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OECD EURASIA COMPETITIVENESS PROGRAMME INITIATIVE FOR THE SOUTH CAUCASUS AND UKRAINE The Black Sea Region: New Challenges and Opportunities for Regional Cooperation Berlin, May 2009 OECD Private Sector Development 1 1. The competitiveness challenge 2. Potential policy priorities to enhance competitiveness 3. The need for a focused and demand driven regional approach OECD Private Sector Development 2 Is the region competitive? FDI trends indicate potential interest from investors FDI in USD Million 35,000 Central Europe 30,000 25,000 SEE South Caucasus and Ukraine SEE: Second wave of FDI Central Europe: First Wave of FDI 20,000 BlackSea: Third wave? 15,000 10,000 5,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: EBRD Transition report 2008, OECD Analysis OECD Private Sector Development 3 GDP growth in the region is impacted by the financial crisis Average GDP growth falling in 2008 Growth in BSEC-CA Countries GDP growth (per cent) 14 1998 - 2008 12 10 8 6 4 2 0 -2 LOW & LOWER-MIDDLE INCOME BSEC: Albania, Armenia, Azerbaijan, Georgia, Moldova, Ukraine UPPER-MIDDLE & HIGH INCOME BSEC: Bulgaria, Greece, Romania, Russia, Serbia, Turkey CENTRAL ASIA: Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, Uzbekistan Source: OECD Development Centre / IMF Source: EBRD; e. estimate; p. projection OECD Private Sector Development 4 Reliance on external financing is increasing On average 13% of GDP for BSEC region 330 14 280 12 230 10 180 8 130 6 80 4 30 2 -20 0 External Financing / GDP (%) USD Billion External Financing - BSEC External financing/GDP (right-hand axis) External financing Capital inflows FDI Inflows Workers' remittances and compensation of employees Source: OECD Development Centre / IMF OECD Private Sector Development 5 FDI growth is slowing down after a period of high growth South Caucasus and Ukraine: FDI Net Inflows 1999-2007 (in US$ million) FDI per capita up to 6 times lower than South East Europe Source: EBRD Transition report 2008 OECD Private Sector Development 6 The region remains cost competitive Example: Cost competitiveness in labour for the Republic of Moldova Example of SEE Leveraging their competitive labour costs in services Index (100: Hungary) Relative comparison of average monthly labor cost in services (2005) Up to 7 times lower (1) Hungary Poland Sample of CEE countries Croatia Bosnia Serbia Albania UNMIK &H FYR Montenegro Macedonia WB countries covered by the project R.Moldova India Other references Note: Monthly wages have been calculated on 2003-05 or 2003-06 average; using the LABORSTA Labour Statistics Database and covering, unless specified only the category J (financial intermediation) and K (business activities, real estate and renting). For Albania overall figures are based on category I (transport, storage and communications) due to the absence of statistics on J/K in the ILO databases (1) average monthly wages in all services Source: International Labour Organization; zdnetasia; Wall Street Journal, OECD interviews OECD Private Sector Development 7 Cost competitiveness is a short term advantage The need to move up the value-chain Cost competitiveness is not sustainable • Markets like India and China are clear low-cost alternatives. • Cost levels in some sectors are increasing by up to 15% annually, impacting negatively on margins and potentially eroding market share levels. • Limited access to finance and strategies to reinvest capital in technology and human capital is a risk. Significant gaps in human capital limit the opportunities to move up the value chain • Skills gaps in high growth industries such as ICT reach 60%. • Coordination between ministries of education and economy and dialogue with civil society are limited. Limited focus on sector specific policy barriers as well value-added services OECD Private Sector Development 8 Policy priorities to enhance competitiveness Based on feedback from countries of the region Which key areas need to be address to enhance investment and competitiveness in the Black Sea (SCU)? Human Capital How to tailor human capital policies and practices to support financial and business services? Sustained Competitiveness Financial Markets Development How to address the impact of the financial crisis, especially in terms of access to finance? Investment climate policy and promotion How to support FDI by removing policy barriers and supporting specific sectors? The need to focus on SME competitiveness OECD Private Sector Development 9 OECD Eurasia Competitiveness Programme New OECD Mandate (2008) covering two regions and 11 countries Enhancing Regional Business Climate Prioritisation of policies to improve the business climate Policy Working Groups Policy guideline and targeted implementation Improving National Competitiveness OECD Sector Competitiveness Strategy Surveys of investors and private sector perception Evaluation of policy reforms Supporting in implementing reforms OECD Private Sector Development 10 Example : Monitoring policies at the regional level Addressing reforms through regional working groups and peer review Example for South 5 The OECD Investment Reform Index The SME Charter East Europe 4 3 2 1 Investment Policy Investment Promotion Tax Policy AntiCorruption Policy Trade Policy Regulatory Reform Human Capital Regional Policy Working Group Chaired by a country of the region and OECD country Strong involvement of regional policy makers, private sector and OECD experts Focused on delivering a “How To” guideline on implementation of reforms in the targeted policy area OECD Private Sector Development 11 Example: Developing and implementing country / sector specific competitiveness strategies Example for Republic of Moldova Sector specific approaches help focus reform efforts OECD Private Sector Development 12 Engaging the region and listening to country priorities The initiative was formally launched at a Ministerial Conference held on 01 April 2009 at the OECD. Ministers and high-level representatives of all countries of the region (Armenia, Azerbaijan, Georgia, Ukraine and Moldova) adopted a statement to enhance competitiveness in the region The conference was chaired by Poland and Sweden in collaboration with Czech EU Presidency and the EC Strong collaboration with the private sector OECD Private Sector Development 13