Tuesday, July 31, 2007

Rossophones in the Baltics

From Bloomberg today:

Baltics' Russian Integration Engulfs EU in Disputes

By Leon Mangasarian and Ott Ummelas

July 31 (Bloomberg) -- Aleksei, a Russian in the Estonian capital Tallinn, longs to become a citizen of the Baltic state, where he was born. There's one snag: The 31-year-old taxi driver, who asked that he not be identified by his last name, failed the language exam when he applied for citizenship.

Difficulties integrating ethnic Russians in Estonia and Latvia -- former Soviet republics whose populations are one-third Russian -- are contributing to tension with Moscow. Russians rioted in Tallinn over the relocation of a Soviet World War II memorial in April, leaving one dead and 153 injured. Pro-Kremlin protesters in the Russian capital replied by attacking the Estonian embassy.

Since Estonia and Latvia joined the European Union and North Atlantic Treaty Organization in 2004, any spat with the Kremlin risks becoming an international crisis, adding to disagreements over issues such as U.S. plans for a missile-defense system in eastern Europe.

``The EU is now engulfed in the historic disputes that these countries have with Russia,'' Oksana Antonenko, senior fellow and program director for Russia at the London-based International Institute for Strategic Studies, said in an interview on July 27.

Perceived threats from Russia -- and 20th-century history -- fuel demands in the Baltic states for stronger security guarantees from NATO, the EU and the U.S.

Retaking Control

The Soviet Union occupied Estonia, Latvia and Lithuania in 1940 under a secret agreement with Nazi Germany. From 1941 to 1944 they were occupied by Germany, with the Soviets retaking control in 1944 until the countries regained their independence in 1991.

Hundreds of thousands of Russians settled in the region during the Soviet era. Estonia and Latvia didn't grant these Russians automatic citizenship after independence. Instead, the two countries require applicants to pass language and other citizenship tests.

About 29 percent of Estonia's 1.3 million people belong to the Russian-speaking minority. Half don't have Estonian citizenship; and according to official figures, 126,000 of these people are stateless and have no passport.

In Latvia, 36 percent of the 2.3 million people are Russians, Belorussians or Ukrainians; and 424,000 are stateless or have ``non-citizen Latvian passports.''

Free of Contention

Things are different in Lithuania -- the third Baltic state and also a NATO and EU member -- where 6 percent of the country's 3.4 million people are Russian. Lithuania gave citizenship to all residents, and the country is largely free of Russian minority contention.

Alexander Rahr, at the German Council on Foreign Relations in Berlin, says the EU is partly to blame for Estonia's and Latvia's ethnic strains, because it didn't demand better integration policies before letting both countries join.

``If the EU had helped win over Estonia's Russians for its values, the chance for Russia to use these people for dirty games would be marginal,'' he said. ``Of course Russia will try to use a radical minority in this group to raise tensions.''

Some analysts, though, say granting citizenship to Estonia's Russians might have delayed EU and NATO entry.

``The homogeneity of the Estonian community allowed for very painful reforms to be carried out fast,'' said Andres Kasekamp, the head of the Estonian Foreign Policy Institute. ``The Russo- phone community would have undoubtedly voted for left-wing political parties, which would not have favored rapid economic reform.''

`Discord and Distrust'

Antonenko said Estonia and Latvia must accept some responsibility for the tension because they dragged their feet on integrating the ethnic Russians and ``are not prepared to overcome old rivalries and share the EU spirit,'' she said.

When Estonia relocated the war memorial from the center of Tallinn to a cemetery on the edge of the capital, Putin criticized the move as sowing ``the seeds of discord and distrust.''

Putin followed his words with action. Transit of goods from Russia, mostly oil and oil products, fell 22 percent in May and 15 percent in June, Estonian officials said. Several Estonian companies, including AS Kalev, a 201-year-old confectionery maker, have said exports to Russia had to be halted since the start of May because of a boycott by Russian retailers.

Estonia was also hit by attacks that disabled Web sites, which Estonian President Toomas Ilves said were traced to the Kremlin. The Estonian government called on NATO to defend it against Russian ``cyber attack.''

Rally Voters

Masha Lipman, a political analyst at the Carnegie Moscow Center, said Putin is using the spat with Estonia to rally voters before Russia's March 2008 presidential election.

It's ``easy'' to create ``this sense that the Baltics are our enemy and we should not allow them to disrespect us like this,'' Lipman said.

Last month the U.S. warned Russia it had to handle its ``deep and difficult'' relations with the Baltic states ``in an honest and civilized way.''

``The past is not forgotten, but it need not determine the future,'' U.S. Assistant Secretary of State Daniel Fried said June 14 in a speech on the Baltic states in Washington. ``Threats, attacks, sanctions should have no place'' in the countries' relations with Russia.

For Tallinn taxi driver Aleksei, there may still be a happy ending.

``I am learning Estonian again, and at some point I want to try applying for Estonian citizenship again because this is my home,'' he said. ``This is where my roots are.''

Sunday, July 29, 2007

US Labour Force Participation Rates

Richard Berner on the MS GEF:

Do Teens Mask Labor-Market Weakness?
June 22, 2007

By Richard Berner | New York

Here’s a puzzle: Despite slower US economic and job growth, the unemployment rate has failed to rise. Some think that teenagers are the culprits; they are dropping out of the labor force, especially lately. The teenage labor force fell by 352,000 in the first five months of 2007, resulting in a 240 basis point decline in the teen participation rate (the ratio of labor force to population) to a seasonally-adjusted record low of 41%. This 5-month dip in the participation rate was the largest since the 2001 recession, and accounted for half of the decline in the overall participation rate during that period. Other things equal, had those teens kept looking for work without finding jobs, the jobless rate would have been 4.7% in May, not 4.5%. Thus, the teen exodus appears to be holding down the unemployment rate and masking a weakening labor market. The deceleration in average hourly earnings from 4.3% in December to 3.8% (year over year) in May seems to confirm such a softening.

I’m suspicious of that line of reasoning. As I see it, recent teen behavior simply renews a 28-year downtrend in teen labor force participation, and while hourly wage gains may have peaked, other wage metrics show ongoing acceleration. Employment gains have slowed, and probably will continue to do so. Along with some rise in participation, that will likely boost the jobless rate, and wage pressures will level off. But most labor-market indicators so far do not suggest underlying weakness in either the job market or wages.

Both demand and supply matter for the balance in labor markets. Regarding demand, I think employment growth will decelerate in coming months, but the slowing probably will be gradual. That’s because companies’ hiring discipline has left some pent-up demand for hiring. As one measure of pent-up demand, job opening rates (the availability of unfilled jobs relative to employment) from the Job Openings and Labor Turnover Survey (JOLTS) remained close to new cycle highs in April, especially in professional business services, education and health, manufacturing, and state and local government. Thus, prospective monthly job gains may slow to 100, 000 to 125,000.

Labor demand has lagged cyclical norms in this long expansion, but labor supply has lagged even more. The labor force participation rate has declined by 1.2 percentage points from its peak seven years ago, following a four-decade-long uptrend. Whether this decline is a temporary or a more lasting development is critical to the analysis of labor-market slack. There were certainly cyclical elements in the falling participation rate, which gathered momentum in the 2001 recession. Those are well and truly behind us. In contrast, I’ve long felt that the decline in the participation rate is mainly secular (see “Are Labor Markets Tight?” Global Economic Forum, July 22, 2005).

At work are three significant structural changes in labor markets. The first, the decline in teenage labor-force participation, has actually been underway for nearly 30 years, challenging the notion that the recent decline is a new, cyclical development. Rather than looking at monthly data, labor-market analysts typically view the July participation rate for teens as a benchmark, because participation during the school year is erratic. So measured, and before seasonal adjustment, teen (ages 16-19) participation rates plunged to 53% in 2005 from a peak of 72% in the mid-1970s, and actually rose to 53.5% last year, perhaps as labor markets continued to firm.

The reasons for this secular decline aren’t clear, but a study by the Bureau of Labor Statistics suggests that, at least since 1994, teens are putting more emphasis on school, both in the summer months and during the school year (see “Declining Teen Labor Force Participation,” Bureau of Labor Statistics, Issues in Labor Statistics, September 2002). While those data may exaggerate the focus on scholastic endeavors, summer school teen enrollment rates jumped from 19.5% to 27% between 1994 and 2000 — a period of booming job growth. Work by economists at the Federal Reserve Bank of Chicago confirms this secular explanation (see Daniel Aronson, Kyung-Hong Park and Daniel Sullivan, “Explaining the Decline in Teen Labor Force Participation,” January 2007). Consequently, I don’t think this trend has much to do with jobs being easy or hard to find.

That view isn’t universally shared however; some view the recent plunge in the teen participation rate and the concurrent rise in the teen unemployment rate over the past five months to 15.7% as an ominous sign that teenagers are dropping out because they can’t find work. I’ll concede that some jobless teens might give up looking for work and go back to school, but that’s unlikely in the middle of a school year. And I simply don’t trust the monthly teen unemployment and labor force data enough to base strong conclusions on them. The CPS sample from which the data are derived covers 60,000 households, and the month-to-month variation can be substantial. As a result, we must wait for July 2007 data to see whether the teen participation rate has really plunged and whether the teen jobless rate has risen.

A second secular trend: The aging of the population is boosting the share in the population of groups that historically have had lower participation rates. This shift in composition is depressing aggregate labor force participation. A Federal Reserve study calculated that such shifts added about 0.6 percentage point to the aggregate participation rate between 1980-95, and subtracted about 0.4 percentage point between 1995-2005 (see Stephanie Aaronson, Bruce Fallick, Andrew Figura, Jonathan Pingle, and William Wascher, “The Recent Decline in Labor Force Participation and its Implications for Potential Labor Supply,” Brookings Panel on Economic Activity, March 2006). A recent update strongly hints that those demographic shifts will continue to depress labor force participation, as it is clear that only heroic increases in geezer labor force participation will offset population aging (see Jonathan Pingle, “The Outlook for Labor Supply in the United States,” presented at “Labor Supply in the New Century,” Chatham, Mass, June 18–20, 2007).

