Structural Reform challenges in SEE countries
BoG – Oxford Uni Conference on:
“Achieving sustainable growth in South East Europe: Macroeconomic policies,
structural reforms, socio-political support, and a sound financial system”
Athens, February 11, 2011
Dr Tassos Anastasatos
Senior Economist
Corporate | Institutional | Private Banking | Shipping | Sovereign
Division of Research & Forecasting
GREECE - BULGARIA - SERBIA - ROMANIA - TURKEY - POLAND - UKRAINE - UNITED KINGDOM - LUXEMBOURG - CYPRUS
I. A definition of structural reforms
 Structural reforms: Policy measures that reduce or remove impediments to the
efficient allocation of resources in order to promote long-term growth
 Definition includes: competitiveness enhancing measures, fighting of
oligopolistic features in product and labour markets, restructurings of
organisations to increase their efficiency.
 Structural reforms aimed at promoting domestic financial development and trade
liberalization, can be important components of a strategy to invigorate economic
growth (McKinnon1973, Krueger 1997, Henry 2007)
 “Structural reforms are a more elusive concept to measure than standard
macroeconomic policies, where gauges—interest rates, liquidity measures, or the
budgetary balance—are typically readily available for most countries” (IMF, 2008)
Dr Tassos Anastasatos
Division of Research & Forecasting
I. Structural reforms and the SEE region
 Structural reforms are in the narrative of the SEE region for a long time, given the
transition from a centrally planned economy to a market economy.
 Objectives of structural reforms pertaining to SEE countries: Transition to a market
economy, integration into the world economy, diversification of the production and
export bases, development of the financial sector, promotion of “high quality” growth,
quality of institutions (budgetary and social security, the Central Bank and financial
regulation), governance issues (IMF, 2001)
 SEE had gained experience in adjusting to structural changes; this helped to
escape the crisis relatively unscathed and can prove valuable in the future.
Dr Tassos Anastasatos
Division of Research & Forecasting
I. Structural reforms and the SEE region
 Grouping of countries with dissimilar characteristics and structure of their
economies, and thus with different needs, is inappropriate but there are features
common among them.
 Pre-crisis growth model: rapid growth (avg 7.4%) based on domestic demand,
fuelled by capital inflows (optimism about future prospects) and consequently rapid
credit growth, expansion of consumption and real estate, overheating, real
appreciation, external deficits / debt; policy making centered around the objective of
integration with the EU and convergence, EMU goal provided anchor for policies.
 Present situation: inflows slowed down, below potential GDP growth, uneven
speed of economic recovery across economies, supply-side inflationary risks,
unemployment remaining high but with stabilizing labour market conditions, personal
indebtedness & lower incomes, banks’ consolidation, fiscal consolidation efforts but
most countries in the region in a much better shape compared to their EMU peers.
 Ensuring access to the financial markets and promoting medium-term
macroeconomic stability will necessitate step up of fiscal consolidation efforts.
 In an environment of fiscal consolidation, slow recovery of price competitiveness,
bank lending and risk perceptions, structural reforms are even more critical for
increasing potential output, which was harmed by the crisis.
Dr Tassos Anastasatos
Division of Research & Forecasting
I. Structural reforms and the SEE region
•Along with the recovery, imbalances are returning too: current account deficits are
on the upside, gross financing requirement is a concern in some “IMF” countries and
exchange rates face jitters.
• This should strengthen the resolve of SEE countries to precipitate what would be
unavoidable and desirable anyway, namely a switch to an export-driven model of
growth. Convergence: less quick, more sustainable
•All structural reforms should be judged on the criterion of how they improve export
performance.
• First structural reform is fiscal consolidation: crowding-in of exports / investment,
reallocation of expenditure away from counter-productive public consumption .
•Short-term: adjustment of wages to productivity (e.g. better bargaining systems,
reduce oligopolising of product markets and wage rigidities) - especially if pegging to
avoid real appreciation
• Medium-term: motivate production switch from non-tradeables to tradeables,
especially in countries where FDI was focused on real estate and financial services
•support credit for SMEs, control mortgages, land to firms, educating
entrepreneurs, reducing bureaucratic burden on entrepreneurship, some tax
exempts (but no subsidies or protectionism)
Dr Tassos Anastasatos
Division of Research & Forecasting
I. Structural reforms and the SEE region
• Longer-term: sustainability can only be achieved if SEE countries move away from
the current medium tech model of production. The increase in the standards of living
means that the region will not be able to compete in terms of low cost indefinitely.
