Download Medium-Term Challenge

Eastern Europe and
Central Asia:
Economic Outlook and
Challenges Ahead
Klaus Rohland
Country Director
ISTANBUL CHAMBER OF INDUSTRY - 6th INDUSTY
CONGRESS
November 26- 27, 2007
Main Messages
• Strong growth, supported by:
o
o
Domestic factors (policy reforms: macro, structural)
External factors (Trade, FDI)
• Short-term challenges:
o Macro vulnerabilities
o Financial sector vulnerabilities
• Medium-term challenges:
o Boost productivity to maintain competitiveness, spur
innovation and sustain economic growth
o Unfinished structural reform agenda:
o Stronger investment climate; export sophistication
(higher added value products); deeper financial
markets
2
I. ECONOMIC OUTLOOK
3
Economic Expansion Continues…
Real GDP growth
(2001=100)
170
160
150
140
130
120
110
100
2001
2002
EU-10
SEE
2003
CIS MID
2004
CIS LOW
Turkey
2005
2006
Russian Federation
GDP Per Capita (Constant 2000 USD) 2001-2006
7000
6000
2001
2004
2006
5000
4000
3000
2000
1000
4
0
EU-10
SEE
Middle Incom e CIS
Low Incom e CIS
Rus s ia
Turkey
Poverty Has Fallen in most countries
Poverty Rate, $PPP 2.15 per day
(Fraction of Individuals Below the Poverty Line)
60
2001 or earliest available year
latest available year
50
40
30
20
10
0
EU-10
SEE
Middle Income CIS
Low Income CIS
Russia
Turkey
5
Strong Productivity Growth is Driving the
Economic Expansion…
Sources of output per capita growth in ECA (1999-2004)
10
(7.3)
8
Growth (%)
(6.5)
(4.0)
6
(2.6)
(3.1)
4
(3.7)
(1.4)
2
0
-2
(-2.8)
-4
(-3.2)
-6
(-5.9)
-8
1993-1998 1999-2004 1990-1998 1999-2004 1993-1998 1999-2004 1993-1998 1999-2004 1996-1998 1999-2004
EU-10
Turkey
CIS-Mid
CIS-Low
SEE
Output per Worker
Employment to Working Population
Working population to Total Population
Output per Capita Growth in Brackets
Labor Productivity
Growth drives per capita
output growth in most
countries
6
Output Growth Was Supported by
Domestic Policies…
Fiscal Balance (Pct of GDP) 2001-2007
8
6
Prudent Fiscal
Policies Helped
Improving Fiscal
Balances
4
2
0
EU-10
SEE
Middle Income CIS
Low Income CIS
Russia
Turkey
2001
2004
2007
-2
-4
-6
-8
-10
-18
7
… And Progress in Structural Reforms
Banking reform
Enterprises
4.0
3.5
2001
2001
3.0
2004
2004
2007
3.5
2007
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
EU-10
SEE
CIS Mid
CIS Low
EU-10
Russia
SEE
CIS Mid
CIS Low
Russia
Overall infrastructure reform
Trade and Foreign Exchange
4.5
3.5
2001 2004 2007
2001
4.0
2004
2007
3.0
3.5
2.5
3.0
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
EU-10
SEE
CIS Mid
CIS Low
Russia
EU-10
SEE
CIS Mid
CIS Low
Russia
Source: EBRD Transition reports
Note: The measurement scale for the indicators ranges from 1 to 4+, where 1 represents little or no change from a rigid centrally planned economy and 4+ represents the standards of an
industrialized market economy. The infrastructure reform ratings are calculated as the average of five infrastructure reform indicators covering electric power, railways, roads,
telecommunications, water and waste water. The enterprise ratings are calculated as the average of large and small scale privatization, and enterprise restructuring. The market and trade
ratings are calculated as the average of price liberalization, trade&forex system and competition policy. The financial institutions ratings are calculated as the average of banking reform & 8
interest rate liberalization and securities markets & non-bank financial institutions.
