Download Growth and

Productivity Growth and
Job Creation in Eastern
Europe and the Former
Soviet Union
Pradeep Mitra
Chief Economist
Europe and Central Asia Region
Presentation at a plenary session of a conference on
“Modernization of Economy and the State” organized by the State
University Higher School of Economics in Moscow, April 4-6, 2006
Views expressed are mine and do not necessarily represent those of the World Bank.
1
100%
Distribution of Population by Poverty Status
90%
Growth and
(mostly) no
increase in
inequality have
moved 40 million
people out of
poverty in
Eastern Europe
and the Former
Soviet Union
during 1998-2003
Source: Staff estimates based on World Bank (2005a)
80%
Non-Poor: above $ 4.30
178.3
231.8
70%
60%
Vulnerable:above $
2.15 and below $4.30 a
day
50%
40%
139.6
30%
127.3
Poor below $ 2.15 a
day
20%
10%
88.6
46.2
0%
Around 1998-99



Around 2002-3
Where roughly 20 percent (or 1 in 5)
were poor, today 12 percent (1 in 8) are
poor
Poverty has fallen almost everywhere
Much of this poverty reduction has
occurred in the populous middle-income
countries in the Region (Kazakhstan, the
Russian Federation, and Ukraine)
2
Working adults and children continue to form the bulk of
the poor in the region, so that much of the impact of
growth on poverty reduction has been transmitted through
the labor market
Note: EU-8 $4.30 a day at 2000 PPP as a poverty line; others $2.15 a day at 2000 PPP
Source: World Bank (2005a)
3
Overview of the Argument
(arrows run from determinants to outcomes)
Business Environment
(regulations, institutions/property
rights, taxation, competition)
Firm entry and exit
Firm entry
Labor market institutions
(employment protection
legislation, system of wage
bargaining, unemployment
benefits)
Growth in labor productivity
Employment growth
GDP Growth
.
Public transfers (pensions,
social assistance)
Poverty Reduction among
Working families
4
Growth in GDP per capita from 1998 to 2003 owes more to growth
in labor productivity (GDP/EMPL) than improved employment
rates (EMPL/Working POP) or demography (Working POP/POP)
Growth in GDP/POP) = (Growth in GDP/EMPL) +
(Growth in EMPL/Working POP) + (Growth in Working POP/POP)
Average annual growth in GDP per capita and its components, 1998-2003
15%
10%
GDP/EMP
EMP/Working age POP
Working age POP/POP
GDP/POP
5%
0%
-5%
1 Working
age population covers the age range 15-64
Source: Labor Force Survey, World Development Indicators
Macedonia, FYR
Czech Republic
Poland
Slovak Republic
Slovenia
Croatia
Romania
Hungary
Bulgaria
Lithuania
Belarus
Estonia
Ukraine
Albania
Latvia
Russian Federation
Armenia
Kazakhstan
Azerbaijan
-15%
Moldova
-10%
5
Growth in labor productivity was reflected in real wage
growth across all consumption quintiles, while . . . .
6
. . . . the employment rate continued to fall in many countries after
1998. The employment rate is generally higher in CIS countries, but
many jobs are in low-productivity occupations partly because . . . .
Employment Rates: Early Transition, 1998 and 2003
90%
Earliest year
1998
2003
80%
70%
60%
50%
40%
30%
20%
Source: Labor Force Survey, World Development Indicators
Note: The employment rate in Moldova between 1998 and 2003 shows a decline based
on LFS but an increase based on household survey data (previous slide) on account
of a likely more restrictive definition of informal sector employment in the LFS.
Albania
Moldova
Armenia
Poland
Hungary
Slovak Republic
Bulgaria
Ukraine
Romania
Lithuania
Belarus
Slovenia
Estonia
Czech Republic
Azerbaijan
Kazakhstan
0%
Russian Federation
10%
Note: The earliest years (blue bars) for each country are as
follows:
1990:Azerbaijan, Belarus, Bulgaria and Estonia
1992: Hungary, Russia
1993: Armenia, Czech Republic, Kazakhstan, Poland and Slovenia
1994: Albania, Lithuania, Romania and Slovak Republic.
1995: Moldova and Ukraine.
7
. . . . de-industrialization in low income CIS has been accompanied
by a large labor transfer into low-productivity agriculture in the
absence of adequate social safety nets. Not so in Central Europe
where there has been a reduction in agricultural and industrial
employment, with jobs moving to market services
1989
1989
2000
2002
0%
25%
Agriculture
50%
Industry
75%
Services
Czech Republic
Source: World Bank (2005b)
100%
0%
25%
Agriculture
50%
Industry
75%
100%
Services
Kyrgyz Republic
8
Shifts reflected in declining share of skilled labor- and capitalintensive exports in low income CIS and move towards natural
resource exports. In EU-8, increased share of skilled labor- and
capital-intensive exports.
Factor Intensity of Merchandise Exports in Subgroups of Transition Countries, 1996 and 2003
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
3)
A
tra
ns
it io
n
(0
6)
n
it io
EC
EC
A
tra
ns
Lo
w
IS
-
Capital Intensive
Source: Computations based on UN COM Trade Statistics adapted from World Bank (2005c)
(9
3)
in
c
(9
c
in
C
Lo
w
IS
C
C
Unskilled Labor
(0
6)
)
(0
3
in
c
IS
-
M
id
IS
C
Natural Resources
M
id
in
c
(9
6
)
(0
3)
SE
E
(9
6)
SE
E
3)
(0
8
EU
EU
8
(9
6)
0%
Skilled Labor
9
The drivers of productivity growth: the change in aggregate labor
productivity is decomposed into (i) within-firm, (ii) between-firm, and (iii)
cross components, and the contribution of (iv) entrants and (v) exiters
Between
Cross
Entry
S
un A
g
R ary
om
an
ia
U
K
H
Ar
g
Within
U
in
a
C
C hil
ol e
om
b
Es ia
to
n
Fi ia
nl
an
Fr d
an
ce
Ko
re
a
N La
et
t
he via
rla
n
Sl ds
ov
en
Ta ia
iw
an
140
120
100
80
60
40
20
0
-20
-40
-60
-80
en
t
% of total labor productivity growth
Sources of Productivity Growth in Transition, Emerging, and OECD Countries
Exit
Labor Productivity growth - Five -Year Differencing, Real Gross Output.
For Hungary and Romania the decomposition refers to a three-year differencing.
Labor Productivity decomposition shares – Manufacturing Five-Year Differencing, Real Gross Output
For Hungary and Romania the decomposition refers to a three-year differencing which, given significant learning and selection by new entrants,
Underestimates the contribution of entry to productivity growth.
Source: Staff estimates based on Bartelsman, Haltiwanger and Scarpetta (2004)
10
Firm entry and exit are more important in transition countries,
contributing between 20 to 45 percent of productivity growth
11
The drivers of employment: firm entry contributed
strongly (25-50 percent) to job creation. Job creation1/
and job destruction2/ rates increased dramatically in
transition countries
1/
2/
Employment gains during a year divided by average employment during the year.
Employment losses during a year divided by average employment during the year.
12
The business environment has been improving steadily in the
transition countries, but is generally still more difficult than in
the cohesion countries of Western Europe
3.5
3.0
2.5
2.0
1.5
1.0
Regulation
Labour
Taxation
1999
2002
Institutions
2005
Infrastructure
Finance
Macro
instability
Cohesion countries 2005
The business environment was assessed on a scale from 1 (no obstacle) to 4 (major obstable)
Source: Business Environment and Enterprise Performance Surveys 1999, 2002, 2005
Cohesion countries include Greece, Ireland, Portugal and Spain
13
Business environment in 2005 more difficult for de novo than
privatized and state firms in regulation and institutions and
property rights, particularly in SEE and CIS and in taxation
3.0
2.5
2.0
1.5
1.0
de novo
state & privatized
de novo
de novo
state & privatized
Institutions
Taxation
Regulation
Cohesion countries
New EU member states
The business environment was assessed on a scale from 1 (no obstacle) to 4 (major obstable)
Source: Business Environment and Enterprise Performance Survey, 2005
state & privatized
SEE
CIS
14
Re: potential exiters, higher fraction of state and privatized
firms (than de novo) have arrears to utilities the budget,
employees and suppliers, which retards their exit
0.3
0.2
0.1
0.0
Cohesion countries
New EU member states
state & privatized
SEE
CIS
de novo
The business environment was assessed on a scale from 1 (no obstacle) to 4 (major obstable)
Source: Business Environment and Enterprise Performance Survey, 2005
15

