The European Bank for Reconstruction and Development’s (EBRD’s) transition report for 2018-19 is called 'Work in Transition' and it looks at three trends that have huge implications for the growth and development of the region covered by the institution: ageing populations, the spread of automation, and migration.
Until recently, the economic advantage that most emerging markets had was a young population prepared to work in low- to medium-tech manufacturing for wages that were low in global terms. This was how the Asian tiger countries such as Taiwan and South Korea transformed themselves.
But the prospects for repeating this in other emerging markets are less clear as manufacturing needs change with much more automation and less need for mid-level skilled labour.
Job polarisation
Sergei Guriev, the EBRD’s chief economist, says: “The faster pace of technological progress does create a major social challenge, which is job polarisation. If you have skills, this is a wonderful time for you because jobs for skilled people are being created and these jobs pay better. [They are] complementing new technology and the new technology makes [workers] more productive. And if you have very low skills, your jobs are not destroyed because your salary is too low to be automated or outsourced. But in the middle of the skills distribution, jobs are being displaced either by robots or by outsourcing and so we see this increase in inequality and job polarisation.
“What we show in the report is that this process is moving as fast in our region as it is in advanced economies such as the US. And in that sense, this challenge of inequality caused by technological progress is a major challenge for our economies as well.”
As if this trend to automation was not challenging enough, many EBRD countries are experiencing ageing populations, meaning that their dependency ratio (ratio of workers to the retired) is increasing. The response to this problem in advanced countries has been to raise the retirement age and encourage immigration but in the EBRD region some countries are experiencing a double hit of emigration and ageing.
“There are several ways to address the challenge of ageing,” says Mr Guriev. “One is indeed automation, whereby you provide robots that help older people to work in a more productive way, or you do work without workers. The other one is extended working lives and this, unfortunately, is hard to do in our region where older cohorts are not as healthy as their peers in advanced economies. The third solution is immigration – but the problem, of course, is that immigration to the Western countries is emigration from the Eastern countries.”
In terms of countries that are getting old before they get rich, Mr Guriev points to places such as Bulgaria, Croatia and the Baltic states. “These countries are not yet rich. The Baltic states are at the level of 60% of the European average income per capita; Bulgaria is actually much lower at 30% or 40%; and the west Balkans are even further behind.
“When you think about the challenge of ageing, when you are not yet rich, it is much harder to address those challenges because you don’t have infrastructure, you don’t have human capital, you don’t have productive capital installed.”
Mr Guriev points out how countries such as Poland, Hungary, Romania and Bulgaria experienced a hit to their productivity as many of their citizens migrated to other countries in the EU. In Poland’s case this was offset to some extent by an influx of workers from the Ukraine.
Despite the challenges, Poland and Hungary currently provide the best examples of economic growth in the region. “We think that the growth in Poland in 2019 will be below 4% but still close to 4% and that is really outstanding given the demographic challenges,” says Mr Guriev.
EBRD underperformers
The three EBRD countries notably underperforming are Lebanon, Russia and Turkey. “Turkey underwent a major macroeconomic readjustment after going through a credit boom and overheating, supported by the government’s expansionary policies. Now it is going through a recessionary readjustment. We expect growth to pick up at the end of 2019, but currently Turkey is going through a recession," says Mr Guriev.
“Russia is suffering from a different problem. The Russian macroeconomic framework is actually robust but Russia has been very slow, to say the least, with structural reforms, with improving the investment climate and with fighting corruption. Of course, Russia is isolated from the global market.”
Bosnia-Herzegovina, which plays host to the EBRD annual meeting in May, is forecast to grow at 3.5% in 2019. “Unfortunately, this is not sufficiently high to foresee fast convergence to neighbouring countries or with central Europe and western Europe. We would like to see faster growth and more investment, also a lot more trade within the region between west Balkan countries. Each of these countries is small and in order to promote investment, you need to have access to bigger markets. Before Bosnia-Herzegovina and neighbouring countries join the EU, they need to create the market space among themselves,” says Mr Guriev.
