SUSTAINING GROWTH READ ONLINE NOW TRANSITION REPORT tr-ebrd.com

Transcription

1 TRANSITION REPORT TRANSITION REPORT tr.ebrd.com TRANSITION REPORT tr-ebrd.com SUSTAINING GROWTH READ ONLINE NOW SUSTAINING European Bank GROWTH for Reconstruction and Development Transition Report

2 2 SUSTAINING GROWTH A THREE-FOLD CHALLENGE 1. REVERSING POST-CRISIS SLOWDOWN IN THE REGION 2. OVERCOMING MIDDLE-INCOME TRAP 3. MAKING GROWTH GREENER European Bank for Reconstruction and Development

3 1. EBRD regions consistently outperformed , underperformed since EBRD regions outperformance yielded 15% higher output; underperformance cost 9% of output For each country, construct synthetic comparator (15+ countries with max weight 15%) in each year (income per capita, population) EBRD regions: Growth, % IMF WEO and authors calculations. For instance, Tunisia s comparators include Ecuador, Indonesia, Sri Lanka, ++.

4 2. Many countries have reached middle-income status and have to overcome the middle-income trap 4 In particular, the slowing productivity growth at middle incomes Initial per capita income and total factor productivity growth, IMF, World Bank, Penn World Tables and authors calculations. The trend line is based on a polynomial fit.

5 3. Another aspect of middle-income trap: Least green production ( the environmental Kuznets curve ) 5 Middle-income countries have higher level of pollution per unit of GDP than poorer peers (that have not yet built polluting industries) and advanced economies (that moved on to develop post-industrial, greener sectors) GDP per capita and emissions per unit of GDP in 2013 World Resources Institute, IMF and authors calculation. The trend line is based on a polynomial fit.

6 Outline TRANSITION REPORT I. Beyond the middle-income trap II. Firm dynamics and productivity III. Infrastructure and growth IV. Green growth VI. Structural reforms European Bank for Reconstruction and Development

7 7 BEYOND THE MIDDLE-INCOME TRAP 18% 6 ESTIMATED CAPITAL STOCK GAP IN THE EBRD REGIONS NUMBER OF OUTPERFORMANCE EPISODES LASTING 4+ DECADES European Bank for Reconstruction and Development

8 Growth slows down as economies grow richer although with no specific critical trap threshold 8 Initial per capita income and average annual GDP per capita growth, IMF, World Bank, Penn World Tables and authors calculations.

9 Yet middle-income trap is a useful concept describing evolution of emerging markets growth model 9 Low middle incomes Industrial development, mostly in low-value-added sectors adoption of existing technologies; investment in basic education and physical capital Middle high incomes Creating high-value-added industries and services Higher education, research and development, innovation Hence growth of middle-income countries = transition to a different set of political and economic institutions that provide incentives to develop new products and services May be hard to accomplish, hence the middle-income trap For example, because it contradicts the interests of incumbents that benefit from status quo of the old model European Bank for Reconstruction and Development

10 In transition economies, somewhat different profile: Growth in driven by total factor productivity High levels of education, urbanisation and industrial development but factors of production had been combined inefficiently under central planning Market reforms helped to improve efficiency of factor use, boost productivity and close TFP gap Decomposition of sources of growth, , % per annum 10 Penn World Tables, IMF, World Bank and authors calculations.

11 With inefficiencies eliminated, countries faced typical middle-income challenges, growth slowed since TFP slowdown also in (small) part reflects lower capacity utilisation (limited data) Growth now driven by capital accumulation (as in most EMs) Decomposition of sources of growth, , % per annum Penn World Tables, IMF, World Bank and authors calculations.

12 Yet investment in all but 5 EBRD economies has been well below comparators levels 12 Total capital stock gap 2.2 trillion (~18% of capital stock), of which ~ 500 bn due to ~ 40% is due to infrastructure deficit; 60% due to equipment, buildings, intellectual property Average annual growth in capital stock, Penn World Tables, IMF and authors calculations. Growth rates in capital stock of Azerbaijan, Belarus, Turkmenistan and Uzbekistan exceed the y-axis scale.

13 As a result, protracted slowdown in convergence more so than in other emerging markets 13 Average GDP per capita at PPP, in % of US IMF and authors calculations.

14 Divergent paths reflect struggle to raise productivity at 1/3 to 2/3 US GDP per capita (productivity trap)? 15 Wages in the competitive tradeable sector (manufacturing, some services) reflect productivity Prices of non-tradeable services reflect domestic wages Cheap services reflect low wages which means that productivity in tradeables fails to rise fast GDP per capita at PPP vs. at market exchange rates (2016) IMF and authors calculations. The trend line is based on a polynomial fit.

15 Some countries succeeded in middle-income transitions, for example, Korea first boosted TFP, then capital Balanced contributions from all factors: large human capital gains; high investment financed domestically Focus on lower end of high-tech exports: gradual shift imitation innovation, facilitated by human capital Hard hit by multiple crises of 1980 and 1998 but recovered swiftly; GDP per capita now 48% of US (66% at PPP) Cumulative outperformance and TFP in South Korea 16 IMF, World Bank, Penn World Tables and authors calculations.

