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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