how can the small countries in the western balkans continue to grow?
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How Can the Small Countries in the Western Balkans Continue to Grow?. Sanjay Kathuria Lead Economist Europe and Central Asia Region, World Bank July 2008. Outline of presentation. Export-led growth imperative But exports and growth demand skills - PowerPoint PPT PresentationTRANSCRIPT
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How Can the Small Countries in the Western Balkans Continue to Grow?
Sanjay KathuriaLead Economist
Europe and Central Asia Region, World BankJuly 2008
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Outline of presentation Export-led growth imperative But exports and growth demand skills This makes FDI important- as well as
skills What will bring in FDI? Messages
Regional Integration Re-prioritization of some elements of the
national investment climates
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Selected Indicators for Western Balkans
Alb BH Cro fYRM Mont. Serbia
Population (millions) 3.2 3.8 4.5 2.1 0.6 7.5
Poverty rate (%, 2005) 25.4 17.8 4.0 22.0 10.4 9.4
GDP (billion current $) 9.1 12.9 42.6 6.2 2.4 31.6
GDP per capita (US$) 2,830 3,290 9,580 3,050 3,760 4,220
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Growth Appears Healthy in 2007
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Albania BiH
Bulgar
ia
Croat
ia
FYRM
Romania
Serbia
Slovakia
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But growth not as good as other regions (2000-06 average)
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WBalkans Baltics E Asia S Asia
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And Sustainability Concerns Productivity growth harder to
achieve Trade preferences eroding The China factor: Middle Income
Trap Current account deficits: stability
issue; exports key But exports well below potential
and need
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Exports are also critical for growth
Small countries need to trade more, and benefit more from trade
In fact, growth has to be export-led EU integration demands increased
exports Thus, exports crucial for both macro
stability and growth However, export performance, is
largely disappointing…
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Disappointing export performance
Poor export performance Low skill-based exports But wages out of line with such export
patterns And not an important part of
producer-driven supply chains Hence, concerns on sustainability of
exports
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Poor Export Performance
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BCR vs Balkans: Exports/GDP
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Series1
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Exports as a Share of GDP
Exports, GNFS (% GDP, 2006)
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20.0
40.0
60.0
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Alban
ia BiH
Bulgar
ia
Croat
ia
FYRM
Romani
a
Serbi
a
Slova
kia
%
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Export Patterns: Low Skills, High Wages
Capital Intensive Official wage
and Skill Intensive
Albania 10.9 161
BiH 33.2 420
FYRM 35.2 343
SaM 46.8 326
Bulgaria 34.2 161
Croatia 39.3 841
Slovakia 71.0 296
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Wages cause for concern Maybe not high on average relative to most
of EU8 and Europe BiH has higher wages; Albania low; others
vary according to data source Even Albania and Bulgaria high vs. China,
India and B’desh (so exports vulnerable) Reducing tax wedge to make labor more
competitive can help (FYRM starting) But in medium-term, only way out is to
improve productivity
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Participation in producer networks low
Changes over 1996-2005 (percentage of manufactured exports in parts and components):
SEE-- 6% to 11% EU8-- 14% to 19% Slovakia-- 13% to 21%Except Romania and Croatia (much lesser
extent), SEE not part of the dynamic production supply chain
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FDI important for exports and growth
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Per capita FDI stock very low: Albania 603, BiH 676, Serbia 1119, Croatia 4577 euros per capita stands out. EU8 countries at least 3-4 times.
FDI critical for technology and exports But need domestic skills and
motivation for technology absorption
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But what can be done about FDI? Countries are small. Why not invest in Slovakia and
Croatia, Romania and Bulgaria? Stock of FDI (2005)
Western Balkans (except Croatia, 17 m popn.) $ 11 billion
Croatia (4.5 m popn.) $12.5 billion Slovakia (5.4 m popn.) $15.3 billion
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Policy Agenda Context Small countries Not taken advantage of openness and
export-led growth FDI performance: stock and pattern Skill formation has big gaps Countries not integrated enough to function
as one market Overall record on exports therefore not
surprising How to get out of the ‘Middle Income Trap’?
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Deeper Integration in SEE- Goods and Services
Reduce market segmentation Major step forward: CEFTA 2006 But long road ahead:
reducing border frictions; CEFTA rules of origin; regional cooperation in services.
EU MFN rates will reduce trade diversion Benefits: more competition in supply of
goods and services, higher FDI (single market) and intra-regional supply chains
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Deeper Integration in SEE- Labor
Will need an agreement on movement of skilled labor
Can be done bilaterally to begin with Mutual recognition of professional
qualifications and educational institutions
Temporary worker agreements Return migration programs can help in
skill formation Cooperation in education- specialization
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Human Capital Formation is Centerpiece of Economic Strategy Solution for relatively high wages:
Productivity improvement Reduce tax wedge for labor
Human capital needs major thrust in region: gestation lags; poor education outcomes; enable move to more skill-intensive exports and attract FDI; skills constraint in BEEPS 2005
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Costs of Skype Calls (EUR cents)fixed-line mobile
Macedonia 17.6 29.6Bosnia and Herzegovina 16.5 24.6Albania 13.7 16.2Montenegro 9.3 20.9Serbia 9.3 20.9Bulgaria 5.5 21.5Slovenia 5.2 23.9Croatia 4.3 17.9EU-15 1.7 -
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Telecommunications: High Costs deter Integration and reduce potential gains
ECA 18 country study (2007): within infrastructure, highest contribution to productivity from better telecom quality
Application of telecoms universal Potential payoffs to better connectivity
and reduced costs very high: including deeper integration and supply chains within SEE; enabling small firms to overcome handicaps of size; and overall productivity
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Energy : can be a Binding Constraint to Growth World over, electricity can be a binding
constraint to growth: India, Bangladesh Electricity not a major issue in BEEPS
2005 except Albania (problem for 57% firms).
FYR Macedonia going through adjustment process now
Pre-empt regional energy shortages: the regional market optimal solution, will help to reduce volatility in supply as well as demand
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Sum-up: Policies to attract FDI, Increase Exports and Position for Future Growth
FDI : domestic market size, human resources, and elements of infrastructure
Some areas not given due policy attention Deeper Integration and reduction of
barriers thereof Human capital formation: education, return
migration, regional market for skilled labor (and reduce tax wedge)
Energy: regional market Telecoms: competition, regulatory capacity
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Poverty Agenda Growth poverty link: demonstrated world
over. Poverty reduction in region demands continued growth.
Given very large shares of working poor in Balkans (eg, 61% of poor in Albania, 46% FYRM), productivity of jobs is critical
Human capital formation agenda outlined here: critical to sustained exports and growth
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National/Regional Policy Change
Policy examination of priorities needed at country level, followed by action
Deeper Integration, for goods and services at regional level
Same messages in other countries in the region, including on regional integration
Regional integration needs coordinated action by countries and leadership in CEFTA, for example
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Report Recommendations and BiH
Export level in BiH is lower than regional average, trade imbalance very high
SAA and CEFTA provide opportunities for export growth, but structural and business environment reforms necessary to fully exploit new opportunities:
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Reform priorities for BiH to boost export growth Enhance labor competitiveness:
reduce social contributions (FBiH in particular), contain wage growth in public sector, invest in human capital (improve efficiency of education spending)
Reduce regulatory burden to doing business: Facilitate business entry and exit, reduce cost of
regulatory compliance
Restructure public expenditures and increase their efficiency: Increase levels and efficiency of public investment,
increase efficiency of education expenditures, better target social assistance