MACROECONOMIC STATISTICS

(1)

MACROECONOMIC STATISTICS

(2)

MACROECONOMIC STATISTICS

Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,

Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest

Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest

(3)

(4)

MACROECONOMIC STATISTICS

Author: Gábor Oblath

Supervised by Gábor Oblath January 2011

ELTE Faculty of Social Sciences, Department of Economics

(5)

MACROECONOMIC STATISTICS

Week 12

Catching up

Convergence in per capita income, price and wage levels

Gábor Oblath

(6)

Main messages

• Two fundamentally different meanings of

convergence (Maastricht criterion vs. ”catching up”)

• But convergence in the second sense also means different things

– Within a region – That of a country

– Real, price and wage

• The relation among the three aspects of

catching up has to do with sustainability (in a wider sense than discussed above)

• Statistics for analysing convergence are readily available from several sources

(7)

Outline

• Meanings/interpretations of convergence

– For a country vs. region – Real, price, wage

• Statistical sources

• Measurement

– Beta and sigma (region)

– ”Beta” (speed of convergence) for a country

• and ”half-life convergence”

• vs. constant differentials in growth rates

• Patterns in the EU and CEEU

• (Possible changes after 2008)

(8)

Meanings/interpretations of convergence

(real, price, wage)

Two aspects:

1. From the point of view of a (relatively) underdeveloped country (-group):

catching up (beta)

2. From the point of view of a region: fall

in dispersion (sigma-convergence)

(9)

Meanings of real economic convergence

Real convergence:

– GDP/employed/hours worked (”productivity”), or

– GDP/inhabitant (”level of development”) – (GNI/capita or RGDI/capita)

at PPP – is it getting closer to more developed countries?

(or: is the dispersion decreasing in time?)

(10)

Meanings of price-level convergence

• The catching up of relative price levels (RPL); two indicators:

– RPL of GDP

– RPL of household consumption

(i.e. relative to more developed countries, e.g.

EU15)

• Indicators :

– (PPP-GDP)/E

• Corresponds to GDP deflator

– (PPP-consumption expenditures)/E

• Corresponds to CPI

(11)

Meanings of wage convergence

Three (1+2) interpretations

• Convergence in nominal (EUR) wages (SNA compensation/employee)

• Convergence in real wages

– ”Producer real wages”: nominal wages corrected for differences in GDP price levels

– ”Consumer real wages”: nominal wages corrected for differences in consumption price levels

(12)

Statistical sources

• AMECO (GDP/cap, GDP/ emp at PPS etc.;

comp/emp

• http://ec.europa.eu/economy_finance/ameco/user/serie/SelectSe rie.cfm

• Eurostat (PPS for GDP and consumption;

RPLI-s)

• http://epp.eurostat.ec.europa.eu/portal/page/portal/purchasing_p ower_parities/data/database

• PWT

• http://pwt.econ.upenn.edu/php_site/pwt63/pwt63_form.php

• Groningen

• http://www.ggdc.net/databases/

(13)

Convergence: beta and sigma

• Beta – a group of countries: the speed of convergence

(relation between initial level and growth rate)

Estimation of beta :

Ln(Y_t/ Y_t-1)/T = a + b (Ln Y_t-1) +e  absolute

(Y_t-1: GDP/cap at PPP (Y_t : at constant prices and PPP!)

• if b<0 -> convergence

• b =1–e^(-βT)  β= – ln(1+bT)/T

• β: the speed of decrease in the distance from the long run path (steady state)

• half-life convergence: ”how many years does it take to make up for the half of the distance?” ( ln2/β)

Ln(Y_t/ Y_t–1)/t = a + b(Ln Y_t-1)+ c(….) +e  conditional

• ”Beta” for a country (speed of convergence, later)

• Sigma for a region):

– The fall in dispersion over time

(14)

