ISSN: 2038-632X PECOB’S PAPERS SERIES The Social Impact of the Global Economic Crisis in the Western Balkans with a focus on the Republic of Macedonia Will Bartlett European Institute London School of Economics and Political Science JULY 2010 | #01 01 Portal on Central Eastern and Balkan Europe University of Bologna - 1, San Giovanni Bosco - Faenza - Italy www.pecob.eu is an interdisciplinary board of d director directors, responsible for reviewing proposals and accepting international high quality scien–‹Ƥ ’‹‡ ‡•‘ˆ”‡•‡ƒ” Š™‹–Š–Š‡ƒ••‹•–ƒ ‡ of the Europe and the Balkans International Network and the Association of Italian Slavists. Ž›–Š‡• ‹‡–‹Ƥ ’ƒ’‡”•ƒ ‡’–‡†ƒˆ–‡”ƒ blind review process will be published in the portal. ‡„‡”•‘ˆ–Š‡ ‹‡–‹Ƥ ‘ƒ”†‘ˆ‹”‡ tors are: Ȉ–‡ˆƒ‘‹ƒ Š‹‹ȋ Ȍ Ȉ ”ƒ ‡• ‘”‹˜‹–‡”ƒȋ Ȍ Ȉƒ” ‡ŽŽ‘ ƒ”œƒ‹–‹ȋ Ȍ Ȉ–‡ˆƒ‘ ƒ”œ‘‹‘ȋ Ȍ PECOB’s Editorial Staff selects brings thinking se sel lect le cts ts an and d bri b ring ings gs ttogether og get eth ther her tthe he th thinkin of distinguished scholars, scholars experts, experts rre•‡ƒ” Š‡”•ƒ†‰‡‡”‹ —•‡”•‘‡–”ƒŽǦƒ•–‡”—”‘’‡ǡ–Š‡ƒŽƒ”‡‰‹‘ƒ†–Š‡‘•–‘˜‹‡–•’ƒ ‡ǡ„› ‘ŽŽ‡ –‹‰• ‹‡–‹Ƥ ƒ†‹ˆ‘”ƒ–‹‘†‘ —‡–•Ǥ Ms Aurora Domeniconi ‹• ‘‘”†‹ƒ–‘”‘ˆ–Š‡†‹–‘”‹ƒŽ–ƒơǤ‘— ƒ ‘–ƒ –Š‡”ˆ‘”‰‡‡”ƒŽ”‡“—‡•–•ǡ ‘—‹cations concerning conferences and events, courses, academic calls and contents for the ˆ‘”ƒ–‹˜‡”‡ƒǡ’”‘’‘•ƒŽ•ƒ†•—„‹••‹‘‘ˆ• ‹‡–‹Ƥ  ‘–”‹„—–‹‘•ˆ‘”–Š‡ ‹‡–‹Ƥ  Library. aurora.domeniconi@unibo.it Mr Michele Tempera ‹• ”‡•’‘•‹„Ž‡ ‘ˆ –Š‡ ‡ –‹‘ —•‹‡•• —‹†‡Ǥ ‘— ƒ ‘–ƒ – Š‹ ˆ‘” ‘—‹ ƒ–‹‘• concerning the economic and business section. michele.tempera@unibo.it Mr Massimiliano Del Gatto ‹•–Š‡™‡„ƒ•–‡”ƒ†Š‡ƒ†‘ˆ‰”ƒ’Š‹ †‡•‹‰ƒ†’”‘‰”ƒ‹‰Ǥ‘— ƒ ‘–ƒ –Š‹ˆ‘” ‘—‹ ƒ–‹‘•”‡Žƒ–‡†–‘‰”ƒ’Š‹ Žƒ›‘—–ǡ„”‡ƒ†‘™•‹˜‹•—ƒŽ‹œ‹‰’ƒ‰‡•‘”‹correct functioning, as well as for technical details and requirements of contributions. massimiliano.delgatto@unibo.it massim mililia iano.delgatto@unibo.it graphic design: mdelgatto.com PECOB’s Scientific Board PECOB's Paper series | July 2010 | #01 | www.pecob.eu The Social Impact of the Global Economic Crisis in the Western Balkans with a focus on the Republic of Macedonia Will Bartlett European Institute London School of Economics and Political Science Table of contents Abstract .......................................................................................................................... 4 1 Introduction ............................................................................................................. 5 2 The global economic crisis: Impact on the Western Balkans ................................. 6 3 Transmission mechanisms ....................................................................................... 9 3.1 Exports ........................................................................................................10 3.2 Remittances .................................................................................................11 3.3 The banking sector and credit growth........................................................11 3.4 Foreign direct investment .......................................................................... 13 4 The social impact in the western balkans .............................................................. 13 4.1 Unemployment ........................................................................................... 15 4.2 Pensions ...................................................................................................... 15 5 The social impact on households in Macedonia ....................................................18 6 Ethnic tensions and political instabilities in Macedonia ........................................23 7 Conclusion: implications for regional stability .......................................................25 Acknowledgements ..................................................................................................... 26 References.....................................................................................................................27 3 4 Will Bartlett Will Bartlett Sim nonsed et rem. Debisi officia nonecte volut inctem quisint doluptas consequo derecab orescidendis dolenihitas debis dolupta quianteni sequi doluptatur magni dolluptiam sim abo. Nem estetus namus dus min rem aceres dus magnis nobis aut doluptateni. Ab int ut explis erumquam, ni coria conseque velit, qui id quatia eos aut qui occae aut rest a de ommodisquid moluptis eum nobitate remos molore incitios modicim illorep taturita num quibusaniste ipides des di‐ tatemposa aut et et quam, excese perero (77) Abstract This paper studies the social impact of the global economic crisis on the countries of the Western Balkans, with a focus on the Republic of Mace‐ donia. Although almost all countries of the region have been severely hit by the economic crisis in 2009 some, such as Macedonia, that were less inte‐ grated into the global economy were apparently less affected initially. The paper sets out the broad impact of the crisis on the region’s economic growth, and identifies the transmission mechanisms of the crisis, through contractions of export demand, falling remittance flows, bank credit, and sharply reduced flows of foreign direct investment. The international and domestic policy responses to the crisis are outlined. Finally the social impact of the crisis is examined in terms of the effects on unemployment and pen‐ sion provision. The results of a household survey carried out in Macedonia in summer 2009 are used to identify the effects of the crisis on socio‐ economic conditions, poverty, income inequality, and ethnic tensions. The analysis shows that the social effects of the crisis have been far worse than implied by the official macroeconomic data. The paper concludes that the social impact of the global crisis in the region has been severe, and that its impact may worsen in the coming months and years with potentially serious consequences for regional stability. In the case of Macedonia, speedy pro‐ gress with Euro‐Atlantic integration may mitigate these risks. (CC) You are free to share, copy, distribute, and transmit this work The Social Impact of the Global Economic Crisis in the Western Balkans… 5 1 Introduction The countries of the