competitiveness of bulgaria’s economy and the challenges of real and nominal convergence

Competitiveness of Bulgaria’s Economy and the Challenges of Real and Nominal Convergence

Grigor Stoevsky

Economic Research and Forecasting Directorate, Bulgarian National Bank

“Competitiveness of the South Eastern European Countries and Challenges on the Road to EU”

Skopje,30 May 2008

2

Outline

Competitiveness and convergence Theoretical grounds Aspects of competitiveness related to productivity and efficiency Price and cost competitiveness The links between real and nominal convergence

The Bulgarian experience Productivity and efficiency indicators The longer term perspective Driving forces and interpretation

Challenges of real and nominal convergence Conclusion

3

Competitiveness and Convergence: Theoretical Grounds (1)

Many definitions of competitiveness: Global Competitiveness Report 2007-2008:

“We define competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy.” (p.3) Hence, in catching-up economies higher productivity ensures higher

income levels, which in turn stimulate more investment and productivity

Ireland’s National Competitiveness Council, Annual Competitiveness Report 2007:

“Competitiveness refers to the ability of firms to compete in markets. Ireland’s national competitiveness refers to the ability of the enterprise base in Ireland to compete in international markets.” (p.8)

Many factors, hence indicators: Productivity (labour and total factor), efficiency Price and cost developments Export performance

But improving the competitive position of the country can be hampered by other factors, e.g. deficiencies in institutions and the business environment

Competitiveness and Convergence

4

Competitiveness and Convergence: Theoretical Grounds (2)

Competitiveness, convergence and integration Maintaining a sustainable convergence path

maintaining and improving the competitive position of the economy

Real convergence is a long process requiring sustained productivity gains and efficiency improvements

Cost-based advantages (based on low wages and input costs) are easily exhausted in the process of nominal convergence

Trade and financial integration accelerates nominal and real convergence


5

Aspects of competitiveness related to productivity and efficiency (1)

The main competitiveness factors are labour productivity and factor efficiency, which depend on: Physical and human capital TFP Energy intensity

Sectoral productivity developments: Productivity in non-tradable sectors is also important

Competitive advantage Unique and hard to imitate More immune to price shocks Based on innovations (escaping price competition trap) and

technology spillovers


6


GDP per capita in PPS, EU27=100

100

38

0

20

40

60

80

100

120

140

160

Lux

embo

urg

Irel

and

Net

herl

ands

Aus

tria

Den

mar

kSw

eden

Bel

gium

Finl

and

UK

Ger

man

yFr

ance

Spai

nIt

aly

EU

27G

reec

eC

ypru

sSl

oven

iaC

zech

Mal

taPo

rtug

alE

ston

iaSl

ovak

iaH

unga

ryL

ithu

ania

Lat

via

Pola

ndC

roat

iaT

urke

yR

oman

iaB

ulga

ria

Mac

edon

ia

1999 2007

283

7

Aspects of competitiveness related to productivity and efficiency (2)

Labour productivity: Most of the new member states (NMS) maintain

labour productivity growth rate differential vis-à-vis the euro area

A process of capital deepening and efficiency gains

Unit labour costs (ULC) developments: In nominal terms ULC are steadily increasing in all

NMS No clear pattern in real terms


8


Real Convergence (1999-2007)

AUBE

BG

HR

CY

CZ

DK

EE

FI

FR DE

GRHU

IE

IT

LV

LT

MK

MT NL

PL

PT

RO SK

SI

ESTR SE

UK

0

1

2

3

4

5

6

7

8

9

10

0 20 40 60 80 100 120 140

GDP per capita in PPS in 1999, EU27=100

Gro

wth

of

GD

P/c

apit

a, 1

999-

2007

a.

a.,

%

9

Price and cost competitiveness

In a monetary union other adjustment mechanisms are crucial: Labor market flexibility

Labor costs flexibility Working time flexibility Labor mobility (inter-sectoral and geographical)

Product market efficiency Competition enhancing policy (measured by level of competition,

market power) Easy entry, exit and deregulation

Competitiveness usually measured on international level by real effective exchange rate (REER) developments

But, REER exhibits trend appreciation for a catching-up economy


10


Real Effective Exchange Rates

70

80

90

100

110

120

130

140

150

160

1999 2000 2001 2002 2003 2004 2005 2006 2007

Bulgaria Czech Republic Estonia Hungary Latvia Lithuania

Poland Romania Slovakia Slovenia Turkey Euro area

Based on nominal ULC, relative to 36 countries, 1999=100

211, Romania

11


Real and Nominal Convergence

trmk

hr

ukse fi

sk

si

ro

pt

pl

atnl

mt

hult lv

cyit

fresgr

ie

ee

dedk

cz

bg

be

20

40

60

80

100

120

140

160

20 40 60 80 100 120 140 160

Comparative price level (EU27=100)( based on household final consumption expenditure, 2006)

GD

P p

er c

apit

a in

PP

S, E

U27

=10

0,

2007

12

The links between real and nominal convergence

The impact of real convergence on inflation takes place through: The Balassa-Samuelson effect (supply side effects based on

intersectoral productivity growth differentials) Higher demand for non-tradable goods and services relative to

tradable goods driven by increases in income levels (demand side effects) => change in relative prices and higher inflation

