Armenia Systematic Country Diagnostic - Public...
Transcript of Armenia Systematic Country Diagnostic - Public...
Armenia
Systematic Country Diagnostic
“Future Armenia”
Key Findings, June 2017
Objective: Identify Forward Looking Options for Fostering Inclusive Growth to Support Poverty Reduction and Shared Prosperity
2
Armenia Systematic Diagnostic
Analyze Current Economic Model (poverty reduction and growth over the last decade)
Identify Elements of a New Economic model
Global Connectivity
Productive and Competitive Firms
Raising People’s Productivity and Removing Barriers to
Work
Resilience for Sustainable Growth
1. Introduction
2. Poverty, Vulnerability and Shared Prosperity
3. Slowing Growth, New Conditions and a New Growth Story
4. Global Connectivity
5. More Productive and Competitive Firms
6. Raising People’s Productivity and Removing Barriers to Work
7. Resilience for Sustainable Growth
Report Structure
4
Current Economic Model Brought Poverty Reduction and Growth, However,…
Until 2008, Armenia featured as one of the “pre-eminent reformers among the former Soviet Republics”
Since 2009, radically different and challenging circumstances, low growth-low investment environment and stalledpoverty 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
Source: NSSRA (poverty headcount, national) and WDI (real GDP per capita growth). National poverty rate reported.
Pe
rce
nta
ge
po
ints
Poverty Reduction Did Not Result in a Larger Middle Class; Instead, the Size of Moderately Poor and Vulnerable Grew..
5
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Extreme poor (Living below $US 2.5)Moderate poor (Living between $US 2.5 and 5)Vulnerable (Living between $US 5 and 10)
Source: World Bank staff calculations using harmonized consumption data for ECA countries. Poverty is measured at the international poverty line of US$2.50 per person per day, 2005 purchasing power parity. The threshold of $10 per day as the “middle class line” was estimated by Lopez-Calva and Ortiz-Juarez (2014) through a vulnerability-to-poverty approach and corresponds to the income level associated with a probability smaller than 10 percent of falling into poverty
Sustaining Poverty Reduction Would Require Growth In Labor Income, Pensions, Employment, Remittances, and Agricultural Income
6
-30 -25 -20 -15 -10 -5 0 5
Dependency rate
Employment rate
Labor income per employed adult
Per capita agriculture income
Per capita pension income
Per capita private transfer income
Per capita public transfer income
Per capita asset income
Per capita remittances income
Total reduction in poverty
Rural
Secondary Cities
Yerevan
Note: Based on the micro-decomposition of poverty change, negative numbers indicate that the factor helped to reduce poverty, positive numbers
indicate the opposite effect. Agriculture income includes value of home produced food. Following adjustments were made: 1) home consumed
agriculture production was added in household total income; 2) data was trimmed by dropping extreme values at 1%; 3) Consumption to income
ratio was trimmed at 1%.
Source: ILCS data for 2004 and 2015.
Contributors to poverty reduction, 2004-15
The “High-Low” Growth Performance was Due to i) Reliance on External Conditions (consequent Dutch Disease)
7
Export earnings and copper price
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
REER NEER
0
500
1000
1500
2000
0
2,000
4,000
6,000
8,000
10,00020
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Copper ($/mt) lhs Mineral, stones, metal and others (UD$ million) rhs Total
-
200
400
600
800
1,000
Total FDI (US$ million) Russia
0
500
1,000
1,500
2,000
2,500
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Remittances o/w: from Russia
Remittances, 2007-16 (US$ million) Nominal and Real Effective exchange rates
Foreign direct investment flows
ii) Fueled by Domestic Consumption
8
-2
0
2
4
6
8
10
2000-2008 2010-2015
Growth by sectors
Net indirect taxes
Agriculture
Industry
Construction
Services
GDP (at marketprices)
per
cen
tage
po
ints
-2
0
2
4
6
8
10
2000-2008 2010-2015
Growth by expenditures
Privateconsumption
Publicconsumption
GrossInvestment
Net Exports ofG&S
GDP at marketprices
per
cen
tage
po
ints
Growth decomposition by sector and expenditures
Source: NSSRA.
(iii) Supported by Only Piecemeal Reforms
ARMENIA ESTONIA
9
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
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
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
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
Source: EBRD Transition indicators.