Nonetheless, I think the debate about labor force participation for older cohorts in the future is still wide open because several factors may influence change. There are three traditional legs to the retirement saving stool. Working longer, in my view, is the fourth critical leg, and future policy changes in Social Security and other retirement saving incentives matter for labor force participation. And there is a fifth leg: Access to health insurance. Many stay at work to get it, and retire once they are eligible for Medicare. Thus, any changes to health care financing or Medicare have the potential to trigger significant change in labor force behavior (see Alicia Munnell and Steven Sass, “The Labor Supply of Older Americans,” presented at “Labor Supply in the New Century,” Chatham, Mass, June 18–20, 2007).

However, a third and final secular factor reducing the labor force is unlikely to change. The long upswing in female labor-force entry began to abate in the late 1980s and ended in the late 1990s. The participation rate for women 20 years and older rose by more than 20 percentage points in the 40 years ended in 2000 but has since flattened out. The peaking is especially obvious among women aged 35-44: Relative stability between 75-78% in that participation rate followed a rise of more than 30 percentage points through the 1990s. That secular plateau in female participation probably won’t reverse. Until 2004, many women apparently decided to leave the labor force either to start families or to spend more time with their children. More recently, the strength of labor demand has lured some back. Women with their own children under 18 years of age numbered about 36.5 million in 2006, and account for roughly half the female labor force between the ages of 20 and 54. Even with the recent rebound, their participation rate has dropped two percentage points in the past six years, and participation for those with kids under 6 years old has declined by nearly as much. Whether due to poor job prospects, greater affluence, or other reasons, women in greater numbers have chosen families over paying jobs.

In sum, these labor-market trends make this expansion — and those to come in the future — different from those in the past. Teens are less likely to be a ready source of summer labor. An aging population and the end of the long upswing in female participation probably have reduced — and will continue to reduce — growth in the labor force. Thus, the norms for job growth consistent with a stable jobless rate will be lower than in the past.

Cyclical factors also matter, however, and I still think labor force participation will get a cyclical lift. But most participation rates will only continue to rise if labor markets remain tight and pay rises enough to make the payoff from looking for a job worthwhile. An upswing in overall participation actually began in 2005; today the participation rate for adult men is up about half a point from its recent trough. The increase has been concentrated among men 35 years and over. In addition, Fed authors cite evidence that labor force participation may have gotten a temporary cyclical lift in the 1990s from welfare reform, and the end of that boost may have unmasked the underlying trend in participation. In all, while cyclical factors may boost labor supply, labor markets likely will loosen only gradually and wages could accelerate further.

Good inflation news and renewed subprime mortgage woes have helped contain bond yields over the past week, although markets remain volatile. The decline of inflation to low levels is a key reason that the hurdle to tightening monetary policy is high. Nonetheless, Fed officials likely will agree that there is scant evidence of increasing slack in either labor or product markets, and thus there remain upside risks in an uncertain inflation outlook. That means the hurdle to easing monetary policy is also high.

These changing trends add risk to the outlook for slack in labor markets. The unemployment rate still seems likely to rise as job growth slows and labor force participation either holds steady or rises slightly. While job growth could slow more abruptly than we expect, there is also a risk that a slowing labor force would prevent the unemployment rate from rising.

Friday, July 27, 2007

Romania Budget Deficit

From IHT:

BUCHAREST, Romania: The Romanian finance minister on Wednesday said the country's proposed 2008 budget foresees a 2.7 percent deficit, with a 43 percent pension hike estimated to cost as much as €6 billion (US$8.3 billion).

Economic growth, estimated to hover at about 6 percent for the next few years, will help support the additional spending, and the government does not plan to raise taxes, Economy and Finance Minister Varujan Vosganian said.

The government also plans a 6 percent cut in payroll taxes.

However, as the average pension increases from 396 lei (US$180, €130) to 568 lei (US$260, €190), the government will need to overspend again in 2008, Vosganian said.

Gross domestic product is estimated to be 438 billion lei (€146 billion; US$202 billion), with the budget deficit estimated to reach 11.9 billion lei (€3.9 billion; US$5.4 billion) — about 2.7 percent of GDP.

The European Union, which Romania joined in January, and the International Monetary Fund have asked the government to tighten public spending and to reduce the budget deficit, which is expected to reach 2.8 percent this year.

In 2008, Romania also plans to spend more on education and health care, two sectors which have been underfunded for years, the finance minister said.

Polish Retail Sales, Unemployment

From Forbes:

Polish June retail sales rise, unemployment falls

WARSAW (Thomson Financial) - Polish retail sales rose a touch faster than expected in June, adding to evidence of a pick-up in domestic demand which is expected to prompt the central bank to raise interest rates again in August.

Retail sales rose 16.2 pct year-on-year in June, statistics office data showed, up from the 14.8 pct seen in May and forecast by analysts this month.

The office also confirmed that unemployment fell to 12.4 pct last month, from 13.0 pct in May, in line with figures given earlier by the labour ministry.

Month-on-month, sales rose 3.1 pct.

Analysts said the numbers confirmed that economic growth slowed to around 6 pct in annual terms in the second quarter, from a decade-high of 7.4 pct in the first three months of the year.

They said the figures showed that demand-led pressure on prices for the ordinary consumer continued to grow but were unlikely to pressure central bank policy-makers into raising borrowing costs for the third time this year when their monthly meeting ends tomorrow.

'Pressure on price growth in retail trade is gradually mounting,' analysts from Bank Zachodni WBK said in a research note to clients.

'On the other hand, GDP growth is not exceeding its non-inflationary potential level as much as in the first quarter and inflation pressure is still moderate. The most recent data do not give explicit arguments in favour of speeding up the monetary policy tightening cycle.'

Poland's economy has maintained strong growth of around 5-7 pct over the last few quarters, boosted by sharp rises in investment that analysts hope will bear fruit in the period ahead, as the contribution of exports to growth slows.

'Growth in the second quarter is slower than in the first, but there is no reason to announce a long-term slowdown in the pace of growth,' statistics office chief Halina Dmochowska told reporters at a monthly news conference.

Central bank interest rates in Poland now stand at 4.5 pct, 50 basis points above euro zone base rates.

Poland and the Euro

From the Financial Times:

Poland alters stance on euro

By Jan Cienski in Warsaw
Published: 26/7/2007 | Last Updated: 26/7/2007 15:40 London Time

Breaking with its tradition of strongly advocating Poland's adoption of the euro, Poland's central bank under its new governor is to play a more neutral role.

Slawomir Skrzypek, governor for just over six months, is creating an office to study the costs and advantages of joining the eurozone. Pol­and's finance ministry says Poland will meet the Maastricht criteria for joining by 2009 and according to Mr Skrzypek the earliest possible date for Poland adopting the euro is 2012 or 2013.

"I would like for a complete report treating this issue to arise in Poland and to try and look at all aspects of this issue and to try to reconcile as much as possible the opposed sides," Mr Skrzypek told the Financial Times. "I think in order to achieve that, the bank at this stage should avoid becoming engaged on any side of the argument."

Mr Skrzypek's appointment in January was controversial. He is not an experienced economist and was chosen at the last minute after other candidates had been vetoed by President Lech Kaczynski and his twin brother Jaroslaw, the prime minister.

Mr Skrzypek's approach to the euro marks a dramatic break with the thinking of his predecessor, Leszek Balcerowicz. The former governor argued it made sense to remove as many fiscal policy levers as possible from the hands of Polish politicians.

"Until now the national bank has taken a very decisive and single-minded position, being de facto a side in this conflict," said Mr Skrzy­pek. "This sort of a decision should not be about breaking anyone; it should be about creating a consensus."

Mr Kaczynski, a political ally of Mr Skrzypek, has called for a referendum to be held on Poland's eventual accession date, and frequently identifies euro adoption as linked to price in­creases and other negative phenomena. Poland agreed to adopt the euro after joining the European Union in 2004 but has given no date for its adoption.

Some economists have questioned the wisdom of holding a referendum on such a complex question, but Mr Skrzypek said asking voters made sense because "the nation is the ultimate sovereign". "Poland should join the eurozone when it is most advantageous," he said.

Mr Skrzypek is also more of an interest rate dove than his predecessor, who was one of the leading hawks on the 10-member interest rate setting monetary policy council. So far Mr Skrzypek has not been recorded as having once voted to raise rates, although the council as a whole raised rates, which now stand at 4.5 per cent, by a quarter point in April and in June. This week the council held rates steady but many analysts expect another increase in August or September.

Poland's economy grew by 7.4 per cent in the first quarter but growth in the second quarter is expected to be closer to 6 to 6.5 per cent. Unemployment has fallen to 12.4 per cent and is no longer the highest in the EU. Corporate wages are growing annually by 9.3 per cent. Inflation is now 2.6 per cent, just above the bank's 2.5 per cent target rate.

"You can't say that the Polish economy is overheated. The wage increases are an area of concern, but it is a part of nominal convergence and it's not like what we're seeing in other new member countries because we are still seeing single digit salary increases," said Mr Skrzypek.

He called the last two interest rate increases "an important pre-emptive strike to the economy".

Mr Skrzypek would not speculate on future rate rises, but did say he felt that, except for possible short-term movements, inflation would not stray beyond the bank's target range of 1 percentage point above or below 2.5 per cent.

Since becoming governor Mr Skrzypek has kept a fairly low profile.

Mr Balcerowicz, in contrast, was famous for his altercations with politicians and tried to prod the government to reform Poland's bloated public finances and undertake other reforms.

"I agree with the opinion that conditions in the economy support all sorts of reforms, including public finance reforms," Mr Skrzypek said. "But out of respect for the independence of the institution I lead, the national bank should not publicly express an opinion in this area."

