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Division of Research & Forecasting

Structural Reform challenges in SEE countries

BoG – Oxford Uni Conference on: “Achieving sustainable growth in South East Europe: Macroeconomic policies,

structural reforms, socio-political support, and a sound financial system”

Dr Tassos AnastasatosSenior Economist

Athens, February 11, 2011

Dr Tassos Anastasatos Division of Research & Forecasting

I. A definition of structural reforms

Structural reforms: Policy measures that reduce or remove impediments to the efficient allocation of resources in order to promote long-term growth

Definition includes: competitiveness enhancing measures, fighting of oligopolistic features in product and labour markets, restructurings of organisations to increase their efficiency.

Structural reforms aimed at promoting domestic financial development and trade liberalization, can be important components of a strategy to invigorate economic growth (McKinnon1973, Krueger 1997, Henry 2007)

“Structural reforms are a more elusive concept to measure than standard macroeconomic policies, where gauges—interest rates, liquidity measures, or the budgetary balance—are typically readily available for most countries” (IMF, 2008)


I. Structural reforms and the SEE region

Structural reforms are in the narrative of the SEE region for a long time, given the transition from a centrally planned economy to a market economy.

Objectives of structural reforms pertaining to SEE countries: Transition to a market economy, integration into the world economy, diversification of the production and export bases, development of the financial sector, promotion of “high quality” growth, quality of institutions (budgetary and social security, the Central Bank and financial regulation), governance issues (IMF, 2001)

SEE had gained experience in adjusting to structural changes; this helped to escape the crisis relatively unscathed and can prove valuable in the future.



Grouping of countries with dissimilar characteristics and structure of their economies, and thus with different needs, is inappropriate but there are features common among them.

Pre-crisis growth model: rapid growth (avg 7.4%) based on domestic demand, fuelled by capital inflows (optimism about future prospects) and consequently rapid credit growth, expansion of consumption and real estate, overheating, real appreciation, external deficits / debt; policy making centered around the objective of integration with the EU and convergence, EMU goal provided anchor for policies.

Present situation: inflows slowed down, below potential GDP growth, uneven speed of economic recovery across economies, supply-side inflationary risks, unemployment remaining high but with stabilizing labour market conditions, personal indebtedness & lower incomes, banks’ consolidation, fiscal consolidation efforts but most countries in the region in a much better shape compared to their EMU peers.

Ensuring access to the financial markets and promoting medium-term macroeconomic stability will necessitate step up of fiscal consolidation efforts.

In an environment of fiscal consolidation, slow recovery of price competitiveness, bank lending and risk perceptions, structural reforms are even more critical for increasing potential output, which was harmed by the crisis.



•Along with the recovery, imbalances are returning too: current account deficits are on the upside, gross financing requirement is a concern in some “IMF” countries and exchange rates face jitters.• This should strengthen the resolve of SEE countries to precipitate what would be unavoidable and desirable anyway, namely a switch to an export-driven model of growth. Convergence: less quick, more sustainable

•All structural reforms should be judged on the criterion of how they improve export performance.• First structural reform is fiscal consolidation: crowding-in of exports / investment, reallocation of expenditure away from counter-productive public consumption .

•Short-term: adjustment of wages to productivity (e.g. better bargaining systems, reduce oligopolising of product markets and wage rigidities) - especially if pegging to avoid real appreciation• Medium-term: motivate production switch from non-tradeables to tradeables, especially in countries where FDI was focused on real estate and financial services

•support credit for SMEs, control mortgages, land to firms, educating entrepreneurs, reducing bureaucratic burden on entrepreneurship, some tax exempts (but no subsidies or protectionism)



• Longer-term: sustainability can only be achieved if SEE countries move away from the current medium tech model of production. The increase in the standards of living means that the region will not be able to compete in terms of low cost indefinitely.• Instead, it should pursue in a coordinated way to switch to specializations that embody a higher technological content and hence a higher value added, in other words enhance its quality competitiveness.

•Value of exports has increased but they mostly concern parts production of medium-high technology

•This is no easy task and it will require large investments in education, training, machinery and R&D. • However, there are more immediate measures that can help in this direction and which bear little or no fiscal cost. •Many countries in the region suffer from an anti-productive public administration that deters FDI by increasing the time, compliance and tax burden.



