Transcript Presentation

Macroeconomic Policy Challenges in
Southeast Europe
David Vines
Department of Economics and Balliol College, University of Oxford;
Centre for Applied Macroeconomic Analysis, Australian National University;
Research Director, PEGGED Research Programme on Politics and Economics of Global
Economic Governance, European Union; and CEPR
Paper for Conference on Achieving Sustainable Growth in Southeast Europe
Athens, February 11, 2011.
1
1



Introduction
Advertisement: From Crisis to Recovery edited by
Othon Anastasakis, Jens Bastian and Max Watson
This book shows that the European Emerging-Market
Convergence Model was very particular – and very
different from the convergence model in East Asia
This model has six aspects. It is worth reviewing these

cf the way in which Maynard Keynes examined pre WWI
Europe in Chapter 2 of his Economic Consequences of the
Peace, in order to understand the growth model of that time

I will briefly discuss each aspect in what follows

I will then discuss the policy agenda looking forward
2
2
The Emerging-Europe
Convergence Model
Six aspects of the Emerging-Europe Convergence Model
 Capital accumulation, and
 FDI and technology transfer


Trade liberalisation, and integration of the region’s
production system within the European and the global
economy



This aspect describes the convergence-through-trade story
Financial liberalisation
Labour-market integration


These two aspects create the Jeff Sachs convergence story
These two aspects capture the ‘super integration’ story
The Prospect of EMU membership
3
3

“There are three groups of countries in the world”



The Jeff-Sachs Convergence
Story
1.5 billion people in advanced countries, 4 billion in the middle (led
by China), followed by the bottom billion (in Africa and elsewhere)
For the four billion people “in the middle”
 Capital accumulation happens as in a Solow model
 It is augmented by technical progress which happens
through FDI and technology transfer
Asian debate in the ‘90s about capital accumulation:
 Perspiration (which happens through savings) versus
inspiration (which happens through technical progress)
 Interestingly, C19 Europe, like Asia, saved a great deal

cf Keynes, Consequences, Chap. 2
4

In Emerging Europe, savings have not been not high



Need a Ramsey model - with savings choice a policy
issue
Interestingly the central idea about global resource
allocation is that capital should flow to poorer
countries



although savings propensities differed between countries
As Feldstein-Horioka showed, this has not happened
Lucas has suggested why
South East Europe is the one place where this has
happened

The results have not been entirely successful
5
4

Think about a story with 3 sorts of goods: 2 kinds of
tradeable goods plus non-tradeables
 Exportables





produced but not consumed at home
prices determined in world markets - these are tradeable
goods
Importables – which are not produced at home

consumed by not produced at home
prices determined in world markets – these are tradeable
goods
Non-tradeables



The Heckscher-Ohlin
Convergence story
produced and consumed at home
prices determined within the home economy
A framework for thinking about industrial structure as part of
macro strategy: one examines which exports are important6




One factor price – the interest rate – and one goods price –
the price of tradeables – is exogenous here
 nb: ‘tradeables’ includes both exportables and
importables
The endogenous variables here are the wage and the price
of non-tradeable goods
Stolper-Samuelson theorem here shows how the wage and
price of non-tradeables are determined
Trade liberalisation lowers the price of imports relative to
the price of exports




The trade liberalisation choice can be analysed by this model
One must increase the return to exporting – ie increase the relative
price of exportables, as a response to the liberalisation of imports,
One must lower the wage of non-tradeables are labour intensive
One way that growth happens is through such resource
reallocation
7
5

Financial liberalisation: entirely different from East Asia


The Susan Schadler Convergence
Story – “super integration”
Enabled SE Europe to make a low-savings high-growth choice
Risky
 Possible that this strategy leads to export-led growth



Requires trade liberalisation at same time
More generally requires control of rent-seeking in the
tradeable sector
Possible that, instead, this leads to a consumption boom




House prices overshoot upwards and consumers bear this risk
Consumers bear currency risk
Paying back loans may be difficult – requires massive austerity
post-crisis – consumers bear solvency risk
But leverage risk seems not to have been a major problem in
South East Europe - a feature of the institutional integration
process which was chosen
8
….super integration … continued

Labour market integration: entirely different from East Asia
 Transient migration has enabled real wages for Eastern
European workers to rise in advance of the convergence
of their home economies
 Has put upward pressure on the real wage in the home
country of migrants
 This has helped to tilt the convergence outcome towards
 one in SE Europe with a low-savings high-growth
aspect
 one which is biased towards a consumption boom
rather than and away an export-led-growth outcome
9
6 The Prospect of EMU membership:
effects on convergence process

This too has been entirely different from East Asia



Encouraged some good things
Also enabled some bad things
So this too has been risky
10
7


The core short term for
macroeconomic policy
We can learn here from the East Asian recovery after the
Asian financial crisis
 Massive currency devaluation and export-led growth
 That was much easier in the dot-com boom world, in
which demand was growing
 It required currency flexibility
This is the core issue about macro strategy
 This requires curtailment of domestic demand
 It also requires the creation of a competitive position



This will differ as between
(i)
members of EMU zone – Greece – and other countries
with pegged exchange rates
(ii) countries who are floating
11
8
The core longer term issues for
macroeconomic policy
It is necessary to reconsider all six aspects of the European
Emerging-Market Convergence Model.
The capital accumulation process, and
FDI and technology transfer.

How much should a country save?
Trade liberalisation, and integration of the region’s production
system within the European and the global economy.


How will trade liberalisation and increasing openness be managed ?
Financial liberalisation, and
Labour market integration



Is the ‘super integration’ really safe – if not, how to proceed?
Can the uncertainties about EMU membership be resolved?
12