Europe and Central Asia Economic Update Office of the Chief Economist Fall 2019 WORLD BANK ECA ECONOMIC UPDATE FALL 2019 Migration and Brain Drain Office of the Chief Economist © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 22 21 20 19 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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ISBN (electronic): 978-1-4648-1506-5 DOI: 10.1596/978-1-4648-1506-5 Cover design: Lauren Kaley Johnson Contents Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Regional Classification Used in this Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi PART I: Economic Outlook and Long-term Challenges . . . . . . . . . . . . . . . 1 1 The Global Context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Global Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Europe and Central Asia: Recent Developments and Outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Annex: Data and Forecast Conventions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2 Migration and Brain Drain in Europe and Central Asia. . . . . . . . . . . . . 17 The Nature of Migration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Patterns of Migration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Determinants of Migration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Impacts of Migration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Policy Design. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Policies to Meet the Demand for Low-Skilled Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Policies to Meet the Demand for High-Skilled Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Annex 2A. Data on Migration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Part II: Selected Country Pages Albania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Armenia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Azerbaijan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Belarus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Bosnia and Herzegovina. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Bulgaria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Croatia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Georgia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Kazakhstan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Kosovo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Kyrgyz Republic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Moldova. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Montenegro. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 North Macedonia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Poland. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Romania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Russian Federation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Serbia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Tajikistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Turkmenistan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Ukraine. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 Uzbekistan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 iii iv  ●   World Bank ECA Economic Update Fall 2019 Boxes 2.1 How have refugees affected labor markets in Europe and Central Asia?. . . . . . . . . . . . . . . . . . . . . . . 43 2.2 Human trafficking: Ongoing analysis with a new data set. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 2.3 Comparing countries’ migration regimes using the Migration Integration Policy Index. . . . . . . . . . . . 52 2.4 Creating markets for work permits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 2.5 Labor migration programs and the Russian Federation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 2.6 Migration of health care workers from the Western Balkans to the European Union. . . . . . . . . . . . . . 63 2.7 Policy responses to high-skilled migration in Europe and Central Asia. . . . . . . . . . . . . . . . . . . . . . . . . 65 Maps 2.1 Immigrant-to-population ratio, by country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 2.1 Emigrant-to-population ratio, by country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Figures 1.1 Global economic outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 Recent developments, outlook, and risks in Europe and Central Asia . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.3 Long-term economic challenges facing Europe and Central Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.1 Share of population and number of international immigrants in Europe and Central Asia, by subregion, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 2.2 Share of emigrants moving intraregionally, by world region, 2000 and 2017. . . . . . . . . . . . . . . . . . . . 30 2.3 Correlation between emigrant shares of origin countries in Europe and Central Asia and income differences between destination and origin countries, 2017. . . . . . . . . . . . . . . . . . . . . . . 35 2.4 Correlation between emigrant shares of origin countries in Europe and Central Asia and employment differences between destination and origin countries, 2017. . . . . . . . . . . . . . . . . . . . . . 35 2.5 Projected age distribution of the population in Europe and Central Asia in 2020, by subregion. . . . . 36 2.6 Age distribution of immigrants and destination country population in Western Europe, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.7 Actual and projected shares of population 65 and older in Europe and Central Asia, by subregion, 1950–2075 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.8 Actual and projected shares of working-age population (20–65) in Europe and Central Asia, by subregion, 1950–2075. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.9 Working-age population as a share of the total population in high-income countries, low-income countries, and the world, 1980–2060. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 2.10 Effect of inflow of Czech workers on German wages and employment, 1986–95 . . . . . . . . . . . . . . . . 41 2.1.1 Stock of refugees in Europe and Central Asia, the EU-28, and globally, 1970–2017 . . . . . . . . . . . . . . 43 2.1.2 Correlation between refugee destinations and differences in per capita GDP between the destination and origin country. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 2.11 Effect of migration to the United Kingdom at different points of the wage distribution. . . . . . . . . . . . 45 2.12 Impact of refugees on the occupational choices of Danish workers. . . . . . . . . . . . . . . . . . . . . . . . . . . 46 2.13 Effect of migration to Austria on blue-collar employment of native workers, 1980–2000. . . . . . . . . . . . 46 2.14 Effect of Syrian refugees on formal employment of Turkish workers, 2005–14. . . . . . . . . . . . . . . . . . . 47 2.15 Changes in population shares by age-education group in selected countries between 2000 and 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 2.2.1 Type and sector of exploitation of victims of human trafficking from former Soviet republics, 2014–18. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 2.16 Visa mix for main destination countries in the European Union, by country, 2016. . . . . . . . . . . . . . . . 51 2.3.1 The Migration Integration Policy Index (MIPEX) in Europe and Central Asia, by country . . . . . . . . . . . . 52 2.17 Correlation between emigration rates among people with higher education and share of labor force with higher education in Europe and Central Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 2.18 Stock of female migrants to OECD countries, by skill group and origin, 2000–17. . . . . . . . . . . . . . . . 66 2.19 Simulated effect of high-skilled emigration under various assumptions. . . . . . . . . . . . . . . . . . . . . . . . 67 Tables E.1 Regional classification used in this report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix 1.1 Growth assumptions about the external environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.2 Europe and Central Asia growth assumptions summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.3 Europe and Central Asia country growth assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.1 Immigrant and emigrant stocks in Europe and Central Asia, by country (total and as percent of population), 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.2 Migration within Europe and Central Asia, by subregion, 2017 (millions). . . . . . . . . . . . . . . . . . . . . . . 31 2.3 Largest migration corridors in Europe and Central Asia, 2000 and 2017 (millions of migrants) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2.4 Concentration of immigration in Europe and Central Asia, by subregion (percent of total immigration), 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2.5 Concentration of emigration in Europe and Central Asia, by subregion (percent of total emigration), 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Acknowledgments This Europe and Central Asia (ECA) Economic Update is a product of ECA’s Of- fice of the Chief Economist led by Asli Demirgüç-Kunt, in collaboration with the Macroeconomics, Trade and Investment and the Poverty and Inequality Global Practices. In Part I, Chapter I was prepared by the Prospects Group in the Equitable Growth, Finance and Institutions Practice Group, comprising Carlos Arteta, Pat- rick Alexander Kirby, Julia R. R. Norfleet, Vasiliki Papagianni and Collette Mari Wheeler. Chapter I was closely coordinated with contributions from Part II au- thors. Chapter II was prepared by the ECA Chief Economist’s team with contri- butions from the Development Research Group by a team made up of Çağlar Özden, Bingjie Hu, Michael Packard and Chuan Li. Inputs were provided by Harry Patrinos and his team in the Human Development Global Practice; and Ivan Torre and Michael Lokshin of the ECA Chief Economist’s office. Useful com- ments were provided by Olga Emelyanova, Linda Van Gelder, Sebastian-A Mol- ineus, Evgeniy Najdov, Fadia M. Saadah, Apurva Sanghi, Steven N. Schonberger, Andrea Fitri Woodhouse. Part II was prepared by teams from the Macroeconomics, Trade and Invest- ment Global Practice (led by Andrew Burns, Lalita M. Moorty, Sandeep Mahajan, and Gallina Andronova Vincelette) and the Poverty and Equity Global Practice (led by Salman Zaidi). These teams included the following staff: Azamat Agaida- rov, Enrique Blanco Armas, Sarah Nankya Babirye, Reena Badiani-Magnusson, Olena Bogdan, Benoit Philippe Marcel Campagne, Cesar Cancho, Marie-Anne Chambonnier, Alexandru Cojocaru, Marcel Chistruga, Paul Corral, Pablo Fac- undo Cuevas, Donato De Rosa, Mariam Dolidze, Andrei Silviu Dospinescu, Bakyt Dubashov, Hasan Dudu, Olga Emelyanova, Samuel Freije-Rodriguez, Alan Fuchs, Josip Funda, Mismake D. Galatis, Anastasia Golovach, Claudia Guti- errez, Gohar Gyulumyan, Kiryl Haiduk, Sandra Hlivnjak, Saida Ismailakhunova, Ivailo Izvorski, Charl Jooste, Jonathan George Karver, Faruk Khan, Edith Kikoni, Milan Lakicevic, Leonardo Ramiro Lucchetti, Sanja Madzarevic-Sujster, Mikhail Matytsin, Kristina Cathrine Mercado, Rose Mungai, Evgenij Najdov, Metin Ne- biler, Minh Cong Nguyen, Trang Van Nguyen, David Night, Desislava Enikova Nikolova, Ana Maria Oviedo, Catalin Pauna, Alisher Rajabov, Nadir Ramazanov, Monica Robayo, Paul Andres Corral Rodas, Natasha Rovo, Armineh Manookian Salmasi, Apurva Sanghi, Marc Tobias Schiffbauer, Gregor Schwerhoff, William Hutchins Seitz, Asli Senkal, Lazar Sestovic, Hilda Shijaku, Bojan Shimbov, Maryna Sidarenka, Sangjin Song, David Andrew Stephan, Thi Thanh Thanh Bui, Eskender Trushin, Michal Tulwin, Christoph Ungerer, Ekaterina Vostroknutova. Sandra Gain and Barbara Karni provided the editorial support, and Michael Alwan typeset the report. Paul Anthony Clare, Carl Patrick Hanlon, Artem Kole- snikov, John Mackedon, Sona V. Panajyan and Kym Louise Smithies provided communications and outreach support. Ekaterina Ushakova oversaw the layout and production of the report. v Abbreviations BoA Bank of Albania CAD current account deficit CBA Central Bank of Armenia CBR Central Bank of Russia CPI Consumer Price Index CRP Centralized Remittance Platform ECA Europe and Central Asia ECAPOV ECAPOV (ECA Poverty) database of standardized household surveys EEA European Economic Area EEC Eurasian Economic Community EMDEs emerging markets and developing economies EU European Union FDI foreign direct investment GCC Gulf Cooperation Council GDP gross domestic product HPP hydropower plant ICT information and communications technology IOM International Organization for Migration LCU Local currency unit LF labor force MIC middle-income country MIPEX Migration Integration Policy Index NBM National Bank of Moldova NBR National Bank of Romania NBT National Bank of Tajikistan NPL non-performing loan OECD Organisation for Economic Co-operation and Development pc per capita pp percentage point PPA power purchasing agreement PPG public and publicly guaranteed PPP public-private partnership PPP purchasing power parity RHS right-hand side SOE state-owned enterprise vii viii  ●   World Bank ECA Economic Update Fall 2019 TSA Targeted Social Assistance USD US dollar VAT value added tax WAP working-age population y-o-y year on year Country Codes Albania ALB Greece GRC Poland POL Armenia ARM Hungary HUN Portugal PRT Austria AUT Ireland IRL Romania ROM Azerbaijan AZE Italy ITA Russian Federation RUS Belarus BLR Kazakhstan KAZ Serbia SRB Belgium BEL Kosovo XKX Slovak Republic SVK Bosnia and Herzegovina BIH Kyrgyz Republic KGZ Slovenia SVN Bulgaria BRG Latvia LVA Spain ESP Croatia HRV Lithuania LTU Sweden SWE Czech Republic CZE Luxembourg LUX Switzerland CHE Cyprus CYP Republic of North MKD Tajikistan TJK Denmark DNK  Macedonia Turkey TUR Estonia EST Malta MLT Turkmenistan TKM Finland FIN Moldova MDA Ukraine UKR France FRA Montenegro MNE United Kingdom GBR Georgia GEO The Netherlands NLD Uzbekistan UZB Germany DEU Norway NOR Regional Classification Used in this Report This report covers 47 countries referred to as Europe and Central Asia (ECA) coun- tries. These are divided into 10 groups: Western Europe, Southern Europe, Central Europe and the Baltic Countries, Northern Europe, Western Balkans, South Cauca- sus, Central Asia, Russia, Turkey, and Eastern Europe. TABLE E.1 Regional classification used in this report European Union Western Balkans Central Europe Western Southern and the Baltic Northern Europe Europe Countries Europe Austria Cyprus Bulgaria Denmark Albania European Belgium Greece Croatia Finland Bosnia and Herzegovina Union France Italy Czech Republic Sweden Kosovo and Germany Malta Estonia Montenegro Western Ireland Portugal Hungary Republic of North Balkans Luxembourg Spain Latvia Macedonia Europe The Netherlands Lithuania Serbia and United Kingdom Poland Central Romania Asia Slovak Republic Slovenia South Central Russian Eastern Caucasus Asia Federation Turkey Europe Eastern Europe Armenia Kazakhstan Belarus and Azerbaijan Kyrgyz Republic Moldova Central Georgia Tajikistan Ukraine Asia Turkmenistan Uzbekistan ix Executive Summary Global growth continued to dampen in 2019, amid heightened policy uncertainty and decelera- tion of global investment and trade. Growth in the emerging and developing countries of Europe and Central Asia (ECA) is expected to slow to 1.8 percent in 2019 (down from 3.2 percent in 2018), a four-year low. This update summarizes the recent developments and outlook for the region. It also focuses on labor mobility, which can mitigate demographic trends and produce significant growth and poverty reduction benefits for the region. Aggregate growth figures mask the diversity of performance across the region. Regional growth was hindered by marked weakness in Turkey, which suffered from substantial financial market stress, as well as sluggish activity in the Russian Federation amid oil production cuts. There was robust growth in other parts of the region, such as Central Europe and Central Asia, and the South Caucasus strengthened. Regional growth is expected to pick up in 2020–21, as Tur- key recovers from its sharp growth slowdown and Russia strengthens. But there are significant downside risks to this outlook. Chief among them is a sharper than expected slowdown in the region’s most important trading partner, the euro area, as well as the escalation of global policy uncertainty, particularly in relation to trade tensions and Brexit. In Central Asia and Eastern Eu- rope, slowing activity in Russia could reduce remittances, which account for an important portion of income in countries including the Kyrgyz Republic, Moldova, Tajikistan, and Ukraine. Coun- tries with large current account deficits, heavy reliance on capital flows, or sizable foreign cur- rency–denominated debt—such as Turkey and Ukraine—may be subject to sudden shifts in in- vestor sentiment. Sharp fluctuations in energy prices also represent a downside risk, particularly for the region’s energy exporters, such as Azerbaijan, Kazakhstan, and Russia. And increased policy uncertainty could further undermine business and investor confidence in the region. The region faces many long-run challenges to development, including the need to improve governance, complete the transition to competitive and inclusive markets, strengthen the envi- ronment for private investment and innovation, and mitigate and adapt to climate change. Wors- ening demographics, including a shrinking working-age population, add to these challenges. Migrants—who disproportionately tend to be of working age—ease demographic pressures by increasing the size of the labor force, raising productivity and boosting growth in the region. This update focuses on the design of policies on labor mobility to take advantage of the gains and ad- dress the costs of migration and presents the trends, determinants, and impacts of low- and high- skilled labor. Migrants’ share of the world population has barely changed over the past six decades, remain- ing remarkably stable at 2.5–3.5 percent. The aggregate share hides changing patterns, however, as immigration is increasingly concentrated in a handful of destination regions. For example, the share of immigrants in Western and Eastern Europe increased rapidly over the past four decades. Today, one of every three migrants in the world goes to Europe. Furthermore, although globally only one-third of migration takes place within regions, intraregional migration is especially high within ECA, with 80 percent of the region’s emigrants choosing to move to other ECA countries. xi xii  ●   World Bank ECA Economic Update Fall 2019 This concentration has led to widespread opposition in high-income European countries, where migrants are often blamed for high unemployment and declining social services. There are also widespread concerns about brain drain in the migrant-sending countries of Eastern Europe, the Western Balkans, South Caucasus, and Central Asia. Easing immigration restrictions is one of the most effective tools for ending poverty and reduc- ing inequality across the globe. Opposition to migration is often strong, however, because the benefits tend to be longer term and diffused but the costs—displacement and unemployment— are immediate and concentrated among certain groups. These short-term costs need to be addressed. Policy makers can assist workers in destination countries by designing programs to retrain them and adjusting education systems for young people, so that they are not competing with lower-skilled immigrants. Governments can provide relocation assistance for workers who need to change occupations, cities, or sectors of employ- ment. Transitory welfare benefits and unemployment insurance payments can be components of such efforts. Replacing quota regimes with tax regimes would be a useful way to finance the re- quired adjustment assistance by taxing the beneficiaries. Innovative policies may take the form of an additional income tax, a visa fee, or even a visa auction system. Such fee-based systems would allow employers to adjust more quickly to changes in labor markets and reduce the hostility to- ward immigrants. All countries want to attract skilled labor to boost their innovation and productivity. For des- tination countries, creating a clear path to permanent residency or even citizenship is important in attracting skilled labor, because those countries tend to have permanent jobs that require sig- nificant employment-specific human capital investments. Because many skilled migrants move with their families, guarantees on residency and access to education and other public services are important. Investing in higher education is also critical, as the presence of good universities is key in drawing talent and ambition. Destination countries could even directly fund educational insti- tutions in origin countries, an effort that would benefit both the destination and origin countries, as not all graduates of such schools would emigrate. For origin countries that experience extended periods of loss of scarce human capital, emigra- tion of skilled labor represents a serious concern. Such persistent patterns are often a symptom rather than the cause of the underlying problem. Improving governance quality and strengthen- ing institutions in origin countries are long-term policies that can address the root causes of per- sistent emigration. Policies to retain skilled labor include promoting private sector and job cre- ation, investing in higher education, and increasing opportunities for women in the economy. Greater connectivity is also an important aspect of increasing engagement with the diaspora; even if it facilitates emigration, emigrants who stay connected are more likely to invest and return. Over time, skilled migration may increasingly involve shorter durations and circular paths, thanks to greater global integration, lower transportation and communication costs, and rising standards of living outside the traditional advanced economies. Increasing the potential benefits of remaining in countries of origin is more likely to deter outward migration than pursuing poli- cies that restrict the benefits abroad. PART I Economic Outlook and Long-term Challenges 1 Economic Outlook Global Context Global growth has continued to soften in 2019. It is projected to decelerate to 2.5 percent this year, amid weaker-than-expected trade and investment. Heightened policy uncer- tainty has been accompanied by a deceleration in global investment and a decline in confidence. Growth in emerging markets and developing economies (EMDEs) is expected to slow in 2019, as weakening global trade and persistent policy uncertainty in key econo- mies are only partially offset by recent improvements in external financing conditions. Global growth is projected to stabilize, reaching 2.6 percent by 2021. This outlook is predicated on the absence of any major negative shocks, as well as a modest recovery in EMDEs that were previously affected by financial market pressure. Risks are firmly on the downside, partly reflecting the potential of destabilizing policy developments, includ- ing a further escalation of trade tensions between major economies, rising geopolitical frictions, renewed financial turmoil in EMDEs, and sharper-than-expected slowdowns in major economies. It is therefore urgent for EMDEs to reinforce policy buffers and build resilience to possible negative shocks. Overall Trends Global economic activity has continued to soften in 2019, with trade and manu- facturing showing signs of weakness. Global industrial production was anemic in the first half of 2019, growing at less than half the rate observed in early 2018. A sustained deterioration in business confidence and the global manufacturing Purchasing Managers’ Index suggests that industrial activity will remain sub- dued for the rest of 2019. Although the services sector was resilient earlier in the year, it has begun to slow in tandem with declining consumer confidence. 3 4  ●   World Bank ECA Economic Update Fall 2019 The weakening global environment is consistent with the deceleration in growth discussed in the June 2019 Global Economic Prospects report, which fore- cast that global growth would decline to 2.6 percent in 2019, its slowest pace since 2016 (figure 1.1, panel a; World Bank 2019b). But the realization of certain risks— including the re-escalation of trade tensions between major economies—has darkened the outlook since June. Market expectations of GDP growth have dete- riorated, with average forecasts for global and EMDE growth continuing to edge downward. Under current working assumptions, more than half of all econo- mies—including several major advanced economies and EMDEs—are expected FIGURE 1.1 Global economic outlook a. Global GDP growth, 2010–21 b. Share of bonds trading with negative interest rates, January 2014–June 2019 8 35 World Percent of all bonds outstanding Advanced economies 30 Annual GDP growth (percent) EMDEs 6 25 20 4 15 10 2 5 0 0 14 N 14 Ap 4 Se 5 Fe 5 Ju 6 D 6 M 16 O 7 M 7 Au 18 Ja 8 Ju 9 19 -1 r-1 1 1 l-1 -1 -1 1 1 10 11 12 13 14 15 16 17 18 19 20 21 n- n- p- b- - - g- n- n- ar ov ec ay ct 20 20 20 20 20 20 20 20 20 20 20 20 Ja Ju c. Portfolio flows and sovereign bond spreads in emerging d. Oil demand forecasts, July 2018–July 2019 markets and developing economies, January 2018–July 2017 20 480 1.8 Millions of barrels per day, year-on-year Cumulative 8-week portfolio flows 15 Sovereign bond spread (RHS) IEA EIA OPEC 10 430 1.6 Billions of dollars 5 Basis points 0 −5 380 1.4 −10 −15 330 1.2 −20 −25 −30 280 1.0 8 8 9 8 18 8 19 9 19 9 8 9 18 19 -1 r-1 r-1 l-1 -1 -1 l-1 -1 -1 p- n- - n- n- ar ct ov ay l l Ju Ju Ap Ap Ju Ju Ja Se Ja Ja O M M N Source: Bloomberg; EIA; Institute of International Finance; IEA; J.P. Morgan; OPEC; World Bank. Note: In panel a, the shaded area indicates forecasts. Data for 2018 are estimates. Aggregate growth rates are calculated using constant 2010 US dollar GDP weights. In panel b, the last observation is for September 2019, which includes data through September 18, 2019. Panel c shows the cumulative weekly flows since January 1, 2018. Equity flows include Brazil, India, Indonesia, the Philippines, Qatar, Sri Lanka, South Africa, Thailand, Turkey, and Vietnam. Debt flows include Hungary, India, Indonesia, Mexico, Poland, South Africa, Thailand, and Turkey. Sovereign spreads are measured by J.P. Morgan’s Emerging Markets Bond Index. The last observation is for September 13, 2019. Panel d shows the level change. EIA = Energy Information Administration; EMDEs = emerging markets and developing economies; GDP = gross domestic product; IEA = International Energy Agency; OPEC = Organization of the Petroleum Exporting Countries. Chapter 1: Economic Outlook ●  5 to slow in 2019. Collectively, they account for about two-thirds of global GDP. As a result, global growth in both 2019 and 2020 is now projected to be slightly slower than previously projected. Cyclical headwinds and persistent policy uncertainty continue to dampen global trade growth. The estimate for global trade growth in 2019 was revised downward by a full percentage point in June, to 2.6 percent, the weakest pace since the global financial crisis. Preliminary estimates incorporating more recent data suggest that projections of trade growth may be reduced even further. Growth in global goods trade and industrial activity weakened substantially over the course of 2019, and new export orders have been declining for more than a year, amid escalating trade tensions, most notably between the United States and China. By the end of 2019, tariffs will cover nearly all U.S. imports from China and more than two-thirds of Chinese imports from the United States. Trade policy uncertainty in the United States spiked this year, reaching levels not recorded since the early 1990s. Disputes involving other economies have also escalated, particularly between the United States and India and between Japan and the Republic of Korea. Since October 2018, the volume of trade affected by new import-restrictive measures introduced by the G20 has more than tripled relative to the 2012–18 average. Amid signs of deterioration in the global growth outlook and subdued global inflation, major central banks have adopted more accommodative monetary pol- icy stances. Long-term yields in advanced economies have declined sharply in anticipation of further monetary easing, with 10-year yields recently reaching a three-year low in the United States and an all-time low in Germany. As a result, the share of bonds yielding negative market interest rates has increased to its highest level since mid-2016, exceeding 25 percent globally and more than 50 percent in Europe and Japan (figure 1.1, panel b). Although long-term yields in advanced economies have declined, capital out- flows from EMDEs have resumed, and external financing conditions have tight- ened for some economies. Currency and equity price pressures have also re- turned, amid growing concerns over the global economy and trade policy uncertainty, but so far most losses have affected only the most vulnerable econo- mies. Notwithstanding recent reversals related to geopolitical and trade policy concerns, aggregate EMDE sovereign bond spreads have fallen back to May 2018 levels, albeit with much variation across countries (figure 1.1, panel c). Amid lower global borrowing costs, debt in EMDEs has increased to historical highs. Moderating inflation has allowed some EMDE central banks to cut interest rates or put their tightening cycles on hold to support growth. Oil prices rose in the first half of 2019, supported by supply constraints and production cuts. Concerns about slowing global growth, compounded by grow- ing trade tensions, triggered a sharp fall in oil prices in early June and August, with the Brent crude oil price falling to as low as $56/barrel (bbl), down from $72/bbl in May. Supply concerns stemming from geopolitical tensions in the Middle East led to price spikes in July and again in September, after a strike on Saudi Arabia’s oil infrastructure halved Saudi production capacity. As produc- tion was reportedly fully restored in late September, the impact is likely to be short-lived and not affect current oil price projections. However, the incident is a 6  ●   World Bank ECA Economic Update Fall 2019 reminder of the volatility of energy prices in an environment of heightened geo- political uncertainty, highlighting potential risks for oil exporters, including Azerbaijan, Kazakhstan, and the Russian Federation. Weak oil demand and escalating trade tensions are expected to dampen oil prices (figure 1.1, panel d). In light of this expected dampening, the Organization of the Petroleum Exporting Countries (OPEC) and its partners, including Russia, agreed to extend their production cuts to March 2020. Oil prices were forecast to decline slightly from 2018 levels, but this forecast is predicated on a rebound in prices in the second half of 2019. Supply bottlenecks for metals—including copper, nickel, lead, and zinc—sup- ported prices in the first half of 2019. Although iron ore prices have continued to rise amid ongoing supply concerns, the prices of other base metals have since declined, partly reflecting the re-escalation of trade tensions in mid-2019. Over- all, metals prices are expected to decline in 2019 and 2020, reflecting a weaker outlook for global metals demand. In contrast, agricultural prices, particularly prices for grains—which rose earlier in the year, on worries that poor weather for some major producers may reduce harvests—are expected to fall, as weather conditions improve. Trends in Major Economies The United States The United States entered the longest period of sustained economic growth on record in 2019, overtaking the 1991–2001 expansion. Incoming data suggest that the expansion is likely to slow, as rising trade tariffs and policy uncertainty weigh on investment. Activity in the industrial sector has decelerated, but the labor market continues to make strong gains. Amid persistently low inflation and con- cerns about the prospect of a deceleration in U.S. activity, the Federal Reserve has adopted a more dovish stance, cutting rates by 25 basis points in both July and September. Working assumptions project growth to slow to 2.3 percent in 2019 and 1.6 percent in 2020, as the effects of earlier fiscal stimulus wane and recent tariff increases weigh on activity. The euro area Activity in the euro area has deteriorated markedly since 2018, particularly in the manufacturing sector, which has fallen into a pronounced contraction. While in- dustrial production and international trade have shown the greatest weakness, consumer activity is starting to show signs of deterioration amid softening retail sales volumes and declining consumer expectations. On the back of growth con- cerns, the European Central Bank cut policy rates further and resumed quantita- tive easing. Growth in the euro area is expected to slow to 1.1 percent in 2019 and 2020, reflecting weakness in trade and domestic demand that will not be fully offset by more accommodative fiscal and monetary policy support. The United Kingdom’s exit from the European Union, originally scheduled for late March, was extended to October 31. Following Prime Minister Theresa Chapter 1: Economic Outlook ●  7 May’s resignation, the Conservative Party elected Boris Johnson as prime minis- ter. He has indicated that he will not seek further extensions to the scheduled exit, but he lost several key votes and his party’s majority in Parliament, where many legislators are seeking to prevent the country from leaving without a deal. The exact form of Brexit remains unclear—the default option if no new agreement is reached is a potentially costly no-deal Brexit, with no transition agreement in place to smooth the introduction of border controls. A no-deal Brexit could dis- rupt activity in the short term and exacerbate financial stability risks in the United Kingdom and abroad. Uncertainty remains high, and recent data suggest that the economy is fragile. In the second quarter of 2019, activity contracted for the first time since 2012, and the manufacturing Purchasing Managers’ Index and eco- nomic sentiment fell to their lowest levels since 2013. China Growth in China is projected to decelerate to 6.1 percent in 2019, slightly weaker than anticipated, as incoming data point to slowing activity. Trade flows and in- dustrial production growth have weakened amid elevated policy uncertainty. Survey data point to subdued sentiment, especially in the manufacturing sector. Expectations of continued domestic policy support and more accommodative external financing conditions have helped support growth but may slow the TABLE 1.1  Growth assumptions about the external environment (Percent change from previous year) Percentage point differences Real GDP (percent) from June 2019 projections Category 2016 2017 2018e 2019 f 2020 f 2021f 2019 f 2020 f 2021f World 2.6 3.2 3.0 2.5 2.5 2.6 −0.1 −0.2 −0.2 Advanced economies 1.7 2.4 2.2 1.6 1.4 1.4 −0.1 −0.1 −0.1 United States 1.6 2.4 2.9 2.3 1.6 1.5 −0.2 −0.1 −0.1 Euro Area 1.9 2.4 1.9 1.1 1.1 1.2 −0.1 −0.3 −0.1 Japan 0.6 1.9 0.8 0.9 0.5 0.6 0.1 −0.2 0.0 Emerging market and 4.1 4.5 4.3 3.7 4.2 4.4 −0.3 −0.4 −0.2 developing economies (EMDEs) China 6.7 6.8 6.6 6.1 5.9 5.8 −0.1 −0.2 −0.2 World trade volumea 2.6 5.8 4.1 1.5 2.0 2.6 −1.1 −1.2 −0.6 Commodity pricesb Oil price −15.6 23.3 29.4 −3.4 −1.5 0.7 0.0 0.0 0.0 Non-energy commodity −2.8 5.5 1.7 −2.1 −0.1 1.4 0.0 0.0 0.0 price index Source: World Bank. Note: Aggregate growth rates are calculated using constant 2010 U.S. dollar GDP weights. World Bank assumptions are frequently updated based on new information. Consequently, the working assumptions presented here may differ from those in other World Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment. e = estimate; f = forecast. a. World trade volume of goods and nonfactor services. b. Oil is the simple average of Brent, Dubai, and West Texas Intermediate. The nonenergy index is made up of the weighted average of 39 com- modities (7 metals, 5 fertilizers, and 27 agricultural commodities). For details, see http://www.worldbank.org/en/research/commodity-markets. To download the data in this table, please visit www.worldbank.org/gep. 8  ●   World Bank ECA Economic Update Fall 2019 deleveraging process. Growth is projected to decelerate to 5.9 percent in 2020 and 5.8 percent by 2021, as mounting trade tariffs with the United States dampen growth. Global Risks Risks to global growth remain firmly on the downside. Confidence and invest- ment could be dented by a sudden rise in policy uncertainty—triggered, for in- stance, by substantial new trade barriers between major economies or further escalation in geopolitical tensions. A further increase in trade tensions between the United States and China would result in significant economic losses for ex- porters of the targeted products and lead to cascading trade costs to other sectors. Although some countries could benefit from trade diversion in the short run, adverse effects from weakening growth and rising policy uncertainties involving the world’s two largest economies would have predominantly negative repercus- sions (Freund and others 2018). Additional US tariff hikes, including in the auto- mobile sector, could significantly disrupt tightly integrated value chains and raise average US tariffs substantially above those of most G20 countries (World Bank 2019b). A disorderly exit of the United Kingdom from the European Union would lead to a spike in uncertainty and further impede trade flows, and it could lead to dislocating shifts in financial markets. Further disruptions to the global energy supply—triggered, for instance, by rising geopolitical tensions in the Middle East—could also generate substantial volatility in commodity prices. Any event that triggers a sudden weakening of financial market sentiment could spur sharp increases in risk premiums. The impact on the economy would be amplified by high and rising debt levels, corporate sector vulnerabilities, and increasing refinancing pressures in many EMDEs. The risk of a sharper-than-ex- pected deceleration in major economies—such as the euro area, the United States, or China—would result in considerably weaker global and EMDE growth. The probability of growth in 2020 being at least 1 percentage point below cur- rent projections is estimated at about 20 percent. Such a slowdown would be comparable to the 2001 global downturn. Meanwhile, climate change poses ever- growing risks to various EMDE regions, especially those with agricultural ex- porters or low-lying coastal regions. Europe and Central Asia: Recent Developments and Outlook Aggregate growth in EMDEs in Europe and Central Asia (ECA) is projected to deceler- ate to 1.8 percent in 2019, down from 3.2 percent in 2018. The sharp slowdown partly reflects substantial weakness in Turkey, following acute financial market stress last year, as well as sluggish activity in Russia amid cuts in oil production. Regional growth is projected to improve in 2020–21, as activity recovers in Turkey and firms up in Russia. Headline growth numbers mask substantial subregional variation, however, with Central Europe markedly decelerating and Central Asia delivering the strongest growth in the region. Key external risks to the region include spillovers from weaker-than-expected Chapter 1: Economic Outlook ●  9 activity in the euro area and escalation of global policy uncertainty, particularly in rela- tion to trade tensions and Brexit. Renewed financial pressures in Turkey could also dis- rupt regional growth, while the possibility of sharp energy price declines represents a downside risk to the region’s energy exporters. Recent Developments Growth in the EMDEs in ECA is projected to decelerate markedly in 2019, to a four-year low of 1.8 percent, down from 3.2 percent in 2018. The growth profile reflects slowdowns in the region’s two largest economies, Turkey and Russia, as well as in other economies that are grappling with continued weakness in trade and industrial activity in Europe (figure 1.2, panel a). Headline numbers mask diverging growth trends across the region, however. In Central Europe, contin- ued government support has staved off spillovers from a slowing euro area, tem- porarily boosting growth in early 2019. In the Western Balkans, activity deceler- ated more than anticipated, despite robust private consumption growth. TABLE 1.2  Europe and Central Asia growth assumptions summary (Real GDP growth at market prices in percent, unless indicated otherwise) Percentage point differences Annual GDP growth (percent) from June 2019 projections Category 2016 2017 2018e 2019 f 2020 f 2021f 2019 f 2020 f 2021f EMDE ECA, GDPa 1.9 4.1 3.2 1.8 2.7 3.0 0.2 0.0 0.1 EMDE ECA, GDP excl. Turkey 1.5 3.0 3.3 2.5 2.6 2.6 0.1 0.0 0.0 Commodity exportersb 0.7 2.1 2.6 1.7 2.2 2.4 −0.1 0.0 0.1 Commodity importersc 3.1 6.1 3.7 2.0 3.1 3.5 0.6 0.0 0.0 Central Europe and Baltic Statesd 3.3 5.0 4.6 4.0 3.3 3.1 0.4 0.1 0.1 Western Balkanse 3.2 2.6 3.9 3.2 3.6 3.8 −0.3 −0.2 −0.1 Eastern Europef 0.9 2.6 3.3 2.8 3.0 3.3 0.4 0.3 0.3 South Caucasusg −1.6 1.7 2.6 3.5 3.1 3.1 −0.2 −0.8 −1.1 Central Asiah 2.9 4.6 4.7 4.4 4.2 4.5 0.2 0.2 0.4 Russian Federation 0.3 1.6 2.3 1.0 1.7 1.8 −0.2 −0.1 0.0 Turkey 3.2 7.5 2.8 0.0 3.0 4.0 1.0 0.0 0.0 Poland 3.1 4.9 5.1 4.3 3.6 3.3 0.3 0.0 0.0 Source: World Bank. Note: World Bank assumptions are frequently updated based on new information and changing (global) circumstances. Consequently, the work- ing assumptions presented here may differ from those contained in other World Bank documents, even if basic assessments of countries’ pros- pects do not differ at any given moment. For additional information, see www.worldbank.org/gep. e = estimate; ECA = Europe and Central Asia; EMDE = emerging market and developing economy; f = forecast; GDP = gross domestic product. a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. b. Includes Albania, Armenia, Azerbaijan, Kazakhstan, the Kyrgyz Republic, Kosovo, the Russian Federation, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. c. Includes Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Georgia, Hungary, Moldova, Montenegro, North Macedonia, Poland, Romania, Serbia, and Turkey. d. Includes Bulgaria, Croatia, Estonia, Hungary, Latvia, Lithuania, Poland, and Romania. e. Includes Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia. f. Includes Belarus, Moldova, and Ukraine. g. Includes Armenia, Azerbaijan, and Georgia. h. Includes Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. 10  ●   World Bank ECA Economic Update Fall 2019 Sustained weakening in the volume of goods trade growth and new export orders continues in ECA, amid slowing manufacturing activity and investment. Softening external demand is likely to dampen export growth across the region, especially in economies with closer trade and financial linkages to the euro area, such as Central Europe (figure 1.2, panel b). Overall, regional gross domestic product (GDP) growth is expected to firm to 3 percent by 2021, assuming that the euro area and key commodity prices stabilize and Turkey’s economy bottoms out in 2019. Moderating inflation and generally lower global interest rates have provided some EMDEs in ECA with space for monetary policy room to support growth. Headline inflation in ECA has somewhat eased in tandem with energy prices, particularly among commodity importers. These factors have allowed some ECA economies (including Russia, Tajikistan, Turkey, and Ukraine) to offset weaken- ing growth momentum by pausing or reversing the tightening cycle that was pursued in 2018. However, core inflation is beginning to pick up in some econo- mies, especially economies with accelerating wages as a result of labor shortages and other rising capacity constraints, such as Hungary, Poland, and Romania (figure 1.2, panel c). For economies facing sustained weakening and spillovers from the slowdown of key trade partners, countercyclical fiscal stimulus would be appropriate if there is fiscal space. Careful consideration should be given to debt sustainability, however. In economies that are more constrained, policy makers could mobilize domestic resources and ensure that public expenditure is efficiently allocated. The Russian Federation Growth in Russia is projected to decelerate to 1.0 percent in 2019, down from a six-year high of 2.3 percent in 2018. The slowdown stems from multiple factors, which are compounded by the continuation of international economic sanctions. Weak investment and trade growth partly contributed to softer-than-expected GDP growth in early 2019. Industrial activity softened in the first half of 2019, as compliance with agreed upon oil production cuts with OPEC took effect. Con- tamination of major fuel lines to Europe has further disrupted energy produc- tion. Retail sales volumes also slowed with the onset of the value-added tax hike, and consumer confidence remained firmly negative. Tighter monetary policy at the beginning of the year also weighed on activity; the central bank later reversed course by cutting the key policy rate three times in mid-2019. As a non-OPEC partner, Russia agreed to extend current oil production cuts until March 2020. Further policy accommodation and planned public infrastructure projects should help buoy growth in 2020. Private investment remains tepid because of policy uncertainty and prospects for slowing potential growth over the longer term as demographic pressures increase and ongoing structural problems, such as the lack of competition, accumulate. Weaker-than-expected growth in Russia could potentially spill over to Central Europe, Eastern Europe, and the South Caucasus, all of which maintain close trade and financial linkages with it. Chapter 1: Economic Outlook ●  11 Turkey Turkey entered a recession in the second half of 2018, after acute financial market pressures led to sharp declines in investment and consumption. The downturn was triggered by corporate fragility stemming from rising levels of debt, often denominated in foreign currency, and exacerbated by policy uncertainty. Invest- ment weakness is expected to weigh on activity in Turkey in 2019. Flare-ups in financial market pressures highlight the fact that downside risks remain very high. Incoming data point to a slow recovery in Turkey, as industrial production growth and manufacturing activity remain soft amid heightened policy uncer- tainty. Private consumption has been dampened by elevated inflation and associ- ated pressures on real incomes as well as rising unemployment. In mid-2019, the central bank sharply reversed monetary policy by cutting the policy rate 7.5 per- centage points, to 16.5 percent, despite above-target inflation. Gradual improve- ment in domestic demand and net exports are expected to support growth over the forecast horizon, provided that fiscal and monetary policy avert further sharp declines in the lira and corporate debt restructurings help prevent serious dam- age to the financial system. Central Europe and the Baltics Growth in Central Europe and the Baltics is projected to slow to 4.0 percent in 2019, down from 4.6 percent in 2018. Robust growth in the first half of the year in Central Europe was supported by temporary factors, which helped offset waning activity in some economies in the Baltics. In Bulgaria, Croatia, Hungary, Poland, and Romania, strengthening private consumption—supported by rising real wages and government transfers—helped underpin disposable income and growth at the start of 2019. A boost in investment helped delivered robust growth and propel construction in Hungary and Romania. These trends are not expected to continue, however, as decelerating investment, weakness in external demand from key trading partners, and rising domestic capacity constraints will likely dampen growth prospects. The slowdown in the euro area has already begun to weigh on exports in Bulgaria, Hungary, and Romania. Fiscal stimulus, and the resulting boost to private consumption, will begin to fade in some of the subre- gion’s largest economies (Hungary, Poland, Romania) by 2020–21. Shrinking working-age populations, partly reflecting emigration to Western Europe in re- cent years, limit growth prospects. Progress on structural reforms is key to sup- port private investment growth over the medium term. The Western Balkans Growth in the Western Balkans is expected to slow to 3.2 percent in 2019, down from 3.9 percent in 2018. Activity decelerated in several economies, with marked weakness stemming from slowing investment (Kosovo), manufacturing (Serbia), and export growth (Albania). One-off factors related to weather and subsequent energy production dampened activity in Albania, while domestic demand soft- ened in Montenegro. 12  ●   World Bank ECA Economic Update Fall 2019 Growth in the Western Balkans is projected to firm to 3.8 percent by 2021, as- suming political instability and policy uncertainty remain contained. Rising fis- cal liabilities in the subregion—in some cases due to large public sector wage increases or higher-than-expected costs for infrastructure projects—could reduce space for future countercyclical fiscal stimulus and weaken the business climate (Kosovo and Montenegro). Investment in existing infrastructure needs could boost growth in Kosovo, the Republic of North Macedonia, and Serbia, but the subregion faces rising external risks from weakness in key trading and financial partners in the euro area. The South Caucasus Growth in the South Caucasus is forecast to grow 3.5 percent in 2019, slowing to 3.1 percent by 2021. However, the recent escalation of tensions following Russia’s imposition of sanctions on travel to Georgia has reduced tourism and could fur- ther dent activity and confidence in the region. Activity in the South Caucasus has been supported by private consumption, with growth further boosted by an expansion in industrial activity, reflecting strong manufacturing growth and a recovery in mining production in Armenia. In Azerbaijan, the subregion’s largest economy, activity is expected to be damp- ened by slowing private investment; the effects will be compounded by subdued oil prices and weak credit growth arising from fragilities in the financial sector. Longer-term growth depends on continuation of domestic reforms to enhance the business environment, as well as investment in education in order to boost human capital and reduce skills mismatches. Eastern Europe and Central Asia Growth in Eastern Europe and Central Asia is expected to stabilize over the fore- cast horizon, but it is subject to considerable policy uncertainty. Both subregions face a challenging external environment, as growth remains subdued in major trading partners, such as the euro area and Russia; Central Asia is also affected by developments in China. Industrial production growth has softened in Eastern Europe, reflecting weakness in manufacturing amid slowing export growth, par- ticularly in Belarus. Activity in Ukraine was robust in early 2019, but it reflected temporary factors, including a bumper crop harvest. In Central Asia, the cyclical recovery is expected to moderate following flat- tening oil production following agreed upon production cuts by Kazakhstan and lackluster growth in the nongold sectors in the Kyrgyz Republic. Activity in Ka- zakhstan—the largest economy in Central Asia—will be constrained by the wan- ing effect of earlier fiscal stimulus; modest or slowing growth in key trading partners (Russia, China); and low productivity. The pace of growth in Eastern Europe and Central Asia depends on successful implementation of structural reforms to improve the business environment, achieve debt sustainability, and restructure state-owned enterprises to improve competition (EBRD 2017; Funke, Isakova, and Ivanya 2017). Chapter 1: Economic Outlook ●  13 TABLE 1.3  Europe and Central Asia country growth assumptions (Real GDP growth at market prices in percent, unless indicated otherwise) Percentage point differences Annual GDP growth (percent) from June 2019 projections Country 2016 2017 2018e 2019 f 2020 f 2021f 2019 f 2020 f 2021f Albania 3.3 3.8 4.1 2.9 3.4 3.6 −0.8 −0.3 −0.2 Armenia 0.2 7.5 5.2 5.5 5.1 5.2 1.3 0.2 0.0 Azerbaijan −3.1 −0.3 1.4 2.8 2.3 2.1 −0.5 −1.2 −1.6 Belarus −2.5 2.5 3.0 1.5 1.3 1.2 −0.3 0.0 0.0 Bosnia and Herzegovinaa 3.1 3.2 3.6 3.1 3.4 3.9 −0.3 −0.5 −0.1 Bulgaria 3.9 3.8 3.1 3.2 3.0 3.1 0.2 0.2 0.3 Croatia 3.5 2.9 2.6 2.9 2.6 2.4 0.4 0.1 0.0 Georgia 2.8 4.8 4.7 4.4 4.3 4.5 −0.2 −0.5 −0.5 Hungary 2.3 4.1 4.9 4.4 2.8 2.6 0.6 0.0 0.0 Kazakhstan 1.1 4.1 4.1 3.9 3.5 3.7 0.4 0.3 0.5 Kosovo 4.1 4.2 3.8 4.0 4.2 4.1 −0.4 −0.3 −0.4 Kyrgyz Republic 4.3 4.7 3.5 4.2 3.7 3.7 −0.1 −0.3 −0.4 Moldova 4.4 4.7 4.0 3.4 3.6 3.8 0.0 0.0 0.0 Montenegro 2.9 4.7 4.9 3.0 2.8 2.7 0.1 0.4 0.4 North Macedonia 2.8 0.2 2.7 3.1 3.2 3.3 0.2 0.0 −0.3 Poland 3.1 4.9 5.1 4.3 3.6 3.3 0.3 0.0 0.0 Romania 4.8 7.0 4.1 4.2 3.6 3.2 0.6 0.3 0.1 Russian Federation 0.3 1.6 2.3 1.0 1.7 1.8 −0.2 −0.1 0.0 Serbia 3.3 2.0 4.3 3.3 3.9 4.0 −0.2 −0.1 0.0 Tajikistan 6.9 7.6 7.3 6.2 5.5 5.0 0.2 −0.5 −1.0 Turkey 3.2 7.5 2.8 0.0 3.0 4.0 1.0 0.0 0.0 Turkmenistan 6.2 6.5 6.2 5.0 5.2 5.5 −0.6 0.1 0.6 Ukraine 2.4 2.5 3.3 3.4 3.7 4.2 0.7 0.3 0.4 Uzbekistan 6.1 4.5 5.1 5.5 5.7 6.0   0.2 0.2 0.0 Source: World Bank. Note: GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars, unless indicated otherwise. World Bank as- sumptions are frequently updated based new information and changing (global) circumstances. Consequently, the working assumptions present- ed here may differ from those contained in other World Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. For additional information, see www.worldbank.org/gep. e = estimate; f = forecast. a. GDP growth rate at constant prices is based on the factor costs approach. Risks to the Regional Outlook The regional outlook remains subject to significant downside risks, despite recent easing in global financing conditions. A sharper-than-expected slowdown in the euro area—ECA’s most important trading partner—could generate nega- tive spillovers in economies with tightly linked trade and financial ties (figure 1.2, panel d). Modest activity in Russia could dent remittance inflows, which ac- count for an important share of income in the Kyrgyz Republic, Moldova, Tajiki- stan, and Ukraine. Slowing growth in China—which continues to expand its role in trade in the region, particularly for metals exporters—could affect commodity exporters and economies in Central Asia through trade channels. 