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1
CONVERGENCE AND INSTITUTIONS
Jörg DecressinEuropean Department
October 5, 2017
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.
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.
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
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
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
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
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
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
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
CASE STUDIES:
BOSNIA AND HERZEGOVINACROATIAESTONIAPOLANDROMANIASERBIA
11
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
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
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
14
ADDITIONAL SLIDES
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
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
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
CROSS-COUNTRY EVIDENCE
Conditional Correlations
19