Business environment
difficulties reflected in
FDI stock per capita
FDI Stock per Capita and Share of Skilled Labor
and Capital-Intensive Exports, 2003
Czech
Republic
Hungary
CIS, some SEE:
natural resource or
unskilled laborintensive exports and
lower quality jobs
8
Croatia
7
Latvia
Azerbaijan
Kazakhstan
Slovenia
Slovak Republic
Poland
Lithuania
Bulgaria
6
Macedonia Romania
Albania
5
Armenia
Georgia
Serb & Montenegro
Russian Federation
Belarus
Moldova
Ukraine
Kyrgyz Republic
4

EU-8, some SEE:
skilled-labor and
capital-intensive
exports and better
jobs
ln(FDI stock per capita in 2003 in US$)

Estonia
0
20
40
60
80
Share of skilled-labor and capital intensive products in total exports in 2003
16
Conclusions
 Continued poverty reduction will depend on growth in
labor productivity and job creation, together with a
targeted program of public income transfers
 Entry of new firms and exit of obsolete firms important for
the growth of labor productivity, while entry of new firms
also important for job creation in the transition countries
 The business environment continues to be more
challenging in the transition countries (esp. SEE and
CIS) than in the cohesion countries of the EU, particularly
for new firms compared to state and privatized firms
 The business environment also retards the exit of stateowned and privatized firms
17
Conclusions (cont.)
 Difficulties in the business environment, not illiberal
trade regimes, limit the FDI that would integrate CIS and
parts of SEE into global networks, expand the share of
skilled labor- and capital-intensive exports and better
jobs
 Continued improvements in the business environment,
and a level playing field for de novo firms are critical for
productivity growth and job creation
 Labor market institutions not the primary cause of low
labor market performance but job creation can be
helped by reform of employment protection legislation,
firm-level wage determination, and reform of social
assistance schemes to encourage labor turnover
18