Job Loss Deja Vu

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In much of Asia, there is no visible labor crisis. The global economic downturn has had a huge impact on employment in the region, but people are still traveling during rush hour, and still in the shopping malls and restaurants.

“It is very hard to see open unemployment because there is nobody standing in line to collect their unemployment benefits,” says Duncan Campbell, an economist at the International Labour Organisation (ILO).

A decade ago, the situation was similar in the aftermath of the Asian financial crisis of 1997. The causes of that crisis were different, but the effects were much the same: millions of Asians found themselves without work and on the brink of falling back into absolute poverty. And there were few social safety net systems in place to break their fall.

In 1997, notes Sri Wening Handayani, a senior social development specialist with the Asian Development Bank, Asian governments were not ready for the surge in unemployment. This time around, they are better prepared, she says.

There is still nothing similar to the unemployment benefits found in Europe or North America but, across Asia, improvements can be seen in providing protection to those who have lost their jobs.

Thailand has an unemployment insurance scheme. The Indonesian government is giving cash handouts to the poor. Across the continent as a whole, governments are more active in treating the main symptom of unemployment: the lack of personal income.

“A lot of governments, with the lessons learned from 1997, now provide social safety nets,” says Ms. Handayani.

But lack of money is only a symptom of unemployment. The most crucial task for governments is to get people back to work.

In the years after 1997, Asian governments could do little except turn to the International Monetary Fund (IMF) to help them through the crisis.

The problem in 1997 was originally financial, so the solution provided was also financial. The policies imposed on the hardest-hit Asian countries in return for IMF assistance entailed limits on government spending and higher interest rates.

Governments had little money for relieving the plight of the unemployed, and businesses could not afford to borrow money to stay open and keep their employees in work. The result was greater unemployment and greater poverty.

“A social dimension was completely left out of the package,” says Mr. Campbell.

IMF programs worked for financial systems, but not for the unemployed. “Capital markets recovered much more rapidly than labor markets,” he says. It took years for people to get back to work in large numbers.

Today, Asian governments believe the way out of the crisis is to spend, spend, spend—not just on social safety nets but also on creating jobs through public works projects.

This is a lesson learned not from the 1997 crisis but from the Great Depression of the 1930s in the United States. But it was a lesson several Asian governments were not able to apply 12 years ago.

The People’s Republic of China (PRC) largely avoided the 1997 crisis, but the current downturn has severely cut demand for products made in the country sometimes called “the world’s factory.”

“What we are seeing in China is widespread job losses in export-oriented businesses,” says Mr. Campbell.

In the PRC, too, it is difficult to see the unemployed. Many are migrant workers laid off by factories in the prosperous east of the country.

The PRC’s system of residence permits means that if a migrant worker loses his job, he must return to his village in the poorer hinterland, much as Thais laid off in 1997 went home to the farm—except that in the PRC, the worker has no choice but to go.

“You do become invisible, in legal terms,” Mr. Campbell says of the newly unemployed in the PRC.

But the government is pouring the equivalent of $586 billion into the economy, about 16% of gross domestic product (GDP). Three quarters of that money is being spent on public works projects such as bridges and hospitals. This will create jobs, many in the hinterlands where the unemployed take refuge.

“In GDP terms, China has put out the biggest fiscal stimulus package in the world,” says Mr. Campbell. “I think China is weathering this extremely well.”

The fiscal stimulus should help the PRC’s economy to continue growing, although more slowly.

And the PRC, like the rest of Asia, needs economic growth not just to get those already unemployed back to work but also to provide jobs for the millions of young people that each year go in search of their first job.

Another lesson of the 1997 crisis is that while a recovery in economic growth might occur quickly, it could take 5 to 8 years for employment to recover. This is not only because it takes time for somebody who has dropped out of the labor market to climb back in but also because of all those youngsters entering the market.

For a long-term solution, governments should spend money on retraining workers, Mr. Campbell says. They should encourage employers to avoid laying off workers in the first place, perhaps by introducing short-time work or unpaid leave, he says.

“We will see a recovery, but we won’t see a labor market recovery that quickly,” says Mr. Campbell. “There is a need to hasten a labor market recovery.” •