Economic Challenges in the Enlargement Region

2 Where are we now, a year after the crisis started? Good news for enterprises, but external financing requirements clouds the future Industrial production stopped falling in the last couple of months But USD164 billion of external financing requirements (for CAD and debt amortization) needed in 2010 Bad news for families as poverty and unemployment rise, while household debt clouds the future Between 2002 and 2008 number of poor decreased by 15% But now estimate is that poverty rate will be higher by 5 percentage points Tough times ahead for governments, and social security debt clouds the future Fiscal deficits will rise from 2.4 percent of GDP in 2008 to 4 percent of GDP in 2009 Stress tests indicate pension deficits rising to 5-6 percent of GDP

Financing requirements Poverty trends

Response to crisis: accelerate structural reforms With unemployment on rise and increasing competition for investors these countries should focus its effort on: creation of jobs through new investments: business environment easing the access to markets and flow of goods: Infrastructure Since at the same time governments are faced with tighter budgets they need to: increase effectiveness of spending in large social sectors including pensions and social protection create savings by speeding up public administration reform

Regulatory reforms to improve business environment Countries from our region are not among the top ranked countries (except FYRM) as per Ease of Doing Business index 2010 In some cases all suffer from the same problem, like for instance dealing with construction permits Recovery from the global economic crisis would assume agile private sector Economy Ease of Doing Business Rank Macedonia, FYR32 Montenegro71 Turkey73 Albania82 Serbia88 Croatia103 Kosovo113 Bosnia and Herzegovina116 Economy Dealing with Construction Permits Macedonia, FYR137 Montenegro160 Turkey133 Albania173 Serbia174 Croatia144 Kosovo176 Bosnia and Herzegovina136

Regulatory reforms to improve business environment Most of these countries need to ensure: Better contract enforcement Land management and property rights Strengthen minority shareholders protection Simplify the exit from business (i.e. bankruptcy legislation) while ensuring protection for creditors Some countries started Regulatory Guillotine i.e. Croatia and Serbia

Infrastructure State of infrastructure is in most cases below European standards This is significantly limiting trade and investments in the region At the same time governments spending on infrastructure is not low which indicates poor state of public investments management Most of the attention should be paid to energy and transport sectors

Social Protection Growth of unemployment due to impact of the crisis will require increased social spending Most of the countries from the Enlargement region have high levels of spending on social protection But significant share of it goes to veterans, which shows that these countries actually spend little on social protection. Public Spending on Social Assistance excl. veterans, % of GDP

Reform of Social Protection Harmonization of benefit structure and objectives with the EU member states Linking cash benefits to social care services and labor market activation Improving the monitoring and reporting on benefit application and intake Improving beneficiaries registries Reducing exclusion 9

Pensions

Population in Region is Aging: - By 2050, the percentage of elderly almost doubles while the percentage of working age available to support both the elderly and the children falls Pensions

Financial Crisis Impact Pales with Comparison to Coming Demographic Crisis Even in the most severe crisis scenario which no longer seems likely, the fiscal impact is less than half of whats coming from the demographics

How Can Countries Prepare for the Demographic Crisis? Raise retirement ages, particularly for women Retirement ages are still below western European levels, particularly for women Mens life expectancies are a bit lower than western European, but womens are not Lower the extent of early retirement As many as 2/3 of new pensioners are retiring earlier than legislated retirement ages in some countries Index pensions in payment to inflation only Protect the pensioners purchasing power, not necessarily income relative to wage earners Start preparing for elderly without pension rights Most elderly in former socialist countries have pension rights now But many of the current working age are not in the formal labor market and not contributing

Public Administration Reform

Due to severe deterioration of the fiscal stance (i.e. increasing fiscal deficits primarily due to falling revenues, except for Albania) The need for savings in the public sector become more pressing

Public Administration Reform Most of the efforts are aimed at reducing the wage bill Bosnia, Kosovo, FYR Macedonia, Montenegro, and Serbia, all started the work on new legislation for public sector employees and their wages Some of the most important measures include: broadening the wages definition (ME); improved payroll system and wages setting process (BH, KO, MK and RS); etc.

How is the Bank supporting Structural reforms implementation?

World Bank lending FY09/11 The Bank is providing Development Policy Loans, Investment operations and Analytical Services To the region as a whole we are considering commitments of approximately $5.3 bn (DPLs – $2.5bn and Investment lending $2.8bn) Largest share will be for Turkey, with expected commitments of $ 3.3bn, of which $2 billion are slated for DPLs

World Bank lending FY09/11 Development Policy Loans provide untied, direct budget support to governments for policy and institutional reforms (typically energy sector, social sector, private and financial sector, human capital and employment) Investment operations cover a broad range of sectors: energy and transport, environment, social sectors Bank is also providing programmatic and tailored analytical studies for our client countries AAA examples include: Public Expenditure Reviews, Poverty updates, Country Economic Memoranda, Labour market assessments