Beta-convergence in the EU-countries (-B3) 1991–2008 and 1995–2008

UK SE

FI SI

RO

PT PL

AU NL HU MT

LV LT

CY

IT RFR ES

EL IE

DE DK CZ

BG

EU15BE y = -0,0136x + 0,1515

R² = 0,4224

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

4,0%

4,5%

5,0%

8,20 8,40 8,60 8,80 9,00 9,20 9,40 9,60 9,80 10,00

átlagos növ (vol)91-08

Ln(GDP/fő)1991

β (speed of convergence) 1.5 p.a.; half life convergence about 45 years (ln2/β) [ 0,69/β]

UK SE FI SK

SI RO

PT PL

NL AU MT

HU LV

LT

CY

IT RFR ES

EL IE EE

DEDK CZ

BG

EU15BE y = -0,0282x + 0,2961

R² = 0,6637

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

8,20 8,40 8,60 8,80 9,00 9,20 9,40 9,60 9,80 10,00

átlagos növ (vol)95-08

Ln(GDP/fő)95

β (speed of convergence), due to B3 3.5 p.a., i.e., half life of 20 years

[this will change as a result of the crisis]

(15)

Sigma-convergence in Europe 1993–2007 (Depends on the group of countries observed)

0,1 0,2 0,2 0,3 0,3 0,4 0,4 0,5

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

EU-26 EU-24 EU-14 NMS-10 NMS-12 CEE-8 CEE-10 EU-26

EU-24

EU-14 NMS-12 CEE-10

NMS-10 CEE-8

The standard deviation of log GDP/capita

(16)

”Beta” for a country: speed of convergence

• At what speed does the gap close (e.g., relative to the EU15)?

= Ln[(1–RY_t1)/(1–RY_t0)]/T Where

RY_t= (GDP_t/cap_t)_HU/(GDP_t/cap_t)_EU (at PPP); T:

number of years observed (T=t1–t0)

• Interpretation of ”half life convergence”: if the distance shrinks at the speed observed in the past, how long would it take to close half of the gap?

(17)

Example: HU’ real convergence

1991 2008

Y/Y(eu) 0,46 0,59

1-Y/Y(eu) 0,54 0,41

(1-Y/rel08)/(1-Yrel91) 0,76

ln[…] -0,27

T 17

ln[…]/T -0,016

Felezési idő -43,6

Speed of convergence

(–) Half-life

(18)

A FAQ: how long does it take to catch up to the EU (EU15 or EU27)?

1. Bad/ inapropriate question, but we can play with numbers (assuming alternative growth rates)

2. Mental experiment: what happens if overall trends observed in the recent past continue?

– Essential question: how to interpret overall trends – what do we project for the future?

a) Does the difference in growth rates remain constant? or b) Does the rate of convergence stay constant?

– The choice between assumption (a) and (b) has spectacular effects

(19)

Two interpretations of developments between 1991 and 2008 (GDP/capita in HU relative to EU15)

a) constant difference in growth rates; b) constant rate of convergence

y = 45,159e^0,0145x R² = 1

40 42 44 46 48 50 52 54 56 58 60

1991 1992

1993 1994

1995 1996

1997 1998

1999 2000

2001 2002

2003 2004

2005 2006

2007 2008 HU GDP/fő (EU15=100) tény

HU GDP/fő (EU15=100) konstans növ.

ütemkülönbség mellett Expon. (HU GDP/fő (EU15=100) konstans növ.

ütemkülönbség mellett)

y = 55,055e^-0,016x R² = 1

40 42 44 46 48 50 52 54 56 58

1991 1992

1993 1994

1995 1996

1997 1998

1999 2000

2001 2002

2003 2004

2005 2006

2007 2008 Távolság HU-EU15 GDP/fő tény

Távolság konstans konvergencia-ütem mellett Expon. (Távolság konstans konvergencia-ütem mellett)

EU15=100 Distance from EU15

Actual

Fitted (to end-points)

(20)

The implications of the two assumptions (hypothetical ”smooth” paths of catching) up until 2008 (left pane) and afterwards (right pane) EU15=100

a) Catch up to the EU15 by 2045 (35 years); b) we shall have made half of the distance by 2033-ban (23 years) [in 2045 we would be at 80%]

