achieving inclusive and resilient growth in...
TRANSCRIPT
ACHIEVING INCLUSIVE AND RESILIENT GROWTH
IN ARMENIA:
CHALLENGES AND OPPORTUNITIES
ARMENIA SYSTEMATIC COUNTRY DIAGNOSTIC
CONCEPT STAGE
March 2017
What is a Systematic Country Diagnostic?
• Conducted upstream of country partnership framework (CPF) to inform strategic
discussions with client countries and not limited to areas of engagement for WBG in
the country
• Diagnostic is NOT about what projects or programs the WBG could or will support in
the future. That will come later in when the CPF is prepared.
2
Identify key challenges and opportunities for country to accelerate progress in
poverty reduction and shared prosperity (the World Bank Group Twin goals) in a
sustainable way
• Available analyses
• Data
• New analyses
Gather Evidence
• Challenges
• Opportunities
Diagnose• What are the
key priorities?
Identify Priorities
ARMENIA SYSTEMATIC COUNTRY DIAGNOSTIC
CONCEPT STAGE
Outline
1. Context and progress towards the twin goals
2. Looking Ahead: SCD Objectives and Key Questions
3. Reigniting sustained and inclusive growth: What are the
key hypotheses the SCD will examine?
4. Approach
5. Timeline
4
5
1. Context and progress towards the twin goals
• Until 2008, Armenia featured as one of the “pre-eminent reformer among the former
Soviet Republics”.
• Since 2008, radically different and challenging circumstances, with a low growth-low
investment environment and stalled poverty reduction
-20
-10
0
10
20
30
40
50
60
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
per capita GDP growth
poverty headcount
FDI led, nontradable sectors, construction, high remittance flows
Construction sector collapsed, weakening remittance inflows, recession in main trading partner, contracting private consumption
Context
• Small and landlocked within a troubled
neighborhood
• Closed borders with Azerbaijan and
Turkey, Georgia is the only regional and
international trade route (Iran’s
opening)
• Demographic challenges - shrinking
and aging population
• Social challenges - opportunity and
equity gaps between women and men,
girls and boys
• Environmental/natural disaster risks
• Lagging implementation of some
critical reforms
• Country is multi-connected via trade,
financial flows, ICT, migration, and
diaspora
• Armenia could graduate to UPPER
middle income category in about 5
years6
Progress towards poverty reductionand shared prosperity
• Poverty reduction gains by and
large before 2009, stagnation
since.
• Spatial differences – capital city,
secondary cities, rural areas.
• Shared prosperity gains by and
large before 2009; consumption
of the poorest 40 percent barely
grew since 2009.
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5.61%
0.85%
3.20%
1.61%
2.17%1.89%
2.42%
1.87%2.15%
2004-2009 2009 - 2014 2004-2014
Bottom 40 percent Top 60 percent ALL
Spatial Differences in Poverty Rates in Armenia (% poor): Secondary Cities have the highest poverty rate
Shared prosperity in Armenia (consumption growth)
0
10
20
30
40
50
2008 2009 2010 2011 2012 2013 2014 2015
Rural areas Secondary cities Yerevan
What have been the drivers of poverty reduction?
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• Employment rate, labor and agriculture income,
pensions are key drivers of poverty reduction.
Remittances are driver of poverty reduction outside
Yerevan.
• Drivers have changed in importance after the 2009
crisis
• – for secondary cities: waning impact of labor income
and growing importance of pensions and remittances
• – for rural areas: greater importance of labor income,
agriculture income and employment; remittances
impact declined
• – for Yerevan: labor income, employment and pension
have become more important
Source: ILCS data for 2004, 2007 and 2015. Note: Based on micro-decomposition of poverty change, negative numbers indicate that the factor helped to reduce poverty, positive numbers indicate the opposite effect (World Bank staff calculations).
