UCL SSEES Workshop
“Transition economics meets new structural economics”
London, United Kingdom, 25-26 June 2013
Economic Growth in Central and Eastern Europe.
Convergence, Capital Flows and Crisis
Karsten Staehr
Tallinn University of Technology
Eesti Pank
All viewpoints are personal!
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The next 19½ minutes
1. Introduction
2. Some numbers
3. Credit constrained growth
4. Simulations
5. Final comments
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1. Introduction
Another look at the growth performance in the 10 CEE countries 1995-2012
How impressive?
Remove “easy” growth drivers
Capital flows, convergence
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Post-communist countries as economic laboratory
Reforms changing institutions and administrative framework
Remove shortages
Economic growth
Fischer, Sahay & Vegh (1996): “The beginning of growth” effects of reforms
Econometric studies Growth = α0 + α1·Reform + α2·Controls
Babetskii & Campos (2007) Meta analysis of α1: 1/3, 1/3, 1/3
Possible explanation explain short-term growth performance by long-term
structural measures?
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Here look at drivers of short-term growth in CEE
Open economies
Trade, technology, ideas, people
International capital flows
Capital flows
Flowing down stream [ prior to global financial crisis]
Sudden stop [ during global financial crisis]
Extreme magnitudes in many CEE countries
Argument 2 “easy” economic growth in CEE?
Helped by accumulation of large net foreign liabilities
▫ Booms “driven” by capital inflows
▫ Downturns often from sudden stops / reversals
Catch-up growth 2%-rule
Assess importance of capital inflows and catch-up on economic growth performance
in the CEE countries since mid-1990s
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2. Some numbers
Figure: GDP growth for four CEE country groups, percent per year, 1995-2012
10
10
5
5
0
0
Balkan
-5
-5
Baltics
CE4
-10
-10
Poland
-15
-15
96
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Figure: GDP level for four CEE country groups, percent of EU15 average,
1995-2012, PPS
100
100
90
Balkan
90
80
Baltics
80
CE4
70
70
Poland
60
60
50
50
40
40
30
30
20
20
96
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Figure: GDP growth in the CEE countries, averages 1996-2012, percent per year
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GDP growth
5
5
4
4
3
3
2
2
1
1
0
0
Sl
Sl
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Figure: Current account balance for four CEE country groups, percent of GDP,
1995-2012
5
5
0
0
-5
-5
-10
-10
Balkan
Baltics
-15
-15
CE4
Poland
-20
-20
96
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04
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06
08
10
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Figure: Net international investment position for four CEE country groups,
percent of GDP, 1999-2012
-20
-20
-30
-30
-40
-40
-50
-50
-60
-60
Balkan
Baltics
-70
-70
CE4
-80
-80
Poland
-90
-90
00
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3. Credit constrained growth
Thirlwall (1979), Thirlwall & Hussain (1982) “credit constrained growth”
Chenery & Strout (1966) World Bank’s Two-Gap Model
UK policy dilemma since WW2
Economic growth ↑ ⇒ CA ↓
If external financing ☺, otherwise foreign currency reserves down / crisis Under financial repression growth rate depends on possibility of financing CA
Direction of causality?
Capital inflows ⇒ demand ↑ ⇒ economic growth ↑ [ cf. also Transfer effect]
In any case current account balance as constraint on short-term economic growth
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Economic growth constrained by financing possibilities in CEE countries?
Various exchange rate crises
EU accession boom
Global financial crisis
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Economic growth, percent per year
Figure: The current account balance and economic growth for the CEE countries,
annual data, 1995-2012
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15
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
-25
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-15
-10
-5
Current account balance, percent of GDP
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Economic growth, percent per year
Figure: The current account balance and economic growth for the CEE countries,
annual data, 1995-2012
15
15
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
-25
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-15
-10
-5
Current account balance, percent of GDP
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0
5
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Instruments C, CA(-1), CA(-2), YPPP(-1), GYEU15, GYEU15(-1), DUM2008, DUM2009
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► An aside: Seven Asian countries China, HK, Indonesia, Korea, Malaysia,
Taiwan, Thailand
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Economic growth, percent per year
Figure: The current account balance and economic growth for the Asian countries,
annual data, 2001-2012
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15
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
-25
-20
-15
-10
-5
Current account balance, percent of GDP
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End of aside ◄
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Findings
In CEE countries clear negative (conditional) correlation coefficient between
CA and growth
▫ Slope ≈ {-0.4, -0.2}
In Asian countries no clear pattern
Economic growth in CEE constrained by financing possibilities…
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4. Simulations
Simulation scenarios for each of 10 CEE countries
Counter-factual experiments “what if”?
a) Average growth 1996-2012
b) Average growth if CA = -4% each year (slope = -0.3) [ EU surveillance]
c) Average growth if CA = -4% each year (slope = -0.3) and β-convergence = 2%
Robustness analysis CA = 0
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Figure a): Actual and adjusted GDP growth in the CEE countries, averages 19962010, percent per year
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GDP growth
5
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3
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2
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1
1
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0
Sl
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Figure a+b): Actual and adjusted GDP growth in the CEE countries, averages 19962010, percent per year
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GDP growth
Adjustment for capital flows
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5
4
4
3
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2
2
1
1
0
0
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Figure a+b+c): Actual and adjusted GDP growth in the CEE countries, averages
1996-2010, percent per year
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GDP growth
Adjustment for capital flows
Adjustment for capital flows and convergence
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3
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2
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0
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Figure a+b+c): Actual and adjusted GDP growth in the CEE countries, CA = 0,
averages 1996-2010, percent per year
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GDP growth
Adjustment for capital flows
Adjustment for capital flows and convergence
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3
3
2
2
1
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-1
-1
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Conclusions
All countries, except Poland and Slovenia, do worse when adjusted for capital
flows
All countries, except Czech Rep. and Slovenia, do worse when adjusted for
convergence
Bulgaria, Hungary and Romania laggards after adjustment
Baltics less impressive after adjustment
Poland and Slovenia best after adjustment
NB: Conservative assumptions
Slope not = -0.5
Not CA = 5
Not β = 3.45%
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5. Conclusions
The CEE have benefitted from “easy growth”
Initially poor Conditional β-convergence ⇒ 2% of gap “for free”
Recipient of external financing
Growth rates adjusted for “easy growth” not very impressive
Not same growth characteristics as Asia
Some variation in adjusted growth performance across 10 CEE countries
Balkans, Hungary – Baltics – Poland, Slovenia
NB: Pattern also applies to growth variability
Links to structural development and economic model?
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Last slide
KARSTEN STAEHR
E-mail: karsten.staehr@ttu.ee
Homepage: http://www.ttu.ee/karsten-staehr
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