Croatia's medium-term growth and investment challenges

Transcription

1 Croatia's medium-term growth and investment challenges Servaas DEROOSE Deputy Director-General European Commission, DG Economic and Financial Affairs Investments Moving productivity frontier Joint conference by EIB and Croatian National Bank Zagreb, 7 March 2018

2 * 2018* 2019* * 2018* 2019* * 2018* 2019* 2020* 2021* 2022* Setting the scene Croatia's GDP finally set to surpass pre-crisis level next year Investment also rebounding after a big slump followed by stagnation Employment growing for fifth year in a row in spite of low activity rate However, real and potential growth still lag behind peers (CZ, HU, PL, SK, SI) GDP and investment Employment Potential growth 10% 8% 6% 4% 2% % of GDP (GDP growth) % of GDP (invest.) 30% 25% thousand persons employed activity rate, % of population 80% 75% % of pot. GDP 0% -2% -4% -6% 20% % % -10% 15% % -2 GFCF constant prices () Real GDP growth () Real GDP growth (peer ave.) Employed persons Activity rate () Activity rate (peer ave.) TFP contrib. () Labour contrib. () Pot. growth (peer ave.) Capital contrib. () Pot. growth ()

3 * 18* 19* 20* 21* 22* * 18* 19* 20* 21* 22* * 18* 19* 20* 21* 22* Drivers of potential growth The contribution of capital deepening has been consistently positive and in line with peers However, TFP and especially labour were less growth-supportive and even detracted from growth in some periods TFP contribution was negative in the period before and during the crisis Labour contribution plummeted during the crisis 3,5 Contribution of capital 3,5 Contribution of labour 3,5 Contribution of TFP 3,0 2,5 In pps of pot. GDP 3,0 2,5 In pps of pot. GDP 3,0 2,5 In pps of pot. GDP 2,0 2,0 2,0 1,5 1,5 1,5 1,0 1,0 1,0 0,5 0,5 0,5 0,0 0,0 0,0-0,5-0,5-0,5-1,0-1,0-1,0-1,5-1,5-1,5 Peer range Peer average Croatia Peer range Peer average Croatia Peer range Peer average Croatia

4 3 Challenges to durable growth Negative contribution of labour since 2010 was driven by decreases in both hours worked and number of people in employment By contrast, in peers the slight decrease in hours worked was more than offset by rising employment Increasing the participation rate poses the main labour market-related challenge With regard to TFP, the key problem is allocative efficiency Breakdown of labour contribution to potential growth (avg ) Change in productivity ( ) 0,8 In pps 0,5 0,6 0,4 0,3 0,4 0,2 0,2 0,1 0 0,0-0,2-0,4-0,1-0,2-0,3-0,4-0,5 Change in allocative efficiency Change in firm level average productivity Change in industry average productivity -0,6 Persons Hours -0,8 CZ HU PL SK SI Manufact. Constr. Trade Transp. ICT Rest. & hotels Total

5 4 Wide range of barriers to investment Reform progress CR 2018 CR 2017 Regulatory/administrative burden Limited Some Public administration/ Business environment Public administration None Some Public procurement/ppps Limited None Judicial system Limited Some Insolvency framework Limited Some Labour market/education Wages & wage setting None None Education None Financial sector Access to finance Limited Some Business services/regulated professions None None Sector specific regulation Digital Economy/Telecom None None Energy None None Transport None None Note: Investment barriers that are also subject to a current CSR in bold; Education was not identified as a barrier to investment in the 2017 Country Report

6 5 Main deficiencies in the business environment Cumbersome business environment Excessive regulation in product and services markets Regulatory uncertainty: frequent changes in regulation and excessive recourse to urgent legislative procedures Legal uncertainty: big backlogs of cases and long duration of proceedings in the judiciary Ease of Doing Business scores Doing Business, selected indicator rankings (2018) Resolving insolvency Justice system indicators Days needed to resolve case Slow resolution + high caseload Getting credit Starting a business Paying taxes Fast resolution + low caseload Number of cases (per 100 pop.) CZ HU PL SK SI Peer average CZ HU PL SK SI Source: World Bank Doing Business Notes: Methodological changes in 2014, 2015 and 2016; scores indicate distance to frontier (100=best) Source: World Bank Doing Business

7 6 Efficiency of public spending In spite of higher public spending, in most areas Croatia does not achieve better outcomes than its peers This suggests scope for improvement of outcomes for citizens and businesses without increasing spending Structural reforms needed: e.g. means-testing of social benefits, education reform, e- communication, reform of judicial map Primary spending (2016) Efficiency of spending compared to peers 46 % of GDP pps 0 Police services (Input in % of GDP) 44-2 Social - below 65 Health Social-old age Law courts Transport R&I 34 HU SI SK PL CZ Primary expenditure (lhs) Change from average (rhs) -10 Minimum efficiency Average efficiency Education efficiency score Efficiency frontier

8 7 How can the EU help? EU funds, EFSI Financing of productivity-enhancing investments which spur growth More than EUR 10 billion available for by 2020 Selected projects: Loan guarantees for start-ups, new Dubrovnik airport, "digitally mature schools" European Social Fund Supporting employment and social inclusion EUR 1.6 billion available for by 2020 for the operational programme "Efficient Human Resources"; ten-fold increase from previous programme Funds primarily channelled towards (i) sustainable and quality employment for job seekers and inactive persons; and (ii) increasing the skills of the workforce Structural reform support service Offers funded technical support in reform design and implementation 36 projects since 2016 in Croatia, mostly related to CSRs More than EUR 140 million available by 2020 Reform delivery tool Support for national reforms. The convergence facility for MS on the Euro adoption path

9 8 Conclusions Despite the ongoing broad-based recovery, medium-term projections reveal feeble potential growth Labour market activation and improved allocative efficiency are key stepping stones to lift growth Various obstacles to investment need to be removed, particularly in the domain of public administration and the business environment Reform implementation has been disappointing, Croatia should step up its efforts The EU can help by providing financial and technical assistance

10 9 Background: Reform implementation Overall assessment On track Wait-and-see Action wanted Disposal of state assets NPL reduction Reform of public sector wages Reduction of administrative burden and parafiscal charges Education system reform Improving public assets management Reduction of backlogs in judicial system HBOR's asset quality review Recurrent property tax Strengthening of fiscal frameworks Modernisation of public administration Pension system reform Social protection reform Reducing fiscal risks in healthcare Reform of regulated professions and other service markets