competitiveness of bulgaria’s economy and the challenges of real and nominal convergence
DESCRIPTION
“Competitiveness of the South Eastern European Countries and Challenges on the Road to EU”. Competitiveness of Bulgaria’s Economy and the Challenges of Real and Nominal Convergence. Grigor Stoevsky Economic Research and Forecasting Directorate, Bulgarian National Bank. Skopje, 30 May 2008. - PowerPoint PPT PresentationTRANSCRIPT
Competitiveness of Bulgaria’s Economy and the Challenges of Real and Nominal Convergence
Grigor Stoevsky
Economic Research and Forecasting Directorate, Bulgarian National Bank
“Competitiveness of the South Eastern European Countries and Challenges on the Road to EU”
Skopje,30 May 2008
2
Outline
Competitiveness and convergence Theoretical grounds Aspects of competitiveness related to productivity and efficiency Price and cost competitiveness The links between real and nominal convergence
The Bulgarian experience Productivity and efficiency indicators The longer term perspective Driving forces and interpretation
Challenges of real and nominal convergence Conclusion
3
Competitiveness and Convergence: Theoretical Grounds (1)
Many definitions of competitiveness: Global Competitiveness Report 2007-2008:
“We define competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy.” (p.3) Hence, in catching-up economies higher productivity ensures higher
income levels, which in turn stimulate more investment and productivity
Ireland’s National Competitiveness Council, Annual Competitiveness Report 2007:
“Competitiveness refers to the ability of firms to compete in markets. Ireland’s national competitiveness refers to the ability of the enterprise base in Ireland to compete in international markets.” (p.8)
Many factors, hence indicators: Productivity (labour and total factor), efficiency Price and cost developments Export performance
But improving the competitive position of the country can be hampered by other factors, e.g. deficiencies in institutions and the business environment
Competitiveness and Convergence
4
Competitiveness and Convergence: Theoretical Grounds (2)
Competitiveness, convergence and integration Maintaining a sustainable convergence path
maintaining and improving the competitive position of the economy
Real convergence is a long process requiring sustained productivity gains and efficiency improvements
Cost-based advantages (based on low wages and input costs) are easily exhausted in the process of nominal convergence
Trade and financial integration accelerates nominal and real convergence
Competitiveness and Convergence
5
Aspects of competitiveness related to productivity and efficiency (1)
The main competitiveness factors are labour productivity and factor efficiency, which depend on: Physical and human capital TFP Energy intensity
Sectoral productivity developments: Productivity in non-tradable sectors is also important
Competitive advantage Unique and hard to imitate More immune to price shocks Based on innovations (escaping price competition trap) and
technology spillovers
Competitiveness and Convergence
6
Competitiveness and Convergence
GDP per capita in PPS, EU27=100
100
38
0
20
40
60
80
100
120
140
160
Lux
embo
urg
Irel
and
Net
herl
ands
Aus
tria
Den
mar
kSw
eden
Bel
gium
Finl
and
UK
Ger
man
yFr
ance
Spai
nIt
aly
EU
27G
reec
eC
ypru
sSl
oven
iaC
zech
Mal
taPo
rtug
alE
ston
iaSl
ovak
iaH
unga
ryL
ithu
ania
Lat
via
Pola
ndC
roat
iaT
urke
yR
oman
iaB
ulga
ria
Mac
edon
ia
1999 2007
283
7
Aspects of competitiveness related to productivity and efficiency (2)
Labour productivity: Most of the new member states (NMS) maintain
labour productivity growth rate differential vis-à-vis the euro area
A process of capital deepening and efficiency gains
Unit labour costs (ULC) developments: In nominal terms ULC are steadily increasing in all
NMS No clear pattern in real terms
Competitiveness and Convergence
8
Competitiveness and Convergence
Real Convergence (1999-2007)
AUBE
BG
HR
CY
CZ
DK
EE
FI
FR DE
GRHU
IE
IT
LV
LT
MK
MT NL
PL
PT
RO SK
SI
ESTR SE
UK
0
1
2
3
4
5
6
7
8
9
10
0 20 40 60 80 100 120 140
GDP per capita in PPS in 1999, EU27=100
Gro
wth
of
GD
P/c
apit
a, 1
999-
2007
a.
