#1Inclusive growth in Russia: Achievements and Challenges Ana Revenga Senior Director Poverty and Equity Global Practice, The World Bank THE WORLD BANK IBRO IDA WORLD BANK GROUP Moscow, 7 April 2015#2Growth is the main driver of improved economic welfare globally, but the inclusiveness of growth matters too The World Bank uses the Shared Prosperity indicator to monitor both average growth and growth of the lower quintiles of the population in every country. Shared Prosperity 14 Russian Federation (2004-2009) Growth has been inclusive 12 globally, with the bottom 40 growing faster than the average in more than 70% of countries for which data is available. But in about 1/5 of these cases growth rates are very low (under 2%) limiting progress on this goal. • And in some high growth countries, including in Europe and Central Asia, shared prosperity has been spurred by social transfers which may not be sustainable. Growth Rate of Bottom 40% 10 B LO 4 2 0 -2- 4 THE WORLD BANK IBRD IDA WORLD BANK GROUP Peru (2006-2011) Brazil (2006-2011) South Africa (2006-2011) Thailand (2006-2010) -2 China (2005-2010) Turkey (2006-2011) India (2005-2012) Nigeria (2004-2010) 2 Growth Rate of Total 4 6 8 10 Source: World Bank, Global Database for Shared Prosperity 2#3Eastern Europe and Central Asia performed well on shared prosperity, and Russia provided a strong example of this Shared Prosperity in the Eastern Europe and Central Asia region, circa 2006-2011 Annualized growth in incom ome/consumpt mption, % 12.00 10.00 8.00 6.00 4.00 2.00 0.00 -2.00cerbia -4.00 THE WORLD BANK IBRD IDA WORLD BANK GROUP Albania Hungary Latvia Georgia Lithuania Armenia Bulgaria Slovenia Montenegro Czech Republic Poland Estonia Ukraine Bottom 40% Total Population Source: World Bank, Global Database for Shared Prosperity Tajikistan Turkey Moldova Romania Kyrgyz Republic Kazakhstan Slovak Republic Belarus Russian Federation 3#4Russia's inclusive growth in the 2000s generated remarkable upward economic mobility and rapid middle class growth Share of the population whose per capita consumption is equal or higher than US$10/day (2005 PPP) 100 90 280 80 70 60 50 40 30 20 THE WORLD BANK IBRD IDA WORLD BANK GROUP 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: World Bank staff calculations using data from the RLSM-HSE, 2001-2010 4#5Russia outperformed other BRICS in middle class growth... Middle-class growth in the BRICs, circa 1980-2010 60 60 50 50 40 40 30 30 Middle class, percentage of population 20 20 10 10 0 1975 1980 1985 1990 1995 2000 2005 2010 Brazil India Russian Federation China Latin America and the Caribbean THE WORLD BANK IBRD IDA WORLD BANK GROUP Source: World Bank, Economic Mobility and the Rise of the Latin American Middle Class, 2013 5#6... and, as a result, the share of the middle class in Russia is one of the largest in the region Percentage of population in each economic group by country, circa 2010 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Latvia Hungary Lithuania Belarus Armenia Tajikistan Kyrgyz Kosovo Georgia Albania Moldova Kazakhstan Romania Bulgaria THE WORLD BANK IBRD IDA WORLD BANK GROUP Source: World Bank staff calculations using the ECAPOV database. Note: Numbers for Russia based on 2008 Household Budget Survey. extreme poor poor vulnerable middle class Serbia Turkey Urkaine Poland Russia 9#7Aggregate data do not capture significant differences in income levels and living standards across regions Poverty rates by Region in 2013, percent Legend 6.9.9.3 9.3.11.6 11.6,12.6 12.6,15.1 15.1,16.9 16.9,35.4 No data Kalend Ard Murmansk And Bund Taymyr Sakha (Yakut Kareja Arkhangelsk Tver Vologda solers Aryans Roskow Zambd 15 24 rashen Kam Novgor Krov Perm Nonetak Evenk Yamalo-Nenets Khari-Mansiysk Sverdlovsk Konyank Buryata Tomsk Tyumen CH Omsk Kurgan Novosibir 1821 Tyva THE WORLD BANK IBRD IDA WORLD BANK GROUP Source: Rosstat and World Bank staff calculations. Chukotka Khabarovsk Amur 7#8Middle class growth was accompanied by persistent levels of economic vulnerability Income distribution (share of population with per capita income in US$ PPP per day, percent) 100 90 - 80 70 60 50 40 30 20 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 