Transcript DISCUSSION by Zuzana Murgasova

The Sixteenth Dubrovnik Economic Conference
Croatian National Bank
(Dubrovnik, June, 2009)
Discussion of the paper:
“Growing Together: Croatia and Latvia”
Zuzana Murgasova
International Monetary Fund
The views expressed herein are those of the author and should not be
attributed to the IMF, its Executive Board, or its management.
Outline
• The focus of the paper is on long-term growth
trends and underlying factors
• This presentation is complementary—the
focus is on the boom-bust cycle and policy
challenges going forward to achieve
sustainable growth
Different Pre-crisis Macro Developments
Pre-Crisis Macro Developments
Average 2002–07
Real GDP (year-on-year percent change; geometric mean)
Real domestic demand (year-on-year percent change; geometric mean)
Credit to the private sector (year-on-year percent change; geometric mean)
Current account balance (percent of GDP; arithmetic mean)
Net FDI (percent of GDP; arithmetic mean)
External debt (percent of GDP; end-2007)
Exports of goods and services (percent of GDP; arithmetic mean)
Net exports (contribution to real GDP growth; arithmetic mean)
Inflation (annual average; geometric mean)
General government balance (percent of GDP; arithmetic mean)
Croatia
Latvia
4.8
6.1
19.0
-6.2
4.7
83.4
42.7
-1.8
2.5
-2.9
9.2
11.4
44.9
-14.2
4.5
127.7
43.1
-4.0
5.7
-1.1
Sources: IMF, World Economic Outlook ; IMF, International Financial Statistics ; and IMF staff
calculations and estimates.
The Boom-Bust Cycle
Different Magnitudes
15
15
Real GDP Growth (Year-on-year percent change)
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
Croatia
Latvia
-20
-20
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Need to Change the Growth Model
• Capital inflows unlikely to resume to pre-crisis
levels, hence credit driven domestic demand
expansion not sustainable.
• Rebalance growth from non-tradables to
tradables
Improve competitiveness
How to Boost Competitiveness?
Cost side
• With stable/fixed exchange rate, internal adjustment
(depreciation) needed; wage and incomes policies;
government to take the lead.
Productivity side
• Structural measures to address productivity and
improve business environment.
•
ULC adjustment
Also, if tax burden high, create fiscal space through
expenditure reduction for tax cuts (Croatia).
Unit Labor Costs and Wages
Different need for and pace of adjustment
275
275
300
Croatia: public
275
Croatia (manufacturing sector)
300
Average Wages, SA (2002=100)
Nominal Unit Labor Cost (2005=100)
275
Croatia: private
Latvia (entire economy)
225
225
175
Latvia: public
250
250
Latvia: private
225
225
200
200
175
175
150
150
125
125
100
100
175
125
125
75
75
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
75
75
2002
2003
2004
2005
2006
2007
2008
2009
2010
Wages and Productivity
Wage level higher in Croatia
60
60
20000
Average Gross Monthly Wages vs
Per Capita GDP , 2008
(In euros)
Wages and Labor Productivity, 2008
18000
CZE
50
50
18000
SVN
16000
HRV
SVK
40
POL
HUN
EST
LTU
30
BIH
40
30
LVA
20
20
MKD
BGR
10
UKR
ROM
RUS
SRB
500
CZE
14000
SVK
12000
RUS
LTU
8000
10
Average monthly gross wages, in euros
0
1,500
HRV
POL
ROM
6000
MKD
SRB
2000
0
0
500
8000
4000
BIH
UKR
10000
6000
MNE
4000
2000
1,000
HUN
14000
12000
EST
LVA
10000
BGR
0
0
Per captia nominal GDP
Labor productivity, Euro Area=100
16000
20000
1000
Average monthly gross wages, in euros
0
1500
Recovery in Trading Partners Matters
5
Real Domestic Demand Growth of Trading Partners (Year-on-year percent change)
5
4
4
3
3
2
2
1
1
0
0
-1
-2
-3
-4
Croatia's Top Five Trade
Partners:
Italy
Germany
Russia
Slovenia
Bosnia and Herzegovina
Croatia
Latvia
-1
Latvia's Top Five Trade
Partners:
Lithuania
Russia
Estonia
Germany
Poland
-5
-2
-3
-4
-5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Business Environment
Scope for improvement in Croatia
Ease of Doing Business
Croatia
Overall
Starting a Business
Dealing with Construction Permits
Employing Workers
Registering Property
Getting Credit
Protecting Investors
Paying Taxes
Trading Across Borders
Enforcing Contracts
Closing a Business
Source: World Bank, Doing Business.
Latvia
2010
Rank
2005
Rank
Change in
Rank
2010
Rank
103
101
144
163
109
61
132
39
96
45
82
134
112
171
131
109
117
156
72
140
28
76
+31
+11
+27
-32
0
+56
+24
+33
+44
-17
-6
27
51
78
128
58
4
57
45
22
15
88
Croatia: Economic Recovery Program
How will it promote growth?
• A home-grown comprehensive reform program.
• Excellent diagnosis of problems and challenges.
• Tackles key reforms needed to improve competitiveness and
increase policy space (fiscal consolidation, wage and incomes
policies, reduction in pension and health expenditure, labor market
flexibility, privatization and reduction of business costs;
• Success depends on its decisive and well-sequenced
implementation (Pursue expenditure cuts and privatization to
ensure lower taxes do not compromise fiscal consolidation; an
ambitious Fiscal Responsibility Law is key);
• Implementation progress is encouraging (Within weeks of
adoption, the authorities are proposing amendments to politically
sensitive areas)
• If properly implemented, it will instill market confidence and
enable Croatia to enter the EU from a position of strength.
Speedy Implementation
Hvala