40 42 44 46 48 50 52 54 56 58 60

1991 1992

1993 1994

1995 1996

1997 1998

1999 2000

2001 2002

2003 2004

2005 2006

2007 2008 HU GDP/fő (EU15=100) tény

HU GDP/fő (EU15=100) konstans konvergencia-ütem mellett

HU GDP/fő (EU15=100) konstans növ. ütemkülönbség mellett

0 20 40 60 80 100 120 140

1991 1994

1997 2000

2003 2006

2009 2012

2015 2018

2021 2024

2027 2030

2033 2036

2039 2042

2045 2048

2051 2054

2057 HU GDP/fő (EU15=100) tény

HU GDP/fő (EU15=100) konstans konvergencia-ütem mellett

HU GDP/fő (EU15=100) konstans növ. ütemkülönbség mellett

A konvergencia félútja (44 év)

Utólérés (54 év)

Neither of the two assumptions is realistic, but both useful for illustrating alternative paths a)

(21)

Experiences in Europe

• A graphical typology of

convergence/divergence of EU countries:

• Comparing earlier and more recent relative positions (EU15=100)

– Convergence ≠ higher relative growth rate – Divergence ≠ lower relative growth rate

• Illustrations based on EU-experiences

(22)

Convergence/divergence vs.

higher/lower relative growth of GDP/cap

Convergence

50 100 150

Relatív fejlettség 1960-ban Relatív fejlettség 2002-ben

Taking over

Catching up

From poor to poorer

From rich to

richer From rich to

less rich

From rich to (relatively) poor

Initial relative position Subsequent

relative position

Divergence

(23)

EU-experiences: 1960 vs. 2002

40%

60%

80%

100%

120%

140%

40% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140%

Relatív szint 1960-ban Relatív szint

2002-ben

AU BE

”Taking over

Relatív felzárkózás

From rich to richer

From rich to less rich

IR

SP PO

GR

FIN ^IT

Relative catching up

Relative level in 2002

Relative

Relative level in 1960

(24)

Broader European experiences – the Maddison- database (1950–2008; 20-year periods)

YUG RO

POHU CZ BG

ALB PTES

EL IE

UK

CH

SE

NO NL IT

DE FR

FI

DK BE

AU

0 0,2 0,4 0,6 0,8 1 1,2 1,4 1,6 1,8 2

1970GDP/cap

1950

YUG

RO PO

HU CZ BG ALB

ES PTEL IE

UK

CH NO SE

IT DE NL FI FR

DK AUBE

0 0,2 0,4 0,6 0,8 1 1,2 1,4 1,6

1990 GDP/cap

1970

YUG RO

PO HU CZ BG ALB

ES

PT EL

IE

UK SE CH

NO NL DEIT FR

FI DK AUBE

0 0,2 0,4 0,6 0,8 1 1,2 1,4

2008 GDP/cap

1990

Ample experiences with relative catching up, but very few for

”taking over” (DE, IE)

(25)

Some issues regarding the interpretation of

”real” convergence

• Convergence within a region: no weights vs.

weights (e.g. population, economic size)

• When does the economic history of CEEU begin? (Certainly: not in the early 1990s)

• A GDP/capita vs. productivity

• A GDP is an indicator of production – how about indicators of real aggregate income?

(26)

Beta-convergence: 1995–2006 (Countries vs. population)

UK SE FI SK

SI RO

PT PO

AU NL MT

HU LT

LV

CY

IT FR ES

GR

IR EE

DE DK CZ

BU

BE

y = -0,0271x + 0,3064 R² = 0,5588 y = -0,0499x + 0,5143

R² = 0,7778

y = -0,0269x + 0,305 R² = 0,2413

0%

2%

4%

6%

8%

10%

12%

8,2 8,4 8,6 8,8 9,0 9,2 9,4 9,6 9,8 10,0

Log GDP/cap 1995

Annual growth GDP/cap

CEE-8

CEE-10

EU-26

LT

LV EE

CZ BG

0%

1%

2%

3%

4%

5%

6%

0 10 20 30 40 50 60 70

GDP/cap (EU-15=100)

Growth difference vs. EU-15

PO SK

RO

HU SI

Log GDP/cap (PPS) in 1995 vs. annual growth Relative levels of income vs. growth rates (the size of the bubble indicates population size

(27)

In most analyses of CEE relative growth rates (real convergence), history begins in 1991–1993

Per capita GDP levels at current PPS (EU-15=100%)

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

Czech Republic Hungary

Austria1 Austria2 Poland Slovakia

Source: Eurostat

(28)

History: real divergence

Per capita GDP of 3 (4) CEE-countries relative to Austria, 1950–2006 in GK-PPP1990 $ (left) and in EKS-PPP2006 $ (right)

Which story do you believe?

