How well does real GDP growth predict change in GDP per capita in PPS?

In one of my previous posts, I predicted that by 2009, Slovakia will overtake Portugal in GDP per capita in PPS. I calculated this from from real GDP growth forecasts of the European Commission (Eurostat) for 2009 and the 2008 forecasts of GDP per capita in PPS. How accurate is however this prediction?

For evaluating this, I graphed above the actual annual changes in GDP per capita in PPS relative to the EU27 average (x-axis; in percentage points) and the values predicted via calculation of real GDP growth (y-axis), using a very small dataset (n=13) of Slovakia between 1996-2008 (Data source: Eurostat1, Eurostat2). The correlation coefficient is 0.9304, the trend line is defined as y = 1.0038x - 0.2169 (R=1 would mean y = 1x + 0). The standard deviation of the actual values from the predictive model is however still too high for a conclusive answer about a minute positive difference between Slovakia and Portugal in 2009.

Central Europe joins Schengen area with no border controls

Source: BBC

(Curious is the fact that the map views Romania and Bulgaria as non-EU members, or alternativelly as not able to join the Schengen area)

In less than 2 years, Slovakia will overtake Portugal

Data 1995-2008: Eurostat (2007-8 are forecasts). The 2009 values were calculated from the real GDP growth rate forecasts, again by Eurostat.

Kotian: inflation won't threaten Slovak euro ambitions

Juraj Kotian, deputy chief economist of Erste Bank AG for Eastern Europe in Vienna speaks for Erste TV.

Slovak Quarterly GDP Growth Revised

The revision based on a new methodology (chain-linking) did not bring any significant interpretational differences.

Reuters Central European Investment Summit

I am aware that this notice comes a bit late, but still.
The summit takes place on October 15-17 (Monday to Wednesday) in Vienna, Austria. If you can't attend, check out at least the issues that are going to be discussed.

DEBlog - discussing pension system

As announced, three Slovak economists have started a discussion about Slovak pension reform. The discussion is in Slovak. However, we might translate some important outputs and hopefully publish them here.

Slovak 2009 Euro Adoption in Doubts

The planned public finance deficit of 2.94% of GDP this year, which just barely meets the 3.0% Maastricht criterion for euro adoption, might increase by 0.2-0.3 pp as Eurostat suggested including the national highway company and public media into the public finance balance sheet. The Ministry of Finance said these amounts are still manageable in the light of keeping the deficit under 3.0% in 2007, since the state revenues and expenditures after nine months suggest an actual deficit of about 2.7% of GDP by the end of the year. However, health care, railways and public-private partnership (PPP) projects in highway construction remain a potential danger if included into the official public finance numbers. A final say by the Eurostat on the deficit accounting is expected soon. A survey among analysts on the probability of euro adoption reflected the arisen worries and fell by 7 pp to its lowest level since December last year (from 77% in August to 70% in September).

On Convergence Within the EU

An article by Philippe Maystadt, president of the European Investment Bank, for the Project Syndicate.

Slovak Business Environment Worsens

A September report of ING Slovakia includes this graph and comment on the PAS business environment index: "The strong anti-reform pre-election rhetoric has not been followed up with the reversal of the previous government's reforms. Facing a possible currency crisis after the elections, the new government recommitted itself to the original euro adoption schedule. However, financial markets had assumed the anti-reform stance would not be met with action and the government would keep the status-quo in reforms.
Nevertheless, as time goes by, the government's policy is taking a negative toll on the business environment. And there is no guarantee that this process will not deteriorate further after 2009 euro entry."

New Statistics on GDP per capita in PPS

	% of EU-27	Change
	(2007)	since 2003
Austria	129.4	+0.3
Czech Republic	81.5	+7.7
Slovakia	66.6	+11.3
Hungary	65.7	+2.1
Poland	55.1	+6.0

Source: Eurostat: GDP per capita in PPS

Pension Economics Soon to be Spoken @ eTREND.sk

Juraj Draxler (CEPS Reviser Reseach Fellow), Martin Filko (PhD student at Erasmus University Rotterdam), and Martin Chren (director of F. A. Hayek Foundation Bratislava) will soon commence the Slovak "Economics Forum" with an online debate à la Richard Thaler and Mario Rizzo on the topic of pension economics. Next Monday at the economic weekly TREND's portal.