• Instead, it should pursue in a coordinated way to switch to specializations that
embody a higher technological content and hence a higher value added, in
other words enhance its quality competitiveness.
•Value of exports has increased but they mostly concern parts production of
medium-high technology
•This is no easy task and it will require large investments in education, training,
machinery and R&D.
• However, there are more immediate measures that can help in this direction and
which bear little or no fiscal cost.
•Many countries in the region suffer from an anti-productive public administration that
deters FDI by increasing the time, compliance and tax burden.
Dr Tassos Anastasatos
Division of Research & Forecasting
I. Structural reforms and the SEE region
•Rodrik and Subramanian (2003): quality of institutions is the most important
factor in in increasing TFP (50% of growth).
• Measures: enhancing the rule of law, fighting bureaucracy in launching and
reallocating entrepreneurial activity, protecting property rights, simplifying legislation
and making it more transparent, fighting corruption and multiple local and peripheral
jurisdictions in business-related policymaking (veto points).
•These reforms especially benefit the more efficient (and thus more cost-alert) hightech sectors which are also more desirable as they can produce knowledge
spillovers to local businesses and spur the quality transformation.
• While those measures also reduce fiscal costs, their implementation is a politically
complicated process: institutional provisions necessary to facilitate the adherence of
policymaking to the longer run, beyond the political cycle.
• Regional policies will be needed too to protect cohesion.
•Addressing ageing (problem worse than Western Europe) also preserves
competitiveness as social security contributions weigh heavily at production cost:
policies to increase participation in the labor force, human capital-enhancing policies
• ECB (2007): countries that follow quality improvements as a strategy to converge.
experience RER appreciations. Therefore, applying for monetary union prematurely
in not advised.
Dr Tassos Anastasatos
Division of Research & Forecasting
II. Structural reforms in retrospect 1989-2011
4.0
3.5
Transition Indicators average score per year
3.0
2.5
2.0
1.5
1.0
Source: EBRD Transition reports
Scale 0 to 4, 0=low progress 4=high progress
0.5
1989
1991
ALBANIA
CROATIA
SERBIA
1993
1995
1997
1999
2001
2003
BOSNIA & HERZEGOVINA
FYROM
2005
2007
2009
BULGARIA
ROMANIA
• EBRD Transition indicator: survey of managers evaluating countries in the areas of large &
small scale privatization, enterprise restructuring, price liberalization, trade, competition,
banking & interest rate liberalization, securities markets, overall infrastructure
• Countries have made great progress since 1989. However, the rate of change has slowed
down in recent years.
Dr Tassos Anastasatos
Division of Research & Forecasting
III. Structural reforms in times of international
financial crisis-the global view
Share of economies with at least one reform
Source: World Bank Doing Business 2007 and 2011 Reports, processed data
100
90
80
70
60
50
40
30
20
10
0
East Europe and
C entral Asia
OEC D High
Income
2006
2007
Latin America
and C arribean
2008
2009
East Asia and
Pacific
2010
Middle East and
North Africa
2011
 According to Doing Business reports, 100% of SEE countries had at least one reform during
2006-2011 with the exception of Romania and Serbia during 2008, and of Turkey during 2010.
Dr Tassos Anastasatos
Division of Research & Forecasting
III.
WB Top-ten reformers in 2004-2010
World Bank’s Ease of Doing Business
COUNTRY
Albania
Among Top 10
Reformers
2008
Bosnia & Herzegovina
Bulgaria
2007
Croatia
2006 , 2007
FYROM
2007 , 2009
Romania
2005 , 2006
Serbia
Turkey
2005
Source: WB
Doing Business
Reports
• Individual SEE countries scored well in the boom years 2004-2010
Dr Tassos Anastasatos
Division of Research & Forecasting
1.5
1
0
Georgia
Mozambique
Mexico
Madagascar
Indonesia
France
Bhutan
Tanzania
Syrian Arab Republic
Guatemala
Colombia
Vietnam
Lao PDR
Saudi Arabia
Mauritius
Sudan
Rwanda
Honduras
Romania
Costa Rica
Poland
Congo, Dem. Rep.
Netherlands
Macedonia, FYR
Uzbekistan
Iceland
Haiti
Hong Kong SAR,
Portugal
Djibouti
Ethiopia
Cameroon
Belarus
El Salvador
Burkina Faso
Guinea-Bissau
Spain
Pakistan
Switzerland
Guyana
Moldova
Austria
Malawi
United Arab
Slovak Republic
Yemen, Rep.
Congo, Rep.
