1. ECA REGION AND THE GLOBAL CRISIS PRODUCTIVITY AND THE HUMAN FACTOR Klaus Rohland Country Director for Russia Europe and Central Region The World Bank Higher School of Economics Conference April 7-9, 2009 Moscow, Russia

2. 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?

3. 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]

4. Capital flows to developing countries drying out, oil prices likely to remain low

5. 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

6. 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

7. Severe losses in stock markets 77 For now, ECA hit harder — Financial markets Source: JP Morgan, Datastream, and World Bank staff estimates. Crisis Impact 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

8. 88 For now, ECA hit harder — Product markets Crisis Impact Industrial Production Index (seasonally adjusted) Exports and Imports, % yoy change, 2009 (f) Contraction in trade in 2009 In Q4 2008 output shrank back to 2005 levels Source: World Bank staff estimates.

9. 99 For now, ECA hit harder - Labor markets Crisis Impact Declining growth in remittances Fewer jobs, labor markets expected to weaken further *Projection. Source: DECPG. Note: January 2009 unemployment data or latest available. Source: World Bank staff estimates.

10. 10 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. 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) $5 a Day Poverty and Vulnerability Projections (%) $2.5 a Day Poverty Rate Projections (%) Source: World Bank staff estimates.

12. III. The impact on Russia, 2009-10

13. Russia’s Labor markets—adjusting rapidly

14. RUSSIA: Social impact—spreading fast

15. RUSSIA: Projected amount of poor people before and after the crisis (in millions), 2008-09

16. FISCAL POLICY RESPONSE —initially supporting banks and enterprises

17. 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

18. 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.)