Transcript How Can the Small Countries in the Western Balkans Continue to

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
 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
Selected Indicators for Western
Balkans
Population (millions)
Poverty rate (%, 2005)
GDP (billion current $)
GDP per capita (US$)
Alb
BH
Cro
fYRM
Mont.
Serbia
3.2
3.8
4.5
2.1
0.6
7.5
25.4
17.8
4.0
22.0
10.4
9.4
9.1
12.9
42.6
6.2
2.4
31.6
2,830
3,290
9,580
3,050
3,760
4,220
Growth Appears Healthy in 2007
12.0
10.0
8.0
6.0
4.0
2.0
ov
ak
ia
Sl
Se
rb
ia
Ro
m
an
ia
RM
FY
Cr
oa
t ia
H
Bi
Bu
lg
ar
ia
Al
ba
ni
a
0.0
But growth not as good as other
regions (2000-06 average)
9
8
7
6
5
4
3
2
1
0
WBalkans
Baltics
E Asia
S Asia
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
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…
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
Poor Export Performance
BCR vs Balkans: Exports/GDP
50.0
45.0
40.0
35.0
30.0
25.0
Series1
20.0
•
15.0
10.0
5.0
0.0
1
2
Exports as a Share of GDP
Exports, GNFS (% GDP, 2006)
100.0
60.0
40.0
20.0
Sl
ov
ak
ia
Se
rb
ia
om
an
ia
R
M
FY
R
ul
ga
ria
C
ro
at
ia
B
iH
B
lb
an
ia
0.0
A
%
80.0
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
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
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
FDI important for exports and
growth
 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
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
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’?
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
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
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
Costs of Skype Calls (EUR cents)
Macedonia
Bosnia and
Herzegovina
Albania
Montenegro
Serbia
Bulgaria
Slovenia
Croatia
EU-15
fixed-line
17.6
mobile
29.6
16.5
13.7
9.3
9.3
5.5
5.2
4.3
1.7
24.6
16.2
20.9
20.9
21.5
23.9
17.9
-
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
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
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
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
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
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:
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