Download The `growth model`

1
The New Member States in the context of the
European financial and economic crisis:
differentiation and prospects
Michael A Landesmann
Lecture at the University of Finance and Administration, Prague,
25.11.2011
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Topics to be covered
 Features of the European economic and financial crisis
 The position of ‘Emerging Europe’: GIPSI and CEECs
 The ‘growth model’ of the CEECs pre-crisis
 The crisis and pitfalls in the ‘growth model’
 Differentiation across CEE economies
 Prospects and policy lessons
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The ‘growth model’ in the NMS prior to the crisis
•
In the last two decades the region experimented with unique
model of growth through integration into the EU:
•
Key features
- Strong institutional anchoring – a model of ‘unconditional
convergence’
- Trade and FDI integration
- Financial integration (downhill capital flows)
•
- (Labour mobility)
Made considerable sense in view of initial conditions
- Foster institutional build-up after transition
- Substitute lack of domestic saving by foreign saving
- Make use of wealth of human capital
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Pre-crisis growth model, cont’d
 Integration boosted capital inflows
- low level of physical capital offering higher return on
capital; complementary highly-educated labour force and
low level of wages
- EU accession prospect and improvement in the business
climate
- low level of domestic credit offering the potential for
substantial credit expansion
- Seemingly low exchange rate risk
 Rapid productivity growth; up-grading of production and
trade structures
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Growth – GDP at constant prices
Average annual growth rates, 2002-2008, in %
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The NMS/CEECs and the build-up to the crisis
 Features of the development experiences prior to the crisis
 Differentiation across NMS/CEECs:
- Extent of external imbalances
- Private vs. public debt build-up
- De- and re-industrialisation and the build-up of export capacity
- Differences in the sectoral allocation of FDI
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CEECs and comparisons with other emerging
economies
 CE-5: Czech Republic, Hungary, Poland, Slovakia and


Slovenia
BB-5: Bulgaria, Romania (SE-2); Estonia, Latvia, Lithuania
(B-3)
WB-6: Albania, Bosnia and Herzegovina, Croatia, Former
Yugoslav Republic of Macedonia, Montenegro and Serbia;
 EU-Coh: (Ireland), Greece, Portugal, Spain
 Asia-6: Indonesia, Korea, Malaysia, Philippines, Taiwan and

Thailand
Latam-8: Argentina, Brazil, Chile, Columbia, Ecuador,
Mexico, Peru and Uruguay
9
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Common characteristic 1:
Reliance on foreign savings
10
CA/GDP
Post-1998, Asia and
even Latin America go
into surplus
5
0
-5
Until 2007, most of
emerging Europe goes
into deficit
-10
CE-5
BB-5
WB-6
Asia-7
LATAM-9
EU-15
-15
-20
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
-25
10
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Composition of the current account of the balance of
payments, 1995-2009
Goods&Services
Income
Transfers
Current account
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
-20.0
LATAM-8 ASIA-6 MENA-6 EU-COH CE-5 SEE-2
B-3
WB-6
TR
-25.0
Note: ASIA-6 excl. Taiwan.
Source: IMF International Financial Statistics and IMF WEO October 2010.
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Composition of the current account of the balance
of payments, 1994-2010,
Goods&Services
15.0
10.0
5.0
9.0
in % of GDP
Income
Transfers
Czech Republic
Hungary
Hungary
Czech Republic
Goods&Services
6.0
Poland
Poland
Income
Current Account
Slovakia
Slovakia
Transfers
Slovenia
Slovenia
Current Account
0.0
15.0
-5.0
10.0
-10.0
Bulgaria
3.0
Romania
Estonia
Latvia
Lithuania
-15.0
5.0
-20.0
0.0
-25.0
0.0
-30.0
-3.0
Goods&Services
-5.0
Income
Transfers
Current Account
15.0
10.0
Bulgaria
-6.0
Bulgaria
Romania
Romania
Estonia
Estonia
Latvia
Latvia
Lithuania
Lithuania
-10.0
5.0
0.0
-9.0
-10.0
-20.0
-15.0
-12.0
1994
1996
1998
2000
2002
2004
2006
2008
2010
1994
1996
1998
2000
2002
2004
2006
2008
2010
1994
1996
1998
2000
2002
2004
2006
2008
2010
1994
1996
1998
2000
2002
2004
2006
2008
2010
1994
1996
1998
2000
2002
2004
2006
2008
2010
-15.0
-5.0
-20.0
-25.0
-30.0
-30.0
1994
1994
1996
1996
1998
1998
2000
2000
2002
2002
2004
2004
2006
2006
2008
2008
2010
2010
1994
1994
1996
1996
1998
1998
2000
2000
2002
2002
2004
2004
2006
2006
2008
2008
2010
2010
1994
1994
1996
1996
1998
1998
2000
2000
2002
2002
2004
2004
2006
2006
2008
2008
2010
2010
1994
1994
1996
1996
1998
1998
2000
2000
2002
2002
2004
2004
2006
2006
2008
2008
2010
2010
1994
1994
1996
1996
1998
1998
2000
2000
2002
2002
2004
2004
2006
2006
2008
2008
2010
2010
-25.0
Source: wiiw Database incorporating Eurostat statistics.