THE WORLD BANK IBRD IDA WORLD BANK GROUP >50 5-10 25-50 <5 Source: World Bank staff calculations based on RLMS data. 10-25 total 10+ 80#9While labor earnings, particularly in public sector, drove middle class growth during the early 2000s, pensions played a greater role in recent years Contribution to observed inflow into middle class (in percentage) 100% 80% 60% 40% THE WORLD BANK IBRD IDA WORLD BANK GROUP 20% 0% 2001-2010 2001-2005 2006-2010 -20% Other income Private transfers Other public transfers Pensions ■Capital ■Wage (public) Wage (private) Employment rate ■Dependency (Old) ■Dependency (Young) Source: World Bank staff calculations using data from the RLSM-HSE, 2001-2010 6#10Policies that support further middle class growth and a reduction on vulnerability will have to be implemented in a difficult context 15 Lower oil prices and slowing growth More limited fiscal space Ageing population GDP growth in Russia, contributions, 2007-2014 4440 Working age population, BRIC countries -5 -10 -15 55 10 5 0 2007 2008 2009 Consumption Export --GDP growth 2010 2011 2012 Gross Fixed Capital Formation Import Source: Russian Statistical Authorities THE WORLD BANK IBRD IDA WORLD BANK GROUP 2013 Change in inventories Stat error 2014 20 120 80 1000 100 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Russia Year Brazil China India Source: UN World Population Prospects: The 2012 Revision. Projections after 2010, median variant. Source: UN World Population 10#11Russia may benefit from rebalancing its policy strategy in two different dimensions 1. Rebalancing the role of the private vs. public sectors in driving economic activity, productivity growth and job creation, by leveling the playing field 2. Rebalancing the responsibilities and accountability for service delivery between central and regional governments, by strengthening local governance and improving effectiveness This would need to be done while rationalizing and continuing to provide targeted social insurance and safety net support to the most vulnerable, the elderly and those unable to work THE WORLD BANK IBRD IDA WORLD BANK GROUP 11#12Rebalancing the role of the private vs. public sector in driving economic activity, productivity growth and job creation, by leveling the playing field THE WORLD BANK IBRD IDA WORLD BANK GROUP 12 22#1305 0 15 Existing firm size and dynamics in Russia are likely to hinder productivity and employment growth and innovation Markets are dominated by large and old(er) firms, and these firms appear to be bigger in size and less profitable than relevant comparators in other countries In contrast, younger and smaller privately-owned firms, which in other countries account for a large fraction of fast growing, innovative firms, have a low probability of survival irrespective of productivity/efficiency levels Size distribution of firms based on sales revenue (log) Russia vs. Rest of ECA Age predicts sales revenue (log) Russia vs. Rest of ECA Rest of ECA Russia 5 10 15 20 Distribution of observations 25 30 Russia Rest of ECA Source: Enterprise Surveys comprehensive dataset (May 2012) IBRD IDA WORLD BANK GROUP 10 15 20 25 10 15 20 Linear prediction 95% CI Rest of ECA Source: Authors' calculations based on Enterprise Surveys comprehensive dataset (May 2012) Source: World Bank, Russia Economic report, Sep 2013, based on data from United Nations, Comtrade, retrieved June 12, 2012. THE WORLD BANK Russia Rest of ECA Russia 13 25#14As a result, “Gazelle” firms appear to play a less important role in terms of formal employment creation and innovation A small number of young private firms ("Gazelles") have been responsible for most of the job creation in Eastern Europe during 2004-08 Share of Enteprises 72 72 71 Share of Jobs Created 73 73 67 66 65 % of all firms and all jobs created 54 50 50 51 22 19 18 17 14 13 13 10 42 12 5.2 2.8 1.1 2.6 5.0 4.5 1.4 -0.3 7.7 -1.0 Bulgaria Czech Estonia Poland B&H Croatia Romania Serbia Russia Ukraine Republic Advanced Intermediate Late Notes: The number above each country represents the average growth rate of employment per year; country groupings refer to advanced, intermediate and late reformers (definition by World Bank, in Back to Work). Source: Back To Work: Growing with Jobs in Europe and Central Asia (2013). THE WORLD BANK IBRD IDA WORLD BANK GROUP 14#15Annual I employment growth in 2 2012, % Employment creation varies significantly across regions... 