a.,
%
9
Price and cost competitiveness
In a monetary union other adjustment mechanisms are crucial: Labor market flexibility
Labor costs flexibility Working time flexibility Labor mobility (inter-sectoral and geographical)
Product market efficiency Competition enhancing policy (measured by level of competition,
market power) Easy entry, exit and deregulation
Competitiveness usually measured on international level by real effective exchange rate (REER) developments
But, REER exhibits trend appreciation for a catching-up economy
Competitiveness and Convergence
10
Competitiveness and Convergence
Real Effective Exchange Rates
70
80
90
100
110
120
130
140
150
160
1999 2000 2001 2002 2003 2004 2005 2006 2007
Bulgaria Czech Republic Estonia Hungary Latvia Lithuania
Poland Romania Slovakia Slovenia Turkey Euro area
Based on nominal ULC, relative to 36 countries, 1999=100
211, Romania
11
Competitiveness and Convergence
Real and Nominal Convergence
trmk
hr
ukse fi
sk
si
ro
pt
pl
atnl
mt
hult lv
cyit
fresgr
ie
ee
dedk
cz
bg
be
20
40
60
80
100
120
140
160
20 40 60 80 100 120 140 160
Comparative price level (EU27=100)( based on household final consumption expenditure, 2006)
GD
P p
er c
apit
a in
PP
S, E
U27
=10
0,
2007
12
The links between real and nominal convergence
The impact of real convergence on inflation takes place through: The Balassa-Samuelson effect (supply side effects based on
intersectoral productivity growth differentials) Higher demand for non-tradable goods and services relative to
tradable goods driven by increases in income levels (demand side effects) => change in relative prices and higher inflation
Restructuring of the consumption basket (towards higher weight of services and lower weight of food) contributes towards lower inflation volatility
Increasing trade openness (pushing up tradable goods prices through the law on one price, but it also has a dampening effect on inflation through stronger competitive pressures and lower mark-ups)
Declining energy intensity
Competitiveness and Convergence
13
Key Developments in the Bulgarian Economy
Competitiveness: productivity and efficiency Real sector Labour market Energy efficiency External sector Survey-based measures of competitiveness
Convergence in productivity: the longer term perspective
Driving forces of the convergence process Interpretation of some of the key indicators
The Bulgarian experience
14
Key Indicators
Recent and likely short-to-medium term developments v.s. long-term trends
Measuring competitiveness Macro data – indirect evidence Sectoral and firm-level data – better but not readily
available
The Bulgarian experience
15
Key Indicators – the Real Sector (1)
The Bulgarian experience
Contribution of GDP Components to Growth
4.5% 5.0%6.6% 6.2% 6.1% 6.2% 6.3% 6.5% 6.5%
-8%
-4%
0%
4%
8%
12%
16%
2002 2003 2004 2005 2006 2007 2008 2009 2010
-8%
-4%
0%
4%
8%
12%
16%
Household consumption expenditures Final consumption expenditure of governmentCollective consumption Gross fixed capital formationChange in inventories Net ExportsGDP Growth
Projection
16
Key Indicators – the Real Sector (2)
The Bulgarian experience
GVA Growth Accounting
3.9%
5.4%
4.2%4.8%
5.3%
6.6% 6.3% 6.1%6.4% 6.3%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Labor Capital TFP GVA growth
Projection
17
Key Indicators – Labour Market (1)The Bulgarian experience
NAIRU
0
2
4
6
8
10
12
14
16
18
20
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Bulgaria Czech Republic Estonia HungaryLatvia Lithuania Poland RomaniaSlovak Republic Slovenia EU
18
Key Indicators – Labour Market (2)The Bulgarian experience
Long-term unemployed as a percentage of the total active population
0
2
4
6
8
10
12
14
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Bulgaria Czech Republic Estonia HungaryLatvia Lithuania Poland RomaniaSlovakia Slovenia EU (27 countries)
19
