like tocontribute to APEC activities via the SR Project in order to realize APEC’s growth strategies.
The views expressed herein are the personal views of the individuals indicated, and do notnecessarily reflect the views of PECC. However, I hope that these inputs will prove useful in
illuminating the way ahead for the region and APEC.
In closing, I would like once again to express my heartfelt gratitude to the SR Project
members for their enthusiastic commitment to this study and their immense contributions to thisproject as well as to the many people who worked so hard in preparing this report.
October 2010

Yoshiji NOGAMI
Chair, JANCPEC
President, Japan Institute of International Affairs

Executive Summary

I. Introduction
A financial crisis of a “once-in-a-century” scale has struck at the underpinnings of social
safety in the Asia-Pacific region. The earlier 1997-98 crisis saw vigorous debates over social
safety nets, but these debates quickly faded after 2003 because, with Asia’s export markets in
Europe doing well at the time, the crisis was overcome simply by pursuing the liberalization of
investment and trade. The situation this time is different in the sense that market conditions in
Europe and the US are worse than in Asia, inspiring little hope for economic growth by relying onexports to these economies. On the other hand, we are in a similar situation to the previous
financial crisis in that the debates over social safety nets are about to fade again as the economy inthis region starts to recover, led by the robust development of emerging markets in Asia. Many
economies in this region are gaining economic impetus by increasing exports to developing Asian
economies.
Economic crises have hit our economies almost every ten years during the past two decades.
Being aware that we must consider not only economic rescue policies in the short term but also
the resilience of infrastructure against frequent economic crises in the long term, we launched theSocial Resilience Research Project (SR Project) last year as a PECC International Project.
Discussing policies and economic models tailored to the new structure within the context of amajor paradigm shift from export-led growth to domestic demand-led growth is also of
significance. Both APEC and Asia must have been aware after experiencing this worldwide
financial crisis that export-led growth relying on a certain big economy is fragile and thatdomestic demand needs to be expanded for solid economic growth. A system of efficient social
safety nets functions to increase consumption instead of savings and helps boost domestic
demand.
The SR Project is designed to shed light on the importance of social safety nets and to
closely examine the mechanism of their roles in the domestic economy. This topic has never been
discussed in depth among APEC economies. Overly focused on the liberalization of investment
and trade, APEC has let slip opportunities to discuss the sense of security of those persons who
underpin liberalization and brisk domestic demand as well as social safety nets for them inconnection with a major paradigm shift toward the construction of a resilient model for sustained
economic growth. In this regard, the SR Project is a very good opportunity to focus more on thesocial and living conditions of people and to share good or bad practices for social safety nets in
the Asia-Pacific region. Comparative research on the actual status of Asian social safety nets
would definitely be useful if we are to make our society more resilient against economic crisesthat may occur again in the future.

7

The SR Project has a four-fold focus: the pension systems, medicare systems, andunemployment insurance systems in the Asia-Pacific region, and a macro analysis. A working
team was formed in each field, and research members on each team pursued studies, collaboratingwith each other while focusing on their own subjects. An interim research report was made during
the PECC International Workshop on Social Resilience Project held in Tokyo on March 4-5, 2010.
The head of each working team as well as team members presented their research findings andreceived advice and suggestions from commentators and participants. Having summarized thediscussions at the very successful and useful Workshop and recognized their next tasks and future
directions, each working team continued its respective research, incorporating and referring to thecomments and suggestions made at the Workshop; a final report was then completed and is to besubmitted to the leaders of APEC.
The economies in this region are recovering steadily, and now is the time to pay more
attention to organizing domestic social safety net systems. Instead of missing this opportunity
again as we did in the late 1990s, we should highlight the significance of constructing a resilient
society and take action as soon as possible. Not enough time remains for most Asian economies,
which are aging rapidly. Many economies in Asia will face the population onus period within 30
years, though they are now enjoying a population bonus. Korea, China, Thailand, and Singapore
will fall into the population onus period in 2015-25, and Vietnam, Malaysia, and Indonesia in
2025-40. Before these economies experience the population onus period and during the period of
population bonus when economies can gain more economic resources, they should establish
secure systems of social welfare, including pension and health care, and prepare for aging
societies.
II. Team Report
1. Pension System TeamThe pension team submitted four papers. The paper written by Professor Mukul Asher fromthe National University of Singapore focuses on how the pension arrangements can be improvedin Asia-Pacific economies to enhance social resilience. Enhancing social resilience in Asia-Pacificeconomies would require that pension reforms be regarded as being integral to overall economic,
social and political management of an economy rather than being of secondary concern. Moreover
pension reforms will require complementary reforms in other areas such as fiscal policies, labormarkets and financial and capital markets.
There are several factors that have increased the urgency of conventional and innovative
initiatives concerning pension policies and processes with the objective of making pension
promises more credible in Asia-Pacific economies. First, Asia-Pacific economies are exhibiting
rapid population aging arising from declining fertility rates, and increasing longevity. Second,
increasing informalization of the labor market relationship requires innovative approaches,8

