Transcript Labour Market

Jaromír Šindel
ECES
The Puzzles of Central and Eastern Europe Transformation and Integration
Discussion over the Puzzles
of Transformation Process
ECES, Prague
ECES, Prague
• Main factor influencing the Transformation
Economic Policy
– Impossible trinity (capital, interest and inflation
differentials), foreign capital, interest groups, …
• Transformation Puzzles - best solutions?
– Gradual vs. rapid liberalization and
deregulation, privatisation, transformation
slowndown, law and transformation, monetary
or exhchange rate based stabilization
programmes, financial and bank crisis, foreign
direct investment, structural changes, labor
market, welfare state, …
– BUT: Initial conditions, methods of solutions,
differences in transition process, …
The Puzzles of Central and Eastern Europe Transformation and Integration
Topics
Index of initial conditions (1989) and real economic growth (1993-1995)
ECES, Prague
Source: Žák (2004)
The Puzzles of Central and Eastern Europe Transformation and Integration
Initial Conditions
The Puzzles of Central and Eastern Europe Transformation and Integration
Index of Liberalization
Accrued Index of liberalization (1989-1997)
Source: Žák (2004)
ECES, Prague
Accrued = Cumulation of values from previous years. Maximum in 1997 is 9.
Accrued Index of liberalization (1989-1997, horizontal axis) and real economic
growth (1991-1997, vertical axis)
ECES, Prague
Source: Žák (2004)
The Puzzles of Central and Eastern Europe Transformation and Integration
Index of Liberalization
Democracy, Legal system, Reforms and IDR in the CEECs, 1997 against 2001
ECES, Prague
Source: Žák (2004)
The Puzzles of Central and Eastern Europe Transformation and Integration
Transformation Index - IDR
IDR in 1997 (horizontal axis, better on left side) and change of IDR in 1997-2001
(vertical axis, negative is better development)
ECES, Prague
Source: Žák (2004)
The Puzzles of Central and Eastern Europe Transformation and Integration
Transformation Index - IDR
Small privatization, Trade and Exchange rate, Large privatisation, Price liberalization,
Banking sector and Interest, Restructuralization, Securities, Trade Competition
ECES, Prague
Source: Žák (2004)
The Puzzles of Central and Eastern Europe Transformation and Integration
Transformation Indexes
HDI in 1990 (horizontal axis, better on right side) and change of HDI in 1990-1999
(vertical axis, positive is better development)
ECES, Prague
Source: Žák (2004)
The Puzzles of Central and Eastern Europe Transformation and Integration
Human Development Index - HDI
Nations in Transit, 1997 to 2005
Source: http://www.freedomhouse.org/…Country Report
ECES, Prague
Slovakia
The Puzzles of Central and Eastern Europe Transformation and Integration
Transformation Index - NIT
Nations in Transit, 1997 to 2005
Source: http://www.freedomhouse.org/…Country Report
ECES, Prague
Czech Republic
The Puzzles of Central and Eastern Europe Transformation and Integration
Transformation Index - NIT
Nations in Transit, 1997 to 2005
Source: http://www.freedomhouse.org/…Country Report
ECES, Prague
Hungary
The Puzzles of Central and Eastern Europe Transformation and Integration
Transformation Index - NIT
Nations in Transit, 1997 to 2005
Source: http://www.freedomhouse.org/…Country Report
ECES, Prague
Poland
The Puzzles of Central and Eastern Europe Transformation and Integration
Transformation Index - NIT
Nations in Transit, 1997 to 2005
Source: http://www.freedomhouse.org/…Country Report
ECES, Prague
Bulgaria
The Puzzles of Central and Eastern Europe Transformation and Integration
Transformation Index - NIT
Nations in Transit, 1997 to 2005
Source: http://www.freedomhouse.org/…Country Report
ECES, Prague
Romania
The Puzzles of Central and Eastern Europe Transformation and Integration
Transformation Index - NIT
Nations in Transit, 1997 to 2005
Source: http://www.freedomhouse.org/…Country Report
ECES, Prague
Belarus
The Puzzles of Central and Eastern Europe Transformation and Integration
Transformation Index - NIT
• Main Characteristics
ECES, Prague
– the nationalized economy
– the system of plans, centrally planned economy
(Imperative planning x Indicative planning); 5-years
plans
– non-existent market
– non-existent prices (no real prices with their
information, allocation and motivating function), the
distorted price system resulted in inefficient
allocation of resources
– the prohibition of entrepreneurship
– the external relationships under CMEA – “soft
market”
– lack of competition, large uneconomical companies
The Puzzles of Central and Eastern Europe Transformation and Integration
Centrally Planned Economy
• Requirements
– 1. Liberalize the economy,
– 2. Stabilize the economy,
– 3. Restructuring the economy
The Puzzles of Central and Eastern Europe Transformation and Integration
Transition Process
ECES, Prague
1. Changes in the economic sphere in the direction of the
capitalistic economic system;
2. Changes in the political field in the direction of democracy;
3. A complete transformation, parallel in all spheres (economy,
political structure, political ideology, legal system, stratification of
society);
4. Non-violent transformation;
5. Transformation under peaceful process;
6. Incredible speed
The Puzzles of Central and Eastern Europe Transformation and Integration
Kornai´ six characteristics of
transformation process
“The presence of all six characteristics together is unique in world history”
ECES, Prague
Source: Kornai, J., 2005.