14  ●   World Bank ECA Economic Update Fall 2019 Financial stress in Turkey has had limited spillover to the other economies in the region, but it is a stark reminder of the risks associated with sudden shifts in investor sentiment. These risks can be magnified in economies in which imbal- ances persist, including economies with large current account deficits or heavy reliance on potentially volatile capital inflows, high external debt loads, or siz- able foreign currency–denominated debt (Belarus, Croatia, Georgia, the Kyrgyz Republic, Moldova, Tajikistan, Ukraine). In Central Europe, fiscal stimulus– driven growth has also generated imbalances, with strong wage growth coupled with government transfers widening current account and fiscal deficits. Rising policy uncertainty, particularly on the trade front, could undermine business and investor sentiment in the region. Further escalation of international trade restrictions or sanctions could have a negative impact on the region, espe- cially given its openness to trade and capital flows. A disorderly exit from the FIGURE 1.2 Recent developments, outlook, and risks in Europe and Central Asia a. Contribution of selected countries and regions to b. Annual growth in export volume in Europe and GDP growth in Europe and Central Asia, 2014–19 Central Asia, by subregion, 2017–19 5 5 12 Annual increase in export volume (percent) Russia CEE 2000–18 4 Turkey Other 4 10 ECA growth (right-hand axis) 3 3 8 Percentage points 2 2 6 Percent 1 1 4 0 0 2 −1 −1 0 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019 −2 −2 ECA Central Central Eastern South Western 14 15 16 17 18 19 Asia Europe Europe Caucasus Balkans 20 20 20 20 20 20 c. Core inflation and capacity utilization d. Destination of goods exported from Europe and in Central Europe, 2015–19 Central Asia and the euro area, 2017 3.0 86 100 Core inflation 2.5 Capacity utilization 84 Percent, year-on-year (right-hand axis) 75 2.0 82 Percent 1.5 Percent 50 1.0 80 0.5 25 78 0 0 −0.5 76 Europe and Euro Area Central Asia 1 3 1 3 1 3 1 3 1 3 Q Q Q Q Q Q Q Q Q Q 15 15 16 16 17 17 18 18 19 19 Within region Rest of Europe Rest of world 20 20 20 20 20 20 20 20 20 20 Sources: Haver Analytics; OECD; UNCTAD; World Bank. Note: In panel a, aggregate growth rates are calculated using 2010 constant US dollar GDP weights. Data for 2019 are forecasts. CEE = Central and Eastern Europe. In panel c, core inflation is the median for the sample, and capacity utilization is calculated using constant 2010 US dollar GDP weights. The sample includes Hungary, Poland, and Romania. The last observation is for the third quarter of 2019. In panel d, shares are calculated from exports in millions of dollars. Chapter 1: Economic Outlook ●  15 European Union by the United Kingdom or a flare-up in trade relations between the United States and Europe, particularly with respect to auto tariffs, could ad- versely affect the ECA region. A spiraling of trade tensions between the United States and China could hurt some regional economies, particularly energy and metals exporters. A reversal of structural reforms remains a key risk in many economies, especially in Eastern Europe, Central Asia, and Turkey. Renewed con- flict in the Syrian Arab Republic or Ukraine, as well as military disagreements with the North Atlantic Treaty Organization (NATO), could trigger new sanc- tions against Russia and Turkey. Long-Term Challenges and Policies Structural challenges are intensifying in the region, as worsening demographic trends— including the shrinking size of the working-age population—and weak productivity growth continue to weigh on prospects. Structural reforms to strengthen institutions and governance could help confront corruption, bolster the business climate, and spur invest- ment growth. Investing in human capital and improving learning outcomes could help unleash untapped potential for growth. Improving access to reliable and affordable infra- structure, leveraging productivity-enhancing technologies, and buttressing institutional quality could help remove key bottlenecks to activity. Adapting to climate change will be critical for the region’s agricultural producers and coastal areas; strengthening institu- tional capacity and enhancing agricultural productivity could help mitigate climate change risks. Chapter 2 of this update focuses on labor mobility, which can mitigate de- mographic trends, increase growth, and spur poverty reduction in the region. Improving Governance Structural reforms aimed at improving governance can lead to sizable productiv- ity gains, particularly in countries that are farthest from best practices (Acemo- glu, Johnson, and Robinson 2005; Cusolito and Maloney 2018). EMDE experience illustrates that major governance and business reforms in EMDEs were associ- ated with higher growth rates in output, total factor productivity, and investment (Hodge and others 2011; Divanbeigi and Ramalho 2015; World Bank 2018b). Re- form is particularly important given the region’s fiscal constraints and large in- vestment needs (World Bank 2019b). Countries across the region need to tackle weak public institutions and policies, in order to improve service delivery, pro- mote stability, and manage economic resources sustainably. Governance indicators, such as indicators of government effectiveness and regulatory quality, tend to be stronger in EMDEs in ECA than in other regions, but they continue to trail those of advanced economies and suffer from deficien- cies in various aspects, notably corruption (figure 1.3, panel a) (Kaufmann, Kraay, and Mastruzzi 2010). Nearly 75 percent of ECA EMDEs fall below the global aver- age for tackling corruption, including almost all of the countries of Central Eu- rope, Eastern Europe, and the South Caucasus. Because progress in confronting perceived and actual corruption has been slow, the perception of corruption is higher than it is in other EMDEs (Transparency International 2019). Anticorrup- 16  ●   World Bank ECA Economic Update Fall 2019 tion campaigns, as well as a reduction in the number of regulations and tax com- plexity, have helped some economies tackle corruption (IMF 2019b). A promising development in the region has been new policy momentum to tackle corruption. Armenia, for example, announced an action plan to prevent and investigate cor- ruption as well as campaigns to improve awareness and education. Bolstering governance—including through control of corruption and rent- seeking, fair application of the rule of law, protection of property rights, and po- litical stability—could boost innovation, increase financial access, improve the provision of public services, enhance infrastructure quality, and spur stronger investment growth (Berkowitz, Lin, and Ma 2015; Kornejew, Rentschler, and Hal- legatte 2019; Rentschler and others 2019). Citizen engagement is an important element of building effective, accountable, and inclusive institutions that under- lie good governance. When citizens can exercise their right to participate and access real-time information, they can become part of the solution by demanding necessary policy changes (World Bank 2016). Transparency, accountability, and citizen engagement are also key to building trust and establishing a strong social contract, which is critical to bringing societies together in striving to achieve their development goals. These issues and policy implications were discussed at length at an ECA Regional Governance conference held in Turkey June 11–12, 2019. Completing the Transition to Competitive and Inclusive Markets EMDEs in ECA face substantial long-term challenges to ensure sustained im- provements in incomes and living standards amid rapid technological and de- mographic changes. Countries in the region are at different stages of transition- ing to building competitive and inclusive markets. Across the board, however, there is a need to boost productivity growth and investment, which has fallen over the past decade. This decline has occurred despite large increases in debt, particularly in the corporate sector. Indebtedness is particularly high in Eastern Europe and Central Asia (Feyen and others 2017; World Bank 2019b). Worsening demographic trends have played an important role in these developments. Gen- erating stronger potential growth will require measures to mitigate declining population size and free up untapped potential for growth and productive gains. Such policies include increasing the labor force participation of women, attract- ing and retaining labor, and investing in human capital. ECA countries are at different stages of the demographic transition, but trends are worsening due to shrinking working-age populations. Higher-income econo- mies in Central Europe are reaching an advanced stage of aging, with declining fertility and mortality; Turkey and to some extent Central Asia are at earlier stages of this transition (Bussolo, Koettl, and Sinnott 2015; World Bank 2018b). Growth in the size of the working-age population in the region has long lagged the average for EMDEs, as a result of sharp declines in fertility rates and signifi- cant migration to the European Union and Russia. One approach that could help counteract the problem would be to remove barriers to entry for female labor force participation—by improving access to parental leave and childcare, for ex- ample (Raute 2017; Thévenon and Solaz 2013). Implementing more flexible im- migration policies could help relieve capacity constraints in the labor market by Chapter 1: Economic Outlook ●  17 attracting foreign workers in an orderly way (Delogu, Docquier, and Machado 2014). Relaxing restrictions on cross-border movement of labor could produce significant gains, but there are costs as well as benefits to such labor mobility. Chapter 2 of this update focuses on labor mobility, presenting recent trends and discussing policy options to reap overall gains while recognizing and easing the short-run adjustment costs so that the long-run benefits are shared more evenly. Inadequate investment in human capital has left parts of the workforce in some EMDEs in ECA poorly equipped with the skills required for the future and unprepared for rapid technological change (Flabbi and Gatti 2018). Boosting hu- man capital investment—including in education and health—could help remove bottlenecks to productivity growth. How education systems adapt to skills needs will be a key determinant of the productivity and distributional effects of technological change (Barro and Lee 2015). In some economies in ECA, learning and the acquisition of necessary skills are lower than expected given the level of school enrollment and the average years of schooling (Altinok, Angrist, and Patrinos 2018). The learning gap (the difference between years spent in schools and educational assessment outcomes) is wider than the global average in most Western Balkan economies as well as in some economies in Eastern Europe, Central Asia, and the South Caucasus. Some economies, including Georgia, have taken measures to reform the education sec- tor and its funding (figure 1.3, panel b) (Kraay 2018). Education policy and train- ing programs can be redesigned to adapt available skills to changing develop- ment needs and new technologies, which could boost growth and employment prospects (Hallward-Driemeier and Nayyar 2018; World Bank 2018b). Strengthening the Environment for Private Investment and Innovation A large body of literature suggests that state-owned enterprises tend to be less efficient than private sector firms (World Bank 1995). Privatization therefore pres- ents an opportunity to raise economywide productivity in many countries across the region, especially if it is accompanied by improvements in management, cor- porate governance, and the business environment. Improving the business envi- ronment is a critical part of fostering private investment and job creation. Re- forms that target simplifying tax and regulatory requirements and ensuring clarity and predictability for investors are an effective way to support private investment, attract foreign direct investment, and increase productivity. Strength- ening the environment for business can also help reduce the likelihood of corrup- tion, informality, and extreme poverty (Demenet, Razafindrakoto, and Roubaud 2016; Djankov, Georgieva, and Ramalho 2018; Lawless 2013; Paunov 2016). Over the past decade, EMDEs in ECA made strides in improving their busi- ness environments. As a result, in many countries in Central and Eastern Europe, the Western Balkans, and the South Caucasus, business environment indexes are approaching the levels in advanced EU countries (figure 1.3, panel c) (World Bank 2018a). Challenges remain, however, including limited improvements in some indicators, which has muted the overall economic response. Notable chal- lenges also remain in Central Asia, which continues to lag well behind countries 18  ●   World Bank ECA Economic Update Fall 2019 elsewhere in the region, notwithstanding improvements in Kazakhstan and Uz- bekistan (World Bank 2019a). A key part of the business environment is a well-functioning financial system. Well-functioning financial systems contribute to growth and poverty alleviation by mobilizing and pooling resources, allocating capital to its most efficient uses, monitoring these investments after they have been made, and diversifying and managing risk. To be able to perform these functions, financial systems need to be deep, efficient, and stable. For all segments of the society to benefit from these services, they also need to be inclusive (World Bank 2019a). There is great variation in financial inclusion in the region. Central Asia and the South Caucasus made the greatest advances in recent years, although they started from a very low base and still lag the rest of the region. Although nearly two-thirds of the adult population owned an account in 2017—up from less than half in 2011—significant challenges remain. Turkey suffers from significant gen- der gaps, for example, and income gaps are wide in Romania (Demirgüç-Kunt, Hu, and Klapper 2019). Small and medium-size enterprises (SMEs) have the largest untapped poten- tial for productivity catch-up with advanced economies, but their growth poten- tial continues to be hindered by many factors, including insufficient access to fi- nance (Ayyagari, Demirgüç-Kunt, and Maksimovic 2017; Cusolito, Safadi, and Taglioni 2017; Wang 2016). The largest gaps in financial inclusion for SMEs in ECA lie in Central Asia and the South Caucasus, where access to financial ser- vices is nearly as limited as it is in the Middle East and North Africa, South Asia, and Sub-Saharan Africa (IMF 2019a). Policies that target more widespread adoption of digital technologies, includ- ing in the delivery of financial and public sector services, could bolster financial inclusion and boost productivity by helping spread innovation and improving private sector and government efficiency (Baldwin 2019). In economies with large informal sectors, widespread adoption of these digital technologies could help expand tax bases through the fiscalization of informal sector transactions (World Bank 2019b). Increasing SMEs’ access to finance could help these firms increase their average size and reduce their reliance on retained earnings to fund investment, which in turn would support job creation and deter suboptimal capi- tal spending (Ayyagari, Demirgüç-Kunt, and Maksimovic 2017; Ayyagari and others 2016). Strengthening the environment for private investment also requires removing other key bottlenecks to economic activity and private sector development, such as inefficient connectivity and inadequate infrastructure. Improved connectivity can accelerate the absorption of technology and speed convergence with ad- vanced economies (Gould 2018). Infrastructure spending needs remain large in ECA, particularly for transport and electricity. Appropriate land use planning and urbanization policies can substantially reduce the cost of meeting transport needs while minimizing carbon footprints (ITF 2018; Rozenberg and Fay 2019). The percentage of firms experiencing electrical outages is lower in ECA than in any other EMDE region, but losses for affected firms in Central Asia can exceed 9 percent of annual sales (Blimpo and Cosgrove-Davies 2019; IMF 2019c). Chapter 1: Economic Outlook ●  19 Mitigating and Adapting to Climate Change Climate change is contributing to various risks for more exposed EMDE regions, including ECA, which contains many agricultural producers and coastal com- munities (IPCC 2018). The Eastern Europe and Central Asia subregions are vital for global food chains, exporting nearly a quarter of the world’s wheat exports; most of these exports are from Russia, Ukraine, and Kazakhstan (Swinnen and others 2017). The adaptive capacity to mitigate climate change in ECA is under- mined by inadequate infrastructure, weak institutions, and constrained financial resources—a serious problem in a region that relies heavily on agriculture and tourism. FIGURE 1.3 Long-term economic challenges facing Europe and Central Asia a. Index of control of corruption in emerging markets and b. Learning gap in Europe and Central Asia, developing countries and in Europe and Central Asia, 2017 by country, 2017 0.1 ECA Interquartile range Average 0 Bosnia and Herzegovina −0.1 Tajikistan Turkey −0.2 Difference in years Armenia −0.3 Romania Index −0.4 Moldova −0.5 Georgia Montenegro −0.6 Albania −0.7 Kyrgyz Republic −0.8 North Macedonia −0.9 Kosovo EMDEs ECA −1.0 0 1 2 3 4 5 6 c. Doing Business indicators, 2010 and 2019 d. Share of population in Europe and Central Asia residing within 100 kilometers of the coast, by country and sea basin 100 100 80 Distance to frontier score (100 = best) Percent of population 75 60 40 50 20 0 25 s Pr Elec ts y r. it ng c. Tr s Co ing In acts cy es xe er ricit st d e i en m e gi Pa rot sin ad ta cr r r lv nt t re Pe p bu so g 0 ty tin or yi ng st et op ve Es nia Ad L nia tic ia Az Tur a Ba bai y lti jan eo a Cr gia a ac ria th a Ca Uk nia ia ne Ru ea rk ol a en d Ka om an kh ia an rti G er ke Bu ati Se Li k Se G Se Tu P ssi m an ria atv za an S R ist st Bl lga sp rai a In ba to ua r o St n c Al 2010 2019 AEs Sources: Kraay 2018; World Bank 2017. Note: In panel a, the indicator reflects perceptions of the extent to which public power is exercised for private gain, including petty and grand forms of corruption, as well as “capture” of the state by elites and private interests. The sample includes 150 EMDEs. In panel b, the learning gap is the difference between expected years of schooling and learning-adjusted years of schooling, as in Kraay (2018). Panel c shows the median ECA EMDE across the different indicators. The sample includes 22 ECA EMDEs and 33 advanced economies. The full names of the reform areas given on the x-axis are making it easier to start a business, deal with construction permits, get electricity, register property, get credit, protect minority investors, pay taxes, trade across borders, enforce contracts, and resolve insolvency. 20  ●   World Bank ECA Economic Update Fall 2019 Heavy reliance on agriculture leaves many ECA economies vulnerable to changes in rainfall patterns, rising temperatures, droughts, and floods. Soil qual- ity is expected to deteriorate in response to higher temperatures and more fre- quent droughts, especially in Russia and Ukraine, which could threaten crop yields in the absence of adaptive measures (Dronin and Kirilenko 2011; Lioubimt- seva, de Beurs, and Henebry 2013; Müller and others 2016; Teixeira and others 2013). These economies are particularly vulnerable because of their aridity, previ- ous underinvestment in infrastructure, frequency of natural disasters, reliance on glaciers for water supply, and legacy of environmental mismanagement. Produc- tivity-enhancing measures in the agriculture sector—including improved irriga- tion, better access to markets, effective use of fertilizers, and new technologies— could help maintain crop yields and food security (Leclère and others 2014; Müller and others 2011; Roudier and others 2011; World Bank forthcoming). Coastal populations in ECA are exposed to climate change risks from sea level rise, storm surges, floods, and droughts. Within the ECA basins—the Adriatic Sea, Baltic Sea, Black Sea, and Caspian Sea—the average coastal population ranges from 20 percent (Caspian Sea) to nearly 70 percent of the population (fig- ure 1.3, panel d) (World Bank 2017). A significant rise in sea level, erosion, and storm surges in the Black Sea are threatening ports, housing, arable land, and tourism sites along the coasts of Georgia, Russia, Turkey, and Ukraine (Frolov 2000; Karaca and Nicholls 2008). Boosting adaptive capacity through improve- ments in coastal management policies—such as zoning and planning, water re- source management, use of new technologies, and flood control—will be critical to mitigate the risks climate change poses on coastal communities. Improved institutions and policy buffers can enhance resilience to climate change, as they provide the resources needed to support victims of extreme events. Strengthening institutional capacity by moving closer to best practices in gover- nance, government effectiveness, contract enforcement, control of corruption, and regulatory quality is critical to ensure that climate mitigation policy efforts are not hindered (Tol, Klein, and Nicholls 2008; World Bank 2017). Investment in climate-smart infrastructure, combined with appropriate land use planning, can help mitigate climate change risks. Effective social safety nets and productive inclusion programs, which act as a countercyclical buffer during economic down- turns triggered by climate events, are needed to protect the most vulnerable. Annex Data and Forecast Conventions The macroeconomic forecasts presented in this report are the result of an iterative process involving staff from the World Bank Prospects Group in the Equitable Growth, Finance, and Institutions Vice-Presidency; country teams; regional and country offices; and the Europe and Central Asia Chief Economist’s office. This process incorporates data, macroeconometric models, and judgment. Data The data used to prepare the country forecasts come from a variety of sources. National income accounts, balance of payments, and fiscal data are from Haver Chapter 1: Economic Outlook ●  21 Analytics; the World Bank’s World Development Indicators; and the Interna- tional Monetary Fund’s (IMF’s) World Economic Outlook, Balance of Payments Statistics, and International Financial Statistics. Population data and forecasts are from the United Nations’ World Population Prospects. Country and lending group classifications are from the World Bank. In-house databases include com- modity prices, data on previous forecast vintages, and country classifications. Other internal databases include high-frequency indicators—such as industrial production, consumer price indexes, housing prices, exchange rates, exports, im- ports, and stock market indexes—based on data from Bloomberg, Haver Analyt- ics, the Organisation for Economic Co-operation and Development (OECD) ana- lytical housing price indicators, the IMF’s Balance of Payments Statistics, and the IMF’s International Financial Statistics. Aggregations Aggregate growth for the world and all subgroups of countries (such as regions and income groups) is calculated as the GDP–weighted average (at 2010 prices) of country-specific growth rates. Income groups are defined as in the World Bank’s classification of country groups. Forecast Process The process starts with initial assumptions about advanced economy growth and commodity price forecasts. These assumptions are used as conditions for the first set of growth forecasts for EMDEs, which are produced using macroeconometric models, accounting frameworks to ensure national account identities and global consistency, estimates of spillovers from major economies, and high-frequency indicators. These forecasts are then evaluated to ensure consistency of treatment across similar economies. This process is followed by extensive discussions with World Bank country teams, which conduct continuous macroeconomic monitor- ing and dialogue with country authorities. Throughout the forecasting process, staff use macroeconometric models that allow the combination of judgment and consistency with model-based insights. References Acemoglu, D., S. Johnson, and J. Robinson. 2005. “Institutions as a Fundamental Cause of Long-Run Growth.” In Handbook of Economic Growth 1A, edited by P. Aghion and S. Durlauf, 385–472. Amsterdam: North-Holland. Altinok, N., N. Angrist, and H.A. 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A desperate young man may be pretending to be a refugee, because doing so may be the only path available to flee his country. On the other side of the border, a middle-aged factory worker fears for her job, as a young immigrant is willing to work for half her wage. A teacher does not know how to teach when half the students in his class do not speak the native language. In the origin country, patients at the local clinic worry their last doctor will also emigrate. The minister of education wonders why the ministry is spending so much money to subsidize the economies of rich countries as many of the uni- versity graduates emigrate, while the finance minister is grateful for the remit- tances they send but worried that these may not last. Whether the issue is undocumented migration, brain drain, refugees, or tem- porary migration, the only certainty is that global migration is here to stay. Cur- rent problems show that policy makers cannot fight labor markets or the pull/ push forces behind migration. These forces are too strong to overcome with simple restrictive policies. They need to be properly managed with innovative and economically sound policies. Labor mobility can address many of the long-run challenges the Europe and Central Asia (ECA) region is facing, such as the burdens created by demographic pressures arising from population aging and low fertility rates. The main diffi- culty is designing policies that will enable the region to take advantage of the gains generated by labor mobility and address the costs of migration. The gains arise from more efficiently allocating labor across sectors and geographic areas, matching unmet demand in many occupations, and taking advantage of 25 26  ●   World Bank ECA Economic Update Fall 2019 agglomeration spillovers in high-skilled sectors. The costs result from the dis- placement and relocation of some workers in destination labor markets and the loss of scarce human capital (brain drain) in origin countries. Emigration and immigration rates are high in ECA, especially within the re- gion. The policy debate should focus on managing external and internal migra- tion so that the region can more effectively transition to a competitive, inclusive, efficient, and integrated market. This chapter examines migration in the region. The first section presents the trends, determinants, and impacts of low- and high-skilled labor in the region. The second section discusses policies for attracting both types of labor and deal- ing with the repercussions in both origin and destination countries. The last sec- tion summarizes the main conclusions. The Nature of Migration Patterns of Migration Opinion polls suggest that the world is facing its most severe migration crisis in recent history. Migration data, however, reveal a different picture. There were slightly more than 250 million international migrants in the world in 2017, the latest year for which comprehensive data exist. This figure represents an increase of more than 75 percent over the 140 million migrants in 1990 and a tripling of the number of migrants in 1960. The share of international migrants in the world population barely changed over the past six decades, however, remaining within the remarkably narrow range of 2.5–3.5 percent. Beneath this overall stability lie several rapidly changing patterns that are the real causes of the anxiety over migration. The first is that immigrants are concen- trated in a handful of destination regions, especially in high-income countries with ongoing labor shortages, high demand in certain sectors and occupations, and relatively liberal immigration policies. Two-thirds of the world’s migrants live in North America, Western and Eastern Europe, and the oil-exporting Gulf Cooperation Council (GCC) countries in the Persian Gulf. The share of immi- grants in Western European countries increased especially rapidly over the past four decades, rising from 18 to about 25 percent of the world migrant population. Former Soviet republics in Eastern Europe account for another 10 percent of the world’s migrants, making Europe the destination region for more than one in three emigrants in the world (World Bank 2018). Migration rates vary significantly both across and within countries. The high- est immigrant-to-home population ratios are in the oil-exporting GCC countries, followed by Australia, Canada, and New Zealand, where immigrants make up about 20 percent of the population (map 2.1). In much of Western Europe and the United States, the share of immigrants is approaching 15 percent of the popula- tion, about four times the world average. Globally, emigration is more evenly distributed than immigration (map 2.2). Within the ECA region, most sending countries are in Eastern Europe and Central Asia. Emigrants from Eastern Europe migrate to Western Europe, particularly to Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  27 MAP 2.1 Immigrant-to-population ratio, by country IBRD 43678 | OCTOBER 2019 Share of immigrants in population (percent) 30–85 20–30 10–20 5–10 1–5 0–1 no data Source: UN DESA 2017, 2019. countries that recently joined the European Union. Emigrants from Central Asia move to the Russian Federation, taking advantage of their historical, political, and economic ties. The number and share of migrants vary widely across ECA. The number of immigrants ranges from 520,000 in the South Caucasus countries (3 percent of the population) to about 35 million in Western Europe (14 percent of the population) (figure 2.1 and table 2.1). The number of emigrants from each region ranges from 900,000 in Northern Europe to 14 million in Western Europe. This wide range partially reflects differences in the population sizes of these regions, as the shares of emigrants in both regions are similar (4.3 and 5.4 percent). MAP 2.2 Emigrant-to-population ratio, by country IBRD 43676 | OCTOBER 2019 Share of emigrants in population (percent) 30–80 20–30 10–20 5–10 1–5 0–1 no data Source: UN DESA 2017, 2019. 28  ●   World Bank ECA Economic Update Fall 2019 FIGURE 2.1 Share of population and number of international immigrants in Europe and Central Asia, by subregion, 2017 30 40 Immigrant stock as share of total population (left-hand axis) Emigrant stock as share of total population (left-hand axis) 35 25 Immigrant stock (right-hand axis) Emigrant stock (right-hand axis) 30 20 Percent of population 25 Millions 15 20 15 10 10 5 5 0 0 Central Central Eastern Northern Russian South Southern Turkey Western Western Asia Europe and Europe Europe Federation Caucasus Europe Balkans Europe the Baltic countries Source: UN DESA 2017; World Bank 2017. A more appropriate metric is the share of immigrants in the total population. At the low end, it is 3.2 percent in the South Caucasus region, 3.7 percent in Cen- tral Europe and the Baltics, and 6.0 percent in the Western Balkans and Turkey. At the other extreme, the main destination regions are the high-income countries in Western, Northern, and Southern Europe, where the shares of immigrants are 13.7, 13.0, and 11.0 percent, respectively. Most of the migrants from the first group of regions moved to the countries in the latter group. The Western Balkans and the South Caucasus have the highest emigration rates, at 25 and 18 percent, re- spectively, followed by Eastern Europe (15 percent) and Central Europe and the Baltic countries (13 percent). The next critical migration pattern is intraregional migration stocks, which account for about a third of global migration and an even larger share in ECA (figure 2.2). Despite the decline in transportation and communication costs, most migrants still prefer to move to neighboring or nearby countries. Physical prox- imity, linguistic and cultural similarities, and policy preferences granted by des- tination countries to their neighbors contribute to such patterns. Regional migra- tion preferences—such as the free mobility granted to residents of member countries within the European Union—are especially important for the ECA re- gion. As a result, about 80 percent of emigrants from the region move to other ECA countries. This share is significantly larger than in any other part of the world. Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  29 TABLE 2.1  Immigrant and emigrant stocks in Europe and Central Asia, by country (total and as percent of population), 2017 Immigrant Emigrant Immigrant Emigrant share stock share stock share share from to top five Immigrant of total Emigrant of total top five origin destination stock population stock population countries countries Subregion/country (millions) (percent) (millions) (percent) (percent) (percent) Central Asia 5.4 7.6 7.7 10.9 92.7 92.5 Kazakhstan 3.6 19.8 4.1 22.5 93.5 95.8 Kyrgyz Republic 0.2 3.1 0.8 12.3 86.1 94.9 Tajikistan 0.3 3.1 0.6 6.5 97.0 95.6 Turkmenistan 0.2 3.3 0.2 4.2 92.9 92.7 Uzbekistan 1.1 3.4 2.0 6.2 97.1 90.5 Central Europe and the Baltic Countries 3.6 3.5 13.8 13.4 52.0 62.7 Bulgaria 0.2 2.1 1.3 18.2 46.6 73.5 Croatia 0.5 12.9 0.9 21.9 94.6 78.4 Czech Republic 0.4 4.1 1.0 9.0 74.5 85.8 Estonia 0.2 14.6 0.2 15.1 91.6 72.4 Hungary 0.5 5.0 0.6 6.5 73.0 67.4 Latvia 0.3 13.2 0.4 19.1 91.2 71.7 Lithuania 0.1 4.4 0.6 20.9 86.2 62.9 Poland 0.6 1.7 4.7 12.4 72.8 76.8 Romania 0.4 1.8 3.6 18.2 75.8 76.1 Slovak Republic 0.2 3.4 0.4 6.5 74.7 73.1 Slovenia 0.2 10.6 0.1 6.9 86.6 70.2 Eastern Europe 5.7 9.9 8.4 14.6 89.1 72.4 Belarus 1.1 11.4 1.5 15.7 93.3 82.3 Moldova 0.1 3.3 1.0 24.0 96.2 83.2 Ukraine 4.5 10.2 5.9 13.4 91.5 75.7 Northern Europe 2.5 11.9 0.9 4.3 26.0 57.3 Denmark 0.6 10.7 0.3 4.4 27.9 62.4 Finland 0.3 6.2 0.3 5.3 45.3 74.7 Sweden 1.6 16.1 0.3 3.5 34.3 59.3 Russian Federation 11.6 8.0 10.6 7.3 73.2 78.5 South Caucasus 0.6 3.5 3.0 17.5 89.1 81.8 Armenia 0.2 5.7 1.0 32.3 94.7 87.6 Azerbaijan 0.3 2.6 1.2 11.7 95.2 87.4 Georgia 0.1 1.9 0.8 20.9 91.7 82.1 Southern Europe 14.1 11.0 7.7 6.0 34.5 55.2 Cyprus 0.2 15.9 0.2 13.9 56.5 85.5 Greece 1.2 11.5 0.9 8.8 61.4 69.2 Italy 5.9 9.7 3.0 5.0 40.5 57.5 Malta 0.1 9.9 0.1 24.0 55.4 95.2 Portugal 0.9 8.3 2.2 21.7 60.7 65.4 Spain 5.9 12.7 1.3 2.8 41.2 57.0 Turkey 4.8 5.9 3.4 4.2 84.8 80.3 Western Balkans 1.1 6.1 4.4 24.5 92.1 53.8 Albania 0.1 1.6 1.1 39.8 98.8 93.5 Bosnia and Herzegovina 0.1 1.1 1.7 49.5 95.2 75.6 Kosovo — — — — — — Republic of North Macedonia 0.1 6.2 0.5 25.7 97.2 77.0 Montenegro 0.1 11.2 0.1 21.9 76.1 72.9 Serbia — — — — — — Western Europe 34.6 13.4 14.0 5.4 28.0 46.3 Austria 1.7 18.8 0.6 6.6 56.6 71.8 Belgium 1.2 10.3 0.6 4.9 54.4 61.2 France 7.9 12.1 1.9 2.9 49.4 45.3 Germany 12.0 14.6 4.2 5.1 52.3 45.1 Ireland 0.8 17.0 0.8 16.7 63.7 87.9 Luxembourg 0.3 44.5 0.1 10.5 74.9 77.5 Netherlands 2.0 11.8 1.0 5.9 41.7 59.4 United Kingdom 8.7 13.0 4.8 7.2 33.9 69.1 Source: UN DESA 2017, 2019; World Bank 2017. Note: — Not available. Immigration and emigration data are not separately available for Serbia and Kosovo in UN DESA (2017), the main source for this table. 30  ●   World Bank ECA Economic Update Fall 2019 FIGURE 2.2 Share of emigrants moving 80 Percent of emigrants moving within their region intraregionally, by world region, 2000 and 2017 60 40 20 0 Europe Sub-Saharan Middle South East Asia North Latin and Africa East and Asia and Pacific America America Central Asia North Africa and the Caribbean 2000 2017 Source: UN DESA 2017. Migration within ECA is concentrated within certain subregions, based on geographic proximity, economic similarity, and historical linkages (table 2.2). ECA is home to 86.8 million immigrants and sends about 74.5 million emigrants to other countries. Of the total number of migrants, almost 60 million are intra- ECA migrants, 26.9 million moved from outside ECA to ECA countries, and 14.6 million moved from ECA to outside ECA. The 26.9 million immigrants from out- side ECA represent less than 3 percent of the approximately 900 million people in ECA. The net migration of 12.3 million people to ECA represents only about 1.3 percent of the region’s total population. High-income (mostly) EU member countries in Western, Southern, and North- ern Europe receive the largest share of immigrants. Of the 54.3 million immi- grants in these countries, more than half (31.3 million) come from other ECA countries; the rest come from other parts of the world. The most important send- ing areas are Sub-Saharan Africa, the Middle East and North Africa, and Latin America and the Caribbean. Non–EU member countries in Eastern Europe and the South Caucasus (mostly former republics of the Soviet Union) form the sec- ond-largest destination subregion, with 17.9 million migrants. Two-thirds of these migrants come from the same set of countries. A large share moved within the Soviet Union before its dissolution, becoming international migrants with the creation of new national borders. Others moved to neighboring countries be- cause of their continuing economic, political, and cultural links. Among sending regions, a similar degree of concentration exists for smaller and lower-income countries. Recent EU member countries in Central Europe and the Baltics form one of the most important source of migrants, with a total of 13.7 million emigrants. About 70 percent of these people moved to high-income EU member countries, taking advantage of the free labor mobility privileges granted as part of their EU membership. Central Asian countries also send many emi- grants, especially as a proportion of their populations. Most of these migrants Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  31 TABLE 2.2  Migration within Europe and Central Asia, by subregion, 2017 (millions) Destination region Western, Russian Southern, EU member Federation, Western and in Central South Caucasus, Balkans All Northern Europe and and Eastern Central and Rest of destina­ Origin region Europe the Baltics Europe (non-EU) Asia Turkey world tions Western, Southern, and 12.2 0.6 0.2 0.2 0.6 9.6 23.4 Northern Europe EU member in Central Europe 9.7 0.7 0.4 0.0 0.9 2.0 13.7 and the Baltic countries Russian Federation, South Caucasus, and Eastern 3.0 1.3 11.5 4.4 0.1 1.7 22.0 Europe (non-EU) Central Asia 1.3 0.0 5.6 0.5 0.0 0.2 7.6 Western Balkans and Turkey 5.2 0.7 0.0 0.0 0.7 1.1 7.8 Rest of world 23.0 0.3 0.2 0.0 3.4 All origins 54.3 3.6 17.9 5.3 5.8 Source: UN DESA 2017, 2019; World Bank 2017. moved to Russia or other former Soviet republics. Many emigrants come from Turkey and the Western Balkan countries (Albania and the former Yugoslav re- publics), moving to high-income EU member countries such as Germany, Aus- tria, and the Netherlands. These flows slowed over the past decade, but the stock of migrants remains large. During this time, Turkey became a major destination country, as a result of the arrival of almost 4 million refugees fleeing the civil war in Syria. Their num- bers are not fully reflected in table 2.2, as the UN Population Division’s migration statistics exclude Syrian refugees worldwide (see annex 2A for issues related to migration data). A small number of corridors shape world migration (World Bank 2018). In- deed, 300 of the more than 40,000 possible corridors account for more than 75 percent of the world’s total migrant stock. The same concentration holds within the ECA region (table 2.3). Migration within the former Soviet republics continues to dominate intra-ECA migration, with the Russia–Ukraine and Russia–Kazakhstan corridors accounting for the largest numbers of migrants. In addition, ethnic Germans migrate from Russia and Kazakhstan to Germany, taking advantage of German immigration laws and preferences granted to them. The main development since 2000 has been the emergence of the Poland–Germany and Romania–Italy corridors after the entry of Poland and Romania into the European Union. Migration from a few origin countries dominates flows into most subregions (table 2.4). The top five origin countries account for more than half of all migrants in every subregion of ECA except the high-income countries of Western, South- ern, and Northern Europe, where migrants come from a wider range of countries and the top five origins account for 26–35 percent of migrants. In Central Asia, for example, almost 93 percent of migrants come from just five countries. 32  ●   World Bank ECA Economic Update Fall 2019 TABLE 2.3  Largest migration corridors in Europe and Central Asia, 2000 and 2017 (millions of migrants) 2000 2017 Origin region Destination Stock Origin region Destination Stock Russian Russian Ukraine 3.7 Ukraine 3.3 Federation Federation Russian Russian Ukraine 3.5 Ukraine 3.3 Federation Federation Russian Russian Kazakhstan 2.6 Kazakhstan 2.6 Federation Federation Russian Russian Kazakhstan 2.0 Kazakhstan 2.4 Federation Federation Turkey Germany 1.6 Poland Germany 1.9 Russian Uzbekistan 1.1 Turkey Germany 1.7 Federation Russian Russian Belarus 0.9 Uzbekistan 1.1 Federation Federation Russian Russian Uzbekistan 0.9 Germany 1.1 Federation Federation Russian Germany 0.9 Romania Italy 1.0 Federation Russian Azerbaijan 0.8 Kazakhstan Germany 1.0 Federation Source: UN DESA 2017, 2019; World Bank 2017. TABLE 2.4  Concentration of immigration in Europe and Central Asia, by subregion (percent of total immigration), 2017 Top origin Top 5 origin Top 10 origin Top 20 origin Subregion country countries countries countries Western Europe 9.1 28.0 44.8 62.9 Southern Europe 12.5 34.5 49.2 67.9 Northern Europe, 6.8 26.0 42.2 62.6 Central Europe, and the 14.1 52.0 70.4 86.6 Baltic countries Russian Federation 28.1 73.2 93.2 99.1 South Caucasus 31.6 89.1 97.0 99.7 Eastern Europe 70.4 89.1 96.5 99.4 Central Asia 69.4 92.7 97.3 99.8 Turkey 37.3 84.8 94.7 98.6 Western Balkans 68.3 92.1 94.6 97.8 Source: UN DESA 2017, 2019; World Bank 2017. The same pattern is evident at the country level (see table 2.1). Except in a handful of high-income countries, such as Denmark, Norway, Sweden, and the United Kingdom, migrants from the top five origin countries constitute more than half of all immigrants in all ECA countries. This ratio reaches 90 percent in every Balkan country and former Soviet republic. Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  33 A similar degree of concentration is observed in the destination choices of emigrants from ECA (table 2.5). Most emigrants from all ECA countries except high-income countries in Western, Southern, and Northern Europe go to only a handful of destinations. Five destination countries receive two-thirds of all emi- grants from recent EU member countries in Central Europe and the Baltics. The concentration of destinations is even stronger at the country level. As table 2.1 shows, more than 75 percent of the emigrants from most ECA countries go to five or fewer destinations. Immigrants are also concentrated within destination countries. This concen- tration is most pronounced for high-skilled migration, which tends to concen- trate in locations where productivity spillovers and agglomeration effects are high- est (such as Silicon Valley for technology jobs or London for finance). In contrast, refugee flows tend to concentrate in the border regions of neighboring destina- tion countries, at least initially, and then eventually in their largest urban areas (World Bank 2018). The rest of this chapter discusses the economic and political significance of this concentration of migration for origin and destination countries. Determinants of Migration Like the movement of goods, capital, and even technology across national bor- ders, migration responds to a range of push and pull factors. Empirical evidence identifies several broad determinants of migration patterns. Potential migrants weigh the economic, social, and other personal costs and benefits in deciding whether and where to move. They move from low-wage to high-wage locations and are attracted to labor markets with better current and future employment opportunities. On the cost side, the most important determinants of mobility are physical and cultural distances. Physical distances impose high transportation costs and are the reason why most low-skilled migrants with tight budget constraints move TABLE 2.5  Concentration of emigration in Europe and Central Asia, by subregion (percent of total emigration), 2017 Top Top 5 Top 10 Top 20 Subregion destination destinations destinations destinations Western Europe 13.3 46.3 69.8 88.0 Southern Europe 18.3 55.2 78.6 93.1 Northern Europe 22.4 57.3 79.6 93.2 Central Europe, and the 27.2 62.7 77.8 92.5 Baltic countries Russian Federation 31.1 78.5 88.3 95.0 South Caucasus 59.3 81.8 91.0 97.3 Eastern Europe 51.6 72.4 86.2 96.4 Central Asia 64.8 92.5 96.6 98.9 Turkey 48.6 80.3 89.2 97.4 Western Balkans 13.6 53.8 82.0 97.5 Source: UN DESA 2017, 2019; World Bank 2017. 34  ●   World Bank ECA Economic Update Fall 2019 to neighboring countries or remain within the same region. Cultural adaptation and settlement are also costly, so existing personal and social networks shape migration flows. Networks of co-nationals help migrants find jobs, establish a new social life, and navigate legal hurdles. The policy environment—preferential treatment granted to certain groups of people; tight border controls; access to domestic health, welfare, and education programs—also makes a big difference. Entry into the European Union has been a critical determinant of the size and distribution of intra-ECA migration flows from Central European and the Baltic countries. Many domestic policies and factors that are not directly linked to migration policies may also operate as “push” factors. People are more likely to emigrate if they lack access to proper public services, their political freedoms and rights are curtailed, or they feel under physical threat, even if there is no explicit civil conflict. These factors also affect the education, skills, gender, and age composition of migrant flows. The skills composition is a critical determinant of the economic impact of migration in destination and origin countries. Economic factors explain the large variation in skills observed in different corridors. High-skilled migrants are disproportionately attracted to higher-income countries that have liberal and skill-selective immigration policies and higher returns to human capital. These migrants have an easier time overcoming physical distances, linguistic differ- ences, and policy barriers, enabling them to move farther and to more diverse countries. The policy environment, the use of English as the official language, and the presence of liberal labor markets are some of the reasons why, for ex- ample, the United Kingdom attracts more high-skilled immigrants than most other countries in Europe and why the United States is home to one-third of all migrants with higher education. Income and employment gaps Income gaps are the most important determinants of bilateral migration flows (World Bank 2018; Gould 2018). Figure 2.3 reveals the strong correlation between income differences between pairs of countries and the share of emigrants from each source country in each destination country. The slope of the blue line sug- gests that a $2,000 increase in mean annual GDP per capita in the destination country is associated with a 10 percent increase in the likelihood that an emigrant chooses that destination. Migration between ECA countries is much less sensitive to income gaps; the same level of income gap leads to only a 4 percent increase in the likelihood of emigration. This difference indicates the importance of other factors, such as free labor mobility privileges within the European Union or his- torical and political bonds within ECA countries. Income differentials tell only part of the story of the labor market–based mo- tivations of migration. Differences in employment rates and opportunities across labor markets are also important (figure 2.4). Intra-ECA flows are sensitive to employment opportunities, as measured by employment-to-population ratios in destination countries. Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  35 FIGURE 2.3 Correlation between emigrant shares of origin countries in Europe Share of origin country emigrants (percent) and Central Asia and income differences between 10 destination and origin countries, 2017 1 0.1 0.01 −50,000 0 50,000 100,000 Difference in per capita GDP, 2011 PPP, US$ (Destination−Origin) Non−ECA destinations ECA destinations Source: UN DESA 2017. Employment data are from World Bank Open Data. Note: Each point represents the mean of 100 equal-size groups of country-pairs. FIGURE 2.4 Correlation 10 between emigrant shares Share of origin country emigrants (percent) of origin countries in Europe and Central Asia and employment differences 1 between destination and origin countries, 2017 0.1 0.01 −3 −2 −1 0 1 2 Differences in employment to population ratios (Destination−Origin) Non-ECA destinations ECA destinations Source: UN DESA 2017. Employment data are from World Bank Open Data. Note: Each point represents the mean of 100 equal-size groups of country-pairs. Demographic factors Demographic forces are the second most important factors in shaping global mi- gration patterns. They are especially critical for Europe. Almost all countries in the ECA region are aging rapidly; the typical age pyramid has almost disap- peared. People 35–55 make up the largest cohort in every subregion except 36  ●   World Bank ECA Economic Update Fall 2019 FIGURE 2.5 Projected age distribution of the population in Europe and Central Asia in 2020, by subregion a. Western Europe b. Central Europe and the Baltic Countries 80+ 6.2 80+ 4.7 75–79 3.9 75–79 3.3 70–74 5.1 70–74 5.0 65–69 5.5 65–69 6.5 60–64 6.3 60–64 6.8 55–59 7.2 55–59 6.2 50–54 7.4 50–54 6.6 45–49 7.0 45–49 7.3 Age Age 40–44 6.6 40–44 7.9 35–39 6.5 35–39 7.3 30–34 5.5 30–34 5.0 25–29 6.2 25–29 7.1 20–24 5.8 20–24 6.2 15–19 5.3 15–19 4.7 10–14 5.3 10–14 5.3 5–9 5.2 5–9 5.0 0–4 4.9 0–4 5.0 0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8 9 Percent of population Percent of population c. Russian Federation,South Caucasus, Eastern Europe d. Central Asia 80+ 3.8 80+ 1.0 75–79 2.2 75–79 0.8 70–74 3.6 70–74 1.2 65–69 5.7 65–69 2.4 60–64 6.8 60–64 3.6 55–59 7.1 55–59 4.6 50–54 6.0 50–54 4.7 45–49 6.7 45–49 5.4 Age Age 40–44 7.3 40–44 6.1 35–39 8.2 35–39 7.2 30–34 4.8 30–34 7.7 25–29 8.6 25–29 8.8 20–24 6.4 20–24 8.8 15–19 4.9 15–19 7.3 10–14 5.6 10–14 8.9 5–9 6.4 5–9 10.6 0–4 6.1 0–4 10.9 0 1 2 3 4 5 6 7 8 9 0 2 4 6 8 10 12 Percent of population Percent of population e. Western Balkans f. Turkey 80+ 3.5 80+ 1.7 75–79 3.0 75–79 1.6 70–74 4.7 70–74 2.3 65–69 6.3 65–69 3.3 60–64 6.5 60–64 4.1 55–59 6.8 55–59 4.9 50–54 6.6 50–54 5.6 45–49 6.8 45–49 6.4 Age Age 40–44 6.8 40–44 7.1 35–39 6.9 35–39 7.6 30–34 6.5 30–34 8.0 25–29 7.2 25–29 7.6 20–24 6.8 20–24 7.6 15–19 5.9 15–19 8.1 10–14 5.6 10–14 8.0 5–9 5.2 5–9 8.1 0–4 4.9 0–4 7.8 0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8 9 Percent of population Percent of population Source: UN DESA 2019. Central Asia and Turkey (figure 2.5).1 People are living longer, and the share of children in the population is shrinking rapidly, as fertility levels decline. As a result, there has been a rapid increase in the number of people in the population over 65 and a steep decline in the size of the labor force. The resulting demands 1. Even Central Asia and Turkey, which have a more traditional age structure, are just two decades behind in their demographic transition, with declining fertility rates and aging populations. Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  37 on the social welfare system are already a source of concern, and pressure on the public finance system will only increase. The demographic composition of ECA countries and the resulting labor mar- ket dynamics will shape migration patterns in the next several decades. Migrants are disproportionately of working age, because employment is the main reason for migration. In the high-income Western, Southern, and Northern European destination countries with rapidly aging populations, migrants bolster the size of the working-age population and significantly increase the size of the labor force. Figure 2.6 presents the age distribution of immigrants and the (weighted) age distribution of the population in Western European destination countries. It shows that most immigrants are 25–54 and that destination country populations are significantly older. Current demographic profiles explain recent migration patterns. The rapid aging of the population in ECA countries that will occur over the next two gen- erations is even more critical for policy making. Figure 2.7 presents the share of the population over 65, which is currently about 20 percent in Western, Northern, and Southern Europe; 17 percent in Central Europe and the Baltic countries; and 14 percent in other ECA subregions. These shares are lower in Turkey (8 percent) and Central Asia (5 percent). The share of people over 65 in most subregions of ECA is significantly higher than the world average of 7 percent—and the trend is even more important. According to the most recent projections by the UN Popu- lation Division, the share of people over 65 will reach 28 percent in Western Eu- rope and 25 percent in Central and Eastern Europe by 2040. In Turkey it will reach almost 20 percent, and it will double to 10 percent in Central Asia. Within another generation—that is, by 2070—the share of people over 65 will stabilize at about 25–35 percent for the ECA region excluding Central Asia. FIGURE 2.6 Age distribution of immigrants and destination 19.1 65+ 11.8 country population in Western Europe, 2017 12.3 55–64 11.7 14.3 45–54 17.2 13.8 35–44 21.6 11.8 25–34 20.7 11.7 15–24 10.9 16.8 0–14 6.1 25 15 5 0 5 15 25 Percent of population Native−born Immigrant Source: OECD 2010; UN DESA 2019. 38  ●   World Bank ECA Economic Update Fall 2019 FIGURE 2.7 Actual and 40 projected shares of population 65 and older in Europe and Central Asia, Percent of population 65 and older by subregion, 1950–2075 30 20 10 0 1950 1975 2000 2025 2050 2075 Western Europe Central Asia Central Europe and the Baltic Countries Western Balkans Russian Federation, South Caucasus, Eastern Europe Turkey Source: UN DESA 2019. The implications of rapid population aging for labor markets are severe. Al- though the share of people 20–65 in the population (a proxy for the size of the potential labor force) has been gradually increasing in most countries (figure 2.8), it has done so only because of the decline in the share of children. By 2020 the size of the labor force will peak in almost every country in the region, at about 60–65 FIGURE 2.8 Actual and 70 projected shares of working-age population (20–65) in Europe and Central Asia, by subregion, 1950–2075 Percent of population 20–65 60 50 40 1950 1975 2000 2025 2050 2075 Western Europe Central Asia Central Europe and the Baltic Countries Western Balkans Russian Federation, South Caucasus, Eastern Europe Turkey Source: UN DESA 2019. Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  39 percent. As the population ages, the labor force will start to shrink, to 55–58 per- cent in 2040 and 50–55 percent in 2075. This decline will affect all aspects of the economy in every country in ECA. In many regions of the world, such as the Americas and East Asia, demo- graphic profiles and economic development levels vary widely across countries. This variation creates regional migration opportunities and helps narrow age distributions and income levels. For example, over the past two decades, the Mexico–United States corridor—the largest migration corridor in the world—has been fueled by the proportionately larger youth population in Mexico, which has faced underemployment. Similarly, the Philippines is the source country for many economic migrants to other countries in the region—such as Singapore and Malaysia—as well as oil-rich countries in the Middle East. For the most part, this type of demographic variation does not exist in ECA, where origin and destination countries tend to be at similar points in their demo- graphic transitions. There are no “young” countries in the region that can export working-age people to “older” countries. The relative uniformity of the age distribution in ECA countries means that the future labor force will need to come from other parts of the world. Figure 2.9 presents the size of the working age population as a share of the total population in high-income OECD countries and low-income countries (mostly in Sub-Saha- ran Africa and South Asia). It shows that the size of the working-age population in high-income countries began its steady decline in 2010 and will continue to decline over the next five decades. In contrast, low-income countries have young populations, with declining fertility rates and few older people. As a result, their working-age populations will be rising steadily over the same period. This con- trast will lead to a world population distribution with a surprisingly stable age distribution (the orange line in figure 2.9). To put it differently, the world has FIGURE 2.9 Working-age 65 population as a share of the Size of the labor force as a share of population (percent) total population in high-income countries, 60 low-income countries, and the world, 1980–2060 55 50 45 40 35 1980 1990 2000 2010 2020 2030 2040 2050 2060 High-income countries World Low-income countries Source: UN DESA 2019. 40  ●   World Bank ECA Economic Update Fall 2019 enough workers, but they are not necessarily in the right labor markets. Migra- tion from low-income countries with younger populations to higher-income countries with aging populations does not solve the structural economic prob- lems that both regions face. However, it does provide a window of opportunity— of about three decades—to address the issues surrounding aging and youth unemployment. Impacts of Migration Recent decades have seen dramatic changes in the global economic landscape thanks to rapid technological progress, increased international trade, and large- scale migration from poorer to wealthier countries. The resulting changes in pat- terns of employment and wage inequality have given rise to a highly politicized debate about the merits of globalization and open markets in which immigrants are often blamed for many of the economic problems in origin and destination countries. In destination countries, they are accused of causing unemployment and reducing wages. In origin countries, they are viewed as perpetrators of brain drain. Benefits of migration for destination countries A large body of literature has shown the many benefits of migration for destina- tion countries, including higher productivity, innovation, growth, and poverty reduction and elimination of labor market shortages (Peri and Sparber 2009; Na- tional Academy of Sciences, Engineering, and Medicine 2017). Realization of these benefits requires that labor markets in destination countries have certain features. First, migrants with the appropriate human capital characteristics need to be selected, so that they can meet labor market demands. The initial level of migrants’ human capital does not address all problems; their eventual contribu- tions depend on the degree to which they continue to invest in country- and firm-specific skills and human capital, ranging from language acquisition to tech- nical training to social norms. Second, migrants need to have relatively secure legal rights, employment con- tracts, and possibly a clear pathway to permanent residency, depending on their occupation and sector. Only then will proper economic and social integration take place. Third, the returns to investing in migrants’ children and integration are high. Immigrant families can help destination countries address some of the demo- graphic challenges they are facing, but only if proper education and social poli- cies are implemented (World Bank 2018). Short-term labor market impacts of migration A vast body of literature examines the short-term labor market impacts of migra- tion. This research has not yet reached a definitive consensus, but three stylized facts emerge from it. First, immigration results in large displacement effects in destination coun- tries for the workers who most directly compete with the immigrant labor. They tend to be low-skilled and older workers who have few opportunities and are Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  41 already struggling in the labor market. Second, workers who do not compete directly with immigrants frequently enjoy significant gains. These workers’ skills tend to be complementary to those of the migrants, and the returns to their hu- man capital increase with the arrival of migrants. Third, average wage effects tend to be small compared with the employment and displacement effects of immigration. Labor market flexibility and ease of movement across local labor markets within destination countries contribute to this outcome. Overall, the benefits of migration tend to be longer term and diffused, whereas the costs—displacement, wage declines, loss of employment—are immediate and concentrated in certain groups of workers. This dichotomy is the source of the political opposition and anti-immigrant sentiments frequently observed in destination countries. An insightful example of the impact on wages and displacement is the post- 1989 policy that allowed Czech workers to seek employment, but not residency rights, in eligible German border municipalities (Dustmann, Schonberg, and Stuhler 2017). Figure 2.10 presents the differences in wages and employment rates in migrant-receiving border regions and comparable nonborder regions. By 1993, an inflow of Czech workers equivalent to 1 percent of the local employed labor stock led to about a 0.15 percent decrease in native wages. In contrast, there was an almost one-to-one (0.93 percent) decrease in local employment, as the German workers in these border regions moved to other parts of the country rather than stay and compete with migrant workers. Short-run displacement effects as a result of the sudden inflow of migrants (such as refugees) provide evidence that conflicts with much of the literature on voluntary and economically motivated immigration, which typically finds small FIGURE 2.10 Effect of inflow of Czech workers on German wages and employment, 1986–95 a. Wage effects a. Employment effects 0.1 0.5 Change in employment (percent) Change in natural log of wage 0 0 −0.1 −0.5 −0.2 −1.0 −0.3 −1.5 1986 1988 1990 1992 1994 1986 1988 1990 1992 1994 Source: Dustmann, Schönberg and Stuhler 2017. Note: The orange lines indicate the effects of Czech workers on the natural log of wages (panel a) and employment (panel b). The blue bars indicate 95 percent confidence intervals. The vertical black lines indicate the year 1990, when the policy that allowed Czech workers into Germany was implemented. 42  ●   World Bank ECA Economic Update Fall 2019 average wage effects. The differences reflect the speed of adjustment in the des- tination labor markets. Sudden inflows of migrants can cause significant disloca- tion in certain geographic areas, sectors, and occupations over a short period in destination countries. The subsequent labor market adjustments (the movement of most workers to other areas or sectors) tend to be similarly large and rapid. As a result, the final wage effects in these local labor markets tend to be small. The literature on voluntary and economic migration flows focuses on average and longer-term wage effects, rather than the relocation of workers. It concludes that immigration has little wage impact for most groups of workers. In most cases, the overall effect might even be positive, especially when long-term spill- overs are considered. Even if relative wage effects are small, however, the disloca- tion of existing workers as a result of the arrival of immigrants can be costly, and it can explain some of the opposition toward immigration. In sum, immigration is likely to adversely affect certain groups of workers, although its overall wage effects are small. The labor market impacts of refugees are similar to the impacts of economic migrants, although the push factors are different (box 2.1). Refugee flows arise from wars, conflict, and natural disasters. The sudden nature of these events leads to large and unpredictable numbers of refugees. In contrast, economically motivated migration tends to be slow and steady. The overall effects in destina- tion countries are qualitatively similar, however, once the refugees adjust and enter the labor force. The concentration of the impact of migration is important. Migration flows are concentrated in certain geographic areas, sectors, or occupations, as people re- spond to wage gaps and other push/pull factors. As labor moves across markets and migrant workers earn higher incomes, employers and consumers benefit. Strong economic forces and higher wage gaps attract more migrants, which leads to further economic gains for employers and consumers. At the same time, the concentration of migration leads to lower wages for and the displacement of some existing workers. The benefits of migration—to consumers, employers, and complementary labor inputs—tend to be longer term, and beneficiaries are less easily identifiable. In contrast, the costs—especially to the existing substitutable labor groups—are immediate, concentrated and easily identified. The political opposition and resulting clash become more striking if the overall economic prospects in the destination country become less promising, as has been the case in OECD countries since the great recession. Comparing the impacts of migration on different labor groups has been one of the main research questions over the past two decades. In a study of the United Kingdom, Dustmann, Frattini, and Preston (2012) estimate the impact of overall immigration along the distribution of wages, implicitly assuming that workers with higher skills earn higher wages. They show an association between the loca- tion of measured effects and the location of immigrants in the native wage distri- bution. They then estimate the impact of immigration across the full wage distri- bution. Figure 2.11 shows that immigration decreases the wages of people at the bottom end of the wage distribution, who tend to be direct competitors of low- skilled immigrants, and increases the wage of people at the higher end of the wage distribution, who benefit from productivity spillovers. Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  43 BOX 2.1 How have refugees affected labor markets in Europe and Central Asia? Refugee crises capture much of the attention in EU countries. Turkey hosts nearly half of all Syr- the debate on migration, to the extent that refu- ian refugees. Syrians who can travel farther go to gee crises and migration problems have become Western and Northern Europe. As of 2015, Ger- synonymous, even though economic migration many hosted more than 200,000 Syrians, the larg- and refugee flows exhibit distinct characteristics. est number among the EU-28 countries. Refugees make their choices under much more The recent spike in refugees follows a period severely constrained conditions than most eco- of declining refugee stocks from a previous high nomic migrants, and their flows are unpredictable. that occurred in the early 1990s, when most refu- Their motivations in choosing one destination over gees were a product of the first Gulf War, conflicts another are similar, however. As a result, their long- in Ethiopia and Mozambique, and the dissolution term economic impacts in destination labor mar- of Yugoslavia. Most of these refugees resided kets are also similar. in neighboring countries. Apart from those in Refugee flows tend to follow wars, civil con- Yugoslavia, they did not have a large presence in flicts, and natural disasters. The sudden nature of Europe. The rise of the Yugoslavian refugee wave these events is reflected in the fluctuations in their beginning in 1992 brought larger numbers of refu- numbers (box figure 2.1.1). Refugee stocks are cur- gees to ECA and EU-28. rently at an all-time high, as a result of the Syrian For both economic migrants and refugees, the civil war, which began in 2011, as well as the fleeing costs and benefits of mobility are critical deter- of millions of people from violence in Sudan, South minants of their migration decisions. Economic Sudan, Somalia, Iraq, Afghanistan, and Myanmar. constraints and urgency are more binding for refu- The spike in refugee stocks is reflected in ECA and gees, who, as a result, are more likely to end up in BOX FIGURE 2.1.1 Stock of refugees in Europe and Central Asia, the EU-28, and globally, 1970–2017 25 10 20 8 Stock of refugees (millions) Stock of refugees (millions) 15 6 10 4 5 2 0 0 1970 1980 1990 2000 2010 2017 All destinations (left-hand axis) ECA (right-hand axis) EU−28 (right-hand axis) Source: UNHCR Population Statistics Database 2019. (Continued next page) 44  ●   World Bank ECA Economic Update Fall 2019 BOX 2.1 How have refugees affected labor markets in Europe and Central Asia? (continued) poorer, neighboring countries. In 2017, for exam- affect the labor market opportunities of compet- ple, nearly 70 percent of refugees resided in neigh- ing locals in the receiving countries, and often have boring countries, compared with just under 40 per- a favorable impact on complementary workers.” cent for nonrefugee migrants (World Bank 2018). Their study does not fully address the possibil- Most economic migrants can afford to wait for the ity that destination country workers increase their best economic opportunities before they move. human capital levels, change occupations or sec- When they are able to choose, refugees appear tors, and benefit from immigration in the long run, to favor higher-income countries. Box figure 2.1.2 however. shows the share of origin country’s refugees in dif- Using longitudinal data, Foged and Peri (2016) ferent destinations, by differences in per capita show that even native workers who are in direct GDP. Despite the large share of refugees residing competition with refugees can benefit from immi- in neighboring countries, there is a clear, posi- gration. They find that inflows of refugees who tive relationship between GDP and their choice work primarily in manual-intensive occupations of destination. Local opposition to refugees is push native workers away from those jobs into jobs partially motivated by this reason. Workers worry that are more intensive in communication and cog- that increased competition for jobs will push down nitive skills. The move results in higher long-run wages or displace them altogether. wages, even for workers who appear very similar to These worries are not fully grounded in empiri- refugees. Similar results have been found following cal evidence; there is little consensus among econ- the arrival of Syrian refugees in Turkey (Del Carpio omists on the extent of the long-term effects of and Wagner 2016) and Eastern Europeans in Aus- refugee inflows on labor markets. Looking at the tria (Packard 2019). The sudden arrival of refugees arrival of refugees in four different settings, Borjas resulted in workers moving into formal employ- and Monras (2017) find that refugees “adversely ment in Turkey and white-collar jobs in Austria. BOX FIGURE 2.1.2 Correlation between refugee destinations and differences in per capita GDP between the destination and origin country Share of origin country refugees (percent) 1 0.1 0.01 −20,000 0 20,000 40,000 60,000 80,000 Difference in per capita GDP (Destination−Origin) Non−ECA destinations ECA destinations Source: UNHCR Population Statistics Database 2019. Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  45 FIGURE 2.11 Effect of 1.0 migration to the United Kingdom at different points Change in natural log of wages of the wage distribution 0.5 0 −0.5 −1.0 −1.5 0 20 40 60 80 100 Percentile of wage distribution Instrumental variable (IV) coefficients 95% confidence interval Source: Dustmann, Frattini, and Preston 2012. Another significant impact of immigration is the sectoral and occupational relocation of existing workers. This job switching occurs because the arrival of migrants reduces wage levels in some regions or occupations, making them less attractive to existing workers. Peri and Sparber (2009) show that foreign-born workers specialize in occupations that require manual tasks, such as cleaning, cooking, and building, and that immigration causes existing workers to pursue jobs requiring more sophisticated and interactive tasks, such as coordinating, organizing, and communicating, presumably as a result of their comparative ad- vantage in language skills and familiarity with the culture. Figure 2.12 show the impact of refugees in Denmark on a measure of occupa- tional complexity (panel a) and manual intensity (panel b) of the occupations in which Danish workers are engaged. The estimates show the difference in out- comes for less-skilled Danish workers in municipalities that are more and less exposed to refugees. An increase in the supply of low-skilled refugees pushes less-educated workers (especially the young) to pursue fewer manual-intensive occupations and more occupations with greater complexity. The occupational complexity of Danish workers increases and their manual intensity decreases in municipalities with larger number of refugee arrivals. The impact is remarkably stable over time, suggesting that these changes are permanent. A critical variable is the age of the workers. Younger workers with longer time horizons and pre- sumably higher cognitive abilities relative to older workers are more likely to make these career switches. A similar pattern of sectoral relocation is observed in Austria, which experi- enced a large influx of migrant workers and refugees following the collapse of the Berlin Wall and the start of the civil war in Bosnia in 1989 (Packard 2019). Most of these workers—from Bosnia and Herzegovina, Croatia, the Czech Republic, Hungary, and the Slovak Republic—were relatively low skilled and sought blue- collar jobs (figure 2.13). Over time, the immigrant share of blue-collar workers increased faster than the overall labor market share, as more Austrian workers, especially young workers, entered white-collar jobs. 46  ●   World Bank ECA Economic Update Fall 2019 FIGURE 2.12 Impact of refugees on the occupational choices of Danish workers a. Occupational complexity b. Manual intensity 0.06 0.06 0.04 0.04 Occupational complexity Manual intensity 0.02 0.02 0 0 −0.02 −0.02 −0.04 −0.04 −3 0 3 6 9 12 15 −3 0 3 6 9 12 15 Years since immigration Years since immigration Source: Foged and Peri 2016; data from the Danish Integrated Database for Labor Market Research. Note: Values represent the results of difference-in-differences regressions controlling for industry-by-year, region-by-year, education-by-year, occupa- tion-by-year, and municipality fixed effects. The solid lines indicate parameter estimates. The dashed lines indicate 95 percent confidence intervals. FIGURE 2.13 Effect of 25 migration to Austria on blue-collar employment of native workers, 1980–2000 20 Percent of workers 15 10 5 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Immigrant workers as percent of all workers Immigrant workers as percent of all blue-collar workers Source: Austrian Social Security Database. The refugee crisis caused by the war in Syria had similar effects on Turkey (Ceritoglu and others 2017; Del Carpio and Wagner 2016). Because Turkey has not issued work permits to the vast majority of Syrian refugees, they are over- whelmingly employed in Turkey’s already large informal sector. Refugees ap- pear to have displaced workers from informal employment but increased the demand for younger Turkish men who have not completed high school. Figure 2.14 shows the difference in the share of the population employed in the formal and informal sector between Southern provinces with large number of refugees (treatment group) and the rest of the country (control group). Less-educated men and women experience net displacement from the labor market and, like workers in the informal sector, declining earning opportunities. Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  47 FIGURE 2.14 Effect of 1.5 Syrian refugees on formal employment of Turkish Difference in employment rate (percent) workers, 2005–14 1.0 0.5 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 −0.5 −1.0 Formal sector Informal sector −1.5 Source: Del Carpio and Wagner 2016. Note: Y-axis shows difference in share of population employed in treatment and control regions. Three forces—population aging, migration, and education—are shaping wage distributions in all countries, especially high-income countries in Europe. Popu- lation aging is a slow but powerful process that evokes great concern among policy makers. Immigration is blamed for the challenges faced by many low- skilled workers. Educational upgrading is viewed as the silver bullet that will solve all problems. An important question is how much each of these forces influ- ences wages across different skill and age groups. Docquier and others (2019) explore the labor market implications of the changes in the education and age structure of the population in the period be- tween 2000 and 2010. Figure 2.15 shows the changes in the shares of four main groups in the working-age population: young low-skilled, young high-skilled, old low-skilled, and old high-skilled workers. (Workers are considered high skilled if they have higher education; they are considered young if they are 25– 45.) The most striking feature is the decline across all countries in the share of young low-skilled workers, as a result of population aging and increased educa- tion levels. This decline is matched by increases in the shares of young and old skilled workers. There are some exceptions to this pattern, notably Japan, but the pattern holds in all high-income ECA countries. Analysis by Docquier and others (2019) shows that changes in the age and skill structure of the workforce are the dominant factors explaining wage changes. In the absence of technological change that rewards higher skills, current trends of aging and increased education levels should favor young and low-skilled workers. However, strong skill-biased technological change that has taken place over the last two decades offsets these benefits for low-skilled workers and ex- plains the increases in the skill premium observed in many countries (Autor, Katz, and Kearney 2008). This observation also confirms the importance of tech- nological change as a key contributing factor to wage inequality over the past decades, including in EU countries with generous welfare programs. 48  ●   World Bank ECA Economic Update Fall 2019 FIGURE 2.15 Changes in population shares by United States age-education group in Canada selected countries between Australia 2000 and 2010 New Zealand United Kingdom Ireland Germany Austria Switzerland France Belgium The Netherlands Luxembourg Italy Spain Portugal Greece Denmark Sweden Norway Finland Czech Republic Hungary Poland Slovak Republic Japan Turkey −15 −10 −5 0 5 10 15 Change in population share between 2000 and 2010 (percent) Old low-skilled Young low-skilled Young high-skilled Old high-skilled Source: OECD 2010; UN DESA 2019. Policy Design Migration policies span a range of areas, including the admission of migrants, migrant reunification with family members, access to local labor markets in des- tination countries, opportunities for migrants to obtain permanent residence and citizenship, and migrants’ rights to political participation and access to social services. There are three paths of entry into a destination country, each corre- sponding to a different set of policies. The first path, legal migration, includes three categories. One is economic migration, which aims to address labor market needs. The other two are family reunification and humanitarian migration for refugees and other people in distress. The second path is undocumented migra- tion, which occurs when people enter a country illegally or overstay their visas. It is also generally economically motivated. The third path is human trafficking or involuntary migration (box 2.2). Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  49 Most migrants move in response to economic incentives (World Bank 2018), even if the data on the type of their entry visa imply otherwise (many economic migrants enter under family unification or humanitarian assistance programs, because most formal labor market channels are restrictive). A fundamental chal- lenge for immigration policy is that labor markets create powerful push and pull forces that lead to large-scale demand for migrant labor in many sectors and re- gions. In most instances, policies cannot withstand such pressure from labor mar- kets. Restrictions on immigrant labor flows lead to the entry of large numbers of undocumented migrants, abuse of humanitarian or family unification–based policies, and distorted labor market outcomes, resulting in eventual political con- flicts and cultural clashes. Another important dimension of immigration policy is whether visas, espe- cially employment-based visas, are temporary or permanent. In some ECA coun- tries, a significant share of economic migrants are temporary migrants. In Russia, for example, 83 percent of migrants are admitted on a temporary basis; BOX 2.2 Human trafficking: Ongoing analysis with a new data set The International Labour Organization (ILO), the cases added each year. The data suffer from sev- Walk Free Foundation, and the International Orga- eral selection biases, as coverage is limited to nization for Migration (IOM) estimate that more countries where IOM has victim assistance opera- than 25 million people worldwide are in forced tions, some types of trafficking cases are more labor, many of them having been trafficked. Esti- likely to be identified (or referred) than others, mates from the United Nations Office on Drugs and larger numbers may indicate more effective and Crime (2018) indicate that about 93 percent countertrafficking response rather than higher of identified victims had been trafficked to work as prevalence. Nevertheless, the database provides a forced laborers, including sex workers. In 2016 ECA unique source of detailed data on victims of traf- had the second-highest rate of forced labor (3.6 ficking that is international in scope and can yield forced laborers per thousand inhabitants), behind initial insights into trafficking trends and patterns. only East Asia and Pacific (4.0 forced laborers per For 2014–18, the IOM data set includes more thousand inhabitants) (ILO, Walk Free Foundation, than 11,500 cases corresponding to victims and IOM 2017). exploited in ECA, mostly in former Soviet republics Research on human trafficking has been lim - in which the IOM has an active presence. Focus- ited to aggregated cross-countr y analysis or ing on the citizens of these countries, the data set qualitative, community-level studies. Although includes about 10,800 victims, with almost the there is agreement in the literature on some com- same number of females (50.4 percent) and males mon features of trafficking—the fact, for instance, (49.6 percent). About 17 percent were children. that it can occur in both institutionally weak and Eighty-six percent of the victims were trafficked strong states—the lack of microdata has prevented internationally, with Russia the most common tar- researchers from assessing the supply and demand get destination: 65 percent of citizens of former factors behind it. Soviet republics who were trafficked abroad were The Victims of Human Trafficking database sent to Russia. Of the 20 percent who were traf- developed by the IOM contains more than 49,000 ficked outside the former Soviet Union, most were individual cases, with approximately 5,000 new sent to EU countries. (Continued next page) 50  ●   World Bank ECA Economic Update Fall 2019 BOX 2.2 Human trafficking: Ongoing analysis with a new data set (continued) For a third of the cases, the dataset includes (49 percent of victims in forced labor on whom information on the type of exploitation (box figure information is available), followed by factory work 2.2.1). Sexual exploitation accounted for 14 per- (24 percent) and agriculture (17 percent). Future cent of exploitation (89 percent of the victims were research by the World Bank, jointly with the IOM, women) and forced labor accounted for 86 percent will analyze this dataset to increase the under- (32 percent of the victims were women). The most standing of the drivers behind human trafficking in common sector for forced labor was construction the region and to design policies to prevent it. BOX FIGURE 2.2.1 Type and sector of exploitation of victims of human trafficking from former Soviet republics, 2014–18 Type Sector, if in forced labor Percent of victims in forced labor 80 80 Percent of victims 60 60 Males Females 40 40 20 20 0 0 r n n k ry er k ce bo or or tio io he th er ct w w la ta O m fis tru y tic d oi m or e d pl ns es Co rc an ct ex Co om Fo Fa re al D tu xu ul Se ric Ag Source: World Bank calculations based on data from Victims of Human Trafficking dataset. Note: In panel a, 1 percent of victims reported other types of exploitation (forced marriage, organ removal). permanent work- and family-based migration are rare. In Finland about 50 per- cent of migrants are on temporary visas; in Germany and Switzerland, this share is over 40 percent; in the United Kingdom, it is 30 percent. It is possible that the permanent visa mix and temporary ratio (the share of temporary economic mi- gration) interact with each other. 2 Sweden, for instance, has low numbers of permanent economic migrants but a moderate temporary ratio, partly as a result of the country’s low levels of permanent economic migration and relatively large numbers of humanitarian visas. In contrast, Denmark and Norway have low temporary ratios and a large share of free-movement migrants from countries within the European Economic Area (EEA). Figure 2.16 shows the visa mix in the main EU destination countries. In addi- tion to the work/employment, family unification, and humanitarian categories, 2. Boucher and Gest (2018) define the visa mix as the distribution of immigrants entering a country under designated laws related to labor, family reunification, humanitarian refuge, or free movement. Family members entering destination countries on work visas are in- cluded as work-related migrants. Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  51 FIGURE 2.16 Visa mix for main destination countries Austria in the European Union, Belgium by country, 2016 Denmark Finland France Germany Ireland Italy Luxembourg The Netherlands Portugal Spain Sweden United Kingdom 0 10 20 30 40 50 60 70 80 90 100 Percent of all visas Work International agreements Humanitarian Family Source: OECD 2019. it includes a fourth category: international agreements. This category covers people who enter under the free mobility provisions of the European Union (they do not require visas). Among permanent migrants in ECA, economic migration is more prevalent than other types of migration in the United Kingdom, Spain, and Italy (Boucher and Gest 2018). Among OECD countries, the work-based im- migration share is high in Australia, Canada, and the United Kingdom. Immedi- ate family members entering on work visas are also included in the work-based category of migrants, as policy makers usually treat work-based migrants and accompanying family visa holders together. The figure shows the importance of the EU provisions for labor mobility within Europe, as “international agreements” represents the leading type of en- try in most countries. Family unification is also important, representing more than 40 percent of all permanent admission permits issued in many countries, including France and Italy. The economic/work migration category represents less than 20 percent of permanent admissions in every country, averaging less than 10 percent, for two reasons. First, economic migrants from EU countries, especially in Eastern Europe, take advantage of their privileged status and do not use this category, which applies to non-EU citizens. Second, most EU countries do not have legal entry pathways for economic migrants, especially low-skilled workers, although there is significant demand for their labor. As a result, many economic migrants use the family unification channel or enter illegally. Visa and immigration regimes vary widely across countries (box 2.3). Some countries, such as Belgium and Sweden, have just one main labor immigration program. In contrast, the United States has six different programs for admitting 52  ●   World Bank ECA Economic Update Fall 2019 BOX 2.3 Comparing countries’ migration regimes using the Migration Integration Policy Index Migration policy regimes vary widely across coun- crimination. It is based on 167 policy indicators that tries. Governments admit migrants for different benchmark current laws and policies against the purposes and for different durations. They grant highest standards. different residency rights, citizenship rights, and The MIPEX data show that migrants gener- access to public services. Countries often imple- ally face greater obstacles in emerging market ment different programs, seemingly for the same economies, where there are smaller numbers of purposes or targeted migrant groups. Countries immigrants and high levels of antiimmigrant senti- may also differ in their enforcement of migration ment (box figure 2.3.1). They tend to enjoy more policies. All of these differences make it almost equal rights and opportunities in wealthier, older, impossible to compare the immigration regimes of and larger destination countries, such as Western different countries over time. Europe (the EU15 average MIPEX score is 60/100) To address this challenge, academics from and traditional destinations such as Australia, economics, political science, law, and sociology Canada, New Zealand, and the United States (the created the Migration Integration Policy Index MIPEX average is 67/100 for these countries). (MIPEX), which measures policies to integrate In recent years, integration policies have migrants. The 2015 edition of the index (http:// improved moderately. Among the 38 MIPEX coun- mipex.eu/) includes information on 38 countries, tries, 13 made improvements by reinforcing current including all EU member states, Australia, Canada, programs (Portugal, the United States); improving Iceland, Japan, the Republic of Korea, New Zea- procedures (France, Ireland, Japan, Switzerland, land, Norway, Switzerland, Turkey, and the United Turkey); or implementing EU law (Hungary, Italy, States. It covers eight policy areas of integration: Lithuania, Romania). Ten countries passed major labor market mobility, education of children, politi- reforms. Denmark introduced several reforms to cal participation, family reunion, access to nation- catch up with policies in the other Nordic coun- ality, health, permanent residence, and antidis- tries, Germany, and international trends. There was BOX FIGURE 2.3.1 The Migration Integration Policy Index (MIPEX) in Europe and Central Asia, by country 90 60 Index 30 0 Sp ly rtu n G lta pu ia d Fra d Th Lux gd e M s Cr nd Ire ria e Bu atia a Sw and en m ec om ria l ov y Es nia pu ia Po nia Fi ark lg y rl g un c th ic e em om er s ga u Sl gar Be an ni Po ai G and Ki nc ec H bli an he ur Ita Re atv Re an Li bl iu pr a st ed Cz R lga la to e ua m et o m re o l nl Au Cy L N b en n D h ak ite ov Un Sl Western Europe Southern Europe Central Europe and the Northern Baltic Countries Europe Source: Migrant Integration Policy Index 2015. (Continued next page) Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  53 BOX 2.3 Comparing countries’ migration regimes using the Migration Integration Policy Index (continued) more targeted support in Austria and Germany, services depends on their legal status. Relative to and Germany introduced dual nationality for sec- other countries, traditional destination countries ond-generation migrants. The Czech Republic and and some countries in Northern Europe offer more Poland adopted EU-required antidiscrimination personalized, general, and targeted support that laws and domestic citizenship reforms. reaches more immigrants in need. Seven countries, including Greece, the Nether- Opportunities for permanent residence vary lands, and the United Kingdom, lost one point or widely across countries. Austria, Cyprus, and more during 2010–2014. Greece reduced citizen- Greece restrict permanent residence and citizen- ship and voting rights. The Netherlands and the ship, which leads to large numbers of permanently United Kingdom imposed residence restrictions temporary foreigners, who are legally precarious and targeted support cuts. and socially excluded. Denmark, Italy, Switzer- Variations in MIPEX scores by policy area are in land, Estonia, and Latvia facilitate permanent resi- line with variations in overall scores. Family reunion dence but restrict citizenship. Permanent residents policies are a major factor determining whether may be discriminated against. In Hungary, Spain, migrants reunite with their families. MIPEX data Japan, and the Republic of Korea, policies privilege suggest that non-EU families are more likely to some national or ethnic groups over others. Some reunite in countries with inclusive family reunion countries in ECA, including Belgium, Portugal, and policies, such as Spain and Portugal. Education Sweden, provide opportunities that allow migrants and health services are slow to adapt to immi- to enjoy equal and secure rights that boost their grants’ needs. Migrants’ basic access to health integration. migrant workers, and Canada and Australia each have four. Norway and Swe- den have a single labor immigration program that is open to migrants of any skill level. In contrast, the United Kingdom has multiple labor immigration programs.3 One of the prominent themes of the migration literature is that immigration does not have a uniform impact across labor markets. The appropriate migration policies should therefore be tailored to the labor markets they are targeting. The rough distinction adopted here between migration policies for high-skilled and low-skilled workers is based on human capital and education levels. Policies to Meet the Demand for Low-Skilled Workers Economically motivated migration is not random: Workers move from labor markets where demand and wages are low to markets where they are higher. As education levels started to increase and the population started to age in OECD 3. There are five tiers of the UK labor immigration programs. Tier 1 admits “high-value migrants” from outside the EEA; it covers the entry of investors and exceptionally talented workers. Tier 2 admits medium- and high-skilled workers. Tier 3 was designed for low- skilled workers filling temporary labor shortages; it no longer exists, and the government never allocated any visas under it. Tier 4 is for students from outside the EEA who wish to study in the United Kingdom. Tier 5 provides temporary work visas. It covers creative, athletic, charity, religious, and young temporary workers. 54  ●   World Bank ECA Economic Update Fall 2019 countries (see figure 2.15), the demand for low-skilled workers surpassed the supply. Young, less educated immigrants from poorer countries on the periphery of OECD countries started to arrive to meet this excess demand. Migration policies are designed to address many objectives in addition to meeting excess demand in labor markets (Boucher and Gest 2018). In many cases, these social and political objectives require restrictions on migration flows and conflict with the needs of the labor market, leading to market distortions as well as cultural, political, and social problems. Evidence and comparison of different experiences show that it is almost im- possible for governments to implement policies that stand against market forces. Instead, immigration policies should be designed with markets in mind. One example of such a policy involves temporary migration schemes. When market demand exists—in sectors like agriculture, construction, and tourism, for example, where seasonal and short-term jobs are the norm—countries should consider creating temporary programs to meet shortages. Temporary migration programs for temporary jobs benefit migrants and destination countries’ labor markets, employers, and consumers. Such programs discourage undocumented immigration by facilitating repeated circular migration.4 Temporary migration policies work only in industries with low turnover costs and substantial seasonal fluctuations, however; they cannot be used to address labor shortages in indus- tries that require higher skills or sector-specific human capital investments. Relocating and compensating workers adversely affected by migration Workers who compete directly with migrant labor often relocate to other sectors, occupations, or geographic regions. Younger workers tend to have more success- ful relocation experiences, eventually obtaining higher incomes and better jobs (World Bank 2018). Thanks to this adjustment in the labor markets, the overall wage effects of migration, especially at the national level, are generally small. How- ever, dislocation costs to workers can be large and involve substantial financial and emotional burdens in the short-run. Policy should therefore support workers in their adjustment and relocation, especially if the workers are relatively low skilled and older, making relocation costlier. How should such policies be designed so that they help reduce these mostly transitory but potentially disruptive costs? Transitory welfare benefits, unemployment insurance payments, and retrain- ing programs are possible components of such assistance programs.5 Education systems for young people should be modified so that they are not forced to com- pete with lower-skilled immigrants who are willing to accept low-paying and demanding jobs. In principle, the beneficiaries of immigration—migrants, employers, and con- sumers of the products and services they produce—should be at least partially 4. Circular migration refers to the migration and return of people to their home countries, often multiple times, rather than one-time emigration. 5. The evidence on assistance mechanisms used to compensate workers dislocated by international trade or technological change is not encouraging. Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  55 responsible for the cost of such efforts. In practice, there are very few policies through which beneficiaries shoulder the costs of relocation. They include extra taxes or fees charged for work permits or requirement for firms to limit the num- ber of migrant workers they employ. As a result, the people who pay the costs often oppose such programs, leading to economic inefficiency and political con- flict. Box 2.4 describes possible ways to overcome such resistance. BOX 2.4 Creating markets for work permits Free mobility of labor across international borders proposed by Lokshin and Ravallion (2019) compen- yields overall efficiency gains—as well as losses for sates people who are willing to “sell” this right for a certain groups of existing workers. The challenge is period of time. Their proposal allows working-age to design policy measures to finance and compen- citizens to “rent out” their “right-to-accept-work” sate these workers for their losses, so that political to foreign workers. The government would oper- resistance to migration is reduced. ate a web platform that connects citizens who want Over the past decades, many prominent econ- to auction their right to accept work and the for- omists suggested market-based mechanisms eigners who need a work permit. When a citizen that would address two problems: identifying decides to rent out his or her right to accept work, who should be allowed to migrate and work in a that right is temporarily transferred, in the form of country and determining how to extract some of a work permit, and the money is transferred to the the economic gains of migration to compensate person who relinquishes the right. This mechanism the workers facing losses. Becker proposed that allows citizens who are most likely to face economic the US government sell visas to foreigners rather losses from migration to be directly compensated. than establishing quotas (Becker 1992; Becker and The migrant worker who buys a work permit is then Becker 1997; Becker and Lazear 2013). Foreign free to take up any job offer in the country. Once workers (or employers) with the highest potential the contract term is completed, the permit is trans- income gains would submit the highest bids, and ferred back to the original owner. the government would raise revenues that would Creating an anonymous and transparent mar- otherwise be captured by the migrants and their ket for work permits can reduce political opposi- employers. Selling visas has also been suggested tion to migration, by helping internalize the main as a means of reducing human trafficking (Auriol externalities generated (or at least perceived to be and Mesnard 2016) or compensating native work- generated) by migrants in the host country. The ers who lose out as a result of competition from host country enjoys several benefits from adopt- migrants (Weinstein 2002). Zavodny (2015) pro- ing this policy, as low-productivity workers with low poses visa auctions to sell work permits. Recently, wages would be replaced with higher-productivity various cash-for-passport programs have emerged migrant workers, raising GDP and tax revenues. (Sumption and Hooper 2014). The replaced workers are directly compensated, These proposals do not eliminate an underlying reducing the need for sophisticated and inefficient market failure. Although there is excess demand social assistance programs for them. The scheme for work permits, the supply side of the labor can be designed to maintain the total number of market is absent in this mechanism. An immigrant jobs in the host country, so that migration does not needs permission or a work permit to take up for- lead to unemployment. The market for work per- mal employment; the government is technically mits can be seen as a social protection policy as selling this permit to them. But the real owners of well as an efficient policy for managing immigra- the permit are the citizens who own the implicit tion. It would likely increase the acceptance of freer right-to-accept-work entitlement. A mechanism international migration. 