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Annual employment growth in 2012, by region Kursk Region Moscow City Irkutsk Region Russian Federation Lipetsk Region Republic Of Mordovia Tomsk Region Voronezh Region Belgorod Region Yaroslavl Region Murmansk Region Ulyanovsk Region Republic Of Sakha (Yakutia) Volgograd Region Chelyabinsk Region Novosibirsk Region Sverdlovsk Region Krasnodar Territory Khabarovsk Territory Republic Of Tatarstan Krasnoyarsk Territory Nizhni Novgorod Region Source: World Bank, Business Enterprise Survey (BEEPS), 2012 Tver Region Omsk Region Perm Territory Moscow Region Leningrad Region Stavropol Territory Kaluga Region THE WORLD BANK IBRD IDA WORLD BANK GROUP Samara Region Smolensk Region Republic Of Bashkortostan IL Rostov Region Saint Petersburg Primorsky Territory Kaliningrad Region 15#16... but it is not linked to labor productivity growth... Correlation between productivity growth and employment creation in (selected) Russian regions Annual productivity growth, % THE WORLD BANK IBRD IDA WORLD BANK GROUP 20.0 15.0 10.0 5.0 0.0 -5.0 0.0 5.0 10.0 15.0 20.0 -5.0 -10.0 -15.0 -20.0 Annual employment growth, % Source: World Bank, Business Enterprise Survey (BEEPS), 2012 16#1790.0 80.0 70.0 60.0 50.0 Number of days to obtain operating license 40.0 30.0 20.0 10.0 0.0 or to variation in the quality of the “de jure” business environment Days need to obtain an operating license, by region (2012) Perm Territory Republic Of Sakha (Yakutia) Moscow City Moscow Region Yaroslavl Region Krasnoyarsk Territory Ulyanovsk Region Leningrad Region Republic Of Bashkortostan Rostov Region Irkutsk Region Russian Federation Saint Petersburg Sverdlovsk Region Primorsky Territory Republic Of Mordovia Voronezh Region Kaliningrad Region Khabarovsk Territory Republic Of Tatarstan Belgorod Region Nizhni Novgorod Region Omsk Region Krasnodar Territory Kursk Region Chelyabinsk Region Kaluga Region Lipetsk Regio Volgograd Region Tomsk Region Tver Region High income: nonOECD Novosibirsk Region Murmansk Region Samara Region World Kemerovo Region Stavropol Territory THE WORLD BANK IBRD IDA WORLD BANK GROUP Source: World Bank, Business Enterprise Survey (BEEPS), 2012 Obtaining an operating license can take between 22 and 82 days, depending on the region. Obtaining electricity connection can take between 8 and 227 days depending on the region, compared to 31 days in high income non-OECD countries. Bribery incidence is reportedly about twice as high in Russian as on average in high income non-OECD countries. 17#18Rebalancing the responsibilities and accountability for service delivery between central and regional governments, by strengthening local governance while avoiding exacerbating inequalities THE WORLD BANK IBRD IDA WORLD BANK GROUP 18#19Increased income levels have not been matched by outcomes in human capital, pointing to low quality of public services 1.1.2 Life expectancy at birth and GDP per capita, 2009 (or nearest year) 1.1.3 Life expectancy at birth and health spending per capita, 2009 (or nearest year) Life expectancy in years 84 JPN DEU ISL Life expectancy in years 84 FRA ESP ITA SWE JPN AUS SL CHE ESP SWE ISR AUS NZL CAN ISA ITA CAN LUX CHE NOR 80 KOR NLD LUX NZL FRA NOR PRT GRC IRL 80 KOR FIN PRT CHL SVN FIN DNK AUT GBR AUT NLD USA CHL GRC CZE GBR SVN IAL BEL DNK POL CZE 76 EST BEL 76 MEX POL SVK MEX EST SVK CHN BRA TUR HUN CHN TUR HUN 22 72 72 IDN 12 BRA IDN RUS 68 RUS 68 R2=0.54 USA R² = 0.69 IND IND 64 64 0 10 000 20 000 30 000 40 000 50 000 60 000 70 000 GDP per capita (USD PPP) 2000 4 000 8.000 Health spending per capita (USD PPP) 6.000 Source: OECD Health Data 2011; World Bank and national sources for non-OECD countries. Source: OECD Health Data 2011; World Bank and national sources for non-OECD countries. THE WORLD BANK Source: OECD, Health at a Glance, 2014. IBRD IDA WORLD BANK GROUP 19#20High level of education... Educational attainment of 25-64 year-olds, 2011 Improved