• Price liberalization
– The end of Shortage Economy (Kornai) – price
didn’t reflex supply and demand relationships
– in Czech Republic
• July 1990 – 10% increase due to foodstuffs prices,
respectively the abolition of subsidies (negative turnover
tax)
• January 1990 – price deregulation – 85 % of GDP under
price regulation in 1990 – in December 1991 only 6 % of
GDP (rents, energy, water, health services, transportation
and communication)
ECES, Prague
• Trade liberalization – in the later lecture
The Puzzles of Central and Eastern Europe Transformation and Integration
Transition Process –
Liberalize the economy
• Rapid
ECES, Prague
– Liberalize the economy
• Quick response of market and private sector
• Queues, uneconomic production and unwanted goods can be
eliminated quickly
– If macroeconomic and structural conditions are right – quick
recovery
– The macroeconomic discipline works – without low inflation no
long-term growth
• Don’t forget on microeconomic view – the Czech Case 19951997
– Essential structural reform – enterprises have to face budget
constraints
The Puzzles of Central and Eastern Europe Transformation and Integration
Gradual vs. rapid liberalization and
deregulation
• Gradualism
– Danger that old system impedes the working of new forces of
the market economy
– Gradual price liberalization also gradual deregulation creates
new deformation in the price structure. This new deformation
need new subsidy, so never ending story of government
intervention in market economy
The Puzzles of Central and Eastern Europe Transformation and Integration
Gradual vs. rapid liberalization and
deregulation
• Flexibility
– fiscal policy, exchange rate regime, …
ECES, Prague
• Restructuring the economy
–
–
–
–
deetatization,
the end of price controls,
the end of production plans,
the end of vertical relationships, …
– New tax system and the independent central bank
for the effective implementation of stabilization
economic policy
The Puzzles of Central and Eastern Europe Transformation and Integration
Transition Process –
Restructuring the economy
ECES, Prague
Other Ways and Solution - comparison
Goal
Better
Corporate
Governance
Speed and
Feasibility
Better Access
to Capital,
Know-how and
Experts
Higher
Government
Revenue
Greater
Fairness
Sale to
foreigners
+
-
+
+
-
MBO / MEBO
-
+
-
-
-
Voucher
privatization
?
+
?
-
+
Method
ECES, Prague
Source: World Bank, World Development Report: From Plan to Market, from Schejbal, J. (2002)
The Puzzles of Central and Eastern Europe Transformation and Integration
Privatisation
The Puzzles of Central and Eastern Europe Transformation and Integration
Privatisation
ECES, Prague
Source: Schejbal, J. (2002)
• Demand side
– Consumption – real wages decline (wage cushion with exchange
rate cushion – important transition tools); increased savings by
expectation of price liberalization with exchange rate devaluation
and by uncertainty about future development.
– Investment – expectation lead to savings; obscure ownership
delayed investment programme; restructuralization didn’t start.
– Government expenditures – changes in government; declined role
of government in economy.
– Export – foreign demand – brake up of CMEA; search of new
markets.