Regarding initial relative levels: for the 1950-s: the left,

For the 2000-s: the right-hand side diagram seems to be right.

But what happened in between? How to reconcile the differences?

20%

30%

40%

50%

60%

70%

80%

90%

100%

1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

20%

30%

40%

50%

60%

70%

80%

90%

100%

1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

EU-15 EU-15

CZ_SK

CZ HU

PL

SK

CZ HU

PL SK

Source: calculations based on the Groningen database

(29)

Very long term convergence/divergence vs. the developed West European (WE-12) countries

WE-12=100

10%

20%

30%

40%

50%

60%

70%

80%

1900 1904

1908 1912

1916 1920

1924 1928

1932 1936

1940 1944

1948 1952

1956 1960

1964 1968

1972 1976

1980 1984

1988 1992

1996 2000 BU

CZSK HU PO RO

Source: calculations based on Maddison: Historical Statistics for the World Economy

(30)

UN-ECE (2000) on longer term divergence of 3 CEE countries

EU average =100

30 40 50 60 70 80 90 100

1950 1955 1960 1965 1970 1975 1980 1985 1989 1990

A. Simple average of all estimates B. Weighted average of various estimates

C. Maddison data

D. Extrapolation of conservative estimates

30 40 50 60 70 80 90 100

1950 1955 1960 1965 1970 1975 1980 1985 1989 1990

CZ-SK

30 40 50 60 70 80 90 100

1950 1955 1960 1965 1970 1975 1980 1985 1989 1990

HU

PL

(31)

Are historical statistics relevant?

• Fundamental problems with the quality of data

– Data based on PPPs of 2006 and 1990 show totally different picture

– Not clear: to what extent quality changes accounted for in price indices

a) during centrally planned period;

b) during and after transformation-recession

• Fundamental problems of interpretation

– If sound, do these figures imply that CEE is converging to its historical distance from WE?

– Or: two structural breaks

• implementing the framework of a market-economy

• joining the EU

Imply a break with the past?

• Important message: divergence of CEE from WE started much earlier than 1989

(32)

The meaning of ”real income” in international comparison (output vs. income; level vs. change)

• Output: GDP at PPP – Per person

• Per employed person

• Per hour worked

• Income:

– GDP?

– RGDI (real GDP corrected for the change in the terms of trade= implicit income transfers from/to RoW)

– GNI = GDP+NFI – GNDI =GNI+NFTc

– GNDI + net capital transfers – RGNI

– RGNDI

– RGNDI + net real capital transfers

 Related to the current account (CA= GNDI–C–I)

– Basic macroeconomic concepts without a name – Related to the fundamental concept

of macroeconomic balance, i.e.: net lending (NL=CA+KA):

S

Change

(33)

”Real income” growth in international comparison

• A neglected aspect of ”income convergence”:

the role of the terms of trade*

• Recent differences in real growth rates between

– GDP – GNI, – GNDI

– GNDI+cap. transfers**

*based on AMECO

**based on Eurostat

(34)

RGDI/capita (change)

real domestic income – the actual indicator of income- growth (thus of income-convergence)

• Change in real GDP: represents change in the volume of output

• Change in RGDI: change in the real income of a country (output corrected for the impact of changes in the terms of trade – i.e., effect of ”trading gain or loss”) [RGDI= (GDP_t/P_gdp +T) /GDP_t-1)]*/

• Is it really ”real”?

– are foreign trade price indices accurate?

– transfer pricing ?

