Inclusive growth in Russia: Achievements and Challenges Ana Revenga Senior Director Poverty and Equity Global Practice, The World Bank Moscow, 7 April 2015
Growth 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 Growth has been inclusive 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. Source: World Bank, Global Database for Shared Prosperity 2
Eastern Europe and Central Asia performed well on shared prosperity, and Russia provided a strong example of this Annualized growth in income/consumption, % Shared Prosperity in the Eastern Europe and Central Asia region, circa 2006-2011 Source: World Bank, Global Database for Shared Prosperity 3
Russia 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$10/day (2005 PPP) 100 90 80 70 60 50 40 30 20 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: World Bank staff calculations using data from the RLSM-HSE, 2001-2010 4
Russia outperformed other BRICS in middle class growth Middle-class growth in the BRICs, circa 1980 2010 Source: World Bank, Economic Mobility and the Rise of the Latin American Middle Class, 2013 5
and, as a result, the share of the middle class in Russia is one of the largest in the region 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Percentage of population in each economic group by country, circa 2010 extreme poor poor vulnerable middle class Source: World Bank staff calculations using the ECAPOV database. Note: Numbers for Russia based on 2008 Household Budget Survey. 6
Aggregate data do not capture significant differences in income levels and living standards across regions Poverty rates by Heterogeneity Region in 2013, x percent Source: Rosstat and World Bank staff calculations. 7
Middle class growth was accompanied by persistent levels of economic vulnerability Income distribution (share of population with per capita income in US$ 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 >50 25-50 10-25 5-10 <5 total 10+ Source: World Bank staff calculations based on RLMS data. 8
While 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% Other income 80% Private transfers Other public transfers 60% 40% 20% Pensions Capital Wage (public) Wage (private) Employment rate Dependency (Old) Dependency (Young) 0% -20% 2001-2010 2001-2005 2006-2010 Source: World Bank staff calculations using data from the RLSM-HSE, 2001-2010 9
Policies that support further middle class growth and a reduction on vulnerability will have to be implemented in a difficult context Lower oil prices and slowing growth More limited fiscal space Ageing population GDP growth in Russia, contributions, 2007-2014 Working age population, BRIC countries 15 10 5 0-5 -10 Population Aged 15 to 64 (2010=100) 100 120 140 60 80-15 2007 2008 2009 2010 2011 2012 2013 2014 Consumption Gross Fixed Capital Formation Change in inventories Export Import Stat error GDP growth Source: Russian Statistical Authorities 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Year Russia Brazil China India Source: UN World Population Prospects: The 2012 Revision. Projections after 2010, median variant. Source: UN World Population 10
Russia 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 11
Rebalancing the role of the private vs. public sector in driving economic activity, productivity growth and job creation, by leveling the playing field 12
.25.05.15.1 Russia vs. vs. Rest of of the ECA World Russia vs. Rest of the World Existing firm size and dynamics in Russia are likely to hinder Rest of the World Rest of the World productivity Rest of ECA and Russia Rest of the World employment growth and innovation Russia.2 0 0 2 4 6 8 Size distribution Age predicts of firms size based of labor on force labor (log) force (log) kdensity labor force (log) Actual sales revenue (log) Russia 10 15.1 20.2 25 30.3 0 Size distribution Age predicts of firms sales based revenue on labor (log) force (log) 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 0 In contrast, 2 younger 4 and smaller 6 privately-owned 8 firms, which in other countries 0 2 4 Linear prediction 6 8 10 account for Distribution a large of observations fraction of fast growing, innovative firms, have a low probability 95% CI Russia Rest Russia of the World Rest of ECA of survival irrespective of productivity/efficiency levels Russia 10 15 20 25 30 Linear prediction 0 5 10 Distribution of observations 95% CI Russia Rest Russia of the World Rest of the World Source: Source: Enterprise Authors' Surveys calculations comprehensive based on dataset comprehensive (May 2012) dataset of Enterprise Surveys (May 2012) Source: Enterprise Authors' calculations Surveys comprehensive based on comprehensive dataset (May dataset 2012) of Enterprise Surveys (May 2012).05.15.1.2 0 2 4 6 8 Size distribution Age predicts of firms size based of labor on sales force revenue (log) (log) Rest of ECA Russia vs. vs. Rest of of ECA kdensity of sales revenue (log) Russia Acutal sales revenue (log) Rest of ECA Russia.05.15 10 15.1 20 25.2 Size distribution Age predicts of firms sales based revenue on sales (log) revenue (log) Russia vs. vs. Rest Rest of of the ECA World Rest of ECA Russia Russia Rest of the World 0 0 2 4 6 8 Linear prediction 5 10 15 20 25 30 Distribution of observations 95% CI Russia Russia Rest of ECA Rest of ECA 0 10 15 20 25 Linear prediction 0 10 20 30 40 Distribution of observations 95% CI Russia Russia Rest of ECA Rest of the World Source: Source: Enterprise Authors' Surveys calculatons comprehensive based on Enterprise dataset (May Survey 2012) comprehensive dataset (May 2012) Source: Enteprise Authors' calculations Surveys comprehensive based on Enterprise dateset Surveys (May 2012) comprehensive dataset (May 2012) Source: World Bank, Russia Economic report, Sep 2013, based on data from United Nations, Comtrade, retrieved June 12, 2012. 13
As a result, Gazelle firms appear to play a less important role in terms of formal employment creation and innovation % of all firms and all jobs created A small number of young private firms ( Gazelles ) have been responsible for most of the job creation in Eastern Europe during 2004-08 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). 14
Annual employment growth in 2012, % Employment creation varies significantly across regions Annual employment growth in 2012, by region 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0-2.0 Source: World Bank, Business Enterprise Survey (BEEPS), 2012 15
Annual productivity growth, % but it is not linked to labor productivity growth Correlation between productivity growth and employment creation in (selected) Russian regions 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
or to variation in the quality of the de jure business environment Days need to obtain an operating license, by region (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. Source: World Bank, Business Enterprise Survey (BEEPS), 2012 17
Rebalancing the responsibilities and accountability for service delivery between central and regional governments, by strengthening local governance while avoiding exacerbating inequalities 18
Increased income levels have not been matched by outcomes in human capital, pointing to low quality of public services Source: OECD, Health at a Glance, 2014. 19
Improved quality of public service delivery needed to ensure inclusiveness of growth, to meet demands of a larger middle class High level of education Educational attainment of 25-64 year-olds, 2011 but of low quality Share of younger and older adults scoring at literacy proficiency level 4/5 (highest levels on the scale), 2012 Sources: OECD, Education at a Glance, 2014; and OECD, Boosting Productivity in Russia Skills, Education and Innovation, 2015. 2
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 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
and 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 Source: World Bank, Developing Skills for Innovative Growth in the Russian Federation, 2013. Calculations based on PISA scores 2009 (OECD). Note: Regional averages are directly computed from the sample in 44 out of 83 federal subjects. Values in the remaining regions have been estimated using a linear model based on level of education of parents, employment status, occupation and fixed effects at the level of federal districts. 22
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 but health outcomes do not seem to improve with higher allocations Need for greater accountability and more efficient use of resources in public service delivery across regions Sources: Staff calculations based on Rosstat data. 23
Conclusion 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.). 24
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