Wiener Institut für Internationale Wirtschaftsvergleiche
The Vienna Institute for International Economic Studies
www.wiiw.ac.at
Financial Crisis and Consequences
Vladimir Gligorov
wiiw Spring Seminar 2009 27 March 2009, Vienna
Wiener Institut für Internationale Wirtschaftsvergleiche
The Vienna Institute for International Economic Studies
www.wiiw.ac.at
Causes of Current Crisis
Lax monetary policy: low interest rates and strong credit expansion
Global imbalances Deficit countries in Central, Eastern and South-eastern
European Countries In the Balkans: low export capacity
Wiener Institut für Internationale Wirtschaftsvergleiche
The Vienna Institute for International Economic Studies
www.wiiw.ac.at
Monetary policy
Wiener Institut für Internationale Wirtschaftsvergleiche
The Vienna Institute for International Economic Studies
www.wiiw.ac.at
Boom-bust in housing starts compared with the counterfactual
Wiener Institut für Internationale Wirtschaftsvergleiche
The Vienna Institute for International Economic Studies
www.wiiw.ac.at
wiiw
6wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Why contagion?
A more cautious banking sector puts the brakes on funding of- Private consumption, private investment,
exports and imports- Real estate transactions
Investors in financial markets have become more risk-aware; the destination and composition of flows have changed to the disadvantage of emerging markets
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7wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
1. Evidence from most recent developments
Decline in industrial outputDecline in foreign tradeDecline GDPDecelerated inflationReal depreciation (not everywhere)
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8wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
-25-20-15-10
-505
101520
Jan-
08
Feb
-08
Mar
-08
Apr
-08
May
-08
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09
Feb
-09
BA ME RS
-25-20
-15-10
-5
05
10
1520
Jan-
08
Feb
-08
Mar
-08
Apr
-08
May
-08
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09
Feb
-09
HR MK TR
Industrial output declineRates of change in %, monthly, year-on-year
Source: wiiw Monthly Database incorporating national statistics.
Candidate countries Potential candidates
40.9
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9wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
80100120140160180200220240260
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
MK
TR
HR
R
Exports of goods: decline after mid-2008 EU candidate countries, euro-based, January 2006 = 100
Source: wiiw Monthly Database incorporating national statistics.
wiiw
10wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
80100120140160180200220240260
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
RS BA
AL
Exports of goods: decline after mid-2008 Potential candidate countries, euro-based, January 2006 = 100
Source: wiiw Monthly Database incorporating national statistics.
wiiw
11wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
GDP - shift from expansion to contraction Candidate countries, change in %, annual, year-on-year*
-4
-2
0
2
4
6
8
2006 2007 2008 2009* 2008 wiiw estimate, 2009 wiiw forecast
Macedonia
Turkey Croatia
Source: wiiw Annual Database incorporating national statistics.
wiiw
12wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
GDP - shift from expansion to contraction Potential candidate countries, change in %, annual, year-on-year*
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
2006 2007 2008 2009
Albania
Montenegro
BA
Serbia
* 2008 wiiw estimate, 2009 wiiw forecastSource: wiiw Annual Database incorporating national statistics.
wiiw
13wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
0123456789
101112
Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09
HR MK TR AL BA ME RS
Decelerating inflation CPI, monthly, change year-on-year in %
* wiiw forecast
Source: wiiw Monthly Database incorporating national statistics.
16
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14wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Currency Board or euro as legal tender:
Producer prices vis-à-vis EU: mainly upEUR per unit of national currency, Jan 2007 = 100
Source: wiiw Monthly Database incorporating national statistics.
Bosnia and Herzegovina
85
90
95
100
105
110
115
120
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
Montenegro
85
90
95
100
105
110
115
120
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
Exchange rate nominal Exchange rate real
wiiw
15wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Countries with de-facto EUR peg Producer prices vis-à-vis EU: various patternsEUR per unit of national currency, Jan 2007 = 100
Croatia
85
90
95
100
105
110
115
120
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
Macedonia
85
90
95
100
105
110
115
120
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
Albania
85
90
95
100
105
110
115
120
Jan-
07
May
-07
Sep
-07
Jan-
08
May
-08
Sep-
08
Jan-
09
Source: wiiw Monthly Database incorporating national statistics.