Restructuring of the consumption basket (towards higher weight of services and lower weight of food) contributes towards lower inflation volatility

Increasing trade openness (pushing up tradable goods prices through the law on one price, but it also has a dampening effect on inflation through stronger competitive pressures and lower mark-ups)

Declining energy intensity


13

Key Developments in the Bulgarian Economy

Competitiveness: productivity and efficiency Real sector Labour market Energy efficiency External sector Survey-based measures of competitiveness

Convergence in productivity: the longer term perspective

Driving forces of the convergence process Interpretation of some of the key indicators

The Bulgarian experience

14

Key Indicators

Recent and likely short-to-medium term developments v.s. long-term trends

Measuring competitiveness Macro data – indirect evidence Sectoral and firm-level data – better but not readily

available


15

Key Indicators – the Real Sector (1)


Contribution of GDP Components to Growth

4.5% 5.0%6.6% 6.2% 6.1% 6.2% 6.3% 6.5% 6.5%

-8%

-4%

0%

4%

8%

12%

16%

2002 2003 2004 2005 2006 2007 2008 2009 2010

-8%

-4%

0%

4%

8%

12%

16%

Household consumption expenditures Final consumption expenditure of governmentCollective consumption Gross fixed capital formationChange in inventories Net ExportsGDP Growth

Projection

16

Key Indicators – the Real Sector (2)


GVA Growth Accounting

3.9%

5.4%

4.2%4.8%

5.3%

6.6% 6.3% 6.1%6.4% 6.3%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Labor Capital TFP GVA growth

Projection

17

Key Indicators – Labour Market (1)The Bulgarian experience

NAIRU

0

2

4

6

8

10

12

14

16

18

20

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Bulgaria Czech Republic Estonia HungaryLatvia Lithuania Poland RomaniaSlovak Republic Slovenia EU

18

Key Indicators – Labour Market (2)The Bulgarian experience

Long-term unemployed as a percentage of the total active population

0

2

4

6

8

10

12

14

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Bulgaria Czech Republic Estonia HungaryLatvia Lithuania Poland RomaniaSlovakia Slovenia EU (27 countries)

19

Key Indicators – Energy EfficiencyThe Bulgarian experience

Energy intensity of the economyGross inland consumption of energy divided by GDP (kilogram of oil equivalent per 1000 Euro)

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1998 1999 2000 2001 2002 2003 2004 2005

EU (27 countries) Slovenia Croatia Turkey Hungary

Poland Latvia Czech Republic Slovakia Lithuania

Estonia Romania Bulgaria

2250, BG

20

Key Indicators – the External Sector (1)


"S-I" Balance: Developments and Projections

-24%

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

28%

32%

36%

40%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-24%

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

28%

32%

36%

40%

Current Account Investment Savings Savings + FDI

Projection

% of GDP% of GDP

21

Key Indicators – the External Sector (2)


Balance of Payments

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Change in reserve assets FDI Net portfolio investment

Other Investment Financial Account Current and Capital Account Deficit

% of GDP % of GDP

Projection

22

Key Indicators – External Sector (3)The Bulgarian experience

66

0

10

20

30

40

50

60

70

1998 1999 2000 2001 2002 2003 2004 2005 2006

FDI Stock-to-GDP Ratio

EU15

EU10

Romania

Bulgaria

23


63

0

10

20

30

40

50

60

70

1998 1999 2000 2001 2002 2003 2004 2005 2006

FDI-to-GCF Ratio

EU15

EU10

Romania

SEE

Bulgaria

Note: Foreign direct inv estment f low in relation to gross capital f ormation (including change in inv entories)

24


Share of Exports of Goods in World Exports, 1999=100

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Lithuania Slovakia Poland LatviaRomania Bulgaria Czech Republic EstoniaHungary Slovenia Croatia Macedonia FYR

25


Exports of high technology products as a share of total exports, %

0

5

10

15

20

25

Hungary CzechRepublic

Estonia Croatia Slovakia Slovenia Latvia Poland Lithuania Romania Bulgaria Macedonia

1999 2000 2001 2002 2003 2004 2005 2006

26

Other Indicators of Competitiveness: Survey-based measures

GCR 2007-2008 Rankings(out of 131 countries, normalized index)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Overall Index Basic Requirements Efficiency Enhancers Innovation andSophistication factors

Estonia Czech Republic Lithuania Slovenia Slovakia Latvia

Hungary Poland Croatia Romania Bulgaria Macedonia

27

Convergence in productivity: the longer term perspective (1)


GDP per capita in PPS, Bulgaria 2005=100

0

100

200

300

400

500

600

700

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

20

31

20

32

20

33

20

34

20

35

20

36

20

37

20

38

20

39

20

40

20

41

20

42

20

43

20

44

20

45

20

46

20

47

20

48

20

49

20

50

BG

EU27

50%

75%

90%

28

Convergence in productivity: the longer term perspective (2)


