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# **3.3  Private and public coping channels**

Interruption or deterioration of the provision of essential public goods and services seems to have had an impact on growth and contributed to worsening social and economic outcomes. In the initial stages of the crisis, social expenditures increased substantially in most developed countries to address the greater need for social support as GDP growth slowed,<sup>29</sup> although some countries (Greece, Hungary) experienced drops in real social spending in 2010/11 compared to their levels in 2007/08. Public spending fell in other countries after they reached peak levels during the 2009-2011 period,<sup>30</sup> as governments were forced to undertake drastic cuts in spending. Social spending overall suffered in Eastern Europe and Central Asia. Government education spending declined since 2008 in countries with IMF programs, and low income countries had lower government spending on health in 2008-10, lower spending on infrastructure in 2010, and across-the-board declines in government spending on social protection.<sup>31</sup> Education budgets fell sharply in the majority of Eastern European countries, by as much as 25 percent in Serbia and 10 percent in Hungary.<sup>32</sup> In many advanced countries hit hard by the financial crisis, the labor market has been further hit by fiscal austerity programs that often involved direct cutbacks or freeze in employment and wages.<sup>33</sup> Unlike the countercyclical responses to the initial crisis in 2009 and 2010, the policy reaction has been pro-cyclical in many cases in 2011 and 2012, contributing to the further drop in economic growth, rising unemployment, and deteriorating earnings—hence, to a further deepening of the crisis through the negative feedback loops between aggregate demand, weak labor markets, lower repayment capacity, and renewed financial stress. Available data show a marked decline in the global growth in real average wages, which was reduced by half in 2008 and 2009, compared to earlier years, highlighting that the crisis hurt not only those who lost their jobs, but also wage earners who managed to stay in work.<sup>34</sup> The decline in earnings was particularly pronounced in emerging Europe and Central Asia, with reduced number of hours worked and shifts in employment from the better-paid industrial sector.

Some countries were better able to implement countercyclical policies during the global crisis. Ferreira and Schady 2009 note, for example, that Latin American and Caribbean countries were less affected by the global crisis than the previous ones, in part owing to implementation of less

> 29 Social expenditures are defined by the OECD to include old-age pensions, health care, unemployment insurance, job-training programs, disability and survivors’ benefits, housing assistance, family-support payments, cash payments and in-kind benefits (OECD 2012).

> 30 For instance in Iceland, Ireland, Portugal, Spain, the United Kingdom, the Czech Republic, and Slovenia. 31 An Oxfam study found that in 56 low-income countries, budget revenues fell by $53 billion in 2009 and by $12 billion in 2010, affecting the ability of governments to use countercyclical fiscal policy to cope with the crisis (Kyrili and Martin 2010). Using evidence from 10 low and middle income country studies (for Bangladesh, Benin, Botswana, Bolivia, Cambodia, Ghana, Kenya, Nigeria, Uganda, and Zambia), Overseas Development Institute 2009 found that social protection coverage was low, distribution of social programs inequitable, helping only a small percentage of the poor, offering disproportionate support to those in formal employment, and little evidence of any major increases in coverage in response to the crisis—with a few exceptions. Some countries were found to be struggling to meet pre-existing social protection commitments (Kenya and Uganda), others try to extend coverage (Ghana, Cambodia), or  focus on stabilizing macroeconomic situation (Indonesia) or promoting stimulation packages by reducing social sector expenditure (Nigeria).

> 32 Education International 2009.

> 33 International Labor Organization 2013a.

> 34 International Labor Organization 2010 and Khanna and others (2010) (for 41 middle-income countries).