56  ●   World Bank ECA Economic Update Fall 2019 Changing the mechanism through which migrants enter the labor market One way to raise the funds from the beneficiaries of migration to finance reloca- tion costs would be to change the mechanisms through which migrants enter a destination labor market by moving from quantitative restrictions to price mech- anisms. Almost every destination country currently uses quotas to regulate for- mal and documented immigration flows. Governments decide on the number of immigrants with a given level of education, occupation, and sector category that will be allowed to work in their country. The use of quotas creates several problems. First, bureaucrats, rather than em- ployers or labor markets, make the assessment of how many immigrants should be allowed to enter. It is difficult to determine what type of migration most ben- efits a destination country, especially in the long run. Furthermore, the needs of the labor market may change rapidly over time. Second, quota-based systems are subject to rent-seeking activities and corruption, as firms try to sway government officials to issue quota permits to benefit their industries. Third, when quotas are set too low, the incentives for smuggling are great, creating large numbers of undocumented migrants. These migrants work in the informal labor market, out- side the social protection system, generating negative externalities for the very low-skilled workers whom the government was trying to protect. Fourth, quotas do not generate revenue for the government. Instead, they benefit only those firms lucky enough to hire an immigrant (by obtaining an employment visa). The intermediary firms that handle the recruitment or the human smugglers who aid the undocumented migrant charge hefty fees for these services. Replacing quota regimes with tax regimes to regulate immigration flows can be achieved via several different methods, including an additional income tax, a visa fee, and a visa auction system. A few countries, such as Malaysia and Singa- pore, impose levies on immigrants. The imposition of taxes, fees, or levies instead of quota restrictions has many clear benefits, although none of these policies has been properly evaluated. These mechanisms would provide the government with revenue to support workers who are struggling economically as a result of migration, particularly older and lower-skilled workers, who are less able to move to other jobs or sectors. Employers would also be able to respond more rapidly to economic fluctuations and hire extra workers when needed. In a quota regime, firms cannot expand production quickly, even if they are willing to pay for employment permits. Governments would be able to adjust the fees/taxes more quickly to respond to changes in the labor markets. Fee-based regimes might also reduce the cultural hostility to immigrants, who would provide the needed “tax” revenue and could no longer be accused of “free riding.” The global trade regime gradually replaced quotas with tariffs over multiple decades. It will take a similar period of time to implement and enforce such poli- cies for immigration, but doing so is worth trying. Policies to Meet the Demand for High-Skilled Workers Many countries want to attract high-skilled migrants, because they generate pro- ductivity spillovers, fill skill gaps in labor markets, integrate more easily into the Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  57 destination country, and do not impose a burden on social services. The main beneficiaries of high-skilled migration in the labor markets are workers with complementary skills working in sectors in which knowledge spillovers are prevalent. Labor market patterns, outcomes, and policies for high-skilled workers vary substantially across countries. Four destination countries—the United States, the United Kingdom, Canada, and Australia—receive more than two-thirds of the world’s high-skilled migrants. Many high-skilled workers from high-income Western European countries, including France and Germany, choose to leave Eu- rope for these destinations for various reasons, including the synergies and pro- ductivity spillovers generated by the agglomeration of high-skilled workers. Policies on high-skilled immigration need to be designed with these patterns and the underlying labor market characteristics in mind (Kerr and others 2016, 2017). Such policies are particularly relevant for European countries, which are both origin and destination countries for such migrants. A large portion of high- skilled migration in ECA is intraregional (box 2.5). There are two basic approaches to policy design: demand driven and supply driven. The demand-driven approach is employer driven. Employers identify the skilled workers that will potentially be admitted into the country. The supply- driven approach is based on points that reflect the priorities of the country or merit-based screening of individual applicants for admission. There are pros and cons to both approaches. Although the employer-driven approach makes the program more responsive to labor market policies, it ties the migrant to the sponsoring firm, at least for an initial period. In both approaches, setting the quotas can be difficult. Demand-driven policies The current trend is toward demand-driven features that emphasize the employ- ability of the migrant. The basic premise of demand-driven selection policies is that incoming migrants should obtain a job in the destination country; the burden of selection is thus placed on labor markets and employers. It is implicitly as- sumed that if a migrant can obtain a job, he or she provides a net benefit and should be allowed to enter. Priority is given to migrants who will be immediately employed and contribute to the economy. Potential employers and current labor market conditions determine who can potentially migrate. Most temporary work permit programs, such as the United Kingdom’s Tier 2 program and Ireland’s work permit program, fall in this category. They require migrants to have a firm job offer before being admitted to the host country. Another high-profile program is implemented in Germany, where applicants with a bachelor’s degree are eligible to apply for a Blue Card, which allows them to reside and work in Germany.6 Applicants must prove that they have secured 6. After a certain period of residence in Germany, such applicants can move to another EU member state and apply for the Blue Card for that country. For instance, if a non-EEA mi- grant had an EU Blue Card issued by Germany for 18 months, he or she has the right to move to Spain and apply for a Spanish EU Blue Card. See https://www.expatica.com/es/ moving/visas/work-visas-103258/. 58  ●   World Bank ECA Economic Update Fall 2019 BOX 2.5 Labor migration programs and the Russian Federation Much migration within ECA is intraregional. One around half a million people leaving Poland each important pathway is migration from former East- year. Naturally, many of these people return after ern Bloc countries that joined the European Union, a several years but, currently, around 6 percent of whose citizens obtained free access to the labor the Polish population is living in the EU countries. markets of high-income EU countries, such as Ger- Russian Federation many. Another is between former Soviet republics, where historical and economic links shape the pat- Russia is a major destination for migrants from for- terns of migration. The migration policies of these mer Soviet republics. Labor migration within the countries deserve special attention, given the Commonwealth of Independent States is regulated importance of these corridors. by several multilateral and bilateral agreements aimed at forming a common labor market. Rus- Enlargement of the European Union sia has bilateral treaties with Armenia, the Kyrgyz Eight Central and Eastern European countries (the Republic, Moldova, Tajikistan, Ukraine, and Uzbeki- Czech Republic, Estonia, Hungary, Latvia, Lithu- stan. All treaty countries are obligated to recog- ania, Poland, Slovakia, and Slovenia) joined the nize the education, work experience, entitlement European Union in 2004. This was the single larg- to compensation for damages, and social security est enlargement in terms of people and number contributions of migrant workers. of countries. They were followed by Bulgaria and Every year, the Russian government defines how Romania in 2007 and Croatia in 2013. With each many work permits can be issued and how they will accession prior to 2004, free movement of people be distributed among the constituent components was automatically applied to the new member of the Russian Federation, depending on the labor countries. Due to the concerns of mass migration, market situation and the opinions of labor unions. some temporary restrictions were implemented Quotas are divided by region, profession, and field in 2004. Several EU members, such as the Ireland, of employment. Foreign workers are not allowed to Sweden and United Kingdom granted immediate change their employer for the duration of the labor access to the new members while the rest imposed contract and are not eligible for hire by another restrictions lasting between two and five years. By employer after the contract expires. If an individual April 2008, the restrictions on the eight new mem- does not obtain employment within 30 days of the bers (which joined in 2004) had been dropped by issuance of the work permit, he or she must leave all members except Germany and Austria, which Russia. removed them in 2011. Special rules were established in 2011 for citi- The impact of EU membership has been rather zens of Eurasian Economic Community (EEC) coun- dramatic for these countries. For example, the tries (Russia, Belarus, and Kazakhstan). Citizens of number of Polish immigrants in other EU countries Belarus and Kazakhstan have the same employ- is estimated to be over 2 million people, mainly to ment rights as Russian citizens. They are therefore the United Kingdom, followed by France and Ger- not required to apply for work permits for employ- many. Even though the financial crisis of 2008 and ment in Russia. More lenient rules for renewal of the resulting labor market difficulties hampered employment contracts apply to citizens from EEC emigration rates, the overall flows have stabilized countries. an employment contract in Germany, in a field related to their qualifications, with a minimum annual salary of €48,000. Applicants who do not have a work contract can still move to Germany, but only for the purpose of searching for a job and only for six months. After securing an employment contract, the migrant can apply for an EU Blue Card. Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  59 A critical and complementary policy measure of demand-driven regimes in- volves labor market tests. These tests require employers to provide evidence that they could not find a current resident with the necessary qualifications to fill the job in question. In Ireland, for instance, employers are required to obtain a certifi- cate from the public employment service to certify that they have advertised the vacancy and were unable to find local workers who met the job requirements. Another example of a labor market test comes from Spain, where work permit applications are more likely to be approved if the job is listed as a “shortage oc- cupation” or the vacancy has been advertised and there are no suitable candi- dates from Spain or other EU countries. Applicants with at least a bachelor’s degree are eligible to apply for an EU Blue Card if they have a work contract or legally binding job offer that pays at least 1.5 times the average wage in Spain (1.2 times for shortage occupations). Other demand-side policies include sectoral and occupational regulations, economic work permit fees, wage regulations, and trade union involvement. For example, almost all ECA countries require employers to pay migrants at least the minimum wage. The most restrictive policy is to require employers to comply with the wage and employment conditions stipulated in collective wage agree- ments. These restrictions are strongest in Norway and Sweden. In Sweden, before the immigration policy reform in 2008, any application for a work permit for non-EEA workers had to be approved by the relevant Swedish trade union, which thus had veto power over individual applications. In some other coun- tries, such as Canada, unions do not have veto power but still have influence over work permit applications (Ruhs 2011). The United Kingdom has an intermediate policy on wage restrictions. It requires employers to pay migrants the average or prevailing wage in the relevant occupation and/or sector. Supply-driven policies Supply-driven policies evaluate potential migrants by their qualifications, with- out an explicit labor market test or employability. These policies generally take the form of a points-based evaluation, giving preference to applicants who pos- sess more desirable labor market or social characteristics, such as youth, educa- tion, experience, or local language proficiency, or work in certain occupations. Proponents of supply-driven policies argue that these regimes adopt a longer- term perspective on the economic needs of a country. Human capital and integra- tion rather than the short-term needs of the labor market are at the heart of the selection process. Supply-driven policies also give workers more flexibility, as they are generally allowed to enter a country, search for a job while there, and obtain a better match, as opposed to trying to find employment while outside the country. An example of this approach is the Austrian points system, the Rot-Weiß-Rot Karte (Red-White-Red Card system), which allows qualified workers from non- EEA countries and their family members to emigrate permanently to Austria. Qualified workers are very highly educated professionals or skilled workers in shortage occupations, such as engineering and health care. Workers in these 60  ●   World Bank ECA Economic Update Fall 2019 categories are not required to prove German language skills before entering the country, although extra points are granted for German or English language skills. Nationality plays a key role in determining the eligibility to work and reside in various European countries. Citizens from EU member states, Iceland, Liech- tenstein, Norway, and Switzerland are allowed to work and live in all of these countries without applying for a residence or work permit. Germany does not require citizens of Australia, Canada, Israel, Japan, the Republic of Korea, New Zealand, and the United States to apply for a visa to enter the country. Citizens from these countries must register with the local authority for a residence and work permit before being employed, however. In effect, these rules work as a supply-driven selection mechanism. Another policy measure that is commonly used in countries adopting supply- driven policies is skill requirements. For instance, under Germany’s labor im- migration program for admitting skilled migrant workers, residence permits are granted to professionals with a recognized degree or a German-equivalent for- eign degree. Non-EEA graduates can request a residence permit for job-seeking purposes; it is valid for 18 months. Once applicants get a job contract, they be- come eligible for an EU Blue Card if the job is related to their qualifications. Non- EEA nationals who want to reside in Germany to get professional training are eli- gible to apply for a residence permit that allows them to live in Germany for up to one year for job-seeking purposes. When candidates obtain an employment contract, they become eligible for a work permit. The most restrictive policies allow admission only for migrants with very spe- cific skills. For example, Denmark’s “positive list” immigration program defines a set of minimum qualifications for each profession, which range from a bache- lor’s degree to a master’s degree, with some occupations, such as dentistry, re- quiring government authorization. Some countries have hybrid programs with features of both approaches. Cer- tain permanent labor immigration programs and temporary programs for high- skilled migrants do not strictly require a job offer. Denmark’s Green Card Scheme and the United Kingdom’s Tier 1 program are examples of points-based tempo- rary labor migration policies that admit high-skilled migrants without job offers. Both programs allow migrants to look for jobs after being admitted on a tempo- rary basis once they obtain enough points. Migrants can upgrade to permanent sta- tus after several years of employment; if they do not, they must leave the country. Economic migrants in France are eligible to apply for a multiyear Talent Pass- port permit if they hold a high-skilled position in France. Foreign employees who are not eligible for the Talent Passport can still be granted access to the French labor market through a temporary residence permit, but their visa and residence permit applications may be rejected if their skill levels are not deemed high enough. Elements of successful migration policies for high-skilled workers Successful policies for high-skilled labor share several key elements. They create a clear path to permanent residency or citizenship. Residency and employment security are especially important for high-skilled migrants, because they tend to have permanent jobs that require them to make significant employment-specific Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  61 human capital investments. The experiences of Australia, Canada, and the United States show the importance of the adoption and enforcement of such policies. Long-term guarantees on residency and access to education and other public services are especially important for high-skilled migrants, because many of them move with their families. High-skilled migrants also tend to be more sensi- tive to top tax rates and to be attracted to destinations with favorable tax treatment. The quality of higher education in the destination country is also very impor- tant in attracting skilled labor. Many high-skilled migrants arrive at the destina- tion country only with raw talent and ambition, rather than specialized human capital and experience; they enroll in higher education programs. Obtaining for- mal education provides an important entry point into labor markets for such in- dividuals. The existence of universities—especially universities that focus on re- search and graduate training in technical and science-oriented fields—is thus an important draw. Another possible approach is to provide funding to educational institutions in origin countries (Clemens 2015). Brain drain is a key concern in many lower-in- come countries, especially in occupations and sectors that provide economywide externalities, such as health care and technical education. Migration of high- skilled workers from lower-income countries implies an implicit fiscal subsidy, as higher education is publicly funded through tax revenue in most countries. If a high-income destination country like Germany were to fund higher edu- cation institutions in an origin country (for example, a medical school in Mol- dova), both countries would benefit. Germany would gain access to highly quali- fied professionals who are trained according to Germany’s licensing and educational standards. Training might even be done in German, so that the mi- grants would arrive in Germany with the necessary language skills and be able to start work immediately. Moldova would be able to provide medical education at no fiscal cost. The two countries could set the enrollment capacity of the school greater than the number of graduates that Germany would accept. As a result, there would be a net gain in the stock of doctors for Moldova. Such a program might even be funded via the “immigration tariff revenues” discussed in box 2.4, completing the full circle in which migrants fund their own education and con- tribute to their origin country. In response to destination countries’ policies to attract more high-skilled mi- grants, origin countries are struggling to find ways to retain them. Departure of high-skilled workers leads to severe skill shortages in many critical sectors, such as healthcare. This problem is especially severe in smaller middle-income coun- tries in ECA, whose high-skilled citizens face fewer restrictions and preferential access to work in high-income countries in the European Union. Figure 2.17 plots the share of the population in the labor force (people 24–65) that has higher education against the share of the population with higher educa- tion that emigrated. It shows that with the exception of Malta and Portugal, higher-income countries have emigration rates below or about 20 percent. In con- trast, many Eastern European countries have much higher high-skilled emigra- tion rates. 62  ●   World Bank ECA Economic Update Fall 2019 FIGURE 2.17 Correlation 60 between emigration rates among people with higher education and share of labor Percent of population 24–65 with higher force with higher education in Europe and Central Asia education that emigrated 40 20 0 5 10 15 20 25 30 Percent of population 24–65 with higher education Source: OECD 2010; UN DESA 2019; World Bank 2017. Note: Red dots indicate high-income countries in Western, Northern, and Southern Europe. Blue dots indicate countries in other subregions of Europe and Central Asia. The emigration rates of high-skilled workers are high, especially in some of the lower-income countries in the Balkans and Eastern Europe. Among people with higher education, 55 percent in Bosnia and Herzegovina; more than 40 per- cent in Armenia and Latvia; and almost 40 percent in Albania, Kazakhstan, Mol- dova, North Macedonia, and Romania have emigrated. Countries with fewer high-skilled workers experience higher rates of emigration. Various factors drive brain drain from these countries. In addition to higher wages, they include opportunities for professional advancement and training, better future for family members (such as educational opportunities for chil- dren), and better living and working conditions. The physical proximity and preferential access to the labor markets of the European Union as well as a mas- sive diaspora reduce the costs of emigrating from many ECA countries. Although the mobility of high-skilled professionals generates gains, extensive and sustained emigration is likely to have long-term negative effects on origin countries. Brain drain is often the symptom, not the cause, of an underperform- ing economy, however. The cost of brain drain arises from the loss of productivity spillovers and im- portant public services—such as health care and education—that workers with higher education would have generated in their own countries had they not emi- grated (box 2.6). In many cases, governments find themselves without good policy options for reversing the tide. Lower-income countries cannot influence pull factors originating in high-in- come countries, but they can diminish the strength of push factors. The first step is to increase the attractiveness of the home country, by increasing the competi- tiveness of wages and productivity in critical high-skilled occupations. Many high-skilled people work in the public sector. It is therefore important to improve meritocracy and reduce red tape and cronyism in public employment. Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  63 BOX 2.6 Migration of health care workers from the Western Balkans to the European Union Shortages of health care workers are a critical centers of excellence or subspecialties. Twinning challenge in many European countries. The World relationships between teaching hospitals and uni- Health Organization estimates a global shortage versities in different countries enhance research of about 17.4 million health workers (WHO 2016). and education opportunities for students and Recent estimates project that Germany will need professionals. Circular migration through bilat- 500,000 additional nurses by 2030 (GIZ 2019), and eral agreements with destination countries allows the demand for health care workers in the United returnees to bring back new skills and experience Kingdom is projected to grow twice as rapidly as to the health sector in origin countries. the population by 2035 (Buchan and others 2019). Challenges arise when international recruit- Personnel shortages arise for several reasons, ment is not well coordinated and negatively affects including an undersupply of medical and nurs- medical education financing and health sector per- ing school graduates, the high cost of labor as a formance. Many health professionals who migrate national health expense for governments, and to higher-income countries have benefited from demographic change, as the working-age popula- government-financed higher education in their tion in Europe continues to shrink and the popula- home countries. Investing in the training of health tion ages. As people live longer, noncommunica- professionals who migrate may create additional ble diseases, such as cancer and strokes, are more pressure on the financing of the education and common and require more complex, longer-term, training systems in source countries and possibly and labor-intensive care. undermine the quality of training. The fact that The Western Balkans have been a net exporter many health professionals migrate after receiving of human resources. Fourteen percent of the pop- education at the expense of the source country ulation of Serbia and 48 percent of the population may reduce source countries’ incentives to invest of Bosnia and Herzegovina has emigrated. Once in education. Selective international recruitment of these countries accede to the European Union, it specialist doctors or experienced nurses can also will be even easier for their citizens to leave. Bul- generate critical shortages in source countries and garia, Croatia, and Romania report high levels of reduce the quality of service delivery. out-migration for all health workers, despite high The World Bank’s health team in ECA has vacancy rates in their domestic health sectors. started to conduct analytical and advisory work on Many health professionals leave for the European health workforce mobility. Core activities include Union and Switzerland. In 2015 about 17 percent of country-based workshops with clients that are physicians and 6 percent of nurses in OECD coun- informed by background material, including a tries were foreign trained (OECD 2016). Higher review of the international literature, country case salaries in higher-income countries, better work- studies, and short policy notes. These activities ing conditions, and professional development will examine the interaction between health care are among the main reasons health professionals worker migration and education of health profes- migrate. sionals, the health workforce, health sector perfor- If well planned, recruiting health professionals mance, and the policy context. Findings will help from abroad can help address short- and medium- inform bilateral and regional agreements to ensure term fluctuations in demand and increase profes- fair recruitment practices while promoting mutually sionals’ skill levels. Migration is often the only route beneficial social and economic policies for medical for physicians and nurses to gain experience in education and health. 64  ●   World Bank ECA Economic Update Fall 2019 Private sector development and job creation need to complement public sector reforms. Private enterprises employ the majority of high-skilled professionals in most middle- and upper-middle-income countries (although public sector em- ployment is important in critical occupations such as healthcare). Without pri- vate sector job creation, especially in knowledge-intensive sectors with produc- tivity spillovers, high-skilled professionals will continue to emigrate. Foreign direct investment (FDI) could play an important role, by both increasing the em- ployment of high-skilled workers and providing technology and capital. Policies to attract FDI in high-skilled intensive sectors should thus complement other policies to reduce brain drain. Countries can also expand the coverage of higher education and increase its quality to compensate for the loss of human capital via emigration. Even though a frequently cited concern is that improvements in education levels will encour- age even more emigration, leading to further losses, many countries follow this path. Investing in education also helps prevent students from going abroad in search of higher education, which makes it easier for them to settle abroad per- manently. Box 2.7 provides examples of policies that ECA countries have adopted in response to high-skilled migration. In most origin countries, higher education is publicly funded. Emigration of high-skilled workers therefore imposes a significant fiscal burden. As a result, a policy option that is often recommended is for governments to require emigrants to repay their country for their education. Such a policy would increase equity with respect to people who stay. Enforcement is difficult, however, especially once the emigrant leaves the country. Moreover, heavy-handed enforcement and legal measures may lead to detachment of the emigrant from the country, pre- venting the realization of diaspora externalities. Policies to tax emigrants need to be designed with care to avoid potential unintended effects. Education policies need to be designed with emigration issues in mind, espe- cially in smaller European countries, from which millions of people migrate, be- cause of both mismatch and quality challenges in origin countries’ labor markets. Long-term workforce planning is almost nonexistent, and coordination between education institutions and private sectors employers is limited. Smaller countries could focus on certain sectors and train the workforce needed to attain a critical mass, especially in sectors that have long-term viability and competitiveness. Specialization and agglomeration lead to increased productivity and higher wages, reducing incentives for emigration. Education systems should focus on training people for these sectors. Collaborative and coordinated efforts with edu- cational institutions and firms from destination countries would increase the ef- fectiveness of such policies. The legal and political structure of the European Union might support the implementation of such policies via the provision of financing through common internal funds. Another policy initiative for origin countries is to improve labor market out- comes for women and reduce gender-based discrimination. High-skilled women make up the fastest-growing group of migrants. Between 2000 and 2017, the number of women with higher education that emigrated from non-OECD coun- tries to OECD countries grew by 130 percent, and the number that emigrated from other OECD countries rose by 70 percent (figure 2.18). In contrast, the total Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  65 BOX 2.7 Policy responses to high-skilled migration in Europe and Central Asia High-skilled migration in ECA increased rapidly ships for secondary vocational and university stu- over the past several decades. In Eastern Europe dents. It will also set up a new permanent schol- and the Balkans, regime change and the entry arship fund through partnerships with the private of many of these countries into the European sector. The new center would also provide job Union opened the doors of Western Europe to training and career services. The scholarships are many young professionals. As a result, emigration expected to increase enrollment. from Romania increased 287 percent between Some countries hope to attract talented stu- 1990 and 2017. High-skilled workers in Romania dents from other countries, in addition to retain- experienced the highest emigration rate, with 27 ing their own. Kazakhstan implemented two percent of the total stock of such workers living programs for this purpose. The first established abroad in 2017. This process led to labor sup- world-class universities, such as Nazarbayev Uni- ply shortages, especially in science and technol- versity, founded in 2010. It serves the 5,000 most ogy fields. As of 2017, more than a third of the gifted and talented Kazakh students. The plan is university-educated workforces of Albania, Bos- to increase enrollment to 8,000 by 2025. Having nia and Herzegovina, and the Republic of North access to higher-quality education allows gradu- Macedonia was living abroad. The emigration rate ates to contribute to the growth of the Kazakh is not uniform across occupations. In 2017 about economy, conduct research, and engage in entre- 70 percent of people employed in North Mace- preneurial activities without leaving the coun- donia’s higher education system were planning to try. The second program provides incentives for emigrate; 20 percent of them had already applied returning scholars. The Bolashak scholarships, for for jobs abroad. example, finance study abroad on the condition Some countries have improved the quality and that students return to Kazakhstan and work in reach of higher education to retain or expand their field there for at least five years. their high-skilled labor forces. The World Bank’s Some ECA countries are trying to reduce high- Moldova Higher Education Project aims to sup- skilled migration by offering joint programs with port interventions to improve the quality and foreign universities. These programs have the labor market relevance of higher education insti- added benefit of attracting high-skilled labor tutions by providing incentives for the internation- from outside the country. For example, Uzbeki- alization of programs to attract foreign students stan has a partnership with Webster University, in and researchers. A World Bank project in Ukraine the United States, which expanded to a location intends to improve the quality and relevance of in Tashkent in early 2019 with a graduate program education, discouraging students and faculty/ for teaching English that encourages foreign stu- researchers from leaving the country. dents to study in Uzbekistan. Attracting foreign In response, the government is planning to students is also a key priority in Russia, where establish a Regional Scholarship and Career the 2025 strategy states that education services Development Center for the region of Slavnoia, should be a key export and that high-skilled for- Baranja and Srijem to boost investment in higher eign students should be attracted to Russian education through the introduction of scholar- universities. 66  ●   World Bank ECA Economic Update Fall 2019 FIGURE 2.18 Stock of female migrants to OECD 70 countries, by skill group and origin, 2000–17 60 Number of migrants (millions) 50 40 30 20 10 0 2000 2010 2017 2000 2010 2017 2000 2010 2017 All origins Non-OECD OECD All migrants High-skilled migrants Source: World Bank calculations based on data from UN DESA 2017. number of all female migrants increased by only 57 percent. Part of this rapid growth reflects increased enrollment of women in universities over the past three decades (Nejad and Young 2015). Another factor is the continuing discrimination against women in the labor market, especially in Eastern and Central Europe and Central Asia. The evidence on the impact of high-skilled emigration on origin countries is inconclusive (Gibson and McKenzie 2011). Data constraints as well as the empiri- cal difficulty of identifying the effects of skilled migration on economic indicators limit the ability to determine the true costs and benefits of high-skilled emigra- tion for sending countries. Nevertheless, a sustained outflow of high-skilled pro- fessionals will have long-term negative effects for a small country with limited resources to fund public education. As figure 2.17 shows, many ECA countries in Central Europe, the Caucasus, and the Balkans fall into this category. There is an urgent need for more research on the extent and impact of high-skilled emigra- tion for these countries. Given the regional nature of the skill flows, the policy dialogue needs to include the higher-income EU countries. Until more detailed microdata become available on the size and distribution of high-skilled migration, one possible research venue involves macroeconomic analysis. Figure 2.19 illustrates the results of a calibration exercise in which the impact of skill-biased emigration is simulated in a macroeconomic model. The critical determinant of the impact of high-skilled emigration is the extent of productivity spillovers that human capital generates across the economy. In the absence of such spillovers (the solid black line, representing the baseline sce- nario, in figure 2.19), brain drain has a relatively small impact: for most countries with income levels below $6,500, the loss is about 1 percent. In the presence of productivity spillovers (the solid red line), the impact can be large, about 6 per- cent, especially for countries with annual per capita income levels of about $2,500. Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  67 FIGURE 2.19 Simulated 6 effect of high-skilled emigration under 4 various assumptions Change in per capita GDP (percent) 2 0 −2 −4 −6 −8 500 2,500 4,500 6,500 8,500 10,500 12,500 14,500 Brain gain Baseline scenario Pessimistic scenario Remittances Diaspora Source: Docquier 2017. Remittances may partially offset this loss, reducing the loss to about 4 percent at the same income level. A common response to brain drain is to restrict migration. However, evidence indicates that high-skilled workers are not necessarily productive in low-income countries, and their presence might not lead to externalities (Kerr and others 2017). A large part of what makes high-skilled workers productive in the destina- tion labor market is the work environment and other complementary inputs. Restricting migration could also reduce the incentives for individuals to accumu- late human capital. What should the governments of source countries do? Recent research high- lights at least two promising ways to take advantage of the global market for high-skilled workers and ideas (World Bank 2018). First, source countries should encourage return migration. Second, they should actively and extensively en- gage with their diasporas and maximize their externalities. Emigrants tend to stay actively engaged—socially and economically—with their home countries and communities. The most common economic engagement takes the form of remittances. Diaspora engagement programs also attempt to connect investors and entrepreneurs abroad with investment opportunities at home and foster the transfer of technology and knowledge from abroad. Communication, political engagement, professional activities, and consular services all serve to increase the connectivity of the diaspora to the origin country and community, in order to increase the transfer of knowledge, capital, and technology. If diaspora externali- ties can be realized, they may more than compensate for the losses from brain drain (the blue line in figure 2.19). A large diaspora can generate significant economic benefits for origin coun- tries in the ECA region (Gould 2018). Remittances are an important source of in- come, have a positive impact on long-term economic growth and poverty 68  ●   World Bank ECA Economic Update Fall 2019 reduction, and improve access to capital markets. Diasporas are also a significant source of investment, export demand, and knowledge transfer for ECA econo- mies (Gould 2018). By increasing their populations’ exposure to the norms of competitive democratic countries, the growing share of migrants going to the United States and advanced European economies may have contributed to im- proving institutions in transition economies in ECA. Migration and remittances also provide more incentives and resources for people to increase the accumula- tion of human capital leading to “brain gain” (Contreras 2013). Over time, skilled migration may involve shorter durations and circular paths (as opposed to one-way and long-duration experiences) as a result of greater global integration, lower transportation and communication costs, and rising standards of living outside traditional destination countries. High-skilled dias- pora members often stay connected with their home countries, periodically go- ing back home or even maintaining two-country residency. These emigrants are instrumental in channeling investments and promoting trade and knowledge transfers. The return of migrants to their home countries can support economic development, particularly when they bring capital and knowledge with them and the origin country provides the framework conditions to help them make use of their skills and investments (Gould 2018). Rather than preventing emigration, some programs seek to encourage the re- turn of successful emigrants. In Malaysia, for example, the Returning Expert Pro- gram provides tax incentives to successful emigrants who have lived abroad for at least five years to return to Malaysia. The program has increased return migra- tion and roughly pays for itself, as return migrants pay taxes, albeit at lower rates than non-returnee taxpayers. Conclusions Migration has played a key role in economic and social development in ECA. Economic migration has helped meet labor market demand in destination coun- tries and improved the welfare of the migrants. Maintaining supportive policies toward migration would contribute to prosperity in the region. Indeed, easing immigration restrictions is one of the most effective way to promote productivity and growth in the region. Supporting migration is often politically fraught, how- ever, because the benefits of migration tend to be longer term and more diffused than the costs to the people in destination countries who are unemployed or displaced by migrants. To reduce resistance to immigration, policies need to address these short-term distributional costs. They can include programs to retrain or relocate workers in destination countries and adjust education systems for young people, so that they are not competing with lower-skilled immigrants. Transitory welfare bene- fits and unemployment insurance payments can also be components of such pro- grams. Replacing quota regimes with tax regimes would be a useful way to fi- nance the required adjustment assistance, by taxing the beneficiaries and compensating the losers. Chapter 2: Migration and Brain Drain in Europe and Central Asia ●  69 For origin countries that experience extended periods of loss of scarce human capital, emigration of skilled labor represents a serious concern. Persistent outmi- gration is often a symptom rather than the cause of underlying problems, how- ever. To reduce potential brain drain, countries need to adopt policies that in- crease the potential benefits in the origin country rather than restrict migration. Improving governance quality and strengthening institutions in origin countries are long-term policies that can address the root causes of persistent emigration. Policies to retain skilled labor include promoting private sector development and job creation, investing in higher education, and providing greater job opportuni- ties for women. Greater connectivity—through lower transportation and com- munication costs—is also important in engaging the diaspora in ways that maxi- mize externalities such as the transfer of ideas, knowledge, technologies, trade, and FDI and encourage return migration. Thanks to greater global integration and technological advances that increase connectivity, skilled migration may in- creasingly involve shorter durations and circular paths, leading to gains for ori- gin countries. Annex 2A. Data on Migration Bilateral migration databases are constructed using data gathered from multiple census rounds in multiple destination countries. They capture the total migrant stock or flow from a given origin country to a given destination, sometimes dis- aggregated by age, gender, education level, or labor market status. Such data- bases are limited by the number of destination countries available, making esti- mates of total migration difficult. Because the quality and frequency of data collection are correlated with a country’s income level and size, the data from the OECD and other high-income destinations are much more complete than data from other parts of the world; most data gaps are in lower-income and smaller destination countries. Data availability also depends on the level of disaggregation required. The United Nations’ Global Migration Database—which disaggregates bilateral stocks only by gender—has collected data from at least one data source from more than 200 destination countries over many years. In contrast, the OECD Da- tabase on Immigrants in OECD and Non-OECD Countries (DIOC-E)—which col- lects bilateral migration data disaggregated by age, gender, education level, and labor market status—contains destination data for only 88 countries in the 2010 census round (33 of the 34 OECD member countries and 55 of the more than 180 non-OECD countries) (see Arslan and others 2015 for details). To account for the missing data, researchers often focus on migration into OECD countries in order not to bias the results. Another way to address missing data is to estimate the size of missing corri- dors using econometric methods that incorporate historical patterns, country- pair characteristics, and patterns observed from other migration corridors. Three databases that use this approach to impute missing data are the United Nations’ Global Migration Database, the World Bank’s Global Bilateral Migration 70  ●   World Bank ECA Economic Update Fall 2019 Database (Ozden and others 2011), and the World Bank’s High-Skilled Bilateral Migration Database (Artuc and others 2015). Researchers use many different strategies to impute data. The quality of the estimates depends on the amount of data used and the model used to forecast migration stocks. These estimates provide researchers with a full matrix of mi- gration corridors, allowing them to make statements about global migration pat- terns that would otherwise be impossible to make. The complete global data in this report come from two sources. The first is Artuc and others (2015), who use the DIOC-E dataset to predict international migration stocks by education group and gender. These data are available only through 2010. To extend these data into 2015 and 2017, the report pulls from the full migration matrix provided by the United Nations’ Global Migration Data- base, which is disaggregated by gender but not by education group. Country- pair and gender-specific education shares for 2010 data from Artuc and others (2015) are then applied to the 2015 and 2017 immigration stocks from the UN data. 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Zavodny, Madeline. 