Some Skills should Come Before Jobs, Others Develop with the Job
To be clear from the onset: I will not oversimplify the unemployment (or inactivity) problem in the Western Balkan countries as solely due to a lack of skills in the population. Low employment rates result from both insufficient creation of jobs by enterprises and too-high a fraction of the workforce that is ill-equipped to take on the jobs that a modern economy creates. Both issues are intertwined. Solutions, therefore, require efforts on several fronts to enable a more vibrant private sector –including improvements in the business environment, enterprise restructuring, integration in global markets and promoting entrepreneurship— as well as to prepare workers for new job opportunities.
The Western Balkans Case
When I travel to the Balkans for work, the journey typically begins with a cab ride to the airport from my home in Vienna. The taxi company I use is run and operated by Serbs living in Austria. It’s a great company: very reliable, clean cars and friendly drivers who are always keen to discuss the politics and economics of the Balkans. When I arrive in Belgrade, I’m picked up by drivers who have very similar skills to those of their compatriots in Vienna. However, the former have better salaries and opportunities simply because the company they work for operates in an environment that is much more conducive to nurturing and growing a business. In Austria, unlike in Serbia, a company can operate efficiently, is subject to a relatively fair tax treatment and knows the industry standards it needs to comply with. In turn, this explains to a large extent why workers, at any given levels of skills, are more productive in Austria – a basic intuition which William Lewis develops in his book The Power of Productivity, projecting the gains that Mexican construction workers make when moving to the USA.
The Western Balkans Case
The Western Balkans have a lot going for them: ideal location next to the world’s largest economic bloc, a well-educated workforce, relatively low wages and decent infrastructure. FDI and investors should be rushing in … but are they?
Southeast Europe is the next frontier of EU expansion and includes six countries: Albania, Bosnia & Herzegovina, Kosovo, Macedonia, Montenegro and Serbia. These countries have a lot in common and an equal amount of differences. They are all relatively small open economies, with a growth strategy premised on deeper international integration. Some, especially Macedonia, are more advanced in attracting international investors but as a whole, the region seems to be stuck in a classical Middle Income Trap: they are too rich to compete on low-cost manufacturing but are too poor to be global innovators. After a strong recovery following war and conflicts in the 1990s, the growth momentum has stalled over the last five years and the region has been particularly vulnerable to external shocks.
Only half of the working age population participates in the labor force in the Western Balkans. This is low by both European and global standards - but participation among women is even worse. This rate was only about 42% in Bosnia and Herzegovina, and a mere 18% in Kosovo in 2012 - the lowest in all of Europe and Central Asia. This participation gap persists throughout a woman’s life, contributing to low employment rates, and widens during child bearing years. In Bosnia and Herzegovina, the gap between male and female employment rates has reached a whopping 44 percentage points for those aged 25 to 49 years with a young child living at home.
Failure to address these labor market inequalities is a missed opportunity for faster economic growth, poverty reduction and increased shared prosperity in a region struggling to recover from the neighborhood effects of the Eurozone crisis.
Editor's Note: "Notes From the Field" is an occasional feature where we let World Bank professionals conducting interesting trade-related projects around the globe explain some of the challenges and triumphs of their day-to-day work. The views expressed here are personal and should not be attributed to the World Bank. All interviews have been edited for clarity.
The interview below was conducted with Violane Konar-Leacy, an Operations Officer in the World Bank Group’s International Finance Corporation. She works for the Investment Climate group, and is based in Belgrade, Serbia. Ms. Konar-Leacy is currently managing a trade logistics project in the Western Balkans. She spoke with us about her personal connection with the region, and how she embraces the challenges of working in a politically complex environment.
You’d probably be skeptical if I told you that the Western Balkans – a region that has long suffered from social and ethnic fragmentation – now has a strong opportunity to boost shared prosperity by promoting research, innovation and entrepreneurship. Your views might not even change if I showed you that such idea is validated by preliminary studies linking research and innovation to the performance of firms and countries in the region.
You might be surprised – yet your initial assumption might be unchanged – if I told you about the kind of companies that are starting to build a different economic landscape in the region: firms like UXPassion, Pet Minuta, Strawberry Energy or Teleskin, which are all technology-based startups created by young researchers who became entrepreneurs. Click on this link (http://www.worldbank.org/en/news/video/2013/10/22/western-balkans-research-and-development-for-innovation), or on the video embedded below, to meet them and other innovators from the Western Balkans.
Indeed, the transition to a market economy and the breakup of the former Yugoslavia starting in 1991 had a severe impact on the research and innovation sector in the Western Balkans. Research capacity narrowed significantly, and R&D’s links to the productive sector of the economy disappeared. The new industrial structure has naturally a lower propensity to invest in research while the current business environment promises low returns to the enterprise investments in innovation. Efforts to revamp the region's research and innovation sector were most of the time short-lived.
As a result, the performance of the research and innovation sector in the Western Balkans is gloomy. The region’s current investment in R&D are roughly the same amount as the investment by just the second-largest university in the United States. (In 2012, for example, only 38 patents from the region were registered with the U.S. Patent and Trade Office – compared to the average of 27 patents registered by each American university.) At the same time, very little of those investments are efficiently transformed into wealth. For example, for each invention that received a patent, the region spent, on average, three times more in R&D resources than does the United States.
Building on a continuing series of efforts to reform their national innovation systems, in the hope of changing their gloomy prospects, the Western Balkan countries in 2009 committed to develop a joint regional research and innovation strategy. That strategy, developed between 2011 and 2013, was formally endorsed last month by the ministers responsible for science and education from Albania, Bosnia-Herzegovina, Croatia, Kosovo, the Former Yugoslav Republic of Macedonia, Montenegro, and Serbia. The preparation of the strategy, which benefited from technical assistance by the World Bank and from the financial support of the European Commission, involved representatives from the region’s leading universities, research institutes, private sector firms and government agencies. Discussions of the draft proposal were pursued in all seven countries as part of a large outreach exercise.
One of my first assignments in the World Bank, some 13 years ago, was in a small and complicated country, better known for coups and mercenaries than for statistical capacity. Before I set off to the Comoro Islands, my then manager (now an established World Bank Vice-president) gave me the following priceless advice: “When you get there, make sure to get a lot of data. It may be difficult to get and sometimes even flawed, but data has one great advantage: It cuts through a lot of crap.”
Numbers are indeed beautiful. They can help bring clarity to our lives and save us time as well as resources. But raw data can be messy and you also need a good system for deciding which numbers to use and how to interpret them. Last week’s launch of the 2014 Doing Business rankings reminded me of the advice my then boss had given me. Doing Business started from the premise that companies are the backbone of any economy but that investors often lacked knowledge of the conditions in “frontier economies”. With the benefit of an annual assessment of the business environment in each country, investors could make more informed decisions. As for policy makers, they could more easily attract investors, provided they made a genuine effort in cutting red tape and supporting businesses.