Why Have Some CESEE Countries Done Better Than Others since Early Transition? IMF Macroeconomic Policy Seminar Vienna, June 13, 2018 Bas B. Bakker Senior Regional Resident Representative for Central, Eastern and Southeastern Europe
In 1989, CESEE countries were much poorer than Western Europe Note: For BIH data for 1990. 2
Then communism was abolished What would we have expect to have happened? Income differentials with Western Europe would become smaller Poorer countries would grow faster than richer countries 3
Convergence between 1989 and 2017 4
What happened in practice? After initial decline in GDP in early transition, countries started growing again in early to late 1990s Since then there has been clear convergence with Western Europe But some countries have done much better than others Some countries are still poorer than they were in 1989 5
After a deep post-transition recession Note: For BIH data for 1990-1996 6
Most countries have grown strongly over the past two decades 7
In the past two decades all countries have narrowed income differentials with Germany 8
GDP per capita growth in 1996-2017 (Percent) EU New Member States have done better than Western Balkans and CIS GDP PPP per capita in 1996 vs. its change in 1996-2017 250 200 Fitted lines BIH BLR LTU LVA New Member States Western Balkans European CIS 150 100 50 0 ALB EST BGRROU POL MDA SVK RUS MNE SRB HUN MKD UKR HRV Note: Data for UVK not available. Source: Penn World Tables and WEO. SVN MLT GRC CZE PRT CYP ESP SWE GBR DEU AUT FIN BEL NLD FRA ITA 0 5 10 15 20 25 30 35 40 45 GDP PPP per capita in 1996 (thousands of 2011 USD) LUX DNK 9
Some parts of CESEE have similar income levels to Spain and Italy; others are still poorer 10
Most-but not all-countries are richer now than in 1989 11
There are also visible differences in emigration 12
What explains these differences? 1. Is it data issues? 2. Early transition 3. War and conflicts 4. Boom-busts / macro-stability 5. EU Membership 6. Whether transition has been completed 7. Institutions 8. Country case (a) Poland vs. Ukraine 13
1. Do differences reflect data issues? GDP statistics in late 1989 not very good Prices were not right Other problem: GDP not good indicator of consumer welfare Much of what was produced was not wanted by consumers (cf. military expenditures) Much was of low quality 14
However, even if size of initial collapse was exaggerated, there clearly were large cross country differences Other more easily measurable indicators also suggest: Large initial output falls Large cross country differences 110 100 90 Electricity Consumption per Capita (index, 1990=100) POL BGR Between 1990 and 1995, electricity consumption fell 80 RUS by almost 40 percent in Moldova and Ukraine very little in Poland. 70 60 MDA UKR 50 1990 1992 1994 1996 15
Both progress and cross-country differences can be seen in satellite pictures 16
2. Early transition to market economy In early 1990s there was a debate whether reforms should be gradual Worry was that more rapid reforms would be too painful Rapid reforms were indeed painful unemployment in early reformers rose sharply However, countries that postponed reforms had a much longer and deeper initial recession Why? Without hard budget constraint on firms, it was hard to get credit growth and inflation under control 17
Cumulative change of GDP in the beginning of transition, t;t+5 (percent) Countries that postponed reforms suffered deeper output losses Cumulative change of GDP and early transition reforms 0-10 -20-30 -40 Note: t=1989 For former USSSR countries: t=1991 For Bosnia and Herzegovina: t=1990 EBRD transition indicator for SRB & MNE data only for Serbia BLR BGR ROU SVN SVK MKD ALB RUS HRV LVA LTU CZE POL HUN EST -50-60 BIH 23 71 12 22 88 26 SRB & MNE UKR MDA -70 1 2 3 4 Average of six EBRD transition indicators in 1995 18
Change in income per capita gap to USA, 1998-17 (pp) Weaker growth in early transition not compensated by faster growth later Convergence per capita to USA in 1989-97 and 1998-17 (pp) 30 Note: 1990-17 for Bosnia and Herzegovina 25 LTU LVA 20 RUS EST SVK 15 ROU BGR BLR CZE POL 10 HUN SVN ALB 5 SRB & MNE UKR HRV MKD MDA BIH 0-30 -25-20 -15-10 -5 0 Change in income per capita gap to USA, 1989-97 (pp) 19
