ECA REGIONAND THE GLOBAL CRISIS

PRODUCTIVITY AND THE HUMAN FACTOR

Klaus RohlandKlaus RohlandCountry Director for RussiaCountry Director for RussiaEurope and Central RegionEurope and Central RegionThe World BankThe World Bank

Higher School of Economics ConferenceHigher School of Economics ConferenceApril 7-9, 2009April 7-9, 2009Moscow, RussiaMoscow, Russia

Outline of the presentation

I. The global outlook

II. The impact on the ECA region

III. The impact on Russia

IV. What should policy do now?

I. World Bank’s Global Outlook for 2009-10

• Real GDP growth• -1.7% (2009)• +2.3% (2010) (recovery possible but

uncertain)

• World trade• -6.1% (2009)• +3.9% (2010)

• Oil prices• USD 47.8 (2009) [ Urals: $45 ]• USD 52.7 (2010) [ Urals: $45 -

$48]

Capital flows to developing countriesdrying out, oil prices likely to remain low

Gross capital flows to emerging markets and Russiabillion US dollars

-

50

100

150

200

20

07

-Q1

20

07

-Q2

20

07

-Q3

20

07

-Q4

20

08

-Q1

20

08

-Q2

20

08

-Q3

20

08

-Q4

20

09

-Q1

* -

10

20

30

40

50

60

70

Banks (left axis) Equities (left axis)Bonds (left axis) Russia-total inflows (right axis)

Sources: Dealogic and World Bank

*Jan-2009 on

quarterly basis

World Bank oil price forecastNominal price of average crude (Brent, Dubai and WTI), simple

average, $/bbl

71.12

96.99

47.7952.71

25

40

55

70

85

100

115

2007 2008 2009 2010

Source: World Bank

II. The impact on the ECA region

Crisis impact in ECA: early and severe

— concern that progress will unravel

Recession at best U-shaped— address the urgent but keep sight of the important

— question on future growth model in ECA

Looming human crisis

66

Rapid growth, sudden reversal,5-10% decline likely

Source: World Bank staff estimates.

Progress and Vulnerability

Poverty halved, but almost 40% poor or vulnerable

(in millions)103

48

173

135

202

294

1998-99 2005-06

Non-Poor: Above$5.00 a Day

Vulnerable:$2.50 to $5.00 aDayPoor: Below$2.50 a Day

Severe losses in stock markets

Stock market index, LCU

0

20

40

60

80

100

120

2008M01 2008M04 2008M07 2008M10 2009M01

EU10MI CISTurkeyEmerging AsiaLatin America

77

For now, ECA hit harder — Financial markets

Source: JP Morgan, Datastream, and World Bank staff estimates.

Crisis Impact

Nominal Exchange Rate Exchange rates/USD median values for each region

80

100

120

140

160

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09

EU10 floating EXRMI CISTurkeyEmerging AsiaLatin America

Exchange rate depreciations have been unusually large

Excess borrowing by corporates and households Loans to deposits ratios in ECA range from 100% for Czech Republic to

278% for Latvia (in Dec. 2008) High share of foreign exchange denominated borrowing

in 2008, FX loans/total loans ratios more than 50% for many countries (e.g., Bulgaria, Croatia, Estonia, Hungary, Latvia, Lithuania, and Romania)

Corporate debt levels require high rollover rates

High exposure of foreign banks to ECA markets

88

For now, ECA hit harder — Product marketsCrisis Impact

Industrial Production Index (seasonally adjusted)

95

105

115

125

135

2008

M1

2008

M2

2008

M3

2008

M4

2008

M5

2008

M6

2008

M7

2008

M8

2008

M9

2008

M10

2008

M11

2008

M12

LAC South AsiaECA MNAEast Asia excluding China

Exports and Imports, % yoy change, 2009 (f)

-6-5-4-3-2-101234

EAP ECA LCR MNA SAR AFR

%

Exports Imports

Contraction in trade in 2009

In Q4 2008 output shrank back to 2005 levels

Source: World Bank staff estimates.

Source: World Bank staff estimates.

99

For now, ECA hit harder - Labor marketsCrisis Impact

Declining growth in remittances

Fewer jobs, labor markets expected to weaken further

Change in Unemployment Rates, Latest Available to One Year Earlier

4.6

2.2

1.5

0.2 0.2 0.1

0.8

-1.0

1.0

3.0

5.0

Latvia Turkey Russia Ukraine Hungary Kazakhstan Armenia

(%)

*Projection. Source: DECPG.

Note: January 2009 unemployment data or latest available.Source: World Bank staff estimates.

Growth of migrants' remittances(y/y % change)

-5

0

5

10

15

20

25

30

35

2005 2006 2007 2008* 2009*

Global ECA

1010

Looming human crisis

• Continuing downward revision of growth projections but worse still to come

• Declines in real incomes as currencies depreciate: in H2 2008 Hungary (-30%), Poland (-40%) Turkey (-25%) Ukraine (-70%)

• Unprecedented job losses: 1 percentage point a month in some countries (Latvia, Estonia, Russia, Turkey, Ukraine)

• Rapid increase in wage arrears (Russia, Ukraine)• Low income CIS countries particularly vulnerable: return of

migrants and declining remittances• Weak social service delivery mechanisms stretched to limit• Protests in Bulgaria, Latvia, Lithuania, Hungary, Romania,

Ukraine• Societies may be unable to absorb large salary

adjustments as required in some programs

Human Crisis?

