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Economic Challenges in
the Enlargement Region
Where are we now, a year after
the crisis started?
 Good news for enterprises, but external financing
requirements clouds the future


Industrial production stopped falling in the last couple of months
But USD164 billion of external financing requirements (for CAD and debt
amortization) needed in 2010
 Bad news for families as poverty and unemployment
rise, while household debt clouds the future


Between 2002 and 2008 number of poor decreased by 15%
But now estimate is that poverty rate will be higher by 5 percentage points
 Tough times ahead for governments, and social
security debt clouds the future


Fiscal deficits will rise from 2.4 percent of GDP in 2008 to 4 percent of GDP in 2009
Stress tests indicate pension deficits rising to 5-6 percent of GDP
2
Financing
requirements
Poverty trends
180000
Western Balkans $5 Poverty and Vulnerability
Rates
160000
140000
36
120000
Serbia
Montenegro
100000
FYRM
80000
Kosovo
Croatia
60000
Bosnia
Albania
40000
$5 a day poverty rates
Turkey
35.2
34
32.7
32
30.4
30.2
30
29.7
28
28.1
26
25.8
24
22
20
2006
20000
0
2009
2010
2007
2008
Base Scenario
2009
Crisis Scenario
2010
Response to crisis: accelerate
structural reforms
 With unemployment on rise and increasing competition
for investors these countries should focus its effort on:
 creation of jobs through new investments: business environment
 easing the access to markets and flow of goods: Infrastructure
 Since at the same time governments are faced with
tighter budgets they need to:
 increase effectiveness of spending in large social sectors including
pensions and social protection
 create savings by speeding up public administration reform
Regulatory reforms to improve
business environment
Economy
 Countries from our region
are not among the top
ranked countries (except
FYRM) as per Ease of Doing
Business index 2010
 In some cases all suffer
from the same problem,
like for instance dealing
with construction permits
 Recovery from the global
economic crisis would
assume agile private sector
Ease of Doing Business
Rank
Macedonia, FYR
32
Montenegro
71
Turkey
73
Albania
82
Serbia
88
Croatia
103
Kosovo
113
Bosnia and Herzegovina
116
Economy
Dealing with Construction
Permits
Macedonia, FYR
137
Montenegro
160
Turkey
133
Albania
173
Serbia
174
Croatia
144
Kosovo
176
Bosnia and Herzegovina
136
Regulatory reforms to improve
business environment
 Most of these countries need to ensure:
Better contract enforcement
Land management and property rights
Strengthen minority shareholders’ protection
Simplify the exit from business (i.e.
bankruptcy legislation) while ensuring
protection for creditors
 Some countries started “Regulatory
Guillotine” i.e. Croatia and Serbia




Infrastructure
 State of infrastructure is in most cases below
European standards
 This is significantly limiting trade and
investments in the region
 At the same time governments’ spending on
infrastructure is not low which indicates poor
state of public investments management
 Most of the attention should be paid to
energy and transport sectors
Social Protection
 Growth of unemployment due to impact of the crisis
will require increased social spending
 Most of the countries from the “Enlargement
region” have high levels of spending on social
protection
 But significant share of it goes to veterans, which
shows that these countries actually spend little on
social protection.
Public Spending on Social Assistance excl.
veterans, % of GDP
Public Spending on Social Assistance,
% of GDP
ECA average
Slovak
Kosovo
Belarus
Czech Republic
Montenegro
Turkey
FYR Macedonia
Serbia
Russia
Serbia
Montenegro
Kosovo
Albania
Latvia
Kosovo
Albania
Poland
Bosnia-Herzegovina
Tajikistan
-
1.0
2.0
3.0
4.0
5.0
-
0.5
1.0
1.5
2.0
Reform of Social Protection
 Harmonization of benefit structure and
objectives with the EU member states
 Linking cash benefits to social care services
and labor market activation
 Improving the monitoring and reporting on
benefit application and intake
 Improving beneficiaries registries
 Reducing exclusion
9
Pensions
Pensions
Population in Region is Aging:
- By 2050, the percentage of elderly almost doubles while the
percentage of working age available to support both the elderly and
the children falls
Population Structure in
2005
65+
12%
15-64
68%
0-14
20%
Population Structure in
2050
65+
22%
0-14
16%
15-64
62%
Financial Crisis Impact Pales with
Comparison to Coming
Demographic Crisis
 Even in the most
severe crisis
scenario which no
longer seems
likely, the fiscal
impact is less than
half of what’s
coming from the
demographics
Projected Fiscal Deficits
for Typical Central and
Southeast European
Base Case
Country
Severe Crisis
2007 2017 2027 2037 2047 2057 2067
%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
How Can Countries Prepare for
the Demographic Crisis?
 Raise retirement ages, particularly for women
 Retirement ages are still below western European levels,
particularly for women
 Men’s life expectancies are a bit lower than western European,
but women’s are not
 Lower the extent of early retirement
 As many as 2/3 of new pensioners are retiring earlier than
legislated retirement ages in some countries
 Index pensions in payment to inflation only
 Protect the pensioners’ purchasing power, not necessarily
income relative to wage earners
 Start preparing for elderly without pension rights
 Most elderly in former socialist countries have pension rights
now
 But many of the current working age are not in the formal
labor market and not contributing
Public Administration Reform
Public Administration Reform
 Due to severe deterioration of the fiscal stance (i.e.
increasing fiscal deficits primarily due to falling
revenues, except for Albania)
 The need for savings in the public sector become
more pressing
8.0
6.0
Overall deficit, as %GDP
60.0
50.0
4.0
Total Revenues, as
%GDP
40.0
2.0
2007
30.0
200
7
-2.0
2008
20.0
200
8
-4.0
2009
p
10.0
200
9p
0.0
-6.0
-8.0
-10.0
-12.0
0.0
Public Administration Reform
 Most of the efforts are aimed at reducing the
wage bill
 Bosnia, Kosovo, FYR Macedonia,
Montenegro, and Serbia, all started the work
on new legislation for public sector
employees and their wages
 Some of the most important measures
include: broadening the wages definition
(ME); improved payroll system and wages
setting process (BH, KO, MK and RS); etc.
How is the Bank supporting
Structural reforms
implementation?
World Bank lending FY09/11
 The Bank is providing Development Policy
Loans, Investment operations and Analytical
Services
 To the region as a whole we are considering
commitments of approximately $5.3 bn
(DPLs – $2.5bn and Investment lending
$2.8bn)
 Largest share will be for Turkey, with
expected commitments of $ 3.3bn, of which
$2 billion are slated for DPLs
World Bank lending FY09/11
 Development Policy Loans provide untied, direct
budget support to governments for policy and
institutional reforms (typically energy sector,
social sector, private and financial sector, human
capital and employment)
 Investment operations cover a broad range of
sectors: energy and transport, environment,
social sectors
 Bank is also providing programmatic and tailored
analytical studies for our client countries
 AAA examples include: Public Expenditure
Reviews, Poverty updates, Country Economic
Memoranda, Labour market assessments