Exchange rate nominal Exchange rate real
wiiw
16wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Countries with flexible exchange rate: Producer prices vis-à-vis EU: strong reversal EUR per unit of national currency, Jan 2007 = 100
Source: wiiw Monthly Database incorporating national statistics.
Serbia
80
85
90
95
100
105
110
115
120
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
Turkey
80
85
90
95
100
105
110
115
120
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
Exchange rate nominal Exchange rate real
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17wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
2. Imbalances
Imbalances:Fiscal imbalances less alarming – so far
Alarming external deficits
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18wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Relatively low government deficits, government debt and overall external debt in % of GDP, 2008
* External debt at end of 2007
Source: wiiw Database incorporating national statistics.
Gov. budget Gov. debt External debt
Croatia -2.3 54.5 96
Macedonia* -1.0 . 49
Turkey -1.3 35.1 47
Albania -4.0 53.5 20
BiH 2 20.0 16
Montenegro 2 . 14
Serbia -2.5 . 71
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19wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
0
10
20
30
40
50
60
70
BA MK ME HR RS AL TR
Exports Deficit
Imports of goods: intensity and coverage by exportsin % of GDP, 2008
Source: wiiw Annual Database incorporating national statistics.
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20wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Deficit in trade with goods: coverage, 1-9 2008
0
20
40
60
80
100
120
140
Croatia Macedonia Turkey Albania BiH Montenegro Serbia
Services Income Current transfers Capital transfersFDI P ortfolio investment Other investment Errors and om.
-40
-20
0C R O M A C T U R A L B B iH M O N S E R
Increase in currency reserves in % of trade deficit5 6 2 8 -111 4
Def
icit
in T
rade
wit h
Go o
ds =
100
Source: wiiw Database incorporating national statistics.
wiiw
21wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
3. Potential trouble Lack of external means for the financing of external
deficits and debt refinancing
More balanced current account becoming a must
Either more exports or less imports (goods and services)
Allowing for nominal depreciation as one alternative (additional burden to households and companies with foreign currency debt)
Wage deflation in the context of strong GDP decline as a second alternative
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22wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
4. Southeastern Europe’s prospects
2009 GDP decline
2010 GDP stagnation
2011 some GDP growth again, provided the international business climate improves
2012 ff. growing GDP, but at rates lower than in 2003-07
Gradual return of FDI inflow
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23wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
5. Financial risks
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24wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
What do we see in the financial indicators? High current account deficits In most cases – worsening So, financing them is the key issue
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25wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Current account balance in % of GDP
-60-50-40-30-20-10
0102030
q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08
AL BA HR RS TR ME MK
Source: National bank of the respective country.
wiiw
26wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Governments’ foreign debt
Mostly not very high And the share in total foreign debt - declining
wiiw
27wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
General government share in gross external debt in %
Source: National bank of the respective country.
0
5
10
1520
25
30
35
40
q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08
BA HR RS TR MK
wiiw
28wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Short-term debt
In a couple of cases too high In a number of cases increasing
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29wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Short-term foreign debt in % of foreign exchange reserves (excluding gold)
Source: National bank of the respective country.
020406080
100120140160180
q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08
AL BA HR RS TR ME MK
wiiw
30wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Banks and risks
Credit expansion decelerating
Leverage ratios relatively low
Risks, however, increasing by most measures
Some countries facing bigger problems than others
Banks rely significantly on foreign liabilities
Foreign currency loans important
Not enough data to say something on non-performing loans
wiiw
31wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Bank loans to non-financial private sector growth in %, eop month (year-on-year)
Source: National bank of the respective country.
0
50
100
150
200
250
q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08
BA HR RS TR ME MK
wiiw
32wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
3m...BOR-3mEURIBOR
spread in percentage points, eop month
Source: National bank of the respective country.
-5
0
5
10
15
20
q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08
AL HR RS MK
wiiw
33wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
TED spread (3m...BOR-3mT-Bill)spread in percentage points, eop month
Source: National bank of the respective country.