10 Largest Non-financial CEE Companies

{Rank, Company Name, Country, Sales in 2006, sector}

1. PKN Orlen, Poland, 13.6 bln. EUR, oil processing
2. MOL, Hungary, 11.4 bln. EUR, oil processing
3. Skoda Auto, Czech Republic, 7.4 bln. EUR, automotive
4. Naftogaz Ukrajiny, Ukraine, 6.1 bln. EUR, energy
5. CEZ, Czech Republic, 5.8 bln. EUR, energy
6. Volkswagen Slovakia, Slovakia, 5.2 bln. EUR, automotive
7. Audi Hungaria, Hungary, 4.9 bln. EUR, automotive
8. Nokia, Hungary, 4.8 bln. EUR, technology
9. Telekomunikacja Polska, 4.8 bln. EUR, telecommunications
10. Polskie Sieci Elektroenergetyczne, 4.0 bln. EUR, energy

Source: Deloitte - Central Europe Top 500

A Small Open Economy

Slovakia was the 11th most trade-open economy in the world according World Bank's 2005 available data, with exports and imports valued together at 161.7% of the country's GDP. Only Hong Kong, Malaysia and Belgium were both more populous and more economically open. Other more open countries included mini-states such as Luxembourg, Seychelles or Guyana. According to the most recent numbers (1st half of 2007), the country's exports amounted to 89.0% of GDP, imports 89.6% of GDP. The total trade openness was thus 178.6% of GDP.

Slovak Public Finance at the Entry to the Eurozone

Possessing sound public finances is one of the four Maastricht convergence criteria enshrined in the 1992 Treaty on European Union. By signing their accession treaties, the new member states agreed to meet the Maastricht criteria with derogation. Sound public finance criterion is defined as annual general government deficits of lower than 3% of GDP together with a general government debt lower than 60% of GDP.

The Slovak government’s official target date for entering the Eurozone was set to January 1, 2009, and as such was adopted by the new government led by left-leaning Smer-SD in 2006. The country’s preparedness to enter the monetary union will be assessed by the European Central Bank and the European Commission in spring 2008.

After eight months of 2007, the state’s budget is in black numbers with a surplus of 401.7 million Sk (12 million EUR). Year on year, this is an improvement of 6.1 billion Sk (181 million EUR). On a last twelve months basis, the state budget deficit stayed at -1.7% of GDP. Corporate tax revenues and VAT collection are both showing positive results. Hence, the probability of meeting the 3.0% EMU criterion is regarded as quite high. As a matter of fact, it is estimated at 81% according to a regular survey of economists done by the Institute for Economic and Social Reforms (INEKO).

The 2008 state budget was prepared in August this year by the Ministry of Finance and presented to the cabinet. The deficit should amount to 24.218 billion Sk (721 million EUR; 2.4% of GDP). Medium-term financial framework - the Convergence Program of May 2004 - calculates in addition with a deficit of 1.9% of GDP in 2009. The goal of the program is a structural deficit of 0.9% of GDP by 2010.

Several analysts have expressed the opinion that a record economic growth of the current years allows for a prompter deficit reduction. The public finance is constrained, however, with the costs of a brave pension reform that introduced a second private pillar for pension savings (1.1% of GDP in 2006).

The general government debt of the Slovak Republic amounted to only 30.7% of GDP (503.1 billion Sk; 13.86 billion EUR) in 2006 according to Eurostat, which is a twelve-year low. The number is compatible with the 60% Maastricht requirement, comparable with that of the Czech Republic (30.4%), and considerably lower than that of Hungary (66.0%), Poland (47.8%) or the EU-27 average (61.7%).

What Bubble?

Image of the day at Bloomberg (growth in Eurozone's M3 since 1978; click for larger view).

Got numbers?

