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ACCUMULATION, COMPETITION AND CONNECTIVITY: RE-ENGINEERING A NEW GROWTH MODEL FOR ARMENIA APIRG CONFERENCE WASHINGTON DC, JUNE 1, 2013 Gohar Gyulumyan.

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Presentation on theme: "ACCUMULATION, COMPETITION AND CONNECTIVITY: RE-ENGINEERING A NEW GROWTH MODEL FOR ARMENIA APIRG CONFERENCE WASHINGTON DC, JUNE 1, 2013 Gohar Gyulumyan."— Presentation transcript:

1 ACCUMULATION, COMPETITION AND CONNECTIVITY: RE-ENGINEERING A NEW GROWTH MODEL FOR ARMENIA APIRG CONFERENCE WASHINGTON DC, JUNE 1, 2013 Gohar Gyulumyan World Bank Senior Economist

2 AGENDA Armenias recent Growth Dynamics Micro and Macro determinants of the new growth model Labor Market Dynamics and Symptoms Engaging with Skilled Diaspora

3 SOME FACTS ON ARMENIAS RECENT GROWTH DYNAMICS

4 STEADY INCREASE IN PER CAPITA GDP SINCE 1995, THOUGH DECELERATING NOW

5 GROWTH MOVED FROM SUPPLY-DRIVEN TO DEMAND- DRIVEN

6 WHILE INVESTMENT WAS ACCELERATING

7 WITH A WIDENING SAVING-INVESTMENT GAP

8 AND NEW INVESTMENT CHANNELED MAINLY TO THE NON-TRADABLE SECTOR

9 THE JOB IMPACT WAS A SLIGHT SHIFT FROM PUBLIC TO PRIVATE NON-TRADABLE SECTOR

10 THE BULK OF THE LABOR FORCE REMAINING IN THE AGRICULTURE SECTOR

11 WHILE FEMALE LABOR PARTICIPATION WAS NOT TRANSLATING INTO EMPLOYMENT

12 AND MANUFACTURING WAS LOSING COMPETITIVENESS

13 TO GROW SUSTAINABLY, THERE IS A NEED TO ENGINEER A SHIFT TO THE TRADABLE SECTOR By keeping investments high and channeling them into the tradable sector: ACCUMULATION By fostering the reallocation of labor into its most productive use: REALLOCATION By diversifying products, sectors and trading partners beyond traditional products, sectors and partners: TRANSFORMATION

14 ACCUMULATION MICRO DETERMINANTS OF SAVINGS We use ILCS for 2004, 2006, 2008 and Positive impact of income: an increase of 10% in the household income leads to 3.9% increase in the savings rate of the households Positive impact of volatility of expected income proxied by education level and access to borrowing Larger households tend to save less, probably in response to a more diversified income stream At high savings rates, increases in income have a much lower impact on savings rates than at lower levels of income

15 ACCUMULATION MACRO DETERMINANTS OF SAVINGS We use quarterly data over to estimate an Error Correction Model which combines long run and short run dynamics. The long run dynamics is: s = y tdr – 0.36reer -0.2crisis The short run dynamics is: s = g openness – 0.94 ECM -1

16 ACCUMULATION BOOSTING DOMESTIC SAVINGS Job creation measures: households will increase their saving as their income increase Financial market development: households will increase their saving as it become easier to use bank service and deposit rates are attractive Macroeconomic policy: sound macroeconomic policy reducing volatility and a competitive exchange rate will stimulate aggregate saving

17 ACCUMULATION FILLING THE SAVING GAP

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21 ACCUMULATION WHERE TO LOCATE INFRASTRUCTURE? Accessibility Poverty

22 ACCUMULATION WHERE TO LOCATE INFRASTRUCTURE? Agriculture potentialAgriculture efficiency

23 ACCUMULATION WHERE TO LOCATE INFRASTRUCTURE? High potential and low average efficiency Low potential and low average efficiency High poverty areas What are the principal differences between high and low efficiency households in the area? Productive projects differentiated to meet local needs and problems Conditional Cash Transfers and Nutritional Programs The inclusion of socioeconomic characteristics and access in the analysis allows for the identification of bottlenecks in areas of high potential but low or medium efficiency Productive and Efficiency potential based on market, socioeconomic, bio-physical and access characteristics. Typology Diagnostic from Poverty map

24 ACCUMULATION WHERE TO LOCATE INFRASTRUCTURE? Areas of high potential and efficiency should be studied to identify key factors behind their better performance In areas of low efficiency and high potential, bottlenecks should be identified: Reductions of transaction costs Access to optimal productive technologies through access to human capital and relevant technical assistance Strategies to diversify income Investments in infrastructure (accounting for their complementarities)

25 ACCUMULATION WHERE TO LOCATE INFRASTRUCTURE? In low potential areas the bottlenecks that prevent expansion to the productive frontier should be identified: The introduction of transfer of knowledge and new technologies to the area Problems in input and goods markets Access to more dynamic urban or international markets Land management and soil quality features Natural risks (e.g. weather variability and strategies to mitigate risk such as insurance).

