Economic Restructuring, Job Creation and the Changing Demand for Skills in WBA

1. Economic Restructuring, Job Creation and the Changing Demand for Skills in WBA William Bartlett School for Policy Studies University of Bristol

2. Drivers of structural change • Structural change associated with transition has significant implications for job creation and changing demand for skills • Restructuring within enterprises, through privatisation and associated defensive and strategic restructuring • Reallocation of resources between sectors driven by entry of SMEs and exit of old enterprises • Changes in technology driven by FDI flows • Foreign trade opens up new sources of demand and competition • Restructuring also has an important regional dimension

3. Privatisation, restructuring, and skills • Privatisation changes the skill-mix of the labour force • Under strategic restructuring, investment in new technology raises the demand for skills • But, most restructuring in Western Balkans has been defensive restructuring, designed to cut costs, rather than strategic restructuring designed to invest in new technology • The EBRD indicator of enterprise restructuring is low: • BiH and Montenegro: 2 • Albania and Serbia: 2+ • Macedonia: 3- • Croatia: 3

4. SMEs and the demand for skills • SMEs created most of the new job creation in transition economies, but a few high-growth firms account for most of it • SME density is low in the Western Balkans, especially in Serbia and Albania, due to high entry and growth barriers • “Necessity” entrepreneurship prevails, rather “Opportunity” entrepreneurship • Most SMEs have entered in the low-skill trade sector (e.g. 52% in Albania) due to low entry barriers in that sector • Craft firms are a important agents of the preservation and development of skills in the ex-Yugoslav countries • Labour force skills are a significant barrier to growth for 35% of SMEs in BiH and Macedonia (ACE 2000 survey)

5. FDI, technology transfer, and skills • FDI may increase the demand for skills due to • Transfer of technology and knowledge • Links to supply chains diffuse new skills and technologies to local SMEs • Productivity spillovers to local firms in less-developed regions (Peri and Urban 2006) • Skilled labour force may also attract FDI, leading to virtuous circle of growth • But FDI may have negative effects, too, destroying jobs through restructuring and out-competing incumbent domestic firms (Mencinger 2003) • A MIGA survey of foreign investors in revealed difficulties for foreign companies in finding skilled workers, in Albania and to some extent in Croatia, with lesser bottlenecks in BiH and Macedonia

6. International trade • The demand for skills is strongly affected by the degree of trade openness; but Western Balkan countries all have a low ratio of goods exports to GDP - Albania, BiH, Serbia, Montenegro all have export ratios less than 20% of GDP • Skill content of exports to EU-25 is low except for Croatia • High technology exports are minimal, except from Croatia which accounts for 72% of region’s high-skill exports • The main commodity exports from Western Balkans consist of textiles, base metals, machinery and electrical equipment • Albania’s exports are concentrated in low-skill textiles and footwear

7. Structural Change, Employment and Skills • Value added as a share of GDP has declined in agriculture and industry (except in Serbia due to delayed transition) leading to fall in blue-collar jobs • Most new job creation has been in services, especially business services, health, and other services • However, a relatively high proportion of private services employment is in low-skill service sectors • There is an excess supply of labour in the mid-range of educational attainment which implies a skills mismatch, and the delivery of inappropriate skills at secondary level (see next slides) • Evidence from EBRD BEEPS survey shows that skill deficits are higher in ECE than in WBA • Is this because restructuring is more advanced in ECE? • Or because ex-Yugoslav countries deliver better quality education?

8. Employment structure by occupation and skill categories • Globally there is a trend to a lower share of blue-collar workers in employment • This is also true in the Western Balkans as restructuring reduces the overstaffing of blue-collar workers, and leads to an increase in the service sector share • In Albania, job destruction has affected the skilled and unskilled blue collar workers disproportionately (ISCO-88) • In Croatia, there was a similar pattern up to 2000, after which blue-collar employment increased under a road building programme. When this ended in 2004, blue-collar employment resumed its falling trend.

9. The local and regional dimension • In most transition economies, structural change has a strong spatial dimension • Agglomeration has taken place in capital cities leading to spatial differences in the demand for skills • Many previously subsidised companies in depressed regions have collapsed (e.g. paper industry in north east Montenegro) • Most FDI flows to capital cities and larger urban areas • There are large spatial variations in unemployment rates • Education levels are lower in rural areas than in urban areas • Shift-share analysis identifies success stories of employment growth • eg. Medjimurje, an “entrepreneurial” region in north east Croatia

10. Conclusion • Globalisation is leading to labour-upskilling in OECD countries (‘skill-biased’ technical change) • Position of low-skill blue-collar workers is worsening due to increased global competition • Two paths of transition opening up – • high FDI, high-tech, high-skill path (Croatia, Serbia) • low FDI, low-tech, low-skill path (Albania, Bosnia and Herzegovina, Macedonia) • Transition countries can fall into either group, depending on initial conditions and policy choices • Key issue for policy makers: how to move from low-skill path of transition to high-skill path of transition