Transcript Industrial Performance: Trends in Productivity and

Industrial Performance:
Trends in Productivity and
Competitiveness
CEM for Republic of Belarus
1
Analysis of productivity trends and labor
costs is the key to understanding the
competitive position of Belarusian industry
Key determinants of growth sustainability
2
Strong growth in industrial
productivity
Employment Growth
Productivity Growth
1997-99
103.9
141.6
2000-03 1997-2003
91.4
94.9
139.8
197.9
3
c
po
To
ta
w l in
er du
ge str
ne y
ra
M
tio
ac
Fe
n
hi
rr
ne
ou Fu
bu
Ti
s m el
m
ild
be
C etal
in
r,
P h s
g
w
a n etr em
oo
o i
d
d
m che cal
pr
e
oc
M tal mic
es
a
a p
s i c h roc l
ng in e
C , p e b ssi
on u
n
str lp uild g
in
u a
g
G ctio nd
la n pa
ss m p
an at er
d eri
p
Li orc als
gh el
t i ain
nd
u
Le
Te stry
at
xt
he
r, A iles
fu pp
Fo r an are
od d l
s
Fl M pro hoe
ou ic ce s
r, ro s si
m bio ng
ill
in log
g ic
an al
C
d
he
gr
m
P
ic
rin ain
al
tin
&
g
O
pe
tro the
ch rs
em
ic
al
El
ec
tri
Employment and Productivity
Growth,1999-2003
Employment and labour productivity
2003/1999
Per cent
250
Employment growth
200
Productivity growth
150
100
50
0
4
Labor market flexibility
•
•
•
Despite administrative interference in
enterprises’ decisions on firing, hiring, and
wage setting, there has been considerable
room for labor mobility in response to market
signals
Labor movement generally occurred in
direction from less to more productive subsectors
Wage differentials were broadly consistent with
differences in sector productivity
5
Cost advantage against
Russia
90
80
70
60
Belarus/Russia
wage ratio
50
40
Belarus/Russia
CPI ratio
30
20
10
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
6
Wage Growth Exceeds Productivity
Improvements
300
Labour productivity 1995
= 100
250
200
Average monthly real
wage (Rbl), 1995 = 100
150
100
Average monthly real
wage (ForEx), 1995 =
100
50
0
1995 1996 1997 1998 1999 2000 2001 2002 2003
7
Growth in ULC Indicates
Erosion in Competitiveness
Developments in unit labour costs by industry
Relative to total industry, 1997=1
1.2
Belarus
1.0
Russia
0.8
0.6
0.4
0.2
0.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
8
Growth in Labor Costs Drives down
Profitability
20
15
profit margin, %
10
labor costs in total
costs, %
5
0
1997 1998 1999 2000 2001 2002 2003
9
Growth Drivers
• Cost/wage advantage
• Expanding share of
Russian market, gains
from re-integration
• Wage/income growth
• High oil prices and strong
global growth
• Restructuring due to
competitive pressures
• Improved capacity
utilization
• Eroding due to the wage
policy
• Share of exports to Russia
is too high
• Limits to future growth due
to competitiveness
concerns
• Cannot remain high forever
• The extent of restructuring
is limited
• Insufficient investments in
new capacity
10
Where will new growth be coming
from? …Unclear
• Earlier growth drivers (cost/wage
advantage vs Russia, Russian post 1998
recovery, expansion in domestic demand,
oil processing exports to Europe) will not
be able to play the same role in the future
• We do not see a big new thing to push
growth up
• Slow down in growth is quite likely
11
Signs of Strain
Trends in industrial productivity and
competitiveness:
• High costs – taxes, wages, interest rates
• Implicit costs – price controls, social
services, administrative burden
• Low profits
• Depressed investments in manufacturing
12
High and distorted tax structure
Taxes as % of sales
Taxes as % of value added
18.5
90
80
18
70
17.5
60
50
Industry, total
Machinery
40
Industry, total
17
Machinery
16.5
30
20
16
10
15.5
0
2000
2001
2002
2003
2000
2001
2002
2003
13
Growth is unbalanced
80
72.6
70
60
44.3
50
40
balance of
answers
24.0
30
16.6
20
10
0
Average wage
Labor
productivity
Fixed capital
investments
Gross profit
14
Weak Investment Performance
• Investment structure is biased against
manufacturing
• The bulk of industrial firms (97%): < than
4% of GDP in 1999-2003
• Why?
- low profitability
- mostly state owned economy
- excessive government interventions in
credit allocation
15
Capital markets remain seriously
distorted
•
•
•
•
Government interventions create barriers for
efficient allocation of investment finance
Correlation between investment growth and
profitability is negative -- less profitable
sectors were able to finance more
investments
Correlation between credit and output growth
was negative as well -- credit allocation is
biased toward less successful sectors
Capital market is more distorted than the
labor market
16
Growing Competitive Pressures
% of firms calling competition from import not important
100%
80%
Poland
60%
Ukraine
Russia
Belarus
40%
20%
0%
1999
2002
17
Growing concerns about
competitiveness
Dynamics of competitive advantage in industry
(As % of the total number of respondents)
Quality
Price
Russia and CIS
2002
2004
48
56.4
70
40.1
Outside the CIS
2002
2004
62.9
31.4
37.1
41.9
18
Main Risks for Future Growth in
Competitiveness
Recent growth
drivers
1. Preservation of
inherited
industrial base and
infrastructure
Risks of erosion
• Domestic savings are
insufficient for
modernization
• Profits are low, which limits
opportunities for
investments
• Poor investment image
limits new entry, deprives
the economy from benefits
related to innovation and
flexibility
19
Main Risks for Future Growth in
Competitiveness
Recent growth drivers
2. Fiscal, wage and
employment policies
aimed at growth in
domestic demand
Risks of erosion
• Excessive labor costs growth
undermines competitiveness
• Income policy aimed at
artificially low income
differentiation may facilitate
emigration of entrepreneurial
and educated youth
• Trends in the pension system
are unsustainable
20
Main Risks for Future Growth in
Competitiveness
Recent growth drivers
•
•
3. Subsidies to leading
domestic exporters
•
•
Risks of erosion
Too much risk for both
fiscal and banking systems
Undermines incentives for
restructuring and innovation
Belarus will have to reduce
its level of subsidization as
art of its WTO accession
process
Russia may be reluctant to
support the existing
asymmetry in trade regimes
21
Main Risks for Future Growth in
Competitiveness
Recent growth
drivers
4. Cost and other
market
advantages at the
Russian market
Risks of erosion
• Costs are driven up by the wage
policy, higher taxes, more
expensive credit, and high costs
of doing business
• Russian economy is too oildependent and thus is
fundamentally risky a primary
export market
• The economy shows a difficulty
to accelerate export
diversification
22
Main Risks for Future Growth in
Competitiveness
Recent growth
drivers
5. Russian energy
subsidies and
other transfers
Risks of erosion
• A need to diversify energy
import sources
• Russian domestic and
export prices for gas and
power are expected to grow
– unavoidable costs of
adjustments (up to 6% of
GDP)
23
Main Risks for Future Growth in
Competitiveness
Recent growth
drivers
6. Benefits from
the favorable
external
environment
Risks of erosion
• Oil and other commodity prices will
not remain high forever
• External market position of Belarus
is rather fragile – it depends too
much on a limited number of large
exporters, which in turn depend too
much on a single market
• If the Belarusian economy fails to
accelerate restructuring, it will lose
its market share in Russia and
elsewhere – Ukraine is already
catching up
24