• Perhaps: measurement problems of Px and Pm (especially price index of services), but if so:

– opposite measurement problems in net exports (volumes)

– RGDI: essential indicator of (change in) macroeconomic income – by definition, its ”level” cannot be interpreted at current prices

• All in all: if ToT shows a trend, RGDI is relevant for income growth

*/T=(X-M)/P_xm – (X/P_x – M/P_m)

(35)

Cumulative differences in RGDI and GDP growth rates (1995–2006)

-0,05 0,00 0,05 0,10 0,15 0,20 0,25 0,30

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

Bulgaria Czech Republic

Estonia Latvia

Lithuania Hungary

Poland Romania

Slovenia Slovakia

LIT

RO

CZ

SK

(36)

Cumulative difference between

RGDI and GDP growth and annual growth rate of GDP:

1995–2006

-10%

-5%

0%

5%

10%

15%

20%

25%

Lithuania Romania Bulgaria Czech Republic Denmark Estonia Netherlands Spain United Kingdom Greece Slovenia Malta EU-27 Portugal Cyprus Italy Latvia France Austria Poland Germany Ireland Hungary Belgium Slovakia Sweden Finland

Cum diff GDI-GDP GDP growth rate

percent

Percentage points

Source: Eurostat, AMECO

(37)

The significance of changes in the terms of trade:

number of years of average GDP-growth corresponding to the cumulative difference between RGDI and GDP: 1995–2006

-3 -2 -1 0 1 2 3 4 5

Romania Bulgaria Lithuania Czech Republic Denmark Netherlands United Kingdom Spain Estonia Greece Slovenia Malta Latvia Cyprus Portugal Italy France Poland Ireland Austria Hungary Slovakia Germany Belgium Finland Sweden

(38)

Per capita GDP and RGDI relative levels in 2006 (EU15=100)

30 35 40 45 50 55 60 65 70 75 80

95_PPS GDI_95PPS

BU RO

PO LA

LIT SK HU

EE

CZ SI

Per capita GDP at 2006 PPS

Per capita GDP at 1995 PPS and

RGDI at 1995 PPS

Two points:

1) differences between constant (1995) and current (06) PPS levels 2) differences between RGDI and GDP levels at prices of 1995

(39)

GDP/cap (PPS) in 1995 (x) and in 2006; RGDI in 2006 at 1995 PPS (y) (EU-15=100)

20 30 40 50 60 70 80

2006_PPS GDI_95PPS

RO BU LA

LIT EE

PO SK

HU

SI CZ

GDP/cap (PPS) 1995

2006 GDP/cap RGDI/cap

(40)

Comparison of GDP and RGDI convergence of CEE-10;

1995–2006

*/ log(Y06/Y95)/t; where Y= Yi/Yeu15

EU15=100

Average annual speed

of convergence GDP/cap

95

GDP/cap 06

RGDI/cap 06

RGDI_06/

GDP_06

Conv GDP

Conv GDI

Number of years of GDP/cap convergence to

fill the RGDI- GDP gap

Bulgaria 27,9 33,2 35,8 107,6 1,6% 2,3% 4,5

Czech

Republic 63,1 71,0 75,6 106,4 1,1% 1,7% 5,7

Estonia 31,1 59,6 60,9 102,1 6,1% 6,3% 0,4

Latvia 27,0 51,8 51,7 99,9 6,1% 6,1% 0,0

Lithuania 30,0 51,5 57,6 111,8 5,0% 6,1% 2,3

Hungary 45,4 59,6 58,4 97,9 2,5% 2,3% -0,9

Poland 36,7 48,6 48,2 99,2 2,6% 2,5% -0,3

Romania 27,2 31,3 34,4 110,1 1,3% 2,2% 7,6

Slovenia 61,6 77,1 77,7 100,8 2,1% 2,1% 0,4

Slovakia 40,0 52,4 50,8 97,0 2,5% 2,2% -1,3

*/

**/

**/ log[(RGDI_06)/(GDP_06)]/(Conv_GDP)

(41)

The role of capital transfers

• GNDI + capital transfers: not an indicator of ”income”, but:

(Recapitulation)

• In less-developed EU-countries (receiving capital-transfers from EU-funds): a fundamental indicator of disposable

resources;

• In these countries: GNDI [thus, gross savings (S) and the CA (=S–I) is a misleading indicator (asymmetry):

– current contributions to the EU-budget decrease GNDI (S), but

– no official macroeconomic aggregate indicating the

impact of capital transfers from the EU to the recipient country

• Need to define/quantify ”non-official” macroeconomic

aggregates (statistical indicators based on official statistics) for macro-analysis, e.g. 