Western Balkans, as elsewhere throughout Eastern Europe, have been severely affected by the recession ‐ more so than most other regions around the world (Mitra et al., 2009). While some countries within the region have been very deeply affected, others appear to have been relatively lightly touched by the crisis, while one, Albania, is among a handful of transition countries that have apparently not experienced nega‐ tive economic growth. The effects of crisis have been transmitted mainly through a decrease in demand from the EU core countries to the peripheral countries. Variability in exposure to demand for tradable goods and migrant labour, and inflows of foreign investment and remittances, has been the main cause of the differential impact of the economic crisis in the region. The social impact has been equally variable across countries, and has fol‐ lowed partly the nature of the transmission mechanism, and partly followed more general factors related to structural features of the economies and the domestic and international policy responses to the crisis, as well as pre‐ vious policies towards the social sector carried out during the transition process. Social protection systems are relatively weak in the Western Balkans compared to those in the EU, and consequently, people in the region are more vulnerable to economic downturns. Over the last twenty years, pov‐ erty and social insecurity has led to political instability, and has undermined progress towards European integration. Low levels of public expenditure, designed to keep budget deficits within Maastricht and IMF targets, has largely undermined attempts to provide effective public services. The World Bank has initiated poverty reduction strategies in the poorest countries aimed at better targeting of social protection programmes towards the poor, but this has been difficult to achieve in countries where the adminis‐ trative capacity is weak. Social sector reforms have therefore been directed towards marketisation, and in some countries this has been achieved through partial privatization of the pension system, one of the largest ab‐ sorbers of public expenditure. Reforms to health systems have involved varying degrees of decentralization and privatization. Housing reforms car‐ ried out at the beginning of the 1990s in many countries have led to a dearth of public sector housing and growing housing problems. The region also still suffers from a large population of refugees which fled their homes during the wars of the 1990s. Donor agencies have been very active in the field of social policy in response to these problems, but they have offered conflicting advice which has led to inconsistencies in the provision of ser‐ (CC) You are free to share, copy, distribute, and transmit this work 6 Will Bartlett vices. Many donors have advocated a welfare mix involving an important role for NGOs in the provision of social services, but the NGO sector is in its infancy and does not have the capacity to play a leading role. Institutional reforms in the region have been the outcome of a policy process which involved a political struggle between pro‐reform and anti‐ reform coalitions (Bartlett 2008). According to Hellman (1998), winners from reform are the most dangerous opponents of reform progress. This is because, in partially reformed economies, new elites have established mo‐ nopoly positions that provide opportunities for rent‐seeking. Consequently, they aim to prevent further reforms that would undermine their privileges. Ethnic conflict is seen as a strategy by which the anti‐reform coalitions have been able to mobilize the population against reform, and maintain their privileges built up during the transition. The current crisis also presents op‐ portunities for the elites to reinforce and consolidate their positions of privi‐ lege, by mobilising the population for austerity measures which they them‐ selves are in a position to avoid, thus leading to further increased inequality. In mobilising for austerity, we may ask whether ethnic mobilisation remains a useful strategy given the countervailing attractions of EU integration, which require elites to desist from fomenting ethnic rivalry and to engage in more normal processes of political mobilisation. The second section of the paper provides an overview of the effects of the crisis in the region; the third section considers the effects of external transmission through trade, remittances, credit contraction, and falling in‐ flows of FDI; the fourth section considers social impacts of the crisis; and the final section concludes with some observations on the implications for political stability. 2 The global economic crisis: Impact on the Western Balkans The sharpness of the contraction is underlined by opinion surveys car‐ ried out in September 2009. More than a third of respondents in all the countries involved considered that the economic crisis was having an ex‐ tremely negative effect on their country’s economy, rising up to over one half in Montenegro, Bosnia and Serbia and two thirds of respondents in Croatia. www.pecob.eu The Social Impact of the Global Economic Crisis in the Western Balkans… Croatia Serbia Bosnia Montenegro Macedonia Kosovo Albania Table 1: Somewhat negative 26 32 36 32 36 38 41 Extremely negative 61 55 52 52 48 44 37 to what extent do you consider that the current economic and financial crisis has a negative effect on your country's economy (% of respondents?) Source: Gallup Balkan Monitor 2009, survey carried out September 2009 Albania Macedonia Montenegro Bosnia Serbia Croatia Kosovo Table 2 No impact 5 8 5 3 7 10 11 7 2007 2008 2009 6.0 5.8 10.7 6.0 6.9 5.5 5.0 8.0 5.5 6.9 5.4 5.5 2.4 5.4 3.0 ‐2.0 ‐4.1 ‐3.1 ‐4.0 ‐5.8 n/a Average growth 2008‐09 5.5 1.8 1.4 1.2 0.8 ‐1.7 n/a Real GDP growth rates (%) Source: Ecofin 2009 Q4; and EBRD online data Data on real GDP shows a similar pattern of effects. Table 2 shows the Ecofin estimates for 2009 and the EBRD projections for 2010. Albania has weathered the crisis relatively well, and is expected positive rates of growth throughout the crisis. Real GDP in Macedonia fell by 2%, in Bosnia by 3%, in Montenegro and Serbia by 4% and in Croatia by nearly 