Comment Rethinking European growth ARC 2011: New growth models for Europe Restoring the Lustre of the European Economic Model Indermit Gill and Martin Raiser with Andrea Dall’Olio, Truman Packard, Kaspar Richter, Naotaka Sugawara, Reinhilde Veugelers, Juan Zalduendo and others Copyright rests with the author. All rights reserved. Work in Progress § Question One What is the European growth model? 2 Principal Components Trade Finance Enterprise Innovation Labor Government Work in Progress – Preliminary Findings 3 Europe’s Growth Agenda? Government Demographic Shifts Labor Innovation Productivity Growth Enterprise Finance Modern Services Trade Work in Progress – Preliminary Findings 4 The European Growth Model: Trade More open Trade Openness, % of GDP, average of 2005-2009 120 100 80 60 40 20 0 EFTA EU15 EU EU12 Acc. E.Prtn. Periph. States States N.Amr. USA Ocea. JPN E.Asia LAC Africa BRA CHN IND RUS Source: World Development Indicators. Work in Progress – Preliminary Findings 5 The European Growth Model: Finance With Capital Flowing the Right Way Capital inflows (current account deficits) and per capita GDP growth, 1997-2008 Source: World Bank Staff Calculations, based on IMF data.. Note: Each dot represents a four-year average during the period covered: 1997-2000, 2001-2004, and 2005-2008. Work in Progress – Preliminary Findings 6 The European Growth Model: Enterprise Businesses that seem to have more social responsibilities Principal Component Analysis Index of Doing Business ratings, 2009 88 86 78 74 89 82 73 69 62 69 66 60 57 58 59 56 47 47 39 EFTA EU15 EU15 EU15 EU15 EU EU12 Acc. E.Prtn.N.Amr. USA JPN E.Asia LAC Africa BRA CHN IND RUS North Conti SouthPeriph. StatesStates Ocea. Source: World Bank Doing Business database. Notes: Averages computed using principal component analysis . Kosovo, Malta and Liechtenstein are not covered by Doing Business, and are not included. Albania and Venezuela are not included because closing business rating is not available for them. Work in Progress – Preliminary Findings 7 The European Growth Model: Innovation Governments that see R&D as a public responsibility Research and Development Expenditure, Share of GDP, and Share Public, 2000-2009 R&D Expenditure, % of GDP 4 3 2 1 0 EFTA EU15 EU EU12 Periph. Acc. E.Prtn. States States N.Amr. USA Ocea. JPN E.Asia LAC Africa BRA CHN IND RUS E.Asia LAC Africa BRA CHN IND RUS % of R&D Expenditure Financed by Government 80 60 40 20 0 EFTA EU15 EU EU12 Periph. Acc. E.Prtn. States States N.Amr. USA Ocea. JPN Source: UNESCO. Work in Progress – Preliminary Findings 8 The European Growth Model: Labor People get to work less Labor Utilization in Europe and Other Countries, average of 2005-2009 Labor Force Participation Rate, Aged 15-64, % 82.4 EFTA 81.2 CHN 76.4 N.Amr. Ocea. 75.2 USA 73.3 BRA 72.8 71.9 71.6 71.0 JPN E.Asia EU15 RUS 69.5 67.5 EU E.Prtn. Periph. States 67.1 66.9 62.9 60.9 54.6 LAC EU12 Acc. States IND Africa 42.8 39.9 39.8 37.8 37.5 RUS Africa EU12 44.2 43.3 41.6 36.5 Africa RUS EU12 Acc. States Labor Force Participation Rate, Aged 15-24, % 69.1 EFTA 65.1 N.Amr. Ocea. 63.6 BRA 63.3 CHN 59.8 USA 48.9 48.9 47.9 45.4 45.0 EU15 E.Asia LAC IND JPN 55.0 52.0 50.8 44.1 EU Acc. E.Prtn. Periph. States States Labor Force Participation Rate, Aged 55-64, % 73.6 EFTA 66.8 JPN 62.6 USA 60.7 60.2 N.Amr. E.Asia Ocea. 57.4 LAC 56.6 CHN BRA IND 48.4 47.0 E.Prtn. EU EU15 States Periph. Source: ILO. Work in Progress – Preliminary Findings 9 The European Growth Model: Government With governments that are more redistributive Gini Coefficients of Income Inequality before and after Taxes and Transfers, mid-2000s Work in Progress – Preliminary Findings 10 § Question Two Does Europe need a new growth model? 