•Rodrik and Subramanian (2003): quality of institutions is the most important factor in in increasing TFP (50% of growth).• Measures: enhancing the rule of law, fighting bureaucracy in launching and reallocating entrepreneurial activity, protecting property rights, simplifying legislation and making it more transparent, fighting corruption and multiple local and peripheral jurisdictions in business-related policymaking (veto points). •These reforms especially benefit the more efficient (and thus more cost-alert) high-tech sectors which are also more desirable as they can produce knowledge spillovers to local businesses and spur the quality transformation. • While those measures also reduce fiscal costs, their implementation is a politically complicated process: institutional provisions necessary to facilitate the adherence of policymaking to the longer run, beyond the political cycle.

• Regional policies will be needed too to protect cohesion.•Addressing ageing (problem worse than Western Europe) also preserves competitiveness as social security contributions weigh heavily at production cost: policies to increase participation in the labor force, human capital-enhancing policies• ECB (2007): countries that follow quality improvements as a strategy to converge. experience RER appreciations. Therefore, applying for monetary union prematurely in not advised.


0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

ALBANIA BOSNIA & HERZEGOVINA BULGARIACROATIA FYROM ROMANIASERBIA

II. Structural reforms in retrospect 1989-2011

Source: EBRD Transition reports Scale 0 to 4, 0=low progress 4=high progress

• EBRD EBRD Transition indicator: survey of managers evaluating countries in the areas of large & small scale privatization, enterprise restructuring, price liberalization, trade, competition, banking & interest rate liberalization, securities markets, overall infrastructure• Countries have made great progress since 1989. However, the rate of change has slowed down in recent years.

Transition Indicators average score per year


III. Structural reforms in times of international financial crisis-the global view

Share of economies with at least one reform

0

10

20

30

40

50

60

70

80

90

100

East Europe andCentral Asia

OECD HighIncome

Latin Americaand Carribean

East Asia andPacific

Middle East andNorth Africa

2006 2007 2008 2009 2010 2011

Source: World Bank Doing Business 2007 and 2011 Reports, processed data

According to Doing Business reports, 100% of SEE countries had at least one reform during 2006-2011 with the exception of Romania and Serbia during 2008, and of Turkey during 2010.


COUNTRYAmong Top 10

Reformers

Albania 2008

Bosnia & Herzegovina

Bulgaria 2007

Croatia 2006 , 2007

FYROM 2007 , 2009

Romania 2005 , 2006

Serbia 2005

Turkey

Source: WBDoing Business Reports

World Bank’s Ease of Doing Business

III. WB Top-ten reformers in 2004-2010

• Individual SEE countries scored well in the boom years 2004-2010


0

0.5

1

1.5

2

2.5

3

Georg

iaM

ozam

biq

ue

Mexic

oM

adagascar

Indonesia

Fra

nce

Bhuta

nTanzania

Syri

an A

rab R

epublic

Guate

mala

Colo

mbia

Vie

tnam

Lao P

DR

Saudi A

rabia

Mauri

tius

Sudan

Rw

anda

Hondura

sR

om

ania

Costa

Ric

aPola

nd

Congo, D

em

. R

ep.

Neth

erl

ands

Macedonia

, FYR

Uzbekis

tan

Icela

nd

Hait

iH

ong K

ong S

AR

,Port

ugal

Djibouti

Eth

iopia

Cam

ero

on

Bela

rus

El Salv

ador

Burk

ina F

aso

Guin

ea-B

issau

Spain

Pakis

tan

Sw

itzerl

and

Guyana

Mold

ova

Austr

iaM

ala

wi

Unit

ed A

rab

Slo

vak R

epublic

Yem

en, R

ep.

Congo, R

ep.

West

Bank a

nd G

aza

Panam

aA

lbania

Guin

ea

Bangla

desh

Chad

Mali

Afg

hanis

tan

Esto

nia

Nam

ibia

Denm

ark

Ira

n, Isla

mic

Rep.

Fiji

Eri

trea

Moro

cco

Tri

nid

ad a

nd T

obago

Hungary

Philip

pin

es

Taiw

an, Chin

aSw

aziland

Solo

mon I

sla

nds

St.

Kit

ts a

nd N

evis

Isra

el

St.

