Competitiveness/Structural Convergence in Central and Eastern Europe Michael A. Landesmann OENB/SUERF Meeting 22 June 2007...
Competitiveness/Structural Convergence in Central and Eastern Europe – Topics to be discussed <ul><li>Structural convergen...
Structural Convergence <ul><li>A.  What is it? </li></ul><ul><li>B.  Why is it interesting? </li></ul><ul><li>C.  Is it to...
Structural features in the catching-up process <ul><li>Aggregate issues of catching-up: </li></ul><ul><li>- Growth </li></...
The aggregate picture
GDP per head, real growth  annual averages 1993-2000 and 2000-2006, in percent  EU-25 countries, incl. Bulgaria and Romani...
Growth of gross domestic product:  Wider Europe % annual change, 2006 and 2006-2020 forecasts
GDP per head at PPS,  EU-25 countries, incl. Bulgaria and Romania   Source: AMECO Database
The employment-output relationship
Employment and GDP growth  1995 = 100 EU-15 NMS-10
Source:  wiiw Database Employment growth rates 2000-2006  in %
Unemployment rates 2000-2007 LFS,  %, annual average Source:  wiiw Database
Employment growth rates Source:  wiiw Database
Structural break in employment-to-GDP relationship Separate Fixed Effects panel regressions of log(employment) on log(GDP)...
GDP growth and Current Account balance  Source:  wiiw Database
GDP growth and Current Account balance Panel estimation of CA  change  (in % of GDP) on real GDP growth (annual data)
Structural change, convergence and the U-shaped pattern of employment growth
Stylized U-shaped pattern of employment growth in NMs Employment levels Time Strong presence of sectors with declining out...
Divergence of employment shares from  EU-15 structure, 2005 NMS-4 NMS-7 PL
Employment growth in sectors,  1999-2005 NMS-4 NMS-7 PL
Divergence of employment shares from  EU-15 structure, 2005 NMS-4 NMS-7
Employment growth in sectors,  1999-2005 NMS-4 NMS-7
Value added, difference to EU-15, 1999
Value added, difference to EU-15, 2005
Agriculture NMS-7 (CZ, HU, SK, SI, EE, LV, LT) Poland Industry NMS-7 (CZ, HU, SK, SI, EE, LV, LT) Poland Output and Employ...
Basic Services (Trade, Restaurants, Hotels, etc.) NMS-7 (CZ, HU, SK, SI, EE, LV, LT) Poland Financial and Business Service...
Growth by sectors, 1995-2005 in % p.a. NMS-7 Poland
Wage-productivity dynamics and the changing pattern of international specialisation
Poland: Dynamics of wages,  productivity and unit labour costs, 2000-2006 Relative to Austria (2002=100) Total manufacturi...
Czech Republic: Dynamics of wages,  productivity and unit labour costs, 2000-2006 Relative to Austria (2002=100) Total man...
Hungary: Dynamics of wages,  productivity and unit labour costs, 2000-2006 Relative to Austria (2002=100) Total manufactur...
Bulgaria: Dynamics of wages,  productivity and unit labour costs, 2000-2005 Relative to Austria (2002=100) Total manufactu...
Romania: Dynamics of wages,  productivity and unit labour costs, 2000-2006 Relative to Austria (2002=100) Total manufactur...
Market shares in EU-25 imports Czech Republic Hungary
Market shares in EU-25 imports Poland Slovak Republic
Market shares in EU-25 imports Bulgaria Romania
Dynamics of international specialisation <ul><li>Unbalanced productivity growth plus wage drift shifts comparative advanta...
Intra-industry trade position:  Vertical product differentiation and quality up-grading <ul><li>Calculations from detailed...
Export unit value ratios by industrial groupings (groupings 1 – low tech, 3 – medium/high tech) 1 – low tech 3 – medium/hi...
Price and quality competition in EU-15 markets  1995/98 - 2002/04 by country groups Low tech industries Medium-high tech i...
Import penetration ratios in EU-North in  medium high-tech industries
Import penetration ratios in USA  in  medium high-tech industries
Import penetration ratios in Japan in medium high tech industries
The impact of structural convergence –  example from the labour market: Skill up-grading, the pressure on the low-skilled ...
Employment by educational  categories 1992-2005 Hungary: (Index: 19 92  = 100) Poland: (Index: 19 92  = 100) Czech Republi...
Skill shift <ul><li>Decomposition into ‘within’ and ‘between’ effects: </li></ul>E stands for employment, S for skilled wo...
