“The competitiveness of CEEin a global context“

Marianne Kager, BA-CA Chief EconomistJulia Wörz, WIIW

29 March 2006

2

Fast growth in productivity

Over the past decade, the new EU member states from Central Eastern Europe (NMS) increased productivity by an average 4% per year (measured as GDP per capita) compared with only 2% for the EU-15 and 3% for the Asian tiger economies1.

The increase was faster only in China (8%).

The NMS move away from cheap selling.

1 Tiger 1 countries = Hong Kong, Korea, SingaporeTiger 2 countries = Indonesia, Malaysia, Philippines, Thailand

3

The NMS gain market share and price setting power in …

Tiger 2advancedOECD

EU 15

Tiger 1

India

ChinaMexico

Turkey

NMS

Candidates

-0.4

-0.3-0.2-0.1

0

0.10.20.30.4

0.50.6

-6 -4 -2 0 2 4 6

Change in market share

Cha

nge

in im

port

pric

ere

lativ

e to

EU

-15

aver

age

… manufacturing

4

The NMS gain markets and price setting powerfaster then anyone else in …

… medium-high tech industries

Tiger 2

advancedOECD

EU 15

Tiger 1

IndiaChina

Mexico

Turkey

NMS

Candidates

-0.05

0

0.05

0.1

0.15

0.2

0.25

-4 -3 -2 -1 0 1 2 3 4

Change in market share

Cha

nge

in im

port

pric

ere

lativ

e to

EU

-15

aver

age

5

More high-tech, more quality, a hub for the automotive industry

The NMS increasingly produce more high-tech and higher value added products.

They increasingly compete on quality.

The main advantages of the CEE countries are in engineering, including the automotive industry and machinery.

6

From relatively low tech to ...

0

0.5

1

1.5

2

2.5

3

3.5

EU15 Adv OECD NMS Cand Tur, Mex Tigers 1 Tigers 2 China India

low medium-low medium-high highRelative market shares in EU15 by industry groupings, 1995-1997

7

... significantly more high-tech

Relative market shares in EU15 by industry groupings, 2002-2004

0

0.5

1

1.5

2

2.5

3

EU15 Adv OECD NMS Cand Tur, Mex Tigers 1 Tigers 2 China India

low medium-low medium-high high

8

CEE – a strong European industry basis

Western Europe will retain its advantage in business services.

Moving towards more sophistication and quality will further strengthen the position of CEE as a basis for industrial activities.

9

FDI play a major role in the integration and catching-up process

0

10

20

30

40

50

60

EU 15 AdvancedOECD

NMS 8 Candidates Turkey Mexico 1st Tigers 2nd Tigers China India

FDI i

nwar

d st

ock

in %

of G

DP

2000 2004

10

Diminishing goods trade deficit despite currency appreciationand weak demand in major trading partners

-20

-15

-10

-5

0

5

10

15

20

EU15 advanced OECD

NMS Candi-dates

Turkey Mexico Tiger 1 Tiger 2 China India

in %

of G

DP

1999 2004Goods Balance

11

Decreasing services surplus reflects integration into European production networks

-5-4-3-2-10123456

EU15 advanced OECD

NMS Candi-dates

Turkey Mexico Tiger 1 Tiger 2 China India

in %

of G

DP

1999 2004Services Balance

12

Trade integration with EU15 has increased sharply

0

50

100

150

200

250

EU 15 USA Japan

USD

bn

adv. OECD Turkey, Mexico Eastern Europe dynamic Asia1990

050

100150200250300350400

EU 15 USA Japan

USD

bn

adv. OECD Turkey, Mexico Eastern Europe dynamic Asia2004

Manufacturing imports excluding intra-advanced EU-trade

13

Manufacturing

-5

-4

-3

-2

-1

0

1

2

3

4

EU11 AdvancedOECD

IRL Cohesion NMS 8 Candidates Turkey Tigers 1 Tigers 2 China India

1995-2004

Increasing presence on the EU15 market

Change in market shares in %pts

14

Market share gains less dynamic since 2000

Manufacturing

-5

-4

-3

-2

-1

0

1

2

EU11 AdvancedOECD

IRL Cohesion NMS 8 Candidates Turkey Tigers 1 Tigers 2 China India

1995-2000 2000-2004

Change in market shares in %pts

15

Low tech industries

-5

-4

-3

-2

-1

0

1

2

3

EU 11 AdvancedOECD

Ireland Cohesion NMS 8 Candi-dates

Turkey Tigers 1 Tigers 2 China India

1995-2000 2000-2004

... especially in low tech industries

Change in market shares in %pts

18

High tech industries

-8

-6

-4

-2

0

2

4

6

EU 11 AdvancedOECD

Ireland Cohesion NMS 8 Candi-dates

Turkey Tigers 1 Tigers 2 China India

1995-2000 2000-2004

Strong gains in high tech industries

Change in market shares in %pts

19

The NMS rank high on infrastructure indicators

Rank Infrastructure Ease of doing business

Economic freedom,

institutions, corruption

1 Advanced OECD Advanced OECD Advanced OECD2 EU 15 1st Tigers 1st Tigers3 1st Tigers EU 15 EU 154 NMS 8 NMS 8 Mexico5 CC-3 Turkey NMS 86 Turkey CC -3 2nd Tigers7 2nd Tigers Mexico CC-38 Mexico China Turkey9 China 2nd Tigers China

10 India India India

20

The gap between the EU-15 and the NMS in the ease of doing business is relatively small ...

0

10

20

30

40

50

60

70

80

EU 15 AdvancedOECD

NMS 8 Candi-dates

Turkey Mexico Tiger 1 Tiger 2 China India

num

ber o

f day

s

0

1

2

345

67

8

Inve

stor

Pro

tect

ion

Inde

x

Start business Time for Export Investor Protection Index

21

... but more needs to be done when it comes to corruption and quality of institutions

0

1

2

3

4

5

6

EU 15 AdvancedOECD

NMS 8 Candi-dates

Turkey Mexico Tiger 1 Tiger 2 China India

Her

itage

Fou

ndat

ion

Inde

x

0

1

2

345

67

8

Cor

rupt

ion

Inde

x

Economic Freedom Trade Freedom Corruption Index

22

The successful and speedy process of structural catching-up in the NMS is testimony that the CEECs have successfully embarked upon a cumulative developmental process and are – so far – successfully facing the competition from other catching-up regions.

“The competitiveness of CEEin a global context“

Marianne Kager, BA-CA Chief EconomistJulia Wörz, WIIW

29 March 2006