Enhancing Investment and Competitiveness in Central Asia, South Caucasus, and Ukraine

1. OECD EURASIA COMPETITIVENESS PROGRAMME Enhancing Investment, Competitiveness and Private Sector Development in Central Asia, South Caucasus and Ukraine Fadi Farra Head OECD Eurasia Program June 2008 OECD Private Sector Development Division OECD Eurasia Competitiveness Programme

2. Promotion job creation in BSEC and CA countries What role for the private sector? The OECD Eurasia Competitiveness Programme Promotion job creation in Eurasia – A sector specific approach

3. Eurasia: The need to improve the business climate • Strong economic performance in both Central Asia and South Caucasus/Ukraine • Regions • However strong economic growth disparities and fluctuations across countries • FDI levels and growth still relatively low • Average FDI per capita up to 6 times lower than South East Europe or CEE • Average FDI growth a third lower than regions like South East Europe • Limited FDI diversification in most countries • Need to improve business climate to attract investment and develop the private • sector and employment further

4. OECD Eurasia Competitiveness ProgrammeNew OECD Mandate (2008) covering two regions and 11 countries Central Asia The South Caucasus and Ukraine Afghanistan Kazakhstan Kyrgyztan Mongolia Tadjiskistan Turkmenistan Uzbeskistan • Armenia • Azerbaijan • Georgia • Ukraine • Observers: Moldova and Belarus Partnership with OSCE and EC Partnership with BSEC and EC

5. Focus on results and implementation to improve investment and competitiveness • Identification and prioritisation of regional barriers to investment and how to remove them • Creation of policy networks in specific policy areas like investment policy, trade, enterprise development, financial sector development • Development of “how to” guidelines at the regional level to implement specific policy reforms Enhancing Regional Business Climate • Surveys of investors and private sector perception to assess and measure impact • Evaluation of policy reforms to improve the business environment • Time-bound and measurable priorities for reforms • Country-specific assistance in implementing reforms Improving National Competitiveness

6. Four pillars to improve the business climate Improving the business climate and Competitiveness in Eurasia A. Enterprise and SME Development B. Policy and Promotion Specific to FDI Investment Reform Index (IRI) SME Policy Index 1. Monitoring and Evaluation Sector Specific Sources of Competitiveness Thematic Working Groups Sector Specific Regional Investment Promotion Enterprise Forum 2. Implemen-tation Support 4 Areas Structured Public/Private Debate Regional Foreign Investors Council, White Book and Investor Forum Sector Specific Studies 3. Private Sector Support Annual Ministerial meetings for South Caucasus, Ukraine and Central Asia Regions 4. Political Support

7. An example: Monitoring policies at the regional level … and addressing reforms through working groups Example for South East Europe The OECD Investment Reform Index Policy Working Group • Chaired by a country of the region and OECD country • Strong involvement of regional policy makers, private sector and OECD experts • Focused on delivering a “How To” guidelines on implementation of • skills development programmes DRAFT NOT FOR DISTRIBUTION

8. Promotion job creation in BSEC and CA countries What role for the private sector? The OECD Eurasia Competitiveness Programme Promotion job creation in Eurasia – A sector specific approach

9. The cost competitiveness trap • Key sectors in the Eurasia regions are able to compete based on low cost • Labour cost in services [e.g. Business Process Outsourcing (BPO), Information and Communication Technology (ICT)] is up to 5 times lower than in Eastern Europe. • Manufacturing cost up to 5 times lower than Western Europe • However cost competitiveness is not sustainable • Markets like India and China are clear low-cost alternatives. • Cost levels in some sectors are increasing by up to 15% annually, impacting negatively on margins and potentially eroding market share levels. • Limited access to finance and strategies to reinvest capital in technology and human capital is a risk. • To sustain competitiveness, the countries in of the Central Asia region and Black Sea regions need to start moving up the value-chain and diversify their sources of FDI

10. Three challenges need to be addressed to sustain competitiveness at the regional level • Significant gaps in human capital and the need for human capital reform linking education and market needs • Skills gaps in high growth industries such as ICT reach 60%. • Coordination between ministries of education and economy and dialogue with civil society are limited. • Limited focus on value-added services and innovation and the need to further link research and businesses • Lack of longer term sector-specific reforms and the need for institutional methods to continuously identify and remove sector specific policy barriers

