WHAT DOES IT TAKE TO GROW?

Opening of the World Bank/NBRM Public Information Center

Lilia Burunciuc

December 16, 2010

Growth performance

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-10.0-8.0-6.0-4.0-2.00.02.04.06.08.0

10.0

MKD NMS SEE

NMS includes: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia,.SEE includes: Albania, Bosnia and Herzegovina, Croatia, Kosovo, Montenegro, Serbia. Source: IMF World Economic Outlook (WEO)

Growth rates of GDP

Growth performance

NMS includes: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia,.SEE includes: Albania, Bosnia and Herzegovina, Croatia, Kosovo, Montenegro, Serbia. Source: IMF World Economic Outlook (WEO)

2001

2002

2003

2004

2005

2006

2007

2008

2009

0

10

20

30

40

50

60

70

MKD NMS SEE

GDP per capita, in PPP, EU-27=100

Convergence requires high and sustainable growth

Macedonia needs to grow faster to catch-up with the EU-average

Convergence in 25 years would require growth rates of 6%

At the 2.8% average growth rate during the last decade, convergence in 86 years

6.0% 3.7% 2.8%0

20

40

60

80

100

Years required to converge to EU-27 average at various

growth rates

Assumes EU-27 growth rate of 1.5% .Average growth rate for Macedonia in last decade was 2.8%.

What does it take to grow?

Learning from success stories: findings of the Commission on Growth and Development

13 countries have grown at 7+% for at least 25 years since 1950.

Botswana, Brazil, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Malta, Oman, Singapore, Taiwan, and Thailand.

India and Vietnam can join soon

What can we learn from the success stories ?

OpennessImport Knowledge

Exploit global demand

Macroeconomic stability

Modest inflationSustainable public finances

Future orientationHigh investment

High savings

Market allocationPrices guide resource

Resources follow prices

Leadership and governance

Credible commitment to growthCredible commitment to

inclusionCapable administration

Ingredients of Growth Strategies:Technology Transfer

Mostly through FDI, Foreign trade Foreign education

ALB BIH BLG CRO CZE EST MKD HUNG KOS LTV LTU MNE POL ROM SRB SVK SLO0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FDI, in USD per capita, 2000-2009

Source: World Bank ECA Regional Tables

Ingredients of Growth Strategies:Macroeconomic stability

Monetary and fiscal policies that keep prices stable, risks manageable and exports competitive

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

MKD SEE

Current account, as % of GDP

2004200520062007200820092010-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

MKD SEE

Fiscal balance, as % of GDP

Source: MOF for Macedonia and WEO for SEE Source: NBRM for Macedonia and WEO for SEE

Good practice MacedoniaInvestments > 25% of GDP Only since 2007

Public Investments 5-7% of GDP Yet to be achieved

Public resources complemented by PPPs

Still in infancy

Ingredients of Growth Strategies:Investments

2001 2002 2003 2004 2005 2006 2007 2008 20090.0

5.0

10.0

15.0

20.0

25.0

30.0

NMS

MKD

Gross Fixed Investments, % of GDP

Source: Eurostat

Ingredients of Growth Strategies:Savings

2001 2002 2003 2004 2005 2006 2007 2008 200950

55

60

65

70

75

80

85

NMSMKD

Private Consumption, % of GDP

Source: Eurostat

Ingredients of Growth Strategies:Investing in Human Capital

Education

Health Decent and slightly improving health indicators

but considerable efforts still needed

WEF Competitiveness Report

MKD NMS

Quantity of Education

4.6

Quality of Education

4.1 4.5

2005 200836

38

40

42

44

46

48

Percent of firms say-ing skills are a prob-

lem

Source: World Bank / EBRD BEEPS

Ingredients of Growth Strategies:

Competition and Structural Change “Creative Destruction” requires

efficient entry and exit, i.e. an efficient business environmentEase of Doing

Business 38

Starting a Business 5

Construction Permits 136

Registering Property 69

Getting Credit 46

Protecting Investors 20

Paying Taxes 33

Trading Across Borders 66

Enforcing Contracts 65

Closing a Business 116

World Bank / EBRD BEEPS: Biggest problems of doing business in Macedonia: Access to finance Courts Tax rates Corruption

Ingredients of Growth Strategies

Labor Markets Promote labor mobility by having flexible

laws But, also invest in skills so that labor is

mobileWEF Competitiveness Report

MKD NMS

Labor Market Flexibility

5.2 4.7

Labor Force Survey2004 2009

Unemployed, primary

education and less

38.1 34.5

as % of total unemployed, Source: SSO

Ingredients of Growth Strategies

Findings from 2008 Country Economic Memorandum:1. Firm entry is strong2. Survival rate is decent3. Firms DO NOT grow

Source: World Bank Staff calculations based on SSO and Eurostat data EU-27 BLG CZE LTV POL ROM SVK MKD

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

LargeMediumSmall

Contribution to Value Added by various types of enterprises

Ingredients of Growth Strategies:Effective Government

Leadership is crucial – a coherent growth strategy Long planning horizon Communicating vision

Contro

l of C

orru

tion

Regulat

ory Qua

lity

Rule

of Law

0

30

60

2006 2008 2009

Governance IndicatorsMKD NMS

Voice and Accountability

53.1 74.6

Political Stability 37.3 70.6

Gov’t Effectiveness 50.5 72.2

Regulatory Quality 59.5 80.0

Rule of Law 47.6 71.7

Control of Corruption

57.1 67.6

Source: Worldwide Governance IndicatorsSource: World Economic Forum Global Competitiveness Report

Ingredients of Growth Strategies:Equity and Equality of opportunity

Equity and equality of opportunity are essential ingredients of sustainable growth strategies

Absolute Poverty

Non-poorFood PovertyModerate Poverty

Source: World Bank Staff calculations based on SSO HBS data

Ingredients of Growth Strategies:Export Promotion and Industrial Policy

Still a lively debate

The risks of doing a lot are well known, however there are also risks of doing nothing

Export promotion is not a good substitute for other key supportive ingredients: education, infrastructure, responsive regulation.

Small States

Per capita cost of Government and Services is very high

Little possibility to diversify economy high vulnerability to economic shocks

The answer: embrace the world economy, forming regional clubs and outsource some government functions

Ingredients of Growth Strategies

Some generally accepted “DONT’S” Subsidizing energy, expect most vulnerable Reducing unemployment with public sector

jobs Cutting deficits by slashing capital spending Shielding sector, firms and jobs from

competition Imposing price controls to fight inflation Underpaying civil servants

Thank you

WWW.worldbank.org/mk