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Productivity Growth, Job Creation and Demographic Change in Eastern Europe and the Former Soviet Union

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Title: Productivity Growth, Job Creation and Demographic Change in Eastern Europe and the Former Soviet Union


1
Productivity Growth, Job Creation and
Demographic Change in Eastern Europe and the
Former Soviet Union
Pradeep Mitra Chief Economist
Europe and Central Asia Region
Lunchtime Presentation at the 12th Dubrovnik
Economic Conference in Dubrovnik, Croatia, June
28 July 1, 2006
2
The Presentation
  • GDP Growth and its Components
  • Growth of Labor Productivity and its Correlates
  • Job Creation and its Correlates
  • The Business Environment facing Firms
  • The Demographic Challenge
  • Conclusions

3
The Presentation
  • GDP Growth and its Components
  • Growth of Labor Productivity and its Correlates
  • Job Creation and its Correlates
  • The Business Environment facing Firms
  • The Demographic Challenge
  • Conclusions

4
Growth in GDP per capita from 1998 to 2003, the
most rapid for CIS countries recovering from a
deep transitional recession, owes more to growth
in labor productivity (GDP/EMPL) than improved
employment rates (EMPL/Working POP) or favorable
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
Working age population covers the age range
15-64 Source ILO LABORSTA database, World
Development Indicators
5
Real wage growth, reflecting gains in labor
productivity, outpaced net employment growth in
transition economies
World Bank (2005a)
6
Indeed the employment rate (EMPL/Working POP)
continued to fall in many countries after 1998.
Slack labor markets are manifest in either open
unemployment, falling labor force participation
or low-productivity employment. While the
employment rate is generally higher in CIS
countries, (compared to the EU-8 countries where
it falls short of the Lisbon target of 70) many
jobs in the CIS are in low-productivity
occupations partly because . . . .
Employment Rates Early Transition, 1998 and 2003
Note The earliest years (blue bars) for each
country are as follows 1990Azerbaijan, 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.
Source ILO LABORSTA database, 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.
7
. . . . de-industrialization in low income CIS
(e.g. Kyrgyz Republic) has been accompanied by a
large labor transfer into agriculture in the
absence of adequate social safety nets. Not so
in Central Europe (e.g. Czech Republic), where
over-industrialization has been corrected through
a reduction in agricultural and industrial
employment, with jobs moving to market services,
but with high open unemployment and/or low labor
force participation in some countries.
Kyrgyz Republic
Czech Republic
Source World Bank (2005b)
8
Since value added per worker is the lowest in
agriculture, a shift in employment away from
agriculture and into services in EU-8 and middle
income CIS has been productivity-enhancing.
While EU-8 countries approached or exceeded
levels of productivity typically observed in
middle-income developing countries (e.g.
Colombia. Turkey), the middle income CIS and SEE
lagged significantly. And low income CIS exhibit
levels and patterns of productivity typical of
low-income developing countries (e.g. Vietnam).
EU8 Countries Czech Rep, Estonia, Hungary,
Latvia, Lithuania, Poland, Slovakia, Slovenia SEE
Countries Albania, Bosnia, Bulgaria, Croatia,
Macedonia, Romania, Serbia and Montenegro Middle
Income CIS Belarus, Kazakhstan, Russia,
Ukraine Low Income CIS Armenia, Azerbaijan,
Georgia, Kyrgyzstan, Moldova, Tajikistan,
Uzbekistan
World Bank (2005a)
9
The Presentation
  • GDP Growth and its Components
  • Growth of Labor Productivity and its Correlates
  • Job Creation and its Correlates
  • The Business Environment facing Firms
  • The Demographic Challenge
  • Conclusions

10
The change in aggregate labor productivity is
decomposed into (i) within-firm, (ii)
between-firm, and (iii) cross components1/, and
the contribution of (iv) entrant and (v) exiting
firms. The decomposition shows that . . . .
Sources of Productivity Growth in Transition,
Emerging, and OECD Countries
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. 1/ The cross term
reflects gains in productivity from expanding
employment shares in high productivity-growth
firms or shrinking employment shares in low
productivity-growth firms Source Staff
estimates based on Bartelsman, Haltiwanger and
Scarpetta (2004)
11
. . . . firm entry and exit are more important in
transition countries, contributing between 20 to
45 percent of productivity growth, as against
between 3 and 35 percent in developed and other
developing countries.
12
In the low income CIS, 40 percent or more of the
labor force is engaged in agriculture. Land
distribution from collective farms to poor rural
households in low income CIS Armenia and
Georgia (early 90s), Kyrgyz Republic (mid 90s),
Azerbaijan and Moldova (late 90s) led to
important gains in labor productivity and,
because of the high labor intensity of
agriculture, to growth in household farming and
reduction of potential unemployment
Factor Intensity and the Growth of Household Farms
Source Macours and Swinnen (2004), World Bank
(2005a)
13
The Presentation
  • GDP Growth and its Components
  • Growth of Labor Productivity and its Correlates
  • Job Creation and its Correlates
  • The Business Environment facing Firms
  • The Demographic Challenge
  • Conclusions