11

Looming human crisis—poverty and vulnerability rising

Human Crisis?

By end-2010, 7.1 percentage point increase in poor or vulnerable (34 million people back to poverty or vulnerability)

By end-2010, 2.6 percentage point increase in poverty (12 million people back in poverty)

33.5

27.4

25.0

29.4

32.130.5 30.8

32.4

22

24

26

28

30

32

34

36

2007 2008 2009 2010

Pre Crisis Projection January Projections

Current Projections

$5 a Day Poverty and Vulnerability

Projections (%)

8.0

6.9

6.2

5.2

7.16.8

7.87.7

4

5

5

6

6

7

7

8

8

9

2007 2008 2009 2010

Pre Crisis Projection January Projections

Current Projections

$2.5 a Day Poverty Rate Projections (%)

Source: World Bank staff estimates.

Source: World Bank staff estimates.

III. The impact on Russia, 2009-10

Table 1.7. Outlook for 2009-2010 2009 2010 World growth, % -1.7 2.3 Oil prices, Urals, USD/brrl 45 45 GDP growth, % -4.5 0.0 Federal government balance, % -7.4 -6.0 Current account, USD bln. 31 16 Net capital outflows, USD bln. 170 90 Source: World Bank projections.

Russia’s Labor markets—adjusting rapidly

Table 1.3.Labor productivity, Disposable Income, Wages, and Unemployment

2006 2007 2008 Q4 2008 09-Jan 09-FebGDP growth, %, y-o-y 7.7 8.1 5.6 1.1** -8.8* -7.3*Total employment, million people 68.8 70.5 71 70.6 69.6 69.2

Employment growth, %, y-o-y 0.8 2.4 0.6 -0.3 -0.4 -0.4

Labor productivity growth, %, y-o-y 6.8 5.6 5 1.4 n/a n/a

Real disposable income growth, %, y-o-y 13.5 12.1 2.7 -5.8 -10.2 -4.7

Real wage growth, %, y-o-y 13.3 17.2 10.3 5 1.9 0.1

Average monthly wage, USD 392 532 694 668 544 524

Unemployment (%, ILO definition, e-o-p) 7.2 6.1 6.3 7.1 8.1 8.5 Source: Rosstat.

* - preliminary estimate of the Ministry of Economy ** - preliminary etimate by the WB staff

RUSSIA: Social impact—spreading fast

Figure 2.2 Projected loss of employment in Russia in 2009

0 2 4 6 8 10 12 14 16

Manufacturing

Construction

Retail

Agriculture

Other

Loss in employment, % change (top bar)

0 100 200 300 400 500 600 700 800 900 1000Loss in employment, thosands (bottom bar)

RUSSIA: Projected amount of poor peoplebefore and after the crisis (in millions), 2008-09

0.00

5.00

10.00

15.00

20.00

25.00

2008 2009ADDITIONAL number of poor after the crisisProjected number of poor before the crisis

FISCAL POLICY RESPONSE—initially supporting banks and enterprises

Table 2.1. Summary of fiscal anti-crisis measures—introduced in 2008 and announced for 2009 Billions of rubles Distribution of each policy measure

as percentage of total 2008 2009 Total

Total as a share of

GDP 2008 2009 Total Strengthening the financial

sector 785 625 1410 3.28% 72.08% 34.06% 48.23% Supporting the real economy 304 798.3 1102.3 2.50% 27.92% 43.51% 37.70%

Protecting the vulnerable - 111.5 111.5 0.25% 0.00% 6.08% 3.81% Transfers to regions - 300 300 0.67% 0.00% 16.35% 10.26%

Total 1089 1834.77 2923.77 6.69% 100.00% 100.00% 100.00% % of GDP 2.62% 4.07% 6.69%

Source: World Bank staff estimates, Government of Russia Note: Excludes quasi-fiscal and monetary measures, state guarantees in the amount of 300 billion rubles planned for 2009, measures that were planned before the crisis, such as increase in the minimum wage and indexation of pensions, as well as external crisis related lending to CIS countries and Mongolia.

Addressing the human crisis in Russia:Shifting policy focus to households

• Win-win proposal: – strengthens safety net during crisis– smart macro policy—supports domestic consumption

• Affordable and efficient– With moderate additional spending (1% of GDP), if well targeted, it

is possible to substantially alleviate the social impact

Cost of the program as a share of GDP

Reduction in poverty rate, percentage

points

Reduction in poverty, million

people

Child allowance 0.28 0.8 1.13Low-end pensions 0.59 1.8 2.54Unemployment benefits 0.14 0.3 0.42Total 1.00% 2.9 4.09

Source : World Bank estimates.

Table 2.4. A social protection stimulus package of 1 percent of GDP, implemented in a period from April 2009 to March, 2010 could help move 4.1 million people out of poverty compared with a no-program scenario

What should policy focus on now?

– Urgent for short-term social stability • protecting the poor and vulnerable

– Important for long-term productivity growth• investing in human capital (health and education

reform)• eliminating worst infrastructure bottlenecks• Supporting SMEs• Accelerating structural reforms (banking sector,

investment climate etc.)