including better designed and funded social pensions, to extend pension coverage. Third, rapid
aging as well as accelerating industrialization and urbanization in Asia-Pacific economies are
expected to increase the resources, both public and private, needed for pensions and for healthcare. Fourth, pension arrangements for cross-border workers have acquired greater importance as
their numbers grow, and because of opportunities to take advantage of potential demographic
complementarities between low fertility economies and those economies where the ratio of theworking age population to total population is still rising.
The urgency of pension reforms has increased but the 2008 global crisis has made this taskeven more complex, primarily due to its adverse impact on medium-term growth and on fiscal
sustainability. The global crisis also led to a considerably less benign environment for generating
returns from pension assets. Pension reforms will also need to accommodate global concerns
about the nature of current economic growth, as environmental issues gain greater prominence
and the social and human costs of conventional growth patterns that assume ever risingconsumption of goods and services per person become more evident.
Professor Asher argues that each Asia-Pacific economy would need to construct a pension
reform package suited to its own policy objectives and economic, fiscal, and institutional
capacities. Major elements of such a package for each economy would include a differing mixtureof greater competence or professionalism in performing core functions of provident or pension
fund organizations; parametric and systemic reforms; budget-financed retirement income
transfers; creation of a labor market environment in which some retirement income could beobtained by the elderly from remunerative economic activities; conversion of home equity into
retirement income streams; and the use of microfinance to develop micro-pension products.
Healthcare measures and habits that enable individuals to resist the onset of geriatric diseases
should acquire greater prominence, if the elderly are to be able to participate in remunerative
economic activities.
In constructing context-specific pension reform packages, the Asia-Pacific economies
would need to pay considerable attention to, and be open to, innovations in pension design anddelivery systems. The reversibility issue in pension design would also need to be addressed.
Construction and maintenance of robust databases, strong analytical capabilities, appropriateorganizational structures and mindsets, and understanding of the subtleties of pension economics(particularly sustainability over a long time-horizon, the tyranny of seemingly small numbers
exerting a powerful impact on pension scheme viability) will also be needed. It is vital thatprovident and pension fund organizations publicly communicate to stakeholders stochastic
actuarial assessments providing long-term projections of the impact of changes in demographic,labor market, and other variables on the sustainability of current pension arrangements. The
importance of social pensions financed from budgetary resources, requiring fiscal and public
service delivery capacities, would need to be recognized.
As the single most important macroeconomic variable in social resilience is the9medium-term trend in economic growth, which is widely shared among the population groups, thetask of sustaining such growth without undermining the environmental and social capital ofsocieties merits serious consideration. This will require much greater emphasis on indigenous
capacity for rigorous pension policy research, and the willingness of policymakers to incorporate
research findings into pension design and processes.
The second paper, written by Mr. Cagri Kumru and Professor John Piggott from the
University of New South Wales, Australia, points out that throughout the developed world,
pay-as-you-go (PAYG) social security was the backbone of retirement income support for most of
the 20th century. Over the last two decades or more, however, governments everywhere haveretreated from their unsustainable promises, as they try to balance adequate retirement benefits
against manageable tax burdens and fiscal stress.