External Factors Also Contributed to the
Economic Expansion
Trade and FDI flows increased across the
region, contributing to the economic
expansion
Total Trade (as % of GDP PPP)
FDI Inflow (in % of GDP PPP)
50
3
1994-1998
45
1994-1998
1999-2005
1999-2005
2.5
40
35
% of GDP PPP
% of GDP PPP
2
30
25
20
1.5
1
15
10
0.5
5
0
0
EU-10
Turkey
SEE
CIS-middle
CIS-low
EU-10
Turkey
SEE
CIS-middle
CIS-low
Source: Bank staff calculations; UN-Comtrade, 2007
9
Overall, Much Progress Achieved
But Further Reform Efforts are Needed
II. CHALLENGES AHEAD
10
Short-term Challenges:
Macro Vulnerabilities Remain…
Large current account deficits (except in resource-rich countries), inflationary
pressures and real exchange rate appreciation are also an issue of concern…
Real Exchange Rates
Current Account Balance (Pct of GDP) 2001-2007
Real Exchange Rates: June 2005 - May 2007
15
2001
2004
2007
180
10
170
5
0
EU-10
SEE
Middle Income CIS
Low Income CIS
Russia
Turkey
2000 average =100*
160
150
140
130
120
110
100
90
-10
-15
Ukraine
Romania
Turkey
Apr-07
May-07
Mar-07
Jan-07
Feb-07
Dec-06
Oct-06
Nov-06
Sep-06
Jul-06
Aug-06
Jun-06
Apr-06
May-06
Mar-06
Jan-06
Feb-06
Dec-05
Oct-05
Nov-05
Sep-05
Jul-05
Aug-05
80
Jun-05
-5
Poland
Russian Federation
Kazakhstan
Source: IFS, Central Bank of Turkey, National Bank of Kazakhstan
Notes: *For Kazakstan, December 2000=100
11
Short-term Challenges:
Financial Sector Vulnerabilities
Rapid Credit Growth has led to Higher Exposure to Financial Risks: (risk
(maturities shortened, portfolio risks increased, risk premia and interest rates rose)
calling for stronger financial supervision
Domestic Credit to the Private Sector (Pct of GDP), 2001-2006
60
2001
2004
2006
50
40
30
20
10
0
EU-10
SEE
Middle Income CIS
Low Income CIS
Russia
Turkey
12
Medium-Term Challenge:
Boosting Productivity Growth
Even in the EU Accession countries income per capita is less than half the EU-15
average. Productivity Growth can accelerate income convergence and improve
competitiveness…..
12,000
50%
11,000
45%
10,000
40%
9,000
35%
8,000
7,000
30%
6,000
25%
5,000
20%
4,000
Ratio to EU-15
GDP per capita, PPP (current intl $)
Income per capita, 1999-2005
15%
3,000
10%
2,000
5%
1,000
0
0%
Low-CIS
Mid-CIS
SEE
Turkey
EU-10
13
Boosting Productivity Growth Calls for
Further Progress on Structural Reforms
STRONGER INVESTMENT CLIMATE:
Reduce barriers to firm entry, exit and expansion (reducing regulatory
burden, reforming tax systems, and increasing labor market flexibility)
Doing business, 2007
100
Share of Medium and High Tech Products in Total Exports (%)
40
90
80
EU-10
SEE
CIS MID
CIS LOW
Turkey
Russian Federation
EU-15
70
60
50
40
30
35
30
25
20
15
20
10
10
0
Procedures
(number)
Time (days) Nonwage labor Firing costs
cost (% of
(weeks of
salary)
wages)
Total tax rate
(% profit)
Time (years)
5
0
EU-10
Starting business
Employing workers
Closing
business
Turkey
SEE
1995-1998
CIS-mid
CIS-low
1999-2005
Higher export sophistication (higher value added products)
and deeper financial markets are needed to spur innovation
and boost productivity growth
14
Conclusions
• Strong economic growth, driven by domestic
reforms and greater integration into global
markets
• But further progress in structural reforms is
needed to boost productivity growth, maintain
competitiveness and spur innovation
15
Thank you for your attention
16