Key Indicators – Energy EfficiencyThe Bulgarian experience
Energy intensity of the economyGross inland consumption of energy divided by GDP (kilogram of oil equivalent per 1000 Euro)
0
200
400
600
800
1000
1200
1400
1600
1800
2000
1998 1999 2000 2001 2002 2003 2004 2005
EU (27 countries) Slovenia Croatia Turkey Hungary
Poland Latvia Czech Republic Slovakia Lithuania
Estonia Romania Bulgaria
2250, BG
20
Key Indicators – the External Sector (1)
The Bulgarian experience
"S-I" Balance: Developments and Projections
-24%
-20%
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
20%
24%
28%
32%
36%
40%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-24%
-20%
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
20%
24%
28%
32%
36%
40%
Current Account Investment Savings Savings + FDI
Projection
% of GDP% of GDP
21
Key Indicators – the External Sector (2)
The Bulgarian experience
Balance of Payments
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Change in reserve assets FDI Net portfolio investment
Other Investment Financial Account Current and Capital Account Deficit
% of GDP % of GDP
Projection
22
Key Indicators – External Sector (3)The Bulgarian experience
66
0
10
20
30
40
50
60
70
1998 1999 2000 2001 2002 2003 2004 2005 2006
FDI Stock-to-GDP Ratio
EU15
EU10
Romania
Bulgaria
23
Key Indicators – External Sector (4)The Bulgarian experience
63
0
10
20
30
40
50
60
70
1998 1999 2000 2001 2002 2003 2004 2005 2006
FDI-to-GCF Ratio
EU15
EU10
Romania
SEE
Bulgaria
Note: Foreign direct inv estment f low in relation to gross capital f ormation (including change in inv entories)
24
Key Indicators – External Sector (5)The Bulgarian experience
Share of Exports of Goods in World Exports, 1999=100
50
100
150
200
250
300
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Lithuania Slovakia Poland LatviaRomania Bulgaria Czech Republic EstoniaHungary Slovenia Croatia Macedonia FYR
25
Key Indicators – External Sector (6)The Bulgarian experience
Exports of high technology products as a share of total exports, %
0
5
10
15
20
25
Hungary CzechRepublic
Estonia Croatia Slovakia Slovenia Latvia Poland Lithuania Romania Bulgaria Macedonia
1999 2000 2001 2002 2003 2004 2005 2006
26
Other Indicators of Competitiveness: Survey-based measures
GCR 2007-2008 Rankings(out of 131 countries, normalized index)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Overall Index Basic Requirements Efficiency Enhancers Innovation andSophistication factors
Estonia Czech Republic Lithuania Slovenia Slovakia Latvia
Hungary Poland Croatia Romania Bulgaria Macedonia
27
Convergence in productivity: the longer term perspective (1)
The Bulgarian experience
GDP per capita in PPS, Bulgaria 2005=100
0
100
200
300
400
500
600
700
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30
20
31
20
32
20
33
20
34
20
35
20
36
20
37
20
38
20
39
20
40
20
41
20
42
20
43
20
44
20
45
20
46
20
47
20
48
20
49
20
50
BG
EU27
50%
75%
90%
28
Convergence in productivity: the longer term perspective (2)
The Bulgarian experience
Contributions to growth by production factors
-1
0
1
2
3
4
5
6
7
20
05
20
07
20
09
20
11
20
13
20
15
20
17
20
19
20
21
20
23
20
25
20
27
20
29
20
31
20
33
20
35
20
37
20
39
20
41
20
43
20
45
20
47
20
49
pe
rce
nta
ge
po
ints
TFP
Capital
LabourValue added
29
Driving Forces of Catching-up
Domestic investment - financed by foreign (FDI) and domestic sources
Investment spurred by: Macroeconomic stability and predictable environment EU membership => positive profit (income) prospects =>
optimism External position = increasing foreign liabilities (both FDI and
debt) => sustainability issues (solvency and liquidity) The investment demand contribution to import growth is
complemented by consumption demand (reflecting income growth)
The Bulgarian experience
30
Interpretation of Some of the Key Indicators Some “headline” indicators = a reason for concern?
