Working on Paper Bringing More Science to Politics

Here's an excerpt:

"Whenever a quarrel in the legislative debate or its part can be reduced to solving an empirical question (of factual nature), scientific method is the one to be followed. For example, a tentative debate over an introduction of a protective tariff could use an argument that “cheap imports from abroad cause higher domestic unemployment.” This argument for a tariff is scientifically verifiable within the realm of economic reserach. This way, the counter-arguments such as “cheaper imports leave more resources in domestic wallets, supporting the local economy in creation of new jobs” or “more import puts pressure on local currency to depreciate, which stimulates exports” or “free labor from uncompetitive industries can move to branches with higher value-added, increasing total income” shall be also given a proper consideration. In the end, thus, a policy decision may not depend on economic misinterpretation of the happenings, but rather on the time preference (that is, short-term- or longer-term-orientedness) of the administration in power."

Any comments on the topic are warmly welcome!

Czech GDP/head higher than New Zealand's or South Korea's

In PPP dollars, according to The Economist (World In 2009).

Average Wages in Visegrád Four Countries

Note: Bloomberg served as the source of data.

The chart above graphs the development of average monthly wages in V4 countries. Inter-country comparisons are difficult however, mainly due to various definitions of gross wage across the region. Comparing total labor costs or net wages instead might make more sense. Due to higher employer contributions in Slovakia, for exmple, the average gross wage is lower than that in Hungary. When comparing net wages, however, Hungarian salaries have been lower than Slovak ones for the last four quarters.

A Narrowing Gap in Europe

This is a re-post of my original blog at etrend.sk (in Slovak), which has been visited by more than nine thousand internet users by now. I am attaching the graph from there to CEEW as well.The chart above shows the development of GDP per head relative to the EU average in three major Eurozone economies as well as several CEE countries. The curves incorporate price levels in various countries through purchasing parity standards (PPS). Thickness of a curve represents roughly the size of a country's population.
One can observe a significant downward movement in case of Italy - by about 20 perc. points within fifteen years. "A lost decade" is currently being felt in Hungary, where GDP per person compared to the EU average is stagnating. Other countries of the region however experience a considerable convergence towards the income levels of the EU average. Slovenia, one of the most succesful countries, will most probably in the medium term overtake its neighbor Italy in GDP per person. This would be the first case of a former Eastern Bloc country to reach higher incomes than a major Western European power.

Top 10 Czech Companies

According to sales in 2007:

1. Škoda Auto, automotive, € 8.00 billion
2. ČEZ, energy, € 6.29 billion
3. Foxconn, engineering, € 3.23 billion
4. Unipetrol, oil transmission, € 3.20 billion
5. Agrofert, foodstuff & retail, € 3.00 billion
6. RWE Transgas, gas transmission, € 2.83 billion
7. Siemens, engineering, € 2.55 billion
8. Telefonica O2, communication, €2.27 billion
9. Moravia Steel, metallurgy retail, € 2.23 billion
10. Toyota Peugeot-Citroen, automotive, € 1.85 billion

Note: RWE Energy is missing in the list, although its should be in the top 5.

Top 5 Exporters:
1. Škoda
2. Foxconn
3. ČEZ
4. Panasonic
5. Unipetrol

Sources:
http://www.feedit.cz/a.asp?a=2002938
http://ekonomika.idnes.cz/skoda-vyvezla-zbozi-za-195-miliard-patri-ji-tak-prvni-misto-mezi-exportery-1le-/ekoakcie.asp?c=A080611_160547_ekoakcie_pin

For top Slovak companies in 2007, visit our earlier post.

