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ACHIEVING INCLUSIVE AND RESILIENT GROWTH
IN ARMENIA:
CHALLENGES AND OPPORTUNITIES
ARMENIA SYSTEMATIC COUNTRY DIAGNOSTIC
CONCEPT STAGE
March 2017
What is a Systematic Country Diagnostic?
Identify key challenges and opportunities for country to accelerate progress in
poverty reduction and shared prosperity (the World Bank Group Twin goals) in a
sustainable way
• Available
analyses
• Data
• New analyses
Gather
Evidence
Diagnose
• Challenges
• Opportunities
• What are the
key priorities?
Identify
Priorities
•
Conducted upstream of country partnership framework (CPF) to inform strategic
discussions with client countries and not limited to areas of engagement for WBG in
the country
•
Diagnostic is NOT about what projects or programs the WBG could or will support in
the future. That will come later in when the CPF is prepared.
2
ARMENIA SYSTEMATIC COUNTRY DIAGNOSTIC
CONCEPT STAGE
Outline
1. Context and progress towards the twin goals
2. Looking Ahead: SCD Objectives and Key Questions
3. Reigniting sustained and inclusive growth: What are the
key hypotheses the SCD will examine?
4. Approach
5. Timeline
4
1. Context and progress towards the twin goals
•
Until 2008, Armenia featured as one of the “pre-eminent reformer among the former
Soviet Republics”.
•
Since 2008, radically different and challenging circumstances, with a low growth-low
investment environment and stalled poverty reduction
60
per capita GDP growth
50
poverty headcount
40
30
20
10
0
-10
-20
5
2004
2005
2006
2007
FDI led, nontradable sectors,
construction, high remittance flows
2008
2009
2010
2011
2012
2013
2014
Construction sector collapsed, weakening
remittance inflows, recession in main trading
partner, contracting private consumption
2015
Context
•
Small and landlocked within a troubled
neighborhood
•
Closed borders with Azerbaijan and
Turkey, Georgia is the only regional and
international
trade
route
(Iran’s
opening)
•
Demographic challenges - shrinking
and aging population
•
Social challenges - opportunity and
equity gaps between women and men,
girls and boys
•
Environmental/natural disaster risks
•
Lagging implementation
critical reforms
•
Country is multi-connected via trade,
financial flows, ICT, migration, and
diaspora
•
Armenia could graduate to UPPER
middle income category in about 5
years
6
of
some
Progress towards poverty reduction
and shared prosperity
•
•
•
Poverty reduction gains by and
large before 2009, stagnation
since.
50
Spatial Differences in Poverty Rates in Armenia (%
poor): Secondary Cities have the highest poverty rate
40
30
Spatial differences – capital city,
secondary cities, rural areas.
20
Shared prosperity gains by and
large before 2009; consumption
of the poorest 40 percent barely
grew since 2009.
0
10
2008
2009
2010
2011
Rural areas
2012
2013
Secondary cities
2014
Yerevan
Shared prosperity in Armenia (consumption growth)
5.61%
3.20%
2.42%
2.17%
1.61%
1.87%
1.89%
2.15%
0.85%
2004-2009
7
2015
2009 - 2014
Bottom 40 percent
Top 60 percent
2004-2014
ALL
What have been the drivers of poverty reduction?
•
Employment rate, labor and agriculture income,
pensions are key drivers of poverty reduction.
Remittances are driver of poverty reduction outside
Yerevan.
Drivers have changed in importance after the 2009
crisis
– for secondary cities: waning impact of labor income
and growing importance of pensions and remittances
– for rural areas: greater importance of labor income,
agriculture income and employment; remittances
impact declined
– for Yerevan: labor income, employment and pension
have become more important
•
•
•
•
Yerevan
Total change in poverty
Per capita remittances income
Per capita asset income
Per capita public transfer income
Per capita private transfer income
Per capita pension income
Per capita agriculture income
Labor income per employed adult
Employment rate
Dependency rate
-15
-10
-5
Poverty change b/w 2004-2007
Secondary Cities
-10
Poverty change b/w 2004-2007
8
-5
5
Poverty change b/w 2010-2015
Rural areas
Total change in poverty
Per capita remittances income
Per capita asset income
Per capita public transfer income
Per capita private transfer income
Per capita pension income
Per capita agriculture income
Labor income per employed adult
Employment rate
Dependency rate
-15
0
Total change in poverty
Per capita remittances income
Per capita asset income
Per capita public transfer income
Per capita private transfer income
Per capita pension income
Per capita agriculture income
Labor income per employed adult
Employment rate
Dependency rate
0
Poverty change b/w 2010-2015
5
-15
-13
-11
-9
Poverty change b/w 2004-2007
-7
-5
-3
-1
Poverty change b/w 2010-2015
Source: ILCS data for 2004, 2007 and 2015.