2015. “Should Countries Auction Immigrant Visas?” IZA World of La- bor 202. https://wol.iza.org/articles/should-countries-auction-immigrant-visas/long. PART II Selected Country Pages Selected Country Pages ●  75 34.6 percent of Albanians are estimated to ALBANIA Recent developments live with under 5.5 dollars per day per capita (in 2011 PPP) in 2019. Inflation declined compared to end-2018, After an expansion of 4.1 percent in 2018, reversing the trend of the recent past. Low annual growth is projected to slow to 2.9 imported inflation from Albania’s trade Table 1 2018 percent in 2019. A drastic decline in rain- partners and an appreciation of the lek P o pulatio n, millio n 2.9 fall in the first half of the year cut hydroe- were the key factors. The decline in infla- GDP , current US$ billio n 15.1 lectric power production in half and is tion reflected the decline in food inflation. GDP per capita, current US$ 5269 estimated to lower GDP growth by a half- The average inflation rate is expected to a Internatio nal po verty rate ($ 1.9) 1.1 percentage-point. Despite growing politi- close at 1.5 percent for 2019. The Bank of Lo wer middle-inco me po verty rate ($ 3.2) a 7.7 cal tensions, domestic demand expansion Albania (BoA) has maintained its policy Upper middle-inco me po verty rate ($ 5.5) a 39.1 led growth in 2019. Net exports reduced rate at a record-low 1 percent since June Gini index a 29.0 growth by 0.4 percentage points (pp), as 2018. Through the first half of 2019, the Scho o l enro llment, primary (% gro ss) b 110.1 stagnant growth among trade partners real effective exchange rate appreciated by b 78.5 limited traditional exports, while energy 4.5 percent. Life expectancy at birth, years exports declined. Job creation, higher The banking sector is well capitalized and Source: WDI, M acro Poverty Outlook, and official data. wages, and consumer credit continue to profitable. All banks exceeded the Basel III Notes: (a) M ost recent value (2012), 2011 PPPs. drive private consumption, which contrib- minimum capital-adequacy ratio of 18.5 (b) M ost recent WDI value (2017) uted 2.1 pp to GDP growth. Meanwhile, percent in June 2019, while the liquidity investment increased thanks to better ratio was adequate at 21 percent. The loan credit conditions and government infra- portfolio improved as the BoA continued structure spending, contributing 0.5 pp to to restructure the nonperforming loans of Growth is expected to slow to 2.9 percent GDP growth. large borrowers. Nonperforming loans in 2019, as lower rainfall slashed energy Employment continued to grow – albeit reached 11.2 percent of the total loan port- the growth slowdown brought a decelera- folio in June 2019. A new insolvency law production. The labor market continued tion in job creation, while poverty has was adopted in 2016, and the BoA is pre- to improve but is showing signs of fa- stagnated. Job creation growth fell from 3 paring a framework for out-of-court settle- tigue, and poverty is projected to stag- percent in 2018 to 2.4 percent in the first ments to resolve large nonperforming nate. Contained spending and clearance half of 2019. While new jobs were created loans. The monetary easing and improve- in services, employment in agriculture ments in the loan portfolio facilitated pri- of arrears helped bring public debt down, declined. Labor force participation rose by vate sector credit growth: loans to the pri- but off-balance risks are mounting. Over 2.3 percent in Q2 relative to the Q2 2018, vate sector grew by 6.8 percent in the first the medium term, growth is projected to with a remaining gap between male and half of 2019, increasing private sector accelerate to around 3.5 percent. Fiscal female participation. Meanwhile, unem- credit from 35.3 percent of GDP at the end consolidation, improvements in public ployment reached a record low of 11.5 of 2018 to 35.9 percent in 2019. percent in Q2 2019. Real wages increased While Albania’s fiscal position improved spending efficiency, and structural re- by 3.3 percent on average, mostly in ser- in 2019, risks from contingent liabilities forms remain critical to sustainable and vices (trade and transport, and tourism and SOEs remain high. In 2019 fiscal reve- equitable growth. sectors). Poverty remains high, as about nue growth was limited by lower GDP FIGURE 1 Albania / Real GDP growth and contributions to FIGURE 2 Albania / Actual and projected poverty rates and real GDP growth real private consumption per capita Percent, percentage points Poverty rate (%) Real private consumption per capita (constant LCU) 5 60 500000 4 50 400000 3 40 2 300000 1 30 0 200000 20 -1 100000 -2 10 -3 0 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Consumption Investment International poverty rate Lower middle-income pov. rate Net exports GDP growth Upper middle-income pov. rate Real priv. cons. pc Sources: Instat and World Bank. Source: World Bank. Notes: see table 2. MPO 42 Oct 19 76  ●   World Bank ECA Economic Update Fall 2019 growth and, especially, by increased re- is highly sensitive to commodity prices continue as the government further reduc- payment of VAT-refund-arrears. The reve- and rainfall conditions, as the latter large- es expenditures on the wage bill, goods nues-to-GDP ratio declined from 27.6 per- ly determine energy production. Thus, the and services, and transfers to social insur- cent of GDP in 2018 to an estimated 27.3 current account deficit is expected to wid- ance beneficiaries and local governments. percent in 2019. Personal income tax reve- en from 6.7 percent of GDP in 2018 to 7 Gradual fiscal consolidation combined nue and social security contributions rose percent in 2019. Foreign direct investment with continued economic growth should slightly, supported by higher wages and is expected to remain unchanged as the eventually lower the debt-to-GDP ratio to efforts to reduce informality. Meanwhile, large projects in energy and gas transmis- 60 percent of GDP beyond 2022. tighter controls on social transfers and sion end their investment phase. Foreign- subsidies curbed current spending. Due to exchange reserves have been stable since lower than projected revenues, capital spending relative to GDP fell by 0.1 pp. 2016 at over six months of goods’ and services’ imports. Large reserves reduce Risks and challenges The government has recently increased risks posed by the high level of external the use of public-private partnerships debt, which is projected to reach 65.7 per- The country’s economic prospects are (PPPs) to finance infrastructure, cent of GDP in 2019. vulnerable to significant downside risks. healthcare, and education projects. Budg- Lower demand from foreign trade part- etary arrears (e.g., VAT refunds and local- ners may constrain growth, worsen labor government arrears) amounted to about 1.5 percent of GDP in 2018. The budget Outlook market conditions and increase poverty. Preserving macro-fiscal stability is crucial deficit is estimated to widen in 2019 to 2.2 to support sustainable growth, which in- percent of GDP, as the government reduc- Growth is projected to accelerate slightly, cludes continued streamlining of expendi- es the stock of VAT arrears while the pub- to 3.4-3.6 percent by 2019-20, as labor in- tures, increasing tax revenues, and man- lic debt, including guarantees and arrears, come gains fuel private consumption. aging fiscal risks from PPPs and SOEs. is estimated to decline to 68.4 percent of Slowdown in global growth will contain Further, fostering inclusive growth re- GDP in 2019. In August 2019, Moody's net exports. Investment will also contrib- quires creating better conditions for pri- confirmed its long-term sovereign credit ute to growth, fueled by public projects vate sector development, including im- ratings for Albania at B+. and – assuming continued progress on proving the business environment, in- The energy shock and lower foreign de- structural reforms such as justice and the creasing financial access, energy security, mand have exposed country’s external financial sector – private investment. Over and human capital. vulnerabilities. The current-account deficit the medium term, fiscal consolidation will TABLE 2 Albania / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 3.3 3.8 4.1 2.9 3.4 3.6 Private Consumption 2.0 2.3 3.2 2.9 3.3 3.3 Government Consumption 4.8 2.9 -1.1 6.4 1.0 3.4 Gross Fixed Capital Investment 2.4 5.5 2.9 2.2 4.4 4.1 Exports, Goods and Services 11.5 13.0 2.9 1.8 4.3 4.3 Imports, Goods and Services 7.0 8.1 3.8 2.1 3.3 3.4 Real GDP growth, at constant factor prices 3.2 3.9 4.3 2.8 3.4 3.6 Agriculture 2.0 0.8 0.9 1.5 1.5 1.5 Industry 1.9 1.9 9.1 -1.2 1.5 1.7 Services 4.3 6.0 3.4 5.2 5.0 5.2 Inflation (Consumer Price Index) 1.3 2.0 2.1 1.5 2.7 2.9 Current Account Balance (% of GDP) -7.6 -7.5 -6.7 -7.0 -6.4 -6.1 Net Foreign Direct Investment (% of GDP) 8.7 8.6 8.0 7.8 7.5 6.9 Fiscal Balance (% of GDP) -2.2 -2.0 -1.8 -2.2 -2.0 -1.7 Debt (% of GDP) 73.3 71.9 69.7 68.4 66.6 64.3 Primary Balance (% of GDP) 0.3 0.0 0.4 0.0 0.2 0.4 International poverty rate ($1.9 in 2011 PPP) a,b 0.9 0.8 0.8 0.7 0.7 0.6 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 6.8 6.6 6.3 6.0 5.8 5.5 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 36.9 36.2 35.3 34.6 33.8 33.0 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 2002-LSM S, 2008-LSM S, and 201 2-LSM S. A ctual data: 201 2. No wcast: 2013-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using average elasticity (2002-2008) with pass-thro ugh = 1based o n private co nsumptio n per capita in co nstant LCU. MPO 43 Oct 19 Selected Country Pages ●  77 the refinancing rate by 25 basis points ARMENIA Recent developments in September, (the second cut in 2019) to 5.5 percent to stimulate the gradual recovery of inflation. Following robust expansions in 2017 and The fiscal accounts over-performed in the Table 1 2018 2018 (of 7.5 and 5.2 percent, respectively), first half of 2019, recording a surplus of 1.9 P o pulatio n, millio n 2.9 annual economic growth remained robust percent of GDP, in stark contrast to the in the first half of 2019, expanding by 6.8 budget projection of a deficit of 1.2 per- GDP , current US$ billio n 12.4 percent. Growth was supported mainly by cent of GDP. The surplus was mainly ow- GDP per capita, current US$ 4238 a private consumption, fueled by rising real ing to under-execution of expenditure, but Internatio nal po verty rate ($ 1.9) 1.4 wages (up 3.5 percent) and consumer also a 10-percent over-performance of tax a Lo wer middle-inco me po verty rate ($ 3.2) 12.3 lending (up 40 percent), in contrast to 2018 revenue. Just 27 percent of the capital a Upper middle-inco me po verty rate ($ 5.5) 50.0 when a substantial build-up of inventories budget was executed during the period, Gini index a 33.6 (investment) accompanied growth. while current spending underperformed Scho o l enro llment, primary (% gro ss) b 94.2 On the supply side, services (up 10 per- by 10 percent. Government debt fell from Life expectancy at birth, years b 74.8 cent year on year) and manufacturing (up 51.3 percent of GDP at end-2018 to below 7 percent) buoyed economic growth in the 48 percent in July 2019. Source: WDI, M acro Poverty Outlook, and official data. Notes: first half of 2019. Mining output expanded The current account balance deteriorat- (a) M ost recent value (2017), 2011 PPPs. by 6 percent as the base effect of the clo- ed in the first quarter of 2019 as a slight (b) M ost recent WDI value (2017) sure of a large mine in early 2018 dissipat- widening of the trade deficit accompa- ed. Construction growth remained mod- nied lower surpluses on the services est, at 4 percent year on year. Agricultural and income accounts. Owing to slower Real GDP growth is estimated to have output fell by 7 percent year on year in the growth in the Russian Federation and a remained strong in 2019, at 5.5 percent, first half, extending a three-year contrac- weaker Russian ruble, remittance in- supported by private consumption. tion in sectoral output. Higher fishery flows declined by 3 percent year on output only partly offset declines in out- year. Still - weak foreign direct invest- Growth will remain above 5 percent over put of both horticulture and cattle- ment was offset by other types of finan- the medium term supported by fiscal stim- breeding. The decline reflects structural cial inflows, including deposits by non - ulus and higher private investment in issues, which have contributed to a reduc- residents and private sector borrowing. response to a robust reform agenda. As the tion in the harvested areas, but also a de- High -frequency data show a gradual layed 2019 harvest season. recovery in goods exports and imports, economy continues to grow, poverty rates With external and internal inflationary following a contraction in early 2019. will continue to fall. Challenges to the pressures low, and the exchange rate On the export side, the decline was due economic outlook include uncertainty in appreciating until recently, average to lower exports of minerals. Owing to the global growth outlook as well as gaps annual inflation fell from 2.5 percent in a strengthening of the Armenian dram in domestic infrastructure, connectivity, 2018 to 1.8 percent in August 2019, be- the real effective exchange rate appreci- low the Central Bank of Armenia ’s ated by 6 percent in the first half of human capital, and Armenia's capacity (CBA) target range (4 +/ -1.5 percent). 2019. Foreign reserves remained steady to restructure its economy toward a path The increase reflected modest increases at $2.2 billion, providing 3.6 months of of sustainable export-led growth. in food prices. In response, the CBA cut import cover. FIGURE 1 Armenia / GDP growth, fiscal and current account FIGURE 2 Armenia / Actual and projected poverty rates and balances real GDP per capita Percent Poverty rate (%) Real GDP per capita (constant LCU) 8 100 2500000 6 4 80 2000000 2 0 60 1500000 -2 40 1000000 -4 -6 20 500000 -8 -10 2014 2015 2016 2017 2018 2019f 2020f 2021f 0 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Real GDP growth, % change CAB, % of GDP International poverty rate Lower middle-income pov. rate Fiscal balance, % of GDP Upper middle-income pov. rate Real GDP pc Sources: National Statistics Service of Armenia; Central Bank of Armenia; World Source: World Bank. Notes: see table 2. Bank staff projections. MPO 44 Oct 19 78  ●   World Bank ECA Economic Update Fall 2019 Banking sector prudential indicators are deficit will narrow gradually, falling sound—at end July the capital adequacy ratio stood at 17.3 percent, the overall Outlook from 9.4 percent of GDP in 2018 to 6.3 percent in 2021, supported by higher ratio of non -performing loans was 5.5 goods exports and tourism. percent, and liquidity in the banking Armenia's baseline scenario envisages system was high. While positive, profit- further economic growth in 2019, with ability remains low with return on a s- sets of just 1.4 percent. Credit expanded real GDP estimated to rise by 5.5 percent. Consumption will remain strong, sup- Risks and challenges by 13 percent year on year in the first ported by additional stimulus from high- half of 2019, entirely due to an increase er government spending, as the authori- The risks related to the global growth out- in dram denominated credits. Total de- ties compensate for spending under - look remain firmly to the downside. Low- posits rose by 18 percent, mainly as a execution in the first half of the year. This er oil prices could negatively impact Rus- result of higher foreign currency depos- will offset the weaker external environ- sia, one of Armenia’s main economic part- its by non-residents. ment. Continued structural reform and ners, which would affect exports, putting Together with low inflation, the recent sound macroeconomic policy will keep pressure on the exchange rate and infla- steady economic expansion has resulted inflation low and attract investment, sup- tion. Domestically, addressing the still- in a reduction in poverty levels. The porting healthy GDP growth rates of over high poverty rate and low income over poverty rate, measured at the lower - 5 percent over the medium term. As the the medium term will require a concerted middle -income poverty line of $3.2/day economy continues to expand, labor in- effort to restructure the economy toward a (PPP 2011), is estimated to have fallen come will rise. With sustained social sustainable export-led growth path. Doing to 10.8 percent in 2018, its lowest rate transfers, poverty will maintain its de- so will require an efficient government, since 2010. The poverty rate fell sharply cline, with the poverty rate dipping to better connectivity, reliable infrastructure, to 12.3 percent in 2017, from 14.1 per- around 7 percent by 2021. and investment in human capital. The cent in 2016. The over -performance of tax revenue strong commitment of the government to Although real wages rose by 1.5 percent in will contain the budget deficit in 2019, to reduce corruption, improve the business 2018 (and are estimated to have risen 0.5 percent of GDP. The deficit will rise environment, and make the country more again in 2019), the unemployment rate to 2 percent in the medium term, affect- attractive for investment provides an op- edged up in early 2019, to 21.9 percent ed also by the fiscal cost emerging from portunity for a vibrant response from Ar- (from 20.4 percent in 2018). The increase lower direct tax rates effective 2020. menia’s private sector. reverses a trend of declining unemploy- Modest fiscal deficits will drive a reduc- ment since 2017 and could limit improve- tion in the debt -to-GDP ratio, to around ments in living conditions. 50 percent in 2021. The current account TABLE 2 Armenia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 0.2 7.5 5.2 5.5 5.1 5.2 Private Consumption -1.1 12.4 4.8 7.7 5.3 5.8 Government Consumption -2.4 -2.1 7.4 4.9 7.9 7.4 Gross Fixed Capital Investment -11.4 9.7 4.5 3.3 4.6 4.3 Exports, Goods and Services 19.1 18.7 2.9 5.1 6.8 7.0 Imports, Goods and Services 7.6 24.6 12.8 4.2 6.7 7.2 Real GDP growth, at constant factor prices 0.6 7.3 4.9 5.5 5.1 5.2 Agriculture -5.0 -5.1 -8.5 0.5 2.7 2.5 Industry -0.3 9.0 4.4 4.1 5.4 5.8 Services 3.2 10.6 9.1 7.4 5.4 5.4 Inflation (Consumer Price Index) -1.4 1.0 2.5 3.0 4.0 4.0 Current Account Balance (% of GDP) -2.1 -3.0 -9.4 -7.2 -6.6 -6.3 Net Foreign Direct Investment (% of GDP) 2.5 1.9 2.0 2.3 2.5 2.8 Fiscal Balance (% of GDP) -5.5 -4.8 -1.6 -0.5 -2.0 -2.0 Debt (% of GDP) 56.7 58.9 55.8 52.6 51.7 50.6 Primary Balance (% of GDP) -3.6 -2.7 0.5 1.8 -0.2 -0.3 International poverty rate ($1.9 in 2011 PPP) a,b 1.8 1.4 1.2 1.0 0.9 0.7 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 14.1 12.3 10.8 9.4 8.1 7.2 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 43.5 50.0 47.2 44.1 41.4 38.3 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 7-ILCS. A ctual data: 2017. No wcast: 2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2017) with pass-thro ugh = 0.7 based o n GDP per capita in co nstant LCU. MPO 45 Oct 19 Selected Country Pages ●  79 five times between January and July (from AZERBAIJAN Recent developments 9.75 percent to 8.25 percent) and scaled back liquidity absorption operations; how- ever, a weak transmission mechanism and Azerbaijan’s economy grew at an annual financial sector limited the response. pace of 2.4 percent in the first half of 2019, Banking sector indicators stabilized in the Table 1 2018 driven by a surge in both natural gas out- first half of 2019, with higher capital and P o pulatio n, millio n 9.9 put and the non-energy sectors. Non- fewer non-performing loans reported. The GDP , current US$ billio n 46.9 energy GDP rose by 3.2 percent year on latter was the result of a foreign-currency GDP per capita, current US$ 4718 year, spurred by strong performances in loan bailout scheme introduced by the Scho o l enro llment, primary (% gro ss) a 103.3 agriculture, manufacturing, and the ser- government in February. Banking sector a 72.1 vices sectors, while the downturn in con- profitability improved in 2018 on the back Life expectancy at birth, years struction sector lingered. On the demand of the stable currency, but several banks Source: WDI, M acro Poverty Outlook, and official data. side, booming consumption reflected fis- reported losses while others were under- Notes: (a) M ost recent WDI value (2017). cal stimulus, rising real wages, and a re- capitalized. Banks remain exposed to high covery in household credit. Investment credit and foreign exchange risks, with a appears to have bottomed-out, although continued short open currency position the investment rate remains low. due to the high dollarization of deposits. Favorable terms of trade in early 2019 Credit expanded by 10.7 percent in 2018, sustained a high current account surplus before easing to 3.6 percent in the first half of 15 percent of GDP in the first quarter of of 2019; growth was mostly driven by Expanding natural gas production and the year. However, the non-energy cur- consumer lending. In contrast, corporate steady growth in non-energy sectors sup- rent account deficit widened to 25 percent lending contracted by 0.3 percent year on of GDP. At the same time, the financial year in the first six months of 2019. ported Azerbaijan’s economy in the first account recorded a small surplus (2 per- The government introduced fiscal stimu- half of 2019. The trickling down of resource cent of GDP) despite negative net foreign lus measures in 2019. These measures rents will improve living conditions, but direct investment. As a result, pressures include more generous personal income will also increase risks given the volatile on the exchange rate were modest, allow- tax exemptions, increases to the minimum ing the authorities to maintain the ex- wage and pensions, higher salaries for external environment. Over the medium change rate at 1.7 manat per U.S. dollar. public employees (between 20-40 percent), term, economic growth is forecast to mod- By mid-2019 foreign reserves held at the and the foreign-currency consumer loan erate as natural gas production peaks and central bank totaled $5.9 billion, while bailout scheme. The cost of these other sectors grow at a moderate pace. State Oil Fund (SOFAZ) assets reached measures is estimated at roughly 3 per- With global risks elevated, it will be im- $42.5 billion (91 percent of GDP). cent of GDP in 2019. Although 12-month consumer price infla- The official national poverty rate has hov- portant to focus on structural reforms and tion edged up to 3.7 percent in July 2019, ered at 5-6 percent since 2012, falling from strengthening the economy’s resilience to it remained comfortably within the central 5.9 to 5.4 percent between 2016 and 2017 external shocks. bank’s target band of 2-6 percent, allow- despite economic contraction, a sharp rise ing the authorities to loosen monetary in consumer prices, and declining real policy. The central bank cut its policy rate wages in those years. Owing to higher real FIGURE 1 Azerbaijan / Non-oil GDP growth and oil price FIGURE 2 Azerbaijan / Poverty headcount rate at the na- tional poverty line USD/bbl Percent Percent 120 10 30 8 100 25 6 80 4 20 60 2 15 0 40 -2 10 20 -4 5 0 -6 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 0 Average Brent oil price (lhs) Non-oil GDP growth (rhs) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sources: State Statistical Committee and World Bank staff estimates. Source: State Statistical Committee. Note: The World Bank has not reviewed the official national poverty rates for 2013-17. MPO 46 Oct 19 80  ●   World Bank ECA Economic Update Fall 2019 incomes and rising private consumption, The fiscal accounts will remain in surplus deepening uncertainties, a deceleration in the poverty rate is estimated to have de- despite the fiscal stimulus; however, the the global economy and high geopolitical clined further in 2018–19. surplus is forecast to fall from 5.9 percent tensions in the Middle East. Slower global of GDP in 2018 to 4.4 percent of GDP in growth could reduce demand for Azerbai- 2021. Additionally, the non-oil fiscal bal- jan’s exports. Additionally, recent in- Outlook ance will widen. With projections of moderate GDP growth creased volatility in oil prices makes fiscal planning (and expansion) challenging, and inflation, living standards are ex- thereby increasing the risks of the recent Annual GDP growth is forecast to average pected to continue to improve. However, fiscal stimulus. 2.4 percent in 2019–21, as oil output mod- vulnerability to poverty remains high, and Restoring compliance with a fiscal rule erates and natural gas production peaks in a negative shock such as job loss, illness, will be critical to strengthening economic 2020. Fiscal stimulus will lift economic or inflation, could push many people into resilience amid high commodity market activity in 2019, but future growth in the poverty. A concerted effort is needed to volatility. Further efforts could be made to non-energy sectors is projected to settle promote shared prosperity and boost the improve the transparency of the fiscal around 2.8 percent as inherent structural incomes of the poorest 40 percent. Social rule, strategic allocation of resources, pub- weaknesses persist. With domestic de- policies could be better tailored to help lic investment management, and public mand recovering gradually, inflation is those at the very bottom of the income procurement system. expected to remain low, averaging 3.1 distribution attain equal opportunities and Slow progress on structural reforms repre- percent in 2019–21. capitalize on the benefits of Azerbaijan’s sents another downside risk. Azerbaijan’s The surplus on the external account is growing economy. recent economic growth has benefited likely to remain significant, assuming from fiscal stimulus (which will only sup- no major decline in oil prices. The cur- port growth temporarily). Structural re- rent account surplus will average 6.5 percent of GDP through 2021, with a Risks and challenges forms to improve the business environ- ment and investment climate, reduce the widening of the non -energy current state footprint in the economy, and tackle account deficit, as higher domestic de- Azerbaijan’s hydrocarbons-dependent competition are necessary to increase the mand pushes up imports. economy faces external risks, driven by economy’s productive capacity. TABLE 2 Azerbaijan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices -3.1 -0.3 1.4 2.8 2.3 2.1 Private Consumption -2.8 2.7 2.8 3.8 4.0 3.6 Government Consumption -8.1 1.8 3.3 12.0 11.4 2.7 Gross Fixed Capital Investment -20.0 -5.2 -0.2 -0.4 -4.3 0.6 Exports, Goods and Services -2.0 -1.0 1.0 2.5 2.4 1.5 Imports, Goods and Services -10.0 0.2 2.5 4.5 4.6 2.3 Real GDP growth, at constant factor prices -3.0 -0.5 1.4 2.7 2.3 2.1 Agriculture 2.6 4.2 4.6 4.2 4.4 4.5 Industry -4.2 -3.5 -0.7 0.6 1.8 1.5 Services -1.4 4.9 4.8 6.4 2.6 2.8 Inflation (Consumer Price Index) 12.4 12.9 1.9 2.8 3.2 3.3 Current Account Balance (% of GDP) -3.6 4.1 11.4 8.5 6.2 5.0 Net Foreign Direct Investment (% of GDP) 3.2 2.8 2.4 2.3 2.2 2.1 Fiscal Balance (% of GDP) -1.1 -1.4 5.9 4.8 4.5 4.4 Debt (% of GDP) 20.6 22.5 24.4 19.8 19.1 18.4 Primary Balance (% of GDP) -0.7 -0.8 7.1 5.8 5.3 5.2 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. MPO 47 Oct 19 Selected Country Pages ●  81 2018, and debt service payments close to 2 BELARUS Recent developments percent of GDP in 2018 and in H1 2019. Inflation picked up slightly to 6 percent in July 2019, from 5.6 percent in December In the first half of 2019, economic growth 2018, due to a scheduled increase in utility slowed considerably to 0.9 percent y/y, prices and a seasonal spike in food prices. Table 1 2018 from 4.5 percent in the first half of 2018. As inflation accelerated due to these non- P o pulatio n, millio n 9.5 Declining exports put a drag on growth, monetary factors, and M3 growth re- GDP , current US$ billio n 58.6 as exports of goods fell by 4.1 percent y/y mained within the established ceiling, the GDP per capita, current US$ 6184 in nominal US$ over Jan-June 2019, with National Bank has reduced its policy rate a 0.8 merchandize exports to EU countries to a historic low of 9.5 percent p.a. from 10 Upper middle-inco me po verty rate ($ 5.5) a down by 11.2 percent (in sharp contrast to percent, set in mid-2018. Gini index 25.4 b the 30 percent increase in 2018), and ex- In the face of exports slowdown, exchange Scho o l enro llment, primary (% gro ss) 101.6 b ports to Russia down by 0.3 percent rate flexibility has been retained and addi- Life expectancy at birth, years 74.1 (compared to the 0.7 percent growth in tional forex market liberalization Source: WDI, M acro Poverty Outlook, and official data. 2018). On the supply side, output stagnat- measures implemented. Between June Notes: (a) M ost recent value (2017), 2011 PPPs. ed in both industry and agriculture, with 2018 and June 2019, the BYN/US$ depreci- (b) M ost recent WDI value (2017) the former growing by only 0.1 percent y/ ated only by 2.6 percent in nominal terms. y, and the latter growing by 0.2 percent y/ Gross international reserves amounted to y in H1 2019. Weaknesses in the corporate US$8.3 billion at the end of June 2019, sector translated to an almost twofold covering two and a half months of goods increase in the volumes of bad loans, and services imports. mainly concentrated in two dominant The national poverty rate peaked at 5.9 state-owned banks. At the same time, do- percent in 2017. The economic recovery of Worsening external conditions and mestic demand was supported by growth 2017-18 contributed to a decline in 2018 to longstanding structural weaknesses have of wages and investments in real terms. 5.6 percent and further in Q2 2019 to 5.1 led to a significant slowdown in economic While real wage grew by 7.6 percent y/y percent, on account of steady growth of growth in 2019. Output has stagnated in in the first half of 2019, real investments real wages and household incomes (8 per- was up by 4.9 percent, driven by higher cent y/y in 2018 and about 7 percent y/y key sectors, marking the end of the 2017- capital expenditure at the local level and throughout the first half of 2019). 2018 recovery. The room for fiscal and increased private sector investments. monetary stimulus is limited due to ad- In H1 2019, growth of real consolidated verse consequences for macro- government expenditures lagged behind growth of revenues (1.9 percent vs. 3.1 Outlook stability. Potential growth is likely to percent y/y), leading to a fiscal surplus of remain below two percent, unless major 4 percent of GDP, net of quasi-fiscal ex- Economic growth is projected at 1.5 per- progress is made on structural reforms to penditures. Public debt pressures remain cent in 2019 due to the continued deterio- improve productivity and competitiveness. significant, with the ratio of direct and ration in terms of trade as well as guaranteed debt of central and local au- longstanding structural rigidities in the thorities to GDP at 45.7 percent of GDP in economy. Even this modest outlook is FIGURE 1 Belarus / Real GDP growth and contributions to FIGURE 2 Belarus / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 15 45 2500000 40 10 35 2000000 5 30 1500000 0 25 20 -5 1000000 15 -10 10 500000 -15 5 Q1/13 Q1/14 Q1/15 Q1/16 Q1/17 Q1/18 Q1/19 0 0 Statistical discrepancy Net exports 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Gross capital formation Total cons. of goods and services Upper middle-income pov. rate GDP growth Real GDP pc Sources: World Bank calculations based on Belstat data. Source: World Bank. Notes: see table 2. MPO 48 Oct 19 82  ●   World Bank ECA Economic Update Fall 2019 conditional upon partial compensation – weaker economic growth, and smaller import-substitution policies, especially in at least of one half of the expected losses – increases in real wages, as well as steady agricultural sector, along with intensified from Russia’s new energy taxation sys- labor market indicators, in particular competition in manufacturing sector from tem, which would imply a loss of export higher unemployment rates among those Russian and global players, is a major duties on oil products and rise in input with low levels of education. challenge for Belarus’s external competi- prices for oil refineries. With no compen- tiveness. In this context, one of the main sation, growth can slow down even fur- challenges is to undertake the necessary ther, while additional foreign borrowing would be required to offset the loss of Risks and challenges structural reforms to strengthen competi- tiveness and accelerate export diversifica- foreign exchange unless exports substan- tion. Improvements in the regulatory en- tially grow. In this context, the room for Rising public debt, largely denominated vironment, supported by further ease of demand stimulus is limited, with fiscal in foreign currency, against the back- doing business, must be accompanied by policy being affected by the burden of ground of weakening exports, and uncer- operational restructuring of domestic debt repayments and high levels of con- tainties about negative spillovers from businesses, especially of SOEs, as export tingent liabilities related to state-owned Russia’s new energy taxation system and success and diversification require mov- enterprises (SOEs) and commercial banks. the terms of possible compensation, pose ing into new markets with new products. Monetary policy efficiency is weakened by risks to medium-term economic growth. Recent measures to stimulate private sec- high dollarization, with the foreign cur- Also, recent wage increases, especially in tor development could have limited rency component of broad money still the public sector for low-paid workers, effects, unless SOE restructuring is activat- close to 60 percent. Exchange rate adjust- may challenge macro-stability, if carried ed to allocate resources for more produc- ment would also further impact the high out continuously throughout 2019-20. The tive uses and to reduce fiscal risks. To share of foreign currency-denominated current export profile makes Belarus’s cushion the impact of restructuring on corporate (above 50 percent) and public economy vulnerable to external shocks, vulnerable groups, social safety net needs (about 97 percent) debt. arising from commodity price fluctuations to be enhanced by introducing unemploy- Over the 2020-2021 period, the poverty and periodic trade disputes between Bela- ment assistance mechanisms and im- headcount is projected to remain flat, on rus and Russia. While these disputes may proved targeting of means-tested support. account of still positive, yet significantly well be resolved, Russia’s reliance on TABLE 2 Belarus / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices -2.5 2.5 3.0 1.5 1.3 1.2 Private Consumption -3.2 4.7 8.3 3.5 2.5 1.8 Government Consumption 0.7 -1.4 -1.0 -0.5 -2.5 2.2 Gross Fixed Capital Investment -14.1 3.7 2.0 1.4 -1.5 -8.7 Exports, Goods and Services 2.6 7.5 3.9 2.8 2.0 2.0 Imports, Goods and Services -1.4 11.1 7.9 4.1 1.6 -0.9 Real GDP growth, at constant factor prices -2.5 2.5 3.0 1.5 1.3 1.2 Agriculture 3.3 4.2 -3.4 1.5 3.5 3.0 Industry -0.4 6.1 5.7 0.7 2.8 2.1 Services -14.9 -14.7 -3.6 6.2 -9.6 -6.8 Inflation (Consumer Price Index) 11.8 6.0 5.6 5.8 5.0 4.5 Current Account Balance (% of GDP) -3.5 -1.7 -0.5 -2.3 -1.1 -2.1 Net Foreign Direct Investment (% of GDP) 2.6 2.4 2.5 2.4 2.2 2.2 Fiscal Balance (% of GDP) 1.5 3.1 4.3 -1.4 0.5 0.4 Debt (% of GDP) 53.9 53.5 48.7 55.3 58.8 56.2 Primary Balance (% of GDP) 3.0 5.6 6.8 0.7 3.4 3.1 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 0.7 0.8 0.7 0.7 0.7 0.7 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 7-HHS. A ctual data: 2017. No wcast: 2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2017) with pass-thro ugh = 0.7 based o n GDP per capita in co nstant LCU. MPO 49 Oct 19 Selected Country Pages ●  83 increase is expected due to higher trans- BOSNIA AND Recent developments fers (i.e. veteran benefits) and higher current expenditures on wages. Current sluggish capital spending reflects imple- HERZEGOVINA Growth (at factor prices) reached 3.6 per- cent in 2018, an increase of 0.4 pp com- mentation delays due to lack of govern- ment formation in Federation of BiH and pared to 2017, driven by consumption BiH Institutions. Public debt remains (1.1pp increase) and net exports (0.5pp). moderate at around 36 percent of GDP On the production side, the main contrib- in 2018, consisting largely of concession- Table 1 2018 utor to GDP growth in 2018 was services al debt. However, without agreement on P o pulatio n, millio n 3.5 (2.6pp). Although the composition of the Global Fiscal Framework there is GDP , current US$ billio n 20.6 growth will not change, regional and currently no guidance on a common fis- GDP per capita, current US$ 5870 global trade developments have weak- cal policy for BiH. Life expectancy at birth, years a 77.1 ened external account dynamic in the On the external side, the current account first months of 2019 and are expected to deficit (CAD) is expected to widen to 4.3 Source: WDI, M acro Poverty Outlook, and official data. Notes: offset Bosnia and Herzegovina (BiH) percent in 2019, on account of declining (a) M ost recent WDI value (2017). growth momentum. exports and a slower rise in imports. Ex- Unemployment continued to decline but ports have been weighed down by the remains high having fallen from 18.4 per- slowdown in growth in the EU (a signifi- cent in 2018 to 15.7 in 2019. This improve- cant trading partner for BiH), weaker ment was partly due to the rise in employ- global prices of aluminum (a major export ment (from 34.3 percent in 2018 to 35.5 in BiH), and loss of markets for some com- percent in 2019), with a decrease in the modities due to ongoing regional trade working-age population and rising inac- disputes, including the export of milk to tivity playing an important role. Kosovo (one of BiHs main markets for Economic growth reached 3.6 percent in The consumer price index increased by 1.6 milk), which slowed down as Kosovo im- 2018. Growth is expected to slow in 2019, percent year-on-year (y-o-y) in December posed a 100% tariff on imports from BiH. weighed down by weaker growth in Europe, 2018 and continued on an upward trend Other components of the current account, in 2019, albeit at a slower pace. Inflation such as services surplus, arising from and slow progress on the formation of a was driven by the recovery of global oil transport, travel, construction, and re- new government. Growth is expected to prices and metals, alongside the increased mittances were almost unchanged and pick up in the medium-term, as the newly excise tax on oil. The biggest drivers of have been sufficient to finance a signifi- formed government implements structur- inflation were transport, tobacco and rent- cant part of the trade deficit, together with al housing, negatively affecting house- other investment and FDI. The exchange al reforms and progresses on EU accession. holds purchasing power. rate is fixed to the EUR under the Curren- These developments would be important In 2019, the fiscal balance is expected to cy Board Arrangement. In 2018, total ex- for poverty reduction. turn to deficit due to higher current ex- ternal debt stood at 66 percent of GDP. penditure mainly in wages. In 2018, rev- Poverty was estimated at 16 percent in enues rose due to stronger collection of 2015, the latest available poverty data us- indirect taxes while an expenditure ing the national poverty line, very close to FIGURE 1 Bosnia and Herzegovina / Real GDP growth and FIGURE 2 Bosnia and Herzegovina / Labor market indica- contributions to real GDP growth tors, 2015-2018 Percent, percentage points Percent 4 50 44.1 2015 2016 2017 2018 45 42.1 3 40 34.3 35 31.9 2 30 27.7 25 22.6 1 18.4 20 15.2 15 0 10 5 -1 0 2013 2014 2015 2016 2017 2018f 2019f 2020f 2021f Activity rate Emp. rate Unemp. rate Long-term Agriculture Industry Services GDP unemp. Rate Sources: BHAS, World Bank staff estimates. Sources: LFS 2015 -2018 report, World Bank staff calculations. MPO 50 Oct 19 84  ●   World Bank ECA Economic Update Fall 2019 the 15 percent poverty rate estimated for are likely to remain stable, and, together unemployment and continuing to safe- 2011. Rural poverty (19 percent) was high- with progress on reforms, will underpin guard the banking sector, will remain er than urban poverty (12 percent). Across a gradual pickup in consumption, which central to the BiH reform progress. Alt- entities, poverty increased slightly in BiH will remain a major driver of growth in hough external deficits continue to be from 15 to 17 percent, while it remained medium term. moderate, on the fiscal side the tax bur- stable in RS at about 14 percent. Higher The much needed consolidation of ex- den is high, and public spending is ineffi- pensions and social assistance contributed penditures will be delayed as the low for- cient, as evidenced by poorly -targeted to improve the welfare of the less well-off, mation of the government delays the benefits and the accumulation of arrears. while labor incomes had a small poverty - needed fiscal framework setting upper Without continued implementation of increasing effect. This effect may have limits of expenditures. Investment in ener- structural reforms, it would be difficult to shifted between 2015-2018, given the re- gy, construction, and tourism will support address rigidities in public employment, cent improvements in the labor market. job creation. pensions, and SOEs. Inequality remained constant at 33 Gini As poverty is strongly associated with The main domestic risk is the challeng- points between 2011 and 2015. unemployment and inactivity in BiH, for ing political environment, which makes growth to translate into poverty reduc- structural reforms difficult, especially in tion, improvements in labor market par- important network sectors, such as in- Outlook ticipation and employment will remain key, in particular in agriculture where frastructure, telecommunications, ener- gy sector, and transport. It also increas- most of the poor are employed. Howev- es risks to the economic outlook. EU Supported primarily by consumption er, poverty is projected to decline slowly accession process hinges on progress on and public investment, growth is project- over the next couple of years as a result the recently received EU opinion on ed to strengthen to 3.9 percent by 2021. of high unemployment and flat real wag- reforms needed towards becoming a BiH’s commitment to gain candidate sta- es due to the substantial remaining slack candidate country. Main external risk tus from the EU is seen as a key anchor to in the labor market. for BiH remains slow growth in Europe, advance the country ’s reform agenda. linked to rising regional and global The CAD is expected to deteriorate from trade tensions. 4.3 percent of GDP in 2018 to 5.0 percent of GDP by 2021 as export growth re- Risks and challenges mains moderate and imports grow due to robust consumption and implementation Achieving prudent, efficient, and effec- of infrastructure projects. Remittances tive fiscal policy, addressing persistent TABLE 2 Bosnia and Herzegovina / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 3.4 3.4 3.2 3.1 3.4 3.9 Private Consumption 2.2 1.5 1.4 3.2 3.2 3.3 Government Consumption 0.0 1.5 0.6 1.5 3.6 2.6 Gross Fixed Capital Investment 2.4 16.4 0.0 2.1 1.9 4.7 Exports, Goods and Services 9.3 11.8 5.9 1.1 1.5 3.0 Imports, Goods and Services 6.8 7.7 3.2 0.8 1.2 2.0 Real GDP growth, at constant factor prices 3.1 3.2 3.6 3.1 3.4 3.9 Agriculture 7.6 -8.1 6.8 2.9 2.9 2.9 Industry 4.7 5.2 1.9 1.9 2.5 2.6 Services 2.0 3.7 4.0 3.6 3.8 4.5 Inflation (Consumer Price Index) -1.1 1.2 1.4 1.2 1.2 1.2 Current Account Balance (% of GDP) -4.5 -4.5 -4.2 -4.3 -4.9 -5.0 Net Foreign Direct Investment (% of GDP) 1.6 2.0 2.2 2.8 3.0 3.1 Fiscal Balance (% of GDP) 2.6 2.6 2.2 -0.6 0.6 1.4 Debt (% of GDP) 42.5 37.3 36.3 34.3 35.9 35.6 Primary Balance (% of GDP) 3.4 3.3 3.5 0.3 1.9 2.6 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. MPO 51 Oct 19 Selected Country Pages ●  85 was due to traditional frontloading of BULGARIA Recent developments revenues in H1, backloading of certain expenditures in H2, and conservative planning of tax collection. A budget revi- After posting higher-than-projected sion was passed in July to accommodate growth of 3.5 percent yoy in Q1 2019, unplanned expenditure for the acquisition Table 1 2018 GDP expansion slowed down to 3.3 per- of F-16 military aircraft from the USA. The P o pulatio n, millio n 7.0 cent in Q2. The slowdown was widely purchase is part of Bulgaria’s commit- GDP , current US$ billio n 65.1 expected on the back of negative signals ments as a NATO member and increases GDP per capita, current US$ 9274 from the eurozone and particularly from the central government deficit to 1.9 per- Internatio nal po verty rate ($ 1.9) a 1.5 Bulgaria’s major markets – Germany and cent of GDP. a Italy. On the demand side, the decelera- The external position remains good. In Lo wer middle-inco me po verty rate ($ 3.2) 3.8 a tion in Q2 was due to slower growth of addition to growing CA surpluses since Upper middle-inco me po verty rate ($ 5.5) 8.7 a both exports and consumption. The latter 2016, gross external debt has remained on Gini index 37.4 contrasted both the substantial increase of a downward course after early 2015, b Life expectancy at birth, years 74.8 fiscal expenditure and strong labor market reaching 57.5 percent of the projected Source: WDI, M acro Poverty Outlook, and official data. data for H1. The employment rate reached GDP as of June 2019. Yet, FDI inflows stay Notes: (a) M ost recent value (2014), 2011 PPPs. a 16-year high of 54.7 percent, while the far from their pre-2008 levels, totaling 3.2 (b) M ost recent WDI value (2016) jobless rate fell to an ever-low of 4.2 per- percent of GDP in 2018. Strong labor mar- cent in Q2 2019. Strong labor demand fed ket conditions, including decreasing un- into rapid nominal wage growth, reaching employment rates among the uneducated, 11-13 percent yoy in Jan-Jun, 2019. The 10 and high real wage growth among low- percent increase of the minimum wage productivity sectors supported continued and the 20 percent salary hike for public- improvement in poverty reduction. Pov- school teachers in January contributed to erty is projected to have declined from 8.5 After relatively strong readings in Q1 this increase. percent in 2015 to 7.1 percent in 2018 (at and Q2, GDP growth is expected to slow Higher inflation likely drove the slow- the $U$5.5 per day line). However, in- down in H2 2019 on worsened external down of real consumption growth in H1. come inequality in Bulgaria has been in- conditions. The labor market remains Average annual CPI inflation in Jan-Jul, creasing and is the highest in the EU, with 2019 reached 3.3 percent yoy, primarily on the Gini coefficient reaching 39.6 in 2018. buoyant with employment reaching an the back of rising fuel, food and regulated The coverage and adequacy of the social all-time high and nominal wages growing utility prices. Yet, inflation apparently transfer system remains low. Unemploy- at double-digit rates. Backloading of cer- supported fiscal performance. After post- ment has declined significantly but re- tain expenses and unplanned military ing a marginal surplus of 0.2 percent in gional variations and unemployment spending in H2 will most likely result 2018, the general government budget among the unskilled remain high. Inactiv- showed a surplus of 2.8 percent of the ity among certain groups of the popula- in a small budget deficit for the full 2019. official GDP projection in Jan-Jul, 2019. tion persists and many citizens – includ- Risks to the outlook are primarily external Apart from inflation and the one-off effect ing the elderly, those living in rural areas, but skewed to the downside. of consolidating an energy sector fund and the Roma – are excluded from eco- into the general government, the surplus nomic opportunities. FIGURE 1 Bulgaria / Real GDP growth and contributions to FIGURE 2 Bulgaria / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 20 25 16000 14000 15 20 12000 10 15 10000 5 8000 0 10 6000 -5 4000 5 -10 2000 2016 2017 2018 2019f 2020f 2021f 0 0 Net exports Private Consumption 2006 2008 2010 2012 2014 2016 2018 2020 Gross fixed capital formation Public Consumption International poverty rate Lower middle-income pov. rate GDP Upper middle-income pov. rate Real GDP pc Sources: World Bank, Bulgarian National Statistical Institute. Source: World Bank. Notes: see table 2. MPO 52 Oct 19 86  ●   World Bank ECA Economic Update Fall 2019 summer tourist season. After deterioration 14 percent yoy, respectively, in July, spur- Outlook of the fiscal balance in 2019 on unplanned expenditure, the fiscal position is expected ring concerns about the potential build-up of non-performing loans in the wake of a to improve in 2020. Poverty reduction is new downturn. So far, the share of non- Growth is expected to remain above the expected to continue at a modest pace in performing loans remains on a downward EU average in the medium run. Following the near term. Sustained improvements in trend, reaching 7.2 percent of outstanding a relatively strong first half of 2019, the employment and wages, as well as recent credits and advances in June, but this Bulgarian economy is expected to slow increases in pensions, should support real could be easily reversed, as evidenced down in H2 2019 and further in 2020. in incomes and therefore further reductions after the 2008 crisis. Bulgaria’s ambition to tune with the worsened external environ- in poverty. Poverty is projected to fall to join the Exchange Rate Mechanism II ment and the toll it takes on export. 