Landesmann

Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute for International Economic Studies

www.wiiw.ac.at

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?‘

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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

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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)

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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



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The aggregate picture

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GDP per head, real growth annual averages 1993-2000 and 2000-2006, in percent EU-25 countries, incl. Bulgaria and Romania

0

1

2

3

4

5

6

7

8

9

EU

-15

EU

-25

Aus

tria

Bel

gium

Ger

man

yD

enm

ark

Fin

land

Fra

nce

Uni

ted

Irel

and

Luxe

mbo

urN

ethe

rland

sS

wed

en

Spa

inG

reec

eIt

aly

Por

tuga

l

Bul

garia

Cze

chE

ston

iaH

unga

ryLi

thua

nia

Latv

iaP

olan

dR

oman

iaS

lova

kia

Slo

veni

a

EU

-15

EU

-25

Aus

tria

Bel

gium

Ger

man

yD

enm

ark

Fin

land

Fra

nce

Uni

ted

Irel

and

Luxe

mbo

urN

ethe

rland

sS

wed

en

Spa

inG

reec

eIt

aly

Por

tuga

l

Bul

garia

Cze

chE

ston

iaH

unga

ryLi

thua

nia

Latv

iaP

olan

dR

oman

iaS

lova

kia

Slo

veni

a

1993-2000 2000-2006

Source: AMECO Database

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Growth of gross domestic product:

Wider Europe% annual change, 2006 and 2006-2020 forecasts

1.1

2.31.5

2.8

4.1

5.24.8

5.2

7.36.8

6.05.8

8.9

7.4

6.1

3.2

6.86

9.6

12.1

7.1 7

2.3

4.9

6.14.6

6.5

5.6 5.2

2.6

0

2

4

6

8

10

12

14

2003 2004 2005 2006 2006-2015

EU-15 NMS-10 Bu,Ro,Cr Turkey SEE-5 Ukraine

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www.wiiw.ac.at

The employment-output relationship

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10

90

100

110

120

130

140

150

160

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Employment GDP Employment GDP

Employment and GDP growth 1995 = 100

EU-15 NMS-10

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Source: wiiw Database

-4

-2

0

2

4

6

CZ HU PL SK SI BG RO

2000 2001 2002 2003 2004 2005 2006

Employment growth rates 2000-2006 in %

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12

4

8

12

16

20

2000 2001 2002 2003 2004 2005 2006


Unemployment rates 2000-2007LFS, %, annual average


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Employment growth rates

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

CZ HU PL SK SI EE LV LT BG RO1996-2000

2001-2006


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Structural break in employment-to-GDP

relationship

1995-2000 2001-2006

CEE4 0.117 0.183Other NMS -0.261 0.199

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

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GDP growth and Current Account balance

-10

-8

-6

-4

-2

0

2

4

6

8


GDP 1995-99

CA 1995-99

GDP 2000-06

CA 2000-06


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GDP growth and Current Account balance

Panel estimation of CA change (in % of GDP) on real GDP growth (annual data)

1995-1999 2000-2006CEE5 -0.46 -0.12Baltics -0.52 -0.25Romania & Bulgaria -0.63 -0.45



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Structural change, convergence and the

U-shaped pattern of employment growth

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Stylized U-shaped pattern of employment

growth in NMs

Employment levels

TimeStrong 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)

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-9 -6 -3 0 3 6 9 12

Health and social work

Education

Public administration

Community services

low skill sectors (G-I)

high skill sectors (J,K)

Market services

low skill sectors

medium skill sectors

high skill sectors

Secondary sector

Primary sector

Divergence of employment shares from EU-15 structure, 2005

NMS-4 NMS-7

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Employment growth in sectors,

1999-2005

-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30


Education


Community services



Market services

low skill sectors

medium skill sectors

high skill sectors

Secondary sector

Primary sector

Total Employed

NMS-4 NMS-7

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-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12


Education


Community services



Market services

Secondary sector

Primary sector

NMS-4 NMS-7 PL

Value added, difference to EU-15, 2005

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25

40

60

80

100

120

140

1995 1997 1999 2001 2003 2005

AgricultureNMS-7 (CZ, HU, SK, SI, EE, LV, LT)

40

60

80

100

120

140

1995 1997 1999 2001 2003 2005

Poland

60

80

100

120

140

160

1995 1997 1999 2001 2003 2005

IndustryNMS-7 (CZ, HU, SK, SI, EE, LV, LT)

60

80

100

120

140

160

180

1995 1997 1999 2001 2003 2005

Poland

Output and Employment, 1995-2005

Output Employment

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26

60

80

100

120

140

160

180

1995 1997 1999 2001 2003 2005

Basic Services (Trade, Restaurants, Hotels, etc.)