11 Europe—Post-War Growth Superstar Relentless growth in the United States, a growth miracle in Europe, and resurgence in Asia, 1820-2008 Western Europe Southern Europe Eastern Europe (Former) Soviet Union United States Japan East Asia Latin America 1820-70 1.0 0.6 0.6 0.6 1.3 0.2 -0.1 0.0 1870-1913 1.3 1.0 1.4 1.1 1.8 1.5 0.8 1.9 1913-50 0.8 0.4 0.6 1.8 1.6 0.9 -0.2 1.4 1950-73 3.9 4.7 3.8 3.3 2.5 8.1 2.4 2.6 1973-90 1.9 2.3 0.5 0.8 2.0 3.0 0.6 0.7 1990-2008 1.6 2.3 2.6 0.8 1.7 1.1 3.0 1.8 Year Note: Regional aggregates are population weighted. Western Europe is used here to refer to Austria, Belgium, Denmark, Finland, France, West Germany, Italy, the Netherlands, Norway, Sweden, Switzerland, and the United Kingdom. Eastern Europe refers to Albania, Bulgaria, Czechoslovakia, Hungary, Poland, Romania, and Yugoslavia. Southern Europe refers to Greece, Ireland, Spain, and Turkey. After 1989, West Germany becomes Germany and the data reflect the newly independent countries in Eastern Europe that emerge from Czechoslovakia and Yugoslavia. Source: Penn World Tables 6.3, World Bank staff. Work in Progress – Preliminary Findings 12 Europe—The Convergence Machine Living standards have converged in Europe, not much elsewhere Consumption levels in 1970 and growth between 1970 and 2009 Source: Penn World Tables 6.3, World Bank staff. Work in Progress – Preliminary Findings 13 Europe—a big part of the world economy Europe’s share in world GDP has been going down, but only in PPP terms GDP shares, percent, 2000 and 2010 % of World Total GDP GDP, PPP 2000 2010 2000 2010 Europe 45 EU27 EU15 EU12 EFTA EU Candidates Eastern Partnership 28.8 26.4 25.1 1.3 1.3 1.0 0.2 29.1 25.8 23.8 2.0 1.5 1.4 0.4 28.3 25.0 22.6 2.5 0.9 1.7 0.6 24.3 20.8 18.3 2.6 0.9 1.8 0.8 USA 30.7 23.1 23.4 19.1 East Asia Japan China 22.7 14.5 3.7 23.2 8.7 9.3 21.2 7.7 7.1 25.7 5.7 13.2 2.0 1.4 0.8 3.3 2.7 2.3 2.9 3.8 2.4 2.8 5.5 3.7 Sum of Countries Above 86.5 83.8 81.9 81.1 World GDP (trillions) 32.2 63.0 42.3 76.3 Brazil India Russian Federation Source: WDI. Work in Progress – Preliminary Findings 14 But productivity is lagging Europe’s leaders are slowing down EU15 Labor Productivity, relative to the United States (=100 left panel) and Japan (=100 right panel) United States Japan 160 140 120 100 80 60 1970 1980 1990 2000 2010 1970 1980 1990 2000 2010 Source: OECD. Work in Progress – Preliminary Findings 15 Populations are aging By 2060, Europe’s labor force might shrink by 50 million Population Projection, 2010-2050 Working-Age Population (2010 = 0) Percentage of Population Aged 65 and Older 40 40 20 30 0 20 -20 10 -40 0 2010 2020 2030 EU15 2040 EU12 Source: US Census, International Data Base. China Brazil 2050 2010 Japan India 2020 2030 2040 2050 United States Russian Federation Work in Progress – Preliminary Findings 16 And public debt has been rising Government debt rose during the crisis, except in non-European emerging economies Gross Public Debt in 2008 and 2010 Source: World Bank staff, based on IMF WEO. Work in Progress – Preliminary Findings 17 Main Questions Trade: Is Europe taking advantage of enlargement? Finance: Are capital flows in Europe too big? Enterprise: Are Europe’s enterprises overregulated? Innovation: Are Europe’s fundamentals flawed? Labor: Is labor making Europe uncompetitive? Government: Are governments in Europe too big? Work in Progress – Preliminary Findings 18 § Question Three Is Europe taking advantage of enlargement? 