6%. Croatia was the only country to have average negative growth over the two year period from 2008‐09. It should be emphasised that these data are estimates, and may well underestimate the real impact of the crisis. In the period from 2000‐08, the countries of the region experienced rapid growth fuelled by external borrowing, inflows of easy credit from for‐ eign‐owned banks, and inflows of foreign direct investment. The effects of the crisis were initially greater in those countries which relied most on ex‐ ternal inflows to support rapid growth (Prica and Uvalic, 2009). Due to the collapse in export demand, industrial production fell even faster than GDP. By October 2009, compared to the same month in 2008, industrial produc‐ tion had fallen by 38% in Montenegro, 9.8% in Macedonia, ‐8.5% in Croatia, (CC) You are free to share, copy, distribute, and transmit this work 8 Will Bartlett Figure 1 Real GDP growth rates 2007‐09 Source Table 2 Figure 2: Current account deficits, estimates and projections, 2008‐09 (% GDP) Source: EBRD online data and 6.6% in Serbia (EC 2009). The Western Balkan countries are in a vulnerable position in relation to the economic crisis because they all have chronic current account deficits. These must be financed by capital inflows or foreign borrowing. The current account deficit for Macedonia for example is over 10% of GDP, and even higher in Albania and Montenegro. Countries which maintain a fixed ex‐ change rate (Bosnia through its currency board, Kosovo, Montenegro by www.pecob.eu The Social Impact of the Global Economic Crisis in the Western Balkans… Figure 3: 9 Foreign debt (% GDP) Source: EBRD online data adopting the euro as legal currency) are not in a position to correct their deficits through depreciation of the currency. Croatia and Macedonia, which peg their currencies to the euro, are in a similar position. Current ac‐ count deficits have nevertheless shrunk due to rapidly falling imports as domestic demand has contracted (see Figure 2). This has been a benefit to the countries and has mitigated economic instability. Over time some countries have built up large stocks on international debt (see Figure 3). This is especially problematic for Croatia whose external debt has increased to over 60% of GDP by 2008. Albania has a relatively low foreign debt and has been able to borrow its way through the crisis. Mace‐ donia was able to issue a €175m Eurobond in July 2009, but only at an inter‐ est rate of 10%. However, as yet the Western Balkan countries have not reached the stage of Greece whose international credit rating has been downgraded due to excessive debt. This is mainly because most countries had maintained relatively low government budget deficits below 3% of GDP before the crisis began (see figure 5). By 2009 however the government budget deficits had increased dangerously in the cases of Serbia, Bosnia, and Albania. Macedonia was in a relatively good position in this respect, with government budget deficit of less than 3% of GDP even in 2009. 3 Transmission mechanisms Four main external transmission mechanisms have relayed the economic crisis to the region. Firstly, exports collapse on a global scale following the demise of the Lehman Brothers bank in October 2008. Secondly, reduced demand for labour in the core market economies has had a negative impact (CC) You are free to share, copy, distribute, and transmit this work 10 Will Bartlett Croatia Macedonia Albania Bosnia Montenegro Serbia Kosovo Table 3: Exports ‐18.1 ‐24.1 0.8 ‐12.4 ‐35.7 1.3 ‐20.4 Imports ‐25.7 ‐28.4 ‐12.1 ‐27.2 ‐26.6 ‐17.1 0.7 Exports and Imports, October 2009 (% change compared to October 2008) Source: EC (2009) on remittance flows on which some countries are heavily dependent. Thirdly, the global collapse in credit has caused foreign banks in the region to scale back their landing to both businesses and households, and this has reduced both domestic business investment and demand for durable goods. Fourthly, inflows of foreign direct investment have hit some coun‐ tries in the region harder than others. 3.1 Exports One of the main transmission mechanisms of the crisis has been external demand for exports from the EU, the main trading partner for the region. A sharp collapse in merchandise exports in the region took place between Q2 2008 and Q2 2009, with exports in almost all countries falling by more than 20% over the year. In October 2009, exports were significantly below the level a year earlier in Croatia, Macedonia, Bosnia, Montenegro, and Kos‐ ovo). In countries which had been able to depreciate their currencies, ex‐ ports held up. The devaluation in Albania was 11.4% against the euro, and in Serbia the depreciation was 14.6%. At the same time, declining domestic demand led to sharp reductions in imports, and for this reason the current account deficits also fell. The reduction in importas was dramatic, reaching over 25% in Croatia, Macedonia, Bosnia and Montenegro. This suggests that the reductions in GDP may have been far greater than indicated in Table 1. In Croatia, 1 exports of goods for outward processing were especially badly hit, falling by 77% over the year 2 , while exports after inward process‐ ing fell by 22%. Overall, Jovičić (2009) has studied the relationship between ———————————— 1 The data refer to the first 11 months of the year up to November (State Statistical Office, First Release, No: 4.2.1/11). Total exports fell from HRK64.1bn in 2008 to HRK50.6bn in 2009, a fall of 21% over the year. 2 Data from Croatian Statistical Office, December 2009 www.pecob.eu The Social Impact of the Global Economic Crisis in the Western Balkans… 2008 Q1 51.92 Table 4: 2008 Q2 64.92 2009 Q1 46.29 2009 Q2 58.86 % change Q1 ‐10.8% 11 % change Q2 ‐9.3% Macedonia, change in net remittance inflows, Q1‐Q2, 2008‐09, (US$m) Source: State Statistical Office Macedonia, Monthly Statistical Bulletin, January 2010. the degree of trade integration to the EU market and the timing and inten‐ sity of the onset of the crisis effects among the Western Balkan countries. She finds that while those with a high degree of integration experienced the crisis sooner, those with a lower degree of integration experienced a larger decrease in production. 