Reform progress
Leaving Fundamentals Unaddressed
-15
-5
5
15
25
35
45
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Investment Savings current Account Balance
Savings, investment, and the current account balance (% of GDP )
Source: NSSRA
10
And Reliance on Countercyclical Government Spending (with Consequent Debt Burden)
0
10
20
30
40
50
60
-8
-7
-6
-5
-4
-3
-2
-1
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Public debt (rhs) Fiscal balance (lhs)
Fiscal and debt developments (% of GDP)
Source: Ministry of Finance and World Bank.
11
Under “Business As Usual” Armenia’s Modest Per-capita Growth Would not be Sufficient by 2050 to Reduce Poverty Significantly
12
Source: Simulations using the DEC-MFM Long-Term Growth Model (LTGM)
Systemic Demographic Change of Shrinking and Aging Population, If Unaddressed, Will Also Take a Toll
13
2.5
2.6
2.7
2.8
2.9
3.0
3.1
0
10
20
30
40
50
60
70
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
20
19
202
1
20
23
20
25
20
27
20
29
20
31
20
33
20
35
20
37
20
39
20
41
20
43
20
45
20
47
20
49
Age dependency ratio (% of working-age population)
Population, total (million)
Source: World Bank staff estimates based on age distributions of United Nations Population Division's World Population Prospects.
Demographic Trends and ForecastsPopulation Decline Has A Significant Impact on GDP GrowthPopulation Aging Has Even Larger Impact on GDP Growth
Looking Ahead: SCD ExaminesNeeded Elements of a Re-designed Economic Model
The SCD recommends the adoption of a new economic model. One that addresses both the fundamentals of growth-poverty relationships AND tackles the systemic challenges posed by aging and shrinking workforce and climate change.
• Re-balance growth from non-tradable to tradable goods and services through greater global connectivity - trade and investment, and from the perspective of the underlying drivers of that connectivity: hard infrastructure to connect to others (through land, and air), and soft infrastructure (ICT) as well as trade and investment policies. (chapter 4)
• Build a vibrant business sector that is dynamic, productive and competitive that creates jobs (a good buffer against the “new global normal” of challenging external conditions) (chapter 5)
• Raise people’s productivity and remove barriers to work participation as a cushion against productivity decline coming from an aging workforce. Removing barriers to participation – especially by women – is the only way available to counteract the negative demographics and raise the share of working age people that participate in the labor force (chapter 6).
• Build resilience into the economic model both to pro-actively tackle macroeconomic and microeconmic vulnerabilities but also to be forward looking and be prepared for the impacts coming from climate change, environmental degradation, and possibilities of natural disasters (chapter 7).
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RE-BALANCE GROWTH THROUGH GLOBAL CONNECTIVITY
Trade Outcomes
16
Low merchandise export competitiveness Low base, low sophistication, low diversification, low survival rate
-10
10
30
50
70
90
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
%
ARM
ALB
HUN
MDA
SRB
SVN
GEO
Exports of goods and services as a % of GDP
AR
M TU
R MK
D GE
O LV
AA
ZE
MD
A
CZ
E ES
T
LT
U SV
K
-40
-20
020
40
60
Exp
ort
Orienta
tion Index
-40 -20 0 20 40 60Ranking
Residuals Residuals
Exports 2012-20152005 2015 CAGR
Georgia 0.009 0.011 1.6%
Latvia 0.035 0.075 8.0%
Moldova 0.008 0.009 0.2%
Macedonia 0.022 0.029 3.2%
Armenia 0.008 0.009 1.2%
Czech Republic 0.826 1.033 2.3%
Slovakia 0.336 0.493 3.9%
Lithuania 0.127 0.167 2.7%
0
20
40
60
80
100
120
140
ALB ARM BIH GEO HUN MDA MKD SER SVN
2000 2005 2010 2014
0
500
1000
1500
2000
2500
3000
ALB ARM BIH GEO HUN MDA MKD SER SVN
2000 2005 2010 2014
Spell Length BIH ARM ALB GEO HUN MDA MKD SRB SVN
1 year 47.8% 36.8% 38.9% 39.5% 54.6% 45.9% 43.7% 48.9% 59.1%
2 years 29.2% 16.8% 20.7% 19.9% 37.3% 26.9% 26.5% 30.4% 42.0%
5 years 13.4% 5.0% 7.1% 5.5% 19.2% 11.4% 11.9% 13.9% 23.6%
10 years 4.2% 1.3% 2.1% 1.2% 9.4% 3.7% 3.5% 5.0% 13.1%
Number of export markets reached Number of exported products
Relative market shares (%) Export orientation index
Source: Authors’ calculations based on data from WDI, UN Comtrade, and UNCTAD
Trade Outcomes: Services
17
However, the ratio of trade in services
to GDP for Armenia is lower than for
comparable countries, such as
Albania, Hungary, and Georgia.