Slovak Public Finance Not Consolidating Anymore

General government deficit in Slovakia should reach 2.2% of GDP this year according to the latest estimate of the Ministry of Finance. Vis-a-vis the 2008 budget, this is a small improvement of 0.1 percentage point. With respect to the last year's result (a 2.2% deficit), however, it is a stagnation in the process of public finance consolidation. The stagnation comes even after the private pension pillar was open for half a year in 2008 and thousands left for the state pay-as-you-go system, bringing their savings into the state Social Insurance Company. According to earlier statements of Prime Minister Robert Fico, this year's public finance deficit should have narrowed to below 2.0% of GDP.

In addition, for the first time in years, the actual collected end-year tax revenues might be smaller than projected. After seven months of the year, state budget revenues of SKK 186.6 billion have been collected, which is only 53.6% of projected end-year total. Last year at the end of July, the number stood at 59.7%, which is slightly more than 7/12 of the total. Cumulatively, as a result, the state budget ended up in a minute deficit of SKK 614 million (€ 20 mil), which is the worst result in four years, despite still booming economy. Last year at this time, the state budget recorded a surplus of almost SKK 4 billion.

Major factor to blame is the collection of VAT, the dominant source of public finance, which is frozen at last year’s levels, even though retail sales grew by an average of 14% in current prices during the first six months of the year. The fiscal trend, representing a negative change from previous years, should theoretically limit the government in its proposals for generous spending policies. As of now, the restricting effect cannot be observed however.

Slovakia with Best Ratings out of V4 Countries

After Slovakia's membership in the Eurozone as of January next year was approved, and the conversion rate between local currency and Euro was set, rating agencies Fitch and Moody’s raised their ratings of Slovakia’s long-term foreign currency debt. Fitch lifted its rating from “A” to “A+” with stable outlook. “As a member of the euro area, Slovakia will be sheltered from monetary shocks and the risks of a self-fulfilling currency crisis,” justified the upgrade David Heslam, director of Fitch’s sovereign rating team. Out of Visegrád Four countries, only the Czech Republic has A+ rating (see table below). Poland has A- and Hungary BBB+. Moody’s, similarly, increased its rating outlook for Slovakia – from stable to positive. Slovak Republic’s bonds in both foreign and domestic currency have now rating of A1. The rating agency also raised the country’s foreign currency debt and deposit ceilings to 'Aaa', putting Slovakia on par with the Eurozone. The last of the three major world’s rating agencies, S&P, expressed a relative reservedness towards Prime Minister Fico’s plans in social spending and kept its ratings stable.

Sovereign Ratings of V4 Countries (long-term, in foreign currency, with outlook):

------------------Moody's --S&P ---Fitch
Slovakia ----------A1p------Ap----- A+s
Czech Republic-- A1p-------As -----A+s
Poland------------ A2s----- A-p -----A-s
Hungary---------- A2s--- BBB+n --BBB+s

BW: Here Comes Booming Bratislava

"A hot real estate market in the Slovak capital is pushing its suburbs into Hungary and Austria, and easier cross-border movement is making it possible", starts a Business Week article.

Source to the image: maps.google.com

Top 10 Slovak Companies

Are not really that Slovak after all :)

Ranked according to sales in 2007:

1. Volkswagen Slovakia, automotive, € 5.73 billion

2. Slovnaft, oil refining, € 3.34 billion

3. Samsung Electronics, electronics, € 3.29 billion

4. U.S. Steel Košice, metallurgy, € 2.87 billion

5. SPP, gas distribution, € 2.17 billion

6. Kia Motors, automotive, € 1.60 billion

7. PCA Slovakia, automotive, € 1.54 billion

8. Slovenské elektrárne, energy production, € 1.38 billion

9. Tesco Stores, retail, € 927 million

10. Sony Slovakia, electronics, € 864 million

Note: Fortune's 500th world's largest corporation (Fluor) had revenues of € 12.19 billion last year.