3.2 Remittances Remittance flows have been a key transmission mechanism for the im‐ pact of the economic crisis. Bosnia, Albania, and Serbia 3 stand out with very high shares of remittance income in GDP. Remittances have so far held up in Albania and Serbia. Data on remittances are by their nature difficult to ob‐ tain and the reliability of the data is questionable. For Macedonia, remittances come from mainly the Diaspora in EU coun‐ tries and the USA, both of which have been adversely affected by the global financial crises. According to the results of a recent household survey car‐ ried out in Macedonia in September 2009 (Bartlett et al. 2010), 7.4% of fami‐ lies in that country receive remittance incomes. The average amount of re‐ mittances received in the twelve months prior to the 2009 survey was 400 Euros (25,690 denars). According to the National Bank of Macedonia, remit‐ tances contributed 20% of GDP (US$1.2 billion) in 2007. The most recent available data indicate that In the first two quarters of 2009, net remittance inflows to Macedonia declined by 10% in each quarter, compared to the same period in 2008 (see Table 4). 3.3 The banking sector and credit growth Financial integration brought about by the extensive penetration of for‐ eign banks in the region has contributed to high economic growth in the region over the last decade, but it has also encouraged credit booms and over‐borrowing, which has increased vulnerability of the region to the eco‐ nomic crisis (EBRD 2009). Montenegro and Macedonia experienced very ———————————— 3 Kosovo also relies highly on remittances to finance its economy, but the data is sparse and unreliable. (CC) You are free to share, copy, distribute, and transmit this work 12 Will Bartlett Croatia Macedonia Albania Bosnia Serbia Table 5: Credit ‐0.5 14.5 12.1 ‐2.8 20.3 Deposits ‐0.3 ‐0.3 58.0 ‐1.6 16.5 Table 5: Growth of credit and deposits October 2009 (% change compared to Oc‐ tober 2008) Source: EC (2009) high credit growth, which had reached over 50% p.a. in 2007, before being sharply scaled back in 2008 as the crisis took effect. Early in 2009, the multi‐ national development banks provided substantial financial support for commercial banks in the region. Together with the of home and host coun‐ try governments, the European Commission, and the affected banking groups, an agreement known as the “Vienna Initiative” was reached to en‐ sure coordinated crisis management. Under the agreement, host govern‐ ments provide deposit insurance and liquidity support for the banks, EU‐ based parent banks agreed to recapitalise and refinance their subsidiaries in the region, home governments agreed to allow bank groups to access fi‐ nancial resources without restrictions, and the multilateral development banks provided large‐scale financial support. This policy response was de‐ signed to ensure that foreign owned banks would not pull out of the region, but would refinance loans which they had placed in the private sector in the regional economies. This agreement has held against possible defections so far, and has stabilised the banking system in the region. Consequently credit growth has also held up in some countries, including Macedonia, Albania, and Serbia. Deposit growth has held up in Albania and Serbia, possibly re‐ flecting counter‐cyclical remittance flows.. However, signs of strain among regional banks are beginning to emerge. The most troubled bank has been the Bavarian Hypo‐Alpe‐Adria bank which was sold to BayernLB for €1.6bn in 2007. Having expanded to 12 countries since 2000 the HAAB had expanded employment in the region from 1,000 to 7500. It became over‐exposed to bad loans in Croatia and lost €520m in 2009. BayernLB put more than €1bn more capital into the bank in 2007 and 2008, in addition to an injection of €900m from the Austrian government. However, none of this was sufficient to rescue the bank, which has now been taken into state ownership by the Austrian government. Reportedly, Greek banks have stopped making transfers to South East European sub‐ sidiaries, leaving them to fund lending entirely out of local deposits 4 . ———————————— 4 Patrick Jenkins and Kerin Hope (2009) “Greece sees few glimmers of hope”, Financial www.pecob.eu The Social Impact of the Global Economic Crisis in the Western Balkans… Figure 4: 3.4 13 Fall in FDI inflows 2008‐09 (%) Sources: IMF, central banks and EBRD estimates. Foreign direct investment A major impact of the economic crisis has come through sharp reduc‐ tions in the inflows of foreign direct investment (FDI). This has been more problematic in the countries in which FDI had reached large scale especially Croatia. FDI has been concentrated in a narrow range of sectors and has been distributed unevenly through time, and strongly linked to privatisation in sectors such as telecommunications, banking, and oil refining. Croatia has been the recipient of the largest share of FDI inflows. Figure 4 shows that the largest fall in FDI inflows has been in Macedonia, where FDI fell by 51% between 2008 and 2009, despite the very generous in‐ centives that have been put in place to attract FDI into the country. 4 The social impact in the western balkans The economic policies of the international institutions and the domestic governments have moderated the impact of the adverse external environ‐ ment. The impact of the crisis on the region would most likely have been ———————————— Times, 15/12/09. (CC) You are free to share, copy, distribute, and transmit this work 14 Figure 5: Will Bartlett General government budget balance (% GDP) Source: EBRD online data much greater if it had not been for a concerted and effective policy re‐ sponse from international institutions, ranging from IMF support pro‐ grammes, to tailored agreements between international institutions and commercial banks to ensure continued lending to the region. IMF support programmes have been directed towards Bosnia and Serbia. There has been little conditionality attached to these rescue programmes. There has also been a robust response by national governments. Following the exam‐ ple of policies adopted in the advanced economies, these have included de‐ posit guarantees, liquidity injections, and recapitalisation of banks. On the side of fiscal policy, the countries are far more constrained than the developed economies being less able to raise finance on the interna‐ tional markets to cover external deficits. Most were fortunately in a rela‐ tively favourable position in relation to government budget deficits, as they had been seeking to reduce these in line with IMF advice and the pre‐ accession programmes for EU membership (see Figure 5). In 2008, only Al‐ bania had a government budget deficit in excess of 3% of GDP. Budget defi‐ cits have increased sharply in all countries, and several of them have adopted contractionary fiscal policies based on cuts in social expenditure. The Serbian government has suspended public sector pay, and has an‐ nounced that it will cut the public sector workforce by 10%. Croatia has in‐ troduced a public sector salary freeze and a wide range of spending cuts in www.pecob.eu The Social Impact of the Global Economic Crisis in the Western Balkans… Croatia Mace‐ donia Albania Bosnia Monte‐ negro Serbia Kosovo Table 6: 2006 2007 2008 16.6 36.0 14.8 34.9 13.9 44.2 14.7 21.6 44.9 15 13.2 33.8 Q3 2009 14.3 31.7 Nov/Oct 2009 16.1 .. Forecast 2010 10.0 35.6 13.4 42.9 11.9 12.8 40.6 10.7 .. 42.1 10.4 .. 42.3 10.9 .. .. .. 18.8 43.6 13.6 47.5 15.7 (a) .. 16.6 .. .. Unemployment rates in the Western Balkans (%) Source: Ecofin 2009 Q4, Note (a) Q2 2009 2009. The budget deficit in Macedonia tripled between 2008 and 2009 from 1% to 3% of GDP. The cost of funding the deficit in international markets has risen to 10% on recent government bonds issues. The IMF has recommended that the government should cut the deficit to 1.5% of GDP, which will inevi‐ tably mean cubs to already low social budgets. 4.1 Unemployment Unemployment had been on a falling trend in all countries up to 2008. However, the impact of the economic crisis has led to reversals in most countries (see Table 6). By Q3 2009 unemployment had begun to increase in Croatia, Bosnia, and Serbia. In Macedonia, unemployment continued to fall, although at very high levels, from 33.8% in 2008 to 31.7% in Q3 2009. By November 2009, unemployment in Croatia had rise to 16.1%, almost back to the level of 2006. Unemployment was also increasing in Bosnia, Montene‐ gro and Serbia. Forecasts prepared by the DG Employment in Brussels fore‐ see a rather optimistic downward trend in Croatia where unemployment is expected to fall to 10% by 2010, a seemingly unrealistic expectation. For Ma‐ cedonia, unemployment is expected to reverse its downward trend and reach 35.6% in 2010, back to the levels of 2006. 4.2 Pensions In response to difficulties in financing the growing cost of pension ex‐ penditures, several countries have introduced pension system reforms (see Bartlett and Xhumari, 2007). Pro‐market reforms in Croatia and Macedonia have transformed the inherited universal systems of pensions into a dimin‐ (CC) You are free to share, copy, distribute, and transmit this work 16 Figure 6: Will Bartlett LFS unemployment rates (%) with EC forecasts for 2010Source: Ecofin 2009 Q4, Note (a) Q2 2009 ished ‘first pillar’ state pension element, a ‘second pillar’ fully funded private pension element, and a ‘third pillar’ additional private voluntary fund. A similar pension system was created in the UNMIK administered province of Kosovo in 2002, which involved the payment of flat rate €40 to all pension‐ ers aged over 60 years of age, and a compulsory contribution by employees into the Kosovo Pension Savings Trust, which has invested the entire pro‐ ceeds abroad in foreign investment funds on the basis that funds in foreign banks would be more secure than those invested in Kosovo. In contrast, limited reforms to the pay‐as‐you‐go state pension system which fall short of radical privatisation have been introduced in Albania, Montenegro and Serbia. Policy responses to the crisis in pension provision have been varied. One response has been to change the indexation formulae. Serbia has an‐ nounced the suspension of indexation for 2009 and 2010, with a return to inflation indexation beyond 2010 in accordance with the agreement with the IMF. Croatia has announced a suspension of indexation in 2010. Mace‐ donia has restricted pension indexation to 20% of the gross wage from July to December 2009. Kosovo has guaranteed only the nominal value of con‐ tributions for those retiring in late 2008 and 2009. Another response has been to increase the retirement age: Croatia has announced an increase in the retirement age for women to 65. The Macedonian pension reform introduced a three pillar pension sys‐ tem which combines both pay‐as‐you‐go and the fully funded elements. The first pillar is a compulsory pension insurance based on the pay‐as‐you‐go model. The second pillar is a fully funded pension, compulsory for individu‐ als who took up work for the first time since January 2003 and for all new entrants to the labour market. The third pillar is a voluntary fully funded www.pecob.eu The Social Impact of the Global Economic Crisis in the Western Balkans… 17 pension insurance for contributors employed before January 2003. Pen‐ sioners above 65 years old are guaranteed a minimum pension when they retire, subsidized from the state budget if the insured person does not reach it from their employment. The reform of the first pillar has also involved a gradual increase in the retirement age, a decrease in the replacement rate, a change in the pension indexation method, the ending of early retirement, and a change of the pension formula. Within the second pillar, contributions for compulsory fully‐funded pension insurance are invested in two private pension funds, both of which are majority owned by Slovenian banks. By design, the re‐ turns to these investments are not guaranteed, and depend upon the per‐ formance of the funds. Moreover the fees and charges imposed by the pri‐ vate pension funds are relatively high, with an entry fee of 7.9% compared to less than 1% charged by the Croatian funds. Management fees are also relatively high. Given the high fees and the relatively small size of the Mace‐ donian funds, it seems unlikely that they will