Transcript Presentation

Restarting Growth in Cyprus
Some reflections from an international perspective
Dirk Reinermann, Program Manager Southern Europe
Nicosia, Republic of Cyprus
July 4, 2014
The Republic of Cyprus is currently undergoing a deep
recession
Unemployment rate, % of labor force
Real GPD growth, %
18
6
Cyprus
EU15 average
EU15 average
Cyprus
16
4
14
2
12
0
10
8
-2
6
-4
4
-6
2
-8
0
2007
2008
2009
2010
2011
2012
2013
2014e
Source: IMF World Economic Outlook database
2007
2008
2009
2010
2011
2012
2013
2
A new growth model is needed
•
Reliance on financial services to drive growth and welfare proven
unsustainable by the crisis  need to diversify
•
New model can build on ROC’s competitive advantages
• Strategic geographic location: part of huge EU market and a bridge
between Europe and Asia
• Strong institutional framework
• Human capital [?]
•
Faster growth, beyond restoring the fiscal and financial health, rests on
adopting reforms that boost private investment, innovation, and global
integration
•
To achieve this, both horizontal and vertical reforms are needed
4
Part of world’s largest and most connected economic bloc
Note: Map resized according to economic strength.
5
Key blocks for a growth reform agenda in the Republic of
Cyprus
Trade
Finance
Business environment
Innovation
Human capital
Energy
Effective governance
Smart industrial policy
6
Trade: Trade facilitation and logistics fall short of European
and global standards
Logistics Performance
Index Score
4.50
4.00
3.50
Timeliness
3.00
Customs and Clearance
2.50
2.00
1.50
1.00
0.50
EU 15 Average
0.00
Cyprus
Singapore
Tracking & tracing
Infrastructure for trade
Logistics competence
International shipments
Source: World Bank, Logistics Performance Index
7
Trade: Export sophistication is behind some EU peers
Export sophistication (EXPY)
10.7
10.6
Log of Product Sophistication (EXPY)
10.5
10.4
10.3
10.2
10.1
10.0
9.9
9.8
9.7
2008
Cyprus
2009
Germany
Greece
2010
United Kingdom
Source: World Bank, World Integrated Trade Solution Database (WITS)
2011
Ireland
2012
Iceland
Malta
8
Finance: Need to restore the financial sector as an engine for
growth…
1
35
0
30
25
-1
NPL ratio (right)
ROA (left)
-2
20
15
-3
10
-4
5
-5
0
€ billion
2008
40
35
30
25
20
15
10
5
0
2009
2010
2011
2012
2013
25
20
Inv. to GDP (right)
Res. loans (gross, left)
15
10
5
• Restructuring and
recapitalization
progress, but…
• NPL overhang
unsustainable,
with…
• credit contraction
holding back
recovery…
• and the collapse in
investment a telling
drag on future
competiveness
0
2008
2009
2010
2011
2012
2013
9
Source: CBC, SSC, ECB, IMF FSIs, BoC
Finance: …while rethinking its structure and services
1,000
100
800
80
600
60
400
40
200
20
0
0
2009
2010
2011
Bank to fin. assets (right)
2012
2013
Fin. assets to GDP (left)
100%
60%
40%
Non-res. loans
20%
0%
2008
2009
2010
2011
2012
• A renewed dialogue
is needed on the
financial structure…
• …including banking
sector competition
• …and alternative
sources of finance
• And a ‘rethink’ is
vital…
• …on the sector as a
service to the local
economy
• …and on its future
as a international
center
Res. loans
80%
Bank of Cyprus alone
accounts for about 40%
of the banking sector
2013
10
Source: CBC, SSC, ECB, IMF FSIs, BoC
Business environment: Good overall, but some areas for
improvement
100
Cyprus's Distance to the Frontier in Doing Business Indicators, 1-100 (best)
Areas for further improvement
80
60
40
20
0
Enforcing
Contracts
Getting
Electricity
Dealing with Registering
Const.