Top 3 in Value Added:

1. U.S. Steel Košice, metallurgy, v.a. € 1.03 billion

2. Slovenské elektrárne, energy production, v.a. € 822 million

3. SPP, gas distribution, v.a. € 541 million

Top 3 in Employment:

1. Železnice SR, railways, 17 982 employees

2. Slovenská pošta, postal services, 15 849 employees

3. U.S. Steel Košice, metallurgy, 13 342 employees

Source: TREND Top 200

For top CEE companies in 2006, visit our earlier post.

How good will be Slovakia's monetary policy?

When Slovakia adopts the euro, monetary policy decisions affecting its economy will no longer be taken in Bratislava. Many think that is good news since the European Central Bank is an enormously credible institution that has been performing really well - so well, in fact, that even EU's critics lack facts to criticize it. Vaclav Klaus, the Czech president and a well-know "EU skeptic" wrote this in June: "Ten years have passed since the founding of the European Central Bank ... a major celebration of this anniversary is being planned by ECB and I admit that there is a reason for it."

There is little doubt that ECB's success has a lot to do with its independence but recent developments show that not all are happy with the present arrangements. Clearly, politicians must care about the short-term state of the economy (even at the expense of medium-run price stability) if they seek popularity and reelection. But, for some, it now includes "a more open discussion about the motivations behind interest rate decisions" (Jean-Pierre Jouyet, the European affairs minister of France). Another French official said that Paris only wants "a voice on monetary policy" and José Luis Zapatero, prime minister of Spain, asserted that he expects the ECB to "behave responsibly." No, he didn't mean the was ECB is paying too little attention to rising prices, he merely hinted at the bleak state of the Spanish housing market.

When the financial crises is over (or becomes less severe), one might hope that attempts to undermine ECB's independence will evaporate. Strong euro and higher-than-America's interest rates will hopefully no longer be big, politically attractive issues. Slovak officials now have an opportunity to impress: all they have to do is to look at some of their western colleagues and not repeat their comic behavior.

Where is Romania?

Countries like Poland, Slovakia and Russia frequently make the headlines. Their growth impresses western analysts and journalists, their domestic events provide for enough (yet not too much) excitement and their names are recognized by most, if not all, spell-checkers and individuals.

But what about Romania? Had there not been high growth? Does it find itself in a "development trap"? Judging by the news coverage, one would never guess that Romania had made enormous advances in recent years. (In fact, I am not sure I have heard the country mentioned since I saw a flood of posters at major European airports in early 2007, announcing/promoting the latest EU enlargement).

And today, my news feed claims that Romania has been "hard hit" by the global financial turmoil. But when I looked up IMF's most recent "consultation with Romania," most of what I saw was praise. The kind that sounds genuine, supportive and substance-based.

Unemployment is falling, growth is well above 5%, fiscal balance is certainly EU-worthy (despite rapidly rising government expenditures) and the growth of external debt appears to have stopped. National Bank of Romania is also praised by the IMF: "Directors welcomed the NBR's commitment to price stability in a challenging environment, and stressed the need to firmly anchor inflation expectations. The NBR has appropriately tightened the monetary stance since mid-2007 ..."

While Romania may not have quite "shined" as much as other emerging markets, at least by the high standards and expectations of the media, the numbers show that it has been successful and is bound to do well in the future. This is a country that should be watched and talked about more - there is clearly much more to it than Dracula-jokes.

Is inflation in Europe too high already?

Some people are now talking about the possibility of stagflation in Europe, as Germany's inflation estimates have risen to 3.3 percent. Inflation needs to be watched closely, of course, and it is never encouraging when its levels move above the official comfort zone. But, from a historical perspective, when EU countries like Portugal, Spain and Sweden all stay below 4 percent and EU-27 projections are well below 3 percent (2.4), sounding the alarm bell might well be premature.

Just recall Ken Rogoff's speech documenting that "globalization and de-regulation have been powerful forces supporting the political economy of low inflation." There might be more regulation in the coming years and some countries will grow less than had been expected. But how does the situation today look when compared with the 1990s?

