Transcript berglofpresentation

Bank of Greece
Erik Berglof
11 February 2011
The transition region’s
pre-crisis growth model
Vigour… or just bubbles?
2
TR 2010: Recovery and Reform – Outline
1. Overview: the argument in a nutshell
2. Developing local currency finance
3. Building export capacity
4. Improving the business environment
South-east Europe 2011: Recovery finally
2009
10%
2010
2011
8%
6%
4%
2%
0%
*
-2%
-4%
-6%
* EBRD growth forecasts as of 21st January 2011.
Turkey
Serbia
Romania
Montenegro
FYR
Macedonia
Croatia
Bulgaria
Bosnia
Albania
-8%
TR 2010: Recovery and Reform – Outline
1. Overview: the argument in a nutshell
2. Developing local currency finance
3. Building export capacity
4. Improving the business environment
Time to draw lessons from a decade of boom and bust …
Pre-crisis the EBRD region
grew as fast as Asia…
…but with high current account
deficits…
…resulting in precipitous drop in
growth in 2009
Emerging Asia
Latin America
Middle East
EBRD region
6
Does the transition region need to reinvent
its approach to growth after the crisis?
 No “new growth model”
 But need to address key weaknesses:
 Incomplete reforms; unbalanced growth; financial fragilities
New Growth Agenda
for both stronger and safer growth
 Build local currency finance and capital markets
 Remove obstacles to export growth
 Improve the business environment
7
A New Growth Agenda
Reform areas
Developing domestic
capital markets and
local currency finance
Strengthening
export growth
Objectives
Less FX
in credit
Improve
current
account
Safer growth
Innovation
Improving business
environment
8
Stronger growth
TR 2010: Recovery and Reform – Outline
1. Overview: the argument in a nutshell
2. Developing local currency finance
3. Building export capacity
4. Improving the business environment
Developing local currency finance: rationale
A way of deepening local capital markets


increase sources of domestic funding
lower dependence on foreign capital inflows
De-euroisation/De-dollarisation


increase share of local currency lending
reduce unhedged FX borrowing
CEB
¦
SEE + Turkey
Loans
¦
Deposits
EEC + Russia
¦
Kyrgyz
Rep.
Tajikistan
Ukraine
Kazakhstan
Russia
Moldova
Georgia
Belarus
Azerbaijan
Armenia
Turkey
Serbia
Albania
Bosnia and
Herz.
Bulgaria
FYR
Macedonia
Romania
Poland
Lithuania
Latvia
100
90
80
70
60
50
40
30
20
10
0
Hungary
Estonia
Czech Rep.
Croatia
Few countries use mainly local currency
Percent of local currency loans and deposits, 2009
g
CA
Low local currency use: longstanding problem
Per cent of all loans
100
Declines in local currency use:
Hungary and Latvia
80
Increases in local currency use:
Turkey, Armenia, and Kazakhstan
60
40
20
2001
2005
EEC + Russia
2008
¦
CA
Tajikistan
Kazakhstan
Kyrgyz
Republic
Ukraine
Russia
Moldova
Georgia
Belarus
Azerbaijan
Armenia
Turkey
FYR
Macedonia
¦
Bulgaria
¦ SEE + Turkey
Slovak
Republic
Bosnia and
Herz.
Poland
Romania
CEB
Lithuania
Latvia
Hungary
Estonia
Croatia
0
Proximate cause: high LC borrowing costs
European countries: LC-FX lending rate spread, 2006-10
Albania
FYR Macedonia
Estonia
Poland
Hungary
Romania
Lithuania
Jun 10
Feb 10
Oct 09
Jun 09
Feb 09
Oct 08
Jun 08
Feb 08
Oct 07
Jun 07
Feb 07
Oct 06
Jun 06
14
12
10
8
6
4
2
0
-2
-4
-6
However, this reflects the risk of devaluation
Key question:
Why so many unhedged firms and
households take the FX risk?
Potential factors inducing FX risk-taking
1. FX loans too cheap
→ Deep cause: lack of local financial development
combined with abundant foreign funding
2. FX risk lower individually than socially
 implicit bailout guarantees; externalities of insolvency
→ Deep cause: distortions
3. FX borrowing risky, but LC borrowing even riskier
 High ex-post real rates if inflation lower than expected.
→ Deep cause: lack of macro stability
Diagnosis and policy remedy: country-specific
Potential causes
for lending in FX
16
Policy remedy
Lack of macro stability
Macro stabilisation +
institution-building
Lack of financial
development
Local capital market
development
Under-pricing of FX
risk
Regulation
Big differences in macroeconomic stability
Percentage points
Predictability of Inflation, 2000-2010
12
10
8
6
4
2
Croatia
Czech
Estonia
Hungary
Latvia
Lithuania
Poland
Slovak
Slovenia
Albania
Bulgaria
FYR
Romania
Turkey
Armenia
Azerbaijan
Belarus
Georgia
Moldova
Russia
Ukraine
Kazakhstan
Kyrgyz
Mongolia
Tajikistan
Turkmenistan
Uzbekistan
0
RMSE of 1 year forecast
RMSE of 2 year forecasts
RMSE: Root Mean Square Errors; based on inflation
predictions from the IMF’s World Economic Outlook, 2000-2010
New EBRD index:
Money market development varies greatly
11
28
FX forward market liquidity
Money market liquidity (up to 3 months)
Money market interest rate benchmark
10
9
8
7
6
5
4
3
CEB
SEE + Turkey
EEC + Russia
CA
Turkmenistan
Tajikistan
Kyrgyz Republic
Uzbekistan
Mongolia
Kazakhstan
Belarus
Azerbaijan
Moldova
Armenia
Ukraine
Georgia
Russia
BiH
FYROM
Albania
Serbia
Bulgaria
Croatia
Romania
Turkey
Lithuania
Latvia
Poland
UK
0
Hungary
2
1
New EBRD index:
Government bond markets also vary
11
26
493 153 35 30
10
9
8
7
6
5
4
3
2
1
0
Turkmenistan
Tajikistan
Uzbekistan
Mongolia
Kyrgyzstan
Kazakhstan
Belarus
Georgia
Azerbaijan
Moldova
Armenia
Ukraine
Russia
BiH
Serbia
FYROM
Croatia
Albania
Romania
Bulgaria
Turkey
Estonia
Latvia
Lithuania
Hungary
Poland
Portugal
Denmark
Spain
Sweden
Netherlands
Germany
Secondary Market Liquidity
Secondary Market Development
Primary Market Development
CA
EEC + Russian Fed.
SEE + Turkey
CEB
Advanced European
Markets
Money and Bond Market
Development
Mapping obstacles to local currency finance
0
1
2
3
4
5
6
7
8
9
10
Belarus
Uzbekistan
Albania Georgia
FYROM Kyrgyz Rep
Armenia
Latvia
Moldova
Croatia
Lithuania
Romania
Bulgaria
Russia
Turkmenistan
Tajikistan
Hungary
Turkey
Mongolia
Azerbaijan
Ukraine
Kazakhstan
Share of Foreign Currency
in Loans and deposits
≥ 75%
40-75%
≤ 40%
Poland
0
2
4
6
8
Inflation prediction (RMSE) in Percentage Points
20
10
LC development vs. FX risk management


