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The Growth of Market and Business Opportunities
in Central and Eastern Europe (BUS
791) Competitiveness of EU-CEE Economies Professor
Tibor Palánkai Corvinus University of Budapest
2008. Spring
Prof. Palánkai Tibor
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Theoretical frameworks

• For companies or sectors question arise about
  competitiveness (different levels of costs or
  quality of products), when entering open markets.
  
• Free markets increase efficiency, through the
  exploitation of economies of scale, and
  competition.
• In competition, producers that can deliver more
  modern products at lower cost gain, while the
  less efficient, if they cannot adapt, are
  squeezed out of the market.
• It leads to better satisfaction of consumers
  needs.

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Theoretical frameworks

• Question arises, how can competitiveness be
  interpreted, and how can it be measured?
• Discussions about micro-level (level of costs,
  quality of products, etc.) competitiveness, while
  at macro-level often questioned. We share the
  view, competitiveness is a complex indicator.
• Countries compete not only with their
  techno-economic structures (technologies,
  products, innovations, company managements etc.),
  but also with their socio-economic and
  institutional systems.
• While the former is rather related to
  micro-economic spheres, the later could be called
  as a certain sort of macro-competitiveness.

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Definitions of Competitiveness

• Attila Chikán defines competitiveness in both
  micro- and macro-economic contexts.
• We may consider enterprises competitive if they
  are able to transform available resources into a
  profit flow while complying with the social
  values of the environment in which they operate
  and if they are able to perceive and manage
  external and internal changes that influence
  their long-run operation in order to maintain
  their profitability, ensuring long-term
  survival.

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Definitions of Competitiveness

• Chikans definition of macro-competitiveness
• The competitiveness of a national economy is the
  ability of a nation to create, produce,
  distribute and provide products and services that
  meet the requirements of international trade so
  that in the process the return on its own factors
  of production increases.

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Complex Definition of Competitiveness

• On micro-level
• Cost levels
• Quality of products (Good enough better than
  Best (Clayton Cristensen) (purchasing power)
• Level of productivity of the given sector or
  products
• Innovation, new technologies and products

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Complex Definition of Competitiveness

• On micro-level
• Comparative cost advantages (relation of wages
  and productivity, availability of resources and
  services and their cost level etc.)
• Efficiency of management and marketing
• Subjective factors (quality of management,
  devotion of employees to the firm, relations
  between management and trade unions, competition
  conscious trade unions.

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Complex Definition of Competitiveness

• On macro level
• Technical and structural factors,
• Macro-performances,
• Infrastructures,
• Institutional and political (economic policy)
  factors,
• Subjective factors.

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Complex Definition of Competitiveness

• Technical and structural factors
  (macro-competitiveness)
• Development levels (per capita GDP, general
  features of economic structures)
• Productivity levels, their relation to increase
  of real wages, productivity and efficiency of
  service sectors
• RD (absolute, per capita levels, relation to
  GDP)
• Position of high-tech sectors (growth, share in
  GDP, in export and import in high-tech balance
  of trade)
• Share of sensitive products (agriculture,
  steel, textiles or chemicals) in foreign trade
• Intra-sector trade, trade balances.

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Complex Definition of Competitiveness

• Macro-performances
• Economic growth
• Inflation
• Employment
• Balance of budget and payments, double-deficit
• Indebtedness
• Exchange rate stability
• Change of terms of trade.

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Complex Definition of Competitiveness

• Infrastructures
• State of human capital (education and training,
  education costs in GDP, training level of
  population)
• State of infrastructure (physical and human)
• Communication and information technologies (use
  of internet in daily life, in trade, or in public
  services).

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Complex Definition of Competitiveness

• Institutional and political (economic policy)
  factors
• Level, character and efficiency of economic
  regulation (economic policies)
• Sate and development of capital markets,
  availability of venture or risk capital
• Capacity of attraction of FDI
• State of labour markets (labour mobility,
  flexibility of wages, level of unemployment, and
  flexibility of regulation of labour markets)
• Legal factors of competitiveness (fight against
  black economy, local taxation, rapidity of legal
  procedures, measures against corruption etc).

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Complex Definition of Competitiveness

• Subjective factors
• Moral factors (moral acceptance of black economy,
  neutrality of legal procedures, corruption etc.)
• Political factors (credibility of politicians,
  country confidence, openness of the society,
  accountability, trust in internal stability etc.)

