EBRD TransitionReport 2017-18 - PPT

TRANSITION TRANSITIONREPORT2016-17
TRANSITIONFOR ALL:EQUALOPPORTUNITIESIN ANUNEQUALWORLD

REPORT
2017-18
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TRANSITION
REPORT
2017-18
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SUSTAINING
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GROWTH NOW
SUSTAINING
© European Bank
GROWTHfor Reconstruction and Development
Transition Report 2017-18
TRANSITIONREPORT2016-17 2
SUSTAINING GROWTH
A THREE-FOLD CHALLENGE
1. REVERSING POST-CRISIS SLOWDOWN IN THE REGION
2. OVERCOMING “MIDDLE-INCOME TRAP”
3. MAKING GROWTH GREENER
© European Bank for Reconstruction and Development

1. EBRD regions consistently outperformed 1998-2008,
underperformed since 2009
EBRD regions’ outperformance yielded 15% higher output; underperformance cost 9% of output
For each country, construct synthetic comparator (15+ countries with max weight 15%) in each year (income per
capita, population)
EBRD regions: Growth, %
Sources: IMF
© European WEO
Bank forand authors’ calculations.
Reconstruction For instance, Tunisia’s comparators include Ecuador, Indonesia, Sri Lanka, ++.
and Development EBRD Transition Report 2017-18
United States’ performance is mixed pre and post crisis
relative to comparator countries
United States: Growth, %
Sources: IMF
© European WEO
Bank forand authors’ calculations.
Reconstruction For instance, United States’ comparators include China, Hong Kong SAR, Saudi Arabia,
Switzerland, Germany, Netherlands ++.
2. Many countries have reached middle-income status and
have to overcome the “middle-income trap”
In particular, the slowing productivity growth at middle incomes
Initial per capita income and total factor productivity growth, 1998-2014
Sources:
© IMF,
European World
Bank Bank, Penn World
for Reconstruction Tables and authors’ calculations. The trend line is based on a polynomial fit.
3. Another aspect of middle-income trap:
Least green production (“the environmental Kuznets curve”)
Middle-income countries have higher level of pollution per unit of GDP than poorer peers (that have
not yet built polluting industries) and advanced economies (that moved on to develop post-
industrial, greener sectors)
GDP per capita and emissions per unit of GDP in 2013
©Sources:
EuropeanWorld
Bank Resources Institute,
for Reconstruction andIMF and authors’ calculation. The trend line is based on a polynomial fit.
Development EBRD Transition Report 2017-18
Especially salient issue in transition countries
that inherited a very polluting industrial base
Despite major improvements, economies remain ~ 25% more polluting than comparators
Greenhouse gas emissions per US dollar of GDP
Sources:
© EuropeanWorld
Bank Resources Institute
for Reconstruction and(2017) and authors’ calculations.
Countries need to develop
environmentally friendly growth models
Greenhouse gas emissions per capita
Sources:
© World
European BankResources Institute
for Reconstruction (2017)
and and authors’ calculations.
Outline
I. Beyond the middle-income trap
II. Firm dynamics and productivity
III. Infrastructure and growth
IV. Green growth
VI. Structural reforms
© European Bank for Reconstruction and Development EBRD Transition Report 2017-18
BEYOND
THE MIDDLE-INCOME TRAP
18% 6
NUMBER OF OUTPERFORMANCE
ESTIMATED CAPITAL STOCK GAP
IN THE EBRD REGIONS EPISODES LASTING 4+
DECADES

Growth slows down as economies grow richer –
although with no specific critical “trap threshold”
Initial per capita income and average annual GDP per capita growth, 1998-2016
©Sources:
EuropeanIMF,
BankWorld Bank, Penn and
for Reconstruction World Tables and authors’ calculations.
Yet middle-income trap is a useful concept describing
evolution of emerging markets’ growth model
Low → middle incomes

• Industrial development, mostly in low-value-added sectors
• adoption of existing technologies; investment in basic education and physical capital
Middle → high incomes

• Creating high-value-added industries and services
• Higher education, research and development, innovation
Hence growth of middle-income countries = transition to a different set of political and

economic institutions that provide incentives to develop new products and services
May be hard to accomplish, hence “the middle-income trap”