Lithuanina Growth Q2 2007

From Bloomberg:

Lithuanian Growth Slowed to 8% in Second Quarter (Update1)

By Milda Seputyte

July 27 (Bloomberg) -- Lithuania's economic growth slowed to a preliminary 8 percent in the second quarter, easing concern that the Baltic economy may overheat.

Gross domestic product growth slowed from 8.3 percent in the first quarter, the Vilnius-based statistics office said in an e- mailed statement today. The expansion in the first half was 8.1 percent, led by construction, retail sales and real-estate transactions, the office said.

The Baltic states of Lithuania, Estonia and Latvia were warned by credit rating companies that their economies, among the four fastest-growing in the European Union, are increasing too fast. A more-gradual slowdown suggests Lithuania may cap inflation and meet terms to adopt the euro around the end of the decade.

``Despite this minor slowdown, growth is impressive,'' Jekaterina Rojaka, an economist with DnB Nord in Vilnius, said in a telephone interview. ``We were much more pessimistic at the beginning of the year with much, much lower estimates. Credit portfolios still keep growing faster than expected.''

Annual credit growth slowed in the first half to 47.1 percent, compared with 59.7 percent in the same period last year, the Lithuanian central bank said yesterday. That's ``too little of a change,'' Rojaka said.

Refiner Expansion

The economic expansion is unlikely to slow in the second half as Lithuania's biggest exporter, refiner AB Mazeikiu Nafta, plans to operate at full capacity later this year, Rojaka said. Mazeikiu had to cut production by half in the last six months of last year due to a fire.

Retail sales, the second-biggest component of the economy, increased an annual 21.3 percent in the first half, the statistics office said in a separate report. Clothing sales rose an annual 37.4 percent.

Lithuania's application to adopt the euro at the beginning of this year was rejected because the inflation rate exceeded EU criteria. The government refuses to set a fixed target date, saying the best time for euro adoption will begin in 2010 when inflation is expected to slow.

The inflation rate was unchanged for the last three months ending June at 4.8 percent, the highest in more than eight years.

Thursday, July 26, 2007

Russian Wages on the Rise

From the BBJ:

Average wage in Russia tops $500/month

23 Jul 2007

The average gross monthly wage in Russia in June was 13,810 rubles, that is, more than $500, according to Rosstat, the federal statistics service.

The average for the Q2 was 13,040 rubles, the first time that the average monthly wage in Russia topped $500, with the exception of December 2006. Analysts say that the rising wage would threaten Russia's competitiveness if it remained steady, but they do not expect that to happen. The strengthening of the rubles, which exchanged for 26.5/$ in January and now is at the level of 25.4/$, is largely to thank for reaching the psychologically significant mark. In annual terms, wages are rising by 20-27%, with the June wage being 25% higher than that of June of last year. Wages have risen 60% in the last two years, doubled in the last three years and increased 750% in the last eight years. The per capita rate of growth is somewhat lower. That was 12,200 rubles in June, 18% higher than June of last year, due to the fact that pensions and social benefits are rising significantly slower than wages.

Real wages (adjusted for inflation) were 15.2% higher in June 2007 over June 2006 and 17.5% higher in the H1 of the year over last year's first half. Real disposable income (wages minus obligatory payments adjusted for inflation) rose even less. It was 7.9% this June over last June, and 11.2% The first half of this year over the same period last year.

While wages in Russia are much lower than in Europe and the United States, prices are comparable. Russia lags behind Eastern Europe as well as Western Europe. The Average monthly wage in 2006 in Slovakia was $750, in Hungary $882, in Poland $875, in the Czech Republic $976. In China, last year's average monthly wage was $230. (kommersant.com)

Romania and the Strong Leu

From the BJJ:

Strong leu forces change in Romanian exports

23 Jul 2007

The sharp rise of the Romanian leu this year is forcing smaller manufacturers out of business and prompting a larger shift in exports out of low-value-added goods such as textiles.

The currency has gained 7% against the euro so far this year, after a 10% rise in 2006, leaving hundreds of local exporters, few of whom tap financial markets for protection against currency risk, exposed to heavy losses.
Much of Romanian manufacturing still relies on antiquated technologies and focuses on basic goods such as textiles, which are cheap to produce and sensitive to price movements. “Several hundreds of exporters will finalize bankruptcy procedures by December," said Mihai Ionescu, head of the Romanian Association of Exporters and Importers. "The impact is much worse. Exporters lose €25 million ($35 million) a month every time the leu gains another 1%.” The industry body has repeatedly called on the central bank to intervene to weaken the leu. But the bank has been reluctant to interfere as the strong currency helps to maintain targeted low inflation. Officially, it has not intervened since late 2005 when it bought euros to keep the leu down.

Some analysts have said it may have been in the market covertly earlier this month when the leu hit five-year highs around 3 per euro. The bank denies this. The leu's gains are driven primarily by foreign demand as investors ploughed their cash into riskier assets globally or bet on juicy returns after Romania's European Union entry at the start of 2007. Romania's barely developed derivatives market, which was opened to foreigners last year, gives little incentive for companies to hedge currency risk. But analysts say demand from desperate manufacturers may be just what the market needs.

“We hedge on foreign commodities bourses, but we did not think we had to hedge the exchange rate. We are discouraged by lack of experience," said Serban Carsteanu, strategy and development director of automotive equipment maker Electroprecizia. Romania badly needs exports to offset hefty imports and curb its gaping current account deficit, which is running at just above 10% of GDP. In the first five months of this year, exports rose 12.7%, but imports were up 28.6%, causing the current account gap to more than double from a year earlier to €5.94 billion ($8.19 billion).

Economists warn the deficit could cause a sharp downward spiral for the leu if foreign investment in Romania dries up or global markets turn sour towards emerging economies. Most of Romania's exports, 70% of which go to the EU, are produced by foreign companies or for foreign contractors with access to better technology. “Lots of small exporters will disappear because of lack of investment strategy and willingness to hedge, but that will not be a tragedy,” said Radu Craciun, ABN Amro's head of research in Bucharest. “FDI is high and will generate exports.”

Romania has a good reputation for its textiles and leather goods production facilities, which represent almost a quarter of last year's exports. But high competition from Asian producers has cut textile exports by 2% last year, while machinery and electrical equipment sales rose by 33% in 2006. Analysts expect deeper cuts in textile exports in 2007. (turkishdailynews.com.tr)

Romanian Land Five times the Price of Poland

From the BBJ:

Romanian land costs 5 times more than in Poland – says Polimeni

25 Jul 2007

American developer Polimeni International, which announced investments worth €300 million ($414 million), has completed its first two acquisitions on the domestic market, after paying €28 million ($36.3 million) for two plots of land located in Galati and Satu Mare, where it intends to develop two shopping centers.

“We made our first land acquisitions two months after the official entry of Polimeni on the Romanian market, unlike the Polish market, where our first transaction was made after three years, with the project starting a year later,” Stefan Gheorghiu, country manager of Polimeni International, told ZF. The land acquired in Galati, located close to the ring road, has a surface area of around 100,000 square meters, with the American developer paying around €20 million ($26.9 million) for the plot.

The company intends to build a shopping centre with a lettable area of around 55,000 square meters, as well as a 1,600-spot car park. As for the shopping centre in Satu Mare, it will have a lettable surface area of around 20,000 square meters, and will be developed on land purchased for €7 million ($9.4 million). Therefore, the price paid per square meter of land in Galati stands at around €200, whereas in Satu Mare the cost of land per square meter stands at €350.

According to Vincent Polimeni, the majority shareholder of the Polimeni group, land prices in Romania are five times bigger than in similar areas in Poland. "However, tenants are willing to pay a higher price, given the opportunities available on the Romanian market," explained Polimeni. “The construction of the two shopping centers will start this year.

The mall in Galati is scheduled for completion in December next year, whilst the mall in Satu Mare is expected to be finalized in the Q1 of 2009,” added Gheorghiu. The company has so far conducted a series of commercial and residential projects in both the USA and Poland, and made its decision to enter the Romanian market after being attracted by the potential of the retail market, which is burgeoning. (zf.ro)

Wednesday, July 25, 2007

Skilled Worker Shortage in Germany

From the Financial Times:

Germany looks east to fill skills shortage

By Hugh Williamson in Berlin

Published: July 25 2007 18:30 | Last updated: July 25 2007 18:30

Berlin is considering lifting some restrictions on workers from eastern Europe taking jobs in Germany, in the latest sign that the upturn in Europe’s largest economy is causing a skills shortage.

Germany’s ban on workers from new European Union member states, imposed at the time of EU enlargement in May 2004, may be eased next year, a labour ministry spokeswoman said on Wednesday. The move would be part of a “package of labour market measures” aimed at tackling shortages of qualified workers such as engineers, technicians and IT specialists, she added.

Chancellor Angela Merkel’s ruling coalition is to consider the proposal at a meeting in late August, the spokeswoman said. Germany and Austria are the only countries among the 15 “old” members of the EU to retain restrictions preventing workers from 2004 accession states in eastern Europe from applying freely for jobs.

Berlin is due to review the ban in two years’ time, but Gerd Andres, the deputy labour minister, said this week that “if the shortage of qualified workers continues, the limits on eastern European workers could be lifted before 2009”.

Germany’s chamber of commerce welcomed the initiative, noting that large companies “urgently need skilled workers from eastern Europe and elsewhere”.

Ute Brüssel, the chamber’s spokeswoman, said: “Unlike Britain, for instance, Germany did itself a disservice by closing itself off to eastern Europe after 2004”. Hundreds of thousands of east European workers have moved to Britain in the past three years.

Workers from Poland, Hungary and the Czech Republic were most likely to move to Germany, experts said. But many workers from these countries have already moved to other EU member states.

The chamber added that “opening to labour migrants from eastern Europe would also help Germany by allowing German workers to take up jobs in Poland and elsewhere”. Some states imposed restrictions on Germany in response to its 2004 ban.