Lucia

Sam

oa

Anti

gua a

nd B

arb

uda

Mars

hall I

sla

nds

Lit

huania

Com

oro

sIra

qO

man

Gabon

Papua N

ew

Guin

ea

Japan

Pala

uTogo

III. Cumulative change before the crisis

Croatia

Bulgaria

Romania

FYROM

Bosnia

Serbia Albania Turkey

Doing Business Change Score (2005-2007)

Source: Doing Business 2006 and 2008 Reports, processed data

• How individual countries rank compared to all other countries in terms of change in business regulation scores.


0

0.5

1

1.5

2

2.5

Rw

anda

Kyrg

yz

Republic

Ukra

ine

Georg

iaC

olo

mbia

Mace

donia

, FY

RS

lovenia

Tunis

iaM

exic

oEgypt,

Ara

b R

ep.

Sw

azi

land

Pola

nd

Arm

enia

Peru

Zam

bia

Eth

iopia

Angola

Uganda

Kaza

khst

an

Saudi A

rabia

Taiw

an,

Chin

aU

nited A

rab E

mir

ate

sG

uate

mala

Spain

Lith

uania

Sie

rra L

eone

Alg

eri

aH

ong K

ong S

AR

, C

hin

aPapua N

ew

Guin

ea

Ghana

Hondura

sC

ost

a R

ica

Chin

aG

renada

Cam

ero

on

Mold

ova

Yem

en,

Rep.

Afg

hanis

tan

Sw

eden

Bulg

ari

aFr

ance

Benin

Mars

hall

Isla

nds

Neth

erl

ands

Om

an

Guyana

Bru

nei D

aru

ssala

mN

iger

Jam

aic

aC

ôte

d'I

voir

eS

ingapore

Tri

nid

ad a

nd T

obago

Italy

Turk

ey

West

Bank a

nd G

aza

Irela

nd

Finla

nd

Gam

bia

, th

eS

enegal

Nig

eri

aC

entr

al A

fric

an R

epublic

St.

Kitts

and N

evis

Slo

vak R

epublic

Lebanon

Uru

guay

Seych

elle

sS

t. L

uci

aEquato

rial G

uin

ea

Kenya

Chile

Guin

ea

Luxem

bourg

Sw

itze

rland

Nam

ibia

Baham

as,

the

Venezu

ela

, R

.B.

Germ

any

São T

om

é a

nd P

rinci

pe

Aust

ria

Rom

ania

Bhuta

nK

uw

ait

Thaila

nd

Serbia

Turkey

Albania

FYROM

Bosnia

Croatia

BulgariaRomania

Doing Business Change Score (2008-2010)

FYROM moves up the pack, Albania and Turkey maintain their relative position, others fall behind

III. Cumulative change during the crisis



IV.2 Mixed picture in the Ease of Doing Business rankings 2007-2010

Rank 2007 among 178

Rank 2010among 183

Albania 136 81

Bosnia & Herzegovina 105 110

Bulgaria 46 51

Croatia 97 89

FYROM 75 36

Romania 48 54

Serbia 86 90

Turkey 57 60



IV.2 Areas of improvement in Ease of Doing Business

Change in scores in Reform areas for the

period 2007-2010

AGGREGATE 96 82 60 84 93 40 54 57

Starting a Business 89 31 84 64 86 38 79 28

Construction Permits 50 94 2 96 83 71 1 57

Registering Property 48 97 7 78 82 73 79 48

Getting Credit 94 80 77 70 97 82 93 76

Protecting Investors 99 71 69 65 93 72 81 89

Paying Taxes 59 4 46 85 78 2 51 54

Trading Across Borders 72 46 15 58 86 20 22 28

Enforcing Contracts 57 9 88 47 93 86 11 89

Closing a Business 39 21 16 15 8 96 98 69

Alb

an

ia B

osn

ia

Bu

lgari

a

Cro

ati

a

FY

RO

M

Rom

an

ia

Serb

ia

Tu

rkey


Performance indices normalized to account for the relative change within the whole group of countries: scale 0 (lowest) to 100 (best)-50 average


IV. The catalytic role of IMF programs

• Structural conditionalities in IMF-supported programs may play a role in spurring structural reform (Ghosh and others, 2005)

Literature on IMF conditionalities: [Vaubel (1983), Bird (1984), Diwan and Rodrik (1992) Collier et al. (1997) and Dreher and Vaubel (2004)]

IMF conditionalities:1. lend credibility to the programs 2. induce governments to pursue policies they would not have chosen without the offer

of financial aid 3. solve the IMF’s selection problem in environments of asymmetrically imperfect

information (adverse selection)4. restrict the way government is spending aid in raising the recipients’ welfare (principal

agent problem)5. address the problem of moral hazard. IMF lending may be interpreted as (subsidized)

income insurance against adverse shocks. The insurance cover induces the potential recipients to lower their precautions against such damages.