Note: Based on micro-decomposition of poverty change, negative numbers indicate that the factor helped to reduce poverty, positive
numbers indicate the opposite effect (World Bank staff calculations).
1
2. Looking Ahead:
SCD Objectives and Key Questions
SCD Objective: to formulate forward looking options for fostering inclusive and
sustainable growth in Armenia to support poverty reduction and shared prosperity
 With a focus on ensuring greater equality of opportunity for women and men, girls and
boys


Can Armenia continue to rely on the past development model to achieve sustainable growth
with poverty reduction and shared prosperity?

Global external environment
investment/liquidities)

Past drivers of growth have run their course (transition gains from structural opening/catching up
and first generation reforms)
changed
drastically
(low
commodity
prices,
low
What could be the key enabling conditions to reignite economic growth that is both inclusive
and resilient?

Inclusive growth as a growth process where equal opportunities are provided to economic
participants and benefit all.


9
has
Special focus women opportunity to find good jobs
Resilient growth means building macroeconomic buffers over time, protecting the most
vulnerable segments of the population with safety nets and managing natural and environmental
assets sustainably.
3. FOUR HYPOTHESES
Four hypotheses to be examined in SCD
1. Armenia needs a new growth model and drivers
of growth to adapt to its new circumstances
2. Supporting firms’ productivity and a vibrant
private sector crucial for economic growth
3. Investing in productive individuals will be key for
inclusive growth
4. Building national resilience to vulnerabilities will
bring sustainable growth
11
Hypothesis 1: A new growth model and
new drivers of growth
 After 2009 and an abrupt stop of
financial inflows, sluggish growth.
Growth by sectors
12
Net indirect taxes
10
percentage points
 Prior to 2009, Armenia experienced a
“double Dutch Disease” (currency
appreciation with high financial
inflows (FDI, ODA, remittances,
exports).
Agriculture
8
Industry
6
4
Construction
2
Services
0
2000-2008
2010-2015
GDP (at market prices)
-2
Growth decomposition by factors
12
non-ICT
Capital
10
8
ICT Capital
6
TFP
4
2
0
2000-2008
2010-2015
GDP Growth
(RHS)
15
Private consumption
percentage pointsd
14
-2
Growth by expenditures
Labor
10
Public consumption
5
Net Exports of G&S
0
2000-2008
-5
12
Gross Investment
2010-2015
GDP at market prices
Lack of trade integration
 less open than its peers (exports of goods and services 30% of GDP),
 “more” landlocked with two closed borders,
 ranked 141 among 160 economies worldwide in 2016 Logistic Performance
Index,
 only half of the road network (excluding urban) is in good or fair condition,
 low high-speed broadband penetration, high prices.
Exports of goods and services (% of GDP)
50
45
40
35
32
30
25
20
15
29
23
25
30
29
28
28
29 30
24
23
21
19
15
Armenia
15
Georgia
10
5
0
13
Europe &
Central Asia
What will it take for new growth drivers to emerge
and be sustained?
•
What are the existing positive drivers? What can we learn from them? How can they
be accelerated and applied elsewhere in the economy?
→ Dynamism and resilience in the agriculture sector.
→ Success story of small but fast-growing IT industry
→ Recent growth rebalancing from consumption to exports and increasing diversification
of export destinations
→ Active and entrepreneurial diaspora
→ Prospects of Armenian mining and metals?
→ Possible re-integration of Iran and transit corridor between Iran and Russia/Europe.
•
How can Armenia rebalance its growth model from domestic drivers (consumption,
non-tradable) to exports and tradable?
→ Growth analysis and scenarios
•
How much is Armenia connected to the rest of the World? What policies /regulations
are hindering the development of exports commensurate with Armenia’s particular
endowments? What can be done to support a multi-connectivity agenda for Armenia
to tap into regional and global markets?
→ Trade, Trade and Transport facilitation analyses with regional and global value chains
→ Trade in services
→ Multi-connectivity angle (ICT, diaspora)
→ Trade integration agreements (EEU)
14
Hypothesis 2: Supporting productive firms
and a vibrant private sector
Firm-level productivity characteristics*:
•
Heterogeneity: A large number of relatively efficient firms coexist alongside
significantly less efficient competitors
•
The policy environment in Armenia has a larger impact on firm-level productivity
than in other countries in the region.
