Regional Economic Trends Implications for Growth in FYR Macedonia Indermit Gill Chief Economist Europe and Central Asia Region The World Bank Skopje, March 18, 2011

Main Points Growth has returned. Growth rates will average about 4 percent in 2011, but Central and Eastern Europe (CEE) will grow only at 3 percent. Poland avoided a recession in 2009 and will grow at 4 percent in 2011 Turkey grew 7 percent in 2010 and will grow at 5 percent in 2011 Jobs have not returned. Unemployment rates are high in CEE and Turkey. Macedonia only country to see a small fall in unemployment rate in 2010, but its rate is the highest in Europe. Poverty rates have not gone up, but middle class has not done well. “Growth model” is being reassessed. The principal components are trade, finance, enterprise, innovation, labor and government. Macedonia should assess what policy changes are needed in these areas. 2

UPDATE THE REGION RECOVERS 11/9/2018

ECA’s growth in 2010 improved, but weakest among emerging economies Real GDP Growth (%), 2008-2012 4

Most economies in the region contracted in in 2009 GDP Growth (%), preliminary estimates for 2009 5

Most countries in the region grew in 2010 GDP Growth (%), ECA Region estimates for 2010 6

All countries in the region forecast to grow in 2011 GDP Growth (%), ECA Region forecasts for 2011 7

Capital inflows up in ECA, because of both official transfers and private portfolio flows Capital Flows (% GDP), 2007-2010 (medians) Europe & Central Asia Latin America & East Asia 11/9/2018

FDI Inflows in FYR Macedonia 11/9/2018

Industrial Production (Index, 2006=100) Industrial production has increased, but not back to pre-crisis levels in much of ECA Industrial Production (Index, 2006=100) 11/9/2018

Non-performing loans are up, and higher than other emerging economies Bank Non-Performing Loans (% Total Loans) 11/9/2018

Unemployment has stayed high in CEE, and continues to rise in CIS Unemployment Rate (%) 11/9/2018

Recessions reduce employment, depressions destroy it Relationship between GDP Growth (2009) and Change in Employment Growth (2008 to 2009) 11/9/2018

Higher social benefits generally mean higher fiscal deficits Relationship Between Increased Social Benefits and Fiscal Deficits (2008- to 2009) 11/9/2018

Fiscal Balance (% GDP), 2008-2010 In 2010, the median ECA country ran fiscal deficits of about 5 percent of GDP Fiscal Balance (% GDP), 2008-2010 15

In 2011, the median ECA country will run a smaller fiscal deficit Projected Fiscal Balance (% GDP), 2011 16

External debt ratios varied in 2009 External Debt (% GDP), 2009 17

External debt ratios roughly the same now External Debt (% GDP), 2011 18

THINKING ABOUT GROWTH MIDDLE INCOME Trap? 11/9/2018

A middle income trap? GDP per capita growth rates, 1900 to 2000 11/9/2018

Countries diversify, then specialize OECD Employment, 1960-1993, Economy-wide 20 sectors. 11/9/2018

Convergence benefits from being in the EU are enormous: Incomes Real GDP Growth (%) 1970-2007 and 1970 Per Capita GDP All Countries: R = 0.02 EU-27 Countries: R = - 0.60 22

Convergence benefits from being in the EU are enormous: consumption Consumption Growth (%) 1970-2007 and 1970 Per Capita Consumption All Countries: R = 0.03 EU-27 Countries: R = - 0.81 23

Half of Southeastern Europe’s exports already go to the EU Exports as a share of total exports to the world (%), 2008 24

Balkan growth prospects depend increasingly on Western Europe Business Cycle Synchronization (12-month moving correlation of industrial production with EU15) 25

Western European prospects are not the strongest Real GDP Growth (%), 2008-2012 11/9/2018

But keep this map in mind 11/9/2018

Location matters: Keep this map in mind 11/9/2018

Macedonia has a fortunate location 11/9/2018

A “GROWTH MODEL” FOR fyr MACEDONIA? QUESTION A “GROWTH MODEL” FOR fyr MACEDONIA? 11/9/2018

Growth model questions Trade. How can Macedonia take fuller advantage of being close to the EU? Finance. The financial sector has been kept stable, now how to make it contribute more to growth? Enterprise. Business-friendly changes in the laws have taken place, but are labor-related reforms lagging? Innovation. Are the secondary and tertiary education systems supporting enterprise and innovation? Labor. Can Macedonia grow any faster with such a high unemployment rate? Government. Fiscal balance has been maintained, but how should government spending be made more growth-oriented? 31