16 17 FIRM DYNAMICS AND PRODUCTIVITY 4 AVERAGE STOCK OF PATENTS GRANTED PER 10,000 PEOPLE IN THE EBRD REGIONS IN 2015, COMPARED WITH AROUND 213 IN SOUTH KOREA 81% OF FIRMS HAVE FEWER THAN 10 EMPLOYEES IN CENTRAL AND EASTERN EUROPE European Bank for Reconstruction and Development

17 Innovation in the EBRD region lagged behind per capita income: innovation-light growth 18 <1% of firms introduce a product that is new to the world Change in patents granted and per capita income, World Bank, World Intellectual Property Organization (WIPO) and authors calculations.

18 Smaller firms are abundant but relatively inefficient, more so in Central Europe than in EU Median large firm in Central Europe and Romania is 70% more productive than median micro firm versus 40% difference in EU-15 Productivity levels by firm size (micro = 100) CompNet and authors calculations.

19 Small firms in the region fail to grow 20 In EU-15 only 20% of firms remain in the same size bracket over 10 years, 40%+ of firms grow In Central Europe, firms have roughly equal chance to grow, remain the same or shrink % of firms by change in employment, CompNet and authors calculations.

20 Industries experience stronger productivity growth when they are further away from the technological frontier 21 Average annual TFP growth, , WIOD and authors calculations. Each observation is for a given industry in a given country. The US benchmarks are for the same industries.

21 Productivity growth is faster in industries further away from the technological frontier 22 Estimated average annual TFP growth, , depending on initial TFP European Bank for Reconstruction Source: and WIOD. Development Predicted TFP growth rates from a country-industry panel regression controlling for country, industry, year effects.

22 With greater trade openness, integration into GVCs, productivity convergence can be sustained 23 Average annual TFP growth, , depending on initial TFP WIOD. Less integrated source <40% of inputs abroad; more integrated > 80%.

23 More productive industries create more jobs, and reallocation of labour boosts growth 24 Average annual job creation, , depending on initial TFP CompNet. Regressions control for country, industry and year fixed effects.

24 Openness to trade help to relocate jobs to more productive industries 25 Average annual job creation, , depending on initial TFP CompNet. Regressions control for country, industry and year fixed effects.

25 26 INFRASTRUCTURE AND GROWTH 1.9 TRILLION EBRD REGIONS ESTIMATED INFRASTRUCTURE INVESTMENT NEEDS OVER THE NEXT 5 YEARS 64% OF THE EBRD REGIONS INFRASTRUCTURE NEEDS ARE IN THE TRANSPORT SECTOR European Bank for Reconstruction and Development

26 EBRD regions lag behind advanced economies in infrastructure: Higher gaps in Central Asia, SE Mediterranean 27 Global competitiveness index infrastructure, World Economic Forum and authors calculations. 1-7 scale, higher numbers = better infrastructure.

27 Lack of reliable energy provision is costly to firms in SE Mediterranean, Tajikistan and Kosovo 28 Losses due to electrical outages, % of annual sales European Bank for Reconstruction Source: and Development Enterprise Surveys.

28 Major improvements in provision of broadband, but some areas still lag behind 29 Broadband access, % European Bank for Reconstruction Source: and Development World Bank.

29 1.9 trillion investment in infrastructure needed in the EBRD region over the next 5 years 30 Some countries need to invest a lot to catch up with their peers Others need high outlays on maintenance and supporting future growth of income/population Total annual investment need in , % of GDP WDI, IMF, EIA, Nunn and Puga (2012) and authors' calculations.

30 SE Mediterranean, Central Asia, Eastern Europe require investments in new infrastructure to catch-up 31 Central Europe needs to invest in maintenance and to support future growth Components' share of estimated infrastructure investment needs WDI, IMF, EIA, Nunn and Puga (2012) and authors' calculations.

31 Main gaps in transport; Turkey and most SE Med countries must also invest in energy 32 Sectorial share of estimated infrastructure investment needs WDI, IMF, EIA, Nunn and Puga (2012) and authors' calculations.

32 Economic benefits of transport upgrades can be large: Evidence from road network upgrades in Turkey European Bank for Reconstruction and Development

33 Upgrades reduced travel times: approximately 3 hour savings between provincial centres 1,500km apart 34 Time savings and travel distance on Turkey s roads Turkish General Directorate of Highways and authors calculations.

34 Improved market access increased domestic trade and expanded the trade linkages to other provinces 35 Domestic trade grew fastest between cities with highest savings in terms of travel time thanks to the road upgrades Change in bilateral trade between provinces, , depending on transit time saved European Bank for Reconstruction Source: and Authors Development calculations.

35 Previously isolated areas experienced increased employment 36 Time savings and change in regional employment, European Bank for Reconstruction Source: and Authors Development calculations.

36 due to lower outward migration: Infrastructure upgrades can counter depopulation of isolated regions 37 Change in emigration to other regions, %, European Bank for Reconstruction Source: and Development Authors calculations.