•
Among policy factors the overall quality of governance and the availability of
skilled labor have the largest impact on firm-level productivity.
•
Export propensity is positively correlated with access to finance, higher rates of ICT
use, increased importing activity, access to infrastructure and productivity.
•
Foreign-owned firms employ more highly skilled labor and are more productive.
* source: World Bank (2015) “Drivers of Dynamisms” Country Economic Memorandum
15
Investment climate
•
Armenia investment climate lags behind
•
Powerful business groups with interests cutting across sectors influence policymaking and prevent
new market entrants.
•
Lack of market contestability in sectors providing important production inputs (utilities, internet
connectivity) hinder the emergence of a dynamic export-oriented private sector.
Doing Business 2016
World Competitiveness Index 2016
Subindex A: Basic
requirements
Innovation
Business
sophistication
Subindex C:
Innovation and
sophistication…
7
Institutions
6
5
Infrastructure
4
3
Macroeconomic
environment
2
1
0
Health and primary
education
Market size
Technological
readiness
Financial market
development
Labor market
efficiency
Armenia -4.1
16
Subindex B:
Efficiency
enhancers
Higher education
and training
Goods market
efficiency
Georgia - 4.3
Estonia - 4.8
What will it take for Armenia’s private sector to
strive and export to the world?
•
What are the top constraints to firm productivity? How can firm productivity be
enhanced?
→
Measurement and comparison of Armenia firm-level productivity
→
Determinants of firm productivity, firm and product survival, entry, exit
→
Main constraint to firm productivity growth
•
To what extent does the current investment climate support firms to access global
markets? What are the key constraints to be removed?
→
regulations and implementation of rules, formulation and effectiveness of policies
→
state footprint (interaction between the private and public sector, e.g. tax
administration)
→
role of financial markets and their intermediation role against the background of low
domestic savings
→
Property rights, constraint to entry and exit
→
access to infrastructure including road, water, electricity, internet, finance
→
access to skills
→
enabling environment for innovation and knowledge
•
How adequately do the incentives of the governance environment support firm
productivity?
→
Role of the public sector as producer and employer
→
competition and market contestability
→
less traditional investment climate barriers such as corporate governance and
conflict of interest between the public and private sectors
17
Hypothesis 3: Invest in people’s productivity
Labor productivity growth slowed down significantly
18
Structural shift from agriculture towards better jobs
but low productivity
(Amd billion, constant
2010 prices)
Change in value added and employment between 2010 and 2015
1,000
900
800
700
600
500
400
300
200
100
0
thousands people
500
19
400
300
200
100
0
...by value added
2010
... by employment
2010
2015
2015
Weak employment outcomes despite high education
•
•
Weak employment outcomes
•
44% women, 60% men employed (low
participation)
•
19.5% women, 17.6% men unemployed
About half of the jobs in Armenia are
informal, of which 72 percent in agriculture,
30 percent outside.
•
One in four jobs is considered low-paying.
•
More than half of the youth pursue high
tertiary education, general education is
close to universal.
•
•
•
20
Skills matter as much as education. The
labor market rewards education (credentials)
combined with skills (job and socioemotional). an additional year of education
would increase hourly earnings by around 2.4
percentage points.
Employers report difficulties
workers with the needed skills.
in
2,500
80
70
2,000
60
49.8
1,500
48.1
49.6
53.2 52.0
51.4 51.9
50.9
50
40
1,000
30
16.4
500
18.7 19.0 18.4
17.3 16.2 17.6 18.5
20
10
finding
More than a third of households have
migrants who work abroad.
Employment
rate, %
0
0
20082009201020112012201320142015
Unemployment
rate, %
Total labour
resources (000
persons)
Economically
active
population (000
persons)
Total
employment
(000 persons)
Unemployment
(000 persons)
Spatial differences in activity patterns reflect
variations in labor market opportunities
Activity status of household heads in Yerevan, Secondary cities and Rural areas
100%
90%
13%
22%
21%
12%
14%
5%
1%
80%
70%
60%
50%
25%
24%
7%
20%
10%
2%
29%
4%
10%
10%
14%
6%
40%
18%
55%
9%
54%
13%
30%
20%
44%
38%
41%
34%
28%
10%
16%
0%
Nonpoor
Poor
Yerevan
Employee
Self employed
Nonpoor
Poor
Nonpoor
Secondary cities
Unemployed
Retired
Poor
Rural
Student
Out of labor force
Source: World Bank staff calculations using ILCS 2015. Household heads
aged 15 to 75
21
What will it take for all individuals to meaningfully
contribute to Armenia’s development?