6.8 percent in 2019, as measured at $5.5 a (ERM II) and the European Banking Un- Growth for the full 2019 is projected at 3.2 day in 2011 PPP, to 6.4 percent in 2020, ion before end-2019 remains high on the percent, with final consumption expected and further to 6.0 percent by 2021. government’s agenda. A recently conclud- to act as growth driver in H2, while ex- ed asset quality review and stress tests of ports wane. Consumption will be support- 6 Bulgarian banks by the ECB showed that ed by public sector wage and pension raises, as well as strong increase of em- Risks and challenges two banks – First Investment Bank and Investbank - faced capital shortfalls under ployment and salaries in the real sector. different scenarios. Given that, the possi- Investment growth is likely to pick up in Risks to the outlook stem mostly from the bility of postponing ERM II entry until the H2 as local elections approach in October external environment, including the ongo- two banks raise their capital to the re- and the military aircraft acquisition is ac- ing global trade tensions. Since China al- quired thresholds, should not be ruled counted for. Going forward, investment ready ranks as the country’s second larg- out. The S&P’s rating agency has reiterat- remains largely dependent on EU funds, est market outside the EU, the ongoing ed recently that as soon as the country which are to pick up as the end of the cur- slowdown of the Chinese economy is hav- enters ERM II, its sovereign rating is most rent programme period approaches. The ing both direct and second-round effects likely to be upgraded. Despite low unem- current account balance is projected to on Bulgaria. The acceleration of credit ployment and the continued reduction of remain in positive territory in the medium growth, especially in the household seg- poverty, high income inequality under- term but shrink in 2019 against 2018, as ment, has also recently added to risks. The mines the inclusiveness of growth and the exports of goods and services underper- growth rates for banks’ consumer and impact it may have on poverty. form in H2, not least due to a weaker mortgage credits reached 19 percent and TABLE 2 Bulgaria / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 3.9 3.8 3.1 3.2 3.0 3.1 Private Consumption 3.4 4.3 6.0 2.2 2.9 2.7 Government Consumption 2.5 4.4 6.3 5.3 4.5 4.1 Gross Fixed Capital Investment -6.6 3.2 6.5 5.6 4.8 4.9 Exports, Goods and Services 8.1 5.8 -0.8 4.2 3.7 3.5 Imports, Goods and Services 4.5 7.5 3.7 3.5 4.2 3.6 Real GDP growth, at constant factor prices 3.4 4.2 3.0 3.2 3.0 3.1 Agriculture 5.3 8.9 -1.1 -0.5 1.0 1.0 Industry 4.0 4.1 1.3 2.8 3.1 2.3 Services 3.1 3.9 4.0 3.7 3.1 3.6 Inflation (Consumer Price Index) -0.8 2.1 2.8 3.1 2.5 2.3 Current Account Balance (% of GDP) 2.6 3.0 4.6 3.2 3.5 2.9 Net Foreign Direct Investment (% of GDP) 2.1 2.7 2.7 2.8 2.9 3.0 Fiscal Balance (% of GDP) 1.6 0.8 0.2 -0.9 -0.2 -0.7 Debt (% of GDP) 27.4 23.3 23.8 23.3 22.9 22.8 Primary Balance (% of GDP) 2.3 1.6 0.9 -0.1 0.5 0.0 International poverty rate ($1.9 in 2011 PPP) a,b 1.2 1.0 0.8 0.7 0.6 0.6 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 3.6 3.3 3.2 2.9 2.7 2.7 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 7.9 7.5 7.1 6.8 6.4 6.0 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 4-EU-SILC. A ctual data: 2014. No wcast: 2015-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2014) with pass-thro ugh = 0.87 based o n GDP per capita in co nstant LCU. MPO 53 Oct 19 Selected Country Pages ●  87 remains high in certain sectors, especially CROATIA Recent developments in retail where labor shortages seem most severe. Inflation remained subdued, with average growth of consumer prices of 0.7 The Croatian economy started strongly in percent in the first six months of 2019. The 2019 but lost momentum in the second current account balance deteriorated in Table 1 2018 quarter. Annual real GDP growth acceler- the first quarter of 2019, driven by deterio- P o pulatio n, millio n 4.1 ated to 3.9 percent in the first quarter, the ration in the goods and services account, GDP , current US$ billio n 60.8 highest growth rate since 2007, and the while workers’ remittances continued to GDP per capita, current US$ 14876 increase was broad-based. After a dismal rise. The financial account of the balance Lo wer middle-inco me po verty rate ($ 3.2) a 1.3 performance in the second half of 2018, of payments in the first quarter registered Upper middle-inco me po verty rate ($ 5.5) a 5.5 export growth rebounded at the begin- similar capital inflow as in the same peri- a 31.1 ning of the year to 4.6 percent y-o-y on the od last year, but direct investments de- Gini index b back of goods export, while public and clined. At the same time, the downward Life expectancy at birth, years 77.8 private investments soared recording an trend of external debt reversed, mainly Source: WDI, M acro Poverty Outlook, and official data. annual growth rate of 11.5 percent. Gov- reflecting central bank’s investment of Notes: (a) M ost recent value (2015), 2011 PPPs. ernment consumption also strengthened, international reserves, which do not affect (b) M ost recent WDI value (2017) while household consumption growth the net external position. On the fiscal edged-up to 4.4 percent y-o-y, from 3.9 side, despite a rise of expenditures of percent in the last quarter of 2018. Howev- around 10 percent and tangible reduction er, in the second quarter the economy lost in the tax burden due to changes in VAT momentum and annual growth decelerat- and PIT systems, in the first half of 2019 ed to 2.4 percent. This mainly reflects the the general government balance remained After a strong rise at the beginning of fall in export of goods related to an eco- stable compared to the same period last nomic slowdown in Croatia’s main trad- year. This mainly reflects buoyant tax col- 2019, in the second quarter the Croatian ing partners and a deceleration of growth lection and suggests that the outturn for economy lost momentum. By year-end, of household consumption. On the other the whole 2019 might be better than ex- GDP growth is expected to accelerate to hand, growth of export of services picked pected by the government. At the begin- 2.9 percent, driven primarily by domestic up and capital investment as well as gov- ning of August, the government has pre- ernment consumption remained robust. sented additional tax cuts for 2020 in the demand. In the remaining forecast horizon, Meanwhile, employment continued to amount of around 0.5 percent of GDP, growth is set to moderate on the back of increase in the first half of 2019 at a similar which, with previously adopted reduction weakening external outlook and structur- pace as in 2018, and the growth was of the standard VAT rate, leads to a total al supply-side rigidities. Public finances spread across most sectors, with the larg- tax relaxation in 2020 of around 0.9 per- are expected to remain sound, despite est contribution coming from construction cent of GDP. and services related to tourism. Registered Pension and labor income have been im- further tax reductions. The poverty rate unemployment continued to decline fall- portant drivers of poverty reduction over is set to decline, albeit at a moderate rate, ing close to 8 percent (seasonally adjusted) the period 2013-2016. Therefore, positive through 2021. in the second quarter of 2019. At the same labor market developments in more recent time, wage growth moderated, but it years, including strong real wage growth, FIGURE 1 Croatia / Real GDP growth and contributions to FIGURE 2 Croatia / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 6 8 100000 7 4 80000 6 2 5 60000 4 0 3 40000 -2 2 20000 -4 1 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 2021f 0 0 2009 2011 2013 2015 2017 2019 2021 Final consumption Gross fixed capital formation Change in inventories Net exports Lower middle-income pov. rate Upper middle-income pov. rate GDP growth Real GDP pc Source: World Bank. Source: World Bank. Notes: see table 2. MPO 54 Oct 19 88  ●   World Bank ECA Economic Update Fall 2019 decreasing unemployment rates among rising negative contribution of net exports the uneducated, and a decline in the youth NEETs are expected to support growth of to growth. Over the next two years, growth is set to moderate to an average Risks and challenges disposable income, particularly among the rate of 2.5 percent. Despite tail winds poor. Poverty incidence (measured at the from tax cuts, household consumption Risks are skewed to the downside. Ex- US$5.5 at PPP 2011) is expected to have growth is expected to slow down, as em- ports of goods are exposed to the risk of further declined from 5 percent in 2016 to ployment and wage growth gradually faster slowdown in external demand of 4.2 percent in 2018. Furthermore, recent decelerate. Furthermore, after a marked Croatia’s main trading partners. On the Gini coefficient estimates suggest that increase in 2019, investment growth is set fiscal side, strong pressures for wage inequality has been decreasing, reaching to moderate, both in the private and gen- increases in the public sector and a pos- in 2018 its lowest level since 2009. eral government sector, while exports sible increase in spending before the might also edge down on the back of a general elections scheduled for Autumn weak external outlook. Notwithstanding 2020 might negatively affect the general Outlook tax reductions, the general government budget is expected to remain close to bal- government balance and debt trajectory. Tackling the weak potential of the Croa- ance in the forecast period, as revenues tian economy would require a broad Growth is expected to pick up slightly in are expected to remain buoyant, while structural reform agenda with the aim 2019 to 2.9 percent. Household consump- interest expenses could further diminish. to increase low productivity by raising tion will make the largest contribution to Public debt could further decline to 64.6 the quality and mobility of both human overall GDP growth, reflecting further percent of GDP by the end of 2021. Mod- and physical capital. The latter would growth in employment and wages but erate economic growth should lead to include addressing business environ- also rising household borrowing. A sig- steady income growth for the poor. Pov- ment constraints related to an inefficient nificant contribution could also come erty, measured at the upper middle - public sector (both as a service provider from investment activity both in the pub- income poverty line (US$ 5.5/day, 2011 and a regulator) and low labor market lic and private sector, partly reflecting PPP), is expected to continue its down- inclusiveness, as reflected in one of the greater EU funds absorption. As a result ward trend, but at a slower pace. Assum- lowest employment and participation of robust domestic demand import ing that growth from 2019 onwards is rates in the EU and in the recent labor growth is projected to increase, while equally distributed across all individuals, shortages. Decisive action on these export growth might remain at the level poverty would decrease from 4.2 percent fronts would lead to higher and more recorded in 2018. This will lead to further in 2018 to 3.9 in 2019 and further to inclusive growth. deterioration of the trade balance and a 3.3 percent by 2021. TABLE 2 Croatia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 3.5 2.9 2.6 2.9 2.6 2.4 Private Consumption 3.5 3.6 3.5 3.7 3.5 3.3 Government Consumption 0.7 2.7 2.9 3.5 2.7 2.3 Gross Fixed Capital Investment 6.5 3.8 4.1 8.3 6.4 6.3 Exports, Goods and Services 5.6 6.4 2.8 2.8 2.7 2.6 Imports, Goods and Services 6.2 8.1 5.5 6.3 5.3 5.1 Real GDP growth, at constant factor prices 3.5 2.1 2.1 2.9 2.6 2.4 Agriculture 7.3 -2.1 2.0 2.0 2.0 2.0 Industry 5.0 0.9 0.3 2.9 2.7 2.5 Services 2.8 2.8 2.8 3.0 2.6 2.3 Inflation (Consumer Price Index) -1.0 1.0 1.5 0.9 1.0 1.4 Current Account Balance (% of GDP) 2.5 3.5 2.5 1.1 0.3 -0.8 Net Foreign Direct Investment (% of GDP) 4.3 2.6 1.4 2.2 2.2 2.4 Fiscal Balance (% of GDP) -1.0 0.8 0.2 0.2 -0.2 0.0 Debt (% of GDP) 80.5 77.8 74.5 70.4 67.5 64.6 Primary Balance (% of GDP) 2.1 3.5 2.5 2.3 1.7 1.8 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 1.3 1.2 1.1 1.0 0.9 0.9 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 4.9 4.6 4.2 3.9 3.5 3.3 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 5-EU-SILC. A ctual data: 2015. No wcast: 2016-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2015) with pass-thro ugh = 0.87 based o n GDP per capita in co nstant LCU. MPO 55 Oct 19 Selected Country Pages ●  89 is affected by the Russian flight ban and GEORGIA Recent developments higher inflation affects purchasing power. Annual inflation accelerated to 4.9 percent in July due to the weakening of the lari Real GDP growth accelerated in the first and higher tobacco excise taxes. In re- half of 2019, to 4.7 percent (reaching 5.1 sponse, the authorities tightened the poli- Table 1 2018 percent year on year in July). Domestic cy interest rate in early September by 50 P o pulatio n, millio n 3.7 demand was supported by higher con- basis points to 7 percent. GDP , current US$ billio n 15.7 sumption in the first half. Investment con- The current account deficit narrowed by GDP per capita, current US$ 4226 tracted as infrastructure projects were half to 4.5 percent of GDP in the first half Internatio nal po verty rate ($ 1.9) a 5.0 completed and FDI declined. Net exports of the year. Goods exports increased by Lo wer middle-inco me po verty rate ($ 3.2) a 16.3 improved considerably reflecting slowing 12.4 percent year on year in the first seven Upper middle-inco me po verty rate ($ 5.5) a 43.6 imports and increased re-exports of used months of 2019 while imports contracted a 37.9 cars and copper ore. On the supply side, by 4.7 percent. Money transfers (including Gini index b all sectors except for mining and electrici- remittances) rose by 7 percent. Tourism Scho o l enro llment, primary (% gro ss) 102.8 b ty production contributed positively to proceeds growth declined to 7.8 percent in Life expectancy at birth, years 73.4 growth. Construction sector output, which January-July from 21 percent growth in Source: WDI, M acro Poverty Outlook, and official data. contracted during most of 2018 and early 2018. With the financing requirement de- Notes: (a) M ost recent value (2017), 2011 PPPs. 2019, appears to have bottomed out. How- clining and healthy portfolio inflows, the (b) M ost recent WDI value (2017) ever, recent developments (a ban on central bank was able to accumulate re- flights from Russia imposed by the Rus- serves in the first half of the year despite a sian authorities, the TBC Bank manage- drop in FDI. However, sentiments have ment case, and a reshuffling of the govern- deteriorated markedly since, resulting in ment) have weakened sentiment and will rising pressure on the exchange rate. negatively affect growth. A faster outturn in government spending Georgia’s economy expanded by 4.7 percent Poverty declined as economic growth supported economic growth in the first in the first half of 2019, driven by strong created jobs. The unemployment rate fell half of 2019. Revenue growth of 10 per- exports and consumption. Growth is pro- to 12.7 percent in 2018, helping to lower cent year on year was outpaced by the poverty rate, as measured at the na- spending growth of 17 percent. Public jected to slow to 4.4 percent for the full tional poverty line, to 20.1 percent. Rural investment rose by 32 percent year on year as a ban on flights from the Russian poverty fell by 3.4 percentage points, year in the same period. As a result, the Federation impacts tourism. Growth will while urban poverty fell by 0.6 percent- budget registered a deficit of 0.6 percent moderate in 2020 as the external outlook age points. These trends continued in the of annual GDP by end-July 2019, com- weakens but is projected to recover in first half of 2019 as the unemployment pared to a 0.5 percent surplus in the same rate declined further, to 12 percent. While period of last year. Public debt increased 2021, helping to improve living conditions. increased employment opportunities by 7.4 percent since the start of the year, The national poverty rate decreased to mostly benefited the country’s urban pop- reflecting the depreciation of the lari, the 20.1 percent in 2018. ulation, the urban unemployment rate acceleration of capital spending (mostly remains high (at 17 percent). Some of this foreign-financed) and efforts to develop improvement may be reversed as tourism the domestic debt market. FIGURE 1 Georgia / Real GDP growth and contributions to FIGURE 2 Georgia / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 12 70 10000 10 60 8 8000 6 50 4 6000 40 2 0 30 4000 -2 20 -4 2000 -6 10 -8 0 0 2014 2015 2016 2017 2018 2019p 2020p 2021p 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Gov. consumption Net exports Investments International poverty rate Lower middle-income pov. rate Priv. consumption GDP growth Upper middle-income pov. rate Real GDP pc Sources: Geostat and World Bank staff estimates. Source: World Bank. Notes: see table 2. MPO 56 Oct 19 90  ●   World Bank ECA Economic Update Fall 2019 After moderating in early 2019, credit offset by a moderate expansion in govern- present a fiscal risk, consumption growth growth accelerated to 13.5 percent year ment spending as well as rising tourist in- trends suggest the need for additional on year in August, driven mainly by lari - flows from Turkey. Real GDP growth is ex- power capacity. The government will re- denominated loans. Deposits were up by pected to recover over the medium term as view PPA decisions going forward to en- 8 percent year on year in August, mostly some of the constraints to growth dissipate. sure compliance with the 2018 Law on on account of lari deposits. Although pru- Although easing, economic growth will Public-Private Partnerships (PPPs). The dential indicators are solid, the banking remain positive and generate more em- inclusion of liabilities from PPPs in public sector will remain sensitive to exchange ployment and other income-generating debt is also an important step. rate depreciation on account of high lev- opportunities at the bottom of the income Georgia is vulnerable to regional develop- els of dollarization. distribution. Increased social assistance ments and the risks associated with a spending may also help to reduce poverty, sharp decline in demand for exports of its but the impact on fiscal sustainability will goods and services or a reduction in re- Outlook need to be considered carefully. mittance inflows. A fresh round of dis- turbances in Russia or Turkey could un- dermine Georgia’s tourism and invest- Real GDP growth is projected to slow to 4.4 percent in 2019 as the ban on all flights Risks and challenges ment prospects, complicate access to fi- nancial markets, and negatively impact between Russia and Georgia costs the economic growth. At the same time, with economy around 0.6 percent of GDP. Substantial quasi-fiscal risks emanate its stable business environment, Georgia is Stronger net exports, recovery in credit from Georgia’s state-owned enterprises well placed to attract investors from growth, and some fiscal stimulus will only (SOEs). The liabilities of the 57 SOEs clas- neighboring countries. partly offset this loss. Growth is projected sified as high- and medium-risk total 16.2 Despite some progress in 2018, rural pov- to further slow in 2020, reflecting the full- percent of GDP; additional risks stem erty remains a challenge. Providing new year impact of lower arrivals from Russia, from contingent liabilities generated by job opportunities to workers currently delays in several larger planned infra- the government’s 181 power purchasing employed in low-productivity agricul- structure projects, and easing credit agreements (PPAs) which provide state ture—and supporting productivity in- growth as international financial markets guarantees for the purchase of excess elec- creases in agricultural production—will tighten. This deceleration will be partly tricity from power generators. While PPAs be critical to reducing rural poverty. TABLE 2 Georgia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 2.8 4.8 4.7 4.4 4.3 4.5 Private Consumption -0.6 1.3 1.1 1.0 3.1 4.3 Government Consumption 6.5 2.0 2.0 -0.6 0.7 0.3 Gross Fixed Capital Investment 11.2 -4.4 8.3 2.6 7.1 7.5 Exports, Goods and Services 7.7 10.3 8.0 7.5 7.0 7.0 Imports, Goods and Services 6.3 0.9 4.2 1.2 5.2 6.2 Real GDP growth, at constant factor prices 3.1 4.7 4.7 4.4 4.3 4.5 Agriculture 0.3 -3.8 1.0 2.0 2.0 3.0 Industry 6.2 6.4 0.9 3.0 3.0 3.0 Services 2.4 5.1 6.4 5.1 4.9 5.1 Inflation (Consumer Price Index) 2.1 6.0 2.6 4.0 3.2 3.0 Current Account Balance (% of GDP) -13.1 -8.8 -7.7 -6.0 -5.6 -5.8 Net Foreign Direct Investment (% of GDP) 9.8 10.9 8.9 6.5 5.8 7.1 Fiscal Balance (% of GDP) -4.1 -3.2 -2.9 -2.9 -2.9 -2.5 Debt (% of GDP) 44.2 45.2 44.8 46.0 44.6 44.6 Primary Balance (% of GDP) -2.9 -1.9 -1.5 -1.4 -1.5 -1.3 International poverty rate ($1.9 in 2011 PPP) a,b 3.9 5.0 4.5 4.2 3.8 3.3 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 16.4 16.3 14.8 13.5 12.3 11.3 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 44.0 43.6 40.9 38.7 36.5 34.5 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 7-HIS. A ctual data: 2017. No wcast: 2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2017) with pass-thro ugh = 0.87 based o n GDP per capita in co nstant LCU. MPO 57 Oct 19 Selected Country Pages ●  91 account of improved tax administration KAZAKHSTAN Recent developments and a weaker tenge. In the second half— and for 2019 as a whole—fiscal policy is likely to be more expansionary because of Real GDP grew by 4.1 percent in the first increased social spending, higher wages Table 1 2018 half of 2019, reflecting robust expansions for low-paid public sector workers, hous- P o pulatio n, millio n 18.3 in household and business spending. Af- ing and debt relief for low-income earners, ter providing a substantial addition to and infrastructure investment. Public debt GDP , current US$ billio n 172.9 GDP in the last two years, the contribution is expected to fall to 19 percent of GDP GDP per capita, current US$ 9465 a of net exports faded on account of surging (from 20.7 percent in 2018). Internatio nal po verty rate ($ 1.9) 0.0 imports. Private consumption expanded Although the government supported the a Lo wer middle-inco me po verty rate ($ 3.2) 0.4 by an estimated 5 percent in the first half banking sector through several bailouts, a Upper middle-inco me po verty rate ($ 5.5) 8.5 of 2019, supported by higher wages and the industry remains fragile. The central Gini index a 27.5 social benefits and increased bank lend- bank plans to conduct an asset quality Scho o l enro llment, primary (% gro ss) b 107.9 ing. Investment increased by 3.4 percent. review of banks in late 2019. The official- Life expectancy at birth, years b 73.0 On the supply side, growth was mainly ly-reported ratio of non-performing loans supported by non-tradable services while was 9.4 percent in June 2019. A contrac- Source: WDI, M acro Poverty Outlook, and official data. Notes: the contribution of mining remained mod- tion in corporate lending was more than (a) M ost recent value (2017), 2011 PPPs. erate compared to previous years. offset by increased lending to house- (b) M ost recent WDI value (2017) The current account deficit widened to holds, partly reflecting the government ’s 2.7 percent of GDP in January-June 2019 program of providing subsidized loans from 1.8 percent a year earlier, as higher to households. Real GDP expanded by 4.1 percent year domestic spending boosted imports and Twelve-month inflation increased to 5.4 on year in the first half of 2019 supported lower oil prices squeezed exports. Net percent in July from 4.8 percent in March by strengthening domestic consumption inflows of foreign direct investment, most- 2018, owing in part to higher food price ly in the mining sector, fell to 4.4 percent inflation and a recent uptick in import and investment. Inflation has increased of GDP from 5.6 percent a year earlier. prices. The decline in inflation earlier in slightly, spurred by rising food prices. With net capital inflows failing to offset the year towards the middle of the 4-6 The poverty rate is projected to remain the current account deficit, net interna- percent inflation target range led the cen- little changed. Consumer spending— tional reserves declined to $27.7 billion by tral bank to cut its policy rate by 25 basis the end of June (down from $30.9 billion points to 9 percent in mid-April. After backed by higher incomes due to real wage at end-2018). The weaker performance of surging in 2016 following the tenge deval- gains and expanded social benefits—is the current account put pressure on the uation, inflation has been following a likely to sustain economic activity and tenge, which fell to a historic low. downward trend over the past three years. support further modest poverty reduction. Higher revenues largely offset stepped-up A substantial increase in the minimum Faster improvements in living standards, spending to keep the deficit of the general wage at the beginning of the year and a government budget (excluding the NFRK, strengthening labor market resulted in a however, will require renewed vigor in the national oil fund) at about 0.3 percent 7.4 percent increase in real wages in the advancing structural reforms to reinvig- of GDP in the first half, little changed from first half of 2019. The unemployment rate orate productivity growth. a year earlier. Revenues increased on declined slightly to 4.8 percent. FIGURE 1 Kazakhstan / Real GDP growth and contributions FIGURE 2 Kazakhstan / Actual and projected poverty rates to real GDP growth and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 70 1000000 5 4 60 800000 3 50 40 600000 2 1 30 400000 0 20 200000 -1 10 -2 0 0 2015 2016 2017 2018 e 2019 f 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Consumption Investment International poverty rate Lower middle-income pov. rate Net exports Real GDP growth Upper middle-income pov. rate Real GDP pc Sources: Statistical Office of Kazakhstan and World Bank staff estimates. Source: World Bank. Notes: see table 2. MPO 58 Oct 19 92  ●   World Bank ECA Economic Update Fall 2019 Poverty rates have yet to return to their companies in global supply chains, will will likely remain close to the poverty line, previous lows following the 2014–16 de- weigh on economic performance. and any potential shocks to economic ac- cline in oil prices and the ensuing eco- The draft state budget for 2020 envisages a tivity could reverse prior gains. nomic slowdown. However, in the context deficit of 2.1 percent of GDP, relatively of rising wages and more generous social unchanged from the 2019 budget, before a assistance, the poverty rate is estimated to have continued to fall to 8.5 percent in steady decline in subsequent years. The budget includes additional spending on Risks and challenges 2018 (using the $5.5/day international social assistance, infrastructure, and subsi- poverty line), marking the second consec- dies to small and medium enterprises. The economy’s vulnerability to external utive year of poverty reduction. Increased spending will need to be offset shocks remains the major source of risk to by higher revenues. The authorities plan medium-term GDP growth and poverty to start reducing the non -oil fiscal deficit reduction. Growth could weaken signifi- Outlook in 2020, with a goal of reducing it to about 5.4 percent of GDP by 2022. cantly if the ongoing trade war between China and the United States intensifies; an Lower oil prices and higher domestic de- intensification could trigger a substantial Economic activity is estimated to have mand for imports are expected to keep the global economic slowdown (or recession), slowed modestly in 2019 on account of current account in modest deficit over the affecting manufacturing and goods trade softer exports (including hydrocarbons). medium term. dynamics, depressing global commodity Economic growth will likely slow further Inflation is likely to stabilize around its prices, and reducing external demand for in 2020, reflecting the impact of stagnant current level. However, rising domestic Kazakhstan’s exports. oil production and sluggish demand in price pressures and potential tenge volatil- Economic prospects are under threat from Kazakhstan’s main trading partners, as ity may strengthen inflation expectations domestic shocks and limited progress in well as the diminishing effect of the fiscal and fuel price increases. To help keep in- advancing reforms to expand the economy’s stimulus on domestic demand. flation within its target band and help productive potential. The lack of a dynamic Household spending and investment effectively steer inflation expectations, the private sector, market capture by large SOEs, will drive demand, although to a lesser central bank plans to strengthen the inter- and banks that are not lending to medium- extent than in previous years. On the est-rate transmission channel further. and small-sized corporates present high supply side, growth is expected to be The policy actions to support socially vul- downside risks to the economy. Renewed supported by non -tradable services. nerable groups, along with solid job crea- vigor in advancing structural reforms, there- Weak manufacturing output, owing to tion, are expected to help bring the pov- fore, will be imperative to boosting produc- lackluster foreign direct investment and erty rate down to near 8 percent by 2021. tivity and attracting much-needed foreign the limited participation of domestic A significant portion of the population investment in the non-oil economy. TABLE 2 Kazakhstan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 1.1 4.1 4.1 3.9 3.5 3.7 Private Consumption 1.2 1.5 5.3 4.9 4.4 4.5 Government Consumption 2.3 1.9 -14.0 8.6 2.9 3.1 Gross Fixed Capital Investment 3.0 4.0 4.6 3.3 3.6 4.2 Exports, Goods and Services -4.5 6.4 11.5 0.8 1.0 1.5 Imports, Goods and Services -2.0 -1.4 3.2 4.4 4.1 4.3 Real GDP growth, at constant factor prices 1.2 3.9 4.1 3.8 3.6 3.8 Agriculture 5.4 3.2 3.2 3.5 3.3 3.4 Industry 1.7 6.3 4.1 1.1 1.7 1.7 Services 0.5 2.5 4.2 5.5 4.8 5.1 Inflation (Consumer Price Index) 14.6 7.4 6.2 5.3 5.4 5.3 Current Account Balance (% of GDP) -5.9 -3.1 0.0 -1.4 -1.1 -0.4 Net Foreign Direct Investment (% of GDP) 10.0 2.3 2.8 2.1 2.5 2.1 Fiscal Balance (% of GDP) -5.5 -4.5 2.7 0.5 0.2 0.1 Debt (% of GDP) 19.6 20.1 20.7 19.0 18.9 19.2 Primary Balance (% of GDP) -4.4 -3.6 3.6 1.5 1.1 0.9 International poverty rate ($1.9 in 2011 PPP) a,b 0.0 0.0 0.0 0.0 0.0 0.0 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 0.7 0.4 0.4 0.3 0.3 0.3 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 12.2 8.6 8.5 8.4 8.3 8.2 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 1-HB S and 2017-HB S. A ctual data: 2017. No wcast: 2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using annualized elasticity (2011-2017) with pass-thro ugh = 1based o n GDP per capita in co nstant LCU. MPO 59 Oct 19 Selected Country Pages ●  93 capital budget, including projects financed KOSOVO Recent developments by international financial institutions and privatization proceeds. Capital spending on infrastructure is expected to accelerate Growth reached 4.1 percent in Q1 2019 towards the end of the year financed by and is expected to remain at 4 percent by the privatization proceeds and the fiscal end 2019, driven by higher public and deficit will reach 2.9 percent by end 2019. Table 1 2018 private consumption, strong services ex- Moreover, since amendments to the law P o pulatio n, millio n 1.8 ports, and higher investment. Higher that caps war veterans’ benefit spending GDP , current US$ billio n 7.9 wages and social spending, remittances at 0.7 percent of GDP were not imple- GDP per capita, current US$ 4312 growth, and increasing credit to house- mented in 2019, these benefits will exceed a Life expectancy at birth, years 71.9 holds are expected to continue to promote the amount budgeted. The overall fiscal Source: WDI, M acro Poverty Outlook, and official data. private consumption, which will add 2.7 balance according to the fiscal rule defini- Notes: percentage points (pp) to growth in 2019. tion will be below the deficit ceiling of 2 (a) M ost recent WDI value (2017). The contribution of investment to growth percent of GDP, as it excludes PAK- will be limited at 1.1 pp, as the late ap- financed (privatization proceeds) capital proval of the budget law in 2019 delayed spending and investment clause. Public the execution of investment plans, and and publicly guaranteed debt is expected upcoming elections will likely postpone that 17.7 percent of GDP by end 2019. capital investment. Net exports will sub- Net foreign direct investment (FDI) and tract 1.4 pp from real GDP growth, despite remittances continue to finance the cur- the strong growth in services exports. On rent account deficit (CAD), expected at Growth is expected at 4 percent in 2019. the production side, services are expected 8.7 percent of GDP, due to under execu- to be the main engine of growth, followed tion of the capital budget. Net FDI in- The fiscal deficit should reach 2.9 percent by industry. creased by 50 percent in the first half of of GDP, but in line with fiscal rules. Consumer price inflation accelerated 2019 compared to the same period last The outlook is positive, with a projected during the first part of the year but start- year. However, most FDI (83 percent) growth rate of 4.2 percent for 2020-2021. ed to ease, reaching 2.7 percent y -o-y at flows into in real estate and construction end August 2019. The main drivers of (12 percent) sectors. The main origin of Fiscal risks are rising due to uncertainty price increases are food, followed by al- FDI is Germany, Switzerland and the about the cost of the law on public sala- coholic drinks and tobacco. The increase United States. Net remittances grew by ries, which could reverse Kosovo’s track in import prices contributed to the in- 8.1 percent in the first half of 2019, com- record of prudent headline fiscal policy, crease in consumer price inflation, with pared to the same period last year. if not properly regulated. To prevent this, an average y-o-y increase of 4.5 percent Goods exports increased by 10.5 percent in the first quarter. Tariffs imposed on up until July 2019, compared to the same employment and allowances could be imports from Serbia and Bosnia and Her- period last year. While net service exports contained through 2020 budget. zegovina might have contributed to the increased by 17.3 percent, mainly driven rise in consumer prices. by travel by the Kosovo diaspora. At the The budget was balanced at end August same time, goods imports grew by 4.9 due to significant underspending of the percent during the same period. FIGURE 1 Kosovo / General government revenues, expendi- FIGURE 2 Kosovo / Actual and projected poverty rates and tures and balance real GDP per capita Percent Percent Poverty rate (%) Real Private Consumption per capita (LCU constant) 31 -2.5 60 4000 30 3500 50 -2.7 29 3000 40 2500 28 -2.9 30 2000 27 -3.1 1500 26 20 1000 25 10 -3.3 500 24 0 0 23 -3.5 2006 2008 2010 2012 2014 2016 2018 2020 2018 2019 2020 2021 International poverty rate Lower middle-income pov. rate Public revenues Public expenditure Budget balance (rhs) Upper middle-income pov. rate Real priv. cons. pc Sources: Ministry of finance and World Bank staff projections. Source: World Bank. Notes: see table 2. MPO 60 Oct 19 94  ●   World Bank ECA Economic Update Fall 2019 Labor force participation continues to be government, lower than projected IFI chronically low at 39.9 percent of the working age population (WAP) in Q2 Outlook investment, and weaker growth in the EU. Moreover, the expansion of public 2019. The employment rate has been investment as a driver of growth in 2019 largely constant since 2017, at 28 -29 per- Kosovo’s economic growth is projected at –2021 may suffer from capacity con- cent of the WAP, suggesting that robust 4.2 percent in the medium-term, driven straints in the implementation of the growth is not translating into more jobs. mainly by public investment, services investment program. Unemployment remains high at 25.3 per- exports and consumption. Public invest- Fiscal risks need to be contained. The law cent of the labor force (LF) in Q2 2019 ment will continue to be financed through on public salaries, if not regulated through (the annual average was 29.5 percent in privatization proceedings and IFI- prudent secondary legislation and 2020 2018), and its recent movements follow financed infrastructure projects. Private budget to control employment and allow- closely the evolution of LF participation investment should also pick up as private ances, could pose risks for macro-fiscal rather than employment. Youth unem- credit is stimulated by the partial credit sustainability through higher fiscal deficits ployment affects more than half of the guarantee fund for SMEs. or can lead to a deterioration in the com- active youth and fluctuates between 50 - FDI inflows, including in the energy sec- position of public spending. As the law 55 percent since 2012, with no significant tor, and remittances are expected to con- will only come into force at end 2019, the downward trend. tinue to finance CAD. full impact will be felt in 2020. Higher The poverty rate (measured at US$ 5.5/ The stagnation of the labor market indica- wages in the public sector can also put day, 2011 PPP) decreased from 21.6 per- tors combined with cost of living pres- pressure on private sector wages reducing cent in 2017 to an estimated 19.6 percent sures due to rising food prices and up- export competitiveness. Additional fiscal in 2018. Analysis of poverty drivers be- ward trend in urban inequality are likely risks might arise from untargeted social tween 2012-2017 suggests that higher to slow the pace of poverty reduction go- protection spending. earnings contributed the most to poverty ing forward. The slower pace of poverty reduction, reduction, since labor is the primary high incidence and long duration of un- source of income for the poor. Rural areas employment continue to be major chal- saw greater progress. Despite weak em- ployment gains, net job creation has fa- Risks and challenges lenges. The level of unemployment is par- ticularly worrisome among the young and vored low-skilled sectors benefitting rela- low-skilled workers, that tend to be over tively more workers at the bottom of the The positive outlook is vulnerable to overrepresented among the poor. income distribution. potential delays in the formation of the TABLE 2 Kosovo / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 4.1 4.2 3.8 4.0 4.2 4.1 Private Consumption 6.6 1.8 4.8 3.2 3.4 3.6 Government Consumption -6.3 -0.6 8.9 11.6 3.6 2.6 Gross Fixed Capital Investment 7.3 5.7 6.1 4.0 7.3 5.5 Exports, Goods and Services 2.4 16.8 3.8 4.2 4.4 5.5 Imports, Goods and Services 6.4 5.4 9.0 4.5 4.4 4.3 Inflation (Consumer Price Index) 0.3 1.5 1.1 2.8 1.8 1.5 Current Account Balance (% of GDP) -7.9 -6.0 -8.2 -8.7 -8.3 -7.4 Net Foreign Direct Investment (% of GDP) 2.9 3.3 2.7 3.8 4.1 4.2 Fiscal Balance (% of GDP) -1.4 -1.2 -3.0 -2.9 -3.2 -3.0 Debt (% of GDP) 14.0 15.5 16.3 17.1 17.2 18.8 Primary Balance (% of GDP) -1.0 -0.9 -2.7 -2.5 -2.9 -2.7 International poverty rate ($1.9 in 2011 PPP) a,b 0.6 0.2 0.2 0.2 0.2 0.2 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 3.1 2.6 2.4 2.2 1.9 1.8 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 20.7 21.6 19.6 18.5 17.1 15.9 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 7-HB S. A ctual data: 2017. No wcast: 2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2017) with pass-thro ugh = 0.7 based o n private co nsumptio n per capita in co nstant LCU. MPO 61 Oct 19 Selected Country Pages ●  95 gold shipments abroad (which were up KYRGYZ Recent developments by 60 percent year on year). Imports con- tracted by almost 7 percent, driven by declines in imports of food and textile REPUBLIC A surge in gold production boosted real GDP growth to 6.9 percent year on year in products. The deficit was mainly fi- nanced by foreign borrowing by compa- January-July 2019 (compared to a contrac- nies and banks. tion of 0.1 percent in the year-earlier peri- The budget deficit declined to 0.3 percent Table 1 2018 od). Gold production rose by 50 percent of GDP in January-July 2019 (from 1.4 P o pulatio n, millio n 6.3 year on year in the first half, partly reflect- percent a year earlier) as both current and GDP , current US$ billio n 8.1 ing a low base of comparison (gold pro- capital spending fell as a percentage of GDP per capita, current US$ 1287 duction contracted by 25.7 percent in the GDP. Lower tax revenues reduced total a Internatio nal po verty rate ($ 1.9) 1.5 same period of 2018). Non-gold GDP revenues in spite of slightly higher non- Lo wer middle-inco me po verty rate ($ 3.2) a 19.6 growth was moderate at 3.1 percent driv- tax revenues and grant support. Upper middle-inco me po verty rate ($ 5.5) a 66.4 en by construction and the services sector. Central bank interventions have main- Gini index a 27.3 Investment and exports drove growth on tained the stability of the som against the Scho o l enro llment, primary (% gro ss) b 107.9 the demand side. Growth was also sup- U.S. dollar since November 2018. Since the Life expectancy at birth, years b 71.2 ported by looser monetary policy in re- beginning of 2019, the central bank has sponse to subdued inflation. Credit sold almost $87 million on a net basis Source: WDI, M acro Poverty Outlook, and official data. Notes: growth was buoyant, rising by 17 percent (compared to net sales of $31.7 million a (a) M ost recent value (2017), 2011 PPPs. year on year in June 2019. Furthermore, year earlier). The real effective exchange (b) M ost recent WDI value (2017) financing from the Russian-Kyrgyz Devel- rate has depreciated slightly since the start opment Fund, which provides support to of the year, mirroring the nominal effec- the real sector, rose by 16 percent during tive exchange rate. Gross international Real GDP grew by almost 7 percent year the first half of the year. reserves were broadly unchanged at $2.1 Annual inflation stood at 0.9 percent in billion in July 2019, the equivalent of four on year in the first half of 2019, driven by a June 2019, up from 0.5 percent at end- months of goods and services imports. surge in gold production and exports and 2018, mainly driven by seasonal increases Banking sector performance remains ro- supported by monetary easing. The growth for vegetables and construction materials. bust, with key prudential indicators well rate will ease to 4.2 percent for the year as a With inflation running well below the above their relevant benchmarks. The whole as gold output slows in the second half central bank target range of 5-7 percent, capital adequacy ratio stood at 23.6 per- the central bank cut its policy rate twice cent at end-July 2019, almost twice the of 2019. Growth is projected to slow in 2020 (in February and May) by 25 basis points minimum regulatory requirement of 12 –21 as gold output contracts. The poverty to 4.25 percent. percent. However, banks remain vulnera- rate will ease modestly. Risks to the outlook The current account deficit shrank to 1.5 ble to interest rate and concentration risks. include a slowdown in regional growth—in percent of GDP in the first quarter of Higher real incomes are supporting 2019 from 6 percent a year earlier owing household consumption. When combined part reflecting global trade tensions and to higher exports and increased income with falling food prices, higher real in- weaker commodity demand—and failure to and current transfers. Exports rose by comes have positively affected the pur- implement fiscal consolidation measures. nearly 15 percent mainly as a result of chasing power of households at the FIGURE 1 Kyrgyz Republic / Real GDP growth and contri- FIGURE 2 Kyrgyz Republic / Actual and projected poverty butions to real GDP growth rates and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 100 10000 6 5 80 8000 4 3 60 6000 2 40 4000 1 0 20 2000 -1 2014 2015 2016 2017 2018 2019 2020 2021 0 0 Agriculture Industry w/out gold sector 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Gold sector Construction International poverty rate Lower middle-income pov. rate Services GDP growth Upper middle-income pov. rate Real GDP pc Sources: Kyrgyz authorities; World Bank staff calculations. Source: World Bank. Notes: see table 2. MPO 62 Oct 19 96  ●   World Bank ECA Economic Update Fall 2019 bottom of the income distribution. The pov- increase in teachers’ wages and pension erty rate (measured at $3.2 per day in 2011 PPP terms) is estimated to have fallen from payments. Over the medium term, infla- tion will likely remain below the central Risks and challenges 19.6 percent in 2017 to 17.7 percent in 2018. bank’s target range of 5-7 percent, assum- Pensions and public social transfers are also ing exchange rate stability and no major The Kyrgyz Republic ’s growth perfor- believed to have supported consumption by shocks to global food prices. While re- mance will remain vulnerable to devel- the poor, but to a lesser extent owing to the mittance inflows are expected to rise fur- opments in its major trading partners. A limited reach of safety net programs and the ther, the current account deficit is project- slowdown in Russia, as U.S. sanctions modest transfer amounts. ed to remain elevated at about 7 percent of intensify, or in Kazakhstan, could nega- GDP, reflecting structural constraints to tively impact the baseline scenario exports and the significant import content through remittances and trade. Fluctua- Outlook of public investment. The authorities are committed to reducing tions in commodity prices could have a mixed impact on export receipts and the the fiscal deficit to 3 percent of GDP by import bill. Unless accompanied by ro- Full-year GDP growth is projected at 4.2 2020 and keeping it below 3 percent there- bust productivity growth, a sustained percent in 2019 as gold production growth after. In 2019–21, tax revenues are project- real effective appreciation of the som slows in the second half (due to a high ed to rise, reflecting planned policy will lead to a deterioration of Kyrgyz base effect). Non-gold GDP growth is pro- measures to expand the tax base by ad- competitiveness. jected at 3.9 percent. This scenario reflects dressing constraints to private sector The adoption of Eurasian Economic Union recently-reduced GDP growth projections growth, reducing tax exemptions, and standards by more local producers and for the Russian Federation (to 1 percent raising excise tax rates. Meanwhile, ex- the improvement in the business environ- from 1.4 percent). GDP growth in the Kyr- penditures are projected to decline follow- ment remain a significant challenge and a gyz Republic will be supported by contin- ing efforts to streamline non-priority pur- profound opportunity. Improving the ued growth in remittance inflows, a looser chases, reduce the wage bill as a share of Kyrgyz Republic’s connectedness with monetary policy, and rising public invest- GDP, and strengthen public procurement. economies in the region will be the foun- ment. Unless the authorities pursue rigor- Against this backdrop, modest progress dation for stronger growth in exports, ous structural reforms that expand the is expected in poverty reduction and output, and jobs. economy’s productive capacity, GDP inequality in the near term, especially growth is likely to slow to an average of given the weak transmission between 3.7 percent over the medium term as gold gold output growth and employment. production declines. The poverty rate is projected to fall only Twelve-month inflation is projected to slightly to 17.3 percent in 2019 and 16.9 increase to 3 percent in 2019, fueled by an percent in 2020. TABLE 2 Kyrgyz Republic / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 4.3 4.7 3.5 4.2 3.7 3.7 Private Consumption 3.2 5.2 3.7 3.6 3.3 3.3 Government Consumption 1.5 1.3 -0.1 0.3 2.7 -1.0 Gross Fixed Capital Investment 7.9 9.2 3.5 9.8 6.6 7.6 Exports, Goods and Services -3.8 6.1 -1.8 2.6 3.1 3.8 Imports, Goods and Services -1.1 7.4 6.7 3.9 4.6 5.1 Real GDP growth, at constant factor prices 3.8 3.8 3.1 4.2 3.7 3.7 Agriculture 2.9 2.2 2.7 2.5 2.5 2.5 Industry 7.1 8.6 6.2 7.2 5.3 6.0 Services 3.3 3.3 2.1 4.2 3.9 3.7 Inflation (Consumer Price Index) 0.4 3.2 1.5 1.5 3.0 3.0 Current Account Balance (% of GDP) -11.6 -6.8 -15.1 -8.3 -7.6 -6.9 Net Foreign Direct Investment (% of GDP) 8.5 -1.0 5.7 5.7 6.1 6.2 Fiscal Balance (% of GDP) -6.3 -4.6 -1.6 -2.3 -3.0 -2.9 Debt (% of GDP) 59.1 58.8 56.0 56.3 55.8 55.5 Primary Balance (% of GDP) -5.2 -3.5 -0.5 -1.2 -1.6 -1.2 International poverty rate ($1.9 in 2011 PPP) a,b 1.4 1.5 1.4 1.2 1.1 1.0 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 19.1 19.6 17.7 17.3 16.9 16.4 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 67.2 66.4 65.8 65.0 64.2 63.3 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 1-KIHS and 201 7-KIHS. A ctual data: 2017. No wcast: 2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using average elasticity (2011-2017) with pass-thro ugh = 0.7 based o n GDP per capita in co nstant LCU. MPO 63 Oct 19 Selected Country Pages ●  97 reserve assets by the NBM and by FDIs, MOLDOVA Recent developments which increased by 18 percent, amounting to 4.9 percent of GDP. By August 2019, foreign reserves decreased to USD2.9 bil- Moldova’s GDP increased by 4.4 percent lion (covering more than 5 months of im- in Q1 2019. Robust increase in wages (14 ports), after reaching a record high of Table 1 2018 percent yoy) and pensions, public invest- USD3.1 billion in November 2018. In P o pulatio n, millio n 3.5 ment and credit growth spurred private March 2019, external debt decreased to GDP , current US$ billio n 11.4 consumption and investment, together 62.5 percent of GDP. Yet, from July the GDP per capita, current US$ 3227 contributing 3.9 percentage points (pp) to resumed external assistance will help re- Lo wer middle-inco me po verty rate ($ 3.2) a 1.1 overall growth. Due to the electoral cycle, built reserves and allow for orderly budg- Upper middle-inco me po verty rate ($ 5.5) a 16.3 public consumption added another 0.5 pp et financing. Gini index a 25.9 to growth. Net exports also contributed to The labor market improved, with unem- Scho o l enro llment, primary (% gro ss) b 91.3 growth (1 pp) due to robust agricultural ployment rate down to 3 percent in 2018, b 71.7 exports. On the production side, retail and boosting activity and employment rates, Life expectancy at birth, years wholesale trade together with the con- particularly in rural areas. Strong agri- Source: WDI, M acro Poverty Outlook, and official data. struction sector were the most buoyant, cultural performance was reflected in a Notes: (a) M ost recent value (2017), 2011 PPPs. contributing 1.2 and 0.9 pp respectively to higher pace of disposable income growth (b) M ost recent WDI value (2017). growth. The remaining growth came from among farmers and agricultural sector industry and ICT. workers. Disposable income growth in With higher food prices, inflationary pres- the bottom 2 quintiles outpaced that of sures are on the rise. Supported by a higher income households, leading to a weaker Leu and robust domestic demand, projected decline in poverty rates in Despite strengthened growth in early inflation grew by 4 percent in July 2019. 2018. Yet, low participation rate remains 2019 due to election-related spending, The base rate was increased for the second a challenge. time this year to 7.5 percent and the re- The fiscal deficit remained contained de- growth is expected to moderate to 3.4 per- serve requirement rate remains at a record spite a pre-election spending spree. By cent by year-end. After months of political high of 42.5 percent. Nonetheless, credit July 2019, revenues increased by 6.6 per- instability, the new government managed activity intensified increasing by 17.1 per- cent yoy due to a rise in VAT (7.9 percent to unlock external assistance to close the cent in Q2 2019, reducing the excessive yoy) and social contributions (8.2 percent). liquidity in the system after the banking Given the excessive increase in non- financing gap for orderly budget execu- fraud. In June 2019, the National Bank of financial assets (37.1 percent), public sec- tion. Accelerating reforms to improve Moldova (NBM) completed the process of tor wages and social spending (18.7 and governance, maintain fiscal and financial transferring the largest three banks to fit 16.4 percent), expenditures increased by sector stability and boost competitiveness and proper shareholders. 16.9 percent, resulting in a 1-percent of remain a challenge for the current coali- Due to lower imports, the current account GDP deficit. With lower external borrow- deficit (CAD) decreased by 0.6 percentage ing and resilient growth, the public and tion government. A slow poverty decline points to a still-high 10.1 percent of GDP publicly guaranteed debt decreased to starting in 2018 is expected to continue in Q1 2019. Contrary to 2018, the CAD 27.8 percent by June 2019, from 30.5 per- over the forecast period. was mainly financed by the net sale of cent of GDP in 2018. FIGURE 1 Moldova / Actual and projected real GDP growth FIGURE 2 Moldova / Actual and projected poverty rates and and current account balance real private consumption per capita Percent Percent of GDP Poverty rate (%) Real private consumption per capita (constant LCU) 10 0 80 35000 70 30000 8 -2 60 25000 6 -4 50 20000 40 4 -6 15000 30 2 -8 10000 20 0 -10 10 5000 0 0 -2 -12 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Lower middle-income pov. rate Upper middle-income pov. rate Real GDP, % change (lhs) Current account balance (rhs) Real priv. cons. pc Sources: World Bank and national statistics. Source: World Bank. Notes: see table 2. MPO 64 Oct 19 98  ●   World Bank ECA Economic Update Fall 2019 second half of 2019. In the medium term, competition. The economy remains sus- Outlook on the back of moderate import prices, the inflation is expected to remain close to 5 ceptible to weather and external shocks, while persistent emigration weakens the percent inflation target. Poverty is project- country’s human capital. Faster credit growth, robust real wage ed to continue declining due to improving In the medium term, the fiscal position growth and strong export performance economic and labor market conditions, may deteriorate due to structural ineffi- will underpin growth in 2019. Yet, lower including continuing growth in disposa- ciencies in public spending and increasing remittances, higher inflation and the dis- ble incomes. burden from wages and social transfers. sipation of the fiscal stimuli introduced Increases in social spending and wages, as Deficit financing also constitutes a risk, as before elections will decelerate growth in well as lower tax revenues will widen the it heavily relies on external financial 2019 to 3.4 percent. Over the medium 2019 fiscal deficit to 2.7 percent of GDP, sources. The government may find it diffi- term, economic growth is expected to the new government’s fiscal package is cult and costlier to finance the planned average 3.6 percent. The recently adopted expected to stabilize revenues over the spending on the local market, with the fiscal consolidation package resumed medium term, although the deficit will be risk of crowding-out private sector credits. external assistance but will also lead to a higher than historical averages. This re- To reduce fiscal risks, further efforts are growth slowdown. In the medium term, quires renewed attention to strengthening needed to stabilize the financial sector and provided that the reform agenda will public finance management, tax collection, address loss-making state-owned compa- continue, consumer and business confi- as well as spending efficiency review. nies. While banking sector risks have sub- dence, together with a continued normali- sided, the accelerated growth of non -bank zation of financial conditions, will further credit organizations and insurance sector support private consumption and invest- ment. At the same time, the projected Risks and challenges could yield to accumulation of systemic risks in the financial sector due to current lower foreign demand, despite an expan- weaknesses in the regulatory and supervi- sion of activities in free economic zones, Despite the declared determination of the sory framework. will also contribute to a growth slow- new ruling coalition, major effort and Key long-term challenges to economic down, keeping the current account deficit political will are needed to accelerate growth include population ageing, large below historical values. reforms. Fighting corruption, strengthen- emigration flows, and low productivity. The increase in food prices along with the ing institutions and leveling the playfield Boosting productivity is the key solution expected adjustments in regulated prices, for all market participants, including for Moldova to achieve sustainable and the 2018 expansionary fiscal package through the elimination of price controls, growth, create jobs, and further reduce (tax cuts and wage increases), built up would unleash productivity, currently poverty. This requires concerted actions to inflationary pressures, likely pushing in- held back by weak performance of state - improve competitiveness and public sec- flation out of the target corridor in the owned companies and barriers to market tor efficiency. TABLE 2 Moldova / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 4.4 4.7 4.0 3.4 3.6 3.8 Private Consumption 2.9 5.3 3.8 2.1 2.8 3.5 Government Consumption 0.8 1.6 -0.1 0.9 0.1 0.2 Gross Fixed Capital Investment 1.0 11.3 14.0 8.7 7.6 8.3 Exports, Goods and Services 9.8 10.9 4.8 3.3 6.3 7.5 Imports, Goods and Services 2.8 11.0 8.9 3.1 5.1 6.7 Real GDP growth, at constant factor prices 5.0 4.2 4.1 3.4 3.6 3.8 Agriculture 18.4 8.6 1.9 1.2 2.1 2.4 Industry 0.7 3.8 8.1 5.2 5.3 5.4 Services 4.0 3.4 3.1 3.2 3.3 3.4 Inflation (Consumer Price Index) 6.4 6.6 3.8 4.7 4.5 5.0 Current Account Balance (% of GDP) -3.5 -5.8 -10.4 -6.1 -6.3 -6.5 Net Foreign Direct Investment (% of GDP) 1.0 1.5 1.7 1.7 1.7 1.5 Fiscal Balance (% of GDP) -1.6 -0.6 -0.8 -2.7 -2.1 -1.8 Debt (% of GDP) 36.9 32.7 30.1 30.4 30.8 31.0 Primary Balance (% of GDP) -0.4 0.5 0.0 -1.7 -1.1 -0.8 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 1.3 1.1 0.9 0.7 0.7 0.5 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 16.4 16.3 14.7 13.2 12.3 11.0 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 7-HB S. A ctual data: 2017. No wcast: 2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2017) with pass-thro ugh = 0.7 based o n private co nsumptio n per capita in co nstant LCU. MPO 65 Oct 19 Selected Country Pages ●  99 mostly in construction, tourism, and MONTENEGRO Recent developments other services sectors. The survey -based unemployment rate declined to 14.3 per- cent in Q22019, down from 14.4 percent After reaching 4.9 percent in 2018, its fast- in Q12018. The youth unemployment est rate in a decade, economic growth rate fell from 23.9 to a historic low of Table 1 2018 slowed down in the first quarter of 2019 20.7 percent in the same period. Like- P o pulatio n, millio n 0.6 because of weaker investment and indus- wise, the survey -based participation and GDP , current US$ billio n 5.5 trial production. Supported by favorable employment rates reached new record GDP per capita, current US$ 8761 labor market developments, increased highs of 57.8 percent and 49.5 percent in Upper middle-inco me po verty rate ($ 5.5) a 4.8 lending, and booming tourism, private Q22019, respectively. Gini index a 31.9 consumption led growth by adding 4.5 Growth and labor market improvements Scho o l enro llment, primary (% gro ss) b 98.2 percentage points in the first quarter but reduced poverty (measured as consump- Life expectancy at birth, years b 77.3 delays in public projects weighed on total tion below the standardized middle- investment which added mere 0.2 percent income-country poverty line of $5.5/day Source: WDI, M acro Poverty Outlook, and official data. Notes: points to growth. The slowdown in invest- 2011PPP) from 8.7 percent in 2012 to an (a) M ost recent value (2014), 2011 PPPs. ment has reduced import growth which, estimated 4.7 percent in 2018, despite po- (b) M ost recent WDI value (2017) however, still outpaced solid growth of tential negative short-term impacts of fis- exports. As a result, net exports subtracted cal consolidation. 