Sustaining Convergence: Policy Challenges for the New Member States. Christoph B. Rosenberg International Monetary Fund September 2006

Transcription

1 Sustaining Convergence: Policy Challenges for the New Member States Christoph B. Rosenberg International Monetary Fund September 26

2 Source: IMF. *ME&A Middle East & Africa, ** WH Western Hemisphere 9-94 EU8 countries are catching up rapidly Real GDP per capita growth (period average, in percent) Asia ME&A WH PL CZ SI HU SK EE LT LV Asia ME&A WH EE PL LV LT SI SK HU CZ Asia ME&A WH LV EE LT HU SK CZ SI PL

3 Factors supporting per capita growth in the EU8 Results from a large - scale regression analysis ( Schadler et al., 26) Low initial per capita income (esp. Baltics) Slow population growth Growth in export markets (esp. Baltics) Good institutional development indices (but governments are larger and educational standards lower than in Asia) European integration

4 Increasing labor utilization and maintaining productivity growth are key to sustaining convergence EMs: : Contributions to GDP growth Employment Capital TFP Overall GDP Growth CEE-5 Baltics East Asia Latin America OECD

5 Specific challenges: 1. Increasing employment 2. Providing a flexible business environment 3. Efficient use of foreign savings, while keeping vulnerabilities in check 4. Adjusting fiscal policies to support growth, including efficient use of EU funds 5. Euro adoption

6 Employment rates are recovering only slowly. Employment rates in EU CZ EE LV LT SI SK HU PL

7 Tax wedges are one of several disincentives to employment EU and EMs: Tax wedge*, 24 B e lgiu m Sweden Turkey Poland Germany France Italy Finland Netherland Hungary Czech Republic Denmark Austria Greece Slovak Republic Spain Norway Canada Portgal Japan United Kingdom Australia United States Switzerlan Icelan d New Zeland Luxem burg Korea Mexico Irelan d Source: OECD * labor cost/ take-home pay

8 A flexible business environment is essential for sustaining convergence Flexibility and adaptability (-1) Adaptability of companies (-1) Best Worst perfomers EU8* performers Hong Kong Iceland Turkey Hungary Estonia Czech Rep. Slovak Rep. Poland Slovenia average EU15 US Indonesia Germany France Source: IMD World Competitiveness Best EU8* perfomers Worst performers Hong Kong Taiwan Iceland Czech Rep. Hungary Estonia Slovak Rep. Slovenia Poland average EU15 US China Indonesia Portugal

9 Structural policies need to focus on improving the business environment

10 The NMSs have increased the use of foreign savings Current account deficit (period average, in percent of GDP) EE LV HU LT CZ SK PL SI

11 Equity inflows dominate IIPs, but debt inflows have contributed in some countries Source: Milesi-Ferretti and Lane, External Wealth of Nations database EU8 and EMs: International Debt and Equity Position Change in net debt position (21-24) Portfolio investment Rest -5 EE CZ HU LV PL SK SI LT Latin TUR Asia America 2 Change in net equity position (21-24) EE CZ HU LV PL SK SI LT Latin TUR Asia America

12 Source: Eurostat. The size of government has some effect on growth 9 Average real GDP growth LT LV EE RO BU SK HU CR CZ SI PL Average revenue / GDP 2-25

13 Source: IMF staff estimates * data for 24 Few countries have used the benign global environment to undertake fiscal adjustments EU8: Structural Fiscal Balances (in percent of GDP) Max prudent fiscal deficit CZ* HU PL SK EE LT* LV SI

14 EU funds present a huge growth opportunity, if efficiently used Average annual commitments for (in percent of GDP) LV LT EE PL SK HU CZ SI

15 Euro Adoption Increased trade Greater policy discipline Reduction of risk premia,, investment Elimination of currency-related related vulnerabilities But: Conditions need to be right, especially sound fiscal policies and a flexible economy

16 Conclusions Huge growth opportunities EU membership (including EU funds of up to 4% of GDP p.a.) Outsourcing from Western Europe with attendant capital inflows and productivity improvements But: Competition from the East Vulnerabilities Momentum for structural reform is petering out