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  • 1. Competitiveness/Structural Convergence in Central and Eastern Europe Michael A. Landesmann OENB/SUERF Meeting 22 June 2007 ‚ Central and Eastern Europe: Is Convergence on Track?‘
  • 2. Competitiveness/Structural Convergence in Central and Eastern Europe – Topics to be discussed
    • Structural convergence:
    • - Is it to be expected? Why are we interested?
    • - Output and employment: structures and behaviour
    • - Productivity – wage dynamics
    • - Features of the labour markets, particularly reg. skills
    • - Regional patterns
    • Competitiveness:
    • - Trade balances and current accounts
    • - Dynamics of inter- and intra-industry specialisation
    • - Outsourcing dynamic
  • 3. Structural Convergence
    • A. What is it?
    • B. Why is it interesting?
    • C. Is it to be expected?
    • Ad B.
    • - Structural convergence shapes Balassa-Samuelson process
    • - Interest in structural convergence/divergence process per se: involves adjustment processes/costs; changes in behavioural relationships; important for policy planning.
    • Ad C.
    • - Yes: Income growth implies productivity level (supply side) convergence and convergence of demand structures
    • - No: Scope for specialisation structures also in an integrated European space (factor endowments, size of country, geographic location, etc.)
    • Institutional specificities (partly still linked to legacy of transition)
  • 4. Structural features in the catching-up process
    • Aggregate issues of catching-up:
    • - Growth
    • - GDP-Employment relationship
    • - GDP growth – current accounts
    • Structural features and convergence processes in Central and Eastern Europe:
    • - output and employment structures
    • - productivity dynamics
    • - link to international specialisation patterns
  • 5. The aggregate picture
  • 6. GDP per head, real growth annual averages 1993-2000 and 2000-2006, in percent EU-25 countries, incl. Bulgaria and Romania Source: AMECO Database 1993-2000 2000-2006
  • 7. Growth of gross domestic product: Wider Europe % annual change, 2006 and 2006-2020 forecasts
  • 8. GDP per head at PPS, EU-25 countries, incl. Bulgaria and Romania Source: AMECO Database
  • 9. The employment-output relationship
  • 10. Employment and GDP growth 1995 = 100 EU-15 NMS-10
  • 11. Source: wiiw Database Employment growth rates 2000-2006 in %
  • 12. Unemployment rates 2000-2007 LFS, %, annual average Source: wiiw Database
  • 13. Employment growth rates Source: wiiw Database
  • 14. Structural break in employment-to-GDP relationship Separate Fixed Effects panel regressions of log(employment) on log(GDP) Note: CEE4 is CZ, SK, SI, HU; Other NMS are PL, EE, LV, LT, BG, RO
  • 15. GDP growth and Current Account balance Source: wiiw Database
  • 16. GDP growth and Current Account balance Panel estimation of CA change (in % of GDP) on real GDP growth (annual data)
  • 17. Structural change, convergence and the U-shaped pattern of employment growth
  • 18. Stylized U-shaped pattern of employment growth in NMs Employment levels Time Strong presence of sectors with declining output shares and strong productivity catching-up Increasing weight of sectors with strong output growth and lower productivity catching-up Aggregate GDP growth / catching-up and convergence in output structures (with more advanced economies)
  • 19. Divergence of employment shares from EU-15 structure, 2005 NMS-4 NMS-7 PL
  • 20. Employment growth in sectors, 1999-2005 NMS-4 NMS-7 PL
  • 21. Divergence of employment shares from EU-15 structure, 2005 NMS-4 NMS-7
  • 22. Employment growth in sectors, 1999-2005 NMS-4 NMS-7
