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Corporate | Institutional | Private Banking | Shipping | Sovereign
GREECE - BULGARIA - SERBIA - ROMANIA - TURKEY - POLAND - UKRAINE - UNITED KINGDOM - LUXEMBOURG - CYPRUS
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)
Dr Tassos Anastasatos Division of Research & Forecasting
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.
Dr Tassos Anastasatos Division of Research & Forecasting
I. Structural reforms and the SEE region
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.
Dr Tassos Anastasatos Division of Research & Forecasting
I. Structural reforms and the SEE region
•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)
Dr Tassos Anastasatos Division of Research & Forecasting
I. Structural reforms and the SEE region
• 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.
Dr Tassos Anastasatos Division of Research & Forecasting
I. Structural reforms and the SEE region
•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.
Dr Tassos Anastasatos Division of Research & Forecasting
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
Dr Tassos Anastasatos Division of Research & Forecasting
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.
Dr Tassos Anastasatos Division of Research & Forecasting
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
Dr Tassos Anastasatos Division of Research & Forecasting
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.
Dr Tassos Anastasatos Division of Research & Forecasting
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
Source: Doing Business 2009 and 2011 Reports, processed data
Dr Tassos Anastasatos Division of Research & Forecasting
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
Source: Doing Business 2008 and 2011 Reports, processed data
Dr Tassos Anastasatos Division of Research & Forecasting
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
Source: Doing Business 2008 and 2011 Reports, processed data
Performance indices normalized to account for the relative change within the whole group of countries: scale 0 (lowest) to 100 (best)-50 average
Dr Tassos Anastasatos Division of Research & Forecasting
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
Dr Tassos Anastasatos Division of Research & Forecasting
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
Dr Tassos Anastasatos Division of Research & Forecasting
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
Dr Tassos Anastasatos Division of Research & Forecasting
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
Dr Tassos Anastasatos Division of Research & Forecasting
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)
Dr Tassos Anastasatos Division of Research & Forecasting
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.
Dr Tassos Anastasatos Division of Research & Forecasting
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
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