Structural Changes in CEE Countries

Vil ém Semerák November 24, 2006 Institute of Economic Studies Charles University, Prague

Outline of Presentation

 Background  The need for structural changes in CEE countries  Structural problems and their symptoms  Overall structural changes  Structural changes in industry  Impact on the economies

Background Information

 “Work in progress”, cooperation with ECNU Shanghai  Questions:   Future role of CEE economies in the EU Type of structural changes and “rationality” of the changes  Possible policy implications and implications for welfare  Analyzed countries:  New member states + other former CPEs  Here data just for the CR, Hungary, and Poland

CEE Countries at the End of 1980s

  Centrally planned economies with very weak economic performance Economies with obsolete economic structures   Macro level    Disproportionately high share of industry and agriculture, low share of services (both in GDP and employment) Within industry – too high share of heavy industry and traditional industries (textile), low share of advanced, knowledge-based sectors (both in GDP and trade) Specific pattern of trade flows – reliance on trade with countries of the soviet block Micro level Inefficient structures at the firm level  Large firms with oligopoly or monopoly positions  Vertical and horizontal integration – but often not on sound economic foundations  Low productivity of labor, low quality of produce, low efficiency, low competitiveness

Structural Changes in CEE Countries

 Three important motives:  Transition  Changes necessary to turn the countries into developed competitive economies  European integration  Changes induced by the need to adopt European legislation and integration into the common market  Adjustment to changes in the world economy  Problem: the three phases overlap in time, it is not possible to delineate exact borders between them and their effects  Countries analyzed:  Czech Republic, Poland, Hungary

Old EU

NMS 8 Rest of the World

Causes of the Changes

 Demand side  Changes in the export demand  Reorientation to western markets  Changing real incomes in the East  Changes in domestic demand  Income effects  Supply side  Changing structure of domestic relative prices/costs  Changes in real exchange rates (relative prices at home/foreign market)  Changes in regulation  Uncertainty, noisy information

Sectors and Changes

 Impacts of the changes are differentiated:  Non-tradables  Tradables  Differentiated commodities  Two-way trade  More homogeneous products  Volume of investment (and perceived risk)

Costs of the Changes

 “Costless” structural change  “Statistical” structural change caused by  Changes in statistical methodology  Break-up of large industrial firms  “Costly” change  Decline of non-performing sectors

Expected Future Structure

 Detailed economic structure of the CEE countries does not have to mimic the structure of other EU members  While convergence in real income is likely to lead to convergence in the structure of individual demand, this does not have to hold for supply  Economic geography models  Geographical distribution of industrial activities sensitive to real barriers to mobility of goods and services

Macroeconomic Structures

 CEE used to have very high share of Agriculture and Industry in both their GDP and employment  Structural changes  Decreasing share of agriculture  Decreasing share of industry  Increasing share of services

Economic Structures in 1990

Germany Austria CR Poland Hungary 0% 20% 40% 60% 80% 100% Agriculture Industry Services

Source: WDI (2006)

CR: C hanges in the Structure of GDP

100%

Relative shares of the sectors in the total value added

80% 60% 40% 20% 0% 1990 1992 1994 1996 1998 2000 2002 2004

Source: WDI (2006)

Services Industry Agriculture

Poland: Changes in the Structure of GDP

Relative shares of the sectors in the total value added

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 Services Industry Agriculture

Source: WDI (2006)

Hungary: C hanges in the Structure of GDP

100%

Relative shares of the sectors in the total value added

80% 60% Services Industry Agriculture 40% 20% 0% 19 90 19 92

Source: WDI (2006)

19 94 19 96 19 98 20 00 20 02

Structural Changes in Industry

    Overall trends   Dramatic changes in the structure of production and employment Changes seem to be positive, i.e. they seem to follow differences in growth of productivity of labor in the sectors Sectors with highest growth   Electrical and optical equipment Transport equipment Sectors with fastest decrease   Textiles and textile products Leather and leather products Note: Growth/decline measured by the share in the total production of manufacturing industry

Changes in Degree of Industry Specialization

measured by Herfidahl index

1600 1500 1400 1300 1200 1100 1000 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04

Source: Based on data from WIIW Handbook of Statistics 2005

CR Hungary Poland Bulgaria Slovakia

Czech Manufacturing – Winners and Losers

Relative Changes in the Importance of Sectors 1990-2004

-100 -50 0 50 100 150 200 Electrical and optical equipment Rubber and plastic products Transport equipment Manufacturing n.e.c.