Largest share of services exports:
travel (62 percent), construction (11
percent), transportation (11 percent),
and computer and ICT services (11
percent).
Recent trends: travel is most dynamic,
(tourism). While the ICT subsector has
not grown as fast, it is also expanding. 0
5
10
15
20
25
30
35
40
45
ARM ALB BIH HUN MKD MDA SRB SVN GEO%
2005 2010 2015
Exports of services more than doubled between 2005 and 2015, growing at an average annual rate of 14.4%
Source: Authors’ calculations based on data from UNCTAD
Trade Outcomes: Agriculture
18
0
50
100
150
200
250
300
350
400
450
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015U
S$ m
illio
n
All Agriculture Beverages
Tobacco Crop and Livestock commodities
Growth of agricultural exports has been dramatic, but primarily driven by tobacco and (alcoholic) beverages (70% of agriculture exports)
Neither group draws significantly on Armenia’s agricultural resource base: Wine grapes, the raw material for
Armenia’s internationally renowned wines and spirits, are grown on just 10,000 ha, or only 3 percent of Armenia’s cultivable land
Cigarettes are manufactured from imported tobacco.
Armenia agriculture exports
Source: UN Comtrade.
Global Value Chains (GVCs)
19
Low participation in GVCs
The analysis of performance of key GVC-prone sectors suggests:
Firms in final and intermediate apparel and footwear have
managed to integrate most with international production networks.
ICT, in which Armenian firms have expanded over the past ten years,
has increasing links to global suppliers and clients.
Medical tourism is a promising export sector that may help move
Armenia’s export basket towards a more knowledge-intensive level
0
500
1000
1500
2000
2500
3000
ALB ARM BIH GEO HUN MDA MKD SER SVN
2000 2005 2010 2014
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Armenia Georgia Czech Republic Serbia Slovakia
%
1996 2000 2006 2011
Share of foreign value added in home exports
Share of home value added in foreign exports
Source: Authors’ calculations based on EORA
26%
24%7%
6%
11%3%
23%
Alternative/Renewable energy CommunicationsFood & Tobacco Software & IT servicesTransportation TextilesFinancial Services
Investment Outcomes
20
0
2
4
6
8
10
12
14
ALB ARM BIH GEO HUN MDA SRB SVN MKD
2001-2004 2005-2008 2012-2015
GEO
MDVARM
AZE
CZE
LTUBIH LVASVK
SVN
-50
510
1520
FDI (
% o
f GD
P)
6 8 10 12
Log of GDP per capita (PPP, av.)
1%
1%
5%2…
31%
2%49%
4%
2%
3%
Beverages Alternative/Renewable energyAutomotive OEM Coal, Oil and Natural GasCommunications Financial ServicesHotels & Tourism MetalsSemiconductors TextilesConsumer Products
FDI integration
FDI - % of GDP FDI inflows by sector
2004-14
2014-16
Source: Authors’ calculations based on WDI. Source: FDI Markets
Diaspora
21
Between 9 and 11 million individuals of Armenian descent live worldwide.Contribution through financial, philanthropic and (intangible) institutional, knowledge and network transfers
Under-utilized potential to support increased international trade, investment flows, knowledge transfer and innovation: Globally, the size of a country’s diaspora is correlated with both trade and investment. In Armenia, little correlation between migrant destinations, trade, FDI.
Members of the diaspora best placed to identify opportunities in Armenia with their combination of outside know-how and intimate knowledge of the home country.
Diaspora engagement as promoting search networks, and help them scale up and institutionalize innovative ideas. Introduce linkages between diaspora members and home country agencies to benefit from the dynamism and
external experience in shaping domestic institutions, removing barriers to growth, and fostering innovation.
Trade Environment: Global Connectivity
22
High trade costs
Trade dependent on third countries (Georgia) Traditional transport services operators
require higher professionalization and modernization
Under-regulated road freight services Rail and ferry services not yet meaningful
alternative Intra-country connectivity an issue: less than
half of the road network in good or fair condition.
Good progress in air connectivity, border management
0
200
400
600
Armenia Georgia
% a
d v
alo
rem
Armenia’s Logistics Performance Index (2016)
Trade costs
Source: World Bank’s Trade Cost Database.
Source: World Bank’s Logistics Performance Index 2016.
