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CONVERGENCE AND INSTITUTIONS Jörg Decressin European Department October 5, 2017

Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

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Page 1: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

1

CONVERGENCE AND INSTITUTIONS

Jörg DecressinEuropean Department

October 5, 2017

Page 2: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

0

10

20

30

40

50

60

70

1960 1968 1976 1984 1992 2000 2008 2016

The fast pace of convergence before crisis …CESEE and Korea: GDP per Capita

(Percent of per capita GDP of the U.S. at PPP)

2

KOR

CZE

HUN

EST

POLHRV

MDA

UKR

ROU

RUS

ALBBIH

MKD

LVA

SRBBGR

BLRTUR

LTU SVK

UVK

SVN

MNE

Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea.

Page 3: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

0

10

20

30

40

50

60

70

1960 1968 1976 1984 1992 2000 2008 2016

… leveled off since 2009CESEE and Korea: GDP per Capita

(Percent of per capita GDP of the U.S. at PPP)

3

KOR

CZE

HUNEST

POL

HRV

MDA

UKR

ROU

RUS

ALBBIHMKD

LVA

SRB

BGRBLR

TUR

LTU SVK

UVK

SVN

MNE

Data for CESEE countries are for 2000-2016 and are shifted back in time to comparable level of development of Korea.

Page 4: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

Lower TFP behind the growth slowdown

-8

-6

-4

-2

0

2

4

LVA

EST

LTU

SVK

SVN

CZE

HU

NPO

L

HRV

ROU

BGR

SRB

MKD UKR

MD

ARU

S

TUR

Labor Capital TFP Potential growth

Change over 2013-15 versus 2002-08(Percentage points)

Baltics CISCEE SEE-EU SEE-non EU 4

Page 5: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

80

90

100

110

120

130

140

2000 2005 2010 2015 2020 2025

Turkey

Germany

CESEE excl. Turkey

Major demographic headwinds aheadFalling Working Age Population

(Index, 2000=100)

5

Page 6: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

Large emigration from the region impacts growth Cumulative Emigration Flows by Region

(Millions of people)Emigration Impact on Real GDP Growth

1995-2012(Percentage points)

6

0

4

8

12

16

20

24

1990 1995 2000 2005 2010 2015

CE-5SEE-EUCISSEE-XEUBaltics

-20

-15

-10

-5

0

ALB

HRV

ROM

EST

BGR

SVN

SVK

LTU

CZE

POL

HU

N

LVA

Due to skilled emigrationDue to unskilled emigration

Page 7: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

Low domestic savings and insufficient investmentCESEE: Gross Investment, 2016

(Percent of GDP)CESEE: Gross Domestic Saving, 2016

(Percent of GDP)

-10

0

10

20

30

CZE

HU

NSV

NRU

SES

TTU

RSV

KBL

RRO

UPO

LBG

RH

RV LVA

MKD LTU

UKR SRB

ALB

MN

EBI

HU

VKM

DA

EU 15 average

-10

0

10

20

30

TUR

UVK ALB

MKD CZ

EM

NE

BLR

ROU

EST

MD

ARU

SSV

KH

RVBG

RLT

ULV

APO

LSR

BH

UN

SVN

UKR BIH

EU 15 average

7

Page 8: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

8

Lighter green= better

Darker green= worse

Rule of law challenges for many European countries.A lot of progress in CESEE countries but remaining gaps

Above 75 percentile Between 25 and 75 percentile Below 25 percentile

Rule of Law2016

Protection of Property Rights 2015

Worldwide distribution excluding LICs

Page 9: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

Darker green= worseLighter

green= better

Room for improvement especially in judicial independence and impartiality

Above 75 percentile Between 25 and 75 percentile Below 25 percentile

9

Judicial Independence 2015

Impartial Courts 2015

Worldwide distribution excluding LICs

Page 10: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

CESEE’s judiciary efficiency good but challenges in perceived independence

1/ Values higher that 100 indicate that more cases are resolved than received, and suggest higher efficiency. 2/ Percent of responders that ranked independence of courts in their country fairly or very good.

