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Transcript of 1 "Prospects of Economic Integration: Are the New Member States Ready to Catch-Up in the Wider EU?"...
1
"Prospects of Economic Integration:
Are the New Member States Ready to Catch-Up in the Wider EU?"
Patrick Lenain, OECD([email protected])
Alexandra Janovskaia, OECD([email protected])
The Cicero FoundationParis, 14 October 2004
The views expressed in this presentation are those of the authors and should not be construed as those of the OECD.
2
Three issues
1. Has the EU achieved its goal of cohesion?
2. How fast will the “New Member States” catch-up?
3. What prospects for EU Eastern neighbours?
3
First issue
Has the EU achieved its goal of cohesion?
4
The EU goal of cohesion
“The Community shall aim at reducing disparities
between the levels of development of the various
regions and the backwardness of the least favoured
regions…” (Article 158 of the Treaty).
5
What Has EU to Offer:Acquis Communautaire
Advantages Free trade of goods Free trade in services Free movement of people Free movement of capital Company legislation Structural funds
6
Measuring cohesion with
“σ-convergence”
Reduced cross-country dispersion
of income-per-capita
measured by standard deviation.
7
Cohesion countries have “σ-converged” …
40.0
60.0
80.0
100.0
120.0
140.0
1980 GDP per capita (PPP), EU15 =100
+ 25% of EU average
- 25% of EU average
Standard deviation = 19.6
8
… but slowly2002 GDP per capita (PPP), EU15=100
Standard deviation = 17.2
40.0
60.0
80.0
100.0
120.0
140.0
- 25% of EU average
+ 25% of EU average
9
Measuring cohesion with
“β-convergence”
Negative relation between growth rate
and level of GDP per capita
10
Countries have slowly β-converged towards the leader
UK
Sweden
SpainPortugal
Netherlands
Italy
Ireland
Greece
Germany
France
Finland
DanemarkBelgium
Austria
y = -0.0015x + 0.0443
R2 = 0.3628
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
9 11 13 15 17 19 21
Countries catching-up to leader
Countries diverging from leader
GDP per capita, average growth
1980-2003
GDP per capita in '000 dollars (PPP95) in 1980
11
EU membership has helped
Cohesion countries: Ireland, Greece, Portugal & Spain. Control group: Antigua, Argentina, Barbados, Cyprus, Israel, Korea, Malta, Macao & Singapore (GDP per capita between 5000$ and 15000$ in 1986).
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Cohesion countries Control group EU
Average GDP/Capita growth rate 1986-2002
12
But other “conditions” also matter (Number of years to close income gap with EU from 2002
based on average growth rates of GDP/capita during 1993-2003)
Average growth rates calculated using HP-smoothed time series.
Years
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Spain Greece Portugal
13
In summary
EU countries are converging slowly
Membership in the EU helps to catch-up
But convergence is not automatic in the EU: other forces (institutions / policies) are at work.
14
How fast will the “New Member States” catch-up?
Second issue
15
The new member states have income per capita of 40% to 60% of EU
0 10 20 30 40 50 60 70 80 90 100
Latvia
Poland
Lithuania
Estonia
Slovakia
Hungary
Czech Republic
Slovenia
Portugal
Greece
Spain
per cent
16
Convergence is a distant prospect at present pace Number of years to converge from 2003*
Based on average growth during 1995-2003.
80 years 97 years
0
5
10
15
20
25
30
35
40
45
50
Years
17
GDP per capita in % of EU
70.0 80.0 90.0
Annual growth of GDP/capita
(%)
3.0 37 23 11
4.0 18 11 5
5.0 12 8 4
6.0 9 6 3
Faster growth rate would make a difference
Assuming annual growth of 2% in EU
18
Gaps in living standards reflecttwo factors
POP
EMPx
EMP
GDP
POP
GDP
GDP per capita can be decomposed between:
Labour productivity Labour utilisation
19
Labour productivity
Ireland
EU 15
Spain
Slovenia
Greece
Portugal
Czech R.
Hungary
Slovak R.
Estonia
Lithuania
Poland
Latvia
Russia
Bulgaria
Romania
Turkey
Ukraine
-100.0 -50.0 0.0 50.0
GDP per employed (PPP) in 2003, deviation from
EU15
Ireland
EU 15
Spain
Slovenia
Greece
Portugal
Czech R.
Hungary
Slovak R.
Estonia
Lithuania
Poland
Latvia
Russia
Bulgaria
Romania
Turkey
Ukraine
-100.0 -50.0 0.0 50.0
Labour utilisation
Share of employment in total population, 2003,
deviation from EU15
20
Convergence needs both labour productivity and utilisation
EU-15
Estonia
Latvia
Lithania
Slovenia
Bulgaria
Romania
Turkey
Czech R.