-15 -10 -5 0 5
Dependency rate
Employment rate
Labor income per employed adult
Per capita agriculture income
Per capita pension income
Per capita private transfer income
Per capita public transfer income
Per capita asset income
Per capita remittances income
Total change in poverty
Yerevan
Poverty change b/w 2004-2007 Poverty change b/w 2010-2015
-15 -10 -5 0 5
Dependency rate
Employment rate
Labor income per employed adult
Per capita agriculture income
Per capita pension income
Per capita private transfer income
Per capita public transfer income
Per capita asset income
Per capita remittances income
Total change in poverty
Secondary Cities
Poverty change b/w 2004-2007 Poverty change b/w 2010-2015
-15 -13 -11 -9 -7 -5 -3 -1 1
Dependency rate
Employment rate
Labor income per employed adult
Per capita agriculture income
Per capita pension income
Per capita private transfer income
Per capita public transfer income
Per capita asset income
Per capita remittances income
Total change in poverty
Rural areas
Poverty change b/w 2004-2007 Poverty change b/w 2010-2015
2. Looking Ahead:SCD Objectives and Key Questions
Can Armenia continue to rely on the past development model to achieve sustainable growthwith poverty reduction and shared prosperity?
Global external environment has changed drastically (low commodity prices, lowinvestment/liquidities)
Past drivers of growth have run their course (transition gains from structural opening/catching upand first generation reforms)
What could be the key enabling conditions to reignite economic growth that is both inclusiveand resilient?
Inclusive growth as a growth process where equal opportunities are provided to economicparticipants and benefit all.
Special focus women opportunity to find good jobs
Resilient growth means building macroeconomic buffers over time, protecting the mostvulnerable segments of the population with safety nets and managing natural and environmentalassets sustainably.
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SCD Objective: to formulate forward looking options for fostering inclusive and
sustainable growth in Armenia to support poverty reduction and shared prosperity
With a focus on ensuring greater equality of opportunity for women and men, girls and
boys
3. FOUR HYPOTHESES
Four hypotheses to be examined in SCD
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1. Armenia needs a new growth model and drivers of growth to adapt to its new circumstances
3. Investing in productive individuals will be key for inclusive growth
2. Supporting firms’ productivity and a vibrant private sector crucial for economic growth
4. Building national resilience to vulnerabilities will bring sustainable growth
Hypothesis 1: A new growth model and new drivers of growth
Prior to 2009, Armenia experienced a
“double Dutch Disease” (currency
appreciation with high financial
inflows (FDI, ODA, remittances,
exports).
After 2009 and an abrupt stop of
financial inflows, sluggish growth.
12
-2
0
2
4
6
8
10
12
14
2000-2008 2010-2015
Growth decomposition by factors
Labor
non-ICTCapital
ICT Capital
TFP
GDP Growth(RHS)
-2
0
2
4
6
8
10
12
2000-2008 2010-2015
Growth by sectors
Net indirect taxes
Agriculture
Industry
Construction
Services
GDP (at market prices)
perc
enta
ge
poin
ts
-5
0
5
10
15
2000-2008 2010-2015
Growth by expenditures
Private consumption
Public consumption
Gross Investment
Net Exports of G&S
GDP at market prices
pe
rce
nta
ge
poin
tsd
Lack of trade integration
less open than its peers (exports of goods and services 30% of GDP),
“more” landlocked with two closed borders,
ranked 141 among 160 economies worldwide in 2016 Logistic Performance
Index,
only half of the road network (excluding urban) is in good or fair condition,
low high-speed broadband penetration, high prices.
13
Exports of goods and services (% of GDP)
2325
2932
30 29
23
19
15 15
2124
28 28 2930
0
5
10
15
20
25
30
35
40
45
50
Armenia
Georgia
Europe &Central Asia
What will it take for new growth drivers to emergeand be sustained?
• What are the existing positive drivers? What can we learn from them? How can theybe accelerated and applied elsewhere in the economy?
→ Dynamism and resilience in the agriculture sector.
→ Success story of small but fast-growing IT industry
→ Recent growth rebalancing from consumption to exports and increasing diversification
of export destinations
→ Active and entrepreneurial diaspora
→ Prospects of Armenian mining and metals?
→ Possible re-integration of Iran and transit corridor between Iran and Russia/Europe.
• How can Armenia rebalance its growth model from domestic drivers (consumption,non-tradable) to exports and tradable?
→ Growth analysis and scenarios
• How much is Armenia connected to the rest of the World? What policies /regulationsare hindering the development of exports commensurate with Armenia’s particularendowments? What can be done to support a multi-connectivity agenda for Armeniato tap into regional and global markets?
→ Trade, Trade and Transport facilitation analyses with regional and global value chains
→ Trade in services
→ Multi-connectivity angle (ICT, diaspora)
→ Trade integration agreements (EEU)14
Hypothesis 2: Supporting productive firms and a vibrant private sector
15
Firm-level productivity characteristics*:
• Heterogeneity: A large number of relatively efficient firms coexist alongside
significantly less efficient competitors
• The policy environment in Armenia has a larger impact on firm-level productivity
than in other countries in the region.