The trigger for this tension has been ademographic shift. Pay-as-you-go plans worked well when labor forces were always growing
relative to retired populations. The prototypical social security plan is a Ponzi scheme in which
ever-increasing human resources are required for sustainability.
Retirement financing has become the battleground for social resilience. It is imperative thatat least the less well-off elderly receive government assistance, since they have few resources,
neither human capital nor financial or real assets. However, funding all the retired adequately
requires tax rates on the working population that will test social cohesion. Most governments have
coped with this by reducing benefits surreptitiously – reducing survivor benefits, for example, oraltering indexation arrangements. Such changes provide short-term political relief, but do little in
the long term to buttress social resilience – the beneficiaries of survivor benefits, for example, arelikely to be among the oldest and poorest in the retired pension community.
With this scene setting in mind, the Australian paper re-visits means-testing as a policy
option. Means-testing has a surprisingly bad connotation among policy makers worldwide. The
main reason for summary rejection of this policy paradigm is that the marginal tax rates faced bythose from whom a benefit is being withdrawn are usually very high. However, the Australianauthors will argue that this has been overblown, and that, in fact, the distortions and adverse
impacts on consumer choice from a means-tested program may be less than those associated witha typical social security program.
The case for means-testing has been strengthened in recent years not only by theimperatives of demographic transition, but also by new analytic insights that indicate that ameans-tested program may in fact be second-best optimal. If this is true, then means-tests, which,when they do crop up, are typically very crude, will require detailed attention to optimize theirdesign impact. Means-test design has received virtually no attention either by academic
researchers or by policy-makers, and their potential has not yet been anywhere near realized.
The paper written by Dr. Hyung-Pyo Moon from the Korea Development Institute briefly
examines the current social issues in Korea and discusses agendas and suggestions on a newsocial policy. Korean society is currently faced with new challenges such as rising income10inequality, declining social mobility as well as rapid population aging. Furthermore, increasingsocial instability calls for the government to intervene in a more active and preemptive manner in
its social policy stance. In particular, policy priority should be placed on the reinforcement of abasic social safety net to restore the eroding middle-income class. This paper suggests thechallenges and strategies for social policies, including social welfare, labor, education and old-age
income security, that should be emphasized in the process of developing and implementing thepolicy.
The Korean paper emphasized that the new social policy should be geared toward
preemptive social investment and system improvement to counter potential risks and enhance
individual progress. In order to accomplish these policy goals the government should pursue threedriving strategies: a preventative and investable approach, a user-oriented integrated approach,and a life-cycle approach. Under these basic concepts, the major policies in each sector suggested
in the Korean paper can be summarized as follows. First, it is crucial to reinforce the basic social
safety net and expand the coverage of social insurance and public assistance programs. Second, it
is important to guarantee equal education opportunities through the qualitative improvement ofpublic education and reduction in the cost of private education. Third, it is necessary to allow forequal opportunities at the starting line through aggressive early investment policies. Fourth,policies that promote quality and creation of jobs should be pursued as well as sustained. Lastly,
to counter increasing longevity risk, it is urgent to expand the pension coverage and compliance ofthe challenged groups, including atypical workers and the self-employed.
The paper written by Professor Noriyuki Takayama explains how the social security pension
system has developed in Japan, where its current coverage is nearly 100 percent, including theself-employed and full-time housewives. He argues that development of the Japanese system
looks like a dividend from economic growth, and that it was attained through strong political will.
Both demographic and economic factors in future Japan will probably impose greater stresses onsocial security pension programs, which are based on pay-as-you-go defined-benefit financing.
Japan has virtually made major pension reforms every ten years to contain increasing costs while
assuring adequate income after retirement. The future picture is yet uncertain.
2. Medicare System Team
Medicare system team examined health insurance systems of Japan and China. The first
paper written by Dr. Miho Sekimoto and Professor Masko Ii illustrates Japan’s health insurance
system and the second paper prepared by Dr. Etsuji Okamoto analyses the role of Japan’s National
Health Insurance in insuring the indigent population and balancing the income inequality. Ms.
Hiroko Uchimura wrote the third paper which explains the status and problems of China’s healthsystems including the recent development of health insurance policies.

11(1) Japan’s Health Insurance System (by Dr. Miho Sekimoto and Professor Masko Ii)
Since World War II, many developing economies tried to introduce a healthcare system
similar to those that had already been in place in developed economies. However, such a system
has often tended to aim at people living in urban areas but not at those living in rural areas. Unlike
many of these developing economies, Japan had already introduced a kind of universal healthinsurance system, though mostly pro forma, at the end of the 1930’s and introduced a moregenuine universal insurance system in the early 1960’s, which is still evolving. In light of theabove, developing economies that in the process of moving from a partial health care system to auniversal system would benefit significantly from drawing on the Japanese experiences in thisregard.
A distinctive feature of Japan’s experience is that mandated social health insurance wasattained at a time when people not employed in the formal sector comprised a large proportion of
the total population. The origin of the health insurance system in Japan dates back to the early 20th
century. The Factory Law, which aimed to protect factory workers, was introduced together withthe rise of modern industry in Japan. About 30 years later, the National Health Insurance Law
was enacted, the purpose of which was to insure the general population in rural areas, mainly
farmers. To implement this insurance system, each municipality formed a National Insurance
Association and became an insurer.