• Supply side shocks
ECES, Prague
– Price increase of imported goods – devaluation of currency; oil
contract cancellation;
– Price liberalization brought higher than expected supply shock
– Government subsidy cancellation (rough budgetary limitations)
– Managerial shock – new market environment
The Puzzles of Central and Eastern Europe Transformation and Integration
Reasons of Transformation Slowdown
How to get new Law – different views
• Law and finance theory
– Choose the best institutional setting
• Institutional convergence has its limits by
existing PATH DEPENDENCY
ECES, Prague
• Impossible to achieve the best results in
CEE countries due to the path dependency
and the political economy
The Puzzles of Central and Eastern Europe Transformation and Integration
Law and Transformation
ECES, Prague
Source: Frait, Komárek (1998)
The Puzzles of Central and Eastern Europe Transformation and Integration
Monetary or Exchange Rate
Based
Stabilization
Programme
Alternative exchange rate scenarios
The theoretical paths of the real exchange rate in transitional economies
ECES, Prague
Source: Frait, Komárek (1998)
The Puzzles of Central and Eastern Europe Transformation and Integration
Exchange rate and transition
ECES, Prague
a) Significant nominal exchange rate depreciation - the
exchange rate flexibility at the beginning of the 1990s Slovenia, Hungary, Poland.
b) fixed exchange rate - lower inflation (The Czech Republic,
Slovakia, Estonia).
c) A trend towards real appreciation can be found in all
accession countries, even though with profound differences.
The strongest one is confirmed in Estonia and significantly
applies also to the Czech Republic, Poland and Slovakia. On
the other hand, Hungary and Slovenia experienced only mild
real appreciation.
– Real appreciation in Czech R. (Inflation differential) x
Poland (inflation caused by devaluation)
d) convergence process - slow
e) Since 1999 - switch from nominal exchange rate depreciation
to nominal exchange rate stability or even appreciation
Source: Frait, Komárek (1998)
The Puzzles of Central and Eastern Europe Transformation and Integration
Following Generalisations about
ER Path in Transition
• Improve image and export at a higher price
• Increase labour productivity at constant
wages
• Pay lower wages at unchanged productivity
• Shift from domestic production to more
import
• Shift production to another country
• Exert political pressure against appreciation
The Puzzles of Central and Eastern Europe Transformation and Integration
Competitiveness and ER
appreciation – how to cope with it?
ECES, Prague
• Crisis Indicators
– ...
– Interest rate´s behaviour during crisis
• 1994, 1997, 1998
– Russian Crisis
• Case studies in CEE countries
The Puzzles of Central and Eastern Europe Transformation and Integration
Financial and Bank Crisis
– Hungary, Czech Republic, Estonia
ECES, Prague
• Banking sector
C&EE
• Transformation
consequences
• Integration
consequences
• Privatisation
• Structural changes
• Better environment for
foreign investment,
better rating (OECD,
NATO, EU, euro)
• Better growth
The Puzzles of Central and Eastern Europe Transformation and Integration
Foreign Direct Investment and
ECES, Prague
ECES, Prague
Source: Newton. Country Report. April 2001. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
Effects of FDI?
Structural Changes
The Puzzles of Central and Eastern Europe Transformation and Integration
Technological Levels of Manufacturing Production (constant prices, %)
–low-tech group (DA food products, beverages and tobacco; DB textiles and textile products; DC leather and
leather products)
–medium/high-tech group (DK machinery and equipment; DL electrical and optical equipment; DM transport
–resource- (and scale-) intensive group (DD wood and wood products; DF coke, refined petroleum products
and nuclear fuel; DG chemicals, chemical products and man-made fibres; DI other non-metallic mineral products)
Source: Newton. Country Report, January 2002. www.newton.cz
ECES, Prague
equipment)
Employment trends in the CEECs, 1989-1999 (1989=100)
ECES, Prague
Source: UNECE. Economic Survey of Europe, 2000 No. 2/3. www.unece.org
The Puzzles of Central and Eastern Europe Transformation and Integration
Labour Market - Employment
• delayed
restructuring, with a
relatively small
output drop and job
destruction
• early retirement
schemes to shrink
the labor force
• low unemployment
benefits and strict
application of
eligibility criteria
The Puzzles of Central and Eastern Europe Transformation and Integration
Czech „unemployment miracle“
Source: IMF 2004, K. Krajnyák and M. Sommer
ECES, Prague
Pre-transition
Mid-transition
Post-transition
Percentage change from
1987-1989
1996-1997
2001-2002
pre- to post-transition
Czech Republic
19.8
23.9
23.4
18
Estonia
28.0
36.1
39.3
40
Hungary
22.5
25.4
26.7
19
Latvia
26.0
32.6
35.8
38
Lithuania
26.3
30.9
35.7
36
Poland
27.5
33.4
35.3
28
Slovakia
19.4
24.9
26.7
38
Slovenia
21.0
24.0
24.4
16
CEE 8
23.8
28.9
30.9
29
EU 15
26.9
27.8
28.6
7
Country
ECES, Prague
Source: Kornai, J., 2005.
The Puzzles of Central and Eastern Europe Transformation and Integration
Welfare State - Gini coefficient