Download Nominal vs. Real Convergence

European Policy Committee
29th October 2007
REAL CONVERGENCE
Jiří Palán
Ministry of Finance of the Czech Republic
Outline
• Trade and catching up
• FDI and catching-up
• Recent convergence pace
• Alternative measures of real convergence
• Nominal vs. real convergence
• Macroeconomic sustainability
• Convergence drivers, need for structural reforms
• Summary
Trade and Catching up
• High weight of trade in GDP, dynamic development
• Strong links between trade and FDI
Exports of Goods
80
% GDP
70
SK
60
CZ
EE
HU
50
SI
40
LV
30
LT
EU15
20
PL
Source: Eurostat
10
1995
1996
1997
PT
1998
1999
2000
2001
2002
2003
2004
2005
2006
Exports and Imports in percent of GDP (2000 - 2006)
FDI and Catching-up
Trade and FDI inflows in percentage of GDP
(2000 - 2006)
• High FDI
inflows support
trade, growth
and convergence
180
MT
y = 10,483x + 46,234
R2 = 0,6103
160
IE
EE
SK
140
HU
BE
CZ
NL
120
SI
BG
LT
LV
100
• CZ: ¼ of gross
value added
(GDP) creation,
60% of gross
value added
growth due FDI
dominated
manufacturing
CY
AT
SE
80
FI
DE
60
IT
FR
DK
RO
PL
PT
ES
I
T
UK
Source: Eurostat
40
0
2
4
6
8
10
FDI inflows in percent of GDP (2000 - 2006)
12
Recent Pace of Convergence
• Convergence is a prevailing process within the EU
GDP at current prices: Percentage of EU27 (based on PPS per inhabitant)
100
%
90
80
70
60
50
40
30
20
10
0
BG
RO
PL
LV
LT
1997
SK
HU
2000
EE
PT
2003
MT
2006
CZ
GR
SI
CY
Source: Eurostat
Recent Pace of Convergence
• β convergence
• Conditional (macro stability, structural reforms)
GDP at current prices: (EU 27 = 100%)
100
%
SI
90
80
PT
70
CZ
HU
60
SK
LT
PL
50
LV
EE
40
Source: Eurostat
30
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Alternative Measures of Real Convergence
• Real Gross Domestic Income (RGDI), Real Gross National Income (RGNI),
• GDP adjusted for terms of trade and income balance
RGDP, RGDI, RGNI Average Growth Rates 2000 - 2006 (in percent per capita)
RGDP
RGDI
RGNI
GNI/GDP 2006
EU27
1,6
1,6
EU15
1,3
1,3
1,5
100,4
CZ
4,2
4,7
3,9
94,6
HU
4,5
4,3
2,8
92,8
PL
3,7
4,0
3,4
96,8
SI
3,6
3,9
3,5
98,9
SK
5,2
3,5
2,6
97,0
Source: Ministry of Finance of the Czech Republic
Nominal vs. Real Convergence
Price level of GDP (EU27=100; 2006)
160
y = 0,8398x + 8,2897
R2 = 0,8947
140
DK
120
SE
FI
UK
BE
FR
IT
100
PT
80
IE
DE
NL
AT
ES
GR
SI
60
PL
RO
LT
EE
HU
SK
CZ
40
BG
20
20
40
60
80
100
GDP in PPP (EU27=100; 2006)
Source: Eurostat
120
140
160
Nominal vs. Real Convergence – Case of CZ
Price level of GDP (EA12=100;1993 - 2006)
75
70
65
2007
60
55
50
45
40
35
1993
30
30
35
40
45
50
55
60
GDP in PPP (EA12=100; 1993 - 2006)
Source: Ministry of Finance of the Czech Republic
65
70
75
Nominal vs. Real Convergence
Relation between GDP (in PPP) and REER
• Non linear
• Competitiveness development
Two channels of CPL adjustment
• CPLt = χt+ πt
CPL = comparative price level, χ = FX movement, π = level of
inflation
• FX fixers – convergence channelled through higher inflation
• Inflation targeters - convergence channelled through inflation
and nominal FX appreciation
Different challenges for macroeconomic policies
• FX fixers (BG, EE, LT, LV) – CA deficits
• Inflation targeters (CZ, HU, PL, SK, RO) – fiscal deficits
Macroeconomic sustainability
• Small open economies, dispersion of CA has trend up
• Use of foreign savings for economic development
Current Account Positions and FDI Inflows (Percent of GDP)
LV
BG
EE
LT
RO
PT
●
●
●
●
SK
HU
CY
CZ
SI
PL
2
0
-2
-4
-6
-8
●
●
●●
●
●
● ●
-10
●
●
●
●
●
●
●
●
●
●
●
●
-12
●
●
● ●
●
●
●
-14
-16
●
●
-18
-20
Source: IMF - World Economic Outlook; Eurostat
-22
1998
2002
2006
Macroeconomic Sustainability
• CA structure matters for double deficit assessment
• Composition of deficit (transfers vs. investment)
Government Deficit (Percent of GDP)
HU
PL
PT
SK
CZ
GR
MT
RO
CY
SI
LT
LV
ES
BG
EE
4,0
2,0
0,0
-2,0
-4,0
-6,0
-8,0
1998
-10,0
Source: Eurostat
2002
2006
Macroeconomic sustainability
• Small open economies, high weight of trade, export oriented FDI
• Structure of CA deficit (life cycle of FDI)
Balance of Trade in Goods and Services, Income Balance (Billions €)
1998
1999
2000
2001
2002
2003
2004
2005
2006
BT
- 2,3
- 1,8
- 3,4
- 3,4
- 2,3
- 2,2
- 0,8
1,3
1,6
IB
- 1,0
- 1,3
- 1,5
- 2,5
- 3,8
- 3,8
- 5,0
- 5,2
- 6,5
BT
- 2,1
- 2,0
- 3,2
- 2,5
- 2,2
- 2,9
- 2,4
- 1,5
- 0,4
IB
- 1,7
- 2,7
- 2,8
- 3,2
- 3,8
- 3,7
- 4,9
- 5,5
- 5,8
BT
- 2,1
- 1,0
- 1,0
- 2,4
- 2,3
- 0,6
- 1,2
- 1,9
- 2,5
IB
- 0,1
- 0,3
- 0,4
- 0,3
- 0,5
- 0,1
- 0,3
- 1,6
- 1,4
CZ
HU
SK
Source: Eurostat
Convergence Drivers, Need for Structural
Reforms
Main convergence drivers
• TFP as main growth driver
• Capital accumulation precedes
• Labour utilisation increases only recently
Challenges for structural reforms
• Competition enhancement especially in non traded goods and services
• Prudential policies to avoid assets prices boom and bust
• Creation of knowledge based economy (education, R&D, innovation)
• Improvement of business environment
• Infrastructure investment
Successful catch-up needs flexible economy
Summary
• Conclusions mostly relevant for the Czech economy,
• Trade (often based on FDI) is fostering catch-up,
• Convergence is prevailing among EU NMS,
• RGDI and RGNI are important alternative measures for small open
economies with high weight of trade and FDI in their GDP,
• Relation between nominal and real convergence is often non linear,
• Challenges for macroeconomic policies are different among EU NMS,
• Mix of structural policies is often very similar.