Companies have in recent months complained that despite persistently high unemployment, at 3.7m, vacancies for specialist workers were hard to fill. An engineering sector survey in February by the IW economic think-tank showed that companies could not fill 48,000 vacancies. A business poll last month in Bavaria, one of Germany’s strongest economic regions, showed that 24 per cent of companies had unfilled openings for qualified staff.

Germany imposed the restrictions over fears of wage dumping from eastern Europe, and on Wednesday trade unions, and some Social Democrats within Ms Merkel’s coalition, voiced worries about lifting the limits.

SPD legislators said the opening towards eastern Europe should be linked to the introduction of minimum wages in certain sectors, an issue that has sparked controversy in the coalition. Members of Ms Merkel’s Christian Democrats said that since vacancies were for highly paid workers, the minimum wage issue was irrelevant.

Other related proposals on the agenda at next month’s coalition meeting seeking to boost the supply of qualified labour include schemes for retraining and improved qualifications for German workers, and greater openness to labour migrants from outside the EU.

Under discussion is a points system to attract well-qualified migrants, and a cut in the threshold above which non-EU migrants can take jobs in Germany. The current threshold of an income of €85,000 ($120,000, £57,000) may be lowered to €60,000 to attract more people.

Central Banks and Monetary Policy

The Global Financial Accelerator and the role of International Credit Agencies
Paper presented to the International Conference of Commercial Bank Economists, Madrid, July 2007
Carsten Valgreen
Chief Economist, Danske Bank

The choice major countries have made in the classical trilemma: ie, Free movements of capital and floating exchange rates – has left room for independent monetary policy. But will it continue to be so? This is not as obvious as it may seem. Legally central banks have monopolies on the issuance of money in a territory. However, as international capital flows are freed, as assets are becoming easier to use as collateral for creating new money and as money is inherently intangible, monetary transactions with important implications for the real economy in a territory can increasingly take place beyond the control of the central bank. This implies that central banks are losing control over monetary conditions in a broad sense. Historically, this has of course always been happening from time to time. In monetarily unstable economies, hyperinflation has lead to capital flight and the development of hard currency” economies based on foreign fiat money or gold.

The new thing – this paper will argue – is that we are increasingly starting to see the loss of monetary control in economies with stable non-inflationary monetary policies. This is especially the case in small open advanced – or semi-advanced – economies. And it is happening in fixed exchange rate regimes and floating regimes alike.

Latvian Inflation

From Baltic Times:

Latvian inflation rages on

Jul 25, 2007
Staff and wire reports
RIGA - Inflation at the producer level in Latvia continues unabated in the second quarter of 2007, increasing by 4.4 percent compared to the first quarter, and showing an increase of 17.8 percent year-on-year, according to Latvia’s Central Statistics Office.

The largest increase in costs from the first to second quarters of this year was in the production of non-metallic goods, registering an increase of 11.5 percent; next came water cleansing producer prices which rose by 6.1 percent, followed by rubber and plastic goods production prices up by 5.6 percent, and production prices for timber and timber products, except furniture, increasing by 5 percent. Producer prices declined in garment manufacturing and fur processing and painting as well as in the printing and sound recording industries by 2.2 percent and 0.8 percent, respectively.

In the second quarter of 2007, the sector with the fastest year-on-year rise in producer prices, at 33.9 percent, was timber and timber products, excepting furniture. Considerable growth, by 26.3 percent, was registered for production of non-metallic goods, while water cleansing producer prices grew 21.2 percent and electricity, gas, steam and hot water supply producer prices grew 19 percent.
Compared to May 2007, the overall month-on-month producer price level rose by 0.4 percent for June, while the year-on-year increase for the month was 17.7 percent. Compared to May 2007, the overall month-on-month producer price level for domestically sold goods grew by 0.9 percent but for goods exported to foreign markets a decline in producer prices of 0.2 percent was registered. The year-on-year increase in March at the producer price level for domestically sold goods reached 18.8 percent but for goods exported to foreign markets, by 16.1 percent.

According to a recent BICEPS report by economists Alf Vanags and Morten Hansen, the high wage inflation that we are currently experiencing in Latvia tends to work itself into producer prices generally over a time lag of up to 15 months. Consumer price inflation, which last month came in at an annual rate of 8.8 percent, can expect to see further pressure from producer price inflation.
These numbers will continue to negatively impact the Latvian government’s anti-inflation plan, in which the two economists say that “linkages between wages, prices and price expectation suggest that there is considerable inflation already in the pipeline and that inflation is likely to increase further in the short to medium term.”
Latvian construction firm Merks has seen its costs go up by about 20 percent this year, though company chief Ivars Geidans says that in his opinion, the 29.1 percent hike in construction costs the Central Statistics Office reported for the second quarter of 2007 was an exaggeration. The Merks chief says that construction materials have not shown steep price climbs so far this year, but labor costs have kept surging. His own estimate is for overall construction costs this year to climb by 18-20 percent.

In a sign that control of Latvia’s inflation problem could be beyond its own devices, a paper presented at the International Conference of Commercial Bank Economists in Madrid this month by the chief economist at Danske Bank, Carsten Valgreen, promotes the idea that small, open economies such as Latvia, even those with fixed exchange rate regimes, are experiencing a loss of monetary control over their economies. Lending in both local and foreign currencies has the effect of crowding out lending in the local currency, he suggests.
“Fast growing Latvia has been seeing aggressive domestic expansion fueled by credit from foreign-owned banking in a fixed exchange rate environment. Monetary policy has become increasingly impotent as the central banks’ money monopoly is getting increasingly hollow.”

He’s arguing that Latvia’s central bank is hampered by the fixed exchange rate, though even if it were freely floating, “it would not help much if [the bank] could change interest rates more freely, as credit decisions in Latvia are overall decided by large foreign banks, whose capital costs, balance sheets and ability to extend credit are insensitive to Latvian interest rates.”
Building firm Skonto Buve’s director Guntis Ravis predicts that construction costs might also grow rapidly in the second half of the year. The increase in costs, he says, is driven by the rapid growth in workers’ salaries and that these still have the potential to double in the future.

And here's what happens to the workers at the end of the day:

Alytus Textile declares bankruptcy, workers storm office

Jul 25, 2007
Staff and wire reports
VILNIUS - Workers stormed the premises of cotton textiles producer Alytus Textile on July 18 upon hearing of the board’s decision from the previous night to put the company into bankruptcy. The decision will lay off approximately 1,200 workers. The company suspended manufacturing in May due to unfavorable market circumstances including increasing competition from cheap imports from China. “This is an overdue decision, yet it has been inevitable,” said Prime Minister Gediminas Kirkilas in a radio interview. He added that company management had been ineffective under previous directors. The ex ...

Health Spending in the OECD

From the Financial Times:

Health spending outstrips economic growth

By Nicholas Timminsin London

Published: July 18 2007 16:34 | Last updated: July 18 2007 16:34

Spending on health is continuing to outpace economic growth with most countries having seen a near doubling of expenditure as a share of national income over the past 25 years, the Organisation for Economic Co-operation and Development reported on Wednesday.

Per capita health spending has increased by more than 80 per cent in real terms between 1990 and 2005, outpacing the 37 per cent rise in gross domestic product per head.

In 1970, across the OECD, health accounted for just 5 per cent of GDP. By 2005 that had reached 9 per cent with a quarter of OECD countries now spending more than 10 per cent of national income on health.

The US continues by a huge margin to be the biggest spender at 15.3 per cent of GDP in 2005. Switzerland and France both spend more than 11 per cent, while Germany, Belgium, Austria, Portugal and Greece spend more than 10 per cent, with Canada and Australia not far behind. The UK spent 8.3 per cent of GDP on health in 2005 with further growth planned that is likely to take it up to the OECD and European Union average.

Rising demand for healthcare means governments must either raise taxes or social security contributions, cut spending elsewhere or make people pay more out of pocket. There are huge variations around the world as to how much people pay directly for healthcare.

In the UK, a mere 13 per cent of health expenditure comes out of pocket against 57 per cent in Greece and 51 per cent in Mexico. In the US, half of all expenditure is covered either by out-of-pocket payments (13 per cent of the total) or private health insurance.

Other countries with low direct payments include the Scandinavian countries and Luxembourg.

The OECD warns that many countries will have to rely on foreign-trained doctors as medical school intakes have been cut in many countries in an attempt to control healthcare costs.

In the UK, medical student numbers have been rising sharply. But the numbers graduating in France, Germany, Italy, Spain, Japan and Switzerland have been in decline. That is exacerbating the brain drain from low-income to high-income countries, with between a quarter and a third of practising doctors in the main English-speaking countries now foreign-trained.

Tuesday, July 24, 2007

Czech Growth

From Bloomberg Today:

Czech Ministry Raises '07 GDP Growth Forecast to 5.8% (Update1)

By Marketa Fiserova

July 24 (Bloomberg) -- The Czech Finance Ministry raised its 2007 economic growth forecast to 5.8 percent as households are projected to step up spending at the fastest pace in 11 years.

The forecast compares with a 5.3 percent prediction made three months ago, the Prague-based ministry said in its macroeconomic forecast posted on its Web site today. The economy should grow 5 percent next year, the ministry said.

The economy expanded a record 6.1 percent in each of the past two years and should maintain its robust pace as the fastest wage growth in three years and the lowest jobless rate in a decade encourage people to spend, the ministry said. The government aims to push through spending cuts and changes to the tax system during the time of accelerating growth to trim the budget deficit.

``The timing of reform steps in the area of public budgets, which will partially curb domestic-demand growth, can be considered extremely suitable from the perspective of the economy's position in the business cycle,'' the ministry said. In 2008, ``the reform will be reflected in lower government spending and in a shift from household consumption to investments.''

Consumer spending, which has become the engine of growth after exports, should surge 6.6 percent this year, the highest rate since 1996 and faster than a 5.4 percent prediction in the April forecast.

Rising Consumption

Higher wages and welfare benefits, continued credit growth and a rush of housing investment before a planned increase in a value-added tax rate will bolster consumption this year.