West Bank and Gaza
Panama
Albania
Guinea
Bangladesh
Chad
Mali
Afghanistan
Estonia
Namibia
Denmark
Iran, Islamic Rep.
Fiji
Eritrea
Morocco
Trinidad and Tobago
Hungary
Philippines
Taiwan, China
Swaziland
Solomon Islands
St. Kitts and Nevis
Israel
St. Lucia
Samoa
Antigua and Barbuda
Marshall Islands
Lithuania
Comoros
Iraq
Oman
Gabon
Papua New Guinea
Japan
Palau
Togo
III. Cumulative change before the crisis
3
2.5
Doing Business Change Score
(2005-2007)
2
Croatia
Source: Doing Business 2006 and 2008 Reports, processed data
Bulgaria
Dr Tassos Anastasatos
FYROM
Romania Bosnia
Serbia
Albania
Turkey
0.5
• How individual countries rank compared to all other countries in terms of change in
business regulation scores.
Division of Research & Forecasting
1.5
Rwanda
Kyrgyz Republic
Ukraine
Georgia
Colombia
Macedonia, FYR
Slovenia
Tunisia
Mexico
Egypt, Arab Rep.
Swaziland
Poland
Armenia
Peru
Zambia
Ethiopia
Angola
Uganda
Kazakhstan
Saudi Arabia
Taiwan, China
United Arab Emirates
Guatemala
Spain
Lithuania
Sierra Leone
Algeria
Hong Kong SAR, China
Papua New Guinea
Ghana
Honduras
Costa Rica
China
Grenada
Cameroon
Moldova
Yemen, Rep.
Afghanistan
Sweden
Bulgaria
France
Benin
Marshall Islands
Netherlands
Oman
Guyana
Brunei Darussalam
Niger
Jamaica
Côte d'Ivoire
Singapore
Trinidad and Tobago
Italy
Turkey
West Bank and Gaza
Ireland
Finland
Gambia, the
Senegal
Nigeria
Central African Republic
St. Kitts and Nevis
Slovak Republic
Lebanon
Uruguay
Seychelles
St. Lucia
Equatorial Guinea
Kenya
Chile
Guinea
Luxembourg
Switzerland
Namibia
Bahamas, the
Venezuela, R.B.
Germany
São Tomé and Principe
Austria
Romania
Bhutan
Kuwait
Thailand
III. Cumulative change during the crisis
2.5
2
Doing Business Change Score
(2008-2010)
Source: Doing Business 2009 and 2011 Reports, processed data
FYROM
Croatia
1
Bosnia
Dr Tassos Anastasatos
Serbia
Albania
Bulgaria
Turkey
Romania
0.5
0
 FYROM moves up the pack, Albania and Turkey maintain their relative position,
others fall behind
Division of Research & Forecasting
IV.2
Mixed picture in the Ease of Doing
Business rankings 2007-2010
Rank 2007
among 178
Rank 2010
among 183
Albania
136
81
Bosnia & Herzegovina
105
110
Bulgaria
46
51
Croatia
97
89
FYROM
75
36
Romania
48
54
Serbia
86
90
Turkey
57
60
Source: Doing Business 2008 and 2011 Reports, processed data
Dr Tassos Anastasatos
Division of Research & Forecasting
Bulgaria
Croatia
FYROM
Romania
82
60
84
93
40
54
57
Starting a Business
89
31
84
64
86
38
79
28
Construction Permits
50
94
2
96
83
71
1
57
Registering Property
48
97
7
78
82
73
79
48
Getting Credit
94
80
77
70
97
82
93
76
Protecting Investors
99
71
69
65
93
72
81
89
Paying Taxes
59
4
46
85
78
2
51
54
Trading Across Borders
72
46
15
58
86
20
22
28
Enforcing Contracts
57
9
88
47
93
86
11
89
Closing a Business
39
21
16
15
8
96
98
69
AGGREGATE
Turkey
Bosnia
96
Change in scores in
Reform areas for the
period 2007-2010
Serbia
Albania
IV.2 Areas of improvement in
Ease of Doing Business
Performance indices normalized to account for the relative change within
the whole group of countries: scale 0 (lowest) to 100 (best)-50 average
Dr Tassos Anastasatos
Source: Doing Business 2008 and 2011 Reports, processed data Division of Research & Forecasting
IV. The catalytic role of IMF programs
•
Structural conditionalities in IMF-supported programs may play a role in
spurring structural reform (Ghosh and others, 2005)
Literature on IMF conditionalities: [Vaubel (1983), Bird (1984), Diwan and Rodrik
(1992) Collier et al. (1997) and Dreher and Vaubel (2004)]
IMF conditionalities:
1. lend credibility to the programs
2. induce governments to pursue policies they would not have chosen without the offer
of financial aid
3. solve the IMF’s selection problem in environments of asymmetrically imperfect
information (adverse selection)
4. restrict the way government is spending aid in raising the recipients’ welfare
(principal agent problem)
5. address the problem of moral hazard. IMF lending may be interpreted as
(subsidized) income insurance against adverse shocks. The insurance cover induces
the potential recipients to lower their precautions against such damages.