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Net private financial flows
in % of GDP, 1993-2009
LATAM-8 ASIA-6 MENA-6 EU-COH CE-5
Source: IMF Balance of Payments Statistics. ASIA-6 excl. Taiwan.
SEE-2
B-3
WB-6
TR
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Common characteristic 2:
Credit booms
1000
CE-5
BB-5
WB-5
Asia 7
LATAM-9
EU-15
Slowdown in Asia
100
Boom in emerging
Europe (from very
low levels)
2009
2008
2007
2006
2005
2004
2003
2001
2000
1999
1998
1997
1996
1995
2002
Slowdown in LatAm
10
17
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CESEE: GDP growth was well above the interest rate
before the crisis
Nominal interest rate on government debt
and nominal GDP growth (%), 2000-2010
CESEE
20.0
15.0
15.0
10.0
10.0
5.0
5.0
Nominal GDP growth
0.0
OECD (non-CESEE)
20.0
0.0
Nominal GDP growth
Nominal interest rate
Nominal interest rate
-5.0
Note: Interest rate = government interest expenditures / previous year gross debt.
2010
2008
2006
2004
2002
2000
2010
2008
2006
2004
2002
2000
-5.0
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Common characteristic:
Foreign bank ownership, 1998-2005
(assets owned by foreign banks as % of banking system assets)
80
70
60
CESEE-13
Latam-6
Asia-5
Russia
Turkey
50
40
30
20
10
0
1999
2000
2001
2002
2003
2004
2005
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Common characteristic 3:
It’s not mostly public debt
20
CE-5
BB-5
WB-3
ASIA-8
LATAM-6
EU-15
80
Debt
70
60
50
40
30
20
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
10
2010
If anything, more favourable
public debt developments
until 2008, especially in BB
countries
20
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Savings and investment in % of GDP
public saving
private saving
public investment
private investment
30
20
10
CE-5
0
-10
30
Baltics
20
10
0
-10
30
20
10
0
-10
SEE
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
NMS-5: CZ,HU,PL,SK,SI (from 2000-2007). SEE: BG (2000-2006) and RO (from 2004-2007).
Source: wiiw Annual Database incorporating national statistics, Eurostat.
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External debt: public and private (% of GDP), 2008
Intercompany lending
Other Sectors
Banks
Monetary Authorities
General Government
120.00
100.00
80.00
60.00
40.00
20.00
0.00
LATAM-8
ASIA-4
MENA-4
CE-5
SEE-2
Note: ASIA-4 excl. PH, TW. MENA-4 excl. LB, SY. B-3 excl. FYROM, BA, RS.
Source: World Bank, World Databank.
B-3
WB-3
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Gross private and public debt (% of GDP), 2009
300.0
Gross Private Debt: Other Financial Corp.
Gross Private Debt: Non-Financial Corp.
Gross Private Debt: Households and NPISH
250.0
Gross Public Debt
200.0
150.0
100.0
50.0
0.0
EE
BG
Source: Eurostat, IMF.