-4-202468
101214
q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08
AL HR RS MK
wiiw
34wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Leverage, banking sector assets to capital ratio, eop month
Source: National bank of the respective country.
0
2
4
6
8
10
12
14
q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08
BA HR RS ME MK
wiiw
35wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Share of banks’ external debt in assets in %, eop month
Source: National bank of the respective country.
0
5
10
15
20
25
30
q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08
BA HR RS TR MK
wiiw
36wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Share of loans in foreign currency in % of total loans, eop month
Source: National bank of the respective country.
0
10
20
3040
50
60
70
80
q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08
AL BA HR MK
wiiw
37wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Share of non-performing loans in % of total loans, eop month
Source: National bank of the respective country.
0
2
4
6
8
10
12
q1'07 q2'07 q3'07 q4'07 q1'08 q2'08
AL HR MK
wiiw
38wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Real estate bubble?
Construction slowing down
Prices for apartments declining
However, not enough data to say more on that
wiiw
39wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Growth in apartment prices in %, CPI deflated (year-on-year)
* Data refer to half year.
Source: National bank of the respective country.
-10
-5
0
510
15
20
25
30
q1'07 q2'07 q3'07 q4'07 q1'08 q2'08
HR* RS*
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40wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Construction sector growth less GDP growth in % (year-on-year)
* Data refer to half year.
Source: National bank of the respective country.
-10-8-6-4-202468
1012
q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08
HR RS TR MK
wiiw
41wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
20
25
30
35
40
45
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Gin
i coe
ffici
ent
Central Europe CISSEE BalticsPolynomisch (Transition countries)
Source: UNU-WIDER: World Inequality Database Version 2.0c, w iiw calculations.
Transition countries (polynomial trend)
Development of income inequality in Central Europe, Baltic States, SEE and CIS, 1989-2006unweighted averages of Gini coefficients (income based)
wiiw
42wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Income inequality in world regions unweighted averages of Gini coefficients (income based), 2003
SEE
CIS
East AsiaRussia
USAMiddle East
& North Africa
South Asia
Sub-Saharan AfricaLatin America
Central Europe & Baltics
Western Europe
China
25
30
35
40
45
50
55
Gin
i coe
ffici
ent
Source: UNU-WIDER: World Inequality Database Version 2.0b , own calculations.
wiiw
43wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Distribution of income & source of income
Correlation of functional distribution and inequality in transition countriesCE & Baltics, SEE and CIS
y = -0.40x + 48.752R = 0.27
15
20
25
30
35
40
45
50
15 20 25 30 35 40 45 50 55
Compensation of employees, in % of GDP
Gin
i coe
ffici
ent
2002
Sources: AMECO database, CIS STAT database, UNU-WIDER: World Inequality Database Version 2.0c .
wiiw
44wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
y = -0.15x + 36.80R2 = 0.44
10
15
20
25
30
35
40
45
0 20 40 60 80 100
coverage rate of collective agreements
Gin
i coe
ffici
ent
2001
Correlation of coverage rate of collective agreements in transition countries, 2001
Sources: Schroeder (2004), UNU-WIDER: World Inequality Database Version 2.0a.
Central Europe, Baltics & BGR, ROU, HRV
Role of labour market institutions
wiiw
45wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Main causes of inequality developmentin transition
Loss in output and increase of unemployment
Rising wage inequalities due to liberalization of labour market regulations
Industrial employment and productivity growth reducing inequality
Dampening effect of public expenditure
While price and trade liberalization reduced inequality via job creation, (public utilities infrastructure) privatization did opposite
Economic integration via exports had positive effects on equality
wiiw
46wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
The outcome
Croatia: Under the assumption of a mild recession, the Gini increases by 0.3pp to 31.2
Hungary: Under the assumption of a strong recession, the Gini increases by 0.9pp to 27.0
Ukraine: Under the assumption of a heavy recession, the Gini increases by 1.2pp to 31.1
Doubling the drop in industrial & overall employment and the increase in unemployment raises the Gini to: HR 31.6; HU 27.3; UA 31.9
wiiw
47wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Crisis impact on inequality
Given the extent of the recession, the model suggest an increase of inequality from 0.3pp to 1.2pp (0.7pp to 2pp)
In general income inequality does not change rapidly
Still absolute poverty will be on the rise with average income levels falling
Stronger fiscal expansion could reduce the increase of inequality
1pp more government expenditures reduces Gini by 0.1pp
wiiw
48wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Conclusions
Risks have increased
Not primarily because of the health of the banks (though Montenegro is different)
But because of high demand for foreign financing that has become scarce
Which drives growth down
Which in turn pushes the risks up
wiiw
49wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
What is to be done?
