period<sup>13</sup> . This is a confirmation that there is a dual type of labor market operating and also that rigidities between these two markets are still growing. Output and employment in manufacturing are decreasing but productivity and wages are increasing suggesting a certain scarcity of skilled labor in this sector. It is also true that living in rural areas is less costly and self-production and self-consumption is higher which partly compensates wages differentials between the two sectors. However, the trend indicates an increasing divide rather than a decreasing divide and this cannot be explained by these compensating factors alone as it will be further shown in section 4.

**Fifth** , during the recent growth period, we are not able to see a reversing trend in the process of population migration from urban to rural areas that characterised the recession period. The share of urban population is still decreasing, although at a lower pace than observed during the recession. This is consistent with output and employment figures and contrary to what has been observed elsewhere during rapid development processes.

**Table 2.4 Urban Population (% of total)**

||**1989**|**1996**|**2002**|
|---|---|---|---|
|Armenia|68.7|67.3|64.3|
|Georgia|55,4|53,8|52,3|
|Kyrgystan|38.2|35.3|34.9|

Source: National Stastical Agencies Websites In the next two sections we move from facts to causality. We try to assess what may be the factors that prevent the industrial sector in general and the manufacturing sector in particular from growing. We look at two possible means of growth. One is the restructuring and growth of enterprises in the formal sector (section 3) and the second is the transition from self-employment to small businesses which usually implies a transition from the informal to the formal sector (section 4). Performances in these two areas are evidently the cornerstones for stimulating growth _cum_ jobs.

# **3. GROWTH CONTRAINTS IN THE FORMAL SECTOR**

This section turns to enterprises in the formal sector and attempts to review all those factors that would potentially constitute barriers to growth and job creation. We will try to establish what are the most critical bottlenecks currently existing in the CIS-7. In the previous sections, we observed that the economy and the labor markets in these countries are segmented into a rural/agricultural sector and an urban/industrial one. By turning to enterprises and given the quasi non-existence of large enterprises in the rural sector, this section evidently focuses on the urban/industrial sector. Moreover, the rise of self-employment in rural and urban areas alike determined a certain segmentation of employment also in urban areas with two rather distinct pools of workers, the employees in enterprises and the self-employed outside enterprises. While the former pool belongs essentially to the formal sector and will be covered in this section, the latter pool is often found in the informal sector to which the next section will turn. Thus, we should keep in mind that this section covers only a share of existing workers.

We mostly draw on data collected by the World Bank Business Environment and Enterprise Performance Survey (BEEPS)<sup>14</sup> and integrate these data with other available databases and data pub-

> 13 See the official websites of the national statistical agencies for a complete set of data on wages.

> 14 For details on this survey see http://info.worldbank.org/governance/beeps/

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