The general population in rural Japan had a sense ofsolidarity that had been developed through irrigation and rice-farming activities in each village,
which created a sense of local community and mutual assistance.

Such a sense of local

community suited the scheme in which the municipality was the insurer and contributed to theimplementation of the social health insurance system targeting farmers. After the Second World
War, the social health insurance system was restructured and attained formal universal coverage.
The social insurance system ensures equitable access to health care services for the whole
population in Japan.
The present social health insurance system, however, needs to be reformed to respond to
emerging issues. In addition to the insurance premium, general tax revenues also fund theinsurance fund in Japan, which is a common feature in developing economies. This mixed
system has caused problems in the role of insurers. The role of insurer should be clearly andappropriately designed, and who has the responsibility for the balance of the insurance fund also
should be clarified.

In addition, Japan’s experience in struggling to respond to the ageing

population will also provide suggestions to some developing economies that are predicted to face
aging problems in the near future.
(2) Insuring the no- or low-income population and balancing the income inequality: the National
Health Insurance program as the base of Japan’s social security (by Dr. Etsuji Okamoto)
Guaranteeing a universal coverage of health insurance to all population including the12indigent requires an effective income redistribution mechanism in the health insurance system.
Two options are available: one is an ample subsidy from the tax revenue and another is an
income-metered premium structure. In case of Japan, the first is implemented by the Livelihood
Protection Act with means-testing and another is implemented by municipal National Health
Insurance system.

These two systems are closely related because indigent people migrate

between the two systems because a majority of households of municipal National Health
Insurance (NHI) have no reported income and are always at the verge of poverty.

The municipal

NHI has an income redistribution mechanism but its redistribution effect is weakened by thepremium cap on high income households. How much of the income redistribution effects are
weakened vary from municipality to municipality, but insurers must monitor and evaluate income
redistribution effects carefully.

The author proposed a formula to calculate the % of thepremium “waived” for high income households. The government also monitors the income
redistribution effects of the overall social security system and taxation by a questionnaire survey
every three years. Although the accuracy of the survey is questionable due to the small sample
size, there is a consistent trend of a widening gap between the rich and poor. Such widening gap
is mitigated by the income redistribution effects of social security and the Lorenz curves suggestthat municipal NHI overall considerably reduces the income inequality as measured by Gini
coefficients through premium and health care benefit. But when one looks at municipal NHI
particularly, one recognizes that the redistribution effect does not work above a certain income
level (five million yen) because of the premium cap. Japan’s experience of municipal NHI with
its premium policy provides a useful tool for designing and evaluating the health insurance
premium scheme for effective income redistribution and thereby achieving a universal coverage.
(3) Health System Reforms in China: Is Universal Coverage Enough to Solve the Problems? (byMs. Hiroko Uchimura)
China’s economic growth has been highly impressive. China has achieved over 9 %growth per year since the 1990s, which has attracted worldwide attention. Along with theeconomic development, socioeconomic conditions have changed considerably in China. Thesechanges brought about decay in the conventional health systems based on state owned enterprises(SOEs) or people’s communes.

Instead, governments were required to take substantial

responsibility for restructuring and financing the health systems. On the contrary, governments,
and particularly the central government, actually tightened the fiscal investments in the healthsector in the 1990s. As a result, most of the population was uninsured and individuals came tobear most of the financial burdens of obtaining health care services.
Against such deterioration in the health system, the central government eventually initiatedrestructuring of the health system at the end of the 1990s; that is, it institutionalized new healthinsurance programs. A health insurance program was established for urban employees in 1998
(Urban Employees’ Basic Medical Insurance), and for the rural population in 2003 (new13

Cooperative Medical Scheme). Pilot programs of health insurance for urban non-employees
started in 2007 (Urban Residents’ Basic Medical Insurance). Initially, the insurance coveragerate was quite low; however, recently, the government has increasingly stressed the importance of
expanding the coverage and has increased the fiscal subsidy for the insurance funds.
Consequently, health insurance coverage has substantially increased both in urban and rural areas.
By the end of 2007, coverage of the new CMS reached 86.2 % (Ministry of Health 2008).
Expansion of health insurance coverage has resulted in some progress in health system
reforms in China. However, broadening the coverage has not sufficiently reduced patients’financial burdens related to obtaining needed health services. In fact, in 2007, half of the total
health expenditures were still financed through out-of-pocket payments (OOP). Is expanding
health insurance coverage enough to lighten people’s financial burdens so that they can accessneeded health care services?