Average annual GDP per capita growth, 1989-2017 (percent) 3. Wars and conflicts: the four countries with the lowest growth all had wars 4 Average GDP per capita growth, 1989-17, and its level in 1989 Red circle indicate whether a country experienced a war in 1989-17 3 2 1 0 ALB BIH MDA BLR POL SVK BGR ROU MKD EST LVA LTU HUN CZE SVN HRV RUS -1 SRB & MNE UKR -2 0 5 10 15 20 25 GDP per capita in 1989, thousands of 2016 PPP US dollars Note: 1999-2017 for BIH. 20
4. Some countries have gone through boom-busts that slowed average growth 12 GDP Growth (Percent) 190 GDP per capita (2000=100) 8 180 Poland 4 Poland 170 160 0-4 150 140 Ukraine -8-12 Ukraine 130 120 110-16 2000 2002 2004 2006 2008 2010 2012 2014 2016 100 2000 2002 2004 2006 2008 2010 2012 2014 2016 21
Average annual GDP growth, 1996-2017 (Percent) Countries with fewer recessions grew faster on average 5 Number of years with a decline of GDP vs. annual average GDP growth between 1996 and 2017 BLR 4 POL ALB UVK LTU SVK LVA EST 3 2 MNE HUN MKD SVN BGR SRB RUS ROU CZE MDA HRV 1 UKR 0 0 1 2 3 4 5 6 7 8 9 Number of years with negative GDP growth, 1996-2017 Note: for MNE and UVK: data for 2001-17; for SRB: 1998-2017. 22
GDP growth in 2009 (Percent) Countries which grew very fast pre-crisis experienced the deepest decline in 2009 Average annual GDP growth in 2002-07 vs. GDP growth in 2009 4 0-4 -8 UVK HUN MKD SVN POL CZE HRV BIH ALB SRB MNE MDA BGR ROU SVK RUS BLR -12-16 3 4 5 6 7 8 9 10 UKR Average annual GDP growth, 2002-07 (Percent) EST LTU LVA 23
Crises led to high NPLs and weak banks, which holds back growth 35 NPL ratio in 2008 and peak value between 2008-16 (Percent) 30 25 20 Max. between 2008-16 15 10 5 0 2008 EST BGR SVK ROU CZE POL BIH HUN BLR RUS UKR SVN HRV UVK MKD ALB MDA Note: for BLR, UVK and ALB: bar showing data for 2010; for MDA: 2009. 24
5. EU Membership EU accession was powerful catalyst for reforms and upgrading of institutional framework 4.0 Average of six EBRD indicators in 2014 3.5 EU countries non-eu countries 3.0 2.5 2.0 BLR BIH SRB MDA UKR RUS ALB MKD SVN ROU BGR HRV CZE HUN SVK LVA LTU POL EST Note: 2007 for Czech Republic 25
GDP per capita in 1995 and 2014, thousands of 2014 PPP US dollars (Prospects of) EU Membership led to more reforms and higher growth GDP per capita and average of EBRD transition indicators 30 2014 1995 20 CE5 SEE EU 10 Baltics SEE non-eu CIS 0 1 2 3 4 5 Average of the EBRD transition indicators in 1995 and 2014 26
Average annual GDP per capita growth, 2000-17 (percent) Rapid convergence in EU and EU candidate countries Average GDP per capita growth, 2000-17, and its level in 2000 6 CESEE-EU countries (as of 2007) 5 Candidate countries and Croatia ALB 5 LTU LVA 4 4 BGR ROU POL EST SVK 3 SRB & MNE 3 2 HUN CZE SVN 2 BIH MKD HRV 1 10 15 20 25 1 Note: Bosnia and Herzegovina has been recognized as a potential candidate country by the EU 5 10 15 20 GDP per capita in 2000, thousands of 2016 PPP US dollars 27
Average annual GDP per capita growth, 1989-17 (percent) By contrast, no convergence in European CIS Average GDP per capita growth, 1989-17, and its level in 1989 3 2 BLR 1 RUS 0 MDA -1 UKR -2 5 10 15 20 25 GDP per capita in 1989, thousands of 2016 PPP US dollars 28
GDP per capita as percent of US, 2017 6. Countries that have more completed transition are richer 70 GDP per capita as percent of US in 2017 and average of EBRD transition indicators in 2014 60 50 40 30 20 10 0 BIH RUS SRB & MNE UKR MDA ALB SVN ROU MKD BGR CZE HUN HRV SVK LTU EST POL LVA 3 3.5 4 4.5 Average of six EBRD transition indicators, 2014 Note: EBRD data for CZE from 2007 and for SRB & MNE only for Serbia 29
GDP PPP per capita as percent of US, 2017 as do countries where private sector is more vibrant GDP PPP per capita in 2017 and private sector share in GDP in 2010 70 60 50 RUS SVN LVA LTU POL SVK EST HUN 40 HRV ROU BGR 30 20 10 SRB BIH UKR MNE MDA MKD ALB 0 55 60 65 70 75 80 85 Private sector share in GDP in 2010 (Percent) 30
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Limited privatization progres in Bosnia and Herzegovina and in Serbia stalled after the crisis EBRD Transition Indicators 4.5 4.0 Large scale privatization HUN, POL, SVK Baltics 4.5 4.0 Small scale privatization HUN, POL, SVK Baltics SRB 3.5 3.5 3.0 BIH 3.0 BIH 2.5 SRB 2.5 2.0 2.0 1.5 1.5 1.0 1.0 31