• However, authorities’ ownership of Programs critical to their success


Albania

2006-2008

Bosnia

2009-2012

Bulgaria

2004-2006

Romania

2009-2011

Serbia

2009-2011

Turkey

2005-2008

Type of programType of program PRGF*

EFF**

Regular

SBA

Precautionary SBA

Regular SBA

Regular SBA

Regular

SBA

Banking system Fiscal rules Pension & Social Security Public sector

(public wages, state-owned enterprises, tax administration)

Labor market Product markets

(regulation, business environment, privatizations etc)

Quantitative ceilings

IV. Conditionalities: Structural benchmarks & Quantitative performance criteria

* Poverty Reduction and Growth Facility, **Extended Facility


Among top 10 factors seen by business executives as the most problematic for doing business in their economies

Alb

an

ia

Bu

lgaria

Bosn

ia

Cro

atia

FY

RO

M

Rom

an

ia

Serb

ia

Access to financing x x x x x x xCorruption x x x x x x xInefficient government bureaucracy x x x x x x xTax regulations x x x x x x xInadequate supply of infrastructure x x x x xInflation x x xPoor work ethic in national labor force x x x x xInadequately educated workforce x x xPolicy instability x x x x x xCrime and theft x x x xTax rates x x x x xRestrictive labor regulations x x x

V.V. Top problematic factors in SEE economiesTop problematic factors in SEE economies according to business executivesaccording to business executives

Source: WEF Global Competitiveness Report 2010-2011

Information drawn from 2010 edition of the World Economic Forum’s Executive Opinion Survey


0

1

2

3

4

5

6

7

V. Upgrading infrastructure high priorityfor all countries in the area

Managers’ survey, ranking of priorities from 1 to 10Source: WEF 2010, processed data,

• Public Investment: define and prioritize areas of comparative advantage, sectors which maximize externalities for private investment (ICT, Power, and transportation), finance projects by criteria of economic efficiency


Investment Policy and Promotion 3.5

Human Capital Development 3.0

Trade Policy and Facilitation 3.5

Access to Finance 2.7

Regulatory Reform and Parliamentary Process 3.1

Tax Policy Analysis 2.7

Indicators and key findings of the OECD report show a good progress overall in all categories listed above in the 2006 – 2010 period, however there is need for additional reforms

Limited Access to Finance, accentuated by the crisis, poses a major concern

Human Capital Development is still considered high priority: profile of skills supplied in labor force does not match what is required by employers

V.V. OECD score aggregates for SEE regionOECD score aggregates for SEE region and main resultsand main results

Source: OECD Investment Reform Index 2010

Indicators of OECD report. Scores range from 0 (lowest) to 5 (highest)


I. Conclusions

•Structural reforms: supply-side policies that increase quality- and price-competitiveness, while demand management preventing overheating.

•In an environment of fiscal consolidation, risk spillovers from the Eurozone and slower growth, SEE must proceed even more quickly and decisively to structural reform as this is the only way to ensure market confidence in the long-term.

• Reforms should be judged on ability to incur technology transfer: product-quality upgrading, better organizational structures, improvement in institutions and behavioral practices.

• Prospects of SEE remain bright: the area possesses the factors of production which important to long term growth: well-educated labor force with still modest wages, industrial culture, strategic geographic location, low capital intensity and thus high returns on capital.


For more info, please consult the Eurobank website: http://www.eurobank.gr/research

THANK YOU FOR YOUR ATTENTION!

My thanks to the Research Department of Eurobank EFG for able research assistance and support

• New Europe: Economics & Strategy Monthly edition on the economies and the markets of New Europe• Economy & Markets: Monthly economic research edition • Global Economic & Market Outlook: Quarterly review of the international economy and financial markets

Subscribe electronically at http://www.eurobank.gr/research

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