This is a key question to examine among the challenges in China’s

current health system.
The present Chinese government is concerned with these health issues, and has launched
new health system reform plans. In April 2009, the government presented guidelines for thehealth system reforms which include fiscal outlays of CNY 850 billion (about US$125 billion)
from 2009 to 2011 (details in section 5 of this paper). Not only the amount of funds but also
their allocation in the health sector has a critical impact on the outcomes.

The reform has justbeen initiated; hence, it is a good time to review current health systems in China and examinebarriers to improving people’s access to needed health care. In this context, this paper analyzes
challenges in China’s health system and proposes possible options to address the challenges.
3. Unemployment Insurance TeamIn recent decades, unemployment has become a serious problem in East Asian economies,
which were affected severely by the recessions stemming from the 1997-98 Asian financial crisisand the 2008-09 global financial crisis. Unemployment insurance (UI) is the most common public
income support program for the unemployed in developed economies but it has been introduced inonly about half of the economies in this region. The purpose of the UI Team, which produced five
papers, is to share the experiences of the economies where UI has already been introduced and to
consider the implications for the economies that have not yet introduced UI but aim to introduce itin the future as well as for the economies that have already introduced UI to make their societies
more resilient together with other social security programs such as pensions and health insurance.
UI is considered to be a “luxury” good in developed economies. In fact, the incidence of UI
is strongly related to the level of economic development.1 However, as illustrated in Dr. Yasuhiro
Kamimura’s paper, which explores the characteristics of the labor market and unemployment
insurance in East Asian economies, in East Asia it is neither related to per-capita GDP nor to the1

Vodopivec, Milan (2004) Income Support for the Unemployed: Issues and Options (Regional and Sectoral Studies), theWorld Bank.

14

share of the agricultural sector, suggesting that UI can be successfully introduced without a highlevel of industrialization if it is adequately implemented with sufficient consideration toeconomy-specific features. In East Asia, UI was introduced in Japan (1947)2, China (1986, limited
to urban areas), Korea (1995), Chinese Taipei (1999), Thailand (2004) and Vietnam (2007),
mostly in recent years. This team examined in detail UI schemes in four economies (Japan, Korea,
Chinese Taipei and Thailand), after compiling an overview of UI schemes in this region.
In developed economies, UI is provided together with pension and health insurance associal insurance. UI is publicly provided primarily because its functioning is affected by strong
information asymmetries that give rise to moral hazard and adverse selection problems. UIprovides good protection, enabling a relatively high degree of consumption smoothing, for all
covered workers compared with other alternative income support programs for the unemployedsuch as unemployment assistance, public works and severance pay, acts as an automatic
macroeconomic stabilizer, and encourages the emergence or expansion of more risky jobs orindustries that may increase efficiency, though it has also been found to create reemployment
disincentives and wage pressure, which increase the equilibrium unemployment rate and makeunemployment persistent.3
Nonetheless, the standard OECD-style UI program in developed economies is unlikely tofunction well in developing economies faced with large informal sectors, weak administrative
capacity, large political risk, and environments prone to corruption.4 In developed economies, theUI program typically requires that workers and their employers pay contributions that, upon
separation, entitle workers to unemployment benefits according to predetermined eligibility
conditions. To qualify for benefits, the worker must satisfy the minimum covered employment orcontribution requirement. Continuing eligibility requires that applicants are available for andwilling to take a job and that they actively search for a job while unemployed. In industrialized
economies, unemployment typically denotes that a worker who does not have his own means of
production has lost his work. In this sense, unemployment is a “discrete” event: employed or
unemployed. In developing economies, though, unemployment is a “non-discrete” event. A large
proportion of the workforce is “partly unemployed” or underemployed and the entry to informal
employment and exit from it is easy with low entry/exit costs. Workers cannot afford to be joblessand therefore they undertake any type of work, even work that leaves them underemployed.
Consequently in low income economies, the unemployed are not necessarily poor. Enforcement of
the standard continuing eligibility conditions of the OECD-style UI program, if applied todeveloping economies, would hamper self-protection by taking away informal jobs andunderemployment. In addition, monitoring of the continuing eligibility conditions would be too

