Title: Competitiveness of Bulgarias Economy and the Challenges of Real and Nominal Convergence
1Competitiveness of Bulgarias Economy and the
Challenges of Real and Nominal Convergence
Competitiveness of the South Eastern European
Countries and Challenges on the Road to EU
- Grigor Stoevsky
- Economic Research and Forecasting Directorate,
Bulgarian National Bank
Skopje, 30 May 2008
2Outline
- Competitiveness and convergence
- Theoretical grounds
- Aspects of competitiveness related to
productivity and efficiency - Price and cost competitiveness
- The links between real and nominal convergence
- The Bulgarian experience
- Productivity and efficiency indicators
- The longer term perspective
- Driving forces and interpretation
- Challenges of real and nominal convergence
- Conclusion
3Competitiveness and Convergence Theoretical
Grounds (1)
Competitiveness and Convergence
- Many definitions of competitiveness
- Global Competitiveness Report 2007-2008
- We define competitiveness as the set of
institutions, policies, and factors that
determine the level of productivity of a
country. The level of productivity, in turn,
sets the sustainable level of prosperity that can
be earned by an economy. (p.3) - Hence, in catching-up economies higher
productivity ensures higher income levels, which
in turn stimulate more investment and
productivity - Irelands National Competitiveness Council,
Annual Competitiveness Report 2007 - Competitiveness refers to the ability of firms
to compete in markets. Irelands national
competitiveness refers to the ability of the
enterprise base in Ireland to compete in
international markets. (p.8) - Many factors, hence indicators
- Productivity (labour and total factor),
efficiency - Price and cost developments
- Export performance
- But improving the competitive position of the
country can be hampered by other factors, e.g.
deficiencies in institutions and the business
environment
4Competitiveness and Convergence Theoretical
Grounds (2)
Competitiveness and Convergence
- Competitiveness, convergence and integration
- Maintaining a sustainable convergence path ?
maintaining and improving the competitive
position of the economy - Real convergence is a long process requiring
sustained productivity gains and efficiency
improvements - Cost-based advantages (based on low wages and
input costs) are easily exhausted in the process
of nominal convergence - Trade and financial integration accelerates
nominal and real convergence
5Aspects of competitiveness related to
productivity and efficiency (1)
Competitiveness and Convergence
- The main competitiveness factors are labour
productivity and factor efficiency, which depend
on - Physical and human capital
- TFP
- Energy intensity
- Sectoral productivity developments
- Productivity in non-tradable sectors is also
important - Competitive advantage
- Unique and hard to imitate
- More immune to price shocks
- Based on innovations (escaping price competition
trap) and technology spillovers
6Competitiveness and Convergence
7Aspects of competitiveness related to
productivity and efficiency (2)
Competitiveness and Convergence
- Labour productivity
- Most of the new member states (NMS) maintain
labour productivity growth rate differential
vis-à-vis the euro area - A process of capital deepening and efficiency
gains - Unit labour costs (ULC) developments
- In nominal terms ULC are steadily increasing in
all NMS - No clear pattern in real terms
7
8Competitiveness and Convergence
9Price and cost competitiveness
Competitiveness and Convergence
- In a monetary union other adjustment mechanisms
are crucial - Labor market flexibility
- Labor costs flexibility
- Working time flexibility
- Labor mobility (inter-sectoral and geographical)
- Product market efficiency
- Competition enhancing policy (measured by level
of competition, market power) - Easy entry, exit and deregulation
- Competitiveness usually measured on international
level by real effective exchange rate (REER)
developments - But, REER exhibits trend appreciation for a
catching-up economy
10Competitiveness and Convergence
11Competitiveness and Convergence
12The links between real and nominal convergence
Competitiveness and Convergence
- The impact of real convergence on inflation takes
place through - The Balassa-Samuelson effect (supply side effects
based on intersectoral productivity growth
differentials) - Higher demand for non-tradable goods and services
relative to tradable goods driven by increases in
income levels (demand side effects) gt change in
relative prices and higher inflation - Restructuring of the consumption basket (towards
higher weight of services and lower weight of
food) contributes towards lower inflation
volatility - Increasing trade openness (pushing up tradable
goods prices through the law on one price, but it
also has a dampening effect on inflation through
stronger competitive pressures and lower