  • 23. Value added, difference to EU-15, 1999
  • 24. Value added, difference to EU-15, 2005
  • 25. Agriculture NMS-7 (CZ, HU, SK, SI, EE, LV, LT) Poland Industry NMS-7 (CZ, HU, SK, SI, EE, LV, LT) Poland Output and Employment, 1995-2005 Output Employment
  • 26. Basic Services (Trade, Restaurants, Hotels, etc.) NMS-7 (CZ, HU, SK, SI, EE, LV, LT) Poland Financial and Business Services NMS-7 (CZ, HU, SK, SI, EE, LV, LT) Poland Output and Employment, 1995-2005 Output Employment
  • 27. Growth by sectors, 1995-2005 in % p.a. NMS-7 Poland
  • 28. Wage-productivity dynamics and the changing pattern of international specialisation
  • 29. Poland: Dynamics of wages, productivity and unit labour costs, 2000-2006 Relative to Austria (2002=100) Total manufacturing Textiles Leather Machinery Electrical equipment Transport
  • 30. Czech Republic: Dynamics of wages, productivity and unit labour costs, 2000-2006 Relative to Austria (2002=100) Total manufacturing Textiles Leather Machinery Electrical equipment Transport
  • 31. Hungary: Dynamics of wages, productivity and unit labour costs, 2000-2006 Relative to Austria (2002=100) Total manufacturing Textiles Leather Machinery Electrical equipment Transport
  • 32. Bulgaria: Dynamics of wages, productivity and unit labour costs, 2000-2005 Relative to Austria (2002=100) Total manufacturing Textiles Leather Machinery Electrical equipment Transport
  • 33. Romania: Dynamics of wages, productivity and unit labour costs, 2000-2006 Relative to Austria (2002=100) Total manufacturing Textiles Leather Machinery Electrical equipment Transport
  • 34. Market shares in EU-25 imports Czech Republic Hungary
  • 35. Market shares in EU-25 imports Poland Slovak Republic
  • 36. Market shares in EU-25 imports Bulgaria Romania
  • 37. Dynamics of international specialisation
    • Unbalanced productivity growth plus wage drift shifts comparative advantage structures in Central-Eastern Europe
    • FDI allocation reflects these shifts and reinforces them
    • Result is up-grading of positions of CEECs in international trade specialisation (inter- and intra-industry)
    • Outsourcing story important (and consistent with above)
    • CEECs become important locations for industrial production (like other successful catching-up regions) and net importers of business and financial services
  • 38. Intra-industry trade position: Vertical product differentiation and quality up-grading
    • Calculations from detailed (6-digit) product level trade statistics
    • Export relative unit values (in EU 25 imports)
  • 39. Export unit value ratios by industrial groupings (groupings 1 – low tech, 3 – medium/high tech) 1 – low tech 3 – medium/high tech period 1: 1995-1997 period 2: 2002-2004
  • 40. Price and quality competition in EU-15 markets 1995/98 - 2002/04 by country groups Low tech industries Medium-high tech industries
  • 41. Import penetration ratios in EU-North in medium high-tech industries
  • 42. Import penetration ratios in USA in medium high-tech industries
  • 43. Import penetration ratios in Japan in medium high tech industries
  • 44. The impact of structural convergence – example from the labour market: Skill up-grading, the pressure on the low-skilled and supply side adjustment
  • 45. Employment by educational categories 1992-2005 Hungary: (Index: 19 92 = 100) Poland: (Index: 19 92 = 100) Czech Republic: (Index: 199 3 = 100) 2005 Primary education Secondary education Tertiary education T otal e mployment
  • 46. Skill shift
    • Decomposition into ‘within’ and ‘between’ effects:
    E stands for employment, S for skilled workers overstrike denotes average over time; the index i denotes industries.