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Competitiveness and Development Levels

• The free trade is not equally favourable for
  countries with different levels of development.
  In latter case, due to increasingly sharp
  competition large numbers of producers may go
  bankrupt, with the result that balance of trade
  and payments may be severely impaired.
• All can have negative macro consequences for
  domestic employment, the budget, and ultimately
  economic growth. All this may reflect that some
  partners are not mature for integration.

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Competitiveness and Integration Forms

• Choice of integration forms should reflect state
  of competitiveness
• In normal case, effects of free trade should be a
  positive-sum game, beneficial for almost every
  partner, although the distribution of the
  benefits will not necessarily be equal.
• In extreme cases, free trade solution has to be
  abandoned, or the asymmetries (unilateral
  liberalisation) or compensations (financial aid)
  must be built into the trade liberalization.

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State of Competitiveness on EU Level

• Competitiveness in focus of EC from the late
  1970s. Losing ground in world markets - in
  high-tech industries.
• Contradictory developments - Closing gap with
  USA Between 1970-1990, productivity growth of EU
  countries annually 2,4, US only 1,3.Between
  1990-2000, EU 1,7, US 1,8. Productivity of
  euro-zone (output per man-hour) is 94 of that of
  US, but Netherlands and Belgium above the
  American level. According to Lisbon Score Board,
  in terms of information society and
  sustainability and social cohesion Scandinavian
  countries are ahead of US. Large European
  Transnationals equal with US.
• Real challenges coming from Asia.

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Structural Problems in EU Countries

• Structural Problems hitting Europe
• Europe is lagging behind of US in terms of
  economic growth (US 3-3,5, EU2-2,5), and
  unemployment (US 4,5, EU 9-10). In US active
  population was 75 of total, in EU only 60-65.
• In RD EU average 1.8, while Japan 2.9 and US
  2.8.
• While EU has nearly equal positions in
  manufacturing, it is behind US in terms of
  competitiveness of service sectors
  (non-tradable). In Europe, inefficient, large, in
  many cases state owned companies in
  telecommunication (Post), air traffic or
  fragmented banking sector. Shortage of risk or
  venture capital.

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Structural Problems in EU Countries

• Structural Problems as institutional and
  regulation questions
• Inflexibility of capital and labour markets. Wage
  inflexibilities, high social costs, high job
  security, lower mobility.
• Inefficient welfare state, which call for
  reforms. Social transfers in EU are 50 above of
  US. Problems of ageing population in Europe.
• Higher tax burdens in 2000, in USA taxes 30 of
  GDP (in Japan 27), while in EU on average 42
  (Sweden 54, Denmark 49).

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Actions for Improving Competitiveness

• Responses
• Drastic restructuring and modernisation on
  company levels transnationalisation of company
  structures.
• Country level focus on structural problems and
  related structural reforms. Contradictory
  progress Scandinavian countries, Ireland or UK
  ahead, while France, Italy or Germany (lately
  making progress) lagging behind.
• Steps to improve competitiveness on EC/EU level.

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  Actions on EU level

• Single European Act (1987) - creation of single
  market, as liberalisation response,
• Research and development was raised to level of
  common policies, and to promote the development
  of hightech sectors, the Framework Programs were
  launched.
• Lisbon Agenda, in April 2000, turning point, with
  objective of transforming EU into the most
  competitive economy on the global markets till
  2010.

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Institutions analysing competitiveness

• World Economic Forum (WEF, OECD, UNIDO, World
  Bank).
• WEF Growth Competitiveness Index (GCI) ( for 102
  countries120 parameters). Synthetic Index of
  bellow
• Macro-economic Environment (MEI) (Economic
  stability, debt, functioning of banking etc.)
• Public Institutions Index (PII) (Fight against
  corruption, legal guarantees etc.)
• Technology Index (TI) (Innovations, granted
  patents etc.)
• Deutsche Bank Research Convergence Network (16
  parameters)

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Factors contributing to competitiveness

1. Research intensity, quality, innovation,
2. Development of human resources (lifelong
   learning, training, best universities),
3. ICT Investments (ICT expenditures, use of
   Internet),
4. Business reorganization (size, management),
5. Access to financing (stock market capitalisation
   (Access to venture capital).