• What are the key constraints to enhancing individuals’ productivity? How
can all segments of the work-able population contribute to the economy,
especially women?
• To what extent is education delivering and producing individuals with needed
skills?
• What are the root causes of spatial disparities and their underlying
dynamics?
• What are the implications of a shrinking and aging population for the labor
supply and existing skills?
• What is the impact of migration on reservation wage, labor productivity,
stock of educated individuals, and incentives to work? What are the
implications?
22
Hypothesis 4: Build resilience to vulnerabilities
60
0
50
-1
50%
Significant
macroeconomic
vulnerabilities
-2
40
-3
30
45%
40%
35%
30%
-4
20
25%
-5
20%
10
-6
15%
0
-7
10%
2012
2013
2014
2015
2016
External public sector debt (lhs % GDP)
Domestic public sector debt (lhs %GDP)
•
Limited available fiscal space
exhausted,
leaving
country
vulnerable to shocks
Challenging
financial
conditions: under-sized,
dominated,
with
vulnerabilities
sector
bankrising
Domestic debt
CBA's external debt
Bank nonperforming loans to total gross
loans (%), 2016
Upper middle income
3.8
Lower middle income
6.0
Europe & Central Asia (excluding high
income)
Georgia
Armenia
23
0%
External debt
Fiscal balance (rhs - %GDP)
•
5%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2011
9.2
3.7
9.3
Household and environmental vulnerabilities
Individual level: Increasing share of the vulnerable and moderate poor; high share of out of
pocket spending on essentials (health, energy).
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Middle class (Living above $US 10)
Vulnerable (Living between $US 5 and 10)
Moderate poor (Living between $US 2.5 and 5)
Extreme poor (Living below $US 2.5)
Natural and environmental: vulnerable to earthquakes, landslides; environmental risks
(health risks of air pollution), degradation of natural resources (water, erosion of
rangelands)
24
What will it take to build resilience?
•
Macroeconomic sustainability, including fiscal, external, financial:
→
→
•
Protecting households from vulnerabilities
→
→
•
What are the key vulnerabilities at the individual-level?
How can vulnerabilities be mitigated and by which instruments or mix of
instruments? (social protection, health spending, dependence on natural assets,
vulnerability to environment)
Environmental sustainability:
→
→
25
How to rebuild a fiscal buffer?
How to anticipate and respond to the macroeconomic impact of a declining and
aging population on long-term growth and macroeconomic sustainability? How to
respond to the macroeconomic impact of migration and remittances?
How to respond to threats to the environment, climate change?
How to manage vulnerability to natural disasters? Here strengthened disaster risk
management frameworks and role of citizen engagement would be important.
4. APPROACH
Approach
• Diagnosis of past (circa 2004-2008 and 2009-2015) drivers of growth, poverty reduction,
and inclusion.
• Benchmark or evaluate performance using comparator countries:
Include select countries from group of lower middle income countries, upper middle
income countries, Eurasian Union, Eastern Partnership countries, EU member and
candidate countries (including Western Balkan countries)
Countries that could be considered “aspirational” for Armenia such as Singapore
When relevant the SCD will also compare Armenia’s experience and policies to
remittance receiving countries, landlocked countries, and countries experiencing similar
demographic patterns.
• Use data from NSS and international databases.
• Knowledge sources
building on existing knowledge
gaps in knowledge to be identified (e.g. urbanization, job diagnostic, trade and transport
facilitation)
27
Criteria for priorities?
Using the analyses, the SCD will prioritize the constraints and opportunities most
important for inclusive and resilient growth, based the following criteria:
Criterion 1: Large and lasting impact on inclusive growth and resilience and hence on
poverty reduction and shared prosperity
Criterion 2: Macroeconomic context
Criterion 3: Sequencing, complementarity and feasibility of reforms
Criterion 4: Feedback from country experts (sounding board)
The SCD will consider what the reform priorities would imply for spatial disparities as
well as and for strengthening the economic potential of both women and men.
28
5. Next Steps
Timeline
• Regional Operation Committee Concept Review (February 15)
→ Chaired by the World Bank Regional Vice President
• Consultations on SCD concept (March 2017)
• Consultations on reform priorities (June 2017)
• WB Management decision meeting (June 2017)
→ Chaired by the World Bank Regional Director
• Report publication (July 2017)
30
THANK YOU
[email protected]