The government will try to win the parliament's final approval for a set of measures such as a flat income tax, an increase in the reduced VAT rate to 9 percent from 5 percent and cuts of some social benefits in a bid to trim the public-budget shortfall to 3.2 percent of GDP next year, 2.8 percent in 2009 and 2.5 percent in 2010, based on European Union methodology.

The budget shortfall will reach 3.9 percent of GDP this year, more than the 3 percent of GDP required for adopting the euro and 3.3 percent pledged to the EU, the ministry said in the forecast.

The ministry's report was published two days before the central bank revises its quarterly inflation and economic growth forecast that is seen to underscore the need to raise the lowest interest rates among EU countries for the second time this year.

The Finance Ministry raised its 2007 average inflation rate forecast to 2.3 percent from the 2.1 percent rate predicted three months ago.

Average Inflation

It expects an average inflation rate to climb to 3.4 percent next year, higher than the earlier 3.2 percent forecast. The central bank targets inflation at 3 percent, allowing it to hover between 2 percent and 4 percent.

Twenty of 22 economists surveyed expect monetary policy makers to lift the main interest rate to 3 percent on July 26 from 2.75 percent.

The unemployment rate is expected to drop to 5.8 percent this year before falling to 5.5 percent in 2008, the ministry said, adding that the structural problems on the labor market is hindering a larger reduction in the jobless rate.

``There are a shrinking number of people who are able and willing to work,'' the Finance Ministry said. ``The number of vacant jobs in the economy has reached record highs while entrepreneurs face problems hiring people for new production capacities.''

The current-account deficit should represent 2.1 percent of GDP this year and account for 1.5 percent of GDP in 2008, the ministry said. The koruna's average exchange rate in 2007 will be 28 against the euro and 27.4 per euro next year, the report said.

The koruna traded at a two-month high of 28.18 per euro as of 3:48 p.m. in Prague, compared with 28.20 yesterday.

Turkey, Employment and Economic Growth

The economy has been booming. In the past five years, growth in gross domestic product exceeded 7% annually, and exports more than tripled to more than $95 billion for the year ended June 30. Stronger growth hasn't substantially reduced Turkey's unemployment rate. The social costs of the changes -- such as increased crime rates, displaced families and even suicides -- are starting to appear before the full benefits of the growth have been realized.

Unemployment has remained stubbornly high -- about 10%, compared with 6.5% in 2000, according to the Turkish Statistical Institute. And in the cities, where hundreds of thousands of rural workers flock each year in search of jobs, unemployment last year was 12.6%, the statistical institute says.
[Economic Agenda]

In the past three years, the effects of prolonged unemployment combined with job losses from privatization have started to stanch consumers' willingness to spend, economists have said.

Historically, private consumption in Turkey has accounted for slightly more than half of gross domestic product. In 2001, private-consumption expenditure was growing at a 44% rate but by last year, that had fallen to 16%. In the same period, consumer sentiment also fell sharply.

The Turkish Industrialists' and Businessmen's Association said in a report last month that at least 550,000 jobs should be created on average each year, to reduce unemployment outside the agricultural sector.

The AKP government said the key to reducing unemployment is more labor flexibility. "Turkey has made huge progress in terms of macroeconomic reforms. Now, it's time for microreforms, which will make the country more competitive," Finance Minister Kemal Unakitan said in an interview before the election. Mr. Unakitan was re-elected to Turkey's parliament Sunday.

"One of our priorities will be reducing the tax burden on employment," he added. "In addition, we will make labor more flexible, by changing some of the laws that hinder employment. Part-time employment should also be encouraged."

The industrialists' association report echoed Mr. Unakitan's views. "The labor market has to be supported by micro reforms," it said in its report. "Regulations related to flexible labor should be designed such that they can create jobs and not encourage the informal economy," it said. "They should also be supported by social-security reform."

FDI in Poland

From Poland:

Poland ranked No. 7 among top worldwide FDI investment draws
– Ernst&Young
16:05 03.07.2007

Poland is now the world's seventh most attractive destination for foreign direct investment (FDI) – although the country is losing ground to attractive economies in Asia, according to a report by Ernst & Young and the Polish Information and Foreign Investment Agency (PAIiIZ), presented Tuesday.

"This is another year where we are one of the world's top 10 most attractive countries," said Agnieszka Talasiewicz, Ernst&Young partner for tax law, during a Tuesday press conference.

Poland was ranked No. 5 in 2006. The released report compiles information included in the annual Ernst & Young European Attractiveness Survey for 2007 with hard figures for 2006 provided by PAIiIZ.

REKLAMA Czytaj dalej

Ernst&Young based the study on the opinions of 809 international "decision makers," mostly from Europe, but also from the United States and Asian countries. FDI figures came from the company's database, which includes the results of monitoring of foreign direct investment projects.

Within Europe, which is seen as the world's most attractive region for investment, some 18% of respondents said Poland was the most likely destination for future operations. The country maintained its No. 2 spot in terms investment attractiveness in Europe, behind neighboring Germany with 20% of votes cast and ahead of the Czech Republic, whose popularity is growing, with 13% support.

The report shows, however, that European markets are beginning to lose out to more attractive economies in Asia.

Other factors may also undermine Poland's position in the future, the report reads. Among the top 15 European states for FDIs projects in 2006, Poland occupied the sixth place with 152 investments, compared with Britain, which held the top spot with 686 projects. In terms of the number of projects, Poland's result last year dropped 16%, and it also declined when compared to 2005 when it had 180 foreign direct investment projects.

Once known for low labor costs, Poland has also seen a steep increase of salaries of more than 8% since the beginning of the year. Moreover, companies are struggling with shortages in skilled labor force, as the unemployment rate continued on a downward path to 13% in May from more than 20% in January 2004.

FDI projects also contributed to the decline of unemployment Poland. In 2006, Poland maintained its lead in Europe as the number one destination for job creation through FDIs, with 31,115 newly created jobs from 37,745 positions the prior year.

"While Central and Eastern Europe attracted only 26% of investment projects [in Europe], they benefited from 51% of the new jobs created by foreign investors," the report reads. "This represented an average of 217 jobs per project, compared with 64 jobs per project in Western Europe. Poland was the largest creator of FDI jobs, with almost 15% of the total."

The FDI workplace figures for Poland resulted from a high number of labor-intensive industrial investments, which accounted for 65% of all FDI projects in 2006. Robust development of the manufacturing sector contradicts, however, the country's plans to switch on the highly advanced technology investments and research and development (R&D) centers, the report said.

"High-technology projects are a priority for us and this direction is unlikely to changes for years ahead," said Pawel Wojciechowski, Chief Executive Officer for PAIiIZ. "So far, Western Europe has attracted much more technologically advanced projects, and we're making our first steps in this area. This is the main challenge ahead."

Ernst&Young's Talasiewicz said Monday that to maintain its strong position, Poland should not only put more efforts into creating and promoting an attractive image of its economy abroad, but also improve the legal environment to make it more transparent, reduce bureaucratic procedures and develop its transport infrastructure, which 54% of respondents pointed as the factor playing the most important role for making decisions about investment destination.

Russian Wages

From BBJ:

Average wage in Russia tops $500/month

23 Jul 2007

The average gross monthly wage in Russia in June was 13,810 rubles, that is, more than $500, according to Rosstat, the federal statistics service.

The average for the Q2 was 13,040 rubles, the first time that the average monthly wage in Russia topped $500, with the exception of December 2006. Analysts say that the rising wage would threaten Russia's competitiveness if it remained steady, but they do not expect that to happen. The strengthening of the rubles, which exchanged for 26.5/$ in January and now is at the level of 25.4/$, is largely to thank for reaching the psychologically significant mark. In annual terms, wages are rising by 20-27%, with the June wage being 25% higher than that of June of last year. Wages have risen 60% in the last two years, doubled in the last three years and increased 750% in the last eight years. The per capita rate of growth is somewhat lower. That was 12,200 rubles in June, 18% higher than June of last year, due to the fact that pensions and social benefits are rising significantly slower than wages.

Real wages (adjusted for inflation) were 15.2% higher in June 2007 over June 2006 and 17.5% higher in the H1 of the year over last year's first half. Real disposable income (wages minus obligatory payments adjusted for inflation) rose even less. It was 7.9% this June over last June, and 11.2% The first half of this year over the same period last year.

While wages in Russia are much lower than in Europe and the United States, prices are comparable. Russia lags behind Eastern Europe as well as Western Europe. The Average monthly wage in 2006 in Slovakia was $750, in Hungary $882, in Poland $875, in the Czech Republic $976. In China, last year's average monthly wage was $230. (kommersant.com)

Polish Retail Sales May

From Bloomberg:

Poland's Zloty Gains as Report Shows Faster Retail Sales Growth

By Ewa Krukowska

July 24 (Bloomberg) -- The Polish zloty rose against the euro after a government report showed retail sales grew faster than forecast last month, stoking speculation the central bank will continue to raise interest rates this year.

Retail sales growth quickened to 3.1 percent from May and 16.2 percent from the same period last year, the fastest pace in three months, the Warsaw-based central statistical office said today. The figures exceeded the median estimate of economists surveyed by Bloomberg News, who predicted sales would rise 1.5 percent on the month and 14.5 percent on an annual basis.

``The figures show that consumption demand is rising dynamically and that inflation pressure is increasing,'' said Grzegorz Maliszewski, an economist at Bank Millennium in Warsaw. ``It will serve as an argument for the central bank to continue tightening monetary policy'' which will support the zloty.

Against the euro, the zloty rose to 3.7599 by 11:08 a.m. in Warsaw, from 3.7613 late yesterday.

Polish government bonds fell on the interest rate expectations, with the yield on the 4.75 percent benchmark bond due April 2012 gaining 1 basis point to 5.45 percent.

The central bank increased borrowing costs in April and June to 4.5 percent to stem inflation. Policy makers will probably leave rates unchanged at tomorrow's meeting of the Monetary Policy Council, according to all 23 economists surveyed by Bloomberg.