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State of competitiveness of CEE

• Country GCI MEI PII TI
• Finland 1 2 2
  2
• US 2 14 17
  1
• UK 15 12 12
  16
• Malta 19 29 18 17
  
• Estonia 22 34 28 10
• Slovenia 31 37 35 24
• Hungary 33 38 33 32
• Greece 35 33 42 30
  
• Czech Republic 39 39 41 21
  (WEF)

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State of competitiveness of CEE

• CEEs competitiveness has, substantially,
  improved in recent years.
• CEE countries have climbed up spectacularly on
  competitiveness lists, and now they rank in the
  middle field on the global economy.
• CEE between 25th and 35th place in these rankings
  with changing places.
• Analyses indicate that CE has good chance to
  close gap with developed EU in 15-20 years.

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Expectations towards New members

• By response to competitive pressure EU defined
  competitiveness indirectly as a criterion for
  accession.
• EU interpretations
• New members should be capable of adopting the
  EUs rules on competition and its competition
  policy.
• It means competition-friendly economic policy and
  a stable economic environment.
• Level of development of the factor markets, in
  relation to both capital and labour.
• In the EU literature linked strongly with
  exchange rate development.

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Exchange-rate stability and competitiveness

• A deteriorating balance of trade reflects weak
  competitiveness, while a trade surplus indicates
  that the economy is competitive.
• Then the balance of trade and payments has a
  large-scale effect on the exchange rate.
• Exchange rate development and exchange rate
  policy are important tools of competition, but
  also an important factor in price stability.
• No accident that the Maastricht criteria require
  that the given country should be capable of
  maintaining its currency exchange rate unaltered
  for two years.

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Exchange-rate stability and competitiveness

• Doubts about balance of payments and exchange
  rate can accurately express competitiveness.
• Competitiveness can be affected by structural and
  trade policy factors (e.g. world market price
  movements, or protectionist measures on the part
  of partner countries).
• Exchange rates affected by external world market
  processes (e.g. oil price explosions).
• Balance of payments determined by international
  movements of capital and speculation.

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Sources of competitiveness of CEE

•  Comparative wage cost advantages. The Hungarian
  productivity is 58 of the EU average, while the
  wages are only 40 of it. (2002). Productivity as
  output per worker employed in manufacturing rose
  between 1991 and 2000 2.2 times. Real wages rose
  only 30.
• Relatively good quality and low cost of their
  human capital, labour is under-priced.
• Average productivity of New Members amounts to
  about 2/5 (40) of old EU, average monthly wages
  in manufacturing in the old EU are 7-12 times
  higher.

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State of Competitiveness of CEE

• CEE are still far away of the knowledge-based
  society. In Hungary RD fell from 2 to 0.5 in
  early 1990s. Since recovery it is on 1 level,
  but still far behind of 2 of EU.
• Some multinational set up research bases in CE
  (Nokia in Hungary).
• Behind in use of Internet, relatively high
  communication costs (in Hungary about 25-30
  above EU average), relative lagging behind in
  infrastructure, high costs of local capital.

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CEE Performance

• CEE countries have produced diverging performance
  in stabilization of their economies.
• CE countries achieved the best progress, returned
  to pre-transformation level by end of 1990s.
• Others (Bulgaria, Croatia, Romania) followed
  later, Baltic countries had to cope with Soviet
  inheritances.
• Unemployment meant a high social cost of
  transformation, by 2005, only Poland (Slovakia
  and Croatia on lesser extent) pose a problem.
  Convergence also in inflation.
• By entering EU, all countries completed
  stabilization of their economies, and they can
  meet or are close to meet Maastricht criteria. 

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Enlargement and Competitiveness

• With full membership new competitive conditions
• Liberalization extended to agriculture,
  contradictory results.
• By entering single market, asymmetry
  in non-tariff, informal trade barriers disappear.
• In single market, new members will be
  able to use their cost advantages in service
  sectors (health, technical design, education,
  etc., but Polish plumber)
• Greater budget transfers for
  compensations.
• Opening to global markets (CET lower than
  national tariffs)
• Unions competitiveness on global markets may
  improve.

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END

• THANK YOU

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Prof. Palánkai Tibor