Stimulating Investment in the Western Balkans

February 24, 2014

Ellen Goldstein World Bank Country Director for Southeast Europe

Key Messages

Location, human capital and labor costs make investing in the Western Balkans today a great opportunity!

Maximum investment, growth and jobs will require courageous Governments to do faster and deeper reforms;

Macro-fiscal adjustment, enhancing competitiveness and connectedness, and building “new economy” skills are key;

History shows that integration into the European economic bloc will drive a powerful convergence towards prosperity.

Location: next to the world’s largest and most connected economic bloc

Note: Map resized according to economic strength

Human capital: education outcomes exceed other fast-growing, middle-income regions

360

380

400

420

440

460

480

LAC Developing Asia Western Balkans ECA

PISA scores in math test, 2012

Source: PISA; Note: Developing Asia includes Indonesia, Malaysia, and Thailand Western Balkans includes: Albania, Montenegro, Serbia

Trend: Stagnating

Trend: Stagnating

Trend: Stagnating

Trend: Improving

Labor costs: significantly lower than the rest of Europe…but well beyond low-cost Asia

Source: ILO

Nominal average monthly wage in USD, 2010

0

200

400

600

800

1000

1200

India Indonesia Philippines Thailand Albania China Serbia Macedonia,FYR

Bosnia EU11average

0

5

10

15

20

25

30

SEE ECA LAC EAP OECD(Europe)

OECD(Non

Europe)

2007 2012

40

45

50

55

60

65

70

SEE ECA LAC EAP OECD(Europe)

OECD (NonEurope)

2007 2012

…Yet labor force participation lowest and unemployment highest of mid/high income regions

Labor Force Participation Rate (% pop)

Unemployment Rate (% of labor force)

Notes: ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; EAP = East Asia and Pacific.

13.2%

7.0%

2.7%

25.4%

6.0%

3.0%

Western Balkans Rest of Southern Europe Rest of the World

1990

2013

Share of migrant stock in source region population

Source: Based on UN International Migrant Stocks (2013 revision)

World leaders in exporting people rather than goods and services

Doing More to Stimulate Investment and Jobs

Post-crisis recovery (2009-2013) much slower than East Asia after its crisis (1998-2002)

-8

-6

-4

-2

0

2

4

6

8

10

t-7 t-6 t-5 t-4 t-3 t-2 t-1 t=0 t+1 t+2 t+3 t+4 t+5 t+6 t+7

Western Balkans (t=2008) EU11 (t=2008) East Asia excl. China (t=1997)

distance from pre-crisis peak

East Asia aggressively pursued export-led growth; Western Balkans’ current accounts deteriorated

-20

-15

-10

-5

0

5

10

t-8 t-7 t-6 t-5 t-4 t-3 t-2 t-1 t=0 t=1 t=2 t=3 t=4 t=5 t=6 t=7

EU 11, t=2008 Western Balkans, t=2008 East Asia**, t=1997

East Asia’s fiscal position stabilized; Western Balkans deteriorated significantly

Note: East Asia* (Crisis Period) 1997-2003

-5

-4

-3

-2

-1

0

1

2

3

EU11 Western Balkans East Asia*

2007 2013

Global connectedness below rest of Europe and fast-growing Asia

0

10

20

30

40

50

60

70

80

90

Albania Bosnia andHerzegovina

FYRMacedonia

Serbia EU11 EU15 Singapore

2007 2011

Global connectedness score, 0-100

Source: DHL

Trade facilitation and logistics fall short of European and global standards …

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Logistics PerformanceIndex Score

Customs and Clearance

Infrastructure for trade

International shipmentsLogistics competence

Tracking & tracing

Timeliness

EU 15 Average

Western Balkan Average

Singapore

Source: World Bank, Logistics Performance Index

Export performance reflects weak integration in global economy

Exports of goods and services (% of GDP)

0

50

100

150

200

250

Ko

sovo BiH

Alb

ania

Serb

ia

Mo

nte

neg

ro

Mac

edo

nia

, FYR

Pan

ama

Mal

aysi

a

Irel

and

Sin

gap

ore

Labor market demands youth with “new economy” skills; older cohort risks obsolescence

40

45

50

55

60

65

2007 2008 2009 2010 2011

Mea

n S

kill

Per

cen

tile

of

20

07

S

kills

Dis

trib

uti

on

FYR Macedonia, Cohort born after 1955

40

45

50

55

60

65

2007 2008 2009 2010 2011

FYR Macedonia, Cohort born after 1974

Source: World Bank staff, based on LFS.

