Inclusive Growth Diagnostics Syria The World Bank. PRMED September, 2011

Transcription

1 Inclusive Growth Diagnostics Syria The World Bank PRMED September, 2011

2 Objectives Use a growth analytics framework to assess the relative importance of different constraints to sustained, high growth in Syria Discuss development dynamics Search for binding constraints to growth Policy recommendations

3 Outline Dynamics and trends drivers of growth Economics trends: growth, income/capita, poverty rates, labor productivity Structural transformation: oil vs non-oil sector, public vs private sector, etc Investment and growth: Trends in investment public/private, allocation of investment by sector and use Binding constraints to growth Given the characteristics, study the constraints within the IG framework and the HRV framework Policy recommendations GD exercise undertaken to enable informed policy analysis tailored to the country context

4 Outline Dynamics and trends drivers of growth Economics trends: growth, income/capita, poverty rates, labor productivity Structural transformation: oil vs non-oil sector, public vs private sector, etc Investment and growth: Trends in investment public/private, allocation of investment by sector and use Binding constraints to growth Given the characteristics, study the constraints within the IG framework and the HRV framework Policy recommendations GD exercise undertaken to enable informed policy analysis tailored to the country context

5 ECONOMIC TRENDS

6 Growth was good in recent years but not in per capita terms 25% Syrian arab Republic: Real GDP per capita and total and per capita GDP Change % Change (Real US$ of 2000) 20% 15% 10% 5% 0% -5% -10% Real US$ of % %Chg GDP (Real 2000l US$) %Chg. Real GDPpc (Real 2000 US$) GDP per capita (Real 2000 US$) Source: Authors calculations, based on World Bank, DDP

7 Growth in 2000s was not high enough: Syria s per capita income has fallen behind MIC s average per capita income Trends in Real GDP per capita : Syrian Arab Republic vs Middle income Middle income Real US$ of ,500 2,000 1,500 1, Middle income Syrian Arab Republic Real per capita GDP in US$ of Source: Income benchmarking tool, based on World Bank, DDP (PRMED).

8 TFP growth was volatile but has followed a positive trend since % Syrian Arab Republic: Growth Accounting Decomposition % 6% 4% 2% 0% -2% -4% -6% GDP Growth Human Capital and Labor Physical Capital TFP Cobb Douglas Source: Staff calculations using data from the Government of Syria, CBS.

9 Reforms in 2004 gave results boosting growth in the period , but job creation was weak and growth was not inclusive Period GDP per capita Growth Physical Capital per capita Contributions Labor Adjusted TFP, Cobb by Skills Douglas CRS per capita Relative Shares Labor Physical Adjusted by Capital per Skills per capita capita TFP, Cobb Douglas CRS % 0.1% 0.9% 0.4% 6.0% 65.6% 28.4% % 1.1% -0.3% 2.5% 32.3% -8.3% 76.0% % 0.6% 0.3% 1.6% 25.4% 10.6% 63.9% Source: Authors calculations based on CBS data. Capital stock estimated following the perpetual inventory method. Human Capital estimated as the exponent of Returns to Education and Average years of schooling. Returns to Education from Huitfeldt and Kabbani (2005). Average years of schooling from Barro and Lee (2000). Assumes a Cobb Douglas, CRS function, share of capital in output equal to 35%, and a variable depreciation rate of capital estimated by Syria Trust.

10 Poverty rates increased Poverty headcount rose from 11% in 2004 to 12.3% in 2007 The rural poverty rate is 50 percent higher than the urban poverty rate Vulnerability is a special characteristic of poverty in Syria Approximately 19 percent of Syrians are at risk of falling into poverty according to 2005 PA.

11 Growth in 2000s was driven by increases in private consumption, followed by investment 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% Syria: Aggregate Expenditures Contribution to GDP Growth, by decades. 1970s 1980s 1990s 2000s Government final consumption expenditure Private final consumption expenditure Gross Capital Formation Net Exports Expenditure on G. D. P. Source: Staff calculations using data from the Government of Syria, CBS.

12 Increases in labor productivity drove growth, but participation rates dropped... Syria: Decomposition of Changes in Per Capita GDP in components (% points per Year), Output per worker Level Employment Sectoral composition of employment Change in Per Capita GDP: 3.1 Sectoral Contribution Agriculture Mining & manufacturing Services Participation rate -1.9 Pop1564/Population 2.0 Source: Staff Calculations, based on CBS data Contributions from changes in: Total

13 While labor moved from agriculture to services, little was gained at the aggregate level as these two sectors have very similar levels of productivity 100% Syria: Sectoral Shares in Employment Percent of Real GDP Factor Costs 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Services Industry Agriculture Source: Government of Syria, CBS.