Current account deficit increases Deterioration of the net IIP Wage growth and inflation REER appreciation
Some “bottom line” indicators Balance of payments surplus Steadily increasing FDI flows and central bank’s
reserves Steady productivity and GDP growth, allowing income
convergence and increased welfare of the population
The Bulgarian experience
31
Challenges of Real and Nominal Convergence (1)Real convergence challenge: ensure sustainable path for
productivity and income growth: Institutional arrangement, stable political and macroeconomic
environment The right policies, conducive to growth:
Fiscal and income policies Monetary policy Structural reforms:
Promote competition and flexibility in product, labour and capital markets
Business environment – basic infrastructure, knowledge economy pillars, rule of law, intellectual property rights, etc.
Challenges of real and nominal convergence
32
Challenges of Real and Nominal Convergence (2) The nominal convergence process is spurred by deepening
integration into the Single European Market with liberalized current and capital accounts, and an increasing domestic income level
The impact of real convergence on inflation complicates the meeting of the nominal convergence criterion on inflation
Factors influencing the effect of the real convergence process on inflation dynamics: The initial level of both prices and income The speed of adjustment/catching-up – interestingly – the better
policies the government pursues and the better environment it secures, the higher the adjustment speed, hence faster convergence (higher inflation)
Flexibility of product, labour and capital markets
Challenges of real and nominal convergence
33
Challenges of Real and Nominal Convergence (3)
Challenges of real and nominal convergence
HIC P
-2%-1%0%1%2%3%4%5%6%7%8%9%
10%11%12%13%14%15%16%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
B ulgaria C zec h R epublic E s toniaH ungary L atv ia L ithuaniaP oland R omania S lov akiaS lov enia C roatia Mac edonia F Y RThe Maas tric ht C riterion
34
Challenges of Real and Nominal Convergence (4)
Policy measures: Short-to-medium term
Decrease vulnerabilities and guarantee sustainability Improve efficiency of public institutions and the general
business environment Longer term
Address the problems of ageing population Provide the right incentives for a transition to a knowledge-
based economy
Challenges of real and nominal convergence
35
Conclusion
Real convergence crucially depends on the competitive position of the economy
Real and nominal convergence are closely related, hence: Increasing prices, wages and real exchange rates are to
be expected Competitiveness is a broad concept => variety of
indicators, which may point at different directions => need proper interpretation
Our assessment of the developments in the Bulgarian economy is that the country improves its competitive position
36
Appendix
37
Growth of GDP per person employed relative to EA, %
-4
-2
0
2
4
6
8
10
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Bulgaria Czech Republic Estonia Cyprus Latvia
Lithuania Hungary Malta Poland Romania
Slovenia Slovakia Croatia Macedonia FYR Turkey
38
Nominal ULC, 2000=100
80
100
120
140
160
180
200
220
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Bulgaria Czech Republic EstoniaCyprus Latvia LithuaniaHungary Malta PolandRomania Slovenia SlovakiaCroatia European Union (27 countries) Euro area (15 countries)
~300, Romania
39
Real ULC, 2000=100
80
85
90
95
100
105
110
115
120
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Bulgaria Czech Republic EstoniaCyprus Latvia LithuaniaHungary Malta PolandRomania Slovenia SlovakiaCroatia European Union (27 countries) Euro area (15 countries)
40
Real Effective Exchange Rates
60
80
100
120
140
160
180
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Bulgaria Cyprus Czech RepublicEstonia Hungary LatviaLithuania Malta PolandRomania Slovakia SloveniaTurkey EA15 (14 countries LUX incl. in BEL)
Relative to 35 industrial countries, 2000=100
41
Real Effective Exchange Rates
80
90
100
110
120
130
140
150
160
170
1999 2000 2001 2002 2003 2004 2005 2006 2007
Bulgaria Cyprus Czech Republic Estonia Hungary Latvia
Lithuania Malta Poland Romania Slovakia Slovenia
Turkey EUR13 EU27
Relative to 41 countries, 1999=100
42
Real Effective Exchange Rates
70
80
90
100
110
120
130
140
150
160
170
1999 2000 2001 2002 2003 2004 2005 2006 2007
Bulgaria Cyprus Czech Republic Estonia Hungary Latvia
Lithuania Malta Poland Romania Slovakia Slovenia
Turkey EUR13 EU27
Based on nominal UWC in manufacturing, relative to 36 countries, 1999=100
243, Romania