Trade Environment: ICT
23
50
20
10
4 58
2
$0.19
$0.50
$1.19
$2.09
$2.42
$3.25
$4.76
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
0
10
20
30
40
50
60
Moldova Bulgaria Georgia Armenia Latvia Chile Albania
Mbps US$/Mbps
Broadband internet access has improved
Markets becoming more competitive in cities
Low penetration of high-speed fixed broadband
in rural and poorer areas due to a lack of
infrastructure and limited affordable options
Internet pricing has declined but affordability
remains an issue
Average speeds lower than in comparator
countries
Fixed broadband speeds (Mbps)Mobile broadband speeds (Mbps)
Monthly entry level fixed broadband basket
Source: ITU 2015.
Source: speedtest.net & Opensignal; adapted from Armenian operators and Akamai.
Trade Environment: Policy Infrastructure
24
Armenia’s membership of the Eurasian Economic Union (EEU) since 2015 brings opportunities as well as challenges.
• Trade policy was very open after Armenia’s accession to the WTO in 2003.
• While Armenia’s membership of the EEU has brought immediate benefits, it has also added bureaucratic burdens for trade outside the Union.
• Membership in the EEU constrains Armenia’s ability to negotiate deep preferential trade agreements with third countries.
• Medium- to long-term impacts are mixed with reduced benefits from structural and institutional reforms, and knowledge transfer.
• However, Armenia may be able to attract considerable interest for FDI seeking markets in the EEU because of its more attractive investment climate relative to other EEU members.
Recommendations
25
High degree of overlap between different dimensions of connectivity. Trade, investment, information, knowledge, technological flows, diaspora, and labor mobility are all intertwined.
How can Armenia increase a reform momentum supportive of knowledge and technology transfers for exports?
Take advantage of “exports enablers” to open new markets
(i) Leverage trade in services as a platform for the sophistication of exports
(ii) Have world-class ICT connectivity and services to overcome land connectivity obstacles. Enable international e-commerce.
(iii) Provide export intelligence through modern export promotion institutions;
(iv) Make better use of diaspora trade, investment, knowledge networks;
(v) Improve logistics constraints where possible, in particular with regard to the north-south corridor.
(vi) Take advantage of the EEU membership by positioning the country as a springboard for market-seeking investors looking to access the wider EEU market; Adopt an open policy towards FDI and technology transfer.
BUILD A VIBRANT BUSINESS SECTOR WITH MORE PRODUCTIVE AND COMPETITIVE FIRMS
Firms’ Characteristics
27
14.4%
19.8%
13.7%
0%
5%
10%
15%
20%
25%
Armenia Azerbaijan Georgia WesternBalkans
Central Asia EU NMS
total population labor force wage workers
SMEs account for the bulk of the firms, are crucial employers and important job creator.
Firms exhibit dynamism with characteristics of a successful and vibrant private sector… high rates of entrepreneurship, SMEs lead the way in job
creation, firms’ size increases at they grow older. More productive firms are younger, use more technology,
and are more innovative, Exporters are more likely to be innovators and foreign
owned.
Exports and outward orientation, innovation come together as productivity-enhancing characteristics
Ever tried to set up a business? Share of:
Size
Small
(<19)
Medium
(20-99) Large (>99)
Tota
l
Number of
firms
Agriculture 86 11 3 2
Manufacturing 87 9 4 12
Services 88 10 2 86
Employment
Agriculture 15 18 67 3
Manufacturing 19 18 63 17
Services 24 30 46 86
Revenues
Agriculture 8 11 81 6
Manufacturing 10 25 65 16
Services 17 20 63 78
Percentage of firms and employment by firm size in 2015
Source: 2016 Life in Transition Survey (EBRD).
Note: Authors’ elaboration from the SCR dataset. Small firms have less than 20 employees, medium-sized firms have between
20 and 99 employees and large firms have more than 99 employees.
Barriers to Enter and Grow
28
64.5%
0%
20%
40%
60%
80%
100%
Azerb
aija
n
So
uth
Cauca
sus
Ka
zakhsta
n
Germ
any
Kyrg
yz R
ep.
Arm
enia
Mo
ldova
Centr
al A
sia
Ko
sovo
Bu
lga
ria
Georg
ia
Ukra
ine
Se
rbia
Ta
jikis
tan
Russia
Mo
ng
olia
Be
laru
s
FY
R M
acedonia
Uzb
ekis
tan
Cze
ch R
ep.
Weste
rn B
alk
ans
Mo
nte
ne
gro
Latv
ia
Po
lan
d
Rom
ania
Lith
uania
Hungary
Alb
an
ia
Bo
snia
an
d H
erz
.