2

The numbers in parentheses show the year UI was introduced.
Vodopivec (2004).
4
Vodopivec, Milan (2009) "Introducing Unemployment Insurance to Developing Countries," Social Protection Discussion
Paper Series, No. 0907, the World Bank.
315

costly, given the weak administrative capacity of developing economies.
The experiences of Thailand documented by Professor Yasuhito Asami provide a good
example of the successful introduction of a UI program tailored to these circumstances indeveloping economies. Thailand introduced UI in 2004. Since then, the UI scheme has been
generating healthy annual surpluses. It alleviated the plight of unemployed workers, at least to
some extent, when the Thai economy was hit hard by the worldwide economic downturn in 2009,
although it only covers workers in the formal sector. The main lessons from Thailand’s
experiences are as follows.
(1) (Virtual) Exemption of informal sector work from disqualifying conditions for continuing
eligibility
As it is difficult for the Social Security Office to know who works in the informal sector,
dismissed workers can continue to get unemployment benefits (UB) even after they start working
in the informal sector, though they are formally disqualified from receiving UB. In other words,
Thailand’s UI is virtually designed on the assumption that many UB recipients would do part-timejobs in the informal sector during the period in which they receive UB.
(2) Modest unemployment benefits with low premium rate
The replacement ratio is 50% and the duration of UB is six months for involuntary
separation. By making the duration shorter and the amount smaller, UI can maintain surpluses
even with a low contribution rate (0.5% for both employees and employers). Many UB recipients
do part-time jobs in the informal sector. Thus, even with modest UB they can continue to look fora decent job in the formal sector. Moreover, the small amount and short duration of UB give
workers a strong incentive to search for a new job.
(3) Co-existence with severance pay at initial stage
Like many other developing economies, Thailand made it mandatory for employers toprovide severance pay to laid-off workers. As there are significant overlaps in coverage, themandatory severance pay system should be integrated into UI in the long run. However, theabolition of mandatory severance pay when introducing UI might complicate the negations on thedesign of UI. To start UI with modest UB without abolishing mandatory severance pay might be apractical way to introduce UI at an early stage of industrialization.
(4) The best timing for the introduction of UI is the period of recovery from the global economiccrisisThailand introduced UI in 2004, seven years after the Asian financial crisis. It was the best
timing, because the Thai economy was in good shape but people’s memory of the social pain
caused by the economic turmoil in 1997-98 was still vivid.

16

(5) The introduction of UI is politically attractive
It should be noted that the introduction of UI is likely to raise the popularity of politicalleaders who play a prominent role in its implementation.
(6) Role of international organizations
The feasibility studies conducted by international organizations such as the ILO, the WorldBank and the Japan International Cooperation Agency turned out to be a very effective tool for the
Ministry of Labor and the Social Security Office to persuade other government agencies andbusiness leaders to agree on the introduction of UI.
The experiences of the economies that introduced UI in earlier years also shed light on
important issues with which other economies may be confronted after the introduction of UI. In
this regard, three economies -- Chinese Taipei, Korea and Japan – were examined respectively by
Dr. Ke-Jeng Lan and Dr. Wen-Chi Chou, Dr. Myoung-Jung Kim, and Professor Naoki Mitani. In
all these economies, UI was introduced in the 1990s or earlier and UI has been integrated with
Employment Insurance (EI), together with Active Labor Market Programs (ALMPs).
In recent recessions, Employment Insurance played the expected roles in these economiesof alleviating the plight of the unemployed with UB, preventing unemployment by preserving
jobs and facilitating reemployment of the unemployed through various ALMP measures. Korea inparticular was able to provide a large number of the unemployed with UB during the 1997-98
Asian financial crisis, which occurred just after the introduction of EI. Nonetheless, EI in these
economies has been under pressure from recent structural changes in the labor market such as theincrease in non-regular (non-standard) employees, together with aging and low fertility rates,
which grew ever more serious during the 2008-09 global financial crisis. The implications of theexperiences in these economies are as follows.
(1) Public short-time work (STW) schemes played an important role in preserving permanent jobs
during the 2008-09 global financial crisis
Short-time work (STW) schemes are public schemes that are intended to preserve jobs at
firms experiencing temporarily low demand by encouraging work sharing with subsidies to thefirms or workers. To tackle the current job crisis, Japan and Korea conducted large-scale public
STW programs as ALMPs and succeeded in preserving a large number of permanent jobs,
particularly in Japan.5 As the economic recovery gains momentum, it is important to begin
phasing out these STW schemes so as not to hinder productivity-enhancing labor reallocation
across sectors. As the experiences in OECD countries show that STW schemes tend to be mosteffective in the early phase of an economic downturn, it would be preferable to prepare them inadvance, for example, by keeping a small but well-run STW scheme even in good times.