1 percentage point from growth in the first The financial sector has remained stable quarter. Recent economic activity indica- so far after the liquidation of two banks. tors are mixed. Retail trade grew 5.3 per- Deposits declined somewhat by 2.7 percent Growth in 2018 reached 4.9 percent, a 10- cent y-o-y by June and tourists overnight y-o-y by June while credits grew by 0.6 per- year high. Growth is expected to moderate stays were up by 12.5 percent y-o-y. At the cent y-o-y, driven by lending to households. same time, industrial production shrank The overall liquidity in the banking system as large public investment cycle phases by 12.2 percent y-o-y as unfavorable hy- remains stable, as reflected in a loan-to- out. Labor market developments remain drological conditions early in the year deposit ratio of 90 percent. Continued credit positive with rising employment, and hindered energy production. Manufactur- growth helped to reduce non-performing poverty is estimated to continue declin- ing growth also declined by 3.5 percent y- loans to 5.3 percent of total loans in June. ing. Fiscal consolidation reduced the o-y, led by a contraction in the manufac- The current account deficit (CAD) re- turing of metals and minerals. The strong mained around 17 percent of GDP y-o-y in budget deficit, but less than projected due recent construction growth decelerated June. Solid growth of exports was led by to higher than planned current expendi- somewhat to 12.3 percent y-o-y, the lowest services, namely tourism and transporta- tures. Accelerating structural reforms since March 2016. Growth is projected to tion, while merchandise exports stalled and managing of public expenditures amount to 3 percent in 2019. because of lower aluminum and electricity Inflation eased in the first half of 2019 to exports. The solid export growth has been prudently are critical to sustain growth. 0.5 percent, driven by declining clothing, outweighed by volume of imports growth, Significant external and domestic risks transportation, alcohol, and tobacco prices. driven by electricity, minerals, and import surround the otherwise positive outlook. Supported by buoyant economic activity, of medical products. Income accounts employment has risen steadily since 2018, moderated due to interest and dividends FIGURE 1 Montenegro / Real GDP growth and contributions FIGURE 2 Montenegro / Actual and projected poverty rates to real GDP growth and real private consumption per capita Percent, percentage points Poverty rate (%) Real Private Consumption per capita (LCU constant) 20 12 5000 15 4500 10 4000 10 3500 8 5 3000 0 6 2500 -5 2000 4 1500 -10 1000 -15 2 500 2014 2015 2016 2017 2018 2019f 2020f 2021f 0 0 Final consumption Gross fixed capital formation 2005 2007 2009 2011 2013 2015 2017 2019 2021 Change in inventories Net exports GDP growth Upper middle-income pov. rate Real priv. cons. pc Sources: MONSTAT, World Bank. Source: World Bank. Notes: see table 2. MPO 66 Oct 19 100  ●   World Bank ECA Economic Update Fall 2019 payments. Net FDI picked up to 8.3 percent external environment pose a risk to the of GDP, providing around half of the CAD financing, the rest being covered by net otherwise positive outlook for the econ- omy, which is expected to grow by an Risks and challenges inflows of portfolio investment and loans. average of 2.8 percent over 2019 -2021. Fiscal consolidation helped reduce the The phasing out of an investment A stronger than considered overall glob- fiscal deficit from 5.7 percent in 2017 to 4.1 boom, which has driven growth in the al slowdown and the associated uncer- percent in 2018. The strong recent econom- past three years, is expected to continue tainties would weigh on growth which ic activity supported high revenue growth to slow growth somewhat from 3 per- could limit the scope for robust labor of 8 percent y-o-y by June 2019. Low capi- cent in 2019 to 2.8 and 2.7 percent in market and welfare improvements. On tal budget execution, which was just below 2020 and 2021, respectively. The com- the other hand, the beginning of the con- 50 percent, also helped to reduce the fiscal pletion of large public infrastructure struction of the remaining phases of the deficit. But higher-than-planned current projects will also reduce current ac- Bar-Boljare highway within the forecast spending because of delays in public ad- count imbalances and the fiscal deficit, period would support growth but, at the ministration and social sector reforms led which is expected to turn to surplus in same time, may compromise the fiscal to total expenditure growth of 3.7 percent. 2021. As a result, public debt and public consolidation. A financing through PPPs, The high current spending delays the goal and publicly guaranteed debt are ex- for example, can imply high contingent of balancing the budget. pected to decline to 62.3 percent and liabilities which would increase the level Against the backdrop of the benign cur- 66.6 percent of GDP in 2021, respective- of public and publicly guaranteed debt rent financial market conditions, the gov- ly. Private investment is expected to relative to the projections. On the other ernment plans to issue Eurobonds in 2019 remain at a high level, mostly driven by hand, the realization of the airport con- to service debt coming due in 2020 and to the energy and tourism sectors. Con- cessions within the forecast period improve the government debt maturity sumption is expected to grow at around would result in additional, one -time rev- profile. The Eurobond is projected to push 3 percent annually by 2020, supported enues. Potential remaining vulnera bili- public debt to 78.6 percent and public and by positive labor market developments. ties in the financial sector stemming publicly guaranteed debt to an estimated Exports are expected to strengthen be- from ailing second -tier banks can also 83.3 percent in 2019. cause of new energy and tourism capac- bear downside economic risks. With ities w hich may be (partially) offset by a uncertain global prospects and with lim- faster slowdown in external demand ited fiscal space, it is an imperative for Outlook from the EU. Subject to improvements in private sector Montenegro to remain fully committed to fiscal consolidation, to improve gov- employment and earnings, poverty is ex- ernance, and to accelerate the implemen- Falling business confidence and the pected to decline to an estimated 4.5 per- tation of structural reforms. overall uncertainty stemming from the cent in 2019. TABLE 2 Montenegro / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 2.9 4.7 4.9 3.0 2.8 2.7 Private Consumption 5.4 3.9 4.5 3.3 2.8 2.9 Government Consumption 0.8 -1.4 2.5 0.1 -0.2 -0.3 Gross Fixed Capital Investment 38.4 18.7 14.8 3.9 -0.8 -4.4 Exports, Goods and Services 5.9 1.8 9.5 4.3 3.9 4.0 Imports, Goods and Services 15.3 8.4 9.3 4.2 1.4 -0.1 Real GDP growth, at constant factor prices 3.0 4.8 4.9 3.0 2.8 2.7 Agriculture 3.9 -3.1 0.0 0.1 0.4 0.5 Industry 11.5 9.7 14.0 5.0 3.0 1.8 Services 0.6 4.4 2.7 2.7 3.1 3.3 Inflation (Consumer Price Index) -0.3 2.4 2.6 1.0 1.6 1.8 Current Account Balance (% of GDP) -16.2 -16.1 -17.2 -17.4 -15.3 -11.9 Net Foreign Direct Investment (% of GDP) 9.4 11.3 7.0 8.0 8.0 8.0 Fiscal Balance (% of GDP) -2.8 -5.7 -4.1 -3.2 -1.0 1.5 Debt (% of GDP) 64.4 64.2 70.8 78.6 71.2 62.3 Primary Balance (% of GDP) -0.7 -3.3 -1.9 -1.1 1.1 3.5 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 4.2 4.4 4.7 4.5 4.3 4.2 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 2009-HB S and 201 4-HB S. A ctual data: 2014. No wcast: 2015-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using po int-to -po int elasticity (2009-2014) with pass-thro ugh = 0.4 based o n private co nsumptio n per capita in co nstant LCU, with estimated impact o f fiscal co nso lidatio n. MPO 67 Oct 19 Selected Country Pages ●  101 wages for public services introduced in NORTH Recent developments early 2019. Using the US$5.5/day (2011 PPP) poverty line, poverty is projected to have fallen to below 21 percent in 2019, MACEDONIA Economic growth strengthened in the first half of 2019 to 3.6 percent, its fastest rate continuing a decreasing trend present since 2009. Using the $11/day (2005 PPP) since 2016. Wholesale and retail trade line, the middle class increased from were the main driver of growth, account- approximately 30 percent in 2009 to Table 1 2018 ing for 1.5 pp. Agriculture contributed 0.5 about 41 percent in 2015. P o pulatio n, millio n 2.1 pp contributions, while industry contrib- Monetary policy was further relaxed. In GDP , current US$ billio n 12.7 uted 0.4 pp despite a slowdown in manu- early 2019, the central bank lowered the GDP per capita, current US$ 6079 facturing, evident in Q2 2019. Construc- key interest rate by 25 bps to a historic low Internatio nal po verty rate ($ 1.9) a 5.3 tion also added 0.1 pp, but this is expected of 2.25 percent, based on favorable devel- Lo wer middle-inco me po verty rate ($ 3.2) a 9.8 to be temporary as surveys for the sector opments in the foreign exchange market, Upper middle-inco me po verty rate ($ 5.5) a 23.2 point to positive expectations from com- moderate inflation, continued solid depos- a 35.6 panies in terms of contracts, prices and it growth, and a negative output gap. Gini index b employment. On the demand side, the Consumer prices increased by 1.2 percent Life expectancy at birth, years 75.9 main contributors to growth were invest- y-o-y, largely due to higher food prices. Source: WDI, M acro Poverty Outlook, and official data. ment as well as private consumption, the Credit continued its strong growth in Notes: (a) M ost recent value (2015), 2011 PPPs. latter spurred by rising wages, pensions, 2019, helped by a rise in corporate lend- (b) M ost recent WDI value (2017). and household lending. Net exports sub- ing. Overall, credit growth stood at 6.8 tracted from growth, as rising exports did percent y-o-y in July 2019, with corporate not compensate for the growing imports credit growth at 4.3 percent, led by longer - of capital and consumer goods. Growth term investment lending. Non-performing Growth is firming up in 2019, expected to for 2019 is expected to reach 3.1 percent, loans increased somewhat, but remained rising from 2.7 percent in 2018. low at 5.4 percent, with corporate NPLs reach 3.1 percent, driven by rising invest- Employment growth accelerated to 5.2 standing at 8.4 percent. Deposits contin- ment and consumption. Unemployment percent y -o-y in H1 2019, compared to ued increasing at 10.5 percent y-o-y. fell to a historical low due to employment an average of 2.1 percent in 2018. Most Despite rise in tax and contribution rise. Public debt and deficit are projected of the new jobs created were in manufac- rates, fiscal deficit widened in 2019. turing, transport and storage, adminis- Government revenues increased by 6.1 to widen in 2019, as current spending trative services and entertainment. The percent y-o-y in the first half of 2019, on rose due to higher public sector wages, employment rate improved to 47.4 per- the back of social contributions (higher pensions and subsidies. Increasing wages cent–-up by 2.7 pp on an annual basis. rates introduced in January), personal beyond productivity is putting pressure Unemployment declined to a historic income tax (higher rate introduced, ex- on the cost competitiveness of the econo- low of 17.7 percent in H1 2019. The real emptions reduced) and excises net wages increased by 2 percent y -o-y (increased tobacco and fuel excises). my. Further reforms are needed to address by end June 2019, partly reflecting the However, spending went up by 8.5 per- the declining human capital, judiciary, increases in the minimum wage in July cent y-o-y due to rising pensions, declining productivity and rising migration. 2018 and April 2019, as well as higher wages, subsidies (including for social FIGURE 1 North Macedonia / Real GDP growth and contri- FIGURE 2 North Macedonia / Actual and projected poverty butions to real GDP growth rates and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (LCU constant) 12 40 250000 10 35 8 200000 6 30 4 25 150000 2 0 20 -2 15 100000 -4 -6 10 50000 -8 5 -10 2011 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 0 0 2009 2011 2013 2015 2017 2019 2021 Residual item Net exports Change in inventories Gross fixed capital formation International poverty rate Lower middle-income pov. rate Final consumption GDP growth Upper middle-income pov. rate Real GDP pc Source: World Bank. Source: World Bank. Notes: see table 2. MPO 68 Oct 19 102  ●   World Bank ECA Economic Update Fall 2019 contribution payments to incentivize 3.2 percent of GDP for the full year. Exter- formalization of wages paid in cash, agriculture, and for a 15 -percent paid nal debt is projected to rise to above 78 percent of GDP, also due to rise in public Risks and challenges VAT refund to citizens upon submission sector external debt. of tax receipts to strengthen tax compli- While the Government introduced two ance) and health spending. Capital programs to fight informality (estimated spending, although rising, is still vastly under-executed. The revised 2019 deficit Outlook at 30-40 percent of GDP), the cost of these programs should not crowd out produc- is projected at 2.5 percent of GDP, in- tive spending or lead to fiscal imbalances. creasing from 1.1 percent in 2018 (with The macroeconomic outlook is moderately While these programs have been accom- the Public Enterprise for State Roads positive with annual average growth pro- modated within the 2019 planned deficit deficit it is estimated at 2.7 percent of jected at 3.4 percent through 2021. Invest- due to lower capital spending, for the me- GDP). Public and publicly guaranteed ment (including in the highway, and pri- dium term they should be offset with oth- (PPG) debt is expected to rise to 51 per- vate investment in energy and tourism) er spending or revenue measures. cent in 2019 from 48.5 percent in 2018, will be the main driver of growth. It will While these measures are intended to as the Government intensifies borrow- be supported by exports and personal tackle one of the key constrains of the ing to meet its obligations and guaran- consumption as employment picks up economy, they are unlikely to address the teed debt also increases as public invest- further and wages continue to grow, pro- issue if not accompanied by strengthening ments in roads accelerates. pelled partly by a higher minimum wage of the tax administration and inspection External imbalance widened marginally in that is expected to affect private sector efficiency along with further improve- early 2019, with the current account deficit employees. Moderate fiscal consolidation ments in public service delivery and the in H1 2019 at 1 percent of GDP (on a four is expected, with public debt stabilizing legal framework for businesses. quarter rolling bases). The continued solid over the medium term. Despite the pre-election year, further re- export performance of FDI-related indus- Poverty will likely continue decreasing forms are needed to address the challeng- tries like automobiles and electrical ma- given the expected real wage growth and es of low and declining human capital, chinery was supplemented by growth of the continuous improvement in the labor weak competition policy, judiciary, declin- exports in iron and steel, because of favor- market. If growth is equally distributed ing productivity and rising migration. able terms of trade, as well as furniture across all Macedonians, the share of the and tobacco. However, rising imports, population with an income below the resulted in a slight increase of the goods US$5.5/day will likely decrease to 18 per- trade deficit. FDIs in H1 2019 dropped as cent by 2021. The social assistance reform a result of repatriation of profits but are currently under implementation should expected to rebound in H2 and to reach favor poorer households. TABLE 2 North Macedonia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 2.8 0.2 2.7 3.1 3.2 3.3 Private Consumption 3.9 0.6 3.3 2.5 2.5 2.4 Government Consumption -4.9 -2.5 6.2 1.0 0.8 0.6 Gross Fixed Capital Investment -6.2 -8.7 -7.2 5.7 6.6 7.2 Exports, Goods and Services 9.1 8.1 15.3 8.0 8.0 8.2 Imports, Goods and Services 11.1 6.4 9.1 6.3 6.5 6.7 Real GDP growth, at constant factor prices 2.0 0.1 2.8 3.1 3.2 3.3 Agriculture -0.4 -13.5 -5.0 1.8 1.5 1.5 Industry -2.9 -1.0 2.2 5.5 5.9 6.4 Services 4.5 2.3 3.9 2.3 2.3 2.2 Inflation (Consumer Price Index) -0.2 1.3 1.4 1.6 1.8 2.0 Current Account Balance (% of GDP) -2.9 -0.8 -0.3 -0.7 -1.2 -1.0 Net Foreign Direct Investment (% of GDP) 3.3 1.8 5.8 3.2 3.7 4.0 Fiscal Balance (% of GDP) -3.8 -3.5 -1.7 -2.7 -3.4 -2.7 Debt (% of GDP) 48.7 47.7 48.4 51.1 52.4 52.2 Primary Balance (% of GDP) -2.6 -2.1 -0.5 -1.3 -2.1 -1.4 International poverty rate ($1.9 in 2011 PPP) a,b 5.2 5.2 5.0 4.8 4.6 4.4 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 9.7 9.7 9.3 9.2 8.9 8.7 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 21.6 21.6 20.8 20.5 18.9 17.9 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 5-SILC-C. A ctual data: 2015. No wcast: 2016-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2015) with pass-thro ugh = 0.87 based o n GDP per capita in co nstant LCU. MPO 69 Oct 19 Selected Country Pages ●  103 As Poland’s key trade partners experi- POLAND Recent developments enced economic slowdown, exports in- creased by 6.3 percent in 2018 (compared to 9.5 percent in 2017), resulting in a small Poland’s GDP grew by 5.1 percent in 2018, negative contribution of net exports to driven primarily by expanding domestic GDP growth. The current account balance Table 1 2018 consumption (4.5 percent growth) and returned to a deficit in 2018 as robust P o pulatio n, millio n 38.0 high investments (8.7 percent increase). household consumption, higher invest- GDP , current US$ billio n 585.5 Private consumption was fueled by a ments, and a slightly depreciated Polish GDP per capita, current US$ 15418 strong labor market, increases in average currency pushed up the volume and cost Internatio nal po verty rate ($ 1.9) a 0.4 salaries (by 5.3 percent) and social pro- of imports. Lo wer middle-inco me po verty rate ($ 3.2) a 0.8 grams such as “Family 500+”. Increased The labor market has further tightened, Upper middle-inco me po verty rate ($ 5.5) a 2.6 government investments substantially partly due to strong labor demand, poli- Gini index a 31.8 influenced by local elections held in 2018, cies that have affected the supply of labor b 77.9 higher absorption of EU funding and in- (lowered retirement age and “Family Life expectancy at birth, years flow of FDI have contributed to the accel- 500+” child benefits) and a decrease in the Source: WDI, M acro Poverty Outlook, and official data. eration of total investments. On the pro- size of the working age population, linked Notes: (a) M ost recent value (2015), 2011 PPPs. duction side, industry (5.6 percent to aging. This has contributed to a sharp (b) M ost recent WDI value (2016) growth), transportation (9.3 percent), and decline in the economically active popula- construction (17.1 percent) were the key tion (by approximately 0.35 million people drivers of growth, while agriculture sector since 2015) during a period of growing declined by 4.1 percent following the sum- demand for labor. Despite rising employ- mer drought. ment rates and more foreign workers, Despite growing public expenditures, the labor shortages affect business activity, as general government deficit for 2018 the job vacancy ratio increased in the re- Poland’s economy continued to perform amounted to 0.4 percent of GDP, while cent year by 0.2 pp to 1.2 percent. strongly in 2018. Real GDP growth Poland’s debt-to-GDP ratio decreased to Median household incomes rose by 5.7 reached 5.1 percent in 2018, driven by approximately 48.9 percent as budget rev- percent in 2017. Income gains were regis- enues exceeded government projections. tered throughout the distribution, and domestic consumption and pick up in Despite high consumption growth, con- faster growth at the bottom of the income investment. The pace of growth is ex- sumer prices rose by a modest 1.6 percent distribution due to employment and wage pected to subside in the coming years in in 2018, thanks to low core inflation of 0.7 gains contributed to a decline in the Gini the face of a tightening labor market and percent. The pass-through of higher ener- Coefficient of inequality between 2016 and slowing growth in the rest of the EU. gy prices to consumer prices was moder- 2017. Household expenditures from 2018 ated by a government cap freezing elec- however signal that growth among the Labor shortages and expansionary fiscal tricity prices faced during 2019 at mid- bottom 10 percent dropped 2017-18. The policies are the main challenges to sus- 2018 levels for households, micro and poverty rate using the Upper Middle- tained growth in the medium-term. small enterprises among others. Income Class line of $5.50 per day (2011 Robust domestic demand caused im- PPP) is estimated to have declined from ports to grow by 7.1 percent in 2018. 2.7 in 2015 to 2.0 percent in 2018. FIGURE 1 Poland / Real GDP growth and contributions to FIGURE 2 Poland / Actual and projected poverty rates and real GDP growth real private consumption per capita Percent, percentage points Poverty rate (%) Real private consumption per capita (constant LCU) 14 35000 6 12 30000 4 10 25000 2 8 20000 6 15000 0 4 10000 -2 2 5000 2011 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 2021f 0 0 Final consumption Gross fixed Investment 2004 2006 2008 2010 2012 2014 2016 2018 2020 Change in inventories Net exports International poverty rate Lower middle-income pov. rate Statistical Discrepancy GDP growth Upper middle-income pov. rate Real priv. cons. pc Source: World Bank. Source: World Bank. Notes: see table 2. MPO 70 Oct 19 104  ●   World Bank ECA Economic Update Fall 2019 to decelerate to 3.6 percent in 2020 and 3.3 expansionary measures encouraged by Outlook percent in 2021. Nonetheless, rising real incomes are expected to lead to further de- the political calendar. The shortage of labor will eventually clines in poverty: the $5.50/day 2011 PPP weigh heavily on potential GDP growth, Amid the economic slowdown in the EU, poverty rate is projected to decline to 1.9 and will be exacerbated by the early re- Poland’s GDP growth may reach 4.3 per- percent in 2019 and to 1.6 percent by 2021. tirement of an increasing share of the cent in 2019, driven by persistently strong Fiscal performance remains a challenge workforce. Poland is at an advanced domestic consumption and higher-than- despite the sound budget position so far. In stage in its demographic transition: its expected investments. Household con- the short-term public expenditure is ex- working age population is already sumption expenditures are set to continue pected to increase significantly due to new shrinking and is forecast to further de- growing, fueled by an expansion of Fami- policies introduced prior to the general elec- cline in coming years. The simultaneous ly 500+, additional pension payments, and tions in October 2019. The extended aging and shrinking of the workforce a strong labor market. However, as the “Family 500+” program and the 13th month could negatively affect production ca- impact of new social programs on con- pension payment (announced to span over pacity and investment. The problem may sumption is likely to be smaller than the 2020) are expected to elevate the general be amplified by the extension of the initial effects of “Family 500+” due to government deficit to 1.6 percent of GDP in “Family 500+” program, which could growing prices (CPI reaching almost 3 2019. Due to additional budget revenues result in more people withdrawing from percent in 2020), the contribution of pri- from restructuring of pension system (one- the labor force. vate consumption to GDP growth is ex- off proceeds over the next couple years), A dense political calendar, with EU, pected to fall in coming years. A stable removing the cap on social security contri- presidential, and general elections tak- banking sector, low interest rates and butions, and from improved CIT and VAT ing place within a year, inspired a availability of EU funds are expected to collections, the deficit is likely to stabilize at range of expansionary policies. Pro- support private investments and offset an 1.0 percent in 2020-21. Thanks to the eco- posed measures increasing social bene- anticipated post-election decline in nomic expansion, general government gross fits, lowering tax rates and inflating the growth of government investments. debt is expected to move towards 47.5 per- cost of pension payments will put pres- Despite the uncertain economic perspectives cent of GDP between 2019-21. sure on public finances. Due to the po- of Germany and the UK (which together litical cost of reversing these policies, account for approximately a third of Po- they will weigh on Poland ’s fiscal posi- land’s exports), Polish exports expanded by 4.9 percent in the first half of 2019 and are Risks and challenges tion and may push the deficit towards the 3 percent EU threshold in the medi- expected to result in a positive trade balance um -term, once the provisional sources and a modest current account surplus. In the The two main challenges ahead for of funding dry up. medium-term, economic growth is forecast Poland are a shortage of labor and TABLE 2 Poland / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 3.1 4.9 5.1 4.3 3.6 3.3 Private Consumption 3.9 4.5 4.5 3.8 3.7 3.7 Government Consumption 1.9 2.9 4.7 4.6 2.5 2.1 Gross Fixed Capital Investment -8.2 4.0 8.7 6.6 5.3 4.6 Exports, Goods and Services 8.8 9.5 6.3 4.5 4.3 3.8 Imports, Goods and Services 7.6 9.8 7.1 4.6 4.5 4.3 Real GDP growth, at constant factor prices 3.0 4.8 5.1 4.2 3.6 3.3 Agriculture 3.0 2.5 -4.1 3.2 2.3 1.8 Industry 3.9 2.5 5.6 5.9 4.0 3.4 Services 2.6 6.3 5.1 3.3 3.4 3.2 Inflation (Consumer Price Index) -0.6 2.0 1.6 2.0 2.9 2.6 Current Account Balance (% of GDP) -0.5 0.1 -0.6 0.3 0.2 0.2 Net Foreign Direct Investment (% of GDP) 0.9 1.2 1.9 1.4 1.2 1.2 Fiscal Balance (% of GDP) -2.2 -1.5 -0.4 -1.6 -1.0 -1.0 Debt (% of GDP) 54.2 50.6 48.9 48.5 47.8 47.3 Primary Balance (% of GDP) -0.5 0.0 1.0 -0.2 0.6 0.6 International poverty rate ($1.9 in 2011 PPP) a,b 0.4 0.4 0.3 0.3 0.3 0.3 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 0.7 0.6 0.6 0.5 0.5 0.5 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 2.4 2.2 2.0 1.9 1.7 1.6 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 2004-EU-SILC and 201 5-EU-SILC. A ctual data: 2015. No wcast: 201 6-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using po int-to -po int elasticity (2004-2015) with pass-thro ugh = 1based o n private co nsumptio n per capita in co nstant LCU. MPO 71 Oct 19 Selected Country Pages ●  105 widened to 2.4 percent of the projected GDP ROMANIA Recent developments as of June 2019 reflecting consumption pres- sures. FDI inflows were up 30 percent yoy in the first half of 2019 amounting to 1.1 Romania’s GDP grew at 4.7 percent in the percent of the projected GDP. first half of 2019, above the long-term po- Strong consumption and depreciation Table 1 2018 tential. Private consumption remained the pressures on the currency pushed the an- P o pulatio n, millio n 19.5 main driver of growth, up 6.1 percent yoy, nual inflation rate to 4.1 percent in June GDP , current US$ billio n 239.6 supported by increases in public-sector 2019, above the upper band of the Nation- GDP per capita, current US$ 12307 wages, minimum wages and pensions, al Bank of Romania (NBR). The NBR kept Internatio nal po verty rate ($ 1.9) a 5.7 which boosted disposable incomes. In- the monetary policy rate unchanged in Lo wer middle-inco me po verty rate ($ 3.2) a 13.3 vestment picked up at 12.4 percent yoy, 2019, at 2.5 percent, and focused on man- Upper middle-inco me po verty rate ($ 5.5) a 25.6 owing to better than expected perfor- aging the liquidity in the financial sector. Gini index a 35.9 mance in construction, retail trade and The dynamics of credit to the private sec- b 75.3 services. Exports grew by 2.7 percent yoy tor decelerated slightly in the first half of Life expectancy at birth, years reflecting weaker demand in the major 2019 to 6.7 yoy, reflecting a slowdown in Source: WDI, M acro Poverty Outlook, and official data. export markets and a slowdown in indus- the growth of domestic currency loans Notes: (a) M ost recent value (2015), 2011 PPPs. trial exports, while imports remained stur- mainly to households. (b) M ost recent WDI value (2016) dy (up 6.4 percent) on the back of strong The labor market benefited from the ex- domestic demand. On the production side, pansion of the economy, with unemploy- ICT (up 9.9 percent yoy) and construction ment at 3.8 percent in June 2019, a 27-year (up 14.9 percent yoy) were the main driv- low and the real average wage increasing ers of growth. Industry stagnated due to a by 11.2 percent yoy. Nonetheless, the low Romania’s growth was stronger than slowdown in manufacturing and the de- employment rate at 65.7 percent, below anticipated, at 4.7 percent in the first half celeration in the dynamics of exports. the EU-28 average of 69.2 percent, coupled The execution of the budget posted a defi- with high youth unemployment at 15.4 of 2019. Economic activity was driven by cit of 1.9 percent of GDP as of June 2019. percent, as of Q1 2019, reflect persistent private consumption, supported by an Compensation of employees was up by structural rigidities in the labor market. expansionary fiscal policy and a rebound 23.4 percent yoy reflecting public wage Real median household incomes increased in investment. The labor market has tight- increases and a 9 percent increase in the by 20 percent yoy in 2017, partly linked to minimum wage in January 2019, while strong labor market conditions, rising ened, with unemployment reaching histor- social assistance spending was up by 11.4 average and minimum wages. Although ic lows. Increases in wages and pensions percent yoy due to increases in pensions. strong growth was seen throughout the contributed to continued poverty reduction. Revenue performance (up 14.4 percent income distribution, inequality indicators Risks to the economic growth outlook yoy) reflects better VAT collection (up 12.6 increased slightly due to faster growth have risen and stem from weaker demand percent yoy) and a rise in social security among the top 40 percent. The poverty contributions (up 17.1 percent) due to a rate corresponding to upper middle- from major exports markets, a tightening fast increase in gross wages and the transfer income countries (using the $5.50/day labor market and the uncertainty of of the social contribution from employers to 2011 PPP poverty line) is forecast to have fiscal policy. employees. The current account deficit declined between 2015 and 2018, from 25.6 FIGURE 1 Romania / Real GDP growth and contributions to FIGURE 2 Romania / Actual and projected poverty rates real GDP growth and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 50 12000 12 10 10000 8 40 6 8000 4 30 2 6000 0 20 -2 4000 -4 10 -6 2000 -8 2016 2017 2018 2019e 2020f 2021f 0 0 2006 2008 2010 2012 2014 2016 2018 2020 Net exports Private consumption Gross fixed capital formation Public consumption International poverty rate Lower middle-income pov. rate GDP Upper middle-income pov. rate Real GDP pc Source: World Bank. Source: World Bank. Notes: see table 2. MPO 72 Oct 19 106  ●   World Bank ECA Economic Update Fall 2019 to 20.9 percent respectively, continuing the The government will have difficulties significant domestic adverse effects on progress seen since 2012. Poverty continues keeping the budget deficit within 3 per- growth and investment. These would be to be substantially higher and concentrated cent of GDP over the medium term. The exacerbated by the expected slowdown in rural areas and among marginalized newly promoted pension law and the in growth in Romania ’s traditional ex- communities. While fiscal policy in 2019 planned public wage increases will put port markets in the EU, mainly Germany supports redistribution, it raises headcount endemic pressure on the consolidated and Italy. The partial decoupling dy- poverty rates since direct cash transfers to budget deficit and reduce the available namics of real wage and productivity poor households are not large enough to fiscal space for investment. The two could also contribute to weakening ex- compensate for their tax payments. measures would add around 0.8 percent ports, putting supplementary upward of GDP to public expenditure in 2019, pressures on the current account deficit. and 1.7 percent of GDP in 2020. The wid- Renewed efforts are needed to improve Outlook ening of the fiscal deficit would push public debt to 39.5 percent of GDP at end labor participation and to tackle the high unemployment among the youth and the -2021, from 36.6 percent in 2018. Despite low -skilled, helping to ease supply side Economic growth is expected to moderate this, public debt remains one of the low- constraints and improve the sustainabil- over the medium term in line with long- est in the EU. ity of growth. Over the medium term, term potential, as the available fiscal space Strong private consumption aided by the the focus of fiscal policy should be re- shrinks and the labor market increasingly expansionary fiscal policy and continued balanced from boosting consumption tightens. This tightening is likely to be most growth in real wages, partly supported by towards mobilizing investment, primari- pronounced for tertiary educated workers, minimum wage increases, should contin- ly from EU funds, to support a sustaina- whose employment rates at 89.2 percent in ue to boost real incomes and lead to fur- ble EU convergence path and social in- Q1 2019 were twice those of workers with ther declines in poverty incidence. The clusion. Reforms in public administra- less than lower-secondary education. This $5.50/day 2011 PPP poverty rate is project- tion and SOEs, increased regulatory pre- is likely to put pressure on wage growth ed to decline to 19.8 percent in 2019 and to dictability, as well as policies to address and to feed into rising inequality. 18.1 percent in 2021. the large social and spatial disparities The fiscal measures promoted in recent should be on the agenda of priorities of years coupled with the political uncer- the government. tainty in the context of a series of elec- tions will make it unlikely that the gov- Risks and challenges ernment will be able to firmly contain imbalances. In 2019, we expect inflation to The uncertainty of fiscal policy coupled stay elevated and the external deficit to with the tightening labor market – am- continue widening. plified by emigration - could generate TABLE 2 Romania / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 4.8 7.0 4.1 4.2 3.6 3.2 Private Consumption 8.0 9.6 4.7 6.0 5.8 5.6 Government Consumption 4.6 4.6 9.9 2.6 2.5 2.4 Gross Fixed Capital Investment 0.0 3.3 -3.1 8.1 6.2 4.1 Exports, Goods and Services 16.1 9.7 5.4 2.9 3.7 3.7 Imports, Goods and Services 16.5 11.3 9.1 7.5 6.1 5.7 Real GDP growth, at constant factor prices 4.9 7.1 3.5 4.2 3.6 3.2 Agriculture 4.2 14.6 10.0 2.0 2.0 2.0 Industry 6.6 6.2 2.1 1.4 2.1 2.4 Services 4.0 6.8 3.5 6.1 4.6 3.8 Inflation (Consumer Price Index) -1.5 1.3 4.6 4.1 3.6 3.1 Current Account Balance (% of GDP) -2.1 -3.2 -4.4 -5.2 -5.4 -5.6 Net Foreign Direct Investment (% of GDP) 2.7 2.6 2.3 2.4 2.3 2.2 Fiscal Balance (% of GDP) -2.4 -2.8 -3.0 -3.0 -3.6 -3.5 Debt (% of GDP) 38.9 36.9 36.6 38.5 39.1 39.5 Primary Balance (% of GDP) -1.1 -1.6 -1.7 -1.7 -2.3 -2.1 International poverty rate ($1.9 in 2011 PPP) a,b 5.5 5.1 4.9 4.7 4.5 4.4 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 12.7 11.8 11.3 10.9 10.5 10.1 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 24.1 22.1 20.9 19.8 18.9 18.1 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 2006-EU-SILC and 201 5-EU-SILC. A ctual data: 2015. No wcast: 2016-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using annualized elasticity (2006-2015) with pass-thro ugh = 0.7 based o n GDP per capita in co nstant LCU. MPO 73 Oct 19 Selected Country Pages ●  107 by the Central Bank of Russia (CBR) rose RUSSIAN Recent developments to $517.1 billion as the CBR continued currency purchases within the fiscal rule framework. The real effective exchange FEDERATION Real GDP growth decelerated to 0.7 per- cent year on year in the first half of 2019 rate appreciated by 0.5 percent in the first eight months of 2019. owing to lackluster domestic and exter- After peaking in March at 5.3 percent nal demand. Economic sanctions contin- (fueled by the effects of the VAT rate in- Table 1 2018 ued to weigh on economic performance. crease), 12-month consumer price inflation P o pulatio n, millio n 144.5 Real disposable incomes fell by 1.3 per- has been declining and eased to 4.3 per- GDP , current US$ billio n 1660.9 cent year on year in the first six months cent in August. As inflation pressures GNI per capita, US$ (A tlas metho d) 10230 of 2019 reflecting a hike in value added subsided amid weak domestic demand, Internatio nal po verty rate ($ 1.9) a 0.0 tax (VAT) rates in January 2019 and sub- the CBR cut the policy rate by 25 basis Lo wer middle-inco me po verty rate ($ 3.2) a 0.3 sequent acceleration in inflation. A de- points in June, July, and September to 7 Upper middle-inco me po verty rate ($ 5.5) a 2.7 cline in public investment, partly related percent in annual terms. a to slow set-up of the national projects, Russia’s banking sector has been relative- Gini index 37.7 b negatively affected total investment. ly stable. The CBR has continued its clean Life expectancy at birth, years 72.1 Mineral resource extraction, financial -up of the sector by revoking the licenses WDI, M PO, Rosstat, and Bank of Russia. services, and the transportation sector of some smaller banks and focusing on Notes: (a) M ost recent value (2015), 2011 PPPs. led growth, while trade and real estate the financial rehabilitation of large finan- (b) M ost recent WDI value (2017) acted as significant drags. cial institutions. To address the risks of Softening external demand, lower prices accelerated consumer lending growth, for Russian exports, particularly in the which peaked at 24 percent year on year second quarter, and oil contamination in in April, the CBR has adjusted risk the Druzhba pipeline drove a narrowing weights on unsecured retail loans three of the trade surplus in the first half of times within the last year. All banks and Real GDP growth slowed to 0.7 percent 2019. Declining imports —reflecting microfinance organizations have been in the first half of 2019 due to weak domes- weak domestic demand —failed to offset required to calculate the debt-to-income tic and external demand. The economy falling export earnings. As a result, the ratio on all consumer loans above RUB current account surplus decreased to 5.8 10,000 ($150) since October. is forecast to grow at 1 percent in 2019 percent of GDP in the first half of 2019 In January-June 2019, the general govern- and 1.7 – 1.8 percent in 2020 – 2021. (from 6 percent in the same period of ment balance improved to a surplus of 5.2 The poverty rate using the national defi- 2018). Renewed foreign investor interest percent of GDP (from 3.2 percent in the nition declined by 0.6 percentage points to in government bonds led to strong capi- same period of 2018), supported by the 12.6 percent in 2018, driven by a rebound tal inflows in the government sector in VAT rate increase and lower spending. the first half of 2019. Net capital out- The unemployment rate fell to 4.7 percent of incomes at the bottom of the income flows from the private sector almost in the first half of 2019 (from 4.9 percent in distribution and a slight downward shift doubled to $27.4 due to larger acquisi- 2018), while real wages rose by 6.8 per- in real terms in the poverty line. tion of net foreign assets by banks. cent. Wage growth was highest in the Nonetheless, international reserves held public sector. Pensions increased by FIGURE 1 Russian Federation / Real GDP growth and con- FIGURE 2 Russian Federation / Actual and projected pov- tributions to real GDP growth erty rates and real private consumption per capita Percent, percentage points Poverty rate (%) Real private consumption per capita (constant LCU) 6 25 400000 350000 4 20 300000 2 15 250000 0 200000 -2 10 150000 -4 100000 5 -6 50000 2017 2018 Q1 2019 Stat error Import 0 0 Export Change in inventories 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Gross fixed capital formation Consumption International poverty rate Lower middle-income pov. rate GDP growth Upper middle-income pov. rate Real priv. cons. pc Source: Rosstat. Source: World Bank. Notes: see table 2. MPO 74 Oct 19 108  ●   World Bank ECA Economic Update Fall 2019 0.8 percent in real terms. The average real the expansion of sanctions. The ongoing disposable income was unchanged in 2018 compared to 2017, potentially implying Outlook fast-paced expansion in household credit may pose a risk to financial stability in that some unobserved components (such the event of a deterioration in the macroe- as informal incomes) contracted in real GDP growth, which is expected to acceler- conomic environment. Currently, con- terms. Nevertheless, incomes at the ate in the second half of 2019 on the back sumer lending risks appear to be con- bottom of the distribution grew slightly of monetary easing and faster public tained by a continued tightening in CBR faster than at the top, supported by the spending on national projects, will reach 1 regulation. Investment growth will be increase in the minimum wage and new percent in 2019. Russia's medium pro- subject to the successful and efficient im- family benefits. spects remain modest, at 1.7 and 1.8 per- plementation of government infrastruc- The poverty rate using the national defi- cent in 2020 and 2021. Domestic demand, ture investment initiatives. nition (the share of the population with a supported by the ongoing national pro- The liquid part of the National Welfare monthly income per capita of less than jects, can be expected to drive growth in Fund will exceed 7 percent of GDP in RUB 10,088 in 2017) fell in 2018 by 0.6 2020–2021. Relatively comfortable oil pric- 2020, creating an opportunity for the percentage points, partly driven by a es will keep the general government government to invest part of the Fund in shift in the poverty line and partly by the budget in surplus in 2019–2021. Inflation domestic infrastructure projects. Howev- rebound in incomes at the bottom of the is forecast to return to the CBR’s target of er, substantial domestic investments distribution. However, in the first half of 4 percent in 2020–21 as one-off effect of could make the economy more depend- 2019 the poverty rate rose slightly (by 0.2 the VAT rate increase dissipates. Weaker ent on energy prices and heighten infla- percentage points) as poverty lines were global demand and rising import spend- tion risks. Demographic challenges, raised by 2 percent in real terms. World ing underpin the forecast of a narrower which weigh on Russia’s growth poten- Bank estimates of the poverty rate using external surplus in 2020–21. The moderate tial, and the resulting tight labor market, the upper-middle-income country line poverty rate is expected to continue to pose medium-term inflation risks. (the share of the population with per decline through 2021. Although Russia has undertaken steps to capita consumption of below $5.5/day in improve its business environment, pro- 2011 PPP, or RUB 4,351 per month in gress in enhancing competition conditions 2017) also suggest a decline, from 2.6 percent in 2017 to 2.4 percent in 2018. Risks and challenges has been limited. The poverty rate using the international poverty line of $1.9/day remained negli- External risks stem from the further dete- gible, well below 1 percent. rioration of global growth prospects and TABLE 2 Russian Federation / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 0.3 1.6 2.3 1.0 1.7 1.8 Private Consumption -1.9 3.3 2.3 1.2 1.6 1.6 Government Consumption 1.5 2.5 0.3 0.2 0.5 0.5 Gross Fixed Capital Investment 1.0 5.2 2.9 1.1 3.7 4.0 Exports, Goods and Services 3.2 5.0 5.5 0.0 2.1 2.3 Imports, Goods and Services -3.6 17.4 2.7 -0.2 3.4 3.7 Real GDP growth, at constant factor prices 0.4 1.5 2.2 1.0 1.7 1.8 Agriculture 2.3 1.5 -2.0 0.7 1.4 1.4 Industry 2.2 0.8 2.9 1.0 1.4 1.6 Services -0.6 1.9 2.2 1.0 1.9 1.9 Inflation (Consumer Price Index) 7.1 3.7 2.9 4.7 4.0 4.0 Current Account Balance (% of GDP) 1.9 2.1 6.8 5.0 4.2 3.6 Net Foreign Direct Investment (% of GDP) 0.8 -0.5 -1.4 -0.1 -0.5 -0.5 Fiscal Balance (% of GDP)a -3.7 -1.5 2.9 1.5 1.1 1.1 Debt (% of GDP) 16.4 15.5 14.3 14.9 15.9 16.8 Primary Balance (% of GDP) a -2.8 -0.6 3.8 2.3 2.0 2.0 International poverty rate ($1.9 in 2011 PPP) b,c 0.0 0.0 0.0 0.0 0.0 0.0 Lower middle-income poverty rate ($3.2 in 2011 PPP) b,c 0.3 0.3 0.2 0.2 0.2 0.2 Upper middle-income poverty rate ($5.5 in 2011 PPP) b,c 2.9 2.6 2.4 2.3 2.1 2.0 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Fiscal and P rimary B alance refer to general go vernment balances. (b) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 5-HB S. A ctual data: 2015. No wcast: 2016 - 2018. Fo recast are fro m 2019 to 2021. (c) P ro jectio n using neutral distributio n (2015) with pass-thro ugh = 0,87 based o n private co nsumptio n per capita in co nstant LCU. MPO 75 Oct 19 Selected Country Pages ●  109 terms 7.2 percent). The private/public SERBIA Recent developments sector wage gap has narrowed, with pri- vate sector wages growing by 10.7 per- cent compared to 9.5 percent in the public Based on the latest estimates, year-on-year sector. Thanks to these trends, combined growth in the first and second quarter of with higher pensions, poverty (living on Table 1 2018 2019 reached 2.7 and 2.9 percent, respec- income under $5.5/day in 2011 PPP terms, P o pulatio n, millio n 7.0 tively. Given this performance, the growth the standardized middle -income-country GDP , current US$ billio n 50.5 projection for 2019 has been revised poverty line) is estimated to have de- GDP per capita, current US$ 7220 downwards from 3.5 percent to 3.3 per- clined from 23.8 percent in 2014 to 19.8 Internatio nal po verty rate ($ 1.9) a 5.6 cent. As in the past, strong consumption percent in 2019. Lo wer middle-inco me po verty rate ($ 3.2) a 11.1 and investment is not sufficient to com- The consolidated general government Upper middle-inco me po verty rate ($ 5.5) a 23.6 pensate for an increasing negative contri- budget showed a surplus of 0.3 percent of Gini index a 39.7 bution of net-exports to growth, with in- GDP in the first half of 2019. Revenues Scho o l enro llment, primary (% gro ss) b 100.3 creasing consumption (both public and increased by 7.6 percent in nominal b 76.1 private) to a large extent matched by in- terms, compared to the same period of Life expectancy at birth, years creased imports. 