14
Increasingly dynamic labor markets were reflected
in a dramatic rise in job reallocation (the sum
of job creation1/ and job destruction2/ rates) in
transition countries from less than 10 of the
workforce in the late 80s to more than 20-25 in
the 90s, indeed to levels equaling or exceeding
those in developed countries and lagging slightly
below those in developing countries
1/ Employment gains during a year divided by
average employment during the year. 2/ Employment
losses during a year divided by average
employment during the year.
15
Job destruction generally surged first but it was
the response of job creation which varied across
countries catching up rapidly with job
destruction in leading reformers but staying
lower than job destruction for prolonged periods
in lagging reformers
16
Firm entry contributed strongly (25 to 50) to
job creation. But their contribution was even
higher in the earlier years and declined over
time except in Russia and Ukraine both late
reformers where the role of firm entry in job
creation increased in the second half of the
1990s. In contrast to the behavior of entrant
firms, existing firms resorted on average to
defensive restructuring, i.e. improved
productivity by downsizing and shedding redundant
labor.
17
The Presentation
  • GDP Growth and its Components
  • Growth of Labor Productivity and its Correlates
  • Job Creation and its Correlates
  • The Business Environment facing Firms
  • The Demographic Challenge
  • Conclusions

18
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, with labor
regulations a notable exception
The business environment was assessed on a scale
from 1 (no obstacle) to 4 (major
obstacle) Cohesion countries include Greece,
Ireland, Portugal and Spain Transition countries
include Albania, Armenia, Azerbaijan, Belarus,
Bosnia, Bulgaria, Croatia, Czech Republic,
Estonia, Georgia, Hungary, Kazakhstan,
Kyrgyzstan, Latvia, Lithuania, Macedonia,
Moldova, Poland, Romania, Russia, Serbia and
Montenegro, Slovakia, Slovenia, Tajikistan,
Ukraine, Uzbekistan Cohesion countries include
Greece, Ireland, Portugal and Spain Source
EBRD-World Bank Business Environment and
Enterprise Performance Surveys 1999, 2002, 2005
19
Unbundling by ownership category reveals that
business environment in 2005 more difficult for
de novo than privatized and state firms in areas
such as regulation and institutions protecting
property rights, as well as taxation . . . .
The business environment was assessed on a scale
from 1 (no obstacle) to 4 (major
obstacle) Source EBRD-World Bank Business
Environment and Enterprise Performance Survey,
2005
20
. . . . particularly with respect to customs and
trade regulations and business licensing and
permits, within the overall area of regulatory
constraints . . . .
Source EBRD-World Bank Business Environment and
Enterprise Performance Survey, 2005
21
. . . . as well as with respect to judiciary and
corruption, within the overall area of
institutions. Hence business environment is more
difficult for de novo firms which are critical
for productivity growth and job creation.
Source EBRD-World Bank Business Environment and
Enterprise Performance Survey, 2005
22
Moving from entrant firms to potential exiters,
while the fraction of firms with arrears has been
falling and those receiving subsidies is
virtually unchanged between 2002 and 2005
(although note that the fraction of subsidized
firms in SEE and CIS is already lower than in the
cohesion countries) . . . .
Source EBRD-World Bank Business Environment and
Enterprise Performance Surveys, 2002, 2005
23
. . . . subsidies from all levels of government
to a higher fraction of state and privatized
firms compared to de novo firms in 2005 retard
the exit of the former . . . .
Source EBRD-World Bank Business Environment and
Enterprise Performance Survey, 2005
24
. . . . and arrears owed by a higher fraction of
state and privatized firms compared to de novo
firms in 2005 on utility payments and taxes as
well as to employees and suppliers also retard
the exit of the former.
The business environment was assessed on a scale
from 1 (no obstacle) to 4 (major
obstacle) Source EBRD-World Bank Business
Environment and Enterprise Performance Survey,
2005
25
The Presentation
  • GDP Growth and its Components
  • Growth of Labor Productivity and its Correlates
  • Job Creation and its Correlates
  • The Business Environment facing Firms
  • The Demographic Challenge
  • Conclusions