provide a pension to partici‐ pants greater than they would have received under a state managed sys‐ tem. An independent assessment carried out on behalf of the World Bank has raised concerns about the introduction of the privately managed sec‐ ond pillar pension scheme in Macedonia, on the grounds that the projec‐ tions for future pensions made in designing the scheme were overly opti‐ mistic (Fornero and Ferraresi 2007). The crisis has led to serious problems for both private and public pen‐ sion systems in the region. The collapse in the value of financial assets has led to sharp falls in the value of pension funds accumulated under fully‐ funded private pillars of the private pension systems introduced in Croatia, Macedonia and Kosovo. The crisis has also worsened the financial deficits in public pension systems by reducing contribution revenues (World Bank 2009). The collapse in global share prices has led to sharp falls in the unit values in the funds under management in the first pillar elements of the pri‐ vate pension schemes introduced under the pension system reforms. The destruction of value in the pension funds is especially dramatic in Kosovo, where the entire pension fund has been invested in financial assets man‐ aged by foreign banks in EU countries, and the value collapse has reduced fund unit prices below their starting position in 2004. In Macedonia, private pensions funds the accounting unit value of the assets fell from 115 to 100 between January 2008 and January 2009, before rallying to 117 in the case of the NLB pension fund and 121 in the KB First (CC) You are free to share, copy, distribute, and transmit this work 18 Will Bartlett Figure 7: KPTS Share Price Since Inception Source: KPST website pension fund 5 . The World Bank, which sponsored the privately funded pension schemes in the region, has now admitted that privately funded pension schemes are vulnerable to the falls in the prices of the assets in which the funds are in‐ vested, declaring in its latest report that the crisis has “revealed the vulner‐ ability of benefits to the vagaries of the financial markets” (World Bank 2009: 16). 5 The social impact on households in Macedonia The quality of life in FYR Macedonia has been adversely affected by the global economic crisis, as shown by the findings of a representative house‐ hold survey carried out in in September 2009 6 . The survey asked people ———————————— 5 Agency for the Supervision of Fully Funded pension insurance, MAPAS, Skopje, online data 6 The survey covered 1,000 households across the whole of Macedonia as a random sam‐ ple that was nationally representative. It was carried out by the Brima polling agency, on behalf of a research team at the South East European University (SEEU) in Tetovo, in a project funded by the UNDP Skopje. www.pecob.eu The Social Impact of the Global Economic Crisis in the Western Balkans… Figure 8: 19 Poverty Headcount Source: Bartlett et al. ( 2010) numerous questions about their living conditions and quality of life. Almost one third of people (31%) considered that their lives had worsened over the 12 months prior to the survey while only half as many (15%) considered that their life had improved7 . The survey also provided up to date information about the relative dis‐ tribution of poor households, defined as those that have equivalised in‐ come or expenditure below the poverty threshold of 60% of median equiv‐ alised income or expenditure. 8 Unemployment is a primary cause of pov‐ erty, with the poverty rate among the unemployed at 38%. Figure 8 shows the poverty rate by ethnic group. Overall, there is a greater level of poverty among the ethnic Roma and Albanians than among the ethnic Macedoni‐ ans. This is partly to be explained by the larger family sizes of the former two groups, rather than simply a question of lower levels of economic de‐ velopment or discrimination. The poverty gap measures the average distance of individuals in poverty from the poverty line of 60% of the median equivalised income or expendi‐ tures, as a percentage of the poverty line. In terms of equivalised incomes, ———————————— 7 The question was “How has your life changed in the past twelve months?” 1= improved; 2= has not changed; 3= got worse. 8 Household income (expenditure) is measured by the household survey. Equivalisation is made on the basis of the OECD modified scale, which assigns a value of 1 to the household head, of 0.5 to each additional adult member and of 0.3 to each child. Household incomes (ex‐ penditures) are divided by the equivalised number of people in the household (two adults would equal 1.5) to establish income per person. Once the number of households that are be‐ low the 60% of the median equivalised income (expenditure) has been estimated, the number of people in those households is aggregated to estimate the percentage of the population in poverty (the poverty headcount). (CC) You are free to share, copy, distribute, and transmit this work 20 Figure 9: Will Bartlett Poverty gap by ethnic group (by income and expenditure)Source: Bartlett et al. ( 2010) Quintile Whole country Rural 2008 Rural 2009 Urban 2008 Urban 2009 Macedonians Albanians Roma ethnic Macedonian households have the lowest poverty gap of around 12%, and ethnic Albanians it is just over 15%, and is highest for the Roma at over 25%. Again this is partly to be explained by larger family size among the eth‐ nic Albanian and Roma communities. The data in Table 7 reveal a remarkable extent of inequality with the bottom fifth of people receiving less than one twentieth of equivalised in‐ come, while the top fifth receive almost one half of income. The ratio of the top to bottom quintiles is 13, indicating a large gap between the richest and the poorest people. The gap is even wider in the urban areas. The highest degree of inequality is found among the Roma and the ethnic Albanian communities, with the income ratio between the richest and the poorest 1 4% 5% 4% 6% 3% 5% 2% 3% 2 10% 11% 10% 12% 9% 12% 8% 7% 3 15% 17% 16% 17% 15% 16% 13% 12% 4 22% 23% 22% 23% 22% 22% 21% 19% 5 49% 41% 48% 41% 50% 45% 56% 59% 100% 100% 100% 100% 100% 100% 100% 100% 13 8 11 7 16 9 30 18 s80/s20 www.pecob.eu