CSOB, PragueApril 2004

Jan Svejnar

EU Entry and the Czech Economy in a Comparative Perspective

1

Source: http://news.bbc.co.uk/hi/english/static/events/the_launch_of_emu/euro_facts/map/default.htm, OECD, WTO

European Union (2002)

Population : 379.7m

GDP: 10,011.7 (in 1995 bn US$)

Unemployment: 7.6% ; CPI: 2.3%

Merchandise exports within EU (2001): 1,417 (US$ bn)

Merchandise exports world-wide (2001): 874 (US$ bn)

2

Europe: Economic Associations

Source: The European Commission3

Accession Countries: Basic Facts

• Account for 5% of EU GDP and 20% of EU population

• Transition-related challenges mostly overcome• Open economies, proceeding with integration

into EU

4

Source: EBRD Transition Report various issues.

Private Sector Share of GDP

1992 1994 1996 1998 2000 2001 2002

Czech Republic 30 65 75 75 80 80 80

Hungary 40 55 70 80 80 80 80

Poland 45 55 60 65 70 75 75

Slovak Republic 30 55 70 75 80 80 80

Slovenia 30 45 55 60 65 65 65

Estonia 25 55 70 70 75 75 80

Latvia 25 40 60 65 65 65 70

Lithuania 20 60 70 70 70 70 75

Bulgaria 25 40 55 65 70 70 75

Romania 25 40 55 60 60 65 65

Russia 25 50 60 70 70 70 70

Ukraine 10 40 50 55 60 60 65

5

Economic Growth

• All accession countries have been growing much faster than the EU

• Have been able to withstand EU slowdown

6

-20

-10

0

10

20

30

40

50

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

-20

-10

0

10

20

30

40

50

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

+

+

+

+

+ United States

Japan

CEBEuropean Union

Real GDP Index(1990 Base Year)

Source: IMF World Economic Outlook 2003 and EBRD Transition Report 2003

-20

-10

0

10

20

30

40

50

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

+

+

+

+

+ United States

Japan

CEBEuropean Union

7

Source: William Davidson Institute based on the IMF World Economic Outlook 2003, and Davidson Institute Forecasts

Real GDP Index, 1989 - 2004(1989 Base Year)

-60

-40

-20

0

20

40

60

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Romania

Slovenia

Russia

CzechRepublic

Poland

Croatia

SlovakiaHungary

Bulgaria

+

+

OECD

EU

+

8

Budget Deficit

• Most accession countries contained budget deficits in the 1990s

• But serious budget deficits emerged recently– Social transfers– Tax harmonization with EU– Electoral cycle– Compensating for demand slowdown in EU

9

Government Budget Balance (as % of GDP)

Sources: 2003 - IMF World Economic Outlook 2003; 1990 to 2003 - EBRD Transition Report 2003; EU - IMF World Economic Outlook 2003; Ministry of Finance of the Czech Republic

*Estimate / ** Projection. Note : Actual Figures for Czech Republic for 2002

1990 1994 1996 1998 2000 2002* 2003**

Czech Republic 8.2 -1.2 -1.7 -2.4 -4.4 -6.7 -5.8

Hungary 0.5 -7.5 -5.0 -4.8 -3.4 -9.9 -5.5

Poland 0.4 -2.2 -3.3 -3.2 -3.2 -5.7 -6.0

Slovak Republic 0.1 -1.5 -1.4 -5.0 -3.6 -5.5 -4.9

Slovenia -0.3 -0.2 -0.2 -1.4 -1.3 -2.9 -1.0

Estonia na 1.4 -1.9 -0.3 -0.7 1.2 -0.5

Latvia na -4.4 -1.8 -0.8 -3.3 -2.5 -3.5

Lithuania na -4.8 -4.5 -5.9 -2.7 -1.2 -1.5

Bulgaria -8.1 -3.9 -10.4 1.3 -0.6 -0.8 -0.7

Romania -0.4 -2.2 -3.9 -5.0 -3.6 -2.8 2.6

Russia na -10.4 -8.9 -8.0 3.0 1.4 0.5

Ukraine na -8.7 -3.2 -2.8 -1.3 0.8 -1.0

EU -4.1 -5.6 -4.3 -1.7 0.8 -1.9 -2.3

10

Inflation

• Containing inflation has been the single greatest success

• Many countries started with high or even hyper-inflation

• Now most in middle to low single digits• Role of central bank interest rate policies

11

Consumer Price Inflation (annual percentage change)

Sources: William Davidson Institute forecast, IMF World Economic Outlook April 2003, EBRD Transition Report 2003, OECD Economic Outlook 2003, and Czech Statistical Office.