Contributions to growth by production factors

-1

0

1

2

3

4

5

6

7

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19

20

21

20

23

20

25

20

27

20

29

20

31

20

33

20

35

20

37

20

39

20

41

20

43

20

45

20

47

20

49

pe

rce

nta

ge

po

ints

TFP

Capital

LabourValue added

29

Driving Forces of Catching-up

Domestic investment - financed by foreign (FDI) and domestic sources

Investment spurred by: Macroeconomic stability and predictable environment EU membership => positive profit (income) prospects =>

optimism External position = increasing foreign liabilities (both FDI and

debt) => sustainability issues (solvency and liquidity) The investment demand contribution to import growth is

complemented by consumption demand (reflecting income growth)


30

Interpretation of Some of the Key Indicators Some “headline” indicators = a reason for concern?

Current account deficit increases Deterioration of the net IIP Wage growth and inflation REER appreciation

Some “bottom line” indicators Balance of payments surplus Steadily increasing FDI flows and central bank’s

reserves Steady productivity and GDP growth, allowing income

convergence and increased welfare of the population


31

Challenges of Real and Nominal Convergence (1)Real convergence challenge: ensure sustainable path for

productivity and income growth: Institutional arrangement, stable political and macroeconomic

environment The right policies, conducive to growth:

Fiscal and income policies Monetary policy Structural reforms:

Promote competition and flexibility in product, labour and capital markets

Business environment – basic infrastructure, knowledge economy pillars, rule of law, intellectual property rights, etc.

Challenges of real and nominal convergence

32

Challenges of Real and Nominal Convergence (2) The nominal convergence process is spurred by deepening

integration into the Single European Market with liberalized current and capital accounts, and an increasing domestic income level

The impact of real convergence on inflation complicates the meeting of the nominal convergence criterion on inflation

Factors influencing the effect of the real convergence process on inflation dynamics: The initial level of both prices and income The speed of adjustment/catching-up – interestingly – the better

policies the government pursues and the better environment it secures, the higher the adjustment speed, hence faster convergence (higher inflation)

Flexibility of product, labour and capital markets


33

Challenges of Real and Nominal Convergence (3)


HIC P

-2%-1%0%1%2%3%4%5%6%7%8%9%

10%11%12%13%14%15%16%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

B ulgaria C zec h R epublic E s toniaH ungary L atv ia L ithuaniaP oland R omania S lov akiaS lov enia C roatia Mac edonia F Y RThe Maas tric ht C riterion

34

Challenges of Real and Nominal Convergence (4)

Policy measures: Short-to-medium term

Decrease vulnerabilities and guarantee sustainability Improve efficiency of public institutions and the general

business environment Longer term

Address the problems of ageing population Provide the right incentives for a transition to a knowledge-

based economy


35

Conclusion

Real convergence crucially depends on the competitive position of the economy

Real and nominal convergence are closely related, hence: Increasing prices, wages and real exchange rates are to

be expected Competitiveness is a broad concept => variety of

indicators, which may point at different directions => need proper interpretation

Our assessment of the developments in the Bulgarian economy is that the country improves its competitive position

36

Appendix

37

Growth of GDP per person employed relative to EA, %

-4

-2

0

2

4

6

8

10

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Bulgaria Czech Republic Estonia Cyprus Latvia

Lithuania Hungary Malta Poland Romania

Slovenia Slovakia Croatia Macedonia FYR Turkey

38

Nominal ULC, 2000=100

80

100

120

140

160

180

200

220

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Bulgaria Czech Republic EstoniaCyprus Latvia LithuaniaHungary Malta PolandRomania Slovenia SlovakiaCroatia European Union (27 countries) Euro area (15 countries)

~300, Romania

39

Real ULC, 2000=100

80

85

90

95

100

105

110

115

120

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Bulgaria Czech Republic EstoniaCyprus Latvia LithuaniaHungary Malta PolandRomania Slovenia SlovakiaCroatia European Union (27 countries) Euro area (15 countries)

40


60

80

100

120

140

160

180

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Bulgaria Cyprus Czech RepublicEstonia Hungary LatviaLithuania Malta PolandRomania Slovakia SloveniaTurkey EA15 (14 countries LUX incl. in BEL)

Relative to 35 industrial countries, 2000=100

41


80

90

100

110

120

130

140

150

160

170

1999 2000 2001 2002 2003 2004 2005 2006 2007

Bulgaria Cyprus Czech Republic Estonia Hungary Latvia

Lithuania Malta Poland Romania Slovakia Slovenia

Turkey EUR13 EU27

Relative to 41 countries, 1999=100

42


70

80

90

100

110

120

130

140

150

160

170

1999 2000 2001 2002 2003 2004 2005 2006 2007

Bulgaria Cyprus Czech Republic Estonia Hungary Latvia

Lithuania Malta Poland Romania Slovakia Slovenia

Turkey EUR13 EU27

Based on nominal UWC in manufacturing, relative to 36 countries, 1999=100

243, Romania

competitiveness of bulgaria’s economy and the challenges of real and nominal convergence

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