Kenneth Glenn Dau-Schmidt and Carmen L. Brun elaborated a paper dealing with different popularity of law and economics in Europe and USA. Amongst some of the major differences are common-law system, different peer-review tradition (journals reviewed by students), state-oriented (communitarian) society in Europe, rather rare mobility among academics, judiciary and practitioners, and a few other.

Trying to contribute with a nice informative article, I have discovered an additional cause (and effect as well) of the L&E underestimation in Europe (and Slovakia especially) - THE (inaccessibility of) numbers.

Based on the SLOVSTAT data, percentage of the closed cases have declined by 46,6 points from 1989* to 2006. This massive decline made me think about possible causes. I approached Slovak Ministry of Interior with an obvious question: "What was the number of police officers and police budget from 1989 to 2006?"

The answer, dear reader, is confidential (read "lost for good"), apart from years 2005-2007 (where we can observe 94 policemen and 1,025 million crowns salary costs increase) and if we do not want to end up being interrogated like Minin brothers, waiting ten years more seems to be a good idea.

Or maybe we could just develop some false memories about our crime rates. Whatever!

* I did not want to spare you the phony number from 1989. Communist duty to explain every crime committed made all the magic:) - or did you really believe those 46,6 percents? I understand both:).

TFP gaps in manufaturing: China, India & CEE

In their recent NBER paper, Chang-Tai Hsieh and Peter J. Klenow tried to quantify the extent of resource misallocation in the manufacturing sectors of China and India. According to the authors, if capital and labour were reallocated to eqalize their marginal products, the Total Factor Productivity would increase by 25-40% in China and 50-60% in India.

What does this mean for CEE manufacturing? If economic policies of these countries continue to apply the traditional approach to foreign investment (subsidies), it is questionable whether the returns on FDI in these countries together with the benefits of fiscal competition for manufacturing firms will continue to be motivating. While already facing a labour shortage, Central Europe has tough manufacturing competitors in China and India.
--
Thanks to František Lipták for this post.

Slovak GDP grew by 9.45% in the last four quarters

Recent Statistical Office's report of 9.4% growth in GDP for 2Q2007 means that Slovakia has been growing at an average pace of 9.45% in the last 12 months (9.8 & 9.6% in 3&42006, and 9.0% in 1Q2007).
At that speed, with the whole EU growing at about 2.9%, Slovakia caught up in a single year more than 4 percentage points in its performance relative to the European Union's average (from about 60 to about 64% of the EU-25 average in GDP per person in PPS).

Catching up and Falling Behind

Eurostat launched a new tool allowing one to graph available data into a map. Here's a map of Europe showing the countries' economic performance between 2002-2006 relative to the EU-25 average (click for larger view).

Portugal, Italy and France have fallen behind relative to other EU member states; countries of the 'New Europe', on the contrary, are catching-up quite quickly.

Macroeconomic stability in the Czech Rep. and Slovakia

Three graphs from my MA thesis.

Draxler on globalization in FT

http://www.ft.com/cms/s/d7692fa0-3b26-11dc-8f9e-0000779fd2ac.html
Would the author be able to convincingly show how comparative advantages can be 'created'?

Is Hillary inspired by Slovakia?

In a provocative article, the president of the Cato Institute suggests that a well-known U.S. senator might be a nationalist, in spite of her party membership.

This rings a bell - perhaps it even sheds some light on the structure of the Slovak government, which should be unthinkable in theory but is alive and well in practice.

Is it a good thing that ideological differences seem to be getting smaller? Slovakia has been described as "lab" before and something tells me there will be a lot of evaluating to do after the present administration's term. Patience is required in the meantime.

IHT on Skilled Labor Shortage in Central Europe

An International Herald Tribune article based on a report by the Vienna Institute for International Economic Studies.

"Slovakia could soon become the world's biggest car producer per capita - if it can find enough skilled workers to assemble the vehicles." [...]

"The problem is particularly acute in the automotive industry in the Czech Republic and Slovakia, but it also affects segments of such high-skill service occupations as health-care personnel, architects, civil engineers and Internet technology experts, he [one of the report's authors] said.
In 2003, the Czech Republic began a program, appropriately called Selecting Qualified Workers From Abroad, which entails offering permanent residence permits to those who have lived and worked in the country for two and a half years. Poland said last month that it was introducing a similar program."

