1

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

Europe and Central Asia Region

Pradeep MitraChief Economist

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.

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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

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)

88.6

46.2

139.6

127.3

178.3

231.8

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Around 1998-99 Around 2002-3

Non-Poor: above $ 4.30

Vulnerable:above $2.15 and below $4.30 aday

Poor below $ 2.15 aday

Distribution of Population by Poverty Status

Source: Staff estimates based on World Bank (2005a)

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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 PPPSource: World Bank (2005a)

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Overview of the Argument (arrows run from determinants to outcomes)

Business Environment (regulations, institutions/property

rights, taxation, competition)

Firm entry and exit Firm entry

Growth in labor productivity Employment growth

GDP Growth .

Poverty Reduction among Working families

Labor market institutions (employment protection

legislation, system of wage bargaining, unemployment

benefits)

Public transfers (pensions, social assistance)

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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)

1 Working age population covers the age range 15-64

Source: Labor Force Survey, World Development Indicators

-15%

-10%

-5%

0%

5%

10%

15%

Azerb

aija

n

Kazakhsta

n

Arm

enia

Russia

n F

edera

tion

Latv

ia

Alb

ania

Ukra

ine

Esto

nia

Bela

rus

Lith

uania

Bulg

aria

Hungary

Mold

ova

Rom

ania

Cro

atia

Slo

venia

Slo

vak R

epublic

Pola

nd

Czech R

epublic

Macedonia

, F

YR

GDP/EMP EMP/Working age POP

Working age POP/POP GDP/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

6

Growth in labor productivity was reflected in real wage growth across all consumption quintiles, while . . . .

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. . . . 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 . . . .

Note: The earliest years (blue bars) for each country are as follows:1990:Azerbaijan, Belarus, Bulgaria and Estonia1992: Hungary, Russia1993: Armenia, Czech Republic, Kazakhstan, Poland and Slovenia1994: Albania, Lithuania, Romania and Slovak Republic.1995: Moldova and Ukraine.

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.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Kaz

akhs

tan

Aze

rbai

jan

Cze

ch R

epub

lic

Rus

sian

Fed

erat

ion

Est

onia

Slo

veni

a

Bel

arus

Lith

uani

a

Rom

ania

Ukr

aine

Bul

garia

Slo

vak

Rep

ublic

Hun

gary

Pol

and

Arm

enia

Mol

dova

Alb

ania

Earliest year 1998 2003

Employment Rates: Early Transition, 1998 and 2003

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. . . . 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

0% 25% 50% 75% 100%

2002

1989

Agriculture Industry Services

0% 25% 50% 75% 100%

2000

1989

Agriculture Industry Services

Czech Republic Kyrgyz RepublicSource: World Bank (2005b)

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Shifts reflected in declining share of skilled labor- and capital-intensive exports in low income CIS and move towards natural resource exports. In EU-8, increased share of skilled labor- and capital-intensive exports.

Source: Computations based on UN COM Trade Statistics adapted from World Bank (2005c)

Factor Intensity of Merchandise Exports in Subgroups of Transition Countries, 1996 and 2003

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

EU 8 (9

6)

EU 8 (0

3)

SEE (96

)

SEE (03

)

CIS-M

id inc

(96)

CIS-M

id inc

(03)

CIS-L

ow in

c (96

)

CIS-L

ow in

c (03

)

ECA tran

sition

(96)

ECA tran

sition

(03)

Natural Resources Unskilled Labor Capital Intensive Skilled Labor

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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

Sources of Productivity Growth in Transition, Emerging, and OECD Countries

Labor Productivity decomposition shares – Manufacturing Five-Year Differencing, Real Gross OutputFor 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)

Labor Productivity growth - Five -Year Differencing, Real Gross Output. For Hungary and Romania the decomposition refers to a three-year differencing.

-80-60-40-20

020406080

100120140

% o

f to

tal la

bo

r p

rod

ucti

vit

y g

row

th

Within Between Cross Entry Exit

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Firm entry and exit are more important in transition countries, contributing between 20 to 45 percent of productivity growth

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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/ 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.

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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

1.0

1.5

2.0

2.5

3.0

3.5

Regulation Labour Taxation Institutions Infrastructure Finance Macroinstability

1999 2002 2005 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, 2005Cohesion countries include Greece, Ireland, Portugal and Spain

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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

1.0

1.5

2.0

2.5

3.0

de novo state & privatized de novo state & privatized de novo state & privatized

Regulation Taxation Institutions

Cohesion countries New EU member states SEE CIS

The business environment was assessed on a scale from 1 (no obstacle) to 4 (major obstable)Source: Business Environment and Enterprise Performance Survey, 2005

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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

0.0

0.1

0.2

0.3

Cohesion countries New EU member states SEE CIS

state & privatized 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

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Business environment difficulties reflected in FDI stock per capita

EU-8, some SEE: skilled-labor and capital-intensive exports and better jobs

CIS, some SEE: natural resource or unskilled labor-intensive exports and lower quality jobs

AlbaniaArmenia

Azerbaijan

Belarus

Bulgaria

Croatia

Czech Republic

Estonia

Georgia

Hungary

Kazakhstan

Kyrgyz Republic

Latvia

Lithuania

Macedonia

Moldova

Poland

Romania

Russian FederationSerb & Montenegro

Slovak Republic

Slovenia

Ukraine

45

67

8ln

(FD

I sto

ck p

er

capi

ta in

20

03 in

US

$)

0 20 40 60 80Share of skilled-labor and capital intensive products in total exports in 2003

FDI Stock per Capita and Share of Skilled Labor and Capital-Intensive Exports, 2003

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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 state-owned and privatized firms

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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