  • 47. Grouping of industries into low-, medium- and high-skill industries; EU-27 High-skill industries 19 Tanning and dressing of leather 18 Wearing apparel 17 Textiles 20 Wood and of products of wood and cork 37 Recycling 36 Furniture; manufacturing n.e.c. Medium-skill industries 28 M etal products 26 Other non - metallic mineral products 15 Food products and beverages 25 Rubber and plastic products 21 P ulp, paper and paper products 27 B asic metals 16 Toba cco products 34 M otor vehicles, trailers and semi trailers 29 M achinery and equipment n.e.c 31 E lectrical machinery and apparatus n.e.c. 22 Publishing, printing and reproduction of recorded media 35 O ther transport equipment 33 M edical, precision and optical instruments, watches and clocks 24 C hemicals and chemical products 32 R adio, television an d communication equipment and apparatus 23 C oke, refined petroleum products and nuclear fuel 30 O ffice machinery and computers Low-skill industries
  • 48. Skill shifts – between and within components in low-, medium- and high-skill sectors,1999-2005 Source: wiiw CZ HU SI SK L=low-skill sectors, M=medium-skill sectors, H=high-skill sectors High education
  • 49. Skill shifts – between and within components in low-, medium- and high-skill sectors,1999-2005 Source: wiiw EU-North EU-South NMS-4 L=low-skill sectors, M=medium-skill sectors, H=high-skill sectors High education
  • 50. Skill shifts – between and within components in low-, medium- and high-skill sectors,1999-2005 Source: wiiw EU-North EU-South NMS-4 L=low-skill sectors, M=medium-skill sectors, H=high-skill sectors Low education
  • 51. Outsourcing : Shares in total EU-27 imports, focus on MH (largely CEEs) and China; 1995 and 2005 (in % of total) Source: wiiw CN MH CN MH CN MH CN MH Processed Parts Final Total HL HH USA HL HH USA HL HH USA HL HH USA
  • 52. Skill up-grading processes in NMS and OMS :
    • The decomposition analysis of ‘within’ and ‘between’ effects of skill up-grading shows strong within effects and also a ‘ sector bias ’ effect (towards sectors with higher skill content)
    • The CEECs also show a strong shift in sectoral employment structures towards high-skill sectors – ‘ between effect ’.
    • Focussing on the shares of the low skilled we see a particularly strong skill up-grading pressure (sharp contraction of the share of low skilled workers) in the Northern countries in medium- & high-skill industries; evidence of up-grading pressure from catching-up economies (see also outsourcing story).
  • 53. Labour supply response
  • 54. Growth of labour force, 15-64, 1999 - 2003, in % Low educated EU-15 EU-S NMS-4 NMS-7 NMS-8 EU-15 EU-S NMS-4 NMS-7 NMS-8 Highly educated Medium educated EU-15 EU-S NMS-4 NMS-7 NMS-8
  • 55. Share of population in education groups in % of total population in education groups Low High
  • 56. The regional dimension
  • 57. Size of regional income disparities in the EU-27 regions Coefficient of Variation, regional GDP per capita at PPS. NUTS-3 regions , 1995 & 2002
  • 58. Regional Clusters Agriculture regions Industry regions Basic service regions Business service regions Capital cities
  • 59. Regional GDP per head, 2002 in percent of country averages, cluster weighted averages
  • 60. Regional GDP growth, 1995-2002 average yearly growth rates, relative to country average, cluster weighted averages
  • 61. Population (15-64 years): Region types and educational attainment levels, 2003
  • 62. Employment rates – of persons with completed tertiary education ( employment as a proportion of the highly educated working-age population 25-64 years ) , 2003 69.0 to 75.0 75.0 to 80.0 80.0 to 82.0 82.0 to 84.0 84.0 to 86.0 86.0 to 94.0
  • 63. Employment rates – of persons with low level education ( employment as a proportion of the low educated working-age population 25-64 years ) , 2003 23.0 to 38.0 38.0 to 45.0 45.0 to 51.0 51.0 to 56.0 56.0 to 59.0 59.0 to 63.0 63.0 to 82.0
  • 64. Regional net migration flows 5 year periods,in % of the labour force (cumulative)
  • 65. Summary points regarding Structural convergence and competitiveness
    • Aggregate catching-up proceeds (pretty close to absolute convergence model)
    • Structural break in GDP-employment relationship (explanation lies partly in structural dynamic) – aggregate U-shaped pattern
    • Sectoral convergence in output and employment structures (with some important exceptions)
    • Uneven productivity (catching-up) dynamic across sectors plus wage drift
    • Changing pattern of international (intra-European) specialisation (dynamic Ricardian model with Gerschenkron effect and transitory dynamic)
    • Outsourcing dynamic
    • Skills: strongly negative employment trends of the least qualified; sharp rise in the demand for highly skilled; labour supply adjustments (demography; educational choices; international and national migration flows)
    • Regional differentiation marked (linked to tertiarisation and industry clustering)
  • 66. Methodological remarks regarding research on structural convergence:
    • Keep track of behavioural structural breaks
    • Keep track of transitory dynamics
    • Full structural convergence not to be expected; heterogeneity remains a feature of an integrated economic space