5

OECD (2010) Employment Outlook: Moving beyond the Jobs Crisis, OECD, Paris.

17

(2) Larger safety net for non-regular workers
With growing shares of non-regular workers, Japan and Korea have made efforts to extend
EI eligibility to vulnerable workers such as non-regular young employees and, in some cases, themaximum duration of benefits to provide better safety nets for such workers. However, suchmeasures should be carefully designed so as to minimize adverse effects on work incentives that
could lengthen the joblessness spell.
(3) Assistance for the non-insured such as first-entry young unemployed workers without
insurance records
Faced with the growing share of non-insured workers, reflecting labor market slackness andstructural changes, social assistance financed by the government is needed to help the non-insured
such as young unemployed who cannot find jobs after graduation. In economies such as Japan,
where temporary measures that support the training and livelihood of non-eligible unemployed
have already been implemented, it is desirable to perpetuate these measures.
(4) Activation measures for UB beneficiaries
The negative effects of UBs on job search efforts or the duration of unemployment could be
mitigated by activation measures such as frequent checks of active job search activities, intensive
job-search assistance or the inclusion of training participation into the qualification conditions for
UB. It should be noted, however, that putting in place such activation measures generally takes
time, as it involves institutional changes associated with the operation of the PES, etc.
(5) Evaluation of ALMPs
A variety of ALMPs are provided in these economies. Nonetheless, these ALMPs haverarely been evaluated, though more effective and systematized ALMPs are needed under strictbudget constraints. The compilation of relevant statistics is necessary so as to conduct scientificevaluation of the programs.
As mentioned above, the evidence in this research suggests that UI can be successfully
introduced in East Asian economies without a high level of industrialization if adequately
implemented. The period of recovery from an economic crisis is a good time to introduce UI or to
improve EI as people have vivid memories of the social pain. These efforts will certainly enhancesocial resilience in this region.
4. Macro Analysis TeamThe Macro Analysis Team submitted two papers: (1) “The Determinants of Saving Rates in
Developed and Developing Countries: The Impact of Social Safety Nets” by Professor Charles
Yuji Horioka, and (2) “The Uncertainty of Public Pensions and Precautionary Saving inJapan—Evidence from the Micro Data of Close-to-retirement Households” by Professor Wataru

18

Suzuki and Dr. Yanfei Zhou.
In the first paper, Professor Horioka analyzes the determinants of saving rates in thedeveloped countries of the OECD and the developing countries of Asia and found that the age
structure of the population (especially the aged dependency ratio) and financial development(credit availability) are the most important determinants of saving rates in both developed anddeveloping economies and that the development of social safety nets and income levels are also
important in some cases.
Turning to the policy implications of those findings, the apparent absence of a clear
relationship between social safety nets and saving rates implies that improving social safety nets
will not necessarily reduce household saving rates and stimulate consumption, but doing so may
be desirable in any case because it will obviate the need for households to worry about unexpected
contingencies, retirement security, etc., thereby enhancing household welfare.

