The catching up process in CESEE countries Gertude Tumpel-Gugerell Institutional quality and sustainable economic convergence 7th ECB conference on central, eastern and south eastern European (CESEE) countries Thursday, 5 October 2017 European Central Bank 1
Successfull convergence and its foundations in the past Short outlook for future catching up Problem that need to be adressed Opportunities that need to be seized 2
Successfull convergence and its foundations in the past Short outlook for future catching up Problem that need to be adressed Opportunities that need to be seized 3
Successfull convergence of CESEE Convergence of GDP per capita at PPP, in % of EA-19 300 250 200 150 100 50 0-50 BA AL RS MK ME BG RO HR LV HU PL EE LT SK SI CZ GR PT CY ES IT MT FI FR UK BE DK AT DE SE NL IE LU 2000 Change 2016 Source: IMF. 4
promoted by macro-stabilization N ominal convergence Inflation regional averages, in % year-on-year 40 35 30 25 20 15 Policy rates regional averages, in % year-on-year 25 20 15 10 10 5 0-5 -10 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 5 0-5 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Central Europe Baltics BG, RO Western Balkans EA19 Central Europe Baltics BG, RO Western Balkans EA19 Source: Eurostat, Bloomberg, WIIW. 5
deeper economic integration FDI by economic sector in % of GDP, 2015 of latest available 100 90 80 70 60 50 40 30 20 10 0 SI LT PL RO BA AL MK SK LV EE CZ HU BG Agriculture, hunting, forestry, fishing Mining, quarrying Manufacturing Electricity, gas, water supply Construction Transport, storage, communication Finance Other services Other Source: WIIW. 6
deeper economic integration (cont.) Global value chains and comparative advantage Participation in global value chains in 2014, index from0 (worst) to 100 (best) 70.0 Revealed comparative advantage in medium high-tech goods in 2014, values above 1 indicate a comparative advantage 1.8 60.0 1.6 1.4 50.0 1.2 40.0 1.0 30.0 0.8 20.0 0.6 0.4 10.0 0.2 0.0 HR RO EA19 LV PL LT BG SI EE CZ SK HU 0.0 LV BG EE HR LT EA19 PL RO SI SK CZ HU Source: ECB COMPNET. 7
and a sound fundament of human capital Population aged 25-34 having completed tertiary education in % of total 60 50 40 30 20 10 0 RO HU MK CZ BG HR SK EE LV SI PL LT IT D E MT PT AT FI GR ES FR BE N L D K UK SE LU IE CY 2009 Change 2016 Source: European innovationscorebord. 8
and institutional development Governance indicators Estimate of governance (ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance) 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 BA RS- MK AL RS ME BG RO HR HU SK PL LV SI CZ LT EE GR IT ES CY MT FR PT BE AT IE UK DE DK NL LU SE FI KM 2000 Change 2016 Source: World Bank. 9
Successfull convergence and its foundations in the past Short outlook for future catching up Problem that need to be adressed Opportunities that need to be seized 10
Crisis only put a temporary brake on convergence Convergence Between CESEE EU Member States and the Euro Area Historic GDP growth differential Year-on-year change in % 5.0 Simulated convergence paths per capita GDP at PPP in % of Euro area (EA-12) 1995 2005 2015 2025 2035 2045 2055 2065 100 4.0 90 3.0 80 70 2.0 60 1.0 50 40 0.0 30-1.0-2.0 IMF forecast 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 20 10 0 Historic convergence process IMF forecast Simulation 1 percentage point growth differential 2 percentage points 3 percentage points Sources: OeNB, IMF. 11
Successfull convergence and its foundations in the past Short outlook for future catching up Problem that need to be adressed Opportunities that need to be seized 12
Institutional gaps can explain differing country paths to a certain extent Control of corruption Estimate of governance (ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance) 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 BA RS- KM AL RS MK BG ME RO HU HR SK LV CZ LT PL SI EE GR IT ES MT CY PT FR AT BE IE DE UK NL LU SE DK FI 2000 Change 2016 Source: World Bank. 13
Institutional gaps can explain differing country paths to a certain extent (cont.) Government effectiveness Estimate of governance (ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance) 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 RS- KM BA RO AL RS MK ME BG HU HR PL SK LV CZ LT EE SI GR IT MT CY ES PT BE IE FR AT UK LU DE SE NL FI DK 2000 Change 2016 Source: World Bank. 14
Wide variation in infrastructure quality Source: IMF Article IV Consultation of Serbia, 2017 15
Source: IMF Article IV Consultation of Serbia, 2017 16
Emigration is still a topic, especially in countries with higher gaps in income and institutional development Average migration intentions by country Share of individuals with theintention to emigrate (in %) 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Albania FYR Macedonia Bulgaria Total Bosnia and Herzegovina Hungary Poland Serbia Croatia Czech Republic Romania Source: OeNB Euro Survey (2014). 17
Successfull convergence and its foundations in the past Short outlook for future catching up Problem that need to be adressed Opportunities that need to be seized 18
Way forward: Innovation R&D spending in the public sector in % of GDP 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4 MK BG RO HU HR LV SI PL RS LT EE SK CZ CY IE MT IT UK ES GR LU PT BE FR AT N L D E FI SE D K 2009 Change 2016 Source: European innovationscorebord. 19
Way forward: Innovation (cont.) R&D spending in the private sector in % of GDP 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 MK LV RO LT RS SK HR PL EE BG HU CZ SI CY GR MT PT ES LU IT IE NL UK FR BE DK FI DE AT SE 2009 Change 2016 Source: European innovationscorebord. 20
Way forward: Climbing up the technology ladder Exports of medium and high technology products in % of total exports 80 70 60 50 40 30 20 10 0-10 -20 BG LT LV HR RS EE PL RO SI MK CZ SK HU GR PT CY FI ES DK NL BE IT LU IE SE UK MT AT FR DE 2009 Change 2016 Source: European innovationscorebord. 21
Way forward: Green economy Energy efficiency Gross inland consumption of energy divided by GDP (in kg of oil equivalent per 1 000 EUR) 1000 800 600 400 200 0-200 -400 SI HR LT LV SK AL RO PL HU CZ ME MK EE BG RS RS- KM IE DK LU MT UK IT AT SE DE ES NL FR CY GR PT BE FI 2000 Change 2015 Source: Eurostat. 22
Back-up slides: Remittances 23
Inflowsto CESEE Remittances per capita, EU CESEE countries current US$ 600 Inflows of remittances to CESEE, by destination economy current US$, billion 35 500 30 400 25 20 300 15 200 10 100 5 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Bulgaria Croatia Czech Republic Hungary Poland Romania 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 Albania Bosnia and Herzegovina Bulgaria Croatia Czech Republic Hungary Macedonia, FYR Poland Romania Serbia Source: WDI, World Bank. 24
Main remittance sending countries Sending regions of remittances Sharein total remittance inflows 100% Sending countries of remittances: Top-10 remittance sending countries to CESEE Shares in total amount that come from top 10 countries 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% Albania Bosnia & H. Bulgar ia Cr oatia Czech Rep. Hungary Macedonia Poland Romania Serbia 0% Albania Bosnia & H. Bulgaria Croatia Czech Rep. Hungary Macedonia Poland Romania Serbia EA19 non-ea EU CIS non-eu, non-cis Europe US, Canada, Austr alia, NZ, South Africa Other Germany United States United Kingdom Italy Austria Canada Spain Turkey Serbia Croatia Source: Bilateral Remittance Matrix 2015 (version Oct. 2016), World Bank. 25