14 Outline Dynamics and trends drivers of growth Economics trends: growth, income/capita, poverty rates, labor productivity Structural transformation: oil vs non-oil sector, public vs private sector, etc Investment and growth: Trends in investment public/private, allocation of investment by sector and use Binding constraints to growth Given the characteristics, study the constraints within the IG framework and the HRV framework Policy recommendations GD exercise undertaken to enable informed policy analysis tailored to the country context

15 STRUCTURAL TRANSFORMATION

16 This is an extraordinary period as Syria s undergoing a process of transformation From an oil to non-oil economy: with non-oil growth driving growth as oil production and exports decline Steep declines in oil exports were registered since 2000 From a public to private-driven growth since 2000: Private sector s share in trade doubled since 2003 In 2003 private sector s exports were only 25 percent of public sector s exports; by 2007 private sector s exports were 140 percent of public sector s exports Rising importance of services in urban centers

17 Transition away from oil 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% Shares of Oil and Non Oil GDP in total GDP and Growth Rates of Oil and Non Oil Real GDP Non Oil Oil Non Oil, annual growth Oil, annual growth 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Authors calculations, based on IMF data: from IMF, Syrian Arab Republic, Statistical Appendix, IMF Country Report No. 05/355. October, from IMF, Syrian Arab Republic, Statistical Appendix. IMF Country Report No. 09/56

18 Private sector s role in output increased significantly GDP composition SYP millions Total Public Private Source: Government of Syria

19 Source: The Central Bank of Syria. And in trade

20 Improvement in private-sector labor productivity drove overall labor productivity growth Syria: Decomposition of Changes in Per Capita GDP in components (Percent points Per Year) Output per worker Level Employment Sectoral composition of employment Change in Per Capita GDP: 2.9 Sectoral Contribution Public Private Participation rate -0.6 Pop1564/Population 2.0 Source: Staff Calculations, based on CBS data Contributions from changes in: Total

21 But few formal jobs were created 4,000,000 Employment: Government, Private and Collective Cooperatives ,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, , Government -Private -Collective cooperative Source: Government of Syria, CBS.

22 Syria diversified considerably since the mid- 1990s Index 0-1 (1 = No Diversification) Herfindhal -Hirschmann Index of Export Diversification: Total and Non-Oil Exports HH Exports HH Non Oil Exports Source: Staff calculations based on COMTRADE, WITS.

23 But Syria has lost market share and was not able to scale up sufficiently non-oil exports % of World Exports 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Shares in World Exports: Syrian Arab Republic (Non Oil) vs MENA and Middle-Low Income Countries % 0.12% 0.10% 0.08% 0.06% 0.04% 0.02% 0.00% % of world Exports Middle East and North Africa (Left scale) Middle Low excl. China (left scale) Syria total exports share (right scale) Middle Low Income (left scale) Syrian Arab Republic, non oil (right scale) Source: Authors calculations, based on WITS COMTRADE data. SITC 2 3 Digit Level, Mirror data. MENA countries included are: Djibouti, Algeria, Egypt, Islamic Republic of Iran, Iraq, Jordan, Lebanon, Libya, Morocco, Tunisia and Yemen. Syrian Arab Republic is excluded from the MENA and Middle Low Income Samples. There are 52 Middle Low Income Countries in sample, including China and India.

24 Outline Dynamics and trends drivers of growth Economics trends: growth, income/capita, poverty rates, labor productivity Structural transformation: oil vs non-oil sector, public vs private sector, etc Investment and growth: Trends in investment public/private, allocation of investment by sector and use Binding constraints to growth Given the characteristics, study the constraints within the IG framework and the HRV framework Policy recommendations GD exercise undertaken to enable informed policy analysis tailored to the country context

25 GROWTH AND INVESTMENT

26 Syria s potential growth outlook is good Demographic factors imply that the economy will benefit from a growing and young labor force High unemployment rates suggest that high growth could occur without upward pressures on wages for some time in the future Other favorable factors Geography and history Agricultural land and climate Gas discoveries

27 Private investment expanded but did not lead to a boost in overall investment during the reform period The rise in private investment could not fully offset the decline in public investment after 2003 Source: Government of Syria, CBS.

28 The opening up of the real estate sector led to a boom in residential construction Source: Government of Syria, CBS.

29 and investment for productive uses declined substantially a pattern that did not support a scale up of exports and is unlikely to support sustainable growth Source: Government of Syria, CBS.

30 Reforms encouraged FDI flows mainly into the energy sector, tourism and construction

31 Despite growth in private investment in 2000s, Syria s private investment rates remain low by international standards Gross Capital Formation, Private / GDP GDP per capita vs Private investment rate, avg Slovenia Bhutan St. Kitts. Grenada Eq. Guinea Morocco Iran Lebanon Yemen Algeria Jordan Tunisia Djibouti Egypt Syria Real per capita GDP (US$ of 2000), logs Data source: World Bank, WDI.