• For example, because it contradicts the interests of incumbents that benefit from
status quo of the “old” model
In transition economies, somewhat different profile:
Growth in 1998-2008 driven by total factor productivity
High levels of education, urbanisation and industrial development but factors of production had
been combined inefficiently under central planning
Market reforms helped to improve efficiency of factor use, boost productivity and close TFP gap
Decomposition of sources of growth, 1998-2008, % per annum
Sources:
© EuropeanPenn
BankWorld Tables, IMF,and
for Reconstruction World Bank and authors’ calculations.
With inefficiencies eliminated, countries faced typical
middle-income challenges, growth slowed since 2009
TFP slowdown also in (small) part reflects lower capacity utilisation (limited data)
Growth now driven by capital accumulation (as in most EMs)
Decomposition of sources of growth, 2008-14, % per annum
Sources:
© Penn
European BankWorld Tables, IMF,and
for Reconstruction World Bank and authors’ calculations.
Yet investment in all but 5 EBRD economies
has been well below comparators’ levels
Total capital stock gap € 2.2 trillion (~18% of capital stock), of which ~ €500 bn due to 2008-14
~ 40% is due to infrastructure deficit; 60% due to equipment, buildings, intellectual property
Average annual growth in capital stock, 2008-14
©Sources:
EuropeanPenn
BankWorld Tables, IMFand
for Reconstruction andDevelopment
authors’ calculations. Growth rates in capital stock of Azerbaijan, Belarus, EBRD Transition Report 2017-18
Turkmenistan and Uzbekistan exceed the y-axis scale.
Some countries succeeded in middle-income transitions,
for example, Korea first boosted TFP, then capital
Balanced contributions from all factors: large human capital gains; high investment financed domestically
Focus on lower end of high-tech exports: gradual shift imitation → innovation, facilitated by human capital ↑
Hard hit by multiple crises of 1980 and 1998 but recovered swiftly; GDP per capita now 48% of US (66% at PPP)
Cumulative outperformance and TFP in South Korea
Sources:
© IMF,
European World
Bank Bank, Penn World
for Reconstruction Tables and authors’ calculations.
Growth outperformance: high investment financed by
domestic savings, quality institutions, equity markets
Finance matters, in particular equity and longer-term debt
Trade and financial openness reduce chances of underperformance episodes
Determinants of growth out / under performances since 1995: Shapley decomposition
Sources:
© EuropeanIMF,
BankWorld Bank, Penn World
for Reconstruction Tables and authors’ calculations. An out/under performance episode is defined
as a period in which an economy out/underperforms its synthetic comparator at least 90 per cent of the time for at
least eight consecutive years.
FIRM DYNAMICS AND PRODUCTIVITY
4 81%
OF FIRMS HAVE FEWER THAN
AVERAGE STOCK OF PATENTS
GRANTED PER 10,000 PEOPLE IN THE 10 EMPLOYEES IN CENTRAL
EBRD REGIONS IN 2015, COMPARED AND EASTERN EUROPE
WITH AROUND 213 IN SOUTH KOREA

Innovation in the EBRD region lagged behind
per capita income: “innovation-light” growth
<1% of firms introduce a product that is new to the world
Change in patents granted and per capita income, 2002-15
Sources:
© EuropeanWorld
Bank Bank, World Intellectual
for Reconstruction Property Organization (WIPO) and authors’ calculations.
Smaller firms are abundant but relatively inefficient,
more so in Central Europe than in EU-15
Median large firm in Central Europe and Romania is 70% more productive than median micro firm –
versus 40% difference in EU-15
Productivity levels by firm size (micro = 100)
©Sources:
EuropeanCompNet and authors’ calculations.
Bank for Reconstruction and Development EBRD Transition Report 2017-18
Productivity growth is faster in industries
further away from the technological frontier
Estimated average annual TFP growth, 1995-2011, depending on initial TFP
Sources:
© EuropeanWIOD. Predicted
Bank for TFP growth
Reconstruction rates from a country-industry panel regression controlling for country, industry, year effects.
With greater trade openness,
productivity convergence can be sustained
Average annual TFP growth, 1995-2011, depending on initial TFP
Sources:
© EuropeanWIOD. “Less
Bank for open” = exports
Reconstruction + imports < 10% of output; “more open” > 110%
And greater integration into global value chains matters,
in particular when it goes beyond simple assembly tasks
Average annual TFP growth, 1995-2011, depending on initial TFP
Sources:
© EuropeanWIOD. Less
Bank for integrated source
Reconstruction <40% of inputs abroad; more integrated > 80%.
More productive industries create more jobs,
and reallocation of labour boosts growth
Average annual job creation, 2002-2013, depending on initial TFP
©Sources:
EuropeanCompNet. Regressions control
Bank for Reconstruction for country, industry and year fixed effects.
Openness to trade help to relocate jobs to
more productive industries
Average annual job creation, 2002-2013, depending on initial TFP
©Sources:
EuropeanCompNet. Regressions control
Bank for Reconstruction for country, industry and year fixed effects.
INFRASTRUCTURE
AND GROWTH
€1.9 64%
TRILLION
EBRD REGIONS’ ESTIMATED
OF THE EBRD REGIONS’
INFRASTRUCTURE NEEDS ARE IN
THE TRANSPORT SECTOR
INFRASTRUCTURE
INVESTMENT NEEDS OVER
THE NEXT 5 YEARS