37 38 GREEN GROWTH EMISSIONS PER US$ OF GDP IN COMPARATOR COUNTRIES ARE AROUND 20% LOWER THAN IN THE EBRD REGIONS 94% OF SEMED PRIMARY ENERGY SUPPLY IS ACCOUNTED FOR BY FOSSIL FUELS, COMPARED WITH 70% IN CENTRAL EUROPE European Bank for Reconstruction and Development

38 Another aspect of middle-income trap: least green production ( the environmental Kuznets curve ) 39 Middle-income countries have higher level of pollution per unit of GDP than poorer peers (that have not yet built polluting industries) and advanced economies (that moved on to develop post-industrial, greener sectors) GDP per capita and emissions per unit of GDP in 2013 World Resources Institute, IMF and authors calculation. The trend line is based on a polynomial fit.

39 Especially salient issue in transition countries that inherited a very polluting industrial base 40 Despite major improvements, economies remain ~ 25% more polluting than comparators Greenhouse gas emissions per US dollar of GDP World Resources Institute (2017) and authors calculations.

40 Countries need to develop environmentally friendly growth models 41 Greenhouse gas emissions per capita World Resources Institute (2017) and authors calculations.

41 Pro-environmental economic policy mix needed, starting with phasing out energy subsidies 42 And develop institutions that help financing investment in the green economy transition Fossil-fuel subsidies, 2013, % of GDP IMF (2015) and authors calculations.

42 Good management improves environmental performance only if incentives are right 43 When energy subsidies are high, better-managed-firms are more energy intensive Change in energy use in response to better management practices IMF, BEEPS V, MENA ES and authors calculations. Solid bars = significant at the 10% level.

43 Equity markets today are optimistic about greener companies future profits 44 Listed companies with a greater share of green business have a higher value of equity per dollar of current profits (= lower return on equity) Performance of firms with green revenues FTSE Russell s LCE database, Bureau van Dijk and authors calculations.

44 Developing equity markets helps environment equity is better suited to finance green projects 45 Equity investors have a stake in the long-term value of the assets and incentives to select projects that will not be stranded when green policy mix is universally adopted Equity markets require improved governance at country and firm level Relative size of the equity market and pollution European Bank for Reconstruction Source: and Development Haas and Popov (2017).

45 Concluding remarks: Region in search of new growth drivers 46 Sustaining growth in the EBRD regions is not going to be easy There is no single silver bullet and no one-size-fits-all solution However, learning from countries that have managed to converge to high income levels creates grounds for optimism EBRD countries should be able to complete the transition to market economy Through strengthening their institutions Supporting firm dynamics and innovation Integrating their firms in global economy And investing in sustainable infrastructure European Bank for Reconstruction and Development

46 47 STRUCTURAL REFORM COMPETITIVENESS AND GOOD GOVERNANCE ARE THE 2 AREAS IN WHICH THE LARGEST GAPS EXIST BETWEEN THE EBRD REGION AND ADVANCED ECONOMIES INCREASING NUMBERS OF COUNTRIES IN THE EBRD REGION'S ARE SETTING THEMSELVES THE TARGET OF GENERATING 20% OF ELECTRICITY FROM RENEWABLE SOURCES European Bank for Reconstruction and Development

47 Six qualities for a sustainable market economy 48 Assessment of transition qualities Competitive Well-governed Green Inclusive Resilient Integrated Market structures for competition and business standards Capacity to add value and innovate National-level governance Corporate-level governance Mitigation of climate change Adaptation to climate change Other environmental areas Gender equality Regional disparities Opportunities for young people Financial stability Resilient energy sector Openness to foreign trade, investment and finance Domestic and cross-border infrastructure European Bank for Reconstruction and Development

48 The EBRD region performs weakest in Competitive and Well-governed 49 Assessment of transition qualities in EBRD countries and advanced comparator countries EBRD.

49 but reform appetite seems to have returned to the region 50 Share of positive/negative developments in total number of developments tracked European Bank for Reconstruction Source: and EBRD. Development Reform developments in 2017 based on qualitative assessment rather than year-on-year upgrades and downgrades.

50 Reform examples TRANSITION REPORT European Bank for Reconstruction Source: and EBRD. Development Reform developments in 2017 based on qualitative assessment rather than year-on-year upgrades and downgrades.

51 TRANSITION REPORT TRANSITION REPORT tr-ebrd.com tr-ebrd.com EASILY ACCESSIBLE INFORMATION ONLINE AND IN PRINT European Bank for Reconstruction and Development

52 In a typical growth episode, capital formation exceeds that of peer economies by 2+ pp Investment typically responds to improved outlook but could be boosted by infrastructure EBRD region relied unusually heavily on foreign savings hence hit particularly hard by crisis 53 Capital stock outperformance during GDP growth outperformance episodes, percentage points IMF, World Bank, Penn World Tables and authors calculations.

53 Sustaining outperformance is hard: only 17% of episodes last for 2+ decades; 43% end in hard landings 54 Hard landings = followed 8+ years with cumulative underperformance of 8pp+ Like EBRD region, countries exhaust their advantages (such as cheap labour), need a new growth model Number of growth outperformance episodes, by length and outcome IMF, World Bank, Penn World Tables and authors calculations.