* Forecast

1990 1992 1996 2000 2002 2003 2004*

Czech Republic 9.7 11.1 8.8 3.9 1.8 0.1 2.6

Croatia 609.5 665.5 3.5 5.4 1.7 2.2 2.7

Hungary 28.9 23.0 23.6 9.8 5.3 4.6 6.6

Poland 585.8 43.0 19.9 10.1 1.9 0.7 2.1

Slovak Republic 10.8 10.0 5.8 12.0 3.3 8.6 7.5

Slovenia 549.7 207.3 9.9 8.9 7.5 5.6 4.5

Estonia 23.1 1,076.0 23.1 4.0 3.9 1.8 2.5

Latvia 10.5 951.2 17.6 2.7 1.9 2.9 3.5

Lithuania 8.4 1,020.5 24.6 1.0 0.3 -1.2 -0.6

Bulgaria 26.3 82.0 123.0 10.3 5.8 2.2 5.4

Romania 127.9 210.4 38.8 45.7 22.5 15.3 11.7

Russia 5.6 1,526.0 47.8 20.8 16.0 13.9 11.2

Ukraine 4.2 1,210.0 80.0 28.2 -0.7 6.9 6.2

EU 5.4 4.6 2.5 2.3 2.3 2.2 1.8

12

Unemployment

• A major problem, especially in some countries• Low but rising in the Czech Republic• Social, political and macro economic problem• Slows down the rate of increase in wages

13

Unemployment Rate

* Estimate / ** ForecastNote: For most countries data based on ILO methodology.

Sources: William Davidson Institute based on ILO, World Bank, EBRD various issues, and OECD based on labor force surveys. Russian data from Sabirianova & Earle 2001 using LFS figures, reported in Goskomstat (2000c), Goskomstat (1999a),

(in percent)

1990 1992 1994 1996 1998 2000 2001 2002 2003* 2004**

Czech Republic - 4.7 4.3 4.0 6.5 8.8 8.1 7.3 7.5 7.6

Hungary 8.4 9.9 11.0 10.1 8.0 6.5 5.8 5.8 6.2 6.4

Poland 5.2 12.0 14.1 12.4 10.5 16.1 18.2 18.9 na na

Slovak Republic 5.4 10.7 13.7 11.1 12.5 18.6 19.2 18.5 18.1 17.8

Slovenia na na 9.0 7.3 7.7  7.2  5.9  4.8 na na

Estonia 0.7 3.7 7.6 10.0 9.9 13.7 12.7 10.4 9.9 9.6

Latvia 8.9 15.2 16.7 19.4 14.0 13.2 13.1 12.1 11.3 11.0

Bulgaria 27.3 27.3 20.0 13.5 12.2 16.3 19.4 21.3 na na

Romania 2.3 7.9 8.2 6.7 6.4 7.1 6.6 8.4 8.8 8.8

Russia na 5.2 8.1 9.7 13.4 8.9 7.6 8.0 8.4 8.1

Ukraine na na na 7.6 11.3 11.7 11.1 10.8 na na

EU 7.0 8.6 10.3 10.1 9.4 7.7 7.3 7.6 7.8 7.5

14

Foreign Direct Investment

• Accession countries are a focal point in the world• Broad and diverse investor base• Czech and Slovak republics the largest regional

recipients on a per capita basis• FDI drives productivity and exports

15

Foreign Direct Investment(Net inflows per capita, in US Dollars)

Sources: WDI Staff calculations based on the World Bank World Development Indicators 2003 and on the EBRD Transition Report 2003.