Retail sales rose 16.2 percent from last year and 3.1 percent from the month before, the Warsaw-based central statistical office said. The median estimate of 15 economists in a Bloomberg survey was for a 14.5 percent annual advance and a 1.5 percent monthly gain.

Poles have been buying more vehicles, furniture and household appliances as their salaries have grown and more jobs have been filled during the fastest economic growth in a decade. Consumer demand has spurred inflation, leading to a half percentage-point increase in the benchmark interest rate, and may influence the central bank's decision on whether to raise again this quarter.

``Pressure on prices growth in retail sales has gradually been growing,'' said Maciej Reluga, chief economist at Bank Zachodni WBK in Warsaw. ``The rate increase may take place next month.''

The economy expanded an annual 7.4 percent in the first quarter, the fastest in a decade, and is forecast by the government to grow 6.5 percent for the full year. This helped cut unemployment to near an eight-year low of 12.4 percent in June and led to an increase in annual corporate wages of more than 9 percent the same month.

The central bank in April and in June raised the benchmark seven-day reference rate in two steps to 4.5 percent after keeping it unchanged since March last year. The council starts its two-day meeting on rates today. The decision will be announced tomorrow.

The zloty traded at 3.759 per euro at 11:15 a.m., little changed from earlier in the morning and up from yesterday's close of 3.761. The yield on the government's five-year bond rose 1 basis point to 5.444 percent.

Sweden's Migrant Policy 2

From FX Street:

Sweden Eyes Bold Moves To Boost Worker Immigration

STOCKHOLM -(Dow Jones)- Sweden's bold proposals Tuesday to throw its door open to foreign workers is the government's latest attempt to relieve a tightening labor market and curb pressure on rising wage levels.

It's proposed that companies will have the right to recruit workers from anywhere in the world rather than being required to give preference to Swedes and other European Union members. The center-right government, elected in September, also says it will introduce a three-month job-seekers' visa allowing anyone in the world to come to Sweden to look for work. Time limits on work visas will also be thrown out, it says.

"If you look at the attitude of Swedish politicians, they are very open to worker immigration," said Robert Bergqvist, chief economist at Swedish bank SEB. "The proposal will increase the labor supply in Sweden, making it easier for people to come to Sweden to work."

Sweden's Migration Minister Tobias Billstrom highlighted the need to boost inward migration to keep pace with retirement levels.

"There will be more to take care of and fewer to support these people," said Billstrom at a press conference Tuesday. "Increasing worker migration can be one way to solve this problem."

Billstrom added these measures will allow Sweden "to be better prepared to recruitthe best to our country."

The proportion of Swedes over the age of 65 is forecast to rise to 21% by 2020 and to 24% in 2050 from 17% in 2006, according to projections from Eurostat. For the European Union, the proportion is set to rise to 30% by 2050, with Spain tops at 36%.

Sweden's government, with a mandate to tweak the welfare state, has already carried out a number of changes aimed at upping incentives to encourage work in Sweden, including cutting income taxes and trimming unemployment handouts.

The country's labor market continues to improve, with unemployment down to a 3.9% rate in May from 6.3% last June.

Demand for pay increases is also picking up as the labor market tightens and some sectors experience problems attracting workers.

The Finance Ministry forecasts wage growth increasing to 4% this year and 4.3% next year from 3.1% in 2006.

The Confederation of Swedish Enterprise, an umbrella organization of Swedish employers, has welcomed the government's new proposals.

Confederation director Urban Backstrom said Tuesday in a statement that there are already labor shortages in construction and added that Sweden's aging population will increase recruitment problems in the future.

"We therefore welcome that the government is now addressing this question," Backstrom said.

Sweden's trade unions, however, are worried.

"They are now giving more power to employers," said Dan Andersson, chief economist at trade union confederation Landsorganisation. "This will have an impact on wages, pushing them lower. It will also increase market competition for lower-skilled workers and make it hard for young people to join the work force for the first time."

Billstrom said trade union criticism of the proposals was expected but he disagreed that wages will fall because of the new proposals.

"All Swedish collective bargaining agreements will still be followed," he said. "Workers who migrate here will have the same working conditions as everybody else."

Sweden was one of only three European Union member countries - the others were the U.K. and Ireland - that didn't place immigration restrictions on citizens from the new E.U. member states that joined in 2004.

The Swedish government's proposals put the country at the top of the list of foreigner worker-friendly governments.

No quotas will be set on the number of people who can come to work in Sweden and the current policy of allowing workers who move to Sweden to bring families with them will also continue, Billstrom said.

The immigration proposals will be under review until mid-November. If implemented, they would come into force next spring, a government spokesman said.

Monday, July 23, 2007

Turkey and Kazakhstan

From Central-Asia Caucasus Institute:


By Marat Yermukanov (01/10/2007 issue of the CACI Analyst)

A mass fight involving hundreds of Turkish and Kazakh workers of a construction company hired by Tengizchevroil which broke out in Atyrau (West Kazakhstan) on October 20 led, according to eyewitness reports, to deaths and dozens of heavy injuries, and triggered public anger in Kazakhstan. Last year, some workers were beaten to death in a similar brawl between local and foreign workers employed by the Turkish company GATE Inshaat in that region. But the Foreign Ministry of Kazakhstan and the Turkish Embassy reacted calmly and made simultaneous statements assuring that the incident would not affect in any way friendly relations between the fraternal countries.

The intensifying contacts between Astana and Ankara confirm these conclusions. Turkey recognizes the leading role of Kazakhstan in Central Asia and regards Astana as the main factor in implementing pan-Turkic ideas of unity. On November 17, President of Kazakhstan Nursultan Nazarbayev attended the summit meeting of the heads of Turkic-speaking countries hosted by Turkey. The event, ignored by Uzbek President Islam Karimov, brought together Kurmanbek Bakiev of Kyrgyzstan, Ilham Aliyev of Azerbaijan and Turkish leader Ahmet Nejdet Sezer, who signed a joint statement on trade and economic cooperation. The statement calls for joint efforts against terrorism, separatism, drugs and arms trafficking. Speaking at the summit, Nazarbayev said Turkic countries should make effective use of their geographic position and the transit potential of the region, and ensure stable development through economic integration. Kazakhstan, which plans to launch its second communications satellite of the KazSat series in 2008, would cooperate in space research with other Turkic nations.

Currently, slightly over 400 joint ventures operate in Kazakhstan. But of a total of $50 billion of investment volume in Kazakhstan, Turkey’s investment share makes up only $2 billion. Turkey accounts for barely 1.2% of Kazakhstan’s total trade volume which stands no comparison with Russian or Chinese trade activities. Traditionally, Turkey fills the construction and textile niche of Kazakhstan’s economy. In 2005, trade turnover between the countries reached $556.8 million, showing 13.8 percent growth from the $500 million level of 2004. Turkish sources forecast $1 billion trade turnover volume this year. But to improve its trade balance with Turkey, Kazakhstan will have to reduce imports of Turkish construction materials, textile and chemical products and export more raw materials. Currently, Kazakhstan’s exports to Turkey make up only $156.9 million, while imports of construction materials and textile (also largely brought in from China) have already exceeded $399 million. Turkey hopes to invest into Kazakhstan’s transport and telecommunications and energy industry, areas where it may face fierce competition from China and Russia. The Kazakh government increased employment quotas for Turkish workers hired for the booming construction sites of Astana.

When last June Kazakhstan joined the American-favored Baku-Tbilisi-Ceyhan pipeline project, Moscow reacted jealously to that turn of events. Slowly but resolutely, Kazakhstan was distancing itself from the Kremlin’s ambivalent schemes of economic integration, leaving the doors open for talks with countries treated in Moscow with suspicion or even open animosity. Kazakhstan has never tired to assure Russian authorities that its relations with third parties are not directed against Kremlin. In July, transport and communications ministers from China, Turkey, Azerbaijan and Georgia gathered in Astana to discuss the potentials of a transport corridor linking Central Asia with the South Caucasus and Western Europe. The route, known as TRACECA or TRAnsport Corridor Europe-Caucasus-Asia, allows for increasing the annual cargo shipment capacity, taking into consideration the railway passage through the Bosporus now undertaken by Turkey, up to 30 million tons. Askar Mamin, transport and communications minister of Kazakhstan, indirectly addressing Moscow, said Kazakhstan as a transit country had to consider all possible routes of export from the point of view of their competitiveness. Kazakhstan also ponders on the construction of an oil refinery on the Black Sea jointly with Turkey.

Shared political goals of playing greater role on international scene will undoubtedly give new impetus to strengthening ties between Turkey and Kazakhstan. Astana has always supported the Turkish bid to join the European Union, just as Turkey welcomes Kazakhstan’s drive toward the WTO. Speaking at the Assembly of the Peoples of Kazakhstan in October this year, Nursultan Nazarbayev made a significant symbolic gesture of Turkic unity, saying it was high time to replace the Cyrillic script used in Kazakh language by Latin, adopted by all Turkic-speaking nations of Central Asia except Kyrgyzstan and Kazakhstan. But far more important and palpable is the economic content of the newly-shaped integration between Turkic countries.

Sunday, July 22, 2007

Turkey Posts

Serhan Cevik's MS GEF Posts:

The Status Quo Barrier
July 20, 2007

Trillion Dollar Economy
July 19, 2007

Sweden's Migrant Policy

From the BBJ:

Sweden moves to allow freer flow of labor

In an attempt to tackle the effects of an aging population and a shrinking future labor force, the Swedish government Tuesday presented proposals aimed at making it easier to move to Sweden to work.

Migration Minister Tobias Billstrom told reporters he had no estimate of how many people would be interested in applying for work permits, but said “key groups” at present included construction workers and health workers. Currently, work permits can be granted for up to 18 months but a parliamentary commission last year suggested increasing the period to 24 months. The new proposed system would allow foreign workers to stay up to four years if they had employment, Billstrom said.
The proposal included allowing foreign workers, who could prove their qualifications, to seek a three-month visa at a Swedish embassy and then seek employment in Sweden. Employers would also be allowed to look for labor abroad. The proposal presented by Billstrom was to be debated by trade unions, employers and other interest groups.

