Recovering from the crisis: Croatia, the former Yugoslav Republic of Macedonia and Serbia

1. The Global Jobs Pact: Supporting strategies to recover from the crisis in South Eastern Europe Sarajevo, 27-28 October 2011 Recovering from the crisis:Croatia, the former Yugoslav Republic of Macedonia and Serbia

2. This presentation • Economic growth and employment: recent trends and impact of the downturn • Policy responses to counteract the crisis • The challenge of job recovery

3. Economic growth and employment:Recent trends and the impact of the crisis

4. Economic and employment growth trends Economic growth … but low job creation Source: EBRD, Macroeconomic indicators.

5. Impact of the crisis on GDP Croatia The crisis affected the three countries at different times and to different degrees… Source: National Statistical Offices

6. The crisis has resulted in job losses, especially for youth • Percentage change in youth and adult employment rates (2008- 2010) • Percentage change in youth and adult unemployment rates (2008- 2010) Source: National LFS , Annual data, 2008-2010

7. Policy responses to counteract the crisis

8. Policy responses (1) • The monetary authorities reacted by injecting liquidity into the market and intervening to stabilize the exchange rate. Increasing expenditures and declining revenues widened the fiscal deficits, especially in Croatia and Serbia .

9. Policy responses (2) • To protect public finances the government of Croatia introduced new taxes (special tax on salaries, pensions and other income) and increased existing ones (VAT rate), reduced the wage bill of the public sector and decreased public discretionary spending; • The Serbian government subsidized credits to enterprises and households, reduced public expenditures (freeze of public sector salaries and pensions and shelving of public investments), and increased taxes (excise duties and tax on mobile calls); • The government of the former Yugoslav Republic of Macedonia introduced measures to support enterprises (lower tariffs, social contributions rates, profit taxes); it approved a large infrastructure investment plan; it established a Fund for agricultural land (to be distributed to eligible unemployed) and, finally it enacted a freeze in public sector wages.

10. Policy responses (3) • Public expenditures on the unemployment and social assistance benefits increased, but low coverage and inaccurate targeting mechanisms limited their action as automatic stabilizers; • Active labour market policies were restructured to respond to the needs of the groups most likely to be more affected by the crisis (youth, long-term unemployed and low skilled workers). • All three countries expanded their training and apprenticeship programmes as well as public works schemes; • Short-time work programmes had low take up in Croatia, while in Serbia they were not introduced due to lack of funds; • However, the amount of funds made available was in most instances insufficient to have an impact on unemployment.

11. Pathways to recovery

12. Job recovery challenges (1) • The crisis exposed the limits of growth based on expanding domestic consumption, fuelled by large inflows of foreign savings, mainly directed towards non-tradable sectors. Such a development strategy is vulnerable to external shocks, especially when large capital inflows do not reflect real savings. • To make the recovery sustainable, many are advocating for a new growth model based on enhancing domestic savings, investment and labour force participation to increase the contribution of labour to economic growth (Growth model for Serbia and Economic Recovery Plan in Croatia); • What is certain is that economies will grow at a much lower pace compared to the period before the crisis and that it will take much longer for the labour markets to return on a positive path.

13. Job recovery challenges (2) • The reduction of budget deficits is currently the main objective of Croatia, Serbia and the former Yugoslav Republic of Macedonia. • Attempts at reducing the budget deficit too rapidly could lead to a fall in aggregate demand, output and employment and to deficit increases, demanding the imposition of further restrictive measures; • The composition of public expenditure cuts is also important. Public spending on health, education, infrastructure, basic income support and key productive investments needs to be protected not to endanger future growth; • Foremost, employment needs to become central to national economic policies and not be a residual outcome of private sector-led economic growth;

14. Which way forward? (1) • There are still structural issues that the three country need to addressed: • A comprehensive industrial policy and the acceleration of reforms to promote enterprise development would increase productivity and competitiveness and could shift the composition of investment from the non-tradable to the tradable sector; • A better ratio of direct to indirect taxation in Serbia and Croatia would reduce the regressivity of the tax system. • A careful revision of the social security tax wedge – negotiated with the social partners − could improve participation and employment rates, particularly if combined with administrative reforms to broaden the tax base and reduce informality; • The duality of the labour market needs to be addressed, first through a better enforcement of existing rules and secondly by limiting the application of temporary contracts to specific circumstances.

15. Which way forward? (2) • The unemployment benefit system should allow temporary changes in eligibility criteria and/or replacement rates. At the same time, the effectiveness of social assistance could be improvedby streamlining and simplifying existing programmes and enhancing targeting; • The reform of the education and training system needs to be accelerated to remedy the growing skills gap, with greater inputs from industry; • As young people face labour market disadvantages, an early identification of risk factors is of the essence to provide effective employment assistance. • Multi-component interventions that combine remedial education and training with work-experience programmes and job-search assistance, as well as incentives for employers to hire young workers, have demonstrated to be more cost-effective than single measures.

16. Which way forward? (3) • There is a need to gradually shift emphasis to ALMPs that are well targeted, respond to labour market requirements and involve the social partners in their design, monitoring and evaluation. • In the short term, programmes such as job subsidies, reductions of social security contributions, public work programmes and entrepreneurship development can support job creation. Once labour demand recovers, more effort should be deployed in improving job search services; • Collective bargaining has an important role to play in dealing with the challenges wrought by the crisis. • As the three countries still face a number of challenges in tackling the effects of the crisis and improving competitiveness it is of key importance that social dialogue institutions be given a role in the monitoring of the implementation of anti-crisis measures on the one hand, and in shaping structural reforms on the other.

17. THANK YOU