Pulp, paper & paper prod; publishing & printing Other non-metallic mineral products Chemicals, chemical prod. & man-made fibres Wood and wood products Basic metals and fabricated metal products Coke, refined petroleum prod. & nuclear fuel Machinery and equipment n.e.c.

Food products, beverages and tobacco Textiles and textile products Leather and leather products

Source: Based on data from WIIW Handbook of Statistics 2005

Hungarian Manufacturing – Winners and Losers Relative Changes in the Importance of Sectors 1990-2004

-100 -50 0 50 100 150 200 Transport equipment Electrical and optical equipment Rubber and plastic products Pulp, paper & paper prod; publishing & printing Manufacturing n.e.c.

Coke, refined petroleum prod. & nuclear fuel Machinery and equipment n.e.c.

Chemicals, chemical prod. & man-made fibres Other non-metallic mineral products Food products, beverages and tobacco Basic metals and fabricated metal products Wood and wood products Textiles and textile products Leather and leather products

Source: Based on data from WIIW Handbook of Statistics 2005

Polish Manufacturing – Winners and Losers Relative Changes in the Importance of Sectors 1990-2004

-100 -50 0 50 100 150 200 Rubber and plastic products Manufacturing n.e.c.

Pulp, paper & paper prod; publishing & printing Transport equipment Wood and wood products Electrical and optical equipment Other non-metallic mineral products Food products, beverages and tobacco Coke, refined petroleum prod. & nuclear fuel Chemicals, chemical prod. & man-made fibres Basic metals and fabricated metal products Machinery and equipment n.e.c.

Textiles and textile products Leather and leather products

Source: Based on data from WIIW Handbook of Statistics 2005

CR, Hungary and Poland - Winners and Losers Relative Changes in the Importance of Sectors 1990-2004

-100 -50 0 50 100 150 200 Electrical and optical equipment Transport equipment Rubber and plastic products Manufacturing n.e.c.

Pulp, paper & paper prod; publishing & printing Wood and wood products Other non-metallic mineral products Chemicals, chemical prod. & man-made fibres Coke, refined petroleum prod. & nuclear fuel Basic metals and fabricated metal products Food products, beverages and tobacco Machinery and equipment n.e.c.

Textiles and textile products Leather and leather products

Simple average used Source: Based on data from WIIW Handbook of Statistics 2005

CR – Structure of Production and Productivity

-100 200 150 100 50 y = 0.8975x - 47.799

R 2 = 0.5002

-50 0 -50 0 -100 50 100 150 -150 Total change in productivity, % (1990-2004) 200 250

Source: Based on data from WIIW Handbook of Statistics 2005

CR – Structure of Employment and Productivity

200 150 100 y = 0.1955x + 2.9703

R 2 = 0.0362

-100 -50 50 0 0 -50 50 100 150 -100 Total change in productivity, % (1990-2004)

Source: Based on data from WIIW Handbook of Statistics 2005

200 250

Hungary – Structure of Production and Productivity

350 300 250 200 150 100 50 0 -50 0 -100 200 400 y = 0.3275x - 82.981

R 2 = 0.9616

600 800 1000 1200 1400 Total change in productivity, % (1993-2004)

Source: Based on data from WIIW Handbook of Statistics 2005

Hungary – Structure of Employment and Productivity

-100 -50 120 100 80 60 40 20 0 -20 0 -40 -60 -80 50 y = 0.4248x - 27.824

100 R 2 = 0.3767

150 Total change in productivity, % (1990-2004) 200

Source: Based on data from WIIW Handbook of Statistics 2005

250

Poland – Structure of Production and Productivity

200 150 100 50 0 0 -50 200 400 600 y = 0.0182x + 6.2788

R 800 2 = 0.0141

1000 1200 -100 Total change in productivity, % (1993-2004)

Source: Based on data from WIIW Handbook of Statistics 2005

1400

Poland – Structure of Employment and Productivity

-100 120 100 -50 80 60 40 y = 0.0383x + 5.0372

R 2 = 0.0042

20 0 -20 0 -40 50 100 150 -60 Total change in productivity, % (1990-2004) 200

Source: Based on data from WIIW Handbook of Statistics 2005

250

Macroeconomic Aspects of Structural Changes

 Distribution of impacts in time = basic problem of structural changes  Succesful structural changes will stimulate growth of GDP and welfare in the long run  But there may be substantial costs in the short run

Further Extensions

 Econometric analysis of determinants of structural changes  Use of firm-level data for the Czech Republic