32 and so does its overall investment rate Investment as a share of GDP (Avg ) All countries Gross capital formation (% of GDP) Bhutan China Vietnam India Syrian Arab Republic ln of gdppc Data source: World Bank, WDI.

33 Reflecting limited FDI: low by international standards and for Syria s level of development Foreign direct investment (Avg ) All countries FDI (% of GDP) Jordan Bulgaria Syrian Arab Republic Hungary Hong Kong, China Estonia Singapore ln of gdppc Data source: World Bank, WDI.

34 Domestic credit, and credit to the private sector expanded, but remain extremely low even after reforms in the financial sector Credit (% of GDP) Domestic credit (Avg ) All countries Japan Switzerland Iceland Syrian Arab Republic Real lending rate Credit (% of GDP) Private credit (Avg ) All countries Iceland United Kingdom Switzerland Syrian Arab Republic Real lending rate Source: IMF/IFS.

35 Outline Dynamics and trends drivers of growth Economics trends: growth, income/capita, poverty rates, labor productivity Structural transformation: oil vs non-oil sector, public vs private sector, etc Investment and growth: Trends in investment public/private, allocation of investment by sector and use Binding constraints to growth Given the characteristics, study the constraints within the IG framework and the HRV framework Policy recommendations GD exercise undertaken to enable informed policy analysis tailored to the country context

36 BINDING CONSTRAINTS

37 So why has private investment in Syria remained low despite reform? Is it because of high cost of capital? Is it because of low returns to capital?

38

39 Real lending rates have not been high 50 Real lending rate (avg ) - middle income economies Syria 0-10 Brazil Paraguay Gabon Mongolia Mauritius Armenia Belize Honduras Romania Bhutan South Africa Cape Verde Costa Rica St. Lucia Guyana Lesotho Dominican Uruguay India Grenada Swaziland Algeria St. Kitts and Poland West Bank Samoa Mexico Fiji Syrian Arab Malaysia Egypt, Arab Libya Argentina Bulgaria Seychelles Iran, Islamic Latvia Belarus Venezuela, Source: World Bank, WDI

40

41 We identify four binding constraints to growth 1. Regulatory uncertainty and corruption 2. Credit misallocation 3. Anti-export bias 4. Infrastructure bottlenecks, especially in power sector 5. Other constraints

42 Constraint 1: The uneven application of rules and regulations, and related corruption, deters private investment Regulatory Uncertainty, vague rules, discretionary enforcement of rules Creates incentives for corruption Poor commercial legal system Lowers returns to investment Makes it difficult to assess expected returns Lack of level playing field

43 Regulatory uncertainty threatens profits and makes it difficult to estimate future returns The percentage of firms citing regulatory uncertainty as a major concern increased dramatically between 2004 and 2009 Illegal Competition from the informal sector/smuggling and dumping Macroeconomic Uncertainty (Ex: inflation, exch. rate) Source: Syria ICA 2004 and 2009 Leading Constraints to Syrian Firms, 2009 and Corruption Regulatory Policy Uncertainty Legal system/conflict resolution Skills and Education of Available Workers Electricity Customs and Trade Regulations Tax Administration Labor Regulations (Like Social Insurance) Tax Rates Business Licensing and Operating Permits Access to Land Access to Financing (Ex: Collateral) % of respondents identifying constraint as "major" or "very severe"

44 Corruption lowers private returns Perceptions about corruption worsened between In 2008 more than 80 percent of firms reported making informal payments, representing a tax of 5.6% of annual sales value and 10% of contract value to obtain contract Source: ICA surveys

45 Small firms are more likely to identify corruption as a concern and rely on informal payments than large and medium-sized firms Informal payments paid by firms of different size and type % of annual sales value Source: Syria ICA 2009

46 We identify four binding constraints to growth 1. Regulatory uncertainty and corruption 2. Credit misallocation 3. Infrastructure bottlenecks, especially in power sector 4. Anti-export bias 5. Other constraints

47 Constraint 2: Credit misallocation: both public and private banks tend to lend only to public and well established private firms the private sector GDP share is 60% GDP by sector the public capital stock is already large and private investment more efficient Total Public Private Capital stock by sector Public Private

48 Private sector invests much more than the public sector relative to the amount of credit it obtains Credit by sector Credit to public sector (% of GDP) Credit to private sector (% of GDP) Total credit (% of GDP) Source: IMF/IFS

49 Lack of level playing field in access to finance Lending rates (%) Liquidity constrained firms by type (%) Source: Syria ICA 2009.

