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

3EU11 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

TimelinessEU 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

Koso

vo BiH

Alba

nia

Serb

ia

Mon

tene

gro

Mac

edon

ia, F

YR

Pana

ma

Mal

aysia

Irela

nd

Sing

apor

e

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 Sk

ill P

erce

ntile

of 2

007

Ski

lls D

istrib

utio

n

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 2000sIntermediate Reformers FYR Macedonia 1990s Intermediate Reformers FYR Macedonia 2000sLate 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

Ann

ual p

er c

apita

con

sum

ptio

n gr

owth

perc

ent,

1970

-200

9

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