7. CESEE countries differ in the quality of institutions, e.g. in governance. Worldwide Governance Indicators, 2016 (Ranges from -2.5 (weak) to 2.5 (strong) governance performance) 32
and the judiciary. Judicial Independence, 2015 Impartial Courts, 2015 Below 25 percentile Between 25 and 75 percentile Above 75 percentile Source: World Economic Forum. Note: Worldwide distribution excluding LICs 33
GDP per capita in 2016 (Thousands of PPP dollars) Richer countries have better institutions (though causality may go both ways) Government Effectiveness vs. Income Per Capita, 2016 60 50 40 30 20 10 0 UKR MDA BLR ROM BIH UVK RUS MNE SRB MKD ALB GRC HUN BGR ITA HRV SVK LTU POL SWE ISL AUT -1.0-0.5 0.0 0.5 1.0 1.5 2.0 2.5 Government Effectiveness (WGI), 2016 Ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance LVA MLT ESP CZE PRT SVN EST BEL FRA DEU GBR NLD DNK FIN 34
COUNTRY CASES 35
8. Country case (a) 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 36
Difference is clearly visible on satellite pictures. Nightlights intensity 37
Macro-stabilization occurred much earlier in Poland. 1200 10155 CPI Inflation (Percent y/y) 18 GDP Per Capita (Thousands of 2016 US$) 1000 16 14 Poland 800 12 600 Ukraine 10 8 400 6 Ukraine 200 Poland 4 2 0 1989 1993 1997 2001 2005 2009 2013 2017 0 1989 1991 1993 1995 1997 1999 POL UKR 38
Poland has not had any crisis; Ukraine has had three Exchange Rates vs EUR (Percent m/m) GDP Level (Index, 1997=100) 60 Russian crisis GFC Ukrainian crisis 220 Russian crisis GFC Ukrainian crisis 50 200 Poland 40 180 30 160 Ukraine 20 140 10 120 0 100-10 PLN UAH 1995 1999 2003 2007 2011 2015 80 1997 2001 2005 2009 2013 2017 39
Poland reformed earlier and deeper Average of EBRD Transition Indicators Max 4.0 Poland 3.5 Ukraine 3.0 2.5 2.0 1.5 1.0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 40
Better institutions Poland has much better institutions Worldwide Governance Indicators, 2016 (CESEE countries in global ranking) Poland Ukraine Voice and Accountability Political Stability Government Effectiveness Regulatory Quality Rule of Law Control of Corruption 41
CONCLUSION 42
Why have some countries done better than others? Part of it is good luck No wars EU membership (due to geographical location) But policies also played a role 43
Good policies help Good macro-policies Macro-instability hurts growth Good micro-policies Good working markets help boost productivity/efficient allocation of resources Good institutions Strengthens incentives to invest, innovate, and not emigrate 44
IMF has helped too, both with financial support 80 IMF Lending Arrangements (Percent of average GDP 1995-2018) 70 1990-2000 2001-2010 2011-2018 60 50 40 30 20 10 0 CZE SVK POL EST LTU HRV RUS ALB UVK BLR BGR MKD LVA HUN ROU SRB BIH MDA UKR 45
...and with technical assistance. 90 80 IMF Technical Assistance (Sum of person years) 1990-2000 2001-2010 2011-2017 70 60 50 40 30 20 10 0 CZE EST SVK HUN SVN LVA LTU MNE POL ROU HRV BLR SRB BGR BIH MKD UVK ALB RUS UKR 46
Western Balkans have long history of IMF-sponsored programs IMF Lending Arrangements in Western Balkans, 1990-2018 Facility Years Amount (millions of 2018 USD) Bosnia and Herzegovina In percent of GDP EFF 2016-2020 641.2 3.6 SBA 2012-2015 942.1 5 SBA 2009-2012 1813.4 8.9 SBA 2002-2004 119.4 1.3 SBA 1998-2001 188.4 2.4 Albania EFF 2014-2017 478.5 3.4 ECF/EFF 2006-2009 15.3 0.1 ECF 2002-2005 49.4 0.8 ECF 1998-2001 89.9 2.4 ECF 1993-1996 95 4 SBA 1992-1993 46.3 3.3 EFF - Extended Fund Facility ECF - Extended Credit Facility SBA - Standby Arrangement STF - Systemic Transformation Facility PCL - Precautionary and Liquidity Line Facility Years Amount In percent (millions of of GDP 2018 USD) Serbia: SBA 2015-2018 1379.4 3.5 SBA 2011-2013 1658.3 3.2 SBA 2009-2011 4681.0 9.5 EFF 2002-2006 1147.9 5.2 SBA 2001-2002 352.6 2.1 Kosovo: SBA 2015-2017 217.5 3.2 SBA 2012-2013 153.6 2.1 SBA 2010-2012 161.9 2.4 Macedonia: PCL 2011-2013 732.9 6.1 SBA 2005-2008 96.2 1.2 SBA 2003-2004 37.5 0.6 ECF 2000-2001 19.3 0.4 EFF 2000-2001 45.0 0.8 ECF 1997-2000 111.6 1.9 SBA 1995-1996 52.1 0.7 STF 1994-1994 27.9 0.5
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