(42)

GNDI + capital transfers (change at constant prices)

• Questions related to the ”adequate”

volume index of national income and disposable national resources

• Deflator of

– Net factor income (GDP or DE deflator)

– Net current transfers (GDP or DE deflator) – Net capital transfers (GDP or GCF deflator)

(43)

GDP, GNI, GNDI and GNDI + capital transfer annual average volume changes: an illustration (CZ, HU, PL: 2004–2006)

CZ

5,8%

5,9%

6,0%

6,1%

6,2%

6,3%

6,4%

6,5%

6,6%

6,7%

GDP GNI GNDI GNDI+captr

HU

3,8%

3,9%

4,0%

4,1%

4,2%

PL

4,4%

4,6%

4,8%

5,0%

5,2%

5,4%

5,6%

• Different ”levels” in growth rates (CZ: >6%; PL 5%; HU 4%),

• different national patterns, but

• a common feature in all 3 countries:

GNDI+captr. growth > than

”headline”

indicators of economic growth (GDP/GNI)

Source: own calculations based on Eurostat

(44)

Environment of convergence: economic policy and institutional background

• Macroeconomic stability

– Relative price and wage level (RER) – Fiscal and external balance

• Business environment

– Taxation

– Institutions

(45)

Convergence in GDP/cap and relative price levels (1995–2005) (EU-15=100)

20 30 40 50 60 70 80

SI

CZ HU

SK

EE

PL

LT LV

Per capita GDP at PPS Price level

of GDP

(46)

Relative productivity (per hour) and relative real product wage: levels (EU-15=100%)

20%

30%

40%

50%

60%

70%

80%

20% 30% 40% 50% 60% 70% 80%

Comp/emp2005 Comp/emp2000 Comp/emp95

SK PL

CZ

HU SL

SK vs SL?

Relative productivity

Comp/emp at GDP-PPP

(47)

Strong negative relationship between CA balance and real convergence (2000–2006)

(larger deficit accompanied by faster convergence: 0,6 pp increase in deficit 1 pp increase in relative per cap growth)

y = -0,5894x + 0,0042 R² = 0,7644

0%

1%

2%

3%

4%

5%

6%

7%

8%

-12% -10% -8% -6% -4% -2%CA/GDP 0%

Relative growth rate

But: deficits above 10% may be unsustainable

(48)

Positive relationship between fiscal balance and relative growth 2001–2006

(smaller deficit  faster real convergence: 0,55 pp decrease in the deficit  1% pp increase in per cap. relative GDP growth)

Relative growth rate

y = 0,553x + 0,0563 R² = 0,5293

0%

1%

2%

3%

4%

5%

6%

7%

8%

-8,2% -7,2% -6,2% -5,2% -4,2% -3,2% -2,2% -1,2% -0,2% 0,8% 1,8%

HU

Fiscal

balance/GDP

(49)

Domestic counterpart of the CA deficit

Luengnaruemitchai, Pipat-- Schadler, Susan:

Do Economists' and Financial Markets' Perspectives on the New Members of the EU Differ? IMF-WP07/65 (March 2007)

(50)

The political fiscal cycle: HU

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0

2000 2001 2002 2003 2004 2005 2006 2007

Fiscal balance/GDP (%)

36 38 40 42 44 46 48 50

Primary expenditures/GDP(%)

Fiscal balance

Primary expenditures

Election years

(51)

The fiscal impulse and difference in relative growth rate vs. EU-15: HU 2000-2007

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

4,0%

4,5%

2000 2001 2002 2003 2004 2005 2006 2007

-4,0%

-3,0%

-2,0%

-1,0%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

fiscal impulse Grdif

(52)

Possible channels between larger deficit and lower growth

• High risk premium, high interest rate

• Uncertainty regarding the time and mode of correction

• Uncertainty regarding the exchange rate (currency crisis?)