EU
NM
S
Cro
atia
Esto
nia
Cyp
rus
Italy
Tu
rke
y
Slo
venia
Slo
vak R
ep.
Gre
ece
Firms are constrained in their ability to enter markets and grow.
Slow growth in the entry rates of new companies
Difficulties by small firms in growing larger suggest significant barriers to entry and in terms of employing more workers or accessing capital.
There is scope for improving efficiency by shifting labor and capital to more productive firms.
2015
2013 <5 5 - 9 10 – 49 50 - 99 > 99
Less than 5 92 7 1 0 0
5 - 9 26 63 11 0 0
10 – 49 4 12 81 3 0
50 - 99 0 0 15 77 7
More than 99 0 0 2 8 90
Small firms struggle to grow (Firm-size transition between 2013 and 2015)
Success Percentage among those that tried to start business
Source: 2016 Life in Transition Survey (EBRD).
Note: Authors’ elaboration from the SCR dataset. Values indicate the percentage of firms in each cell. Categories indicate the number of employees
Agriculture Productivity
29
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
La
nd
Pro
du
ctivity
La
bo
ur
pro
du
ctivity
Agriculture, value added (constant LCU)/agric worker
Agriculture, value added (constant LCU)/ha agric land
While agriculture sector growth has been strong, closer
examination shows that the high growth rate is
unsustainable. Recent strong growth has been driven
largely by increased productivity of semi-subsistence
farms rather than the widespread adoption of improved
technology and a shift towards modern, commercial
agriculture. In fact, changes in the composition of
production have been modest.
Yield increases and public investments have driven sector productivity (increased use of fertilizer, improved seeds through subsidies, increase number of livestock, improved (subsidized) access to capital and extension services)
No room for complacency, if the agriculture sector is to continue growing and become more export-oriented. By focusing on input subsidies for the smallest farms rather than facilitating farm enlargement and building the institutional infrastructure for knowledge transfer, government has preserved this structure rather than driving its transformation.
Trends in agricultural productivity
Source: World Bank Development Indicators; National Statistical Services (NSS).
Policy Levers for Growth and Productivity
30
Business climate has improved, but implementation lags behind.
Improved performance in business climate indicators: Increasing its Distance to Frontier in the Doing Business Index (DBI) from 61 in 2010 to 74 in 2017, Ranking in the Global Competitiveness Index (GCI) from 97 in 2009-10 to 79 in 2016-17.
0 10 20 30 40 50 60 70 80
BIH
ALB
SER
MDA
HUN
ARM
SVN
Ease of doing business index (1=easiest to 185=most difficult)
Ease of Doing Business Index 2017 Global Competitiveness Index 2016
Source: WBG DBI 2017. Source: World Business Forum 2016.
Policy Levers for Growth and Productivity
31
Much room for further improvement:
Incomplete implementation of regulatory reforms (Armenia’s public governance lags behind its peers, particularly in the rule-of-law and the control of corruption)
Corporate governance is another area where implementation has been lagging. The legal framework is in place, but implementation is limited (limited transparency, limited effectiveness of Boards, limited protection of shareholders rights)Most problematic factors for doing business(Global Competitiveness Report, 2016)
World Bank Governance Indicators, 2015
Source: World Business Forum 2016.
Source: WBGI 2015.
Market Contestability
32
Lack of market contestability
Improvements in recent years (World Economic Forum’s Global Competitiveness Report (2016-17).
Legal framework has improved, but could be further strengthened.
But investors in Armenia face one of the highest risks in doing business among other European and Central Asian countries. Perceived risks are related to: (i) vested interests and cronyism; and (ii) unfair competitive practices.
Lack of market contestability in sectors providing production inputs (railways, utilities, internet connectivity) adds to the costs of firms operating in Armenia and reduces their competitiveness
Lack of competition in procurement and transparency in state aid.
0
2
4
6
8
10
12
14
Ukra
ine
Arm
en
ia
Bo
sn
ia a
nd H
erz
eg
ovin
a
Mo
ldova
Alb
an
ia
Ma
ced
on
ia,
FY
R
Bu
lga
ria
Rom
an
ia
Se
rbia
Ge
org
ia
Po
lan
d
Hun
ga
ry
Latv
ia
Lith
uan
ia
Esto
nia
Vested interests/cronyism Discrimination against foreign companies
Unfair competitive practices Price controls
Business risks related to weak competition policies (by component)
Source: Economist Intelligence Unit, 2017
Access to Finance and Innovation
33
Access to finance remains an important constraint to growth and private sector development. Only 3 percent of firms indicated that access to finance was not a problem in 2013, compared with an average of 49 percent across ECA countries. Skewed towards large firms (75 percent of them reporting having bank loan, against 31 percent of small firms), concentrated in Yerevan
0 5 10 15 20 25 30 35 40 45 50
ARM
ALB
BIH
GEO
HUN
MDA
SVN
SEB
2015 2016
Progress in the development of an
innovation ecosystem, but limited use of
innovation
45.7
020406080
100120140160180200
Domestic credit to private sector (% of GDP) 2015
Banking depth
Global Innovation Index, 2015-16
Source: WDI Source: Global Innovation Index 2016.