Grouping of industries into low-, medium- and high-skill industries; EU-27 High-skill industries 19 Tanning and dressing o...
Skill shifts – between and within components in low-, medium- and high-skill sectors,1999-2005 Source:  wiiw CZ HU SI SK L...
Skill shifts – between and within components in low-, medium- and high-skill sectors,1999-2005 Source:  wiiw EU-North   EU...
Skill shifts – between and within components in low-, medium- and high-skill sectors,1999-2005 Source:  wiiw EU-North   EU...
Outsourcing :  Shares in total EU-27 imports, focus on MH (largely CEEs) and China;   1995 and 2005 (in % of total) Source...
Skill up-grading processes in NMS and OMS : <ul><li>The decomposition analysis of ‘within’ and ‘between’ effects of skill ...
Labour supply response
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 H...
Share of population in education groups in % of total population in education groups Low High
The regional dimension
Size of regional income disparities in the EU-27 regions Coefficient of Variation, regional GDP per capita at PPS. NUTS-3 ...
Regional Clusters Agriculture regions Industry regions Basic service regions Business service regions Capital cities
Regional GDP per head, 2002 in percent of country averages, cluster weighted averages
Regional GDP growth, 1995-2002 average yearly growth rates, relative to country average, cluster weighted averages
Population (15-64 years): Region types and educational attainment levels, 2003
Employment rates –  of persons with completed tertiary education ( employment as a proportion of the  highly  educated wor...
Employment rates –  of persons with low level education ( employment as a proportion of the  low  educated working-age pop...
Regional net migration flows 5 year periods,in % of the labour force (cumulative)
Summary points regarding  Structural convergence and competitiveness <ul><li>Aggregate catching-up proceeds (pretty close ...
Methodological remarks regarding research on structural convergence: <ul><li>Keep track of behavioural structural breaks <...
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Landesmann

  1. 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. 2. Competitiveness/Structural Convergence in Central and Eastern Europe – Topics to be discussed <ul><li>Structural convergence: </li></ul><ul><li>- Is it to be expected? Why are we interested? </li></ul><ul><li>- Output and employment: structures and behaviour </li></ul><ul><li>- Productivity – wage dynamics </li></ul><ul><li>- Features of the labour markets, particularly reg. skills </li></ul><ul><li>- Regional patterns </li></ul><ul><li>Competitiveness: </li></ul><ul><li>- Trade balances and current accounts </li></ul><ul><li>- Dynamics of inter- and intra-industry specialisation </li></ul><ul><li>- Outsourcing dynamic </li></ul>
  3. 3. Structural Convergence <ul><li>A. What is it? </li></ul><ul><li>B. Why is it interesting? </li></ul><ul><li>C. Is it to be expected? </li></ul><ul><li>Ad B. </li></ul><ul><li>- Structural convergence shapes Balassa-Samuelson process </li></ul><ul><li>- Interest in structural convergence/divergence process per se: involves adjustment processes/costs; changes in behavioural relationships; important for policy planning. </li></ul><ul><li>Ad C. </li></ul><ul><li>- Yes: Income growth implies productivity level (supply side) convergence and convergence of demand structures </li></ul><ul><li>- No: Scope for specialisation structures also in an integrated European space (factor endowments, size of country, geographic location, etc.) </li></ul><ul><li>Institutional specificities (partly still linked to legacy of transition) </li></ul>
  4. 4. Structural features in the catching-up process <ul><li>Aggregate issues of catching-up: </li></ul><ul><li>- Growth </li></ul><ul><li>- GDP-Employment relationship </li></ul><ul><li>- GDP growth – current accounts </li></ul><ul><li>Structural features and convergence processes in Central and Eastern Europe: </li></ul><ul><li>- output and employment structures </li></ul><ul><li>- productivity dynamics </li></ul><ul><li>- link to international specialisation patterns </li></ul>
  5. 5. The aggregate picture
  6. 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. 7. Growth of gross domestic product: Wider Europe % annual change, 2006 and 2006-2020 forecasts
  8. 8. GDP per head at PPS, EU-25 countries, incl. Bulgaria and Romania Source: AMECO Database
  9. 9. The employment-output relationship
  10. 10. Employment and GDP growth 1995 = 100 EU-15 NMS-10
  11. 11. Source: wiiw Database Employment growth rates 2000-2006 in %
  12. 12. Unemployment rates 2000-2007 LFS, %, annual average Source: wiiw Database
  13. 13. Employment growth rates Source: wiiw Database
  14. 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. 15. GDP growth and Current Account balance Source: wiiw Database
  16. 16. GDP growth and Current Account balance Panel estimation of CA change (in % of GDP) on real GDP growth (annual data)
  17. 17. Structural change, convergence and the U-shaped pattern of employment growth
  18. 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. 19. Divergence of employment shares from EU-15 structure, 2005 NMS-4 NMS-7 PL
  20. 20. Employment growth in sectors, 1999-2005 NMS-4 NMS-7 PL
  21. 21. Divergence of employment shares from EU-15 structure, 2005 NMS-4 NMS-7