Compared to last year's proposal from a parliamentary inquiry headed by former Social Democratic cabinet member Lena Hjelm-Wallen, the trade unions would have less means of blocking applications. Billstom stressed that the trade unions would still have an important role “in determining wages, collective agreements and insurance terms.”
Dan Andersson, chief economist with blue-collar trade union federation LO, has voiced doubts over the trade unions' reduced influence in saying what jobs were impacted by labor shortages. Billstrom said the proposed system would follow legislation that specifies that positions should first be filled by workers in Sweden, and if that fails by workers from other European Union members or workers from the European Economic Area. In the globalized world economy, Sweden faced challenges recruiting labor Billstrom said, mentioning factors like language and climate as hurdles. He said the proposal would also allow foreign students who have graduated from a Swedish university to seek work in Sweden without first having to return to their native country, as is the case now.

In neighboring Finland, Minister of Migration and European Affairs Astrid Thors also touched on work visas in an interview published Tuesday. “The government aims for a good employment policy, but there are already sectors where the domestic labor force is insufficient,” Thors was quoted as telling the Finnish news agency STT. By introducing work visas, some of the delay in the present system where authorities have to investigate if there is a work shortage or not before giving their approval would be reduced, Thors said. Random checks could be introduced to ensure that the system is upheld, she said.

Filipinos Move Up the Value Chain

From the Asia Times:

Filipino diaspora moves up value chain

By David L Llorito

MANILA - A growing global search for English-speaking talent is greatly benefiting Philippine workers who pursue overseas opportunities and badly hurting the local companies and domestic economy they are in growing numbers leaving behind.

A recent study conducted by Grant Thornton International and Philippine accounting firm Punongbayan & Araullo found that 43% of Philippine companies rated the scarcity of skilled labor as the major impediment to their business-expansion plans. Last year

only 15% of Philippine companies surveyed complained about a chronic lack of skilled labor.

"Employers across industries are experiencing ... the draining of our local talent pool," said Greg Navarro, managing partner and chief executive officer of Punongbayan & Araullo. "Even in the accounting practice, we are struggling to compete with foreign firms that see the Philippines as a good resource for highly trained, English-speaking [staff]."

Official statistics from the Philippine Overseas Employment Administration corroborate those complaints. Since 2000, the Philippines on average has seen 79,000 professional and technical workers, most of them college or university graduates, take positions overseas each year.

Over the past six years, 10,000 nurses have left the country annually for Saudi Arabia, the United Arab Emirates, the United Kingdom, Ireland, the United States and other destinations. Close to 13,000 medical caregivers, many also with nursing backgrounds, have likewise left each year for jobs in destinations as far flung as Taiwan and Israel.

Meanwhile, Japan and South Korea are emerging as the most popular destinations for performing artists, with each country now receiving on average 55,000 Filipinos per year. More worrying to national competitiveness, the Philippines is sending a growing number of highly trained information-technology (IT) workers to such countries as Saudi Arabia, the UAE, Malaysia, Singapore and the US - undermining the crucial local electronics industry.

Official figures may understate the actual outward movement of IT workers to such countries as Singapore and Malaysia, where they are often directly recruited by employers there. Many Filipino IT workers take advantage of the waived visa requirements for fellow Association of Southeast Asian Nations countries by applying directly to regional companies while traveling on tourist visas.

Manuel Villa, a Filipino industrial engineer who works for Fairchild Semiconductors in Singapore, said there are many professional Filipinos in that country. He said that apart from IT workers, a growing number of Filipino professionals are seeking high-paying jobs with Singaporean and multinational companies, including positions in upper management, engineering, logistics and aviation. "The [official] Filipino population here has already reached 120,000 and is rising," he said.

Previously, the professional exodus only affected a few sectors of the Philippine economy, predominantly shipping, aviation, engineering, construction and nursing. In the past three years, however, the loss of professionals has hit nearly every sector.

That includes Filipino journalists moving to Singapore, Saudi Arabia and the UAE; engineers and oil-rig workers to Nigeria, Russia, and the Persian Gulf states; speech and physical therapists to the US; and mining engineers and geologists to Australia and China.

According to the Personnel Management Association of the Philippines (PMAP), high-value-added industries are being hit by higher staff turnover rates, including pharmaceuticals, banking, consumer goods, hotels, electronics, semiconductors, telecommunications, and IT. Anywhere between 33% and 59% of employees who recently left their jobs in these industries pursued new opportunities abroad, according to a recent PMAP survey.

The lower-paying public sector is also being adversely affected. For instance, the state-run Weather Bureau and Mines and Geosciences Bureau are increasingly losing forecasters and geologists to better pay offers from abroad. The Department of Science and Technology recently revealed that out of almost 3,000 national scientists with PhD degrees in various scientific disciplines, nearly 500 have left the Philippines in recent years.

Outward march
Even the Armed Forces of the Philippines have not been spared foreign poaching. Army sources who spoke with Asia Times Online said Australia recently started to recruit Filipino soldiers trained in asymmetrical warfare and counterinsurgency operations, sometimes luring them with the offer of citizenship.

The Australians "know that Filipino soldiers are well trained in the different occupational specialties which make them competent and efficient and they can communicate and verbalize [in English] very well", a senior army officer said in an interview. "The Armed Forces of the Philippines is using American military doctrines and it is compatible with Australian military doctrines. For several decades, our soldiers have been fighting the NPA [New People's Army], secessionists, and terrorist groups. The Australians do recognize this Filipino talent," he said.

As more Filipino professionals move offshore, local companies are scrambling to recruit from a thinning talent pool. "In just 12 months, we lost about a dozen human-resource officers to other companies," said Raymond Santiago, corporate-affairs manager of Unilab, producer and exporter of prescription and consumer-health products.

Noel de Leon, country manager of Mercer Consulting, a global human-resources company with clients in 42 countries, attributes the fierce global competition for Filipino talent to demographic change in the US and the Asia-Pacific region. "There's a war for talent out there because China is growing so fast," said de Leon. "The trend of rising demand for skilled workers is really Asia-Pacific-wide."

In a recent regional survey, Mercer found that anywhere between 50% and 77% of companies in Japan, South Korea, mainland China, Hong Kong, Taiwan, Singapore, Malaysia, Thailand, Indonesia, Vietnam, Australia and New Zealand had expressed intentions to hire more English-speaking staff, even as many of them are experiencing high local worker attrition rates. "And where are they going to get new talents? Naturally, many of them will recruit from the Philippines," said de Leon.

And global economic trends show that demand will grow before it diminishes. In a recent paper titled "Global Competition for Skilled Workers and Consequences", Manolo Abella, a Bangkok-based labor-migration expert who formerly worked for the International Labor Organization, said the intensifying battle for Filipino and other English-speaking professional talent results from "the growth of global supply chains" brought about by trade and investment liberalization.

"The emergence of these global production structures has been everywhere accompanied by greater movements or transfers of technical and managerial personnel," said Abella. "Another important development has been the growth of informal as well as flexible forms of employment, opening markets for foreign workers willing to enter occupations or sectors abandoned by [local workers]."

According to Dieter Ernst, an economist and senior research fellow at the East-West Center based in Hawaii, the trend toward downsizing of local staff among US firms since the late 1990s has also been a major factor in the hiring trend. Ernst explained that because many US companies operate on very lean staff, many of these firms are now scrambling for lower-paid, but equally skilled, foreign workers.

"For many high-tech companies, competing for scarce global talent has become a major concern," said Ernst. "As a result, global sourcing for knowledge workers now is an important global manufacturing and supply-chain strategy. The goal is to diversify and optimize a company's human-capital portfolio through aggressive recruitment in global labor markets."

But what's adding real fire to the global professional-talent war is increasingly aggressive recruitment from the US, Canada and Australia, especially in regional areas suffering from low population and labor-force growth. For instance, Canada and Australia have been offering permanent residence and citizenship as incentives for skilled migrants, including from the Philippines.

Through its so-called H1-B visa program, US firms have been increasingly aggressive in trying to lure IT workers from the Philippines to Silicon Valley. Middle Eastern countries such as Saudi Arabia and the UAE have been giving temporary admission to skilled engineers, welders, pipe fitters, accountants, journalists and advertising people from the Philippines and other Asian countries. And Australia is now using its universities as so-called "academic gates" for attracting skilled migrants from the Philippines and all over the world.

Slowly but surely, the mounting professional exodus is driving up wages in the Philippines. Patrick Marquina, associate consultant for Watson Wyatt, another human-resources-related firm, says 148 Philippine companies involved in manufacturing, business process outsourcing, banking and other industries have in the past year all raised their pay scales by an average of 9.2%, or nearly three times the benchmark inflation rate.

Rising pay scales, Marquina explained, are moving fastest in the outsourcing and IT-related businesses. Still, several economic analysts and corporate executives believe average professional wages have risen too little, too late, and fret that the mounting exodus of talent from the Philippines is adversely hitting overall national competitiveness.

Labor expert Abella said: "Experience has shown that human capital, rather than natural-resource endowments, is the key to economic development. The current competition for the highly skilled has raised alarms that ... developing countries will have difficulty in creating a critical mass of professionals and technical workers needed to raise productivity."

Ageing Russia

From RIA Novosti

Russia: a nation of pensioners

12:56 | 02/ 07/ 2007

Print version

MOSCOW. (RIA Novosti economic commentator Mikhail Khmelev) -Russia's population is currently ageing faster than almost any other country in Europe.

The workforce/pensioner ratio has shrunk by a factor of 1.5 over the past 15 years. The idea of solidarity between generations no longer works in the Russian pension system, hence our big headache-old people living from hand to mouth and a snowballing Pension Fund deficit. Regular federal subsidies are not a long-term remedy. Russia faces a hard choice-either to go on paying token pensions or take drastic measures and risk a public outcry.