Stabilization is the key in the short run
In the medium run, it is a question whether it might be necessary to move from a neoclassical to a mercantilistic growth strategy
The choice may depend on the policy of the EU
wiiw
50wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Rast na kratak rok
• Trenutna kretanja, ocenjena na osnovu dostupnih podataka, su veoma negativna
• Industrijska proizvodnja se smanjuje po visokoj stopi gotovo svuda – takođe u Hrvatskoj
• Spolja trgovina se takođe smanjuje gotovo svuda – isto i u Hrvatskoj
• Inflacija se usporava, a preti i deflacija, praktično svuda• Ova kretanja implicraju značajnan pad bruto domaćeg
proizvoda, praktično svuda, a u Hrvatskoj do 4 ili 5%
wiiw
51wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Stabilnost na kratak rok
• S obzirom na pad proizvodnje, reč je o “igri sa negativnom sumom”, dakle o raspodeli gubitaka
• Ovo ide uz promene u relativnim cenama• Od kojih je ključan realni tečaj – dakle odnos između (uprošćeno govoreći)
izvoza i unutrašnje potrošnje• Budući da se smanjuje izvoz, finansiranje postojećih obaveza zavisi od
smanjenja potrošnje ili od mera za povećavanje izvoza• Ovo poslednje podrazumeva depresijaciju realnog kursa, bilo preko deflacije
ili preko nominalne depresijacije• Za razliku od okolnosti kada nominalna depresijacija podstiče inflaciju, u
deflatornom okruženju je moguća relaksacija monetarne politike čak i uz depresijaciju tečaja
• Osnovna pretnja stabilnosti jeste prinudna devalvacija usled suviše jakih deflatornih pritisaka
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52wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Zaključci G20 i MMF
• Ključan zaključak jeste da se održi kratkoročna stabilnost i da se podstakne globalna tražnja
• Ključnu ulogu ima MMF – triplira se njegova kreditna sposobnost i značajno povećava sposobnost da podrži likvidnost
• MMF se reformiše, pri čemu su ključni sledeći elementi• Cilj je održanje rasta a ne samo stabilnosti• Monetarni i fiskalni uslovi se rukovode održivošću, dok su
kvantitativni kriteriji indikativni, a ne bezuslovni• Strukturni kriteriji su takođe indikativni, a ne obavezujući• MMF ima ključni zadatak da podrži globalnu tražnju i da obezbedi da
ne dođe do sloma sistema tečajeva što bi vodilo finansijskom haosu i rastu protekcionizma
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53wiiw Spring Seminar, 27 March 2009Fragile Europe: the Path in and out of the Crisis – What Is to be Done?
Srednjoročne perspektive
• Najvažnije pitanje izbora metoda stabilizacije jeste šta to znači za razvoj na srednji rok?
• Ovde je važno poći od pretpostavke da je malo verovatno da će rast na srednji rok moći da se finansira na isti način kao i u prethodnom periodu
• Kako će se onda hrvatska privreda vratiti na put visokih stopa rasta?• Ukoliko ne dođe do korekcije realnog tečaja, dakle ukoliko se samo
recesijom očuva nominalni tečaj, postoji opasnost da će to imati za posledicu produženu stagnaciju ili preovladavanje niske stope rasta
• Ovo zato što će rast morati mnogo više da se finansira povećanjem unutrašnje štednje, a mnogo manje kreditima i ulaganjima iz inostranstva
• To znači da je potrebno značajno povećati konkurentnost hrvatske privrede• To je problem i većine drugih zemalja u tranziciji