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Brussels, Belgium, December 14-15, 2010

Policy Responses of the Western Balkans Countries to

the Global Economic Crisis and Their Social and Labor

Market ImpactMihail Arandarenko and Pavle Golicin

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Summary

Impact of the crisis

Policy responses

New growth models

Conclusion

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Impact of the crisis - growth

Country GDP

2007 2008 2009 2010* 2011*

Albania 5.9 7.7 3.3 2.6 3.2

Bosnia and Herzegovina 6.1 5.7 -3.1 0.5 3.0

Croatia 5.5 2.4 -5.8 -1.5 1.6

Macedonia, FYR 6.1 5.0 -0.8 1.2 3.0

Montenegro 10.7 6.9 -5.7 -1.8 4.5

Serbia 6.9 5.5 -3.0 1.5 3.0

Kosovo under UNSC 1244 4.0 5.4 4.0 4.6 5.9

Source: International Monetary Fund (IMF), World Economic Outlook, October 2010. Note: * GDP projections.

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Impact of the crisis - employment In Serbia, 6.1% points decline in April 2010

compared to October 2008 (LFS); historically, a record low since the total number of employed workers declined by 368,000 from pre-crisis period.

Similar, although less dramatic situation can be found elsewhere in the region.

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Impact of the crisis – employment elasticity

Adjustments of labor market indicators unusually quick and strong in Serbia (employment elasticity 2.6).

In comparison, a mild drop in Croatia (employment elasticity 0.2) although it suffered a much graver recession than Serbia.

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Impact of the crisis – poverty Estimates (Armitage, 2009) show in 2009 that

5.8 million people in the Western Balkan were bellow 5$ line; 0.8 million more compared to the pre-crisis projections.

Poverty loss ratio goes from 96.9% in Croatia and 68.2% in Bosnia to 14.9% in Albania and Montenegro and 12.9% in Macedonia.

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Policy responses

Monetary, exchange rate and banking policies

Fiscal and budgetary policies

Stimulus packages

Labour market and social policy measures

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Monetary, exchange rate and banking policies

Measure Impact on distribution and poverty

Impact on labour market

Increase in guaranteed deposits

Regressive Ambiguous

Increase of reference interest rate

Harmful for debtors, the poor and middle class with mortgages

Negative for labour demand

Sale of foreign currency reserves

Protecting the poor (preventing inflation), positive for middle class with foreign dnm. debts

Negative for labour demand; positive for supply

Removal of tax on interest on saving deposits and tax on capital gains

Regressive Negative for labour demand; negative for labour supply

Profit tax exemption for retained profits

Regressive Stimulating labour demand

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Fiscal and budgetary policies

MeasureImpact on

distribution and poverty

Impact on labour market

VAT rate increaseVery regressive and anti-

poor

Negative for labour demand; positive for

labour supply

Increases in excises on oil and luxury products and property taxes

ProgressiveNegative for labour demand; positive for labour supply

Salary freezes and/or cuts in public sector

Neutral or progressiveProtecting employment in public sector; mildly negative for labour supply

Pension freezes / cuts Moderately regressiveNeutral to positive for labour supply

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Stimulus packages

MeasureImpact on

distribution and poverty

Impact on labour market

Subsidizing interest rates on commercial banks’ credits to companies and citizens

Regressive on distribution – supporting middle classes

Increasing both labour demand and labour supply

Take over of liabilities of loss-makers

Progressive Ambiguous

Conditional moratorium / write-off of penalty interest on social contribution arrears

Ambiguous or somewhat progressive

Positive in short term, but erodes the discipline

Public investment in infrastructure projects

Progressive; at first possibly regressive

Positive for labour demand

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Labor market and social policy

MeasureImpact on

distribution and poverty

Impact on labour market

Emergency public works PositivePositive for labour supply, but mainly in short run

Subsidised apprenticeship programmes

Progressive if most participants with lower education levels

Increasing labour demand

Establishment of emergency social funds

ProgressiveNeutral to negative for labour supply

Emergency cash payments to the poor

Progressive Negative for labour supply

Opening of specialised food shops for the poor

ProgressiveAmbiguous or somewhat positive

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New growth models The crisis has revealed weakness and

unsustainability of the ‘old model’ based on consumption, demand, deficits and growing external and internal imbalances.

The two largest economies, Croatia and Serbia, have in 2010 embraced new growth models.

The need for new model has also been recognized in Montenegro and Bosnia, but perhaps less so in Macedonia and Albania.

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Impact of new growth models Unlike the Serbian model whose primary

goal is to reduce budget deficit, Croatian model has reduction and reorganization of public expenditures in its focus.

Starting position in 2011 – out of the introduced measures, what was temporary and what remained?

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Conclusion Western Balkans governments could have

paid more attention to labor market and distributional impact of their anti-crisis measures.

Equally, they should have these effects high on agenda while preparing post-crisis growth strategies.

New models confronted with resistance of interest groups, mostly introducing modest social and economic changes.

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Thank you!

Mihail Arandarenko

Foundation for the Advancement of Economics

E-mail: arandarenko@yahoo.com

Pavle Golicin

Public Policy Research Centre

E-mail: pavlegolicin@hotmail.com