Hungary
Poland
Slovakia
Ireland (86)
Ireland (03)
Belgium
Finland
France
Germany
Greece
Italy
Netherlands
Portugal
Spain
SwedenUK
60
70
80
90
100
110
30 50 70 90 110 130
Labour productiv ity, 2003
Labour utilisation, 2003
Countries that need to increase both labour
productivity and utilisation
EU15=100
21
How does labour productivity catch up?
Capital deepening (increase in the ratio of capital to labour)
Diffusion of technology through international spillover, education and R&D spending.
Reallocation of labour towards high-productivity sectors
22
Most new member states invest strongly
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
24.0%
26.0%
28.0%
30.0%
GFCF in % of GDP, 2003
23
Labour productivity benefits from international integration, including FDI
Hungary
Poland
Ukraine
Russian Federation
Turkey
RomaniaBulgariaSlovenia
Lithuania
LatviaEstonia
0
1
2
3
4
5
6
7
8
0 1 2 3 4 5 6 7
FDI Inflows as % of GDP
La
bo
ur
pro
du
cit
ivty
gro
wth
1995-2003 average, regression without outliers (CZE and SVK)
24
FDI has helped technology spillovers
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
Share of high medium-tech manufactures in total value-added
25
0
5
10
15
20
25
30
35
Czech Republic Hungary Poland Slovak Republic
Labour productivity growth
Intra-industry
Shift effect
Growth could benefit from faster reallocation of labour towards high-
productivity industries
Source and methodology: See Lenain et Rawdonowicz (2004)
26
How does labour utilisation increase?
Higher participation rates (incentives for older workers to work rather than retire, incentives for female workers to enter the labour market).
Higher labour demand (lower tax wedge, easier Employment Protection Legislation).
Higher regional mobility (housing-rental market deregulation).
Removal of disincentives to join “official economy”.
27
Participation is particularly low among older workers
Labour-force participation rate of workers age 55-64
0
10
20
30
40
50
60
Estonia Lithuania Latvia Czech Republic Poland Hungary Slovak Republic Slovenia
In % of working age population
EU-15
28
Without higher labour-force participation, population ageing will prevent convergence
Source: Burniaux et al. (2004)
Projected decline in labour force during…
-40-30-20-10
010
Czech Rep. Hungary Poland SlovakiaOECD
average
2000-25
2025-50
29
Labour-market policies hinders participationSome examples:
Poland– Minimum wage high relative to average wage– Tax wedge among highest in OECD – High share of persons with disability pension
Slovak Republic– Employment Protection Legislation very strict (being eased)– Low regional mobility
Czech Republic– Employment Protection Legislation very strict (being eased)– High tax wedge on low-skilled labour– Regulations impede functioning of housing market
30
In sum… New member states have started to converge, but at different
speeds. Baltic states & Slovenia have better convergence prospects than Central Europe.
In most (but not all) countries, labour productivity has risen fast thanks to, inter alia, strong investment, FDI and technology spill-overs.
Weak labour utilisation impedes convergence, especially in Central Europe. Low participation of older workers and negative demographic trends will hinder convergence, unless labour markets are reformed.
31
What prospects at the “new” EU Eastern borders?
A few issues for discussion
Third issue
32
Growth “premium” from being an accession country
Estonia
Latvia
Lithuania
Slovenia
Bulgaria
Romania
Turkey
Russia
Ukraine Czech Republic
HungaryPoland
Slovak Republic
0
1
2
3
4
5
6
7
8
0 2 4 6 8 10 12 14
GDP per capita, in thousand USD, in constant 1995 prices and constant PPPs
Annual GDP per capita growth,
1995-2003, in per cent
New member states
Eastern neighbours
33
Will candidate countries benefit from accession boom?
0
1
2
3
4
5
6
1 2 3 4 5 6 7 8 9
Years after recovery
Annual GDP growth
New EU members (Since 1995)
Bulgaria (Since 1998)
Romania (Since 2000)
Real GDP
34
Two Turkish challenges: how to raise labour utilisation and improve resilience?
-10
-8
-6
-4
-2
0
2
4
6
8
10
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Change in labour utilisation (right scale)
Real GDP growth
Labour utilisation relative to EU-15 (left scale)
0102030405060708090
100
1996 1997 1998 1999 2000 2001 2002 2003
-5
-4
-3
-2
-1
0
1
2
35
What economic strategy to sustain growth in non-candidate Eastern neighbours?
-15
-10
-5
0
5
10
15
1996 1997 1998 1999 2000 2001 2002 2003
Annual real GDP growth Russia
Ukraine
36
Thank you for your attention !