* Estimate

1992 1994 1996 1998 2000 2002 2003*

Czech Republic 95.27 72.47 123.70 348.81 481.15 802.06 348.96

Hungary 142.48 106.91 223.58 153.75 110.95 59.64 126.44

Poland 7.40 14.06 70.98 128.43 211.42 95.57 155.28

Slovak Republic 18.84 44.13 37.03 69.38 381.04 739.99 370.10

Slovenia 56.60 64.86 83.88 111.47 35.70 915.75 115.46

Estonia 52.19 144.91 78.39 414.08 236.58 130.61 146.63

Latvia 11.02 109.50 152.15 125.73 168.63 163.55 148.37

Lithuania 2.16 8.47 42.16 259.07 106.96 193.04 157.96

Bulgaria 4.80 12.45 16.52 65.04 123.45 52.63 113.74

Romania 3.20 15.00 18.36 92.39 46.85 48.13 49.09

Russia 9.78 2.76 11.22 10.18 (3.41) 0.00 17.27

Ukraine 3.28 2.90 9.94 14.61 11.81 14.10 15.28

16

Foreign Direct Investment(Net Inflows, in Millions of US Dollars)

Sources: World Bank World Development Indicators 2003 and EBRD Transition Report 2003.

* Estimate

1992 1994 1996 1998 2000 2001 2002 2003*

Czech Republic 983 749 1,276 3,591 4,943 4,820 8,226 5,000

Hungary 1,471 1,097 2,279 1,555 1,123 2,255 598 1,288

Poland 284 542 2,741 4,966 8,171 6,928 3,700 6,000

Slovak Republic 100 236 199 374 2,058 1,460 4,007 2,000

Slovenia n.a. 113 129 167 221 71 371 1,790 230

Estonia n.a. 80 212 111 574 324 343 185 200

Latvia n.a. 29 279 379 303 400 151 388 350

Lithuania n.a. 8 31 152 921 375 439 714 550

Bulgaria 41 105 138 537 1,003 641 430 900

Romania 73 341 415 2,079 1,051 1,154 1,080 1,100

Russia 1,454 409 1,657 1,496 -496 -137 0 2,500

Ukraine n.a. 170 151 516 747 594 769 698 750

17

Overall Impact of EU Accession on Entrants

• Moderate short run (static) effect on the Czech Republic (accession countries in general)– EU rules already in place– Tariffs and other protection measures limited– Banking sector competitive and increasingly efficient– => limited trade and competitive effects and strong

pressure to complete the legal and regulatory reform– Liberalization and regulatory changes will affect sectors

such as pharmaceuticals, telecoms, transport, and steel– Autos, food and banking will benefit from growth

• Long run dynamic effects can be sizable (relocation)

18

Impact on Existing EU Countries

• Small but positive effect– In economic terms, adding the new countries is like adding

an economy of the Netherlands

– Exporters will benefit

– Import substituting producers will feel greater competition

19

Impact on the Czech Banking Sector

• Positive but limited in the short run– Virtually all banks are already foreign owned and

adequately capitalized– Ready for Basel II capital adequacy rules– Most large banks are profitable and produce financial

statements based on local as well as international accounting standards

– Many new financial products on the market– Will benefit from faster growth driven by the enlargement,

rising personal incomes and further efficiency gains

• Long-run: effect of global competition

20

Adoption of Euro

• Most likely a 4-6 year horizon for adoption• Beneficial for accession countries to eliminate

currency risk with their largest trading partners• ERM2 – enhanced risk of financial instability/crisis

21

Current Challenges for the Czech Republic

• Budget deficit– Pension and healthcare reform

• Legal, regulatory and institutional reforms• Restructuring of firms privatized to domestic

owners• Speed of EU recovery• Prices of raw materials (oil)

22

Davidson Institute Emerging Market Forecasts (DIEMF)

Sources: William Davidson Institute calculations.

(April 2004)

F : Forecast

2004F 2005F 2004F 2005F

Czech Republic 3.1 3.1 2.6 2.8

Hungary 3.8 4.1 6.6 4.8

Slovak Republic 4.3 4.5 7.5 5.4

Slovenia 3.4 3.4 4.5 4.0

Estonia 5.5 6.3 2.5 3.2

Latvia 6.2 6.0 3.5 2.5

Lithuania 8.1 6.4 -0.6 0.3

Poland 4.3 4.5 2.1 2.0

Bulgaria 5.0 5.0 5.4 4.1

Romania 4.9 5.4 11.7 10.7

Russia 5.7 4.8 11.2 9.4

Ukraine 8.3 6.9 6.2 5.5

GDP Growth CPI Average

23