Competitiveness of Bulgaria

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Competitiveness 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
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Outline

• 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

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Competitiveness 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

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Competitiveness 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

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Aspects 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

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Competitiveness and Convergence
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Aspects 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

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Competitiveness and Convergence
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Price 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

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Competitiveness and Convergence
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Competitiveness and Convergence
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The 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

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Key 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

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Key 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

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Key Indicators the Real Sector (1)
The Bulgarian experience
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Key Indicators the Real Sector (2)
The Bulgarian experience
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Key Indicators Labour Market (1)
The Bulgarian experience
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Key Indicators Labour Market (2)
The Bulgarian experience
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Key Indicators Energy Efficiency
The Bulgarian experience
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Key Indicators the External Sector (1)
The Bulgarian experience
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Key Indicators the External Sector (2)
The Bulgarian experience
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Key Indicators External Sector (3)
The Bulgarian experience
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Key Indicators External Sector (4)
The Bulgarian experience
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Key Indicators External Sector (5)
The Bulgarian experience
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Key Indicators External Sector (6)
The Bulgarian experience
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Other Indicators of Competitiveness Survey-based
measures
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Convergence in productivity the longer term
perspective (1)
The Bulgarian experience
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Convergence in productivity the longer term
perspective (2)
The Bulgarian experience
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Driving 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)

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Interpretation 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

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Challenges 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.

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Challenges 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

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Challenges of Real and Nominal Convergence (3)
Challenges of real and nominal convergence
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Challenges 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

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Conclusion

• 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

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Appendix
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