Current and future sources of growth in Central and Eastern Europe

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1 Jan Hagemejer* Narodowy Bank Polski Current and future sources of growth in Central and Eastern Europe * The views presented here are mine and do not necessarily reflect the official position of the NBP

2 Introduction Relative GDP per capita PPP (EU15=100) Substantial convergence of Poland and other CEE countries have substantially converged to the EU average The dominant role of capital deepening and TFP due to influx of foreign direct invesment as well as knowledge spillovers and technology adoption Private consumption and investment have played crucial role in catching-up process in CEE countries The role of exports and global value chains in GDP/value added growth Future sources of growth Source: NBP s calculations based on Eurostat data

3 Fragmentation: production in CEE has moved further away from final demand Average upstreamness weighted by output Average upstreamness weighted by export Source: NBP s calculations based on WIOD data (Antras et al method). Source: NBP s calculations based on WIOD data (Antras et al method)

4 Vertical specialization: more (intermediate) imports in exports, more imports in final demand Import content of final demand (in %) Import content of gross export (foreign value added in export, in %) Source: NBP s calculations based on WIOD data. Source: NBP s calculations based on WIOD data.

5 Growth in exported value added is mostly driven by exports of intermediate goods Exported value added growth (y/y, average) and its components Source: NBP s calculations based on WIOD data.

6 Non-negligible role of vertical integration in changes in shares in total world exports: offshoring to CEE Change in export share (in p.p.) between 2000 and 2014 Source: NBP s calculations based on WIOD data.

7 Foreign sales have played dominant role in the GDP growth but after the great trade collapse their importance has become heteregonous amongst the CEE economies Value added growth and its components (y/y, average) Source: NBP s calculations based on WIOD data.

8 After the GFC foreign consumption was the most important growth driver of CEE Value added growth and its components (y/y, average) Source: NBP s calculations based on WIOD data.

9 Growth in the exported value added in CEE driven mainly by final demand in UE15 countries and other emerging economies Value added growth and its components (y/y, average) Source: NBP s calculations based on WIOD data.

10 High elasticity of exports to distance: Focus on local markets and price-cost competitiveness Elasticity of partner s share in export to physical distance (in %) Source: NBP s calculations based on WIOD and CEPII data.

11 Possibility of further geographical expansion through GVC Geographical structure of gross exports and exported value added (in %) Source: NBP s calculations based on WIOD data.

12 Smiling curves: low value added per unit of exports (1) in CEE Source: Hagemejer, 2016.

13 Smiling curves: low value added per unit of exports in CEE (2) Attract larger parts of GVC. Improve VA through process innovations. Build own GVCs. Source: Hagemejer, 2016.

14 Low firm productivity: still room for technology spillovers LATVIA POLAND ESTONIA CZECHREPUBLIC CROATIA SLOVAKIA SPAIN ITALY FINLAND FRANCE BELGIUM DENMARK CROATIA LATVIA ESTONIA CZECHREPUBLIC POLAND SLOVAKIA SPAIN ITALY FINLAND BELGIUM FRANCE DENMARK 0 0 Productivity Productivity Labor productivity: all non-financial enterprises Labor productivity: manufacturing Source: CompNet, simple average of firm level productivity, sample with L>20

15 ITA HUN DEU CZE SVK PRT AUT GRC ESP EST FIN LVA SVN POL FRA BEL NLD DNK SWE LUX GBR LTU Tremendous progress in educational attainment: comparative advantage in services exports Share of tertiary education: yrs old vs yrs old 3 2,5 2 1,5 1 0,5 Exports of services (% of GDP, Poland) Total services (right axis) Transportation Source: OECD 25_34 55_64 Travel Computer and information services Construction services Other business services

16 Other considerations Demographics, shrinking labor supply Automatisation/robotisation vs routine job content Rise of protectionism

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