EBRD regions lag behind advanced economies in
infrastructure: Higher gaps in Central Asia, SE Mediterranean
Global competitiveness index – infrastructure, 2015-16
©Sources:
EuropeanWorld
Bank Economic Forum and
authors’ calculations. 1-7 scale, higher numbers = better infrastructure. EBRD Transition Report 2017-18
€1.9 trillion investment in infrastructure needed
in the EBRD region over the next 5 years
Some countries need to invest a lot to catch up with their peers
Others need high outlays on maintenance and supporting future growth of income/population
Total annual investment need in 2018-22, % of GDP
©Sources:
EuropeanWDI,
BankIMF, EIA, Nunn andand
for Reconstruction Puga (2012) and authors' calculations.
Economic benefits of transport upgrades can be large:
Evidence from road network upgrades in Turkey
2005
2015
Improved market access increased domestic trade and
expanded the trade linkages to other provinces
Domestic trade grew fastest between cities with highest savings in terms of travel time thanks to the
road upgrades
Change in bilateral trade between provinces, 2006-14, depending on transit time saved
©Source: Authors’
European Bank forcalculations.
Reconstruction and Development EBRD Transition Report 2017-18
Previously isolated areas experienced increased
employment – due to lower outward migration
Time savings and change in regional employment, 2006-14
©Source: Authors’
European Bank forcalculations.
GREEN GROWTH
EMISSIONS PER US$ OF GDP IN

COMPARATOR COUNTRIES ARE
AROUND 94%
20 %
LOWER THAN IN THE EBRD REGIONS
OF SEMED PRIMARY ENERGY SUPPLY
IS ACCOUNTED FOR BY FOSSIL FUELS,
COMPARED WITH 70% IN CENTRAL
EUROPE

Another aspect of middle-income trap: least green
production (“the environmental Kuznets curve”)
Middle-income countries have higher level of pollution per unit of GDP than poorer peers (that have
not yet built polluting industries) and advanced economies (that moved on to develop post-
industrial, greener sectors)
GDP per capita and emissions per unit of GDP in 2013
©Sources:
EuropeanWorld
Bank Resources Institute,
for Reconstruction andIMF and authors’ calculation. The trend line is based on a polynomial fit.
Especially salient issue in transition countries
that inherited a very polluting industrial base
Despite major improvements, economies remain ~ 25% more polluting than comparators
Greenhouse gas emissions per US dollar of GDP
Sources:
© EuropeanWorld
Bank Resources Institute
for Reconstruction and(2017) and authors’ calculations.
Pro-environmental economic policy mix needed, starting
with phasing out energy subsidies
And develop institutions that help financing investment in the green economy transition
Fossil-fuel subsidies, 2013, % of GDP
Sources:
© EuropeanIMF (2015)
Bank and authors’and
for Reconstruction calculations.
Good management improves environmental performance
only if incentives are right
When energy subsidies are high, better-managed-firms are more energy intensive
Change in energy use in response to better management practices
©Sources:
EuropeanIMF,
BankBEEPS V, MENA ESand
authors’ calculations. Solid bars = significant at the 10% level. EBRD Transition Report 2017-18
Equity markets today are optimistic about greener
companies’ future profits
Listed companies with a greater share of green business have a higher value of equity per dollar of
current profits (= lower return on equity)
Performance of firms with green revenues
©Sources:
EuropeanFTSE
BankRussell’s LCE database,
for Reconstruction Bureau van Dijk and authors’ calculations.
Developing equity markets helps environment – equity is
better suited to finance green projects
Equity investors have a stake in the long-term value of the assets and incentives to select projects
that will not be “stranded” when green policy mix is universally adopted
Equity markets require improved governance at country and firm level
Relative size of the equity market and pollution
©Source: DeBank
European Haasforand Popov (2017).
Concluding remarks:
Region in search of new growth drivers
• Sustaining growth in the EBRD regions is not going to be easy
• There is no single silver bullet and no one-size-fits-all solution
• However, learning from countries that have managed to converge to high income levels
creates grounds for optimism
• EBRD countries should be able to complete the transition to market economy
• Through strengthening their institutions

