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The Social Impact of the Global Economic Crisis
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Will Bartlett
European Institute
London School of Economics and Political Science
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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
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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.
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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‐
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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.
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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,
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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
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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
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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
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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.
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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
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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.
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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
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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‐
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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
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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
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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).
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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
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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).
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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‐
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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),
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Bartlett, W. and Xhumari, M. (2007) “Social security policy and pension
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EBRD (2009) Transition in Crisis: Transition Report 2009, London: European
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Fornero, E. and P. Ferraresi (2007) ‘Pension Reform and the Development of
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Prica, I. and Uvalić, M. (2009) “The impact of the global economic crisis on
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