2018. This increase was led by VAT reve- Source: WDI, M acro Poverty Outlook, and official data. Looking at sectoral composition, perfor- nues, up by 8.9 percent in nominal terms Notes: (a) M ost recent value (2015), 2011 PPPs. mance of industry disappointed most: thanks to higher collection from growing (b) M ost recent WDI value (2017). industrial output fell by 2 percent in the imports, and social security contributions, first half of the year, including a 2.8 per- up by 8.1 percent, as the government cent decrease in manufacturing. This de- withdraws fiscal adjustment measures cline was broad based, with 17 out of 29 and formal employment increases. Budg- industrial sectors decreasing output. etary spending rose by 9.6 percent in Based on early indicators, agriculture out- nominal terms, corresponding to 1.7 per- put is also projected to decline or stagnate cent of annual GDP, driven by social Growth is projected to slow down from in several key subsectors. transfers (up by 6.6 percent), capital in- 4.3 percent in 2018 to 3.3 percent. Growth has contributed to labor market vestments (up by 30.7 percent) and the Growth continues to bring improvements improvements. The Q2 activity rate and wage bill (up by 8.3 percent). employment rate among population aged Inflation is on a declining path, after in labor market outcomes, with unem- 15 and above continued to increase in reaching a peak in April of 3.1 percent (y/ ployment down to 10.3 percent in Q2 2019, reaching 54.8 and 49.1 percent re- y). Increasing food prices was the main 2019. Poverty is projected to have declined spectively. The employment rate remains driver of inflation in the first half of the from 23.8 percent in 2014 to 19.8 percent lower among female workers and youth. year. Food prices index reached a peak in in 2019. Over the medium-term, growth Unemployment declined to an estimated April of 6.1 percent (y/y), constraining 10.3 percent in the second quarter of 2019 households’ purchasing power. With is expected to remain at 3-4 percent, alt- (the unemployment rate for population inflationary pressures low and a stab le hough risks remain, including from policy aged 15-64 stood at 10.8 percent). In the inflation outlook, and in order to support reversals and delays in structural reforms. first half of 2019, average wages increased growth, the NBS lowered its policy rate by 9.9 percent in nominal terms (in real to 2.75 percent in July and to 2.5 percent FIGURE 1 Serbia / Value added FIGURE 2 Serbia / Actual and projected poverty rates and real private consumption per capita Index 2000=1 Poverty rate (%) Real private consumption per capita (constant LCU) 2.2 30 500000 2.0 25 400000 1.8 20 1.6 300000 1.4 15 200000 1.2 10 1.0 100000 5 0.8 0.6 0 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2012 2014 2016 2018 2020 Agriculture value add Service value add International poverty rate Lower middle-income pov. rate Industry value add Upper middle-income pov. rate Real priv. cons. pc Source: Statistics Office. Source: World Bank. Notes: see table 2. MPO 76 Oct 19 110  ●   World Bank ECA Economic Update Fall 2019 in August, the lowest level since the in- attract investment. Finally, short- to medi- troduction of the targeted inflation poli- cy. In 2019, the dinar continued to appre- Outlook um-term growth prospects may be affect- ed by lead times for the election campaign ciate against the euro, by 0.4 percent in and formation of the government. nominal terms. The economy is expected to continue to With economic growth and improvements External imbalances widened as evi- grow at around 3-4 percent over the medi- in the labor market, poverty is expected to denced by an increase in the CAD by 51 um-term. The ongoing political divisions continue its gradual decline. Poverty, percent in the first half of the year, and in the society will likely to increase with measured as income below the standard- now projected at 6.7 percent of GDP for the upcoming elections in the spring 2020. ized $5.5/day 2011 PPP line is estimated to 2019. FDI inflows remain strong – up 28 Investment and consumption will be the fall to around 18.7 percent by 2020. percent in the first half of the year. Total main drivers of growth. Consumption will external debt reached EUR 27.1 billion in increase as wages and employment are the first quarter, but continued to decline as a share of GDP, to 62.5 percent at end- expected to continue to grow. The rising consumption will continue to push up Risks and challenges March 2019. Public debt declined to 54 imports, widening the CAD. percent of GDP by end-June 2019. The medium-term growth projections Risks are associated with the pace of re- Credit continues strong in 2019. Overall crucially depend on the pace of structural forms (particularly in the public sector), credit grew by 6.9 percent (y/y) through reforms and political developments. Most progress on EU accession, and internal July, primarily because of the increase of importantly, Serbia needs to work further political developments. Regional dis- loans to enterprises (up 10.3 percent, y/y). on removing bottlenecks to growth putes, and relatively slow progress with Loans to private businesses, SOEs and (among others, inefficiencies in SOEs, con- the EU accession process affect invest- households were up by 8.4 percent, 32.8 straints to both foreign and domestic in- ment sentiment and therefore delays real- percent and 9 percent respectively. A vestment, the regulatory framework for ization of investment projects in infra- high proportion of household loans con- the financial sector, taxation and trade structure and other sectors. Despite re- tinue to be short-term “cash” loans to facilitation). Acceleration of the EU acces- cent labor market improvements, partici- individuals. Gross nonperforming loans sion process is important not only from pation rates remain low and limit the (NPLs) declined considerably, to reach 5.2 the point of view of strengthening institu- scope for robust welfare improvements. percent in June 2019. tions but also as a signaling device to TABLE 2 Serbia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 3.3 2.0 4.3 3.3 3.9 4.0 Private Consumption 1.3 1.9 3.3 5.3 4.6 3.8 Government Consumption 1.3 3.3 3.6 3.8 0.6 1.5 Gross Fixed Capital Investment 5.4 7.3 9.2 7.9 15.9 5.9 Exports, Goods and Services 11.9 8.2 8.9 4.0 3.8 8.7 Imports, Goods and Services 6.7 11.1 11.1 8.3 7.2 7.3 Real GDP growth, at constant factor prices 3.7 2.1 4.3 3.3 3.9 4.0 Agriculture 8.3 -11.2 15.6 3.8 3.0 3.0 Industry 4.1 3.3 2.8 4.6 3.5 3.5 Services 2.9 3.2 3.8 2.6 4.2 4.4 Inflation (Consumer Price Index) 1.1 3.1 2.0 2.2 1.9 2.5 Current Account Balance (% of GDP) -3.3 -6.3 -5.2 -6.7 -7.9 -7.7 Net Foreign Direct Investment (% of GDP) 3.5 4.4 3.9 6.2 6.0 5.7 Fiscal Balance (% of GDP) -1.2 1.1 0.6 -0.4 -0.5 -0.5 Debt (% of GDP) 68.9 58.7 55.7 52.1 49.4 46.5 Primary Balance (% of GDP) 1.7 3.6 2.7 1.2 1.0 1.1 International poverty rate ($1.9 in 2011 PPP) a,b 5.5 5.4 5.3 5.1 4.9 4.7 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 10.8 10.6 10.2 9.6 9.3 8.8 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 23.0 22.1 21.2 19.8 18.7 17.7 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 5-EU-SILC. A ctual data: 2015. No wcast: 2016-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2015) with pass-thro ugh = 0.87 based o n private co nsumptio n per capita in co nstant LCU. MPO 77 Oct 19 Selected Country Pages ●  111 investments in the energy sector, the au- TAJIKISTAN Recent developments thorities have delayed important decisions on social spending, namely the long- awaited rollout of the Targeted Social Assis- Real GDP growth remained buoyant at tance (TSA) program and the 10 percent 7.5 percent in the first half of 2019, com- increase of the TSA budget. Investments in Table 1 2018 pared to 7.3 percent in 2018, supported by the Rogun Hydropower Plant (HPP) contin- P o pulatio n, millio n 9.1 robust expansion in industry (12.5 percent), ue to account for the largest share of public GDP , current US$ billio n 7.5 agriculture (11 percent), and services (9 investment in 2019; the authorities launched GDP per capita, current US$ 826 percent). On the demand side, growth was the second of six turbines in September. a Internatio nal po verty rate ($ 1.9) 4.8 driven by net exports and public invest- After subsiding to 5.4 percent in 2018, reflect- a Lo wer middle-inco me po verty rate ($ 3.2) 20.3 ment. Private consumption was muted on ing one-off effects from the introduction of Upper middle-inco me po verty rate ($ 5.5) a 54.2 account of stagnant remittance inflows low-price Uzbek imports, consumer price Gini index a 34.0 during the first half of the year. inflation surged to 8.7 percent in the first half Scho o l enro llment, primary (% gro ss) b 98.8 The current account deficit remained of 2019, mostly driven by food price increases Life expectancy at birth, years b 71.2 steady at 5 percent of GDP in January-July. in April-May. Full-year inflation is expected Public purchases of construction materials to exceed the central bank’s target band of 5-9 Source: WDI, M acro Poverty Outlook, and official data. Notes: from abroad for large infrastructure pro- percent; this will also reflect the pass-through (a) M ost recent value (2015), 2011 PPPs. jects boosted import spending on machin- effect of the 2.7 percent depreciation of the (b) M ost recent WDI value (2017) ery and construction materials. At the same somoni in August and the 15 percent electrici- time, surging export earnings from pre- ty tariff increase in September. cious metals and increased electricity ex- With the intention to leveraging the large ports helped to narrow the trade deficit to inflows of foreign exchange received Tajikistan’s economy continued register- 30 percent of GDP in the first half of 2019 through private transfers, the National (from 32 percent of GDP in the same period Bank of Tajikistan (NBT) plans to launch a ing strong across-the-board growth dur- of 2018). Tajikistan’s export basket is small Centralized Remittance Platform (CRP). ing the first half of 2019. The poverty and concentrated in metallic minerals, rais- However, there are concerns that this plat- rate, based on the national poverty line, ing its vulnerability to fluctuations in inter- form may divert some remittances from fell from 29.5 percent in 2017 to 27.4 per- national commodity prices. Chinese invest- official to unofficial channels and end up ment in the mining sector helped lift for- on the “black” market for foreign exchange. cent in 2018, reflecting a recovery in re- eign direct investment (FDI) from 0.9 per- Except for two problem banks, the financial mittance inflows and rising wages. cent of GDP in 2017 to 2.6 percent in 2018. sector has continued its recovery from the Growth is expected to soften in the medi- The Tajik authorities reduced the budget 2016 banking crisis, demonstrating an im- um-term reflecting the projected fall in deficit to 2.8 percent of GDP in 2018, re- provement in the quality of the credit portfo- metal prices and the slowdown of the Rus- flecting fiscal consolidation efforts. Prelim- lio. The share of non-performing loans de- inary data for the first seven months of clined to 27 percent in June (from 30 percent sian economy. While public investments 2019 suggest that the authorities broadly in 2018), while the capital adequacy ratio will continue to remain high, the slow adhered to the consolidation path by con- rose to 23 percent (from 22 percent in De- pace of reform pose downside risks. taining the fiscal deficit to around 3 per- cember 2018 and 17 percent in 2016). In ad- cent of GDP. However, while safeguarding dition, the profitability of the banking sector FIGURE 1 Tajikistan / Real GDP growth and contributions FIGURE 2 Tajikistan / Actual and projected poverty rates to real GDP growth and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (LCU constant) 10 100 1000 8 80 800 6 60 600 4 40 400 2 0 20 200 -2 2015 2016 2017 2018 2019f 2020f 2021f 0 0 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Agriculture Industry and construction Services Net taxes International poverty rate Lower middle-income pov. rate Real GDP growth Upper middle-income pov. rate Real GDP pc Sources: TajStat; World Bank staff estimates. Source: World Bank. Notes: see table 2. MPO 78 Oct 19 112  ●   World Bank ECA Economic Update Fall 2019 has continued to improve, and the level of deepening of regional cooperation, con- prospects. Governance challenges in dollarization has declined. The NBT has suc- nectivity, and trade should also help to public enterprises—including in key cessfully advanced reforms of banking su- sustain high rates of GDP growth. Re- sectors of the economy—present high pervision and the deposit insurance scheme. mittances are expected to support private quasi -fiscal risks and threaten the sus- The pace of poverty reduction has acceler- consumption despite the current uncertain- tainability of public finances. Delays in ated since the second half of 2017. The ties surrounding the CRP. Fiscal pressures implementing much -needed structural poverty rate, using the country’s official are expected to remain high; however, the reforms to improve the business envi- poverty line, fell to 27.4 percent in 2018, country’s high risk of debt distress suggests ronment will continue to hinder private reflecting a recovery in remittance inflows. that it will likely adhere to fiscal consolida- sector development. Tajikistan ’s limited Rural poverty fell markedly, from tion throughout the medium term to re- fiscal space and weak policy buffers ex- 36.1 percent in 2014 to 33.2 percent in store macroeconomic stability. The long- pose its economy to potential shocks. An 2017, and further to 30.2 percent in 2018, awaited resolution of problem banks, once escalation of global trade tensions, or reflecting rising household consumption. completed, would help lead to a gradual economic slowdown in the region ’s large Urban poverty also declined, though to a pickup in private credit and investment. economies, would negatively impact lesser extent, falling from 24 percent in The central bank’s declared move to an inflows of FDI and remittances . 2015–16 to 21.5 percent in 2017–18. Ex- inflation-targeting regime would help The construction of the Rogun HPP fi- treme poverty fell steadily from 18 percent strengthen the monetary policy framework nanced from budget proceeds could present in 2013 to 12 percent in 2018. and macroeconomic stability. a serious risk to fiscal sustainability and The current account is expected to remain crowd out social spending. However, there in deficit at around 4 percent of GDP ow- are indications that the authorities consider Outlook ing to continued strong demand for capi- tal-intensive imports for the construction financing from private sources and improve fiscal management by initiating tax reforms of large public investment projects. FDI and strengthening power utilities and the Tajikistan’s medium-term growth outlook inflows are forecast to remain modest, financial sector. is expected to moderate reflecting the pro- mirroring the significant shortcomings of A potential three-year program with the jected slowdown in China and the Russian Tajikistan’s business environment. IMF, if successfully negotiated, would Federation, and volatility in international suggest an upside risk to the outlook. prices for major export commodities Extreme poverty is likely to decline fur- (aluminum, gold, and cotton). GDP growth is likely to be supported by large Risks and challenges ther if the TSA program is expanded to compensate for the utility tariff increases. public investment in the run-up to Tajiki- stan’s commemoration in 2021 of 30 years Domestic and external risk factors of independence. In addition, the expected weigh on Tajikistan ’s economic growth TABLE 2 Tajikistan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 6.9 7.6 7.3 6.2 5.5 5.0 Private Consumption 6.4 0.0 7.2 6.6 5.3 4.8 Government Consumption 3.9 2.5 3.8 3.7 3.9 3.9 Gross Fixed Capital Investment 20.3 20.3 8.9 10.8 11.2 11.5 Exports, Goods and Services 0.0 0.0 2.2 2.7 2.7 3.2 Imports, Goods and Services 0.0 0.0 3.5 3.7 4.2 4.0 Real GDP growth, at constant factor prices 6.8 9.8 7.6 6.2 5.5 5.0 Agriculture 5.2 6.8 4.0 3.3 2.9 2.7 Industry 16.2 20.5 10.4 8.7 8.0 7.7 Services 1.1 2.9 7.0 5.4 4.5 3.6 Inflation (Consumer Price Index) 6.0 7.3 3.9 8.0 6.8 6.0 Current Account Balance (% of GDP) -5.2 2.1 -5.3 -5.0 -4.1 -4.0 Net Foreign Direct Investment (% of GDP) 3.4 -0.2 3.4 2.3 2.3 2.3 Fiscal Balance (% of GDP) -9.0 -6.0 -2.8 -2.8 -2.5 -2.1 Debt (% of GDP) 42.0 50.3 47.9 45.9 43.3 41.8 Primary Balance (% of GDP) -8.3 -5.5 -1.6 -1.8 -1.7 -1.2 International poverty rate ($1.9 in 2011 PPP) a,b 4.2 3.4 2.8 2.3 2.3 2.0 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 18.0 15.5 13.9 12.4 11.4 10.2 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 51.0 47.1 44.0 41.7 39.2 37.2 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 5-HSITA FIEN. A ctual data: 2015. No wcast: 2016-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2015) with pass-thro ugh = 1 based o n GDP per capita in co nstant LCU. MPO 79 Oct 19 Selected Country Pages ●  113 currency loans to the corporate sector fell TURKEY Recent developments by a similar amount. Domestic credit has remained flat as the banking sector focus- es on improving its balance sheet and bor- After ending 2018 with two successive rowing costs remain elevated. While the quarters of seasonally -adjusted negative official non-performing loan (NPL) ratio Table 1 2018 growth, the economy grew in both the remains low (4.5 percent in 2019 Q2), cor- P o pulatio n, millio n 81.4 first and second quarter of 2019. Credit porate leverage and economic slowdown GDP , current US$ billio n 773.7 growth and fiscal stimulus in the first have raised concerns over asset quality. GDP per capita, current US$ 9505 quarter spurred an expansion of private Twelve -month inflation has declined Upper middle-inco me po verty rate ($ 5.5) a 9.9 and public consumption growth. Invest- from a peak of 25 percent in late 2018 to Gini index a 41.9 ment, on the other hand, contracted for an average of 18.2 percent in the first Life expectancy at birth, years b 76.0 the fourth consecutive quarter. Alt- eight months of 2019, reflecting the im- hough GDP expanded by 0.8 percent in proved stability of the Turkish lira. Source: WDI, M acro Poverty Outlook, and official data. Notes: the first half of 2019 compared to the However, monthly inflation remains (a) M ost recent value (2016), 2011 PPPs. second half of 2018, on a year -on-year high, averaging 1 percent. Additionally, (b) M ost recent WDI value (2017) basis growth remained negative—GDP policy rates have fallen sharply (by 750 contracted by 2 percent year on year in basis points so far in 2019), and recent the first half of 2019. consumption tax hikes may slow down- The current account deficit has narrowed ward pressure on inflation. steadily; in June, the current account rec- The slowdown in the economy has driv- The Turkish economy is gradually adjust- orded a surplus on a 12-month rolling en a spike in unemployment. Turkey ’s ing from the external shock of August basis for the first time since 2002. In real economy lost around 770,000 jobs in the 2018. Economic recovery and deleverag- terms, exports rose by 8.6 percent year on 12 months between June 2018 and June year in the first half, while real imports 2019. The seasonally-adjusted unemploy- ing have progressed steadily in 2019 fell by 23 percent. ment rate increased from 10.9 percent to despite market instability late in the first The government pursued an expansionary 13.9 percent during this period, leaving quarter and early in the third quarter. fiscal policy in the first half of 2019, result- 4.5 million people unemployed (up from Inflation is easing from elevated levels ing in a 50 percent year-on-year widening 3.5 million a year earlier); the non - of the fiscal deficit in nominal terms. The agricultural unemployment rate rose to and unemployment is high, putting up- main drivers of the wider deficit were an 16.2 percent from 12.9 percent. The high- ward pressure on poverty rates. GDP is acceleration in public transfers and weak- est job losses were in the agriculture and projected to record zero percent growth er revenue mobilization linked to declin- construction sectors, where low -income in 2019 before a gradual medium-term ing economic activity. Central government households comprise most of the work- recovery. Restoring investor confidence net borrowing more than doubled, with a force. Similarly, youth unemployment notable increase in external borrowing. rose sharply to 25.8 percent from 20.2 through the implementation of a robust The financial sector continued to delever- percent a year earlier. Moreover, real economic program will be essential for age in the first half of 2019. External loan wages dropped for all income groups. a sustained recovery. liabilities of banks fell by 10 percent year These trends are putting upward pres- on year through July; the stock of foreign sure on the incidence of poverty, which FIGURE 1 Turkey / Real GDP growth and contributions to FIGURE 2 Turkey / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (constant LCU) 15 45 25000 40 10 35 20000 30 5 15000 25 0 20 10000 15 -5 10 5000 -10 5 2003 2005 2007 2009 2011 2013 2015 2017 0 0 Private consumption Government spending 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Investment Net exports Stocks Growth Upper middle-income pov. rate Real GDP pc Sources: Turkstat and World Bank staff calculations. Source: World Bank. Notes: see table 2. MPO 80 Oct 19 114  ●   World Bank ECA Economic Update Fall 2019 has remained steady at around 9 percent 7.53 million in 2020. Although the gov- The continuation of adverse trends in the for the last three years. ernment increased the minimum wage by medium term would increase poverty and 26 percent in January 2019, unemployed put some of the poverty reduction gains of and informal workers will remain partic- the last decade at risk. Outlook ularly exposed to falling into poverty. Stronger social safety nets may be re- External buffers have eroded over the last year; rebuilding them would afford great- quired in the medium term to protect er confidence in Turkey’s capacity to ab- Leading indicators suggest that the econ- vulnerable households from recent in- sorb future shocks. Gross international omy continued its recovery in the third come and price shocks. reserves have recovered to $100 billion, quarter. Manufacturing capacity utiliza- but this is still below the prudential level tion is nearing long -term averages, retail recommended by the IMF; reserves net of sales are on a moderately increasing trend, and real sector indicators Risks and challenges short-term drains (both pre-determined and contingent) have fallen sharply from (confidence, purchasing managers index) $50 billion in January to $30 billion in July. have recovered to their levels from a year The outlook for the global economy and Turkish banks have remained resilient ago. The economy is projected to record financial markets is uncertain. Further since the lira depreciation of August 2018. zero percent growth in 2019 before re- volatility in and bearish sentiment on Banks have adequate liquid foreign ex- bounding to 3 percent and 4 percent in emerging markets is likely to hit Turkey change to cover their short-term liabilities. 2020 and 2021, respectively. particularly hard, given its high external Banks are well-capitalized, and the capital Nominal credit growth is projected to financing requirement and uncertain adequacy ratio is above 17 percent. accelerate—however, given asset quality outlook. Geopolitical developments also However, the banking sector remains concerns and debt overhang, economic pose a risk to Turkey, most notably the exposed to deteriorating asset quality and recovery is unlikely to be fueled by rapid potential imposition of sanctions by the the risk of further currency fluctuations. credit expansion. Turkey is expected to United States. The regulator has asked lenders to reclas- record a moderate current account deficit Addressing high levels of unemployment sify $8.1 billion in bad loans by the end of in 2019 as import demand begins to re- is central to Turkey’s push for poverty 2019, which would raise the NPL ratio to cover in the second half of the year. The reduction. Unemployment continues to an estimated 6.3 percent. A significant general government fiscal deficit is ex- climb in sectors where low-income house- share of loans (12 percent) is under close pected to peak in 2019 with high counter - holds are employed, resulting in income monitoring. The Turkish banking sys- cyclical expenditure. loss and rising vulnerability. Inflation, tem’s profitability will also suffer from Poverty is expected to increase in 2019. which remains high despite a slight de- reduced business volumes and higher The total number of poor is forecast to crease in prices pressures, disproportion- funding and hedging costs. rise from 7.35 million people in 2018 to ately impacts low-income households. TABLE 2 Turkey / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 3.2 7.5 2.8 0.0 3.0 4.0 Private Consumption 3.7 6.2 0.0 1.0 2.2 3.3 Government Consumption 9.5 5.0 6.6 3.0 2.6 1.8 Gross Fixed Capital Investment 2.2 8.2 -0.6 -11.5 6.5 9.5 Exports, Goods and Services -1.9 12.0 7.8 7.2 4.0 4.5 Imports, Goods and Services 3.7 10.3 -7.8 -9.1 6.5 9.0 Real GDP growth, at constant factor prices 3.1 7.9 3.1 0.0 3.0 4.0 Agriculture -2.6 4.9 1.9 2.3 2.0 2.0 Industry 4.6 9.2 0.4 -3.0 3.5 4.0 Services 3.2 7.6 4.6 1.2 2.9 4.2 Inflation (Consumer Price Index, on average) 7.8 11.1 16.3 16.5 11.0 9.0 Current Account Balance (% of GDP) -3.8 -5.6 -3.5 -0.8 -3.1 -3.8 Net Foreign Direct Investment (% of GDP) 1.3 1.0 1.2 0.9 1.1 1.1 Fiscal Balance (% of GDP) -1.4 -1.8 -2.4 -2.9 -2.1 -1.7 Debt (% of GDP) 28.3 28.2 30.2 32.1 32.5 32.4 Primary Balance (% of GDP) 0.6 0.1 -0.2 0.6 0.4 0.4 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 9.9 9.2 9.0 9.1 9.0 8.7 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 1-HICES, 201 7-, and 2016-HICES. A ctual data: 2016. No wcast: 2017-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using po int-to -po int elasticity (2011-2017) with pass-thro ugh = 1based o n GDP per capita in co nstant LCU. MPO 81 Oct 19 Selected Country Pages ●  115 bolstered by higher hydrocarbon proceeds, TURKMENISTAN Recent developments while public spending was reduced by 17.6 percent on account of sharp cuts to public investment and subsidies. External The availability and quality of statistical borrowing to finance large investment data are major concerns in Turkmenistan; projects is estimated to have increased the Table 1 2018 the following analysis should be viewed public external debt to 25.4 percent of GDP P o pulatio n, millio n a 5.8 with that caution. in 2018 (from 21.8 percent of GDP in 2015). GDP , current US$ billio n 40.8 Real GDP growth weakened slightly in 2018, Turkmenistan’s external position reversed in a 7065 slowing to 6.2 percent from 6.5 percent in 2018; the current account recorded a surplus GDP per capita, current US$ b 2017, reflecting a decline in the non- of 5.7 percent of GDP from a deficit of 10.3 Scho o l enro llment, primary (% gro ss) 88.4 c hydrocarbon economy. Net exports positive- percent of GDP in 2017. Higher prices and Life expectancy at birth, years 67.8 ly contributed to economic growth, but this export volumes of natural gas were the main Source: IM F, WDI, M acro Poverty Outlook, and official data. was more than offset by weakened domestic drivers of this reversal. Meanwhile, contin- Notes: (a) estimations. demand, reflecting a decline of public in- ued import substitution efforts combined (b) M ost recent WDI value (2014). vestment (to 22 percent of GDP in 2018 from with lower demand for imported construc- (c) M ost recent WDI value (2016). an average of 30 percent in 2014-17). Follow- tion materials resulted in 47.8 percent reduc- ing the government’s decision to discontin- tion in imports. However, once tight foreign ue the free provision of water, natural gas, exchange controls are eased, and the deficit electricity, and salt, the authorities eliminat- of foreign exchange is eliminated, the exter- ed budget subsidies for utilities, which also nal position may again revert. The official negatively impacted domestic demand. exchange rate of the Turkmen manat to the Growth weakened, inflation accelerated, Average annual inflation rose sharply in U.S. dollar is still set at 3.5 manat/US$, de- and pressures on the national currency 2018, to 13.2 percent (up from 8 percent in spite significant pressures. 2017). In addition to eliminating budget Foreign investment continued to decline increased in 2018, reflecting the adjust- subsidies, the authorities adjusted utility in 2018 owing to challenges in the foreign ment of the Turkmen economy to declin- tariffs (gasoline prices rose by 50 percent) exchange market, the dominance of ineffi- ing hydrocarbon revenues in 2016-17. and increased public salaries, pensions, and cient state-owned enterprises (SOEs), and A reduction of public investment helped other social transfers by 10 percent. Re- a challenging business environment. duced consumer imports, owing to curren- The authorities continued their directed to improve the fiscal and external balances cy shortages, also stoked price pressures. lending and easy credit policies in 2018, in 2018. The public sector-driven and However, greater administrative price con- although credit growth slowed slightly. hydrocarbon-dominated economic struc- trols and state procurement and imports of The loan portfolio continues to be allocat- ture assumes a recovery in public invest- basic consumer staples—which boosted ed mostly to SOEs at concessional financ- ment and an expansion of gas exports to food supply—helped to contain food price ing terms by the central bank. inflation during the second half of the year. Turkmenistan does not release official statis- sustain growth. The slow pace of reforms The government’s fiscal consolidation tics on living standards, and little is known presents a downside risk; cuts in budget efforts nearly resulted in a balanced budg- about the country’s labor market or the subsidies may negatively affect welfare. et in 2018 (compared with a deficit of prevalence of poverty. Nonetheless, the 2.8 percent of GDP in 2017). Revenue was gradual reduction of welfare subsidies— FIGURE 1 Turkmenistan / Real GDP growth and natural FIGURE 2 Turkmenistan / Exchange rate and natural gas gas prices prices Percent Percent TMT per US$, inverse series US$ per mmbtu 16 40 2.6 14 14 30 2.8 12 12 20 3.0 10 10 10 3.2 0 8 8 3.4 -10 6 6 -20 3.6 4 -30 4 3.8 2 -40 4.0 2 0 -50 4.2 0 2010 2012 2014 2016 2018 Real GDP growth (lhs) Change in gas prices (rhs) Exchange rate (lhs) Natural gas prices, Europe (rhs) Source: State Committee of Statistics of Turkmenistan. Source: Central Bank of Turkmenistan. MPO 82 Oct 19 116  ●   World Bank ECA Economic Update Fall 2019 which the population has enjoyed since Turkmenistan’s external position is ex- hydrocarbons prices would significantly shortly after independence—is expected to pected to deteriorate in 2019-20 but then reduce economic growth prospects. Other have negatively affected living standards. benefit from the expected expansion of external risks include the escalation of International migration drives substantial natural gas exports. Also, the industrial trade tensions or the tightening of global poverty reduction in neighboring economies output is expected to respond to the gov- liquidity, which could result in a sudden but is restricted from Turkmenistan, and ernment’s export promotion and import- deceleration in economic growth in Turk- remittance flows remain much lower than substitution policies. However, ongoing menistan’s trade partners. elsewhere in Central Asia. challenges associated with expatriating Domestically, risks include slow progress on profits will discourage strong FDI inflows. the implementation of policies that support The government will seek fiscal consolidation economic diversification and private sector Outlook in the medium term to rebuild depleted poli- cy buffers. However, the expansion of public development. Liberalizing business regula- tions and easing foreign exchange controls investment in strategic infrastructure using will be necessary to improve investor confi- Turkmenistan’s weak economic outlook re- off-budgetary funds cannot be ruled out. dence. Long-term socio-economic sustainabil- flects the projected fall in the natural gas price Although ending free access to water, gas, ity will require a shift toward investment in and softening global demand for energy re- and electricity may result in a deterioration human capital. Turkmenistan’s restrictions on sources. The global economy, including Chi- in living standards for the poor, such internal mobility are the strictest in Central na and Russia, is expected to slow down in measures underscore the government’s com- Asia, resulting in the exclusion of rural resi- 2019-20. Although in July 2019 Turkmenistan mitment to improving the finances of Turk- dents from more diverse urban labor markets and the Russian Federation signed a 5-year menistan’s utilities and reducing state budg- and the relative prosperity of higher-income contract for resuming natural gas supply, the et liabilities. The agriculture sector—which areas, in particular the capital, Ashgabat. agreed volumes will be significantly lower employs most of the labor force—is expected Utility tariff increases will impact the wel- than used to be the case until three years ago. to benefit from increased government pro- fare of households over the medium term. Policies aimed at fostering private sector devel- curement prices for wheat and cotton, which Therefore, the social consequences of the opment and economic diversification should were raised by 100 percent and 50 percent, reform should be considered, and a distribu- be prioritized to promote non-hydrocarbon respectively, in January 2019. tional analysis performed, together with sectors and contribute to inclusive growth. mitigating measures to protect vulnerable Inflationary and exchange rate pressures are households through a well-targeted social expected to remain as hydrocarbon earnings decline. The authorities are likely to adhere to Risks and challenges protection mechanism. Although Turkmen- istan has a social protection system in place, the exchange rate peg. Considerations to adjust a performance assessment is needed to eval- the national currency will largely depend on External and domestic risks to the econo- uate the targeting accuracy, and implications the evolution of public sector foreign liabilities. my will remain elevated. A decline in on the Sustainable Development Goals. TABLE 2 Turkmenistan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020f 2021 f Real GDP growth, at constant market prices 6.2 6.5 6.2 5.0 5.2 5.5 Inflation (consumer price index, period average) 3.6 8.0 13.2 13.4 13.0 8.0 Current account balance (% of GDP) -20.2 -10.3 5.7 -2.0 -2.3 -4.0 Financial and capital account (% of GDP) 5.9 6.1 3.6 4.2 4.5 4.5 of which: net foreign direct investment (% of GDP) 5.4 4.0 3.7 3.0 2.9 2.6 Fiscal balance (% of GDP) -2.4 -2.8 -0.2 -2.2 -1.5 -0.8 Total Public debt (% of GDP) 24.1 28.8 29.1 30.4 29.5 29.9 Source: National authorities, International Monetary Fund and World Bank Notes: e = estimate, f = forecast. MPO 83 Oct 19 Selected Country Pages ●  117 13.2 percent in 2018), contributed to a pick UKRAINE Recent developments -up in imports and a widening of the cur- rent account deficit to 3.3 percent of GDP in 2018 (vs 1.9 percent in 2017). Remittanc- In 1H2019 GDP grew by 3.5 percent es reached 9 percent of GDP in 2018. In (compared to 3.3 percent in 2018). The 1H2019, Ukraine’s terms of trade im- Table 1 2018 solid growth was driven by a strong agri- proved due to higher iron ore and wheat P o pulatio n, millio n 44.5 cultural harvest, and sectors dependent on prices, with exports growing 6 percent GDP , current US$ billio n 124.6 domestic demand—including services YoY. Imports, however, continued to GDP per capita, current US$ 2799 (domestic trade, transport, and the finan- grow faster at 8.6 percent YoY, driven by Internatio nal po verty rate ($ 1.9) a 0.1 cial sector) and construction. Household intermediate goods. The merchandise Lo wer middle-inco me po verty rate ($ 3.2) a 0.5 consumption continued to grow rapidly in trade deficit grew by 13 percent YoY in Upper middle-inco me po verty rate ($ 5.5) a 6.4 1H2019, supported by (i) one-off social 1H2019, but growth in the surplus of ser- Gini index a 25.0 transfers during the election cycle; (ii) vices trade and primary incomes (mostly b continued strong remittances from labor remittances) brought the current account Life expectancy at birth, years 71.8 migration to EU countries; and (iii) a re- deficit down to just $0.2bn, one third of Source: WDI, M acro Poverty Outlook, and official data. sumption of consumer lending. At the that in 1H2018. Notes: (a) M ost recent value (2016), 2011 PPPs. same time, manufacturing and investment Tight monetary policy, together with offi- (b) M ost recent WDI value (2017). growth remained weak, with the level of cial borrowings helped stabilize the ex- fixed investment (only 20 percent of GDP) change rate and boost international re- insufficient for sustainable growth. Invest- serves to US$20.8 billion at end-2018 ment was limited by (i) low FDI of just 0.6 (equivalent of 3.5 months of imports). percent of FY GDP in 1H2019, (ii) high Inflationary pressures have declined in GDP growth was solid at 3.5 percent in interest rates and structural weaknesses in 2019, with the CPI stabilizing at 9 percent, 1H2019 due to a good harvest and growth the financial sector (little progress has the National bank reduced the policy rate been made in resolving non-performing to 16.5 percent by September 2019. As in consumption supported by remittances, loans so far) and (iii) market distortions election related uncertainties have subsid- consumer lending, and social transfers from the absence of an agricultural land ed, foreign portfolio flows into local cur- during the elections. At the same time, market, an anticompetitive environment, rency government bonds have increased investment remained weak due to struc- and large number of SOEs. markedly by US$3 billion, attracted by Higher consumption helped reduce pov- high rates. As a result, Ukraine’s interna- tural bottlenecks and high interest rates. erty. Real wages continued to grow in tional reserves grew to US$21.8 billion in Ukraine faces macroeconomic vulnerabili- 2019 due to economic growth and contin- August 2019, while the exchange rate has ties from current expenditure pressures ued outward labor migration. As a result, appreciated to UAH25/$1 (vs UAH27.4/$1 and formidable financing needs to repay poverty (consumption per capita below average in 2018). public debt in 2019-2021. The growth 5.5 USD/day in 2011 PPP) declined to 3.5 The fiscal deficit was contained at 2.1 per- percent in 2018 from 4.9 percent in 2017 cent of GDP in 2018 (compared to 2.3 per- outlook depends on delivering on the am- and 6.4 percent in 2016. cent in 2017), with the primary balance at bitious reform agenda of the new govern- Strong domestic demand, together with 1.2 percent, which helped reduce PPG ment and mobilizing adequate financing. real exchange rate appreciation (by debt to 63 percent of GDP in 2018. At the FIGURE 1 Ukraine / GDP growth by sectors FIGURE 2 Ukraine / Actual and projected poverty rates and real private consumption per capita Percent Poverty rate (%) Real private consumption per capita (constant LCU) 20 50 25000 15 40 20000 10 30 15000 5 20 10000 0 10 5000 -5 0 0 -10 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2016-Q1 2016-Q3 2017-Q1 2017-Q3 2018-Q1 2018-Q3 2019-Q1 International poverty rate Lower middle-income pov. rate Agriculture Manufacturing Domestic trade GDP Upper middle-income pov. rate Real priv. cons. pc Source: UKRSTAT. Source: World Bank. Notes: see table 2. MPO 84 Oct 19 118  ●   World Bank ECA Economic Update Fall 2019 same time, the public wage bill grew to 11 goals, growth can increase to 4 percent by not linked to productivity growth in these percent of GDP in 2018 (vs. 9 percent in 2021. This will require progress in the sectors, (ii) resisting populist pressures to 2016) due to a significant hike in mini- following areas: (i) reviving sound bank tinker with the newly established pension mum wages and additional sectoral top - lending to the enterprise sector by com- indexation, (iii) further targeting social ups, while social assistance spending re- pleting the reform of state-owned banks; assistance programs. mained high at 4 percent of GDP. In 2019, (ii) attracting private investment into trad- If the necessary reforms are undertaken, pressures on the wage bill are easing due able sectors by establishing a transparent the poverty rate is expected to decline to a more prudent increase in the mini- market for agricultural land, demonopo- further in the medium term. As public mum wage, while improved targeting of lizing key sectors and strengthening anti- spending is constrained, labor income will the housing utility subsidy (HUS) is help- monopoly policy and enforcement, privat- become the most important driver of in- ing to reduce expenditures on social pro- izing state-owned enterprises, and tack- come growth for the bottom 40 percent. grams to 3.5 percent of GDP. Revenue ling corruption; and (iii) safeguarding Some rebound in the real sector, including performance in 1H2019 was affected by macroeconomic stability by addressing wage growth in the private sector will the shortfall of VAT on imported goods current expenditure pressures, securing support disposable incomes and help the and other external trade related proceeds adequate financing, further reducing infla- poverty rate to gradually decline. due to appreciation of the hryvnia, alt- tion, and rebuilding international re- hough this was offset by overperformance serves. If reforms do not progress and of other revenue sources due to higher than expected GDP growth. adequate financing is not mobilized, growth could fall below 2 percent as in- Risks and challenges vestor confidence deteriorates, macroeco- nomic vulnerabilities intensity, and fi- Ukraine faces formidable financing needs Outlook nancing difficulties force a compression in domestic demand. in the next three years, which will require mobilizing sizable international financing. Ukraine will need to safeguard macroeco- Ukraine needs about $11 billion per year The growth outlook going forward de- nomic stability and manage fiscal risks. (8 percent of GDP per year) to repay pub- pends critically on accelerating the reform The key to safeguarding fiscal sustainabil- lic debt and finance the fiscal deficit in momentum address the bottlenecks to ity going forward is to address current 2019, 2020, and 2021. To raise the neces- investment and productivity. Given the expenditure pressures and keep the fiscal sary financing, it is critical to maintain the strong performance in 1H2019, growth is deficit below 2.5 percent GDP to ensure reform momentum and fiscal discipline, projected to stay at 3.3 percent in 2019. the sustainable debt reduction. This will while continuing cooperation with devel- Going forward, if the new government is require (i) avoiding any additional hikes opment partners. able to deliver on its ambitious reform in wages in education and health that are TABLE 2 Ukraine / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 2.4 2.5 3.3 3.4 3.7 4.2 Private Consumption 1.8 8.4 8.9 6.7 4.5 4.0 Government Consumption 0.0 3.3 0.1 -0.5 0.1 0.1 Gross Fixed Capital Investment 20.1 18.4 14.3 10.5 11.3 12.1 Exports, Goods and Services -1.6 3.6 -1.6 -1.0 2.2 2.6 Imports, Goods and Services 8.4 12.8 3.2 7.2 6.0 5.0 Real GDP growth, at constant factor prices 2.4 2.6 3.3 3.4 3.6 4.3 Agriculture 6.0 -2.5 7.8 3.0 3.5 4.5 Industry 3.3 2.1 2.0 2.0 3.0 4.0 Services 1.4 3.7 3.0 3.9 3.8 4.4 Inflation (Consumer Price Index) 13.9 13.7 9.5 6.8 6.0 5.4 Current Account Balance (% of GDP) -3.7 -2.1 -3.2 -3.5 -3.8 -4.3 Net Foreign Direct Investment (% of GDP) 0.2 2.1 1.9 2.2 2.2 2.3 Fiscal Balance (% of GDP) -2.3 -2.3 -2.0 -2.2 -2.1 -1.9 Debt (% of GDP) 80.9 71.9 60.9 53.0 54.6 55.3 Primary Balance (% of GDP) 2.0 1.5 1.9 2.2 2.0 2.7 International poverty rate ($1.9 in 2011 PPP) a,b 0.1 .. .. .. .. .. Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 0.5 0.4 0.3 0.2 0.2 0.2 Upper middle-income poverty rate ($5.5 in 2011 PPP) a,b 6.4 4.9 3.5 2.9 2.3 2.0 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. (a) Calculatio ns based o n ECA P OV harmo nizatio n, using 201 6-HLCS. A ctual data: 2016. No wcast: 2017-2018. Fo recast are fro m 2019 to 2021. (b) P ro jectio n using neutral distributio n (2016) with pass-thro ugh = 0.87 based o n private co nsumptio n per capita in co nstant LCU. MPO 85 Oct 19 Selected Country Pages ●  119 agreements with international investors, UZBEKISTAN Recent developments net inflows of foreign direct investment (FDI) contracted sharply. The negative balance on the financial account reflected In the first half of 2019, real GDP growth the rapid growth of portfolio invest- increased to 5.8 percent (from 4.9 percent ment, foreign loans, and trade credits Table 1 2018 in the year-earlier period) supported by a and advances. P o pulatio n, millio n 32.3 surge in investment growth financed by The Central Bank of Uzbekistan (CBU) GDP , current US$ billio n 49.8 substantial increases in directed lending to has kept its policy rate on hold at 16 per- GDP per capita, current US$ 1540 state-owned enterprises (SOEs). Industry, cent since September 2018 (when it was a 103.1 agriculture, and services all experienced raised from 14 percent). However, the Scho o l enro llment, primary (% gro ss) a faster growth in the first half of 2019 com- interest rate transmission mechanism Life expectancy at birth, years 71.4 pared with a year earlier. continues to be distorted by significant Source: WDI, M acro Poverty Outlook, and official data. Annual consumer price inflation eased to state-directed lending at subsidized in- Notes: (a) M ost recent WDI value (2017). 13.6 percent in June 2019 (from 17.7 per- terest rates. Directed lending contributed cent in June 2018) reflecting a slowdown to a 52.8 percent year-on-year spike in in the growth of both food and non-food credit growth in the first half of 2019 (on prices. Slower inflation and stronger re- the back of a 50.8 percent increase in mittance inflows (up 13 percent year on 2018). Currency depreciation in Uzbeki- year) supported an expansion of private stan’s main trading partners (Russia, consumption in the first half of 2019. China, and Kazakhstan) and increased The current account deficit, which fell to domestic demand for U.S. dollars led to a an estimated 6.6 percent of GDP in the som depreciation of 8.8 percent against Economic growth accelerated in the first first half of 2019 (from 8.4 percent in the the U.S. dollar in August 2019 (compared half of 2019 due to increased investment year-earlier period), was financed by a to a 2 percent depreciation in the first in infrastructure and industry. Despite drawdown of reserves and borrowing half of 2019). The exchange rate has re- projected weaker conditions in its main abroad. Import spending rose sharply in mained stable since the end of August, the first half of 2019 (up 32 percent year supported by a recent decision by the trading partners, Uzbekistan’s medium- on year) driven by large capital imports CBU to allow the som to float more freely term economic outlook remains favorable by SOEs and new investment projects in in response to market conditions. as broad-based reforms continue to im- infrastructure, industry, and housing. Government revenue collection has re- prove the environment for new and high- Export earnings growth (up 27 percent mained strong despite cuts to direct tax potential growth sectors. Steady economic year on year) was fueled by higher ex- rates in January 2019. Nevertheless, ex- ports of gold (up 35 percent year on pansions in public investment, govern- growth and buoyant remittance inflows year), food (36 percent), and natural gas ment lending to SOEs, and reform- are expected to contribute to a modest and cotton (33 percent each). Large trans- related social spending schemes in- reduction in the poverty rate. fers resulted in a capital account surplus creased the overall budget deficit from of $135 million in the first quarter of 2.3 percent of GDP in the first half of 2019. Owing to higher repatriation of 2018 to estimated 3 percent of GDP in the investments under production -sharing first half of 2019. FIGURE 1 Uzbekistan / Real GDP growth and contributions FIGURE 2 Uzbekistan / Poverty, GDP per capita, and small to real GDP growth business development Percent, percentage points GDP per capita, US$ Percent 10 3,500 70 3,000 60 8 2,500 50 2,000 40 6 1,500 30 4 1,000 20 500 10 2 0 0 2006 2008 2010 2012 2014 2016 2018 0 Small business, % of GDP 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 GDP per capita, US$ (lhs) National poverty rate, % of population (rhs) Services Construction Agriculture Industry Net taxes Real GDP growth Source: Uzbekistan official statistics. Due to a lack of data access, the Bank cannot validate the official figures. Note: The national poverty line is based on a Source: Uzbekistan official statistics. minimum food consumption norm of 2,100 calories per person per day. Both the national poverty line and welfare aggregate exclude non -food items. MPO 86 Oct 19 120  ●   World Bank ECA Economic Update Fall 2019 In August 2019, the capital adequacy ratio driven by increased remittance inflows be financed by a gradual increase in FDI of the banking system was 14.9 percent, and a 30 percent nominal increase in so- and sustained donor inflows. Foreign ex- down from 16.5 percent a year earlier. cial protection payments. Minimum wag- change reserves stood at $27.7 billion in While the capital adequacy and liquidity es, salaries, pensions, and allowances August 2019 (the equivalent of 12.4 buffers remain above regulatory mini- were increased by 10 percent on August months of import cover); external buffers mum levels, both have been depleted 1, 2019. Public works and employment will remain comfortable over the medium over the last year owing to high bank programs were expanded in 2018 and the term. Gross external debt is expected to credit growth, which increased vulnera- first half of 2019 . decline slightly by 2020 to about 34 per- bility to shocks. cent of GDP. Stronger economic growth resulted in a decline in the official poverty rate from Outlook 11.9 percent in 2017 to 11.4 percent in 2018, though it is measured using non - Risks and challenges standard methods. Producing interna- GDP growth is expected to remain at tionally comparable poverty rates is chal- around 5.6 percent in 2019–20 before in- The prospect of turbulent global economic lenging due to limitations in PPP conver- creasing to 6 percent in 2021 as market conditions is the main risk to Uzbekistan’s sion factor data for Uzbekistan, but reforms open new sources of export-led economic outlook. The country is especial- World Bank data sources suggest the pov- growth, address production bottlenecks, ly vulnerable because its main trading erty rate at the LMIC line was approxi- and ease regulatory constraints. Annual partners face particularly heightened ex- mately 9.6 percent in 2018. The official inflation is forecast to increase by about ternal risks. These risks are mitigated by a unemployment rate was 9.1 percent in the one percentage point in 2019 following comfortable level of foreign exchange re- first half of 2019 (down from 9.3 percent increases in energy prices in August 2019 serves and low external public debt. Do- rate in the same period of 2018), including (18.8 percent for natural gas, 18 percent mestic risks emanate from the high rate of 16.8 percent among youth (16-25 years for electricity, and 12.5 percent for gaso- credit growth that continues to undermine old) and 12.7 percent among women. Ac- line). Inflationary pressures are likely to the transmission of monetary policy and cording to the official labor force survey, persist in 2019–20, due to further price heighten the potential for financial sector the number of workers employed in the reforms and wage increases, but should instability. The complexity of the next informal sector declined for the first time decline over the medium term. phase of structural reforms to tackle diffi- since independence, falling by 1.1 per- The current account deficit is expected to cult issues such as SOEs, the banking sec- centage points to 58.2 percent of total moderate from its 2018 peak but remain at tor, agriculture, and land reforms also employment in the first half of 2019. 5-6 percent of GDP in 2020–21 on account heighten domestic risks. Since September 2018, income growth of sustained heavy machinery and equip- among the bottom 40 percent has been ment imports. The shortfall is expected to TABLE 2 Uzbekistan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 2019 e 2020 f 2021 f Real GDP growth, at constant market prices 6.1 4.5 5.1 5.5 5.7 6.0 Private Consumption 1.4 1.3 3.8 5.2 5.3 5.4 Government Consumption 2.4 1.9 3.7 5.9 6.2 6.6 Gross Fixed Capital Investment 4.5 19.7 18.1 21.4 15.4 9.7 Exports, Goods and Services 7.9 1.3 10.7 8.2 3.5 4.5 Imports, Goods and Services -2.2 17.2 26.8 28.1 15.9 9.6 Real GDP growth, at constant factor prices 6.1 4.5 5.1 5.5 5.7 6.0 Agriculture 6.2 1.2 0.3 2.7 3.2 3.4 Industry 5.9 5.4 10.5 6.4 6.5 6.7 Services 6.2 6.1 5.4 6.6 6.6 7.0 Inflation (Private Consumption Deflator) 8.8 13.9 17.5 15.8 14.1 11.0 Current Account Balance (% of GDP) 0.3 2.5 -7.1 -6.4 -5.5 -4.8 Fiscal Balance (% of GDP) -0.5 -1.9 -2.1 -2.6 -2.1 -1.8 Debt (% of GDP) 8.6 20.2 20.6 24.0 25.5 25.4 Primary Balance (% of GDP) -0.4 -1.8 -1.7 -2.2 -1.6 -1.5 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. MPO 87 Oct 19 WORLD BANK ECA ECONOMIC UPDATE FALL 2019 Migration and Brain Drain The share of immigrants in Western and Eastern Europe has increased rapidly over the past four decades. Today, one of every three immigrants in the world goes to Europe. Furthermore, although globally only one-third of migration takes place within regions, intraregional migration is especially high within Europe and Central Asia, with 80 percent of the region’s emigrants choosing to move to other countries in the region. In high-income destination countries, migrants are often blamed for high unemployment and declining social services. There are also widespread concerns about brain drain in the migrant sending countries of Eastern Europe, the Western Balkans, 4PVUI $BVDBTVT  and Central Asia. This update focuses on the design of policies on labor mobility and presents the trends, determinants, and impacts of low- and high-skilled labor. ISBN (electronic): 978-1-4648-1506-5 © 2019 International Bank for Reconstruction and Development / The World Bank Some rights reserved 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://creativecommons.org /licenses/by/3.0/igo.