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How Can the Small Countries in the Western Balkans Continue to Grow?

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

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How Can the Small Countries in the Western Balkans Continue to Grow?

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  1. 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

  2. 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

  3. Selected Indicators for Western Balkans

  4. Growth Appears Healthy in 2007

  5. But growth not as good as other regions (2000-06 average)

  6. 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

  7. 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…

  8. 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

  9. Poor Export Performance

  10. Exports as a Share of GDP

  11. Export Patterns: Low Skills, High Wages

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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’?

  17. 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

  18. 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

  19. 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

  20. Costs of Skype Calls (EUR cents)

  21. 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

  22. 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

  23. 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

  24. 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

  25. 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

  26. 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:

  27. 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

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