Central, Eastern, and Southeastern Europe: The Past and Future of Convergence LSE SU Emerging Markets Forum London, March 1, 218 Bas B. Bakker Senior Regional Resident Representative for Central, Eastern and Southeastern Europe
Global growth in 218 is highest since 211 4.5 Global Real GDP growth according to various WEO vintages (Percent) 4. WEO Update Jan-218 WEO Oct-17 3.5 WEO Apr-17 3. 211 212 213 214 215 216 217 218 219 22 2
Advanced economies are growing around 2 ¼ percent, China and India, 7, other EMCs, 3½ 14 Real GDP Growth (Percent) 12 1 8 6 4 2 China and India EMs excl. China and India Advanced Economies -2-4 2 22 24 26 28 21 212 214 216 218 3
USA will grow by 2.7 percent, euro area by 2.2, and Japan by 1.2 6 Real GDP Growth (Percent) 4 2 USA Japan -2 Euro Area -4-6 2 22 24 26 28 21 212 214 216 218 4
Unemployment rate in advanced countries is near pre-crisis low 9 Unemployment Rate in Advanced Economies (Percent) 8 7 6 5 198 1983 1986 1989 1992 1995 1998 21 24 27 21 213 216 219 5
Fed has started to tighten, ECB rates are expected to remain low for longer 3.5 US and EA Policy Rates and Forecasts (Percent) 3. 2.5 FOMC Projections 2. 1.5 1..5 Fed ECB Survey of Professional Forecasters. ECB 214 215 216 217 218 219 22 6
In CESEE, CIS recovering and non-cis growing strongly 1 Real GDP growth (Percent) 8 6 4 2 Other CESEE CIS -2-4 -6-8 -1 2 22 24 26 28 21 212 214 216 218 7
NON-CIS CESEE 8
Growth is rapid, and unemployment is falling sharply Real GDP growth (Percent) Unemployment Rate (Percent) 7 25 6 5 Baltics SEE EU 2 SEE non-eu 4 CE-5 15 3 2 1 SEE non-eu 1 5 Baltics SEE EU CE-5-1 211 212 213 214 215 216 217 211 212 213 214 215 216 217 9
Unemployment is now below pre-crisis levels in many countries 14 Cumulative Changes in Unemployment Rate (28Q1=, seasonally adjusted) 14 14 12 12 12 1 1 1 SRB 8 EST LTU 6 LVA 4 SVK HUN 2 POL -2-4 27 21 213 216 CZE 8 HRV 6 4 SVN BGR 2 ROU -2-4 27 21 213 216 8 6 4 2-2 -4 MNE BIH ALB* MKD 217Q3: -12.2 28 21 212 214 216 *For ALB 212Q1= 1
Growth in the region is not as high as in the pre-crisis years 15 1 5-5 Real GDP growth in CESEE excl. CIS (Percent) Max Average Min 27 level -1-15 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 11
2 year average employment growth But employment growth in many countries is as high as during pre-crisis peaks GDP growth vs. employment growth (Percent, 2 year average) 3 CE-5 2 SEE 2 1 Post-crisis 213 212 217 216 215 214 22 23 27 26 25 24 1-1 -2 Post-crisis 215 214 213 212 217 216 27 26 25 24 Pre-crisis 23 22 Pre-crisis -1-3 1 2 3 4 5 6 7 2 4 6 8 2 year average GDP growth 12
Inflation, which was very low in 215-16 has picked up recently 8 CPI Inflation (Percent) 6 4 CESEE excl. CIS 2 Euro Area -2 28 29 21 211 212 213 214 215 216 217 218
Energy and food prices played key role in pickup of inflation 4 Oil and Food Prices (Percent, Y/Y, 6 months moving average) 3 2 1-1 -2-3 -4-5 Oil Price Food and Beverage Price Index 213 214 215 216 217 14
But wage growth has also accelerated 18 Nominal Wage Growth (Percent, Y/Y) 16 14 12 1 8 6 4 217Q3 215Q4 2-2 MNE BIH MKD SRB POL HRV LVA SVN CZE SVK LTU EST BGR HUN ROU 15
Growth in 218 will continue to be strong External demand expected to remain strong in the next quarters Consumption is solid as employment is growing rapidly and wages are accelerating Investment further boosted by pick-up of EU funds 16
What will this imply for labor markets? 3 Employment and Working Age Population Growth in CESEE (Excl. TUR and CIS, percent) 2 Employment growth 1-1 -2 Working Age Population Growth and UN projection -3 25 27 29 211 213 215 217 17
This would be the good time to create fiscal space and reduce structural deficits Particularly given that debt is much higher than pre-crisis levels. 9 8 General Government Debt (Percent of GDP) 7 6 5 4 217 3 2 27 1 EST UVK BGR CZE LVA LTU ROU MKD BIH SVK POL SRB ALB MNE HUN SVN HRV 18
Unfortunately, many countries with too high structural deficits are reverting to pro-cyclical loosening 3 General Government Structural Balance (Percent of GDP) 2 1-1 -2 216 218-3 -4-5 ROU POL HUN SVK HRV EST LVA SVN BGR SRB BIH CZE LTU 19
CIS 2
In 214-15, Russia and Ukraine suffered from shocks, and Belarus from spillovers Collapse of commodity prices Sudden stop in capital flows to Russia, result of sanctions on Russia Conflict in Ukraine -2-4 -6-8 -1-12 Cumulative Change in GDP, 213-16 (percent) -14 Ukraine Belarus Russia 21
Foreign reserves (USD index, H1 213=1) Reserves drawdown Exchange rate flexibility was unavoidable given the limited buffers 12 11 1 9 8 7 216 Foreign reserves and XR depreciation (6-month moving averages) 215 215 RUS 214 214 214 Depreciation 213 6 5 216 UKR 216 BLR 4 215 3 2 2 3 4 5 6 7 8 9 1 11 USD exchange rate (index, H1 213=1) 22