Some seem to forget that world inflation was around 30% in 1990-4. Between 2000 and 2007, by contrast, prices around the world rose no more than 3.8% per annum on average. That is, inflation fell EIGHT FOLD. The industrial economies will probably not venture far from the 3% benchmark. Rising prices in the developing world should, by all means, be a source of concern. But the European Union, including Central Europe, seems to be in a reasonably good shape. Even Hungary, in spite of having a bad year, will probably do well in 2009.

Record Koruna Revaluation to Set the Final Conversion Rate

    At the request of Slovak authorities, the central parity between Slovak koruna and Euro within the ERM II system has been moved for the second time, this time by 15% from 35.4424 to 30.1260 SKK/EUR on May 28. The revaluation is the most significant movement of the central rate in the history of the European exchange rate mechanism. In case of Ireland and Greece before 2002, the changes were by three and three and a half percent respectively. The change is a reaction to the positive assessment of the Slovak euro bid by the European Commission from the beginning of May and a significant appreciation of the Koruna exchange rate due to healthy economic fundaments during the last two quarters.

    The new exchange rate center will most probably constitute the final exchange rate as Slovakia switches to Euro in January next year, since no country has yet joined the Eurozone with an exchange rate different from its central parity, and another revaluation is highly unlikely. 

    The Koruna revaluation appeased the bullish market that continued to trade Slovak currency at ever stronger positions in May. Verbal assertions of the Slovak PM Robert Fico as well as NBS governor Ivan Šramko stating that there is a room for koruna appreciation helped to move the exchange rate to new all-time highs. Another driving factor of appreciation was low risk aversion of global investors, which has fallen to ten-month lows according to standard proxies (VIX and global macro-risks indices). From SKK 32.25 for a Euro at the beginning of May, Koruna appreciated to record 30.616 SKK/EUR on May 28, 2008 – shortly before the revaluation, and up to 30.087 SKK/EUR on the following day. This makes Slovak Koruna the most appreciating currency vis-à-vis Euro in the world since 2005. The local currency’s year-on-year strengthening averaged at above six percent in the last three and a half years. Czech Koruna and Polish Zloty appreciated on average by slightly more than five percent each year. Against the dollar, Koruna strengthened to levels below 20 SKK/USD for the first time in history. The record now stands at 19.254 SKK/USD.

    In the future, no further significant movements of the exchange rate from the new parity are to be expected, however. We expect the new rate to be confirmed as the final conversion rate by the EcoFin on July 8, since it approximately constitutes already the 2009 equilibrium exchange rate. Worries springing from the record currency appreciation, 11.1% in year-on-year terms, have already spread among exporters, who produce in Korunas but earn in Euros. It is thus reasonable to anticipate that the trade surplus predicted for 2008 will be, as a result, a bit smaller than expected.

The Left and Right: Economic Worldviews Explained

I consider this such a great piece of text that I am attaching it here as a whole. It comes from Harvard professor Greg Mankiw, who's explaining the differences between the left- and right-leaning economists.

The right sees large deadweight losses associated with taxation and, therefore, is worried about the growth of government as a share in the economy. The left sees smaller elasticities of supply and demand and, therefore, is less worried about the distortionary effect of taxes.

The right sees externalities as an occasional market failure that calls for government intervention, but sees this as relatively rare exception to the general rule that markets lead to efficient allocations. The left sees externalities as more pervasive.

The right sees competition as a pervasive feature of the economy and market power as typically limited both in magnitude and duration. The left sees large corporations with substantial degrees of monopoly power that need to be checked by active antitrust policy.

The right sees people as largely rational, doing the best they can given the constraints they face. The left sees people making systematic errors and believe that it is the government role to protect people from their own mistakes.

The right sees government as a terribly inefficient mechanism for allocating resources, subject to special-interest politics at best and rampant corruption at worst. The left sees government as the main institution that can counterbalance the effects of the all-too-powerful marketplace.