26
While the population is expected to decline by
over 15 percent by 2025 in Ukraine, Bulgaria and
Georgia on account of aging, it is expected to
expand by over 30 percent by 2025 in Turkey,
Turkmenistan, Uzbekistan and Tajikistan
Percentage Change in Population in ECA Countries,
2000-2025
Source UN Population Prospects
27
The share of working age population to total
population is expected to decline rapidly after
2015 in the EU-8, Southeastern Europe and the
middle income CIS countries, a pattern similar to
that in the EU-15, better than Japan but worse
than USA
Working Age Population to Total Population in
Selected Country Groups, 1950-2050
EU8 Czech Republic, Estonia, Hungary, Latvia,
Lithuania, Poland, Slovakia, and Slovenia Middle
Income CIS Belarus, Russian Federation, and
Ukraine SEE Bosnia, Bulgaria, Croatia,
Macedonia and Romania
Source UN Population Prospects 2004 WB staff
estimates
28
Maintaining the share of working age population
in total population in 2025 at current levels
through extra immigration alone would require
increases in the share of the immigrant
population outside the range of historical
experience, particularly in Central Europe,
Bosnia, Bulgaria and Romania
Changes in Migrant Share of Population Required
to Maintain the Share of the Working Age
Population to Total Population in 2025 at current
Levels
Source UN Population Prospects, 2004,
International Migration, 2002
29
Maintaining the share of working age population
in total population in 2025 at current levels by
intensifying labor force participation alone
would require very large increases in the labor
force participation rate, particularly in Central
Europe and Croatia
Change in Labor Force Participation Rates
Required to Maintain the Share of the Working Age
Population to Total Population in 2025 at current
Levels
Source UN Population Prospects, , Labor Force
Survey (LABORSTA)
30
The Presentation
  • GDP Growth and its Components
  • Growth of Labor Productivity and its Correlates
  • Job Creation and its Correlates
  • The Business Environment facing Firms
  • The Demographic Challenge
  • Conclusions

31
Conclusions
  • Economic growth and poverty reduction in the
    transition countries since 1998 have been driven
    more by increases in real wages, reflecting
    growth in labor productivity, than job creation
  • Entry of new firms and exit of obsolete firms are
    important for the growth of labor productivity in
    the transition countries.
  • Entry of new firms is important for job creation
    as well as productivity growth in the transition
    countries. Whereas new firms have expanded
    employment, existing firms have, on average,
    improved productivity by downsizing and shedding
    labor (defensive restructuring).

32
Conclusions (cont.)
  • While the business environment has been improving
    in the transition countries as a whole, it
    continues to be more challenging in the
    transition countries (esp. SEE and CIS) than in
    the cohesion countries of the EU, and
    particularly so for those firms which are
    important for productivity growth and job
    creation, viz, de novo firms compared to state
    and privatized firms.
  • The business environment also potentially retards
    the exit of state-owned and privatized firms
    relative to de novo firms through higher
    tolerance of arrears and subsidies, also impeding
    productivity growth.
  • Looking ahead, continued improvements in the
    business environment, particularly a level
    playing field for de novo firms, as well as exit
    mechanisms for obsolete firms, will be critical
    for productivity growth and job creation and call
    for reform of competition policy, the regulatory
    regime and institutions, such as the court
    system, which protect property rights.

33
Conclusions (cont.)
  • Redistribution of land still under collective
    farms/agricultural enterprises to peasant farms,
    together with on-farm technology transfer and
    better integration of the rural economy into
    labor and credit markets, will be required to
    improve yields and agricultural labor
    productivity in the low income CIS countries.
  • Rapid aging of the population in Central and
    Southeastern Europe, as well as Russia and
    Ukraine, if not offset by accelerated growth in
    labor productivity, will require policies to
    facilitate a combination of, rather than sole
    reliance on additional immigration,
    intensification of (currently low) labor force
    participation and delayed retirement. Failure to
    do so and also to boost labor productivity growth
    through new investment will derail convergence
    towards EU-15 living standards.

34
References
  • Erik Bartelsman, John Haltiwanger and Stefano
    Scarpetta (2004), Microeconomic Evidence of
    Creative Destruction in Industrial and Developing
    Countries, World Bank Policy Research Working
    Paper No. 3464
  • David Brown and John Earle (2004), Economic
    Reform and Productivity Enhancing Reallocation in
    the Post-Soviet Transition. Upjohn Institute for
    Employment Research, background study for World
    Bank (2005b)
  • EBRD-World Bank Business Environment and
    Enterprise Performance Surveys 1999, 2002, 2005
  • Karen Macours and Johann Swinnen (2004), Rural
    Poverty in ECA, background study for World Bank
    (2005a)
  • World Bank (2005a), Growth, Poverty, and
    Inequality Eastern Europe and the Former Soviet
    Union
  • World Bank (2005b), Enhancing Job Opportunities
    Eastern Europe and the Former Soviet Union
  • World Bank (2006), The Third Transition From Red
    to Gray (forthcoming)
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