In highly euroised countries, LC market
development without exchange rate flexibility is
not plausible (Latin American experience)
Hence, countries that are firmly committed to
hard pegs will need to live with Euroisation, and
manage its risks
bigger onus on regulation; country insurance
 mechanisms to cover FX liquidity gaps in a
crisis and prevent amplification of FX shocks
A framework for country-specific reform
Hard peg in anticipation of Euro?
No
Macroinstitutional
credibility meets
minimum
standards
 Further reform macro institutions
(including monetary policy frameworks);
build track record;
 Further develop local currency markets
 Develop regulation;
Hungary, most south-eastern European
countries; Armenia, Georgia, Russia
Macroinstitutional
credibility weak
 Reform macro institutions; build track
record;
 Country insurance.
Ukraine; Central Asia, some Western
Balkans countries
Yes
Develop
regulation
 Fiscal
consolidation
/reforms
Baltics;
Bulgaria
TR 2010: Recovery and Reform – Outline
1. Overview: the argument in a nutshell
2. Developing local currency finance
3. Building export capacity
4. Improving the business environment
Building export capacity: rationale
More balanced growth


lower current account deficits
lower dependence on foreign capital inflows
Strengthen long run growth

link between exports and innovation
But which way did the causality run?
 More innovative firms are better exporters, or
 Exports help innovation (e.g., larger market to recoup costs)
Which way causality runs – the evidence
• US and German data: causality runs from
productivity to exporting
• Emerging markets: Exporting makes firms more
productive/innovative
– Aw, Chung, Roberts (2000) for Korea and Taiwan;
Hallward-Driemeier et al (2005) for East Asia; Jiang et al
(2009) for China
– De Loecker (2007) for Slovenia
Substantial effect, especially for R&D spending
35
Marginal probability of innovation
85
75
15
10
5
70
Exporter
20
Non-Exporter
25
Exporter
80
Non-Exporter
30
0
65
60
55
50
R&D spending (left
scale)
Product innovation
(right scale)
2000
2008
2000
2008
2000
2008
10
9
8
7
6
5
4
3
2
1
0
2000
2008
Pre-crisis: exports remarkably successful…
China
EBRD
region
China
EBRD
region
Share of world exports
(left scale)
0.18
0.16
0.14
0.12
0.10
0.08
0.06
0.04
0.02
0.00
Export market concentration
(right scale)
Source: IMF, Direction of Trade Statistics.
… but past export growth drivers are fading
Labour costs elsewhere in
the CEE catching up with
advanced countries
Brazil
Poland
Korea
Slovak Rep.
Slovenia
Mexico
Bulgaria
Hungary
Lithuania
Estonia
Romania
Latvia
ULC grew
much faster
-1
1
3
5
7
9
Tariffs already low, few
further gains from
trade arrangements
2007 average trading
partner tariff only 5.5%
Slower projected growth
of large trading partners
2010-15 trading partner to
grow 1 percentage point
lower than before crisis
28
11
Multiple of U.S. ULC growth, 2001-2008
Invigorating exports requires structural reforms
Statistical analysis points to three key policy
instruments:
 reducing or adapting to non-tariff barriers
 increasing efficiency of customs
 reducing corruption and entrench rule of law
Basis: panel regression of real export growth on institutional
indicators, tariff barriers, nontariff barriers, and controls
(average trading partner real GDP growth, real effective
appreciation); 130 countries; 1999-2009.
29
Top priorities to improve export-friendliness*
30
* Based on deviations from
mean values
TR 2010: Recovery and Reform – Outline
1. Overview: the argument in a nutshell
2. Developing local currency finance
3. Building export capacity
4. Improving the business environment
Improving the business environment (BE)
Key to long run growth