Recommendations
34
Support firms’ entry, growth and exit by:
Address regulatory and implementation gaps in the investment climate and strengthen the evidence, consultative and institutional base of regulations.
Reinforce the effectiveness of Competition Law by including competition principles in regulatory impact assessment; introducing true investigative powers; adjusting the level of fines; accounting for individual companies that operate under common control; ensuring competitive neutrality (state aid control, competitive/transparent e-procurement)
Strengthen conflicts of interest framework and follow through cases.
Improve corporate governance (improve corporate transparency, including disclosure of financial and non-financial information, strengthen Boards of Directors and protect the rights of shareholders)
Enable access to finance (implement the new secured transactions framework, develop the capital markets, promote savings; improve skills in MSMEs and in lenders). CBA is carrying out a financial inclusion assessment to identify the key policy and institutional constraints to access to finance.
Enhance access to innovation (innovation institutions; intellectual property rights; dissemination and commercialization of new technologies; marketplace for innovation; access to Armenian scientists abroad; international standards for R&D and private-sector innovation)
Build a modern agriculture sector using new institutional infrastructure and knowledge transfer (focus on medium-scale farms, farmers willing to invest in modern farming technology, and the knowledge needed to use this technology effectively; Facilitate farm enlargement through the land market)
RAISE PEOPLE’S PRODUCTIVITY AND REMOVE BARRIERS TO PARTICIPATION
Declining Labor Resources, Aging PopulationLow Labor Productivity Growth
80
85
90
95
100
105
110
115
120
125
2008 2009 2010 2011 2012 2013 2014 2015
Labor resources 2008=100
Emp 2008=100
Unemp 2008=100
Econ active 2008=100
36
Growth in labor resources, economically active, and employed workers, 2008-15
9.2
12.7 12.3 12.8
5.8
-12.8
-1.3
0.7
5.3
0.6
4.1
1.1
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Labor Productivity growth (percent change)
Source: Computed using Data from WDI
Source: Based on Data from NSSRA (2016) Report on Labor Market
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Armenia Georgia
Median Age of the Population (Years), 2000-2050: Population Aging
Source: UN Population Prospects 2015
Labor supply is affected by population shrinking and aging. The average worker (15-75) is 43 years old (in 2015) –she/he completed most schooling before transition.
Employment is contracting, unemployment growing and labor productivity growth slowing down – due to combination of demographics, job creation patterns, and changing skills demand
Workers’ Productivity: Low Foundational Skills
37
500452 450
516
607
469
InternationalAverage
Armenia Georgia Serbia SlovakRepublic
Turkey
TIMSS 2011 Grade 4 Math Achievement
Workers’ Productivity: Qualification Mismatch (Over-Education) Especially for Older Workers
38
4.8
4
5.1
3.8
66.2
66.4
72.6
72.1
28
29.4
22.3
24
0 20 40 60 80 100 120
Armenia
Georgia
FYR Macedonia
Ukraine
Individual (actual) match rates between worker education and job required education
Under-education Matched Over-education
05
10152025303540
Ove
r-ed
uca
tio
n (
%)
Un
der
ed
uca
tio
n(%
)
Ove
r-ed
uca
tio
n (
%)
Un
der
ed
uca
tio
n(%
)
Ove
r-ed
uca
tio
n (
%)
Un
der
ed
uca
tio
n(%
)
Ove
r-ed
uca
tio
n (
%)
Un
der
ed
uca
tio
n(%
)
Armenia (2013) Georgia (2013) Macedonia (2013) Ukraine (2012)
Young workers (15-29) Prime age workers (30-49) Older workers (50-64)
Source: Kupets 2015 based on STEP SurveyNote: Estimates based on STEPS (Skills Toward Employment and Productivity) household surveys of working-age adults (aged 15-64) residing in urban areas.Source: Handel, Valerio and Sanchez Puerta (2016
% over- and under-educated by age
1. Over-education is more common than under-education. Common for transition economies.2. Share reporting over-education is highest for older workers (like Georgia but unlike Macedonia or Ukraine). Degrees obtained during the Soviet era may have now become obsolete. 3. Younger workers also report over-education. Suggesting that education systems may not be keeping up with an evolving economy, failing to equip young people with sufficient skills and quality of education need for the labor market.
