Macroeconomic Policy Challenges in Southeast Europe

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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.

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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

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2 The Emerging-Europe Convergence Model

• Six aspects of the Emerging-Europe Convergence
  Model
• Capital accumulation, and
• FDI and technology transfer
• These two aspects create the Jeff Sachs
  convergence story
• Trade liberalisation, and integration of the
  regions production system within the European
  and the global economy
• This aspect describes the convergence-through-trad
  e story
• Financial liberalisation
• Labour-market integration
• These two aspects capture the super integration
  story
• The Prospect of EMU membership

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3 The Jeff-Sachs Convergence Story

• There are three groups of countries in the
  world
• 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

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• In Emerging Europe, savings have not been not
  high
• although savings propensities differed between
  countries
• 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
• 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

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4 The Heckscher-Ohlin Convergence story

• 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
• 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 important

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• 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

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5 The Susan Schadler Convergence Story
super integration

• Financial liberalisation entirely different from
  East Asia
• 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

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.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
  

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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

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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

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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
  regions 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?