• Among policy factors the overall quality of governance and the availability of
skilled labor have the largest impact on firm-level productivity.
• Export propensity is positively correlated with access to finance, higher rates of ICT
use, increased importing activity, access to infrastructure and productivity.
• Foreign-owned firms employ more highly skilled labor and are more productive.
* source: World Bank (2015) “Drivers of Dynamisms” Country Economic Memorandum
Investment climate
16
0
1
2
3
4
5
6
7
Subindex A: Basicrequirements
Institutions
Infrastructure
Macroeconomicenvironment
Health and primaryeducation
Subindex B:Efficiencyenhancers
Higher educationand training
Goods marketefficiency
Labor marketefficiency
Financial marketdevelopment
Technologicalreadiness
Market size
Subindex C:Innovation andsophistication…
Businesssophistication
Innovation
Armenia -4.1 Georgia - 4.3 Estonia - 4.8
• Armenia investment climate lags behind
• Powerful business groups with interests cutting across sectors influence policymaking and prevent
new market entrants.
• Lack of market contestability in sectors providing important production inputs (utilities, internet
connectivity) hinder the emergence of a dynamic export-oriented private sector.
World Competitiveness Index 2016 Doing Business 2016
What will it take for Armenia’s private sector to strive and export to the world?
17
• What are the top constraints to firm productivity? How can firm productivity beenhanced?
→ Measurement and comparison of Armenia firm-level productivity→ Determinants of firm productivity, firm and product survival, entry, exit→ Main constraint to firm productivity growth
• To what extent does the current investment climate support firms to access globalmarkets? What are the key constraints to be removed?→ regulations and implementation of rules, formulation and effectiveness of policies→ state footprint (interaction between the private and public sector, e.g. tax
administration)→ role of financial markets and their intermediation role against the background of low
domestic savings→ Property rights, constraint to entry and exit→ access to infrastructure including road, water, electricity, internet, finance→ access to skills→ enabling environment for innovation and knowledge
• How adequately do the incentives of the governance environment support firmproductivity?→ Role of the public sector as producer and employer→ competition and market contestability→ less traditional investment climate barriers such as corporate governance and
conflict of interest between the public and private sectors
Hypothesis 3: Invest in people’s productivity
Labor productivity growth slowed down significantly
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Structural shift from agriculture towards better jobs
but low productivity
Change in value added and employment between 2010 and 2015
19
0100200300400500600700800900
1,000...by value added
2010 2015
(Am
db
illio
n, c
on
stan
t 2
01
0 p
rice
s)
0
100
200
300
400
500... by employment
2010 2015
tho
usa
nd
s p
eop
le
Weak employment outcomes despite high education
• Weak employment outcomes
• 44% women, 60% men employed (low
participation)
• 19.5% women, 17.6% men unemployed
• About half of the jobs in Armenia are
informal, of which 72 percent in agriculture,
30 percent outside.
• One in four jobs is considered low-paying.
• More than half of the youth pursue high
tertiary education, general education is
close to universal.
• Skills matter as much as education. The
labor market rewards education (credentials)
combined with skills (job and socio-
emotional). an additional year of education
would increase hourly earnings by around 2.4
percentage points.
• Employers report difficulties in finding
workers with the needed skills.
• More than a third of households have
migrants who work abroad.
20
49.848.1
49.651.4 51.9 53.2 52.0 50.9
16.418.7 19.0 18.4 17.3 16.2
17.6 18.5
0
10
20
30
40
50
60
70
80
0
500
1,000
1,500
2,000
2,500
20082009201020112012201320142015
Employmentrate, %
Unemploymentrate, %
Total labourresources (000persons)
Economicallyactivepopulation (000persons)Totalemployment(000 persons)
Unemployment(000 persons)
Spatial differences in activity patterns reflect
variations in labor market opportunities
21
44%38% 41%
34%28%
16%
10%
6%
14%
13%
55%
54%
7%
10%
4%9%
1%
2%25%
24%20% 29%
5%
10%
13%22% 21%
14% 12%18%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Nonpoor Poor Nonpoor Poor Nonpoor Poor
Yerevan Secondary cities Rural
Employee Self employed Unemployed Retired Student Out of labor force
Activity status of household heads in Yerevan, Secondary cities and Rural areas
Source: World Bank staff calculations using ILCS 2015. Household heads
aged 15 to 75
What will it take for all individuals to meaningfully contribute to Armenia’s development?