Workers’ Productivity: High Returns to Tertiary Education
Reflecting Demand for Skilled Workforce
39
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
2010 2011 2012 2013 2014 2015
Lower secondary Upper secondary Tertiary
Returns to schooling by level
Source: ILCS data. Note: Estimates from a standard OLS Mincer regression
0
5
10
15
20
25
30
No Yes
Invested in R&D
Major Obstacle Very severe obstacle
% of Firms Reporting Inadequately Educated Workforce to be a Constraint by Investment in Research and Development
Source: World Bank Staff estimates using BEEPS 2013.
Skills not a constraint for most firms . Higher share of Firms Investing in R& D report skills to be a constraint
Worker Productivity: Structural Transformation,
Skills Needed for Technology in Workplace
40
25%
44%
27%
14%11%
4%
37% 38%
19%
35%
18%
11% 10%
5%
53%49%
0%
10%
20%
30%
40%
50%
60%
AgricultureGDP
AgricultureEmployment
Industry GDP IndustryEmployment
ConstructionGDP
ConstructionEmployment
Services GDP ServicesEmployment
2000 2015
Armenia’s economic transformation, 2000-15
Source: NSSRA
74.867.9
80.1 83.8
59.8
36.6
88.882
98
83.3 85.8
65.1
0
20
40
60
80
100
120
Armenia Small firms (1-19 employees)
Medium (20-99employees)
Large (100+employees)
ECA Lower MiddleIncome
Percent of firms using own website
Percent of firms using email to communicate with clients/suppliers
Source: Enterprise survey 2013. Manufacturing and Service Sector Firms.
Firms’ use of ICT 2013
1. Rural workers, especially the rural poor, are predominantly in agriculture operating small scale semi-subsistence farms. Employment in agriculture declining, attributable to short term migration. Increasing diversification to rural non-farm employment.
2. Information technology, the expansion of broadband and greater use of digital technology bringing another change in the demand for skills
Work Participation Rates:Scope to Raise Women’s Participation
41
Source: World Development Indicators (2016)
Male-Female Difference in Labor Force Participation Rates, Ages 15 to 641.5 women for every
man enrolled in tertiary
education. However,
most do not participate
in the labor market.
An key obstacle to work participation by women – their care responsibilities.
Several countries have managed to raise women’s participation by addressing care needs.
Work Participation Rates:Women’s Greater Participation to
Offset Rising Dependency Rates & Gain in Aggregate Output
42
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
2015 2020 2025 2030 2035 2040
nu
mb
er o
f in
div
idu
als
0 t
o 1
4 o
r 6
5+
per
per
son
act
ive
in
the
lab
or
mar
ket
Scenario A: Labor participation does not change
Scenario B: Female labor force participation growing at average rate of 1.05% annually to equalizemale and female rates of participation in 2040Scenario C: Female and male labor force participation growing at average rate of 1.24% and 0.18%annually to equalize male and female rates of participation TO 80% IN 2040
Source: World Bank staff calculations using age specific UN population projections and modeled ILO estimates of labor force participation for 15-64.
Albania
Armenia Georgia
Croatia
Netherlands
Sweden Norway Finland
0
5
10
15
20
25
30
Gain in Output From Reducing Gender Gap in Participation (as % GDP)
Source: World Bank staff calculations following Cuberes and Teignier.
Trends in Ratio of Economic Dependents to Economically Active Persons 2015-2040
Recommendations
Education System Provides Skills Relevant for the Labor Market + Support Women’s Work
• Expand Early Childhood Education to cover children under 3; expand to rural areas.
• Improve teacher training in General and Tertiary education systems to teach technical and soft skills needed for labor market.
• Scholarships to rural students for tertiary enrollment. (support movement to non-farm)
• Reform National Center for VET Development and National Council for VET Development; improve VET curricula and integration with labor market.
• Establish clear pathway to STEM and improve student’s performance on STEM subjects
• Modernize workforce development
• Strengthen lifelong learning/adult education43
Support Matching of Workers to Jobs
- Improving job-worker matching by strengthening the State Employment Agency (SEA)
- facilitate the best job-worker matches; reduce skills mismatches, especially shortages of some types of skills, by providing career guidance and necessary active labor market programs (ALMPs)
- Low-income groups, including social assistance beneficiaries, need targeted activation policies to facilitate their transition to (more productive) employment.