HU
LV
SI
LT
RO
CZ
SK
PL
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Relationship between pre-crisis credit growth and
current account balances
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Differences:
Real exchange rate developments
25
Misalignment in the
Baltics/Balkans
70
Relative price level (percent)
1995
2010
60
2010
1995
Appreciation hands-inhands with catching-up
in Central Europe
2010
2010
2010
50
1995
40
1997
CE-5
BB-5
30
20
WB-5
1995 real X-rate in
Stable
Asia post crisis
ASIA-7
LATAM-9
20
30
40
50
60
70
Relative GDP per capita at PPP (percentage points)
25
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Differences:
Composition of capital flows
NFA as percentage of GDP, 2006-2008
Direct investment
Portfolio investment
Other investment
40
20
0
-20
-40
-60
-80
-100
-120
-140
CZ
HU
PL
SK
SI
EE
LV
LT
BG
RO
HR
AL
BA
UA
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
-160
Mostly FDI in
central Europe
Mostly credit in
Baltic countries
26
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Summary of pre-crisis growth period and
differentiation amongst the CEECs
 CEE region in general had a classic pre-crisis pattern

of catching-up with ‘down-hill’ capital flows; other
emerging economy regions had changed their
patterns
A lot of differentiation amongst CEECs:
- extent of capital inflows
- nature and composition of capital inflows
- private and public debt build-up
- real exchange rate (mis)alignments
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Differentiation amongst the CEECs:
further relevant features




Prior periods of de- and re-industrialisation
Exchange rate regimes
Distortions tradable/non-tradable sectors
Structure and up-grading of export sector
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Industrial production, cumulative change
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Differences in the composition of FDI
Large part in
manufacturing,
infrastructure,
trade in central
Europe
Large part in real
estate, finance in
Baltic region
30
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Real lending NB/ECB interest rates, 2008-2010
CPI-deflated, in % p.a.
SK
8
-10
Note: For Estonia: 1-month interbank lending rate (Talibor); for Lithuania: 1-month interbank lending rate (Vilibor).
Source: Eurostat.
Jan-10
-10
LT
Oct-09
-8
Jul-09
-8
Apr-09
-6
Jan-09
-6
Jan-10
-4
Oct-09
-4
Jul-09
-2
Apr-09
-2
Jan-09
0
Oct-08
0
Jul-08
2
Apr-08
2
Jan-08
4
LV
Fixed ER
6
4
EE
Oct-08
Flexible ER
BG
Jul-08
6
RO
Jan-08
8
PL
Apr-08
HU
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Structural features: the role of exchange rate regimes
‘Fixers’ and ‘floaters’ amongst the CESEEs
CESEE float
CESEE fix
20.5
32.8
1.6
-1.6
Current account balance/GDP, 2007 (%)
-6.6
-11.8
Gross external debt, 2009 (% of GDP)
78.8
95.6
GDP-growth, 2008-2010
1.18
-1.78
FDI to finance and real estate sectors, 2007 (per cent of total FDI stock)
26.5
40.2
1.5
3.9
Credit/GDP, change from 2004 to 2008 (percentage points)
Real interest rate average, 2005-2007
Change in unemployment rate from 2007 to 2010 (percentage points)
Source: wiiw calculations.
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The crisis and its aftermath
 Sudden stops in net capital flows
 Turn-around in current accounts:
- differences in GDP declines
- sharp credit contraction
- differences between fix-ex and flex-ex countries
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GDP, 2008 Q3 = 100 (2005 Q1–2010 Q2)
110
CE-5: Czech
Republic, Hungary,
Poland, Slovakia
and Slovenia
CE-5
Baltic/Balkan-5
Asia-6
Latam-7
105
100
Baltic/Balkan-5:
Bulgaria, Estonia,
Latvia, Lithuania
and Romania
95
90
Asia-6: Indonesia,
Korea, Malaysia,
Philippines, Taiwan
and Thailand
2010Q1
2009Q1
2006Q1
2005Q1
80
2008Q1
85
2007Q1
Starting point:
severe shock
and weak
recovery
Latam-7:
Argentina, Brazil,
Chile, Columbia,
Ecuador, Mexico
and Uruguay
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Net private financial flows
in % of GDP, 1995-2010
Direct investment
Private portfolio
flows
Private portfolio
flows
Other
flows
Other
flows
Direct investment
50.0
50.0
Czech Republic
30.0
40.0
Direct investment
50.0
10.0
Hungary
Czech Republic
20.0
30.0
Czech Republic
40.0
0.0
Poland
Hungary
Czech Republic
40.0
Slovakia
Poland
Slovakia
Poland
Hungary
Slovenia
Slovenia
Slovakia
Private portfolio flows
Folie
55
Hungary
Private financial
flows
Private
financial flows
Slovenia
Other flows
Poland
Private financial flows
Slovakia
Slovenia
20.0
Bulgaria
Romania
2010
2005
Private financial flows
Lithuania
Latvia
Estonia
2000
1995
2010
2005
2000
1995
2010
Other flows
Estonia
Romania
Bulgaria0.0
2005
Private portfolio flows
50.0
20.0
2000
1995
2010
Direct investment
2005
2000
1995
10.0
2005
2000
1995
30.0
-20.0
2010
-10.0
Latvia
Lithuania
40.0
10.0
30.0
-10.0
2010
2005
2000
1995
2010
2005
2000
1995
2010
2005
2000
1995
2010
2005
2000
1995
2010
0.0
2005
-20.0
2000
0.0
10.0
1995
20.0
-10.0
Source: wiiw Database and Eurostat
2010
2010
2005
2005
2000
2000
1995
1995
2010
2010
2005
2005
2000
2000
1995
1995
2010
2010
2005
2005
2000
2000
1995
1995
2010
2010
2005
2005
2000
2000
1995
1995
2010
2010
2005
2005
-20.0
2000
2000
-20.0
1995
1995
-10.0
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Pre-crisis credit growth and GDP growth in 2009
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Quarterly GDP developments (2008Q3=100), 2005Q1-2010Q2
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Bank loans to non-financial private sector
change in % against preceding year
Source: National Bank of respective country.
