Slovak Competitiveness: Fundamentals, Indicators and Challenges

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1 Copyright rests with the author Slovak Competitiveness: Fundamentals, Indicators and Challenges Presentation by Mark De Broeck European Department, IMF Seminar Organized by the European Commission November 19,

2 Competitiveness: What can the concept refer to? 1. Long term: fundamentals of output per capita and longrun growth For example, European Competitiveness Report : productivity growth is the key driver of competitiveness in the long run Fundamentals: inputs of capital and labor, education, quality of the business environment 2. Short term: indicators of short-run exchange rate misalignment

3 GDP and Growth Fundamentals GDP per capita is below EU average and below other countries in the region. But Slovakia has been converging fast. 3 GDP per capita, PPP terms (In th. constant 5 U.S. dollars) GDP PPP gap vs. EA-11 (In percent of EA-11) SVN SVN Sources: World Bank Development indicators and IMF staff calculations

4 Reasons for Still Relatively Low Level of GDP Per Capita 1. Capital stock: relatively low but growing Capital stock per inhabitant, 5 (In th. euros) Capital goods imports (In percent of GDP) LTU FRA BEL ITA DEU FIN NLD AUT SVN Source: Eurostat Sources: World Bank; and IMF staff calculations

5 2. Labor force: high participation rate, but unemployment rate needs to come down. 65 Labor force participation rate, 15+ (In percent) Unemployment rate (In percent of abor force) SVN SVN 45 EA EA Sources: World Bank Development indicators and IMF staff calculations

6 3. Human capital: still relatively low level of higher education 8 7 Percent of Population With Tertiary Education by Age Group (7) year-old year-old 4 3 Canada Korea Russian Federation1 Japan New Zealand Ireland Norway Israel France Belgium Australia United States Denmark Sweden Finland Spain United Kingdom Netherlands Luxembourg Switzerland Estonia OECD average Iceland Slovenia Poland Greece Germany Hungary Portugal Mexico Austria Italy Chile2 Slovak Republic Czech Republic Turkey Brazil Source: OECD.

7 4. Infrastructure: relatively low quality Quality of overall infastructure, 9- (1 = extremely underdeveloped; 7 = extensive and efficient by international standards) ITA IRL GRC LVA HRV LTU SVN GBR EST BEL ESP NLD KOR PRT JPN DEU AUT SWE FIN Source: Global Competitiveness Report,

8 5. Quality of the business environment Standard surveys show areas of strength, but also remaining weaknesses E.g. World Economic Forum, Global Competitiveness Report; World Bank, Doing Business; IMD, World Competitiveness Yearbook Key strengths: e.g. macroeconomic environment, relatively low tax rates, good access to financial services But also key areas for further improvements: e.g. infrastructure and network industries, corruption and inefficiency in government, legal framework and judiciary Yearly change of Slovak ranking reflects developments domestically but also in other countries: ranking can slip if other countries improve more than Slovakia

9 Short-term Exchange Rate Misalignment Application of CGER Methodologies to Slovakia, Fall Overvaluation, in percent Macroeconomic Balance approach -.2 External Sustainability approach -6.8 Equilibrium RER approach 1.7 Source: IMF staff calculations. No clear evidence of significant over or undervaluation.

10 Macroeconomic Balance Approach: Current Account in Line with Economic Fundamentals Current account balance, 9 (In percent of GDP) GRC PRT ESP HRV ITA IRL SVN GBR BEL FIN AUT JPN LTU EST DEU KOR NLD SWE LVA Source: IMF World Economic Outlook.

11 External Sustainability Approach: Net investment position excluding direct investment liabilities (share of GDP) is only modestly negative 3 Slovakia: Net Investment Position (NIP, Percent of GDP) Current account deficit NIP NIP without direct investment liabilities Current account deficits (share of GDP) are projected to stabilize at a moderate level

12 REER approach. Exchange rate appreciation in 8 9, followed by depreciation but no differences impact on export Real effective exchange rate, CPI-based (Index, July 8 = ) Real exports of goods Q1 6Q3 7Q1 7Q3 8Q1 8Q3 9Q1 9Q3 Q Nominal effective exchange rate (Index, July 8 = ) Consumer price index, HICP (Index, January 6 = ) Sources: Haver Analytics; and IMF staff calculations.

13 Unit Labor Cost (ULC) appears a better measure of competitiveness Slovakia: real effective exchange rates (Index =, SA) REER-ULC (manufacturing) REER-ULC (total economy) REER-CPI Source: OECD; and IMFstaff calculations.

14 but may reflect differences in economic structure and does not yield insight on developments in the economic structure. A New Approach Evaluating competitiveness in different sectors: A deeper and more precise measure of competitiveness. Allows insight into the different sectors in the economy and the dynamics. Captures the facts that sectors could have different ULC dynamics,which could bias the aggregate measure.

15 ULC: Different Dynamics Across Sectors and Across Countries ULC in Live Animals Except Fish Industry Slovakia Hungary Lithuania Poland Romania industry average ULC in Special Machinery Industry Slovakia Hungary Slovenia Poland Romania Industry average ULC in Electrical Equipment Industry ULC in Road Vehicles Industry Slovakia Hungary Slovenia Poland Industry average Slovakia Hungary Slovenia Poland Romania Industry average

16 Evaluating Competitiveness Estimating for each sector in each country the norm level of ULC. Competitiveness in each sector is measured as the deviation of the actual ULC from its norm.

17 Estimating Norm ULC in Each Sector in Each Country Regressing ULC Relative to Industry Average (in sector i, country j, time t) h>z / > 'W WWW dd de d dee > d dde d ddd h> d ddd d ddd ^ d ded d ddd

18 Measure of Competitiveness in Slovakia in Selected Sectors Deviations from Norm ULC in Slovakia - Selected Industries Iron and steel Electrical equipment Petroleum and products Rubber manufactures nes Telecomms etc equipment Road vehicles Industrial equipment nes Misc manufactures nes Metal manufactures nes Paper/paperboard/article

19 Competitiveness Impact on Export Growth ' ^ h> d de d dd ^ d dd d de h> d dd d de The proposed competitiveness measure has the expected impact on export share growth

20 Conclusion Overall, the analysis suggests that most sectors in Slovakia are competitive and that competitiveness has improved, as is reflected also in export growth. Need to enhance fundamentals for long tern growth to continue the transformation among sectors and maintain competitiveness and rapid export and economic growth.