BUILD RESILIENCE FOR SUSTAINABILITY
Role of Resilience In Mitigating Impact of Vulnerabilities
45
Vulnerabilities Resilience and Sustainability
Impact
Current and future aggregate economic output; individual
consumption
Macro resilience:
Macro policy; environmental regulations; disaster risk management;
management of natural resources
Macropolicy and the business cycle
Natural disasters; environmental pollution;
degradation of natural capital
Micro resilience: Consumption smoothing;
social protection; basic services; adaptation
Health shocks/job loss; impact of energy tariff increases; and other
individual shocks
Need for Resilience Policies at the Macro and Micro Levels
• Macrofiscal and financial: A sharp rise in Armenia’s public debt burden: 84 percent of public debt denominated in foreign currency. Debt sustainability analysis suggests that real GDP growth has the largest impact on Armenia’s debt indicators. Armenian financial sector appears to be healthy. CBA has employed macro-prudential policy tools to address risks from dollarization.
• Climate change is exacerbating natural and environmental vulnerabilities with significant implications for agriculture, such as an increase in the use of irrigation water, reduced yields of major crops, reductions in soil fertility, land degradation, and greater severity and frequency of extreme weather events. In 2013, financial losses to Armenia’s agriculture from extreme weather events amounted to AMD 23.9 million.
• Natural disasters Most of Armenia is also exposed to significant risk of earthquakes, hailstorms, and floods. It is estimated that currently more than 2.5 million people in 48 cities of Armenia are located in seismically active areas.
• Mining, one of the largest contributors to GDP and exports, is also a source of air and water pollution.
• Among Armenia’s natural resources, the use of water needs to be better managed, especially as future water availability appears to be uncertain due to climate change. Some areas outside Yerevan lack full time access to water.
46
• Targeted Family Benefit Program: Program reaches around 13 percent of the population in 2015, but could be better targeted: only 61 percent of its resources went to the poor. Low coverage of the poor. Concerns that program may discourage take up formal employment (although no evidence of work dis-incentive).
• Simulations show pensions played significant role reducing poverty and inequalities. Pensions cover 60 percent of poorest 20 percent of the population. Pension system consists of two components: (i) a defined benefit component that is financed from the State budget; and (ii) a defined contribution program that has been in place since 2014, which covers only civil servants and new labor force entrants since that date.
• Health affordability: households shoulder a large burden of health spending, especially on pharmaceuticals. Free primary health care services but 32 percent of poorest decile and 4.2 percent of richest decile report going without primary health care due to affordability concerns (ILCS, 2014). Targeting is a issue as many of the poor are not covered for the full Basic Benefit Package.
• Credit/financial access: Shallowness savings and credit markets inadequate to enable individuals to respond to shocks. Only 19.3 percent of adults (aged 25+) had an account at a financial institution in 2014. This is the lowest among peer countries, which had an average of 74.5 percent.
Recommendations
47
Macro resilience Micro resilience
Re-build fiscal buffers and mitigate fiscal risks Consider gradual implementation of pension targets for the defined benefit component (PAYG) and pursue as planned the re-establishing of the defined contribution component in 2018.
Strengthen response to climate change with a clear and comprehensive plan for adaption in agriculture. Translate Nationally Determined Contribution (NDC) document into an effective implementation strategy by promoting cross-sectoral dialogue.
Improve coverage and targeting accuracy of the Family Benefit Program (FBP) and promote labor activation among its beneficiaries. An important priority would be to strengthen the State Employment Agency (SEA).
Enhance capacity of Armenia’s Disaster Risk Management (DRM) system. mainstream DRM in urban planning and building disaster resilience in key infrastructure sectors such as schools.
Pursue the integrated delivery of social services, especially for marginalized and vulnerable families.
Implement existing environmental laws and regulations; strengthen fines and consequences for non-compliance; and raise public awareness.
Given the constrained fiscal space, improve targeting of the Basic Benefit Package (BBP) to improve affordability of health spending.
Improve management of forests Effort to deepen and broaden credit, savings, insurance, and capital markets needed to provide financial services and products to help households cope with shocks.
Strengthen management of water resources to ensure sustainable and productive use.
NEXT STEPS
Next Steps
• World Bank Management Concept Review (February 2017)
• Consultations on SCD concept (March 2017)
• Consultations on reform priorities (June 2017)
• Prioritization of Recommendations
• World Bank Management Decision Meeting
• Report Publication
49
THANK YOU