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Interest rates on government bonds
Maturity 10 years
Source: International Finance Statistics (IMF), Eurostat,
National Banks and National Ministries of Finance.
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Real appreciation*, 2008-2010
EUR per NCU, PPI deflated, January 2008=100
CZ
110
HU
PL
105
105
100
100
95
95
90
90
85
85
80
80
Jan- Apr08
08
Jul08
Oct- Jan- Apr08
09
09
Jul09
SK
110
Oct- Jan- Apr09
10
10
Jan- Apr08
08
Jul08
SI
Oct- Jan- Apr08
09
09
Jul09
Oct- Jan- Apr09
10
10
*Values over 100 indicate appreciation relative to January 2008.
Source: wiiw Database incorporating national statistics.
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Real appreciation*, 2008-2010
EUR per NCU, PPI deflated, January 2008=100
AL
115
MK
RO
RS
110
110
105
105
100
100
95
95
90
90
Jan- Apr08
08
Jul08
Oct- Jan- Apr08
09
09
Jul09
BA
115
Oct- Jan- Apr09
10
10
Jan- Apr08
08
Jul08
BG
ME
Oct- Jan- Apr08
09
09
Jul09
HR
Oct- Jan- Apr09
10
10
*Values over 100 indicate appreciation relative to January 2008.
Source: wiiw Database incorporating national statistics.
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Contributions to the GDP growth rates
in percentage points *)
*) Contributions of changes in inventories are not shown.
Source: wiiw estimates incorporating national sources.
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Contributions to the GDP growth rates
in percentage points *)
*) Contributions of changes in inventories are not shown.
Source: wiiw estimates incorporating national sources.
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Development of unemployment rates (LFS)
Source: wiiw Database incorporating Eurostat statistics.
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Resurrecting growth?
New constraints following the crisis
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Constraints following the crisis:
Internal factors:
 ‘Deleveraging’ of private sector, affects private sector
spending;
 Public debt has gone up: less fiscal space;
 Weak and cautious banking sector;
 Differentiated processes of real exchange rate adjustments
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Constraints following the crisis:
External factors:
 Volatile risk assessment of the region (debt overhang);
 Difficult external (and internal) financing;
 Contagion effects of banking crisis in Western Europe:
consolidation process of banks’ balance sheets
 Reduced growth expectations in the most important export
markets;
 Crisis in the eurozone: new OCA debate; unfinished
governance structure leads to wait-and-see w.r.t. EMU
membership
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Principal policy lessons:
 In national and EU policy frameworks: neglect of private sector debt
build-up relative to public sector
 Fixed exchange rate regimes bear high risks; much stronger emphasis
on OCA criteria on the way to EMU and after
 Financial market regulation severely underdeveloped; specific issue of
cross-border banking
 Use of taxation or insurance to prevent bubbles in financial markets
(sand in the wheels taxes on particular types of investments)
 Use scope for counter-cyclical policy, but beware of debt sustainability
and restructure public finance in growth-enhancing manner
 Direct policies towards tradable sector: structural policies, avoid
distorting macro-policies; use EU funds
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Unresolved issues:
 Will Euro-zone deal with governance issues?
 Will there be recapitalisation of banks?
 What would be repercussions of a break-up of the
Euro-zone?
 New timetables – if at all – for further Enlargements
and EMU memberships
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