26 ACCUMULATION WHERE TO LOCATE INFRASTRUCTURE? In critical areas the focus should be on social interventions. Thus short term assistance should be provided along the following Social networks Conditional transfer programs School nutrition programs

27 LABOR MARKET Starting Point To grow sustainably, there is a need to engineer a shift to the tradable sector…By fostering the reallocation of labor into its most productive use. Poor labor market outcomes are an important cause of poverty in Armenia. High unemployment, inactivity, and low-paid employment significantly reduce social welfare.

28 THE LABOR FORCE PARTICIPATION RATE IS COMPARABLE TO THE REST OF ECA… The economically active population is projected to declineif there are no demographic or policy changes from 2012 onwards …but there are longer-term challenges to Armenias labor supply Source: World Bank (2011) Demographic Change and Implications for Social Policy and Poverty

29 SOME EVIDENCE THAT INTERNATIONAL MIGRATION MAY ALSO AFFECT LABOR FORCE PARTICIPATION Source: Ongoing work led by Saumik Paul (2012) These bars represent the labor force participation of households with migrants relative to households without migrants.

30 THE EMPLOYMENT RATE IS LOWER THAN IN MOST EUROPEAN COUNTRIES …and the unemployment rate (near 20 percent in 2010) is among the highest in the region and is of long duration Source: Rutkowski 2012

31 THE UNEMPLOYMENT RATE IN URBAN AREAS AT 28 PERCENT IS VERY HIGH… …and people have little incentive to move from rural to urban areas, or to move in general, like most of ECA Source: Tiongson 2012 Source: Rutkowski 2012

32 AS A RESULT, MOST WORKERS REMAIN IN LOW-PRODUCTIVITY JOBS …which also tend to be low-paid, seasonal, part-time Source: World Bank 2012 Main CEM PresentationSource: Rutkowski 2012

33 WORLD UNDEREMPLOYMENT IS 17% IN 2011… …but Armenias underemployment rate (35%+)is among the highest in the world Source: Gallup 2012

34 LABOR FORCE PARTICIPATION RATE IS AT PAR WITH ECA AND SOCIAL PROGRAMS DO NOT APPEAR TO CREATE WORK DISINCENTIVES... No evidence to date that social programs, such as the Family Benefit Program (FBP), creates disincentives to work Members of beneficiary households versus non- beneficiary households: essentially the same labor market characteristics Source: World Bank (2011) Social Assistance Programs and Work Disincentives

35 IMPROVING LABOR MARKET OUTCOMES RESTS ON THREE PILLARS Strengthening labor demand and creating productive jobs Enhancing labor supply and improving workforce skills Improving job-worker matching Source: Rutkowski 2012

36 JOB CREATION/LABOR DEMAND AMONG FIRMS, INCIPIENT JOB CREATION LED BY NEW PRIVATE FIRMS WAS OVERTAKEN BY A SERIES OF GLOBAL CRISES… …and latent entrepreneurship is not particularly encouraging. This requires a better understanding of impediments to firm entry and business start-ups Source: Tiongson 2012

37 SKILLS/LABOR SUPPLY WORKFORCE SKILLS ARE SEEN BY FIRMS AS A CONSTRAINT TO THE CREATION OF NEW, MORE PRODUCTIVE JOBS… …and innovative and modern firms suffer from skill shortages the most Source: Rutkowski 2012

38 SKILLS/LABOR SUPPLY 2 THE LARGEST GROUP AMONG THE UNEMPLOYED ARE THOSE WITH SECONDARY GENERAL EDUCATION WITH NO TECHNICAL SKILLS, ALTHOUGH MANY POSSESS SECONDARY TECHNICAL AND TERTIARY EDUCATION. … This suggests that unemployment has two dimensions: those with no job-specific skills and those who do have skills but are still jobless. This requires helping the first acquire critical employable skills and helping the second find jobs that match their qualifications. Source: Rutkowski 2012

