State Involvement and Economic Growth

Transcription

1 State Involvement and Economic Growth (The Future of the European Economy: Over to the State, or to the Market?) 27th Economic Forum Krynica, Poland September 2017 Bas B. Bakker Senior Regional Resident Representative for Central and Eastern Europe

2 In last two decades income gap between CESEE and Western Europe has narrowed 2

3 But further convergence will be harder. Labor markets tightening rapidly Cumulative changes in unemployment rate (2008Q1=0, seasonally adjusted) LVA LTU EST SVK POL CZE HUN SVN HRV BGR ROU

4 working age population is set to decline sharply 4 Change in share of working age population (Percent) SVN LTU SVK POL HRV LVA EST CZE HUN BGR ROU 4

5 and productivity growth has slowed 10 Growth of GDP per employed person (Percent, 3-year moving average) LTU SVK SVN HUN POL EST

6 What is needed is smarter growth More innovation Higher productivity growth But how do we get this? Do we need more government involvement? Or less? 6

7 GDP per capita, thousands of PPP dollars There is no clear relationship between the size of the government and GDP per capita General Government Size vs. GDP per capita PPP, IRL NOR ALB ROU MKD CHE LTU TUR BGR MLT RUS EST LVA MDA GBR CYP SVK CZE POL BLR UKR ESP SVN BIH NLD DEU SRB PRT HRV ISL HUN SWE AUT ITA MNE GRC DNK BEL FIN FRA y = x R² = General Government Expenditure, percent of GDP 7

8 GDP per capita, thousands of PPP dollars but government effectiveness seems to matter richer countries have more effective governments Government Effectiveness vs. GDP per capita in PPP dollars, RUS BLR BIH MDA UKR ITA SVK ROU GRC HUN TUR BGR HRV POL MKD MNE ALB SRB CYP AUT MLT CZE ESP LVA SVN EST LTU PRT NOR IRL SWE CHE ISL DEU NLD DNK BEL GBR FIN FRA y = x R² = Government Effectiveness (from World Bank Governance Indicators) (Ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance) Of course causation may at least partly go two ways! 8

9 How can government be more effective? Improve efficiency public investment and tax collection enhance government efficiency Improve institutions and rule of law address factors that might constrain private sector productivity Ensure there is sufficient private sector competition Make sure SOEs are well run 9

10 Address factors that might constrain private sector productivity (REI May-16) Insufficient protection of property rights and Inefficient legal systems and other government services Limited access to financial services (e.g. for SMEs) Infrastructural gaps 10

11 Improve public investment management and tax administration (REI Nov-16) Closing efficiency gaps in public investment and tax collection could bring sizable benefits. Further upgrades of public investment management should focus on improving allocation and implementation frameworks and procedures. 11

12 Intense competition Many competing firms CESEE markets are less competitive than Western Europe 12

13 In part because product markets are more regulated 13

14 European Innovation Scoreboard Relative performance as compared to EU in 2010 Modest Innovators Innovation Leaders This may be a contributing factor why there is less innovation. 180 Extent of Market Dominance vs. Innovation Performance y = x R² = DNK GBR FIN IRL NLD DEU ISL LUX AUT FRA BEL MLT SVN NOR GRC CZE SVK EST LTU PRT ITA CYP ESP TUR HRVMKD BGR POL UKR ROU Few competing firms CHE Many competing firms WEF GCI Extent of market dominance 14

15 CESEE has many SOEs, in particular among energy companies, but also in manufacturing Lithuania Poland Czech Republic Slovakia Hungary Slovenia Croatia Romania Bulgaria Serbia Ukraine Russia Top 100 CESEE non-financial companies by Deloitte + top 25 companies from Russia Size of bubble reflects the volume of sales revenues in 2015 Bordered bubble indicates state-owned companies In CESEE, SOEs are present mostly in energy sector Consumer Business Manufacturing Energy and Resources and Transportation The biggest bubble: 75.6 bln EUR (Gazprom, RUS) The smallest bubble: 1.6 bln EUR (Polkomtel, POL) Technology, Media and Telecommunications Life Science and Health Care

16 Russia and Poland have large stateowned banks Estonia Top 50 CESEE banks by Deloitte + top 10 banks from Russia The size of the bubble reflects the volume of assets in 2015 Black bubble indicates state-owned bank Lithuania Poland Czech Republic Slovakia Hungary Slovenia Croatia The biggest bubble: bln EUR (Sberbank, RUS) The smallest bubble: 1.3 bln EUR (Českomoravská stavební spořitelna, CZE) Bulgaria Romania Ukraine Russia 16

17 Government ownership may not be inefficient in itself But subject to specific risks: Weak governance Soft budget constraint Political interference Distorted competition 17

18 WEF GCI Effectiveness of antimonopoly policy Less effective anti-monopoly policies More effective anti-monopoly policies Sweden has large SOE sector but also effective competition policy. Public ownership vs enforcement of competition SWE NOR FRA FIN DNK IRL LUX DEU BEL AUT GBR NLD POL 4.5 TUR More state control CZE 3.0 ISL PRT ITA SVK GRC 2.5 HUN ESP 2.0 OECD PMR Public Ownership (axis in reverse order) Less state control

19 Another concern is whether SOEs are as innovative as private sector If we look at 265 manufacturing companies in CESEE with at least $50 million revenue and at least 1 patent, private owned firms are on average more innovative than state-owned but some SOEs are very innovative Squares indicate revenue or number of patents of individual companies. 19

20 Conclusion Government size does not distinguish rich countries from poor But government effectiveness does There is scope in CESEE to improve government effectiveness Improve efficiency of public investment and tax collection Enhance institutions and rule of law Enhance private sector competition Make sure SOEs are well run 20

21 Thank you 21