NMS-7 (CZ, HU, SK, SI, EE, LV, LT)

60

80

100

120

140

160

180

1995 1997 1999 2001 2003 2005

Poland

60

80

100

120

140

160

1995 1997 1999 2001 2003 2005

Financial and Business Services

NMS-7 (CZ, HU, SK, SI, EE, LV, LT)

6080

100120140160

180200

1995 1997 1999 2001 2003 2005

Poland

Output and Employment, 1995-2005

Output Employment

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27

-6-4

-2024

68

Agriculture, forestry,fishing

Industry total Trade, hotels,restaurants

Finance and businessserv.

Value added Productivity Employment

Growth by sectors, 1995-2005 in % p.a.NMS-7

-6-4

-20

24

68

Agriculture, forestry,fishing

Industry total Trade, hotels,resaurants

Finance and businessserv.

Poland



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Wage-productivity dynamics and the changing

pattern of international specialisation

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Poland: Dynamics of wages,

productivity and unit labour costs, 2000-2006Relative to Austria (2002=100)

0

20

40

60

80

100

Wag

es

Pro

duct

ivity

Uni

t lab

.cos

ts

Wag

es

Pro

duct

ivity

Uni

t lab

.cos

ts

Wag

es

Pro

duct

ivity

Uni

t lab

.cos

ts

Wag

es

Pro

duct

ivity

Uni

t lab

.cos

ts

Wag

es

Pro

duct

ivity

Uni

t lab

.cos

ts

Wag

es

Pro

duct

ivity

Uni

t lab

.cos

ts

Totalmanufacturing Textiles Leather Machinery

Electricalequipment Transport

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Bulgaria: Dynamics of wages,

productivity and unit labour costs, 2000-2005Relative to Austria (2002=100)

0

30

60

Wag

es

Pro

duct

ivity

Uni

t lab

.cos

ts

Wag

es

Pro

duct

ivity

Uni

t lab

.cos

ts

Wag

es

Pro

duct

ivity

Uni

t lab

.cos

ts

Wag

es

Pro

duct

ivity

Uni

t lab

.cos

ts

Wag

es

Pro

duct

ivity

Uni

t lab

.cos

ts

Wag

es

Pro

duct

ivity

Uni

t lab

.cos

ts

Totalmanufacturing Textiles Leather Machinery

Electricalequipment Transport

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Market shares in EU-25 imports

00,5

11,5

22,5

low tech medium-lowtech

medium-hightech

high tech officemachin.&

comp.

1995 2000 2005Czech Republic

00,5

11,5

22,5


medium-hightech


comp.

1995 2000 2005Hungary

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00,5

11,5

22,5


medium-hightech


comp.

1995 2000 2005Poland

00,20,40,60,8

1


medium-hightech


comp.

1995 2000 2005Slovak Republic

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00,20,40,60,8


medium-hightech


comp.

1995 2000 2005Bulgaria

0

0,5

1

1,5


medium-hightech


comp.

1995 2000 2005Romania

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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

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Export unit value ratios by industrial groupings(groupings 1 – low tech, 3 – medium/high tech)

-0.4

-0.15

0.1

EU-15 NMS ACCs Turkey Tigers1

Tigers2

China

period 1: 1995-1997period 2: 2002-2004

period 1: 1995-1997period 2: 2002-2004

1 – low tech 3 – medium/high tech

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Import penetration ratios in USA

in medium high-tech industries

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

EuropeSouth

Ireland EastEurope

Tigers 1Tigers 2 China India SouthAmerica

Mexico EFTA RestOECD

Japan EU NorthRest ofWorld

1980-1987 1988-1992 1993-1996 1997-2000

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Import penetration ratios in Japan

in medium high tech industries

0.0

1.0

2.0

3.0

4.0

5.0

EuropeSouth

Ireland EastEurope

Tigers 1 Tigers 2 China India SouthAmerica

Mexico EFTA RestOECD

EU North Rest ofWorld

1980-1987 1988-1992 1993-1996 1997-2000



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The impact of structural convergence –

example from the labour market:

Skill up-grading, the pressure on the low-skilled and

supply side adjustment

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Employment by educational categories1992-2005

405060708090

100110120130140

1992 1994 1996 1998 2000 2002 2004

Hungary:(Index: 1992 = 100)

40

60

80

100

120

140

160

180

1993 1995 1997 1999 2001 2003 2005

Poland:(Index: 1992 = 100)

40

60

80

100

120

140

1993 1995 1997 1999 2001 2003 2005

Czech Republic:(Index: 1993 = 100)

Primary education

Secondary education

Tertiary education

Total employment

2005

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Skill shift

Decomposition into ‘within’ and ‘between’ effects:

i

iii

ii seses

where

jj

ii

E

Ee , iii ESs / and ESs /

E stands for employment, S for skilled workers

overstrike denotes average over time; the index i denotes industries.

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Skill shifts – between and within components in

low-, medium- and high-skill sectors,1999-2005

-1

0

1

2

3

4

L M H L M H L M H L M H

between within total skill shift

Source: wiiw

CZ HU SI SK

L=low-skill sectors, M=medium-skill sectors, H=high-skill sectors

High education

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-2

0

2

4

6

L M H L M H L M H


Source: wiiw

EU-North EU-South NMS-4


High education

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-8

-6

-4

-2

0

2

4


Source: wiiw

EU-North EU-South NMS-4


Low education

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0

510

15

20

95 05 95 05 95 05 95 05 95 05 95 05 95 05 95 05

low medium medium-high high

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

0

20

40

60

95 059505 9505 9505 9505 9505 9505 9505 9505 9505 950595 05

Processed Parts Final Total

HL HH USA HL HH USA HL HH USA HL HH USA

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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).



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Labour supply response

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Growth of labour force, 15-64, 1999 - 2003, in %

-15

-10

-5

0Low educated

EU-15 EU-S NMS-4 NMS-7 NMS-8

0

5

10

15

20

25


Highly educated

0

5

10

15 Medium educated


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0

5

10

15

20

25

25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64

NMS-7 NMS-8 EU-10

Share of population in education groupsin % of total population in education groups

Low

0

5

10

15

20

25

25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64

High



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The regional dimension

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0.00

0.10

0.20

0.30

0.40

0.50

0.60

Sw

eden

Net

herla

nds

Fin

land

Irel

and

Aus

tria

Den

mar

k

Bel

gium

Fra

nce

Ger

man

y

Uni

ted

Kin

gdom

Spa

in

Italy

Por

tuga

l

Gre

ece

OM

S

NM

S

Slo

veni

a

Lith

uani

a

Bul

garia

Rom

ania

Hun

gary

Cze

ch R

epub

lic

Est

onia

Pol

and

Slo

vaki

a

Latv

ia

1995 2002

Size of regional income disparities in the EU-27 regionsCoefficient of Variation, regional GDP per capita at PPS.

NUTS-3 regions, 1995 & 2002

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Agriculture regions

Industry regions

Basic service regions

Business service regions

Capital cities

Regional Clusters

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60

100

140

180

Ca

pita

ls

Ag

ricu

ltura

l

To

uri

sm

Min

ing

Ba

sic

Ind

ust

ry

Fw

loo

kin

gin

d

Ba

sic

Se

rvic

es

Bu

sin

ess

Se

rvic

es

NMS North EU South EU ALL

Regional GDP per head, 2002in percent of country averages, cluster weighted averages

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-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Ca

pita

ls

Ag

ricu

ltura

l

To

uri

sm

Min

ing

Ba

sic

Ind

ust

ry

Fw

loo

kin

gin

d

Ba

sic

Se

rvic

es

Bu

sin

ess

Se

rvic

es

NMS North EU South EU ALL

Regional GDP growth, 1995-2002average yearly growth rates, relative to country average, cluster weighted averages

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61

60

80

100

120

140

160

180

Ca

pit

al

cit

ies

Ag

ric

ult

ura

l

To

uri

sm

Min

ing

Old

Ind

us

tria

l

Ne

wIn

du

str

ial

Se

rvic

e

primary secondary tertiary

Population (15-64 years): Region types and educational

attainment levels, 2003

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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

Employment rates – of persons with completed tertiary education(employment as a proportion of the highly educated working-age population 25-64 years), 2003

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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

Employment rates – of persons with low level education(employment as a proportion of the low educated working-age population 25-64 years), 2003

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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)

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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

Landesmann

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