CESEE and EU: Closing the remaining gaps

26th Economic Forum in KrynicaKrynica, September 2016

Bas B. Bakker Senior Regional Resident Representative

for Central and Eastern Europe

CESEE is still much poorer than Germany

2

ALB

ROU

RUSPOL

UKRBIH

SRB & MNE

MKD

BLR BGRHRV

LVA LTUHUN

SVK

ESTCZE

SVN

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

1950 1960 1970 1980 1990 2000 2010

GDP per capita in Germany(in constant 2014 dollars, PPP-adjusted)

Per capita income in CESEE countries as of 2015

How to close gap?

Through combination ofMore capital per workerHigher employment to population ratioMore efficient use of inputs.

3

Capital

4

Capital stock per worker in CESEE is still much lower than in Western Europe

5

BEL

BGR

CZE

DNK

DEU

EST

IRL

GRC

ESP

FRA

HRV

ITACYP

LVA LTU

LUX

HUN

MLT

NLD

AUT

POL

PRT

ROU

SVNSVK

FIN

SWE

GBP

y = 0.2725x + 11.738R² = 0.8154

0

20

40

60

80

100

120

0 50 100 150 200 250 300 350

Capital stock per employed and productivity, 2015(thousands of 2010 EUR)

GD

P pe

r em

ploy

ed

Capital stock per employed

But investment rates are too low compared with Western Europe for a rapid catch-up

6

Average investment rate(percent of GDP)

2003-06 2011-15

10 - 1515 - 2020 - 2525 - 3030 - 3535 - 40

Investment needs are large: infrastructure less developed than in Western Europe

7

Highways

Colored lines denote railways with maximum speed above 200 km/h

Railways

Increased investment would necessitate higher saving (otherwise foreign capital needed)

8

-15

-10

-5

015

20

25

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Saving rate

Investment rate

Saving and investment rate in CESEE-EU countries (percent of GDP)

Current account deficit (rhs)

But how to increase domestic saving?

9

Little appetite to increase government saving (i.e., reduce deficits)

Corporate saving will come under pressure from tightening labor markets

Can household saving be increased?

Labor

10

40

45

50

55

60

65

70

75

HRV ROU SVK BGR POL HUN SVN LTU LVA CZE EST DEU

Employment rates have increased sharply since 2000

11

Employment rate in 2000 and 2015(percent)

2015

2000

Note: For HRV data for 2002 and 2015.

Labor markets are tightening—labor may soon become scarce

12

2

4

6

8

10

12

14

16

18

20

2000 2003 2006 2009 2012 20152

4

6

8

10

12

14

16

18

20

2000 2003 2006 2009 2012 2015

Unemployment rates(percent)

Czech Rep.Hungary

Poland

Bulgaria

Slovakia

Estonia

Latvia

Lithuania

-15

-13

-11

-9

-7

-5

-3

-1

1

3

5

BGR

UKR

ROM

BLR

LTU

BIH

POL

RUS

LVA

MD

A

HRV SVN

HU

N

EST

SRB

SVK

ALB

CZE

MKD

MN

E

Working-age population is falling rapidly

13

2005-15

2015-25

Working age (15-64) population growth (percent)

Productivity

14

TFP was growing rapidly before crisis, but has slowed sharply

15

-2

-1

0

1

2

3

4

5

6

7

8

BIH

BGR

HRV BL

R

HU

N

CZE

SVN

MKD UKR PO

L

SVK

ALB

ROU

EST

RUS

LTU

LVA

MD

A

2000-07

2010-14

Average TFP growth (percent)

Why has TFP growth in CESEE slowed and how can we accelerate it?

Why did TFP slow? Partly global phenomenon (happened in other

countries and regions as well) Why has it happened globally? (we really do not

know much) How can we accelerate it?

We have a bunch of variables that are associated with higher TFP

But we do not have good models that explain the link

16

Variables that are associated with higher TFP

Increased competition More use of technology More R&D Foreign firms can help More venture capital Further transformation of economy

17

Increased competition would support productivity

18

Standardized indicators of market development

Min MaxCompetition (Global Competitiveness Report), 2015-16

Product Market Regulation (OECD), 2013

Competition Policy (EBRD), 2014

Min Max

Min Max

BIH NLDESTDEU

RUS NLD

SVK

DEU

BLR

ESTLVALTUPOL

0

10

20

30

40

50

60

70

80

BGR

ROU

PRT

LTU

POL

GRC

HU

N

CZE

EST

CYP

ITA

HRV SV

K

SVN IRL

ESP

FRA

GBR

NLD

DN

K

FIN

As would more use of technology

19

Share of employment using computer in non-financial enterprise sector, 2015 (percent)

Note: CESEE countries in orange.

0

1

2

3

4

5

6

7

8

9

10

BGR HRV SVK EST POL PRT CZE HUN GBR ITA ESP SVN NOR DEU AUT FIN NLD

R&D is very low

20

Share of R&D employment in manufacturing, 2011 (percent)

Total

Foreign-ownedenterprises

Note: CESEE countries in orange.

0

50

100

150

200

250

DN

KES

TD

EU LUX

FRA

SWE

SVN

AUT

NO

RCY

PFI

NN

LD ITA

POL

GBR ES

PH

RV LTU

PRT

BGR

BEL

ROU

GRC CZ

ESV

KLV

AH

UN

Foreign companies may bring higher productivity

21

Ratio of labor productivity in foreign- and domestically-controlledmanufacturing enterprises, 2013 (percent)

Note: CESEE countries in orange.

0.00

0.02

0.04

0.06

0.08

0.10

0.12

ROU CZE ITA BGR POL AUT ESP BEL HUN DEU NLD GBR SWE FRA PRT IRL FIN LUX DNK

Investment in later stage

Investment in start-up stage

Investment in seed stage

Venture capital financing isunderdeveloped

22

Venture capital investments, 2015 (percent of GDP)

Note: CESEE countries highlighted in orange.

Further transformation: employment share of agriculture is still high

23

0

10

20

30

40

50

60

70

80

90

100

Slov

akia

Czec

h Re

p.Es

toni

aH

unga

ryLa

tvia

Lith

uani

aSl

oven

iaPo

land

Bulg

aria

Rom

ania

Luxe

mbo

urg

Ger

man

yBe

lgiu

mU

nite

d…N

ethe

rland

sD

enm

ark

Swed

enFr

ance

Spai

nIta

lyFi

nlan

dAu

stria

Irela

ndCy

prus

Port

ugal

Gre

ece

Employment structure(percent)

NMS Other EU

AgricultureIndustry

Regression suggest gains from structural reforms may be substantial

24Source: IMF, CESEE Regional Economic Issues (Spring 2016)

Potential efficiency gains from structural reforms(percent)

Thank you