11. Example for a sector: Business Process Outsourcing (BPO) Example for the Republic of Moldova Leveraging their competitive labour costs in services Index (100: Hungary) Relative comparison of average monthly labor cost in services (2005) (1) Hungary Poland Croatia Serbia Albania UNMIK Republic of Moldova India Bosnia &H FYR Macedonia Montenegro Sample of CEE countries Note: Monthly wages have been calculated on 2003-05 or 2003-06 average; using the LABORSTA Labour Statistics Database and covering, unless specified only the category J (financial intermediation) and K (business activities, real estate and renting). For Albania overall figures are based on category I (transport, storage and communications) due to the absence of statistics on J/K in the ILO databases (1) average monthly wages in all services Source: International Labour Organization; zdnetasia; Wall Street Journal, OECD interviews

12. The human capital gap 50% of BPO firms have difficulties finding skilled and educated workers 70% of BPO firms find education and training to be key policy issues Skills and education of available workers Key issues within human capital policy 50% Source: OECD 2008

13. Engaging the private sector for short term results How to address the lack of skilled resources in the short term? Short term actions: Engaging the private sector • During Pre-employment through offering of internships, intervention in university courses, exchange programs with foreign vendors and universities • During employment through linkage programs, company training including sector/technical-specific training like CAD, ERP, Vendor Managed Inventory for textile or Design for Manufacturability Software and Computer Aided Engineering for automotive • Post employment through the usage of e-courses in particular on new applications and processes like PHP/MYSQL, Ajax, PHP-.Net , XML, Flash Animation & Action Script • Review government practices and private sector practices to upgrade skills e.g. government sponsored coaching programmes; tax relief for training, company sponsored trainings; exchange programmes • Implementation of policies through a sector specific approach e.g. internships, coaching, vocational training, digital learning) • Development of linkage programs DRAFT NOT FOR DISTRIBUTION

14. Policy reforms to move up the value chain and diversify FDI The Republic of Kazakhstan example How to improve sector competitiveness for the Republic of Kazakhstan • Match supply and demand • Align ministries • Develop tools to analyse skills gaps and • shortages • Review the labour market regime • Develop a mechanism for dialogue with • civil society Sustained Competitiveness • Remove sector specific policy barriers on a continuous basis • Set-up sector specific • working groups • Develop sector • specific monitoring tools • Channel innovation efforts • Assess the success levels of current cluster initiatives • Develop an organisational structure and governance model at the national level • Map out the objectives and scope of competitive clusters to channel innovation efforts

15. Key Success factors Clear links with the National Development Plan and priorities to ensure sustainability Close partnership with the private sector to accelerate reforms at the sector level Inclusion of all relevant donors efforts to avoid any overlap Practical approach with a gradual implementation based on pilots and championing stakeholders to deliver tangible results A focus on policy priorities, execution and communication

16. Appendix

17. Governance: Strong collaboration with regional bodiesSouth Caucasus and Ukraine Co-chairs: OECD Country + SCU Country + OECD OECD donor countries SCU Competitiveness Committee Eurasia- SCU country economic teams Regional Working Groups*: Human Capital Investment Promotion Transportation Trade SCU Competitiveness Programme International organisations Private sector Partners: Black Sea Economic Cooperation (BSEC) and EC * Note: Tentative groups being discussed with countries of the region

18. Governance: Strong collaboration with regional bodies (II)Central Asia Co-chairs: OECD Country + CA Country + OECD OECD donor countries CA Competitiveness Committee Eurasia- CA country economic teams Regional Working Groups*: Human Capital Investment Promotion Infrastructure Trade Financial Markets CA Competitiveness Programme International organisations Private sector Partners: OSCE and EC * Note: Tentative groups being discussed with countries of the region

19. 1. How to find relevant local and foreign companies: Sector database Building a database with company profiles and offering • DATA CREATION AND STORAGE • Creation and maintenance of the reference company databases • Automatic update of Moldova statistical databases • Automatic update of registered information by company (in coordination with the National Statistical Bureau) • Automatic feedback between MIEPO and company included in the database • DATA ANALYSIS AND • MINING • Search by company offering and segments • Group/ Community management together with international companies • Possibility to leverage the database for lead generation: identification of company having representatives in Moldova ‘active’ and those that are ‘prospect’ • COMPANY PROFILES: • Includes: • General information • Financial information • Key contacts • History • Subsidiaries • Activities • Actions in Moldova and abraod • Organisation changes • Founders • Actions with international players

20. 2. How to identify and prioritise skills improvement efforts: Skill gap analysis Example for call centers - languages Excluding salary expectations, major discrepancy between supply and demand Qualitative performance Language students and company demand Evolution of demand and supply Italian language Quality of curricula (1) # of people Demand Awareness Supply/Demand Equilibrium Supply Quality of graduates Notes (1): Ranking: (1) Poor; (5) outstanding Source: OECD field survey