The Pension Fund deficit is growing quickly. How to replenish it? This will be one of Russia's most acute social questions in several years. The country is short of pension money even now. The problem is becoming all the worse as government obligations steadily increase. The average labor pension growth rate for 2006-2009 is not expected to go below 20% a year. It is impossible to avoid pension increases, with pensioners among the worst-off of Russia's population groups. The average accrued pension was 3,084 rubles a month in April 2007, compared with a living wage of 3,713 rubles and an average monthly wage of 12,744 rubles for May 2007. The income-replacement ratio (average pension vs. average wage) is at a miserly 24.2%. That is the most the Russian pension system can afford in the present economic and demographic situation.

According to the Economic Development and Trade Ministry, Russia presently has 47.9 million unified social tax payers versus 38.7 million pensioners. The latter's share is steadily increasing, while the population-in particular, its able-bodied share-is shrinking. The workforce dwindled by 3.6 million, while the number of pensioners grew by 200,000 in 2006. There are 1.24 employees per pensioner, and the ratio is rapidly sliding down-quicker than experts expected. It was 1.34 last year, compared with 2.2 in 1991. Reality is far more dramatic than the forecast made by the Moscow-based Independent Institute for Social Policy. In 2005, it predicted that the able-bodied population would gradually shrink to 51.5 million by 2012-too good to be true.

Tax revenues are not enough to pay decent pensions, because these revenues do not only go to current payments. A solid slice is being put away in an accumulation fund for the pensions of present-day employees born after 1967. The pension part of the unified social tax, which constitutes 20% of accrued wages, is divided. Citizens born before 1967 pay 6% of their earnings to finance the basic part of today's pensions and 14% to the insurance part. Younger employees have their tax payments divided in three: 6%-10%-4%, the latter 4% going toward increases in their future pension.

The Federal Pension Fund has a fat purse, with revenues of 1.85 trillion rubles and expenditures of 1.73 trillion rubles for 2007. However, the fund has been barely surviving for the last two years. Its surplus goes entirely to the accumulation fund, which had swollen to 345.3 billion rubles by the start of this year. Not a kopek can be withdrawn from it to pay pensions today.

The problem emerged when the government cut the unified social tax rate in 2005. It did not affect the accumulated pension part, but the Pension Fund can no longer afford to make basic and insurance payments to present-day pensioners. These shortages have to be covered by government subsidies to the fund. As much as 183.9 billion rubles came from the federal budget to finance basic pensions in 2006, and 191 billion is expected this year. The respective figures for insurance pensioning are 74.5 billion and 88.2 billion.

According to the Audit Chamber, federal allocations make up 53.3% of the Pension Fund budget for 2007. So Russian pensioners today depend for their survival on the federal purse. Shrinking government revenues will hit them first. That is why officials oppose increasing pension payments using funds from the budget. Hence, Russian pension expenditures make up 6% of the gross domestic product, compared with 7%-15% in other European countries, according to the World Bank. But further pension rises at the expense of the budget threaten to upset the entire pension system in 2010-2020, when the Pension Fund forecasts that the pension load on the national economy will reach its peak.

There are many ideas of how to considerably increase pensions. For the most part they do not promise to cope with the Pension Fund deficit. A 3% increase of the unified social tax rate was recently proposed. President Vladimir Putin mentioned another idea in his last state of the nation address. He proposed adding 1,000 rubles from the federal purse to every 1,000 rubles of voluntary private pension payments, encouraging every citizen to contribute to his or her own pension account. All that, however, will not help the Pension Fund with its deficit or increase present-day pensions.

There are only two evident ways to do so-increase either taxes or the number of taxpayers. This can be done by collecting back taxes, raising tax rates or increasing the retirement age. The Pension Fund estimates undeclared revenues at 40% of the wage bill, or 7.29 billion rubles in 2007. If all tax dodgers are forced out of the shadows, the fund will have surpluses for years ahead. But that is hard to do, and will take many years. A tax raise is far simpler-but then, the higher taxes are, the harder it is to collect them, and the entire national economy will suffer.

The World Bank and Russian pension experts strongly suggest increasing the average retirement age by five years, to 60 for women and 65 for men. This appears quite natural for Russia, with a large share of seniors in its population. After all, 60 and 65 is the retirement age in a majority of developed countries. In contrast, countries with lots of young people have a far lower retirement age. In Turkey, for one, it is 44 for women and 49 for men. East European countries have retirement ages of 53 and 58, respectively, and former-Soviet countries 58 and 63.

Russia has a reason for comparatively early retirements, with its short life expectancy. Men seldom live long after they retire; and if the retirement age is increased, too many will die on the job. So this is no cure-all. However effective the measure might be, it will certainly not meet with public approval, so the Russian government will never approve it, at least not before upcoming parliamentary and presidential polls. The pension system will for a long time yet need to strike a balance, as it does now, between minimal pensions and the necessity of taking unpopular steps.

Skill Shortages in India

From Forbes:

India Struggles With Labor Shortages

Ruth David, 07.11.07, 1:37 AM ET


In a country where double-digit industrial growth rates have become par for the course, employers in as many as 20 sectors ranging from retail to textiles to financial services are facing extreme labor shortages, according to a new study.

It isn’t just a fight for the highly qualified. The study by the Federation of Indian Chambers of Commerce and Industry found shortages of “skilled, semi-skilled and unskilled workers.”

Post-secondary institutions aren’t churning out enough graduates with the skills companies are looking for, and the tight job market is allowing workers to job-hop at will for better opportunities.

“[It] has made it very difficult for companies to get a person to say yes and go through with it,” says Deepak Gupta, CEO of the Indian arm of U.S. consulting giant Korn/Ferry (nyse: KFY - news - people ).

In biotechnology, there is a need for 80% more scientists with doctorates. In banking and finance in 2006, there was a 90% shortage of risk managers; 65% for tech professionals, 50% for treasury managers, 75% for credit operations professionals and 80% for financial analysts. The tech sector is expected to face a shortage of as many as 500,000 employees in 2010, according to industry estimates.

In sectors like technology and financial services, there’s plenty of moving around because of the number of opportunities available as companies ramp up aggressively, Gupta told Forbes.com. But in newer sectors like real estate, retail and private equity, there aren’t enough people in the market with relevant experience.

The Indian economy has expanded at an average annual rate of over 8.5% since 2003, and sectors like technology and IT services have grown at a double-digit pace.

India churns out about 2.5 million college and university graduates each year, including 400,000 engineers, but the numbers are misleading.

The number of graduates is small relative to the size of the population — about 10% of Indians receive any college training, as opposed to 50% in the United States — and the quality of their education is often doubtful.

A study by the National Association of Software and Service Companies in 2005 found that only a quarter of the graduates churned out each year are fit to be employed by foreign and Indian tech companies. Problems include a lack of English-speaking skills and the absence of standardized curricula and programs that provide graduates with technical skills.

Infosys (nasdaq: INFY - news - people ) has said that it found only 2% of the 1.3 million job applicants it reviewed last year acceptable.

There’s a lack of workers even at the lower rungs in industries like mining, food processing and textiles, the survey found. The reasons include working hours that are unsatisfactory to prospective employees, distant locations and a dearth of sector-specific skills.

Human resource managers are looking at second- and third-tier cities as the labor pool in bigger cities gets tapped out, advertising on the radio and building strong relationships with colleges to ensure they get a hold of employees, says E. Balaji, COO at recruiting firm Ma Foi Consultants.

Companies across sectors like banking, technology and retail that Ma Foi deals with have hiked recruitment budgets by about 15% in the last year and a half, Balaji says. Referral rates at some companies have risen to 100,000 rupees ($2,487.56) for specialized positions. At junior levels, up to 30,000 rupees ($746.26) is normal in fields like technology and financial services.

In two years, there’s been an increase of about 80% in the number of employees who ask companies for a sign-on bonus, estimates Gupta.

The hot tech sector is bedeviled by the problem of “post-offer dropouts” — people who don’t turn up for work after signing job contracts, either because of better offers elsewhere or a raise from their current employers.

It’s common for job seekers to talk to five different companies at the same time, Balaji says. Post-offer dropout rates are as high as 15% in industries where there’s a keen fight for talent.

In a bid to ensure employees don’t run out on them for a few thousand rupees more, companies have started putting in place noncompete clauses that prevent employees from joining competitors for a specified time period. Infosys, Accenture (nyse: ACN - news - people ) and Wipro (nyse: WIT - news - people ) were reported to have put this in place earlier, and now recruiters say the practice is spreading. Such contracts are not uncommon for senior-level management in developed markets, but at a junior level, it’s uncertain how much weight they have in an Indian court of law.

One company that set up a stall at a recent job fair in Bangalore, later told recruiters that it was there not to hire, but to ensure that none of its employees were sneaking off work to look for greener pastures.

The chase for talent is good news for at least one business — the recruiters — says Hitesh Oberoi, COO of India’s leading online jobs portal, Naukri.com.

“The recruitment process has become a lot shorter. At junior levels, employers make offers within a couple of days. And they are willing to compromise on quality, look at the next level from their earlier cutoffs,” Oberoi told Forbes.com.

With businesses forced to hire people with less experience, training programs for prospective employees are proliferating in sectors like financial services and technology, often in partnership with companies, says Oberoi.

Several Indian businesses are scaling down their expansion plans in India in the face of the talent crunch and rising wages, says Oberoi, who estimates that wages in fast-growth industries have risen by about 18%-20%. In sectors like technology, that could translate into more hiring overseas. (See: “ In Pictures: Where India Outsources”).

And for foreign companies, it no longer makes sense to outsource a few hundred jobs to India, says Oberoi. With the increase in wages as well as the cost of setting up in a big city like Mumbai, Delhi or Bangalore, “the market is now all about scale if outsourcing is to be cost effective,” he says.

Recruiters say the only new source of skilled labor is overseas Indians attracted back by the booming economy. Indians in the Middle East and Far East are coming home, as are expatriates from destinations like the U.S. and the U.K.