Perceived Independence of Courts, 2017 2/ Resolution Rate: Insolvency Cases, 2014 1/

0

50

100

150

200

250

EU15 CESEE EU CESEE non-EU

Min-max rangeMeanCoefficient of variation

0

20

40

60

80

100

EU15 CESEE EU

Min-Max rangeAverage

10

Page 11: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

CASE STUDIES:

BOSNIA AND HERZEGOVINACROATIAESTONIAPOLANDROMANIASERBIA

11

Page 12: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

Factors Facilitating Reform(Index = 0 to 10, 0=worst, 10=best)

Estonia

12

Romania

2

3

4

5

6

7

8

1996 2000 2004 2008 2012 2016

Rule of lawJudicial independenceProtection of property rights

2

3

4

5

6

7

8

1996 2000 2004 2008 2012 2016

Rule of lawJudicial independenceProtection of property rights

Page 13: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

A. Initial Conditions:

B. Distribution of Resources:

C. Transparency:

D. State capacity:

E. Role of the EU:

• Estonia: Vibrant civil society; clean break from communism• Romania: New government still connected to old regime

• Estonia: Inclusive privatization; economy opened up quickly• Romania: Privatization lead to concentration of resources

and delayed liberalization• Estonia: Media freedom and e-government• Romania: Freedom of Information Law promoted by EU

helped civil society

• Estonia: New judges were chosen based on merit• Romania: Stop-and-go reforms but some improvement

• Estonia: EU provided benchmarks for high standards• Romania: EU membership acted as a catalyst for reforms

Comparison of factors facilitating reform

13

Page 14: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

Key messages

Strengthening institutions a priority for next generation of reforms

Some countries successfully reformed, though reversals also occurred

Distributional factors key to successful judicial reforms; privatization andopening up had notable effects

Strengthened transparency and accountability conducive to improvements in judicial effectiveness

The quality of the public administration was another critical factor

The EU was a strong external anchor but sustainability of reforms appears to depend manly on domestic factors

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Page 15: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

ADDITIONAL SLIDES

Page 16: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

0

10

20

30

40

50

LTU

LVA

EST

SVK

SVN

POL

HU

NCZ

E

HRV

BGR

ROU

SRB

ALB

RUS

MD

AU

KR

TUR

Easing business regulation Lowering restrictions on FDIProperty rights Upgrading judicial systemTotal

Baltics CISCEE SEE-EU SEE-non EU

CESEE: Estimated Efficiency Gains from Institutional Reforms(Percent; potential improvement in TFP)

Upgrading institutions key for moving to a higher growth path

16

Presenter
Presentation Notes
The charts shows what percent of the technical efficiency gap could be closed if a particular structural indicator improves to the level of EU15 average. For each country, the respective bar shows from which reforms they can get the largest growth benefit. These are estimates of potential efficiency gains from improving structural and institutional characteristics of CESEE countries to EU-15 average level based on the stochastic frontier analysis. In the case of Croatia, for example, efficiency gains from all structural reforms would allow it to close the gap with the frontier economy. But, in the case of Estonia, potential gains are limited since in many of these areas Estonia is already very close to the EU-15 average levels.
Page 17: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

Control of corruption Legal system

BGR

LVA

ROUHUN

POL

HRVSVN

BIH

ALB

SRB

UKR

UVK

MNE

MDA

TUR

Independent anti-corruption agency

Creditor rights

Improve oversight of SOEs

Contract enforcement

Improve recovery of collateral

Improve oversight of procurement

Speed up debt resolution

Reduce corruption and inefficiency in

courts

Enhance transparency of capital projects

The Fund’s Recommendations on Governance and Institutions

Legal systems a challenge for many European countries with high NPLS.

IMF SDN 15/19 “A Strategy for Resolving Europe’s Problem Loans”.

ESP

ITAGRC

17

Page 18: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

4

6

8

10

Educationalequality

Health equality

Absence of gov.censorship

Justification ofpolicies

Freedom ofinformation

Strength of civilsociety

Equal distributionof resources

EU15 CESEE EU Estonia

18

Factors Facilitating Reform, 1993(Index = 0 to 10, 0=worst, 10=best)

4

6

8

10

Educationalequality

Health equality

Absence of gov.censorship

Justification ofpolicies

Freedom ofinformation

Strength of civilsociety

Equal distributionof resources

EU15 CESEE EU Romania

Estonia Romania

Page 19: Convergence and institutions...2017/10/05  · SVN MNE Data for CESEE countries are for 2000-2008 and are shifted back in time to comparable level of development of Korea. 0 10 20

CROSS-COUNTRY EVIDENCE

Conditional Correlations

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