Transcript Trade, Regional Integration and Growth in the Western

Trade, Regional Integration and
Growth in the Western Balkans
Sanjay Kathuria
Poverty Reduction and Economic Management
Europe and Central Asia Region
World Bank
Outline of presentation
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Macro performance
Concerns about growth
Role of exports
Export performance: patterns
Role of FDI
What can be done to attract FDI?
Consistency with Poverty Agenda
Macro performance
But not as good as other regions
(2000-06 average growth)
9
8
7
6
5
4
3
2
1
0
WBalkans
Baltics
E Asia
S Asia
And there are other important
concerns
Need to increase and sustain growth, given
poverty and EU aspirations. But concerns
on sustainability:
• TFP growth harder to achieve
• Trade preferences eroding (Bulgaria,
Romania, multilateral liberalization)
• The CHINA factor
• Current account deficits: stability issue
• Exports well below potential and need
Exports are critical for growth and
current account sustainability
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Small countries need to trade more
They also benefit more from trade
In fact, growth has to be export-led
EU integration also demands increased
exports
• However, export performance, despite
recent growth, is disappointing…
Aspects of 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 producerdriven 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
• Merchandise trade deficit varies from 17 % (SaM) to 49 % of GDP (BiH)
• Under-trading relative to potential
• Per capita exports of goods and services very low indeed: US$ per capita
exports from 584 (Albania) to 1236 (FYRM); Croatia 4206; Slovakia 5940; Turkey
(much bigger) 1368 (all figures 2005)
Export Patterns: Focus on Low-skill and
Natural Resource-Intensive Exports
CI+SI (%) Official wage
Albania
10.9
165
BiH
33.2
408
FYRM
35.2
348
SaM
46.8
307
Bulgaria
34.2
161
Croatia
39.3
841
Slovakia
71.0
296
• Wages are gross official wages in euros. Wages appear out of
line with Skill Intensity of exports (2005)
• Slovakia very strong in high CI and SI (capital intensive and
skill-intensive)
• Low wage segment: Bulgaria strong, and China, India, Bgldesh.
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 yet become part of the production
supply chain: which is dynamic and fast-growing
FDI explains exports
90.0
80.0
70.0
60.0
50.0
Series1
40.0
Expon. (Series1)
30.0
20.0
10.0
0.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
• Exports to GDP (vert. axis) and FDI to GDP (horizontal axis)
• Explains export performance to a large extent and also performance
in producer-driven supply chains
But what can be done about FDI?
• Countries are small.
• Why not invest in say Slovakia and within
SEE in Croatia, Romania and Bulgaria?
• Until 2005, total FDI stock in Western
Balkans (excl Croatia, 17 m popn.) was $
11 billion
• FDI in Croatia (4.5 m popn.) $12.5 billion
• FDI in Slovakia (5.4 m popn.) $15.3 billion
Move towards a Single Economic
Space: Deeper Integration in SEE
• Deep integration: policies to reduce market
segmentation (eg., customs clearance reqts.,
competition policy, FDI policy, sector-specific
policies, barriers to trade in services, etc.)
• Major step forward: CEFTA 2006 signing: hence
SEE as a whole is regional space
• But long road ahead: reducing border frictions,
cumulation of rules of origin (CEFTA, then with
EU), regional cooperation in services
• Benefits: more competition in the supply of
goods and services, higher FDI (single market),
and more intra-regional supply chains
Human Capital Formation is
Centerpiece
• Wages are out of line with pattern of exports
(earlier table)
• Exchange rate arrangements do not allow much
flexibility for most countries and high remittances
add to pressure on ER
• Productivity improvement is thus critical
• 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
• Very consistent with Poverty Agenda--Wkg. Poor
Energy : can be a Binding
Constraint to Growth
• World over, electricity can be a binding
constraint to growth: India, Bangladesh
• Business abhors unpredictability in critical inputs
• Electricity not a major issue in BEEPS 2005
except Albania (prob. for 57% firms). Albania lost
upto 1 percent of GDP in 2005. FYRM also
faced with problem last year
• Pre-empt regional energy shortages: the
regional market is the optimal solution, will help
to reduce volatility in supply as well as demand
(and so help both producer and consumer)
Telecommunications: High Costs deter
Integration and reduce potential gains
• Average costs of Skype call to Western Balkans
(excl Croatia) is about 16 cents
• Western countries: 2.1c, Bulgaria, Croatia and
Slovakia: 6.8 c
• ECA 18 country study (2007): within
infrastructure, highest contribution to productivity
from better telecom quality
• Application of telecom universal
• Potential payoffs to better connectivity and
reduced costs very high, especially looking to
deeper integration and supply chains within SEE
Sum-up: Policies to attract FDI, Increase
Exports and position for future growth
• FDI is attracted by many factors, but crucial ones
are a large domestic market, competitive human
resources, and critical elements of infrastructure
• Deeper Integration and reduction of barriers
thereof
• Human Skill formation
• Energy
• Telecom
• In many areas, incl. telecom, private sector will do
the investment, but effective deregulation needed
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 Alb, 46% FYRM),
productivity of jobs is critical
• Human capital formation agenda outlined here:
critical to sustained exports and growth
• Thus, another strong link between poverty and
growth agenda