There is one last issue that divides the right and the left—perhaps the most important one. That concerns the issue of income distribution. Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it? That is such a big topic that I will devote the entire next lecture to it.

A Great Convergence in Europe

Source: Eurostat
(2009 values were calculated from predicted GDP growth)

Robert Aumann Coming to Slovakia!

Young and entusiasthic group of Slovak scholars under the heading of Virtual Scientific Laboratories has managed to organize an unique visit of a unique scholar.

Robert Aumann, father of modern game theory applied in economics, will address an initial lecture of Tatra banka lecture series at the University of Economics in Bratislava on 12th of May 2008.

Participation is possible by invitation. We sincerely believe that one of this blog's editors will attend the event and provide a short summary for our readers.

More info about Mr. Aumann here, short article by Tyler Cowen here, and by the Center for the Study of Rationality here.

So long.

EDIT1: ...for those of you who do not know, Mr. Aumann is a Nobel laureate.

Neighbors

Sources: Eurostat and ŠÚSR

Real and Price Convergence under a Fixed Exchange Rate Regime

Nadežda Stanová in the current issue of Biatec (monthly magazine of the National Bank of Slovakia).

Real and Nominal Convergence Go Hand in Hand

Hence, inflation in a fixed exchange rate regime in New Europe (e.g. in Slovakia after adopting euro) can be expected at levels up to real GDP per capita growth (5-7%).

Forecast

Recent OECD forecast expects a decline of economic growth in Slovakia to approximately 7 percent in 2009. Among other factors influencing this outlook, a slowdown of EU economies is to be blamed. More comments in Slovak Spectator's article.

More interesting is the economic performance under changed economic conditions after adopting euro. Although some expect the growth to decline as a result due to Maastricht fiscal ceiling, fiscal discipline is definitely not the only factor influencing the expected outcome. Taking into account that currency-switching is a very specific situation, one should not omit the long-term effects of euro on economic growth.

In my humble opinion, policy makers should have at hand a strategy for further development in form of an industrial policy vision. For this, measurements of the allocation efficiency of public funds for FDI stimuli should be considered. That is to say, that FDI in the automotive industry might have already exploited the existing economies of scale opportunities, which means that a further contribution of this sector to economic growth may not be so robust anymore. For a small country, in addition, a fast adjustment in competitiveness seems to be the key priority of economic policy. Without a scientific guidance in economic policy-making, it is hard to follow optimal solutions, unbiased by ideological disputes.

Slovak wages at 685 EUR when entering Eurozone

Nominal expectations can be as important as real ones for possible euro-related real price changes and resource misallocations. I thus bring numbers for the average monthly gross wage in Slovakia at the break of 2009, when the country expects to convert to euro. The average wage, seasonally adjusted, will be 680-690 eur. The figure is to be used in the context of the Slovak economy only, since comparing gross wages across Central-European economies is rather complicated, as I demonstrated before. The expected conversion rate between koruna and euro used in this calculation is 32.63 SKK/EUR (taken from the survey on assessments of Slovakia meeting the Maastricht criteria.

Historically Lowest Budget Deficit Confirms Slovak Euro Ambitions

The 2007 state budget ended up in a deficit of 23.5 bn SKK (712 mil EUR) at the end of December. Relative to the Gross Domestic Product (GDP), this constitutes 1.3%, which is a historical low (data available since 1995). The budget was originally planned with a shortfall of 38.4 bn SKK. The narrower-than-planned budget gap was caused by 2007 state revenues being almost four percent higher than those budgeted, thanks to record economic growth, while the actual state spending almost exactly matched the plan. Together with the negative balance of regional administration and social security, which is estimated at 1.1% of GDP in the latest update of the Finance Ministry, the figure means that the general government deficit will most probably lie at 2.4% of GDP. Public finance deficit of this size satisfies the 3.0% of GDP Maastricht convergence criterion necessary for adopting the common currency in January 2009.