• Supporting firm dynamics and innovation
• Integrating their firms in global economy
• And investing in sustainable infrastructure
STRUCTURAL
REFORM
INCREASING NUMBERS OF
COMPETITIVENESS AND GOOD COUNTRIES IN THE EBRD REGION'S
GOVERNANCE ARE THE ARE SETTING THEMSELVES THE
TARGET OF GENERATING
2
AREAS IN WHICH THE LARGEST GAPS
20%
OF ELECTRICITY FROM RENEWABLE
EXIST BETWEEN THE EBRD REGION SOURCES
AND ADVANCED ECONOMIES

Six qualities for a sustainable market economy
Assessment of transition qualities
Competitive Well-governed Green Inclusive Resilient Integrated
•Market •National-level •Mitigation of •Gender equality •Financial •Openness to

structures for governance climate change • Regional stability foreign trade,
competition and •Corporate-level •Adaptation to disparities •Resilient energy investment and
business governance climate change •Opportunities sector finance
standards •Other for young •Domestic and
•Capacity to add environmental people cross-border
value and areas infrastructure
innovate
The EBRD region performs weakest in Competitive and
Well-governed…
Assessment of transition qualities in EBRD countries and advanced comparator countries
©Sources:
EuropeanEBRD.
Bank for Reconstruction and Development EBRD Transition Report 2017-18
… but reform appetite seems to have returned to the region
Share of positive/negative developments in total number of developments tracked
© European
Source: BankReform
EBRD. for Reconstruction
developmentsand in
Development
2017 based on qualitative assessment rather than year-on-year upgrades and downgrades. EBRD Transition Report 2017-18
Reform examples
© European
Source: BankReform
EBRD. for Reconstruction
developmentsand in
Development
2017 based on qualitative assessment rather than year-on-year upgrades and downgrades. EBRD Transition Report 2017-18
TRANSITION TRANSITIONREPORT2016-17
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TRANSITION TRANSITIONREPORT2016-17

TRANSITIONFOR ALL:EQUALOPPORTUNITIESIN ANUNEQUALWORLD

2. OVERCOMING “MIDDLE-INCOME TRAP”

3. MAKING GROWTH GREENER

© European Bank for Reconstruction and Development

EBRD regions: Growth, %

United States: Growth, %

GDP per capita and emissions per unit of GDP in 2013

Greenhouse gas emissions per US dollar of GDP

Greenhouse gas emissions per capita

I. Beyond the middle-income trap

II. Firm dynamics and productivity

III. Infrastructure and growth

IV. Green growth

VI. Structural reforms

© European Bank for Reconstruction and Development

Low → middle incomes

Middle → high incomes

Hence growth of middle-income countries = transition to a different set of political and

May be hard to accomplish, hence “the middle-income trap”

Decomposition of sources of growth, 1998-2008, % per annum

Decomposition of sources of growth, 2008-14, % per annum

Average annual growth in capital stock, 2008-14

Cumulative outperformance and TFP in South Korea

Determinants of growth out / under performances since 1995: Shapley decomposition

FIRM DYNAMICS AND PRODUCTIVITY

© European Bank for Reconstruction and Development

Change in patents granted and per capita income, 2002-15

Productivity levels by firm size (micro = 100)

Estimated average annual TFP growth, 1995-2011, depending on initial TFP

Average annual TFP growth, 1995-2011, depending on initial TFP

Average annual job creation, 2002-2013, depending on initial TFP

Average annual job creation, 2002-2013, depending on initial TFP

© European Bank for Reconstruction and Development

Time savings and change in regional employment, 2006-14

EMISSIONS PER US$ OF GDP IN

© European Bank for Reconstruction and Development

Greenhouse gas emissions per US dollar of GDP

Fossil-fuel subsidies, 2013, % of GDP

Change in energy use in response to better management practices

• There is no single silver bullet and no one-size-fits-all solution

• EBRD countries should be able to complete the transition to market economy

• Through strengthening their institutions

© European Bank for Reconstruction and Development

Assessment of transition qualities

Competitive Well-governed Green Inclusive Resilient Integrated

•Market •National-level •Mitigation of •Gender equality •Financial •Openness to

Share of positive/negative developments in total number of developments tracked

© European Bank for Reconstruction and Development

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