• Negative impact on private investment

• Temporary extra boost to domestic demand

during expansion; large negative impact of fiscal correction

• + high taxes, tax wedge

• Non-Keynesian effects? [Political (un-)feasibility of focusing only on the expenditure side]

(53)

Tax burden (% of GDP)

28%

30%

32%

34%

36%

38%

40%

42%

2000 2001 2002 2003 2004 2005 2006

Czech Republic Hungary Poland Slovenia Slovakia

26%

27%

28%

29%

30%

31%

32%

33%

34%

35%

36%

2001 2002 2003 2004 2005 2006

Estonia Latvia Lithuania Romania Bulgaria

SK vs. SL: the country with the highest/increasing tax burden and the one with the lowest/decreasing burden perform best

In the 2000s.

(54)

GCI: critical factors of HU’s institutional competitiveness (the lower, the worse)

(HU and V3 scores in 2008)

1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 5,0 5,5

Extent and effect of

taxation

Credibility of politicians

Burden of government

regulations

Government efficiency in decreasing poverty and inequality

Role of venture capital

Business R+D expenditures

Recession expectations

Costs of corruption

Quality of education system

Quality of healthcare

Training of employees

Scale of the informal economy

HU

Average V3 (V4-HU)

(55)

Indications

• On macro policies/macro environment:

– CA deficits appear to ”help” convergence, but fiscal deficits ”harm” convergence (implication: ”twin deficits”

harm)

– excessive fiscal loosening (HU) harm real convergence – large CA deficits increase vulnerability of the Baltic

countries

• Reforms, business environment (examples)

– Slovakia – huge cut in taxes, significant reforms

– Slovenia – high taxes, little change in environment (puzzle for reform-fundamentalists) – but: conservative fiscal policy + strange, but successful monetary policy

• Relative prices, wages (examples):

– Slovakia – relatively low wage and price level – Slovenia – relatively high wages

But: both countries’ performance (before the crisis):

outstanding

(56)

Spatial relationships: relative ”real”, price and wage levels

a) Relative ”real” levels and a relative price levels;

b) Relative ”real” levels and a relative real wages;

c) Relative ”real” levels and a relative nominal (EUR) wages;

d) Relative real and nominal (EUR) wages

Why?

Because spatial relations relevant for (prospective) developments over time

(57)

Relative real GDP/cap and relative price level of GDP

in the EU26 (2008, EU15=100)

(58)

Relative GDP/cap and relative real wages (compensation per employee at GDP PPP)

(EU-15=100)

(59)

Relative GDP/cap and relative nominal wages (compensation per employee in EUR)

(EU-15=100)

(60)

Compare the ”evolution” of nominal and real

wages in function of GDP/cap

(61)

Hypothetical example: the relationship between price convergence and nominal and real wage convergence* (EU15=100)

25%

50%

36%

60%

49%

70%

64%

80%

81%

90%

100%

70% =

80% =

90% =

100% = 60% = 50% =

EUR

PPP/E

relative nominal wage relative price level Relative real wage=

*Assuming

”harmonic” relations

Implication for nominal wage convergence?

(62)

A riddle

• Assuming ”harmonic relationships” what is the form of the relation between

• the relative real wage and the relative nominal wage

• (the relative real wage and the relative price level)

• (the relative nominal wage and the relative real wage)

(63)

Relative nominal and real wage and the relative price level (assuming ”harmonic relations”)

y = x²

20%

30%

40%

50%

60%

70%

80%

90%

100%

40% 50% 60% 70% 80% 90% 100%

Rel. nom.bér Rel. Árszint

Hatvány (Rel. nom.bér)

y = x^0,5

40%

50%

60%

70%

80%

90%

100%

20% 30% 40% 50% 60% 70% 80% 90% 100%

Rel. reálbér

Hatvány (Rel. reálbér)

Relative real wage

Relative nominal wage Relative nom. wage