  22. 22. Employment growth in sectors, 1999-2005 NMS-4 NMS-7
  23. 23. Value added, difference to EU-15, 1999
  24. 24. Value added, difference to EU-15, 2005
  25. 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. 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. 27. Growth by sectors, 1995-2005 in % p.a. NMS-7 Poland
  28. 28. Wage-productivity dynamics and the changing pattern of international specialisation
  29. 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. 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. 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. 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. 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. 34. Market shares in EU-25 imports Czech Republic Hungary
  35. 35. Market shares in EU-25 imports Poland Slovak Republic
  36. 36. Market shares in EU-25 imports Bulgaria Romania
  37. 37. Dynamics of international specialisation <ul><li>Unbalanced productivity growth plus wage drift shifts comparative advantage structures in Central-Eastern Europe </li></ul><ul><li>FDI allocation reflects these shifts and reinforces them </li></ul><ul><li>Result is up-grading of positions of CEECs in international trade specialisation (inter- and intra-industry) </li></ul><ul><li>Outsourcing story important (and consistent with above) </li></ul><ul><li>CEECs become important locations for industrial production (like other successful catching-up regions) and net importers of business and financial services </li></ul>
  38. 38. Intra-industry trade position: Vertical product differentiation and quality up-grading <ul><li>Calculations from detailed (6-digit) product level trade statistics </li></ul><ul><li>Export relative unit values (in EU 25 imports) </li></ul>
  39. 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. 40. Price and quality competition in EU-15 markets 1995/98 - 2002/04 by country groups Low tech industries Medium-high tech industries
  41. 41. Import penetration ratios in EU-North in medium high-tech industries
  42. 42. Import penetration ratios in USA in medium high-tech industries
  43. 43. Import penetration ratios in Japan in medium high tech industries
  44. 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. 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. 46. Skill shift <ul><li>Decomposition into ‘within’ and ‘between’ effects: </li></ul>E stands for employment, S for skilled workers overstrike denotes average over time; the index i denotes industries.
  47. 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. 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. 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. 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. 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. 52. Skill up-grading processes in NMS and OMS : <ul><li>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) </li></ul><ul><li>The CEECs also show a strong shift in sectoral employment structures towards high-skill sectors – ‘ between effect ’. </li></ul><ul><li>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). </li></ul>
  53. 53. Labour supply response
  54. 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. 55. Share of population in education groups in % of total population in education groups Low High
  56. 56. The regional dimension
  57. 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. 58. Regional Clusters Agriculture regions Industry regions Basic service regions Business service regions Capital cities
  59. 59. Regional GDP per head, 2002 in percent of country averages, cluster weighted averages
  60. 60. Regional GDP growth, 1995-2002 average yearly growth rates, relative to country average, cluster weighted averages
  61. 61. Population (15-64 years): Region types and educational attainment levels, 2003
  62. 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. 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. 64. Regional net migration flows 5 year periods,in % of the labour force (cumulative)
  65. 65. Summary points regarding Structural convergence and competitiveness <ul><li>Aggregate catching-up proceeds (pretty close to absolute convergence model) </li></ul><ul><li>Structural break in GDP-employment relationship (explanation lies partly in structural dynamic) – aggregate U-shaped pattern </li></ul><ul><li>Sectoral convergence in output and employment structures (with some important exceptions) </li></ul><ul><li>Uneven productivity (catching-up) dynamic across sectors plus wage drift </li></ul><ul><li>Changing pattern of international (intra-European) specialisation (dynamic Ricardian model with Gerschenkron effect and transitory dynamic) </li></ul><ul><li>Outsourcing dynamic </li></ul><ul><li>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) </li></ul><ul><li>Regional differentiation marked (linked to tertiarisation and industry clustering) </li></ul>
  66. 66. Methodological remarks regarding research on structural convergence: <ul><li>Keep track of behavioural structural breaks </li></ul><ul><li>Keep track of transitory dynamics </li></ul><ul><li>Full structural convergence not to be expected; heterogeneity remains a feature of an integrated economic space </li></ul>
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