39 MATCHING FEW UNEMPLOYED WORKERS TURN TO THE PUBLIC EMPLOYMENT SERVICES (PES) OFFICE WHEN SEARCHING FOR A JOB… …and the effectiveness of job matching services provided by PES is limited because of the high unemployment/vacancies ratio. This requires improving the proportion of all vacancies that is reported to PES Source: Rutkowski 2012

40 Enhancing Armenia Growth by Engaging its Skilled Diaspora

41 Setting the Stage Three ingredients of success: Change in the status quo at home: a window of opportunity to open up and shake vested interests and entrenched elite (often after a major crisis) First generation high achiever (highly successful individual) from the skilled diaspora who lends his status to the country rather than seeks it from it Dynamic segments of economy at home which utilize contributions of diasporas In many countries, diasporas played a critical role in knowledge-based growth: China, India, Israel Example: Chinese approach to attract back high level migrants -- Specialized technology parks

42 INSTRUMENTAL VIEW OF INTERNATIONAL MIGRATION AND DIASPORAS As a pragmatic tool to advance domestic agenda Diaspora for what? – as a second step (never the first) in the argument. In our case: diasporas for growth and institutional development Key focus: domestic institutions and constraints (rather than migration flows) Key question: how can diaspora members help to design and implement actions to alleviate the constraints Paradoxes: o Diaspora members as antennas and mentors to reveal and foment dynamic segments of the home country institutions (particularly governments) o Diaspora as part of the country: who know the country but not (yet) part of the entrenched elite

43 Creating a credit reporting agency American-American real estate businessmen Business opportunity seen by others, but no investment had taken place yet Need for cultural intermediation and use of search networks 2004: ACRA Credit reporting LLC is founded: Involvement of WB, KfW, and Diaspora members in ACRA s advisory board, foreign-educated, local management team 2005: Outside, private Investors get involved in ACRA 2007: Online reporting launched Example and a key policy question Policy question A number of isolated examples like this exist in Armenia Which policies would facilitate their emergence? How to scale up and diffuse promising experiences ?

44 Instrument 1.to identify and link exceptions 2.to institutionalize exceptions 3.to solve concrete problems Conceptual framework: search networks Knowledge for Development, WBI Search networks are networks that allow you to rapidly identify people or institutions that are solving (part of) a problem closely related to the one you are trying to solve Antennas to construct a strategic shared vision of the future

45 Remittances Donations Investments Knowledge & Innovation Hierarchy of Diaspora Impact Institutional Reform

46 Armenia: huge diaspora (6 mln.) Unparalleled heterogeneity (by generation, skills etc): the need for high resolution strategy for engagement Significant remittances and large philanthropic contributions which were important for poverty reduction but may have been counter-productive for growth: shock-absorbers delaying reforms Yet engagement in the institutional development has been modest but promising First mover role: bringing new business, educational and management practices (e.g. Marriot hotel) Setting the Stage: Armenia

47 POLICIES FOR ENGAGEMENT WITH DIASPORAS In the long run: need for good business environment (investment climate). It is desirable but rarely present In the short and medium-run: focus on dynamic segments of the economy. Engage diasporas with these better performing dynamic segments of the economy Medium-term is pragmatic: take advantage of the realignment of the domestic elites Better performing segments of Armenian economy Higher education: American university, Slavic university Industry and services: IT cluster, jewelry cluster, tourism industry Public Sector: Enterprise Incubator Foundation (EIF), Armenia Development Agency (ADA)

48 POLICY IMPLICATIONS FOR ARMENIA Three-prong approach: 1.Facilitate a diversity of initiatives from the bottom-up: let one thousand flowers bloom Bringing cutting edge international expertise into higher education (particularly into new universities, such as AUA) Innovation clusters and venture capital (leveraging EIF expertise) What is at stake scenarios of country long-term future – Armenia Provide a framework for information sharing and lessons-learning from promising projects: contests and networks Contest between domestic actors to leverage diaspora members for long-term projects One or two pilot sector-specific diaspora networks (IT and innovation, education or health) 3. Establish an overall framework for engagement with diaspora which recognizes its heterogeneity: Diaspora for Growth Strategy Being humble and ambitious at the same time Humble: recognize huge heterogeneity of diaspora and design multiple nuanced messages Ambitious: focus on big challenges and growth issues rather than remittances and donations


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