Moreover, afinding that financial development is more important as a determinant of saving rates implies thatthe development of capital markets (and the relaxation of borrowing constraints) will alleviate theneed for precautionary saving (self-insurance), which is very inefficient, and serve as a partial
substitute for the development of social safety nets, especially in economies with underdevelopedsocial safety nets, leading to lower saving, higher consumption, and higher household welfare.
Thus, a two-pronged approach of simultaneously developing social safety nets and private capital
markets may be the most effective way to enhance household consumption and welfare.
Using households’ anticipated percentage/value changes of public pensions with respect tothe present benefit level as proxies for public pension uncertainty, the second paper investigates
the impact of public pension uncertainty on wealth accumulation by close-to-retirement Japanesehouseholds. A principal econometric finding is that households’ financial wealth holdings are
positively and significantly related to public pension uncertainty for various measures of wealthand both uncertainty proxies. It is also found that households discount future pension benefits
much more heavily than the government’s planned pension cut. Simulations suggest thatapproximately 10% of the net financial assets and 5% of the gross financial assets ofclose-to-retirement households are held as a precaution against public pension uncertainty. Thesefindings are in accordance with the precautionary saving model and provide supportive evidence
for the hypothesis of excessive saving and wealth accumulation by elderly Japanese households.
III. Policy Recommendations
Having acknowledged long-term projections of the impact of changes in demographic, labormarket, and other variables on the sustainability of current pension arrangements, each
Asia-Pacific economy would need to construct a pension reform package suited to its policy
objectives and its economic, fiscal, and institutional capacities in order to enhance social
resilience.

19

Much greater emphasis on indigenous capacity for rigorous pension policy research and thewillingness of the policymakers to incorporate research findings into pension design and process
will be required. It should also be borne in mind that the new social policy should be geared
toward preemptive social investment and system improvement to counter potential risks andenhance individual progress.
A growing number of economies in the Asia-Pacific region are making efforts to develop anational health insurance with universal coverage. Having gone through the pains of development
later than Western economies but earlier than other Asian economies, Japan's experience indesigning its health insurance system might have important implications for setting-up a national
health insurance system in developing economies.
Health policy makers and the general public should not neglect the important role of a healthinsurance program as a social security system and its most important functions: redistribution of
wealth and securing the integrity of the nation. Japan’s experience will be a lesson to economies
for achieving both universal coverage for health insurance and social integrity through effective
redistribution of wealth.
For economies that have unemployment insurance, it is recommended that they reform theirrespective schemes and adequately cover people who are really in need of social protection.
Economies such as Hong Kong (China), Singapore, Malaysia, the Philippines, and Indonesia that
do not yet have unemployment insurance systems could consider introducing unemployment
insurance or strengthening other schemes that would suit their situations. These efforts willcertainly enhance social resilience in this region.
The period of recovery from an economic crisis is a good time to introduce unemployment
insurance or to improve employment insurance as people have vivid memories of the social pain.
For developing economies that want to have an unemployment insurance system, Thailand’s
successful introduction of such a system would be a good example. Economies in this region
could learn a lot from the experiences of the economies that introduced unemployment insurancein earlier years, such as Japan, Korea, and Chinese Taipei.
Improving social safety nets may be desirable in any case because it will obviate the need forhouseholds to worry about unexpected contingencies, retirement security, etc., thereby enhancing
household welfare. The development of capital markets will alleviate the need for precautionarysaving (self-insurance), and serve as a partial substitute for the development of social safety nets,
leading to lower saving, higher consumption, and higher household welfare.

Thus, atwo-pronged approach of simultaneously developing social safety nets and private capital markets

20may be the most effective way to enhance household consumption and welfare.
As one important macroeconomic variable in social resilience is the medium-term trend ineconomic growth, which is widely shared among population groups, the task of sustaining suchgrowth without undermining a society’s environmental and social capital merits serious
consideration.
When discussing social security schemes including pensions, medical insurance, andunemployment insurance, needless to say, we should keep in mind that since these schemes areinterrelated and intertwined, the so to speak horizontal approach to the issues is of criticalimportance; namely while conducting research and analysis on each scheme, we must study theschemes in totality and in a comprehensive manner.
We also recognize that there are no panaceas applicable for any economy and in any time. What
we have engaged in is to collect and share good practices and bad practices with a view toenhancing resilience of societies, not to impose any fit for all solutions on anyone.
To promote policy innovation, it is essential to compile comparable and longitudinal data relevant
to social issues; for this purpose, it is expected that the StatsAPEC will be upgraded to the level ofthe Eurostat in the EU.
APEC also needs to take up social resiliency issues and consider what infrastructure resilient
against economic crises we can establish in the Asia-Pacific region’s economies. A working teamshould be formed to discuss how to make our society more resilient against economic crises andto design effective social policies for the economies of this region.

21