Perhaps a policy inspiration for the Slovak government? (The government recently made the requirements for obtaining citizenship tougher.)

Thanks to Michal Onderčo for this post.

PS: A careful observer might spot a mistake in the target year of euro adoption in Slovakia. It is not 2008, as in the article, but 2009.

Draxler on Globalization

A very intervention-leaning account by a Slovak CEPS research fellow, but still a nice overview of what is out there in this regard.

Update (21 September 2007): here's the complete report for the Directorate-General.

What are the impediments to growth?

Slovak daily SME came with an unsurprising answer citing the opinion of the Slovak Chamber of Commerce and Industry.

According to the article (in Slovak), the three biggest problems in the economy are: enforcement of law, education, and export promotion. Of course, courts turned out to be the worst part of it. Therefore, we will look at the numbers there in more detail.

Heritage foundation measures the Index of Economic Freedom, assessing the main areas that affect the business environment. I chose indicators of property rights enforcement and corruption to compare their values in the Czech Republic, Hungary, Poland and Slovakia.

Another indicator would be the World Bank Governance Indicators dataset, compiled into a neat rule of law interactive map.

Looking at the graph, there is not too much progress visible in the last twelve years, comparing Slovakia to its neighbors. However, there is a slight improvement in property rights and corruption absolute terms from 2005 to 2007. Nevertheless, law enforcement really seems to be a "bottleneck" of our economy.

Policy prescription in this regard would be a transparent anti-corruption legislation, dealt with in, for instance, Polinsky, Shavell (1999), and a very profound change in judicial execution of law, dealth with in Kühn (2005).

On Comparing Wages Across Central Europe

A recent study by the Slovak Ministry of Finance (in Slovak) revealed problems in inter-temporal comparisons of 'gross wages'. The trick lies in the definition of gross wage, which varies over time as social security or other payments are shifted from employer to employee or vice versa. The same problem, with the addition of currency and price level conversions, appears with inter-country comparisons.

For these reasons, comparing total labor costs (or 'super-gross wages'), or just net wages seems to be a much more reasonable solution to assess living standards of the local working populations. Here's the 2006 data for V-4 countries: an average monthly salary of an employee in the economy, first converted into euro according to official 2006 yearly exchange rates, and then adjusted for the respective price levels (of 2004) relative to the European Union average.

	--SGW	----GW	---NW
CZ	1854	1374	1064
HU	1531	1136	750
PL	1634	1356	920
SK	1250	988	768

Note that GW stand for gross wage's purchasing power in euro, SGW for 'super-gross wage' (including employers' social security contributions), NW - net wage. SGW and NW were calculated according to the OECD information on labor tax wedges in 2006.

An informed observer might spot that the purchasing powers of average wages across V-4 countries do not correspond to GDP/head rankings of these countries. Slovakia, for example has higher GDP/capita in PPS than Poland, but lower wages. In order to explain these differences, one ought to look closer at the labor productivity statistics, as well as the local definition of a 'salary' (as opposed to other income).

Baťo reviews Taleb's "The Black Swan" (in Slovak)

http://ekonomika.etrend.sk/104468/slovensko/cierna-labut
Links to other reviews of this book published in respected English-written periodicals may be found at Nassim Talebs's home page.

Slovakia on the map!

Three maps for you today, no rocket science, just to think about geo-politics and geo-economics. For better details, click on the maps, or check out the links (especially the fancy interactive one:)).

1. Global Peace Index (source: Opinio Juris)

















2. GDP per head - regional figures (source: Regional Policy - EC and The Slovak Europe Blogspot)

























3. Doing Business Interactive Map (source: Opinio Juris)
















Basically, we are a peaceful country, with one thriving region and pleasant business enviroment. People are complaining all the time, and GDP per capita makes one vigilant, but it is not that bad in the world context either.

A nice one, by Alesina on the EU economy

http://www.nber.org/reporter/summer06/alesina.html

Quarterly YoY Real GDP Growth - EU-25, Czech Republic, Slovakia (in %)