The Social Impact of the Global Economic Crisis in the Western Balkans… Figure 10: Rural equivalised income shares by quintile, 2008‐09 (%) Source: Table 5 Figure 11: Urban equivalised income shares by quintile, 2008‐09 (%) Source: Source: Table 5 21 fifth of ethnic Albanians reaching as high as a staggering 30 times, more than twice the average level of inequality for the country as a whole. Compared to the results for 2008, inequality has significantly widened. In rural areas the share of equivalised income of the poorest quintile fell from 5% to 4%, while that of the richest quintile increased from 41% to 48%. In (CC) You are free to share, copy, distribute, and transmit this work 22 Will Bartlett Figure 12: Lorenz curve for equivalised income by ethnic group, 2009 Source: Table 5 urban areas the respective changes were for a fall of the share of the poor‐ est quintile from 6% to just 3%, while the share of the richest quintile in‐ creased from 41% to 50%. At the same time the ratio of the richest to the poorest quintiles increased from 8 to 11 in rural areas and from 7 to 16 in the urban areas. This sharp increase in inequality in just one year has come about even as the economic crisis began to impact on the country. Comparing with the 2008 survey (UNDP 2009), the economic situation of households has worsened. In 2009 three fifth (60%) of households re‐ ported some or great difficulties in making ends meet, compared to just over one half (55%) in 2008. Thus, the financial crisis has had a noticeable impact on people’s standard of living. Elderly people have the greatest diffi‐ culties in making ends meet live with 64% of the age group 55‐64 reported difficulties in realizing their objectives. Very few households (12%) had saved any money during the 12 months prior to the survey, while over twice as many (27%) had borrowed money. The unemployment rate in the third quarter of 2009 by ILO methodol‐ ogy was one of the highest in Europe (31.7%), which was nevertheless down from 33% in the same period in 2008 9 . According to the findings of the household survey, only two‐fifths (40%) of the unemployed are actively looking for a job. Fewer ethnic Albanians (31%) are actively looking for work than ethnic Macedonians (43%). Many have become discouraged from look‐ ing for work, especially ethnic Albanian women. In addition, ethnic Albani‐ ———————————— 9 State Statistical Office, News Release, 2.1.9.29, 23rd December 2009 www.pecob.eu The Social Impact of the Global Economic Crisis in the Western Balkans… Figure 13: 23 has your life changed in the last 12 months? Source: Bartlett et al. ( 2010) ans find it harder to obtain employment in the public sector. Consequently, they are more likely to substitute work in their own businesses, as business owners and entrepreneurs. In terms of pay, ethnic Macedonians are less satisfied than ethnic Albanians. Almost half of ethnic Macedonians feel badly paid (47%) while only just over a quarter (29%) of ethnic Albanians feels that way. According to the survey, over two fifth (44%) of people in work are unsure whether they will keep their job. Inhabitants of rural areas, women, and ethnic Macedonians all feel most insecure in their job. Only a quarter of respondents claimed that their job offers good prospects for ca‐ reer advancement. Ethnic Albanians are more optimistic than ethnic Mace‐ donians (46% vs. 23%) in this respect. 6 Ethnic tensions and political instabilities in Macedonia The survey reveals far worse impact of the crisis on the ethnic Macedo‐ nian population than on the ethnic Albanian population. As shown in Figure 12 above, the global crisis has affected the majority ethnic Macedonian population harder than the ethnic Albanians. The expla‐ nation may be that the crisis has especially affected the larger companies where ethnic Macedonians predominate, and who also comprise the major‐ ity of skilled workers. 10 In the third quarter of 2009, the industrial produc‐ ———————————— 10 27 % ethnic Macedonians work in large companies in comparison with just 13% ethnic Al‐ banians and 31% of ethnic Macedonians are skilled manual workers, in comparison with just 15% of ethnic Albanians; for more details see Bartlett et al. (2010). (CC) You are free to share, copy, distribute, and transmit this work 24 Figure 14: Will Bartlett perceptions that inter‐ethnic relations have worsened over the previous 12 months, by ethnic group Source: Bartlett et al. ( 2010) tion fell by ‐13.1% on an annualised basis. 11 Particularly badly affected were sectors which have a higher density of larger companies and of skilled workers such as the manufacture of refined petroleum (‐36%), manufacture of basic metals (‐42%), manufacture of electrical machinery and equipment (‐52%) and manufacture of transport equipment (‐21%). This may be behind the high level of life dissatisfaction of the majority ethnic group. The economic crisis appears to have led to a heightened sense of inter‐ ethnic tension in the country. A quarter (26%) of respondents thought that inter‐ethnic tensions had worsened in the twelve months prior to the sur‐ vey, whereas only one tenth (11%) though they had improved. In relation to their 25% share of the population, a relatively large proportion of ethnic Al‐ banians perceive that inter‐ethnic relations had worsened in the 12 months prior to the survey (see Figure 13). Over one third (35%) of people considers that there is a high risk of vio‐ lent ethnic conflict. Perceptions are slightly more gloomy among ethnic Ma‐ cedonians than among the ethnic Albanians (see Figure 14). It is remarkable that almost half of the respondents (48%) in the Skopje region consider that the risk of violent ethnic conflict is high. ———————————— 11 National Bank of the Republic of Macedonia, Monthly Information 11/2009, December 2009, Table 4, p21. www.pecob.eu The Social Impact of the Global Economic Crisis in the Western Balkans… Figure 15: 25 Proportion of people who assess the risk of ethnic conflict as high, low or non‐ existent, by ethnic group, 2009 Source: Bartlett et al. ( 2010) 7 Conclusion: implications for regional stability Although the effects of the crisis have been most immediate in countries