Property
Permits
Protecting Getting Credit Resolving Paying Taxes
Investors
Insolvency
Source: Doing Business 2014
Note: Distance to frontier is in percentage points, with 100 being the frontier
Trading
Across
Borders
Starting a
Business
11
Business environment: International experiences in
investment licensing reforms and WBG support
Greece IL reform
• Move toward ex post as opposed to ex
ante regulatory control
• Use of risk and risk management to
determine how, where, and when to
regulate
Informed by good practices
•
Assessed common practices of 5 EU
countries—Austria, France, the Netherlands,
Poland and United Kingdom—to determine
which features comprise an effective and
efficient investment licensing regime
•
Case study of new investment in cardboard
packaging plant detailed key administrative
procedures, institutional arrangements for
setting compliance standards, reviewing
solicitations for permits, licenses and
authorizations, executing inspections,
monitoring compliance and enforcing these
licenses
•
UK at the forefront of using market
mechanisms to regulate. To understand
these types of regimes better, study was
expanded to assess the regulatory regimes
of Australia, Denmark and New Zealand
• Move toward use of self-declarations,
insurance and liability markets where it
is incentive compatible
• With the support of the World Bank,
Greece is tackling this with
comprehensive investment licensing
reforms that regulate licensing in
several industrial and service sectors
12
Innovation: R&D spending per capita has remained well below EU
average, especially in the business enterprises sector
Total R&D spending (Euro per
inhabitant)
Business enterprise R&D spending
(Euro per inhabitant)
700
450
600
400
350
500
Cyprus
400
Euro area (17
countries)
300
300
Cyprus
250
Euro area (17
countries)
200
150
200
100
100
50
0
2003
2005
2007
2009
2011
0
2003
2005
2007
2009
2011
Source: Eurostat
13
Innovation by firms can benefit from more integration with EU
R&D institutions and industry
Scope for catch-up: Incidence of firm-level
innovation is below EU averages
50%
External linkages matter: Innovative firms in
Cyprus have significantly more external
linkages than the average innovative EU firm
100%
40%
EU15
EU27
30%
80%
EU27
EU15
Cyprus
60%
Cyprus
20%
40%
10%
20%
0%
0%
% firms that
introduced a product
or process innovation
% firms that
introduced an
organizational or
marketing innovation
Note: % of all enterprises
Engaged in inhouse R&D
activities
Engaged in external
Engaged in
Engaged in
R&D activities
innovation-related aquisition of other
cooperation with external knowledge
other firms, clients,
or R&D institutes
Note: % of innovative enterprises
Source: Community Innovation Surveys, Eurostat, 2010
14
Human capital: Tertiary education levels are high and growing
Labor force with tertiary education (% of total)
45.0
40.0
35.0
30.0
25.0
2004
2012
20.0
15.0
10.0
5.0
0.0
EU11 average
EU15 average
Source: World Bank, World Development Indicators
Cyprus
15
Human capital: Education outcomes are lower than in other
advanced economies
16
Energy: Electricity tariffs are above the OECD average, while
labor productivity and operational efficiency remain low
25
Tariff (€cent/kWh)
20
15
Cyprus
10
OECD Europe
5
0
2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012
Households
Industry
Source: Cyprus Energy Regulatory Authority Annual Reports; IEA Energy and Taxes Statistics
17
Energy: Potential to increase renewable energy
• Follow a diversification strategy with the addition of renewable energy
(solar, wind, and biomass) and strong emphasis on demand side
management
• Cyprus is geographically located in a spot where the solar irradiation is
in the top segment of the global spectrum (2,200-2,600 kWh/m2).
• In the medium to long term, the potential introduction of natural gas in
the system will reduce costs and provide additional flexibility in the
system, especially in combination with renewable energy
18
Governance and quality of institutions:
Strong correlation with income per capita
12
Income per capita and government effectiveness
4
6
8
10
ru s
C yp
-2
-1
0
1
Government effectiveness (2.5=best)
Source: Worldwide Governance Indicators and World Development Indicators
2
Governance: Changing the role of the state for growth
•
Public administration reform long overdue
•
Modernizing the public sector must be an integral part of
medium-term growth strategy
•
In tandem with broader PFM and strategic management reforms
•
Centralized policy-making, decentralized decision-taking
20
Governance: Total government spending in Cyprus not the
issue, public sector wage bill is
Total General Government Spending, 2012
70
60
50
40
30
20
10
0
General Government Spending on Compensation of Employees, 2012
20
18
16
14
12
10
8
6
4
2
0
Source: Eurostat Government Finance Statistics.
21
Governance: Wage bill crowds out other expenditures and is
not in line with economy wide productivity gains
Composition of general government
expenditure, 2012 (%)
Cyprus: Real Earnings and Productivity,
2000-2012
130
Category
Cyprus
125
Compensation of
employees
34.8
23.3
Social benefits
32.1
41.0
Intermediate
consumption
10.7
13.5
Interest payments
6.9
5.6
Other current
expenditures
6.0
5.0
Capital investments
5.4
5.7
5.4
5.8
of which: Gross fixed
capital formation
Real GDP per worker (2000=100)
European
average
120
Average real earnings in the overall
economy (2000=100)
Average real earnings in the public
sector (2000=100)
115
110
105
100
Capital transfers
2.9
3.0
Subsidies
1.2
2.8
Source: Eurostat Government Financial Statistics.
95
Source: World Bank calculations based on Eurostat National Accounts,
Government Finance Statistics, and Cystat.
22
Smart industrial policy
•
•
Growth of new sectors is needed to fill gap left by the drop in financial services
sector
According to Cyprus’s Strategy for Smart Specialization dialogue, priority
sectors are tourism, energy, agriculture / food, construction, transportation /
shipping and health
• In tourism for example, strategies can help differentiate the island from its
neighbors, extend the tourism season, and promote specific subsectors
(such as diving, agrotourism, sports, and conferences)
• ICT and environment were identified as an important horizontal areas
23
Designing and implementing a growth strategy requires
strong coordination efforts
 Leadership at the highest levels
of government is critical
Public – Business
Dialogue / Diagnostics
 Many reforms require interministerial collaboration
 Structured and ongoing dialogue
with the private sector is key
Evaluation of impact of
reforms
Service delivery
measures
Full and consistent
implementation of
reforms
(including ICT tools)
Identification of most
important obstacles
Targeted changes in
laws and regulations
24
How the World Bank Group can help ROC to design and
implement a growth reform agenda
•
Help with the “what” and “how” of a growth strategy
• Stage 1: What to reform
– Diagnosing the constraints to growth
– Developing a strategy for growth
– Identifying reforms needed to operationalize the strategy
• Stage 2: How to reform
– Assessing implementation gaps
– Developing reform roadmaps and action plans
– Identifying delivery solutions
•
The World Bank Group can help by
– Bringing in top-notch practitioners and academics to discuss international
best practice and how it can be adapted for Cyprus
– Providing tailored advisory services
– Delivering high quality diagnostics
25
Thank you
World Bank Group
Dirk Reinermann
Program Manager, Southern Europe