New Economy skills

Manual skills

Routine Skills

Reforms Make a Difference

% of years in each decade when both labor productivity and employment increased

0%

10%

20%

30%

40%

50%

60%

70%

80%

1990s 2000s 1990s 2000s 1990s 2000s

Poland FYR Macedonia Belarus

Advanced Reformers Intermediate Reformers Late Reformers

Advanced Reformers Poland 1990s Advanced Reformers Poland 2000s

Intermediate Reformers FYR Macedonia 1990s Intermediate Reformers FYR Macedonia 2000s

Late Reformers Belarus 1990s Late Reformers Belarus 2000s

Stronger reformers benefit from increased employment and labor productivity … but with a lag

Source: Back To Work: Growing with Jobs in Europe and Central Asia (2013).

Comparing two countries: business climate reforms and employment growth

Employment growth, 2008=100 (2008-2012)

Left chart: This measure shows the distance of each economy to the “frontier.” An economy’s distance to frontier is reflected on a scale from 0 to 100, where 0 represents the lowest performance and 100 represents the frontier. Right chart, Source: Authors’ calculations based on ILO and WDI.

90

92

94

96

98

100

102

104

106

108

110

2008 2009 2010 2011 2012

Bosnia and Herzegovina FYR Macedonia

40

45

50

55

60

65

70

75

80

2006 2007 2008 2009 2010 2011 2012 2013 2014

Bosnia and Herzegovina Macedonia, FYR

Doing Business: Distance to frontier (=100)

History on your side: Western Balkans will benefit from Europe’s “convergence machine”

Annual growth of consumption per capita between 1970 and 2009, by level of consumption in 1970

Note: n = number of countries. *** statistical significance at the 1 percent. Source: World Bank staff calculations, based on Penn World Table 7.0 (Heston, Summers, and Aten 2011).

Corr. = -0.80***n = 26

0

2

4

6

0 3 6 9 12 15

Europe

Corr. = -0.21n = 15

0 3 6 9 12 15

East Asia

Corr. = -0.25n = 22

0 3 6 9 12 15

Latin America

An

nu

al p

er

ca

pita

co

nsu

mp

tio

n g

row

th

pe

rce

nt,

19

70

-20

09

Initial level of consumption per capita, 1970PPP, thousands of 2005 international dollars

Key Messages

Location, human capital and labor costs make investing in the Western Balkans today a great opportunity!

Maximum investment, growth and jobs will require courageous Governments to do faster and deeper reforms;

Macro-fiscal adjustment, enhancing competitiveness and connectedness, and building “new economy” skills are key;

History shows that integration into the European economic bloc will drive a powerful convergence towards prosperity.

Ellen Goldstein egoldstein@worldbank.org

Thank you

Capital markets reward countries with strong fiscal adjustment

Although access is high, education quality leaves something to be desired

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Kyr

gyz

Rep

ub

lic

Aze

rbai

jan

Kaz

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stan

Alb

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Mo

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neg

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Bu

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Ro

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Serb

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Ru

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Turk

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Lith

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Cze

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Cro

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Slo

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Slo

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Latv

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Hu

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Po

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Esto

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Mex

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Ch

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Au

stri

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Isra

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Luxe

mb

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Gre

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Ital

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Fran

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Spai

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Ger

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Un

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Kin

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Bel

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Po

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Un

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Sta

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Swed

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Icel

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Den

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New

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Net

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lan

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ECA OECD, non-ECASource: Based on OECD PISA 2009.

% of 15-year olds who are functionally illiterate, scoring “below level 2” on PISA reading test 2009

Widespread perception that Government is part of the problem, rather than the solution…

What is the biggest risk currently facing

the Central and Eastern Europe region?

Source: CNBC, January 2014