which have been more integrated into the global and EU markets, the im‐ pact of the crisis has gradually spread throughout the region, as the effects have spilt over across countries, through the transmission of collapsing ex‐ port demand, falling remittances and a collapse in foreign direct invest‐ ment. The crisis has impacted adversely on social conditions. Unemploy‐ ment has begun to rise and private pension funds have seen the values of their assets reduced threatening the livelihoods of future pensioners. Sev‐ eral governments have already introduced drastic budget cuts, frozen pub‐ lic sector pay, or announced cuts in public sector employment. Social ex‐ penditure on health, education, and housing is likely to diminish in future years. In Macedonia, as in other countries, the social impact has been dra‐ matic. The country has been forced to raise funds on international capital markets at a high price, while the budget deficit, low before the crisis be‐ gan, has increased substantially foreshadowing impending cuts in social ex‐ penditure. In analysing the implications for regional stability, I focus here on the case of Macedonia Where the Ohrid Framework Agreement (OFA) sealed a temporary truce between the ethnic Macedonian and ethnic Albanian po‐ (CC) You are free to share, copy, distribute, and transmit this work 26 Will Bartlett litical parties, based upon a radical decentralisation and power sharing in the state institutions. However, progress in implementing the agreement has been slow as ethnic Albanians are still underrepresented in the gov‐ ernment, and the police, and fiscal decentralisation has not followed politi‐ cal decentralisation. Yet the two sides share common ground in a desire for EU and NATO membership, and this perhaps more than the OFA has main‐ tained political stability in the country in the face of the economic crisis. As yet, politicians have not used ethnic mobilisation as a tool for imposing radical austerity measures. Yet, the ominous events surrounding the publi‐ cation of the Macedonian Encyclopaedia in November 2009 showed that ethnic tensions remain just below the surface, and that radical forces are able to mobilise support on a large scale and in a short time. The tension was brought to an end only by a joint announcement of leaders of each ethnic political party in the government that the incident would not be al‐ lowed to be used as an excuse to stoke inter‐ethnic tension. However, as the results of the household survey indicate, ethnic tension persists among ordinary people. Many people consider that ethnic tensions are increasing, and many also fear an outbreak of ethnic violence in the future. Fortunately, so far, ethnic tensions have been contained. Nevertheless, some groups in‐ cluding skilled workers in manufacturing industry have suffered badly from the crisis, industrial output has fallen dramatically in traditional sectors such as textiles and metals, and income inequality has increased. If the joint aim of NATO membership and EU accession are further significantly delayed or thwarted by outside interests in the coming months and years, it may be that this fragile truce will break down and political stability of the country will be once again imperilled. Acknowledgements I am grateful to Hristina Cipusheva for supplying the data from the household survey carried out by SEEU in September 2009, to UNDP Skopje for funding the survey, and to Zhidas Daskalovski, Mirjana Maleska, Ali Pa‐ jaziti, Agim Poshka, and Ivana Prica for helpful comments. Any errors or omissions are my own responsibility. www.pecob.eu The Social Impact of the Global Economic Crisis in the Western Balkans… 27 References Bartlett, W. (2008) Europe’s Troubled Region: Economic development, institutional reform and European integration, London: Routledge. Bartlett, W., Maleska, M., Pajaziti, A. Poshka, A. and Z. Daskalovski (2010), People Centred Analyses: the quality of social services, Skopje: South East European University and UNDP Bartlett, W. and Xhumari, M. (2007) “Social security policy and pension reform in the Western Balkans”, European Journal of Social Security, 9(4): 297‐322. EBRD (2009) Transition in Crisis: Transition Report 2009, London: European Bank for Reconstruction and Development European Commission (2009) Candidate and Pre‐Accession Countries’ Economic Quarterly: Second Quarter, Brussels: DG Economic and Financial Affairs Fornero, E. and P. Ferraresi (2007) ‘Pension Reform and the Development of Pension Systems: an Evaluation of World Bank Assistance’, Background Paper Macedonia Country Study, Washington DC: The World Bank Gallup (2009) Gallup Balkan Monitor: Insights and Perceptions – Voices from the Balkans, Interviews carried out September 2009, in partnership with the European Fund for the Balkans Hellman, J.S. (1998) ‘Winners take all: the politics of partial reform in postcommunist transitions’, World Politics, 50: 203–34. Jovičić, M. (2009) “The onset of the economic crisis in the West Balkans”, paper presented to the conference on Economic Policy and Global Recession, Belgrade, 25‐27 September Mitra, P., Selowsky, M. and J. Zalduendo (2010) Turmoil at Twenty: Recession, recovery and reform in Central and Eastern Europe and the former Soviet Union, Washington: World Bank (CC) You are free to share, copy, distribute, and transmit this work 28 Will Bartlett Prica, I. and Uvalić, M. (2009) “The impact of the global economic crisis on Central and South Eastern Europe”, paper presented to the conference on Economic Policy and Global Recession, Belgrade, 25‐27 September World Bank (2009) Pensions in Crisis: Europe and Central Asia Regional Policy Note, November 12, 2009, Human Development Sector Unit, ECA, World Bank www.pecob.eu PE PECOB editorial Staff is constantly collecting propo posals for scientific contributions. Any contributor willing wil to submit a scientific document (MA thesis, PhD dissertation dissertation, paper or article) iis wel welcome to do it. Guidelines for submissions Each proposal for PECOB Scientific Library will be first evaluated by PECOB Scientific Committee and then pass through a peer review process. 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