conference on competitiveness of the south eastern european countries: challenges on the road to eu,...
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Conference on Competitiveness of the South Eastern European Countries: Conference on Competitiveness of the South Eastern European Countries: Challenges on the Road to EU, organized by the National Bank of the Republic of Challenges on the Road to EU, organized by the National Bank of the Republic of
Macedonia, Skopje on May 30, 2008. Macedonia, Skopje on May 30, 2008.
Growth and Economic Policy: Are There Growth and Economic Policy: Are There Speed Limits to Real Convergence?Speed Limits to Real Convergence?
István P. Székely and Maxwell WatsonIstván P. Székely and Maxwell Watson
European Commission European Commission St Antony’s CollegeSt Antony’s College
Oxford Oxford
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EU accession accelerated real convergence, both with the EU and within RAMS
Catch-up with Europe and convergence among EU10(Per capita GDP at 2000 market prices relative to EU27 average)
20.0
25.0
30.0
35.0
40.0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
30.0
40.0
50.0
60.0
Average Relative standard deviation (RHS)
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Convergence started earlier and has been faster in the Baltic countries
Convergence with Europe(Per capita GDP at 2000 market prices relative to EU27 average)
0
5
10
15
20
25
30
35
40
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Baltics CEE5 BG-RO
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…though with vulnerabilities accumulating
RAMS: Current Account Deficit, 2004-06
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
22.5
Latvia Bulgaria Estonia Lithuania Romania Slovakia Hungary CzechRepublic
Poland Slovenia
2004
2005
2006
In percent of GDP.Source: Eurostat and the authors' own calculations.
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Significant potential to absorb modern technology
RAMS: Educational attainment and change in export unit value, 1999-2004
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
70.00 72.00 74.00 76.00 78.00 80.00 82.00 84.00 86.00 88.00
Lithuania
Percentage of the population aged 25 to 64 having completed at least upper secondary education in 1999 (horizontal) and change in export unit value in between 1999 and 2004 (vertical).Sources: Igan et al. (2007) and Eurostat.
Latvia
Estonia
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But there are other important factors that also drive macroeconomic developments
RAMS: Change in Export Unit Value and Real Appreciation, 1999-2004
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
90 100 110 120 130 140 150
Change in export unit value (horizontal) and REER index (1999=100) between 1999 and 2004 (vertical).Sources: Igan et al. (2007) and Eurostat.
LV
LT
EE
CZ
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Factors Determining Potential Growth: Factors Determining Potential Growth: Theoretical and Empirical FindingsTheoretical and Empirical Findings
Institutional quality Institutional quality Educational attainmentEducational attainment Financial convergenceFinancial convergence
• Domestic savings Domestic savings • FDIFDI• Private creditPrivate credit
Size and efficiency of governmentSize and efficiency of government
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Real versus financial convergenceReal convergence (productivity shock in tradables)
Financial convergence (reducing credit constraints)
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Financial convergence can also Financial convergence can also increase vulnerabilitiesincrease vulnerabilities
The B-S effect may be present and important in The B-S effect may be present and important in certain periods and countries, but not alwayscertain periods and countries, but not always
Removal of credit constraints leads to a strong Removal of credit constraints leads to a strong real appreciation in the short-run, but to a more real appreciation in the short-run, but to a more depreciated currency in the long rundepreciated currency in the long run
The two processes may thus seem similar in the The two processes may thus seem similar in the short run, but are rather different in the long runshort run, but are rather different in the long run
The readjustment is not without problems, The readjustment is not without problems, especially with nominal rigidities and other especially with nominal rigidities and other market imperfectionsmarket imperfections
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Financial Convergence: Potential Vulnerabilities
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The importance of allocation and The importance of allocation and efficient use of resourcesefficient use of resources
Efficiency of government (quality of public finance)Efficiency of government (quality of public finance) Quality of labor and capacity to innovate versus Quality of labor and capacity to innovate versus
expenditure on or time spent in educationexpenditure on or time spent in education The important difference between tradable-The important difference between tradable-
nontradable versus productive-nonproductivenontradable versus productive-nonproductive Allocative efficiency (quality of private institutions) Allocative efficiency (quality of private institutions)
Implications:Implications: Large government is not necessarily wrong but …Large government is not necessarily wrong but … Faster credit growth enhances the growth potential Faster credit growth enhances the growth potential
only if …only if … Reliance on foreign savings can speed up real Reliance on foreign savings can speed up real
convergence only if … , and the financial convergence only if … , and the financial convergence that is involved needs policy attentionconvergence that is involved needs policy attention
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Policy Priorities
Overarching goal: raise potential growthOverarching goal: raise potential growth
Key role of government in Key role of government in
assuring stable financial settingassuring stable financial setting
reducing distortive activitiesreducing distortive activities
enhancing human/physical capitalenhancing human/physical capital
addressing incentives (including moral hazard) addressing incentives (including moral hazard)
……thus maximising gains from financial integrationthus maximising gains from financial integration
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Containing Vulnerabilities
Key is to contain adjustment risks – e.g., fromKey is to contain adjustment risks – e.g., from unbalanced financial development (factors that unbalanced financial development (factors that
bias credit towards households) bias credit towards households) rigidities (including balance sheet exposures)rigidities (including balance sheet exposures) inadvertent fiscal errors during boom (from inadvertent fiscal errors during boom (from
output gap or revenue elasticity)output gap or revenue elasticity)
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A “Risk-Return” Strategy
Lay analytical foundation through improved understanding Lay analytical foundation through improved understanding of shocks to economyof shocks to economy
With diagnostic uncertainty, address risk (adjustment With diagnostic uncertainty, address risk (adjustment vulnerabilities) and returns (potential growth)vulnerabilities) and returns (potential growth)
Strong complementarity across policies to achieve this, Strong complementarity across policies to achieve this, including growth-oriented fiscal consolidationincluding growth-oriented fiscal consolidation
Great opportunities, but some constraints and trade-offs…Great opportunities, but some constraints and trade-offs…
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The EU Convergence Context
Opportunities from trade and investment integration, Opportunities from trade and investment integration, institutional strengthening via acquisinstitutional strengthening via acquis
Environment also accelerates financial integration…Environment also accelerates financial integration…
History teaches us this can enhance good outcomes, but History teaches us this can enhance good outcomes, but also heighten risk of policy failuresalso heighten risk of policy failures
Also concerns about policy “traction:” at best, qualified Also concerns about policy “traction:” at best, qualified monetary autonomy, and foreign-owned banksmonetary autonomy, and foreign-owned banks
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Interactions & Trade-Offs
Policies are not powerless, butPolicies are not powerless, but interactions, while mutually reinforcing, may not always interactions, while mutually reinforcing, may not always
have conventional “sign” (depreciation)have conventional “sign” (depreciation) policy restraint may have strong sectoral effectspolicy restraint may have strong sectoral effects questions extend to regime design, not just calibrationquestions extend to regime design, not just calibration inter-temporal trade-offs: may raise short-run volatilityinter-temporal trade-offs: may raise short-run volatility
This argues for quantified scenarios, incorporating This argues for quantified scenarios, incorporating productivity variants/balance sheet risk/policy productivity variants/balance sheet risk/policy interactions/adjustment channelsinteractions/adjustment channels