quality of public service delivery needed to ensure inclusiveness of growth, to meet demands of a larger middle class... ...but of low quality Share of younger and older adults scoring at literacy proficiency level 4/5 (highest levels on the scale), 2012 % 40 35 30 25 20 15 10 5 0 0 Tertiary level of education Upper secondary level of education Below upper secondary education 100 100 90 80 70 60 50 40 30 20 828 9 8 8 90 80 70 60 50 40 30 10 20 10 RUSSIA Canoua Japan Israel United States Korea Finland New Zealand United Kingdom Australia Norway Ireland Luxembourg Estonia Switzerland Sweden Belgium Iceland Denmark Spain Netherlands Chile France Germany Greece Slovenia Poland Austria Hungary ▲ 25-34 year-olds 55-64 year-olds Mexico Slovak Republic Czech Republic THE WORLD BANK IBRD IDA WORLD BANK GROUP Sources: OECD, Education at a Glance, 2014; and OECD, Boosting Productivity in Russia Skills, Education and Innovation, 2015. Portugal Italy Turkey Brazil Indonesia South Africa China Finland Japan Netherlands Sweden Flanders (Belgium) Norway Australia Canada Average England/N.Ireland (UK) Denmark Estonia Germany United States Czech Republic Poland Korea France Austria Ireland Russian Federation" Slovak Republic Spain Italy + 2 0 0#2110 R 8 8 8 & 9 ° % 70 60 50 30 20 Netherlands Hungary Germany United Kingdom THE WORLD BANK IBRD IDA WORLD BANK GROUP ...to lift constraints to employment growth, especially among SMEs... The availability of skilled personnel is limited in Russia Share of SMEs that have admitted to facing difficulties or barriers in finding skilled personnel in the last two years Ireland Denmark Sweden Austria EU27 Luxembourg Spain Italy Norway Iceland Slovenia France Czech Republic Belgium Portugal Poland Slovak Republic Finland Greece Estonia Turkey RUSSIA Source: Demmou, L. and A. Wörgötter (2015), "Boosting Productivity in Russia: Skills, Education and Innovation", OECD Economics Department Working Papers, No. 1189, OECD Publishing. 21 60 50 30 20 10 xR 8 8 9 8 8 ° ° % 70 40#22and to promote equality of opportunity across all regions, including those where public services are of lower quality Distribution of PISA reading score (2009), by federal districts 393 528 510 >520 500-510 490-499 480-489 470-479 460-469 450-459 440-449 430-439 420-429 410-419 400-409 <400 Source: World Bank, Developing Skills for Innovative Growth in the Russian Federation, 2013. Calculations based on PISA scores 2009 (OECD). THE WORLD BANK Note: Regional averages are directly computed from the sample in 44 out of 83 federal subjects. Values in the remaining regions have been estimated IBRD IDA WORLD BANK GROUP using a linear model based on level of education of parents, employment status, occupation and fixed effects at the level of federal districts. 22#23GDP per capita, Roubles Higher and more equitably distributed resources necessary but not sufficient in absence of improved efficiency and accountability Richer regions tend to allocate more to public health services... 1,400,000 ... but health outcomes do not seem to improve with higher allocations GDP per capita vs. Health financing per capita* in 2012, by region 1,600,000.0 GDP per capita vs. Life expectancy in 2013, by region 1,200,000 1,000,000 800,000 600,000 400,000 200,000 1,400,000.0 1,200,000.0 1,000,000.0 800,000.0 600,000.0 400,000.0 200,000.0 D 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 0.0 Per capita financing of the State Guarantees Program, Roubles 60.00 62.00 64.00 66.00 68.00 70.00 72.00 74.00 76.00 78.00 80.00 → Need for greater accountability and more efficient use of resources in public service delivery across regions THE WORLD BANK IBRD IDA WORLD BANK GROUP Sources: Staff calculations based on Rosstat data. 25 23#24Conclusion Sustaining and deepening progress in income mobility will require: Improving competitiveness, removing market distortions, and promoting non-oil private sector job creation; Fostering effectiveness, accountability and responsiveness of public service delivery to needs and demands of several population groups (in terms of income, location etc.). THE WORLD BANK IBRD IDA WORLD BANK GROUP 24#25THE WORLD BANK IBRD IDA WORLD BANK GROUP Thank you