but increased inflation and reduced real wages 3 CPI Inflation in European CIS (Percent, weighted average) max 1 Average monthly wages (USD) 25 2 75 15 RUS 5 1 BLR 5 min 25 UKR -5 24 26 28 21 212 214 216 Q1'21 Q1'212 Q1'214 Q1'216 23
Ukraine and Russia are now recovering (helped by rising oil prices) Real GDP growth in Russia, other CIS countries and changes in oil prices (Percent, y/y) 2 1 2 15 75 15 1 5 RUS 5 25 1 5 BLR RUS -5 Oil prices (right axis) -25-5 UKR -1-5 -1-15 -75-15 -2 25 28 211 214 217-1 -2 25 27 29 211 213 215 217 24
217 218 219 Near-term prospects show solid growth 4. Real GDP Growth Projections (Percent) 3.5 3. 2.5 2. 1.5 1..5. BLR RUS UKR 25
CONVERGENCE: PAST 26
Since the abolition of communism, most of CESEE has become much richer both in absolute and relative terms 27
But not all countries have done equally well 28
Compare Poland vs Ukraine Poland has done much better than Ukraine In 1989 they were equally rich Now Poland is three times as rich Why? Poland more macro-stability Poland reformed more and earlier Poland has better institutions 29
Difference is clearly visible on satellite pictures. Nightlights intensity 3
Macro-stabilization occurred much earlier in Poland 12 1155 CPI Inflation (Percent y/y) 18 GDP Per Capita (Thousands of 216 US$) 1 16 14 Poland 8 12 6 Ukraine 1 8 4 6 Ukraine 2 Poland 4 2 1989 1993 1997 21 25 29 213 217 1989 1991 1993 1995 1997 1999 31
Poland has not had any crisis; Ukraine has had three Exchange Rates vs EUR (Percent m/m) GDP Level (Index, 1997=1) 6 Russian crisis GFC Ukrainian crisis 22 Russian crisis GFC Ukrainian crisis 5 2 Poland 4 18 3 16 Ukraine 2 14 1 12 1-1 PLN UAH 1995 1999 23 27 211 215 8 1997 21 25 29 213 217 32
Poland reformed earlier and deeper Average of EBRD Transition Indicators Max 4. Poland 3.5 Ukraine 3. 2.5 2. 1.5 1. 1989 1991 1993 1995 1997 1999 21 23 25 27 29 211 213 33
Better institutions Poland has much better institutions Worldwide Governance Indicators, 216 (CESEE countries in global ranking) Poland Ukraine Voice and Accountability Political Stability Government Effectiveness Regulatory Quality Rule of Law Control of Corruption 34
CONVERGENCE: FUTURE 35
After deep crisis in 29, convergence has resumed (except in CIS) 7 6 5 Real GDP per capita (Percent of Germany) CE-5 Baltics 4 3 SEE EU CIS 2 SEE non-eu 1 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 36
But growth is slower than pre-crisis 1 GDP growth (Percent, 3 year moving average) 8 6 4 2-2 -4 Baltics SEE non-eu CIS SEE EU CE-5-6 22 24 26 28 21 212 214 216 37
As investment rates are lower (except CIS) 35 Investment Rate (Percent of GDP, 3 year moving average) 3 Baltics SEE EU 25 CE-5 2 SEE non-eu* CIS 15 22 24 26 28 21 212 214 216 *Excl. MKD 38
The working age population is declining (leading to less labor supply).5 Working Age Population Growth (Population ages 15-64 years, 5 year moving average). SEE non-eu -.5-1. SEE EU CE-5 CIS -1.5 Baltics -2. 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 39
And TFP growth is lower 7 TFP Growth (Percent, 5-year moving average) 6 5 4 3 2 CIS Baltics SEE EU 1 CE-5-1 -2 SEE non-eu 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 4
Productivity is too low to sustain rapid GDP growth 8 GDP Growth and Labor Productivity in CESEE (Excl. TUR and CIS, percent) 6 4 GDP growth 2 Labor Productivity -2-4 25 26 27 28 29 21 211 212 213 214 215 216 217 41
As employment growth cannot continue to grow so much faster than the working age population 3 Employment and Working Age Population Growth in CESEE (Excl. TUR and CIS, percent) 2 Employment growth 1-1 -2 Working Age Population Growth and UN projection -3 25 27 29 211 213 215 217 42
What can be done to boost TFP growth? Improve institutions Improve legal systems and government effectiveness Improve tax efficiency Address infrastructural gaps 43
Government effectiveness not as strong as in Western Europe World Governance Indicators, 216 (Ranges from -2.5 (weak) to 2.5 (strong) governance performance) 44
Judicial systems are also weaker Judicial Independence, 215 Impartial Courts, 215 Below 25 percentile Between 25 and 75 percentile Above 75 percentile Source: World Economic Forum. Note: Worldwide distribution excluding LICs 45
How would institutional reforms help? Better institutions hold the promise of retaining emigration of skilled workers Effective protection of property rights provides stronger incentives for investment Institutions affect innovation and productivity through enhanced trust, cooperation, commitment, and contract enforcement 46
CONCLUSION 47
Concluding thoughts CESEE has done nicely in recent years with strong growth and rapidly declining unemployment Growth is not as high as pre-crisis The challenge will be to continue current growth rates Productivity growth will need to pick up; at some stage labor market will become constraint Reforms and improvements of institutions will help 48
Thank you