50 Why is there credit misallocation? Supply side Despite the entry of private banks, these banks have focused on serving large corporate clients or clients with connections to parent foreign banks Mismatch: private banks served only 5% of borrowers in 2007 against a much higher share of bank depositors Banks have been cautious due to: Difficulty in assessing risk information and creditworthiness Banks report major difficulties in taking and enforcing collateral due to protracted court procedures and absence of specialized commercial court; Accounting and auditing procedures must be developed and applied by medium and small firms which usually lack transparent financial data

51 In international comparisons, Syria ranks extremely poorly in terms of strength of legal rights, credit information and registry and bureau coverage Source: Doing Business 2010.

52 Why is there credit misallocation? (Demand side) Firms have also faced difficulties: Imperfect titling system makes it difficult to pledge assets as collateral; registering and pledging collateral is costly and cumbersome; There has been reluctance in dealing with public banks which still dominate the financial sector Limited financial products or lack of awareness of those that exist Informality implies many firms will not get credit through formal channels Informality has grown over time from 20% of GNP in 2000 to 30-60% of GDP in recent years as firms do not think that the benefits of formality outweigh the costs large entry barriers discourage competition, innovation, and investment

53 Barriers to entry and competition are extremely high in Syria Until recently minimum capital required to start a business as a share of national income per capita was highest in the world! Source: Doing Business 2010.

54 Barriers to entry and competition are extremely high in Syria The cost of registering property is also highest in the world! Source: Doing Business 2010.

55 We identify four binding constraints to growth 1. Regulatory uncertainty and corruption 2. Credit misallocation 3. Infrastructure bottlenecks, especially in power sector 4. Anti-export bias 5. Other constraints

56 Constraint 3: Infrastructure bottlenecks: The economic cost of deficiencies in different types of infrastructure is heavy; but electricity stands out % of sales lost due to service interruptions Electricity 9.9% Telecommunications 5.4% Water 7.6% Transport 1.3% Total 24.2% Source: Syria ICA Firms lose nearly a quarter of their sales value because of inadequate basic services! Prices of telecom services are higher than in other MENA countries due to limited competition in the sector Water bigger problem for exporters than other firms

57 Electricity is considered a major obstacle to doing business by nearly 60 percent of firms in Syria Source: World Bank ICA, 2009

58

59 We identify four binding constraints to growth 1. Regulatory uncertainty and corruption 2. Credit misallocation 3. Infrastructure bottlenecks, especially in power sector 4. Anti-export bias 5. Other constraints

60 Constraint 4: Syria has successfully integrated into the world economy but a substantial anti-export bias persists Challenge: The Syrian economy needs continue to increase and diversify its non-oil exports in order to Finance the import of investment goods Offset the decline in oil revenues Benefit from economies of scale, knowledge spill-over and technology transfer Problems: Firms have few incentives to export if the anti-export bias persists and profitability of production for international markets is kept (artificially) low Firms have few incentives to upgrade their capital stock if the import of investment goods is expensive. Syrian manufacturers cannot compete in international markets if the import of intermediate goods remains subject to excessive taxation (e.g. shoe manufacturers selling to Italy)

61 Trade costs have declined in recent years but remain high relative to other countries, while high import costs discourage export processing USD per container Cost of export Cost of import Source: World Bank, Doing Business (2010).

62 Other constraints Skill Shortages Tax rates and administration Macroeconomic environment Ability to discover and sell new products in new markets Geography, transport and access to land

63 Worker skills have emerged as an major leading constraint to large firms Skill shortages matter for exports as nearly ¾ of large firms are exporters Skill shortages are reported for skilled technicians and managers Present obstacles to adoption of sophisticated technologies Modern methods of production Services firms are also more likely to report skill shortages as a major constraint than firms in other sectors

64 The tax burden is not too high and distortionary, but trade taxes remain a concern Source: Doing Business 2009.

65 Macroeconomic environment is stable but Syria faces growing twin deficits and growing concerns about the outlook A growing current account deficit financed by remittances and FDI Source: IMF Syria Article IV 2009.

66 Growing fiscal deficits are increasingly financed by domestic borrowing Financing of Budget Deficit (SYP billions) Other financing Unidentified financing Domestic financing External financing (rev) 2009 (proj) Source: IMF Syria Article IV 2009.

67 Outline Dynamics and trends drivers of growth Economics trends: growth, income/capita, poverty rates, labor productivity Structural transformation: oil vs non-oil sector, public vs private sector, etc Investment and growth: Trends in investment public/private, allocation of investment by sector and use Binding constraints to growth Given the characteristics, study the constraints within the IG framework and the HRV framework Policy recommendations GD exercise undertaken to enable informed policy analysis tailored to the country context

68 POLICY RECOMMENDATIONS

69 Policy Recommendations Reduce regulatory uncertainty by Increasing transparency of regulatory framework Consistently enforcing rules and regulations Strengthen financial intermediation by implementing FSAP recommendations Implement Governance Reform Action Plan Ensure that public investments efficiently and sustainably address infrastructure bottlenecks

70 Questions & Answers