•
However, authorities’ ownership of Programs critical to their success
Dr Tassos Anastasatos
Division of Research & Forecasting
IV. Conditionalities: Structural benchmarks
& Quantitative performance criteria
Albania
2006-2008
Bosnia
2009-2012
Bulgaria
2004-2006
Romania
2009-2011
Serbia
2009-2011
Turkey
2005-2008
Type of program
PRGF*
EFF**
Regular
SBA
Precautiona
ry SBA
Regular
SBA
Regular
SBA
Regular
SBA
Banking system












Fiscal rules

Pension & Social
Security
Public sector
(public wages, stateowned enterprises, tax
administration)



Labor market
Product markets
(regulation, business
environment,
privatizations etc)

Quantitative ceilings

Dr Tassos Anastasatos











* Poverty Reduction and Growth Facility, **Extended Facility
Division of Research & Forecasting
V. Top problematic factors in SEE economies
according to business executives
Source: WEF Global Competitiveness Report 2010-2011
Inadequate supply of infrastructure
x
x
x
Inflation
x
x
Poor work ethic in national labor force
x
x
Inadequately educated workforce
Policy instability
Restrictive labor regulations
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Crime and theft
Tax rates
Serbia
x
x
x
x
Romania
Bosnia
x
x
x
x
FYROM
Bulgaria
x
x
x
x
Croatia
Albania
Access to financing
Corruption
Inefficient government bureaucracy
Tax regulations
Among top 10 factors seen by business executives as
the most problematic for doing business in their
economies
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Information drawn from 2010 edition of the World Economic Forum’s Executive Opinion Survey
Dr Tassos Anastasatos
Division of Research & Forecasting
V. Upgrading infrastructure high priority
for all countries in the area
7
Managers’ survey, ranking of priorities from 1 to 10
6
Source: WEF 2010, processed data,
5
4
3
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• Public Investment: define and prioritize areas of comparative advantage, sectors
which maximize externalities for private investment (ICT, Power, and
transportation), finance projects by criteria of economic efficiency
Dr Tassos Anastasatos
Division of Research & Forecasting
V. OECD score aggregates for SEE region
and main results
Indicators of OECD report. Scores range from 0 (lowest) to 5 (highest)
Investment Policy and Promotion
3.5
Human Capital Development
3.0
Trade Policy and Facilitation
3.5
Access to Finance
2.7
Regulatory Reform and Parliamentary Process
3.1
Tax Policy Analysis
2.7
Source: OECD Investment Reform Index 2010
 Indicators and key findings of the OECD report show a good progress overall in all categories
listed above in the 2006 – 2010 period, however there is need for additional reforms
 Human Capital Development is still considered high priority: profile of skills supplied in labor
force does not match what is required by employers
Limited Access to Finance, accentuated by the crisis, poses a major concern
Dr Tassos Anastasatos
Division of Research & Forecasting
I. Conclusions
•Structural reforms: supply-side policies that increase quality- and pricecompetitiveness, while demand management preventing overheating.
•In an environment of fiscal consolidation, risk spillovers from the Eurozone and
slower growth, SEE must proceed even more quickly and decisively to structural
reform as this is the only way to ensure market confidence in the long-term.
• Reforms should be judged on ability to incur technology transfer: product-quality
upgrading, better organizational structures, improvement in institutions and
behavioral practices.
• Prospects of SEE remain bright: the area possesses the factors of production
which important to long term growth: well-educated labor force with still modest
wages, industrial culture, strategic geographic location, low capital intensity and thus
high returns on capital.
Dr Tassos Anastasatos
Division of Research & Forecasting
THANK YOU FOR YOUR ATTENTION!
My thanks to the Research Department of Eurobank EFG for able
research assistance and support
For more info, please consult the Eurobank website:
http://www.eurobank.gr/research
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economies and the markets of New Europe
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Dr Tassos Anastasatos
Division of Research & Forecasting