Of course! Defined as everything that may matter for
growth – from institutions to education to finance
But which aspect?


BEEPs may help, by ranking constraints from the
perspective of entrepreneurs.
But there are significant hurdles
BEEPS as a guide to reforms: problems
1. Not all “constraints” reflect public goods

Tax rates, credit constraints
2. Differences in demand for public goods

E.g. fast growing firms may complain more
3. Different “reference points” or propensities to complain
across countries and perhaps constraints

E.g. Montenegro vs. Serbia
4. Relating perceived constraints to actual reforms
Approach in TR 2010.
1. Focus on 10 constraints that represent public goods

Ignore tax rates, credit constraints
2. Focus on relative perceived constraints

De-mean reported constraints using firm means
3. Adjust for firm characteristics

Establish relative perceived constraints of a
representative firm in each country
4. Relate adjusted constraints to actual reforms via
comparisons of similar countries; identifying significant
changes over time; and regression analysis.
Note: 1 and 3 follows Carlin and Shaffer (2010)
Crime
Corruption
Courts
Licence
Customs
Labor
Regulation
Montenegro
Tax
Administration
Skills
Availability
-0.8
Land Access
Infrastructure
difference wrt severity in avg country with same GDPPC
Absolute constraint severity
Example: Absolute BEEPS scores suggest
Montenegro much better than Serbia in all areas …
0.2
0
-0.2
-0.4
-0.6
Serbia
-1
Crime
Corruption
Courts
Licence
Customs
Labor
Regulation
Montenegro
Tax
Administration
Skills
Availability
Land Access
Infrastructure
% difference wrt avg constraint severity in each country
Relative constraint severity
…while relative constraints highlight priority
business concerns in both countries
0.3
0.2
0.1
0
-0.1
Serbia
-0.2
Relative score method reveals skills availability
and corruption as top constraints
Number of countries where a constraint is among top three concerns
25
20
15
10
5
Central Europe and Baltics (CEB)
South-eastern Europe (SEE) and Turkey
Eastern Europe and Caucasus (EEC) and Russia
Central Asia (CA)
Land access
Licence
Labor
Regulation
Crime
Infrastructure
Tax
Administration
Corruption
Skills
0
Cross-country and over-the-time analysis
help identify examples to follow within regions
Corruption since 1999: Georgia
Change in rel. severity of corruption
constraint, ’99-’08
Relative severity of
tax administration constraint
Tax administration: Estonia
Spend more and BETTER on education
– Skills constraint more binding in richer countries
– Traditional education measures do not necessarily
relieve skills constraint
–
–
–
–
–
Labour with primary / secondary / tertiary education
Expenditure on primary / secondary education
Literacy rate
Primary education completion rate
Public education spending
Ensure schools provide relevant education
No complacency: now is time to reform

Urgent need to enhance the growth model to avoid
serious post-recovery risks
 Particularly if capital inflows pick up again

Structural reforms to boost growth in a tougher
environment
Prepare for sustainable long-term growth
40
Thank you
Backup slide: assets of insurance corporations and pension
funds
Per cent of GDP
100
2,347
423
US$ billion
55
110
90
50
80
45
40
70
35
60
30
50
25
40
20
Assets as a share of GDP
US$ value of assets
Serbia
Ukraine
Romania
Kazakhstan
0
Turkey
0
Hungary
5
Poland
10
Russia
10
Portugal
20
Sweden
15
Germany
30
Weakness (1): incomplete reforms 4.5
New EBRD sector indicators
4
EST
HUN
3.5
3
2.5
2
BEL
UZB
1.5
POL
LAT
SVN SVK CRO
BGR LIT
TURROM
RUS
SRB FYR
ARM
KAZ
UKR MNE ALB
BIH
MDV
MON
GEO
AZE
KYR
TAJ
TKM
1
1
1.5
2
2.5
3
3.5
Traditional country-level transition indicators
43
4
4.5
Weakness (2): unbalanced growth
44
Weakness (3): financial sector fragilities
45
Computing relative scores
Absolute (raw)
BEEPS score for
business
environment
aspect i, firm j
(Cij
Remove firm-level mean score
1. Absolute score comparisons
are impossible
2. Removes firm-level
tendency to complain
C j )/C j
Firm-level mean calculated

Cj 
from the 10 relevant

constraint area scores
Relative BEEPS
score for
business
environment
aspect i, firm j
 Cij

i Cij  / 10