• What are the key constraints to enhancing individuals’ productivity? Howcan all segments of the work-able population contribute to the economy,especially women?
• To what extent is education delivering and producing individuals with neededskills?
• What are the root causes of spatial disparities and their underlyingdynamics?
• What are the implications of a shrinking and aging population for the laborsupply and existing skills?
• What is the impact of migration on reservation wage, labor productivity,stock of educated individuals, and incentives to work? What are theimplications?
22
Hypothesis 4: Build resilience to vulnerabilities
• Limited available fiscal space
exhausted, leaving country
vulnerable to shocks
• Challenging financial sector
conditions: under-sized, bank-
dominated, with rising
vulnerabilities
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-7
-6
-5
-4
-3
-2
-1
0
0
10
20
30
40
50
60
2011 2012 2013 2014 2015 2016
External public sector debt (lhs % GDP)
Domestic public sector debt (lhs %GDP)
Fiscal balance (rhs - %GDP)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
External debt Domestic debt CBA's external debt
9.3
3.7
9.2
6.0
3.8
Armenia
Georgia
Europe & Central Asia (excluding highincome)
Lower middle income
Upper middle income
Bank nonperforming loans to total gross loans (%), 2016
Significant
macroeconomic
vulnerabilities
Household and environmental vulnerabilities
Individual level: Increasing share of the vulnerable and moderate poor; high share of out of
pocket spending on essentials (health, energy).
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Middle class (Living above $US 10)Vulnerable (Living between $US 5 and 10)Moderate poor (Living between $US 2.5 and 5)Extreme poor (Living below $US 2.5)
Natural and environmental: vulnerable to earthquakes, landslides; environmental risks
(health risks of air pollution), degradation of natural resources (water, erosion of
rangelands)
What will it take to build resilience?
• Macroeconomic sustainability, including fiscal, external, financial:
→ How to rebuild a fiscal buffer?→ How to anticipate and respond to the macroeconomic impact of a declining and
aging population on long-term growth and macroeconomic sustainability? How torespond to the macroeconomic impact of migration and remittances?
• Protecting households from vulnerabilities
→ What are the key vulnerabilities at the individual-level?→ How can vulnerabilities be mitigated and by which instruments or mix of
instruments? (social protection, health spending, dependence on natural assets,vulnerability to environment)
• Environmental sustainability:
→ How to respond to threats to the environment, climate change?→ How to manage vulnerability to natural disasters? Here strengthened disaster risk
management frameworks and role of citizen engagement would be important.
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4. APPROACH
Approach
• Diagnosis of past (circa 2004-2008 and 2009-2015) drivers of growth, poverty reduction,
and inclusion.
• Benchmark or evaluate performance using comparator countries:
Include select countries from group of lower middle income countries, upper middle
income countries, Eurasian Union, Eastern Partnership countries, EU member and
candidate countries (including Western Balkan countries)
Countries that could be considered “aspirational” for Armenia such as Singapore
When relevant the SCD will also compare Armenia’s experience and policies to
remittance receiving countries, landlocked countries, and countries experiencing similar
demographic patterns.
• Use data from NSS and international databases.
• Knowledge sources
building on existing knowledge
gaps in knowledge to be identified (e.g. urbanization, job diagnostic, trade and transport
facilitation)
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Criterion 1: Large and lasting impact on inclusive growth and resilience and hence on
poverty reduction and shared prosperity
Criterion 2: Macroeconomic context
Criterion 3: Sequencing, complementarity and feasibility of reforms
Criterion 4: Feedback from country experts (sounding board)
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The SCD will consider what the reform priorities would imply for spatial disparities as
well as and for strengthening the economic potential of both women and men.
Using the analyses, the SCD will prioritize the constraints and opportunities most
important for inclusive and resilient growth, based the following criteria:
Criteria for priorities?
5. Next Steps
Timeline
• Regional Operation Committee Concept Review (February 15)
→ Chaired by the World Bank Regional Vice President
• Consultations on SCD concept (March 2017)
• Consultations on reform priorities (June 2017)
• WB Management decision meeting (June 2017)
→ Chaired by the World Bank Regional Director
• Report publication (July 2017)
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