Learning How to Share Prosperity: Understanding the Drivers of Poverty in South East Europe

As the six countries comprising the South East Europe (SEE) region exit recession, they are now poised to begin building on the nascent economic growth in the region. Although economic growth is projected to be just 1.8% in 2014, this modest growth will nonetheless help reduce unemployment, increase exports, and limit inflationary pressures in the six countries of Albania, Bosnia and Herzegovina, Kosovo, the Former Yugoslav Republic of Macedonia, Montenegro, and Serbia. As the region travels this slow road to recovery, one of the main challenges that emerges for policymakers there is to ensure that all forthcoming initiatives designed to exploit this growth are as inclusive as possible, capable of increasing shared prosperity for all populations in the region.

Economic growth is a cornerstone for poverty reduction and shared prosperity in the region, but growth that benefits only segments of the population is not sustainable and can limit the long-term economic growth potential of a country. While consumption growth among those who make up the bottom 40% of consumption distribution in the six countries in the SEE region has varied, overall this growth performance has paled on average in comparison to many other neighboring countries in the Europe and Central Asia Region. In order to counter this trend, the World Bank Group is helping guide policymakers in the region in developing programs and policies that are more inclusive and capable of boosting the livelihoods of the most vulnerable populations throughout the region. 

Crucial to the development of such initiatives, however, is a strong understanding of the specific drivers of shared prosperity in these six countries as a whole. This examination is the impetus behind a new paper that identifies these drivers and outlines specific policies and recommendations for designing appropriate interventions in the region that can foster greater shared prosperity – particularly among the bottom 40%.

This new paper, First Insights into Promoting Shared Prosperity in South East Europe, provides a diagnostic on how the region has fared in promoting shared prosperity and explores the pathways - along different dimensions - toward shared prosperity.

“By boosting shared prosperity, we can effectively contribute to growth as a whole in the region,” notes Gallina Andronova Vincelette, Lead Economist at the World Bank and co-author of the paper, “however, in order to achieve the desired results, more data and analysis are needed. This is just the first step in a long journey.”

The report takes an assets-based approach toward collecting and analyzing this specific data, applying a microeconomic framework for policy development that looks at a household’s assets, intensity of use of (and ultimate return on) those assets, and the impact of public and private transfers for these households. This approach reveals that the bottom 40% in the region tend not only to have fewer assets – including education and savings – they also use these assets with lower intensity and receive lower returns on this use. The report also finds that this group is also more vulnerable to shocks, further diminishing their chances to accumulate assets and increase their productive capacity in the long term.

Using this framework, the report identifies five key policy areas where development interventions can be most effective in addressing the challenges of social and economic exclusion:  macroeconomic management, fiscal policies, institutional capacity for improved service delivery, risk management systems, and well-functioning markets within a favorable business environment. By taking this approach, resulting interventions will be more able to improve the income-generating capacity for the bottom 40%. Policies can be designed that remove disincentives to work that arise from labor taxation and social protection, for example. These policies can also eliminate barriers to work, increase access to quality education and boost relevant and marketable skills among the less well-off and poor in the region.

This approach of identifying specific drivers to boost the income-generating capacity of households in the region is setting the stage for more analysis to come. By getting at the question of what elements can policy influence for the poor and less well-off to benefit and contribute to economic growth in the region, policymakers in the six countries will now be better equipped to answer the question of how, exactly, to improve living standards of all and increase the long-term growth potential of the country – thus making progress towards achieving shared prosperity.