MACROECONOMIC STATISTICS

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

2 Author: Gábor Oblath

Supervised by Gábor Oblath January 2011

Week 12 Catching up

Convergence in per capita income, price and wage levels

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

3

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)

Meanings/interpretations of convergence (real, price, wage)

Two aspects:

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

catching up (beta)

• From the point of view of a region: fall in dispersion (sigma-convergence)

Meanings of real economic convergence

Real convergence:

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

4 – 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?)

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

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

5

Statistical sources

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

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

• Eurostat (PPS for GDP and consumption; RPLI-s)

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

• PWT

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

• Groningen

• http://www.ggdc.net/databases/

Convergence: beta and sigma

• Beta – a group of countries: the speed of convergence (relation between initial level and growth rate)

Estimation of beta :

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

(Yt-1: GDP/cap at PPP (Yt : 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(Yt / Yt–1)/t = a + b(Ln Yt-1)+ c(….) +e  conditional

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

• Sigma for a region):

– The fall in dispersion over time

6

Beta-convergence in the EU-countries (-B3)

1991–2008 and 1995–2008

7

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

observed)

The standard deviation of log GDP/capita

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

8

”Beta” for a country: speed of convergence

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

= Ln[(1–RYt1)/(1–RYt0)]/T Where

RYt= (GDPt/capt)HU/(GDPt/capt)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?

Example: HU’ real convergence

9

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

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

• 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?

• Does the difference in growth rates remain constant? or

• Does the rate of convergence stay constant?

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

10

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

11

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%]

12

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

Convergence/divergence vs. higher/lower

relative growth of GDP/cap

13

EU-experiences: 1960 vs. 2002

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

periods)

14

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?

Beta-convergence: 1995–2006

(Countries vs. population)

15

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

16

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?

Source: calculations based on the Groningen database

17

Very long term convergence/divergence vs.

the developed West European (WE-12) countries WE-12=100

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

18

UN-ECE (2000) on longer term divergence of 3 CEE countries EU average =100

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

19

• 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

The meaning of ”real income” in international comparison (output vs.

income; level vs. change)

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”Real income” growth in international comparison

• A neglected aspect of ”income convergence”: the role of the terms of trade¹

• Recent differences in real growth rates between – GDP

– GNI, – GNDI

– GNDI+cap. transfers²

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= (GDPt/Pgdp +T) /GDPt-1)]³

• Is it really ”real”?

– are foreign trade price indices accurate?

– transfer pricing ?

1 based on AMECO

2 based on Eurostat

3 T=(X-M)/Pxm – (X/Px – M/Pm)

21

• 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

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

22

Cumulative difference between RGDI and GDP growth and annual growth rate of

GDP:

1995–2006

Source: Eurostat, AMECO

23

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

24

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

GDP/cap (PPS) in 1995 (x) and in 2006;

RGDI in 2006 at 1995 PPS (y) (EU-15=100)

25

Comparison of GDP and RGDI convergence of CEE-10; 1995–2006

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. 

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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)

GDP, GNI, GNDI and GNDI + capital transfer annual average volume changes:

an illustration (CZ, HU, PL: 2004–2006)

27

Environment of convergence: economic policy and institutional background

• Macroeconomic stability

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

• Business environment – Taxation

– Institutions

Convergence in GDP/cap and relative price

levels (1995–2005) (EU-15=100)

28

Relative productivity (per hour) and relative

real product wage: levels (EU-15=100%)

29

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)

30

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)

31

Domestic counterpart of the CA deficit

The political fiscal cycle: HU

32

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

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

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

33

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

Tax burden (% of GDP)

34

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

(HU and V3 scores in 2008)

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-

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)

35 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

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

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

• Relative ”real” levels and a relative real wages;

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

• Relative real and nominal (EUR) wages Why?

Because spatial relations relevant for (prospective) developments over time

36

Relative real GDP/cap and relative price

level of GDP in the EU26 (2008, EU15=100)

37

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

(EU-15=100)

38

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

EUR)

(EU-15=100)

39

Compare the ”evolution” of nominal and real

wages in function of GDP/cap

40

Hypothetical example: the relationship between price convergence and nominal and real wage convergence ⁴ (EU15=100)

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)

4 Assuming ”harmonic” relations

41

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

relations”)