Ivailo Izvorski is the World Bank’s Chief Economist for Europe and Central Asia. This interview was originally broadcasted by A2CNN on May 5, 2023.
A2CNN: Successive shocks of the recent years have restrained the economic growth of countries in Europe and Central Asia. What were the main channels of impact of these shocks on the region’s economies?
Ivailo Izvorski: Thank you very much for having me. As you know, last year Russia invaded Ukraine—this has been the major shock that affected the economies of Europe and Central Asia last year, this year and until the end of the conflict. As a result of this massive shock, the economies of Europe and Central Asia, after expanding very strongly following the COVID recession, experienced much lower economic growth in 2022: from 7% in 2021 down to about 1% in the 2022. Russia’s invasion of Ukraine hit consumer prices, resulting in a surge in inflation, that negatively affected private consumption across the region; private consumption is a main driver of growth. Investment also slowed because firms were less convinced that they should be investing. Trade suffered tremendously because there were a lot of new trade barriers and value chains were also broken. So, because of these challenges following Russia’s invasion of Ukraine, we had this much slower growth last year. And of course, you know in the last 15 years, we had the global financial crises in 2008 that resulted in a negative growth, contraction in the region, and there was the 2020 COVID crises in Europe and Central Asia as in the rest of the world. That was another major shock, but by far, the largest major shock came from Russia’s invasion of Ukraine.
A2CNN: In contrast to most of the countries in the region, Albania had high economic growth above the regional average. What factors have influenced this growth trend in Albania?
Ivailo Izvorski: Albania indeed grew by almost 5%, four times higher than the average for the region. And even if we exclude Russia and Ukraine, it was much higher than the region without Russia and Ukraine. So, obviously a very positive development. Looking back, Albania has had a tremendous growth expansion since 2000, once the transition recession of the 1990’s ended. So, Albania has grown very strongly over this period. Last year, even though consumer prices rose here, as they did in other countries, they rose by less in Albania not least because you produce most of the energy from hydro sources therefore you are a bit sheltered from these increases in imported energy prices. The government also helped with protecting households and companies. The government also continued with the program of supporting investments after the earthquake of 2019 and so therefore, both your consumption, your investment rose very strongly last year and drove growth. It is also impressive how the number of tourists started increasing dramatically last year, seems to be continuing this year. As a result of these factors and lower inflation than elsewhere in the region, growth was robust.
A2CNN: How does the World Bank evaluate the economic perspective of the countries in the region? According to the latest economic report for the Western Balkans, Albania is expected to have lower growth than now. What factors will affect the decrease in growth?
Ivailo Izvorski: If we start with Albania, after a very strong, almost 5% growth last year, we are projecting growth of about 2.8% this year. Slower, but still very substantial. We still project for growth of about 1.4% for Europe and Central Asia. And so, therefore, you still have a much stronger growth in Albania that in the rest of Europe and Central Asia. Why is growth slowing in Albania? Partly, because the government measures that supported households last year are coming to an end, they are being withdrawn. As inflation is slowing, it makes sense for the government not to be providing as much support to households as last year. Also, the program for supporting the earthquake reconstruction is coming to an end and, more broadly, the government is trying to rebuild the fiscal buffers that were very useful during the COVID crisis. The government aims to rebuild the fiscal buffers, so they are aiming to have a much lower fiscal deficit, and even, what we call a primary surplus, a surplus fiscal deficit excluding interest payments. Taken together, along with the weaker global and EU economies, this means that the economy of Albania is likely to grow more slowly in 2023. It is very important that the fiscal buffers are rebuilt ahead of any shock in the future.
For the region as a whole—for the Western Balkans as we call it—the six countries in the Western Balkans, the main word is resilience. They have been tremendously resilient to the various shocks. Yes, growth slowed everywhere. But this resilience to the shocks is remarkable. What is the main ambition and opportunity for both Albania and the other countries? It is to join EU. So, this is the main opportunity, main ambition and how is that going to be achieved? Much stronger, sustainable and inclusive and I want to say green growth in the future, and we see from what your government is aiming for and other governments in the region are aiming for, they are going to focus on this stronger and sustainable growth. And so, yes, slower growth is here than last year, but hopefully it is going to pick, economic relations of the Western Balkans with Europe will continue to strengthen on the path of EU accession, as the countries would benefit tremendously from the trade and integration opportunities.
A2CNN: In your opinion, what are the main policies that would help a sustainable recovery?
Ivailo Izvorski: As I mentioned, the EU integration is the main goal and much stronger growth is the main tool for a sustainable recovery. Without growth you do not get anything, it is very difficult to improve living stadards, reduce poverty, or improve prospertiy. Clearly, you have accomplished so much over the past 20-30 years. I was looking at data that show that from 1993 to 2022, your income per person, your GDP per capita increased 11 times, and this is much faster than the 7 times increase that we see in Estonia. Estonia now has higher GDP per capita than Japan in purchasing power parity. Therefore you have this tremenodus progress. For Albania, you have at least three key areas to sustain strong and inclusive growth:
- To improve the business environment, so more private firms, more private enterprises can come in, develop and provide this vibrancy that the economy needs. Growth at the end of the day has to be driven by the private sector.
- The second one is the quality of education. You obviously came from a closed economy, things have improved over time, but they have to improve further because the world is changing dramatically and what may have worked ten years ago, twenty years ago, last year, does not necessarly work next year. And so, therefore, you need improvements in the education quality: both at the preschool level, primary, secondary and esecially of the tertiary level, the universty level, because you are a country with more than $7,000 per capita GDP and you would need much more innovative firms, much more innovative staff. And so improving the quality of educaton is absolutely essential to achieve strong growth.
- And last but not least, resilience is important, as we talked earlier. You are a small open economy, exposed to shocks that come form outside whether from the euro-zone or from the world. So you have to continue constantly to build that resilience. On the fiscal side, improve the buffers so that if another shock comes the government can spend to ameliorate it. On the climate side, you had an earthquake several years ago, there were floods last year, there was a drought—so building resilience both in the way you construct the physical infrastructure and in the way you plan your budget is going to be essential going forward.
A2CNN: The government has undertaken an initiative to increase the minimum and average wages of the public sector. What can be the effects of this initiative on the economy and business? And in your opinion, will it help curbing immigration?
Ivailo Izvorski: Because public salaries are not driven by the market, it has to be the government’s decisions to adjust them. When you have high inflation in several—one, two, three—years these salaries have to be adjusted. And they have to be adjusted both to motivate people who work in the government, to attract new talented people, but also they have to be adjusted because there is often in the public sector—everywhere in the Balkans, outside the Balkans—there is too much salary compression. The salaries are too equal between the lowest paid and the highest paid. So, as part of the policy to improve the attractiveness of working in the public sector, to attract talent, you need to work towards broadening this disparity, we call it decompression. They should not be so compressed; they should be a bit less compressed. Because of this policy to improve decompression and the policy to attract talented staff, it makes a lot of sense to increase public sector wages. Salaries in the the private sector, in every country, depend on both the market and the salaries in the public sector. The public sector gives a broad direction, but because the country is very open to the rest of the world, there is a lot of trade, there is a lot of investment, the private salaries also depend on how the things are in the rest of the world. Therefore, you cannot leave public salaries to be lagging substantially private salaries. It makes a lot of sense for the government to be doing something on the public side.