1 Brussels, Belgium, December 14-15, 2010 Policy Responses of the Western Balkans Countries to the Global Economic Crisis and Their Social and Labor Market Impact Mihail Arandarenko and Pavle Golicin

2 Summary  Impact of the crisis  Policy responses  New growth models  Conclusion

3 Impact of the crisis - growth CountryGDP *2011* Albania Bosnia and Herzegovina Croatia Macedonia, FYR Montenegro Serbia Kosovo under UNSC Source: International Monetary Fund (IMF), World Economic Outlook, October Note: * GDP projections.

4 Impact of the crisis - employment In Serbia, 6.1% points decline in April 2010 compared to October 2008 (LFS); historically, a record low since the total number of employed workers declined by 368,000 from pre-crisis period. Similar, although less dramatic situation can be found elsewhere in the region.

5 Impact of the crisis – employment elasticity Adjustments of labor market indicators unusually quick and strong in Serbia (employment elasticity 2.6). In comparison, a mild drop in Croatia (employment elasticity 0.2) although it suffered a much graver recession than Serbia.

6 Impact of the crisis – poverty Estimates (Armitage, 2009) show in 2009 that 5.8 million people in the Western Balkan were bellow 5$ line; 0.8 million more compared to the pre-crisis projections. Poverty loss ratio goes from 96.9% in Croatia and 68.2% in Bosnia to 14.9% in Albania and Montenegro and 12.9% in Macedonia.

7 Policy responses Monetary, exchange rate and banking policies Fiscal and budgetary policies Stimulus packages Labour market and social policy measures

8 Monetary, exchange rate and banking policies MeasureImpact on distribution and poverty Impact on labour market Increase in guaranteed deposits RegressiveAmbiguous Increase of reference interest rate Harmful for debtors, the poor and middle class with mortgages Negative for labour demand Sale of foreign currency reserves Protecting the poor (preventing inflation), positive for middle class with foreign dnm. debts Negative for labour demand; positive for supply Removal of tax on interest on saving deposits and tax on capital gains RegressiveNegative for labour demand; negative for labour supply Profit tax exemption for retained profits RegressiveStimulating labour demand

9 Fiscal and budgetary policies Measure Impact on distribution and poverty Impact on labour market VAT rate increase Very regressive and anti- poor Negative for labour demand; positive for labour supply Increases in excises on oil and luxury products and property taxes Progressive Negative for labour demand; positive for labour supply Salary freezes and/or cuts in public sector Neutral or progressive Protecting employment in public sector; mildly negative for labour supply Pension freezes / cutsModerately regressive Neutral to positive for labour supply

10 Stimulus packages Measure Impact on distribution and poverty Impact on labour market Subsidizing interest rates on commercial banks’ credits to companies and citizens Regressive on distribution – supporting middle classes Increasing both labour demand and labour supply Take over of liabilities of loss- makers ProgressiveAmbiguous Conditional moratorium / write-off of penalty interest on social contribution arrears Ambiguous or somewhat progressive Positive in short term, but erodes the discipline Public investment in infrastructure projects Progressive; at first possibly regressive Positive for labour demand

11 Labor market and social policy Measure Impact on distribution and poverty Impact on labour market Emergency public worksPositive Positive for labour supply, but mainly in short run Subsidised apprenticeship programmes Progressive if most participants with lower education levels Increasing labour demand Establishment of emergency social funds Progressive Neutral to negative for labour supply Emergency cash payments to the poor ProgressiveNegative for labour supply Opening of specialised food shops for the poor Progressive Ambiguous or somewhat positive

12 New growth models The crisis has revealed weakness and unsustainability of the ‘old model’ based on consumption, demand, deficits and growing external and internal imbalances. The two largest economies, Croatia and Serbia, have in 2010 embraced new growth models. The need for new model has also been recognized in Montenegro and Bosnia, but perhaps less so in Macedonia and Albania.

13 Impact of new growth models Unlike the Serbian model whose primary goal is to reduce budget deficit, Croatian model has reduction and reorganization of public expenditures in its focus. Starting position in 2011 – out of the introduced measures, what was temporary and what remained?

14 Conclusion Western Balkans governments could have paid more attention to labor market and distributional impact of their anti-crisis measures. Equally, they should have these effects high on agenda while preparing post-crisis growth strategies. New models confronted with resistance of interest groups, mostly introducing modest social and economic changes.

15 Thank you! Mihail Arandarenko Foundation for the Advancement of Economics Pavle Golicin Public Policy Research Centre