mark-ups) - Declining energy intensity
13Key Developments in the Bulgarian Economy
The Bulgarian experience
- Competitiveness productivity and efficiency
- Real sector
- Labour market
- Energy efficiency
- External sector
- Survey-based measures of competitiveness
- Convergence in productivity the longer term
perspective - Driving forces of the convergence process
- Interpretation of some of the key indicators
14Key Indicators
The Bulgarian experience
- Recent and likely short-to-medium term
developments v.s. long-term trends - Measuring competitiveness
- Macro data indirect evidence
- Sectoral and firm-level data better but not
readily available
15Key Indicators the Real Sector (1)
The Bulgarian experience
16Key Indicators the Real Sector (2)
The Bulgarian experience
17Key Indicators Labour Market (1)
The Bulgarian experience
18Key Indicators Labour Market (2)
The Bulgarian experience
19Key Indicators Energy Efficiency
The Bulgarian experience
20Key Indicators the External Sector (1)
The Bulgarian experience
21Key Indicators the External Sector (2)
The Bulgarian experience
22Key Indicators External Sector (3)
The Bulgarian experience
23Key Indicators External Sector (4)
The Bulgarian experience
24Key Indicators External Sector (5)
The Bulgarian experience
24
25Key Indicators External Sector (6)
The Bulgarian experience
25
26Other Indicators of Competitiveness Survey-based
measures
27Convergence in productivity the longer term
perspective (1)
The Bulgarian experience
28Convergence in productivity the longer term
perspective (2)
The Bulgarian experience
29Driving Forces of Catching-up
The Bulgarian experience
- Domestic investment - financed by foreign (FDI)
and domestic sources - Investment spurred by
- Macroeconomic stability and predictable
environment - EU membership gt positive profit (income)
prospects gt optimism - External position increasing foreign
liabilities (both FDI and debt) gt
sustainability issues (solvency and liquidity) - The investment demand contribution to import
growth is complemented by consumption demand
(reflecting income growth)
30Interpretation of Some of the Key Indicators
The Bulgarian experience
- Some headline indicators a reason for
concern? - Current account deficit increases
- Deterioration of the net IIP
- Wage growth and inflation
- REER appreciation
- Some bottom line indicators
- Balance of payments surplus
- Steadily increasing FDI flows and central banks
reserves - Steady productivity and GDP growth, allowing
income convergence and increased welfare of the
population
31Challenges of Real and Nominal Convergence (1)
Challenges of real and nominal convergence
- Real convergence challenge ensure sustainable
path for productivity and income growth - Institutional arrangement, stable political and
macroeconomic environment - The right policies, conducive to growth
- Fiscal and income policies
- Monetary policy
- Structural reforms
- Promote competition and flexibility in product,
labour and capital markets - Business environment basic infrastructure,
knowledge economy pillars, rule of law,
intellectual property rights, etc.
32Challenges of Real and Nominal Convergence (2)
Challenges of real and nominal convergence
- The nominal convergence process is spurred by
deepening integration into the Single European
Market with liberalized current and capital
accounts, and an increasing domestic income level - The impact of real convergence on inflation
complicates the meeting of the nominal
convergence criterion on inflation - Factors influencing the effect of the real
convergence process on inflation dynamics - The initial level of both prices and income
- The speed of adjustment/catching-up
interestingly the better policies the
government pursues and the better environment it
secures, the higher the adjustment speed, hence
faster convergence (higher inflation) - Flexibility of product, labour and capital markets
33Challenges of Real and Nominal Convergence (3)
Challenges of real and nominal convergence
34Challenges of Real and Nominal Convergence (4)
Challenges of real and nominal convergence
- Policy measures
- Short-to-medium term
- Decrease vulnerabilities and guarantee
sustainability - Improve efficiency of public institutions and the
general business environment - Longer term
- Address the problems of ageing population
- Provide the right incentives for a transition to
a knowledge-based economy
35Conclusion
- Real convergence crucially depends on the
competitive position of the economy - Real and nominal convergence are closely related,
hence - Increasing prices, wages and real exchange rates
are to be expected - Competitiveness is a broad concept gt variety of
indicators, which may point at different
directions gt need proper interpretation - Our assessment of the developments in the
Bulgarian economy is that the country improves
its competitive position
36Appendix
36
3737
3838
3939
4040
4141
4242