ECA REGION AND THE GLOBAL CRISIS PRODUCTIVITY AND THE HUMAN FACTOR

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ECA REGIONAND THE GLOBAL CRISISPRODUCTIVITY
AND THE HUMAN FACTOR

• Klaus Rohland
• Country Director for Russia
• Europe and Central Region
• The World Bank
• Higher School of Economics Conference
• April 7-9, 2009
• Moscow, Russia

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Outline of the presentation

• The global outlook
• The impact on the ECA region
• The impact on Russia
• What should policy do now?

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I. World Banks Global Outlook for 2009-10

• Real GDP growth
• -1.7 (2009)
• 2.3 (2010) (recovery possible but uncertain)
• World trade
• -6.1 (2009)
• 3.9 (2010)
• Oil prices
• USD 47.8 (2009) Urals 45
• USD 52.7 (2010) Urals 45 -48

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Capital flows to developing countriesdrying out,
oil prices likely to remain low
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II. The impact on the ECA region
Crisis impact in ECA early and severe concern
that progress will unravel
Recession at best U-shaped address the urgent
but keep sight of the important question on
future growth model in ECA
Looming human crisis
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Progress and Vulnerability
Rapid growth, sudden reversal, 5-10 decline
likely
Poverty halved, but almost 40 poor or vulnerable
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Source World Bank staff estimates.
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For now, ECA hit harder Financial markets
Crisis Impact

• Excess borrowing by corporates and households
• Loans to deposits ratios in ECA range from 100
  for Czech Republic to 278 for Latvia (in Dec.
  2008)
• High share of foreign exchange denominated
  borrowing
• in 2008, FX loans/total loans ratios more than
  50 for many countries (e.g., Bulgaria, Croatia,
  Estonia, Hungary, Latvia, Lithuania, and Romania)
  
• Corporate debt levels require high rollover rates

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Source JP Morgan, Datastream, and World Bank
staff estimates.
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For now, ECA hit harder Product markets
Crisis Impact
In Q4 2008 output shrank back to 2005 levels
Source World Bank staff estimates.
Contraction in trade in 2009
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Source World Bank staff estimates.
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For now, ECA hit harder - Labor markets
Crisis Impact
Fewer jobs, labor markets expected to weaken
further
Note January 2009 unemployment data or latest
available. Source World Bank staff estimates.
Declining growth in remittances
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Projection. Source DECPG.
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Looming human crisis
Human Crisis?

• Continuing downward revision of growth
  projections but worse still to come
• Declines in real incomes as currencies
  depreciate in H2 2008? Hungary (-30), Poland
  (-40) Turkey (-25) Ukraine (-70)
• Unprecedented job losses 1 percentage point a
  month in some countries (Latvia, Estonia, Russia,
  Turkey, Ukraine)
• Rapid increase in wage arrears (Russia, Ukraine)
• Low income CIS countries particularly vulnerable
  return of migrants and declining remittances
• Weak social service delivery mechanisms stretched
  to limit
• Protests in Bulgaria, Latvia, Lithuania, Hungary,
  Romania, Ukraine
• Societies may be unable to absorb large salary
  adjustments as required in some programs

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Looming human crisispoverty and vulnerability
rising
Human Crisis?
By end-2010, 2.6 percentage point increase in
poverty (12 million people back in poverty)
Source World Bank staff estimates.
By end-2010, 7.1 percentage point increase in
poor or vulnerable (34 million people back to
poverty or vulnerability)
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Source World Bank staff estimates.
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III. The impact on Russia, 2009-10
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Russias Labor marketsadjusting rapidly
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RUSSIA Social impactspreading fast
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RUSSIA Projected amount of poor peoplebefore
and after the crisis (in millions), 2008-09
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FISCAL POLICY RESPONSEinitially supporting
banks and enterprises
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Addressing the human crisis in RussiaShifting
policy focus to households

• Win-win proposal
• strengthens safety net during crisis
• smart macro policysupports domestic consumption
• Affordable and efficient
• With moderate additional spending (1 of GDP), if
  well targeted, it is possible to substantially
  alleviate the social impact

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What should policy focus on now?

• Urgent for short-term social stability
• protecting the poor and vulnerable
• Important for long-term productivity growth
• investing in human capital (health and education
  reform)
• eliminating worst infrastructure bottlenecks
• Supporting SMEs
• Accelerating structural reforms (banking sector,
  investment climate etc.)