19 Trade: Western Europe is trading more with the East New member states have become more important trade partners for the EU15 EU15 trade with NMS as share of all trade, 1996-2008 Trade with NMS as a % of Trade with Whole World 3 4 5 6 7 EU15 trade share with NMS (All Products) 1995 2000 2005 2010 Year Exports Imports Work in Progress – Preliminary Findings 20 Trade is becoming more sophisticated New member states’ exports to EU15 have become more sophisticated Hausmann-Hwang measure of export sophistication, 1996-2008 I_Expy 14000 14500 15000 15500 16000 16500 Sophistication of Intermediates Exports 1995 2000 NMS2004 to EU15 World to EU15 Year 2005 2010 NMS2004 to World Work in Progress – Preliminary Findings 21 In modern services, candidate countries have been slipping Modern—more tradable—services are growing faster almost everywhere Annual growth in modern and traditional services, 2000-08 Source: Chapter 2 in Golden Growth Work in Progress – Preliminary Findings 22 § Question Four Are capital flows in Europe too large and fast? 23 Largest financial flows, more of it FDI The Biggest Capital Flows to Emerging Markets in History (% GDP; period average of group median values) 2001-2004 2005-2008 12 9 6 3 0 -3 -6 -9 EU15 EU Coh. FDI EU10 EU Cand. EU Neigh. East Asia Portfolio Other LAC EU15 Total Capital Flows EU Coh. EU10 EU Cand. EU Neigh. East Asia CA Balance LAC FX Reserves, change Source: IMF World Economic Outlook and authors’ calculations. “EU coh.” refers to the ‘old’ EU cohesion countries. Work in Progress – Preliminary Findings 24 Sizeable financial FDI is a European phenomenon Emerging Europe’s Most Unique Feature: Foreign Banks (% of banking system assets; median values) EU Cohesion EU10 EU Candidates 100 50 0 1997 2001 2005 2008 EU Neighborhood 1997 2001 2005 2008 East Asia 1997 2001 2005 2008 2001 2005 2008 LAC 100 50 0 1997 2001 2005 2008 1997 2001 2005 2008 1997 Source: Claessens, S., and N. van Horen (2011); emerging Europe updated based on EBRD transition indicators for 2006 onwards. Other emerging markets have been kept constant at their 2005 level. Work in Progress – Preliminary Findings 25 Financial Flows in Europe have been more stable Foreign Finance is Stabler the Closer a Country is to the EU (Banking flows to emerging markets during crises, quarterly data; t = 100) 110 100 90 80 70 60 50 40 30 20 t-12 t-10 t-8 t-6 t-4 t-2 EU10 (September 2008) EU Neighborhood (September 2008) t t+2 t+4 t+6 t+8 t+10 t+12 EU Candidates (September 2008) Asian Crisis (June 1997) Source: BIS Locational Statistics and World bank. Note: Based on quarterly data as of March 2011; exchange rate adjusted values. Crisis timing date is defined in parentheses. Asian crisis countries include Indonesia, Korea, Malaysia, Philippines and Thailand. Work in Progress – Preliminary Findings 26 Financial flows varied Emerging Europe has Lower Levels of Public and Private Debt (Aggregate exposure of the public and private sectors, % of GDP, 2004 and 2009) Public Sector Debt, 2004 to 2009 EU10 EU Candidates EU Neighborhood 100 80 HUN 60 ALB LAC (2009) 40 EU10 20 EU Cohesion POL Asia (2009) SVK CZE SVN LVA LAC (2009) EU Candidates LTU ROM EU Cohesion TUR LAC (2009) ARM Asia (2009) BIH HRV EU Cohesion Asia (2009) GEO UKR EU Neighborhood MKD BGR EST 0 0 100 200 0 100 200 0 100 200 Total Private Sector Credit, 2004 to 2009 Source: Eurostat, World Bank calculations. Notes: Arrows begin in 2004 and end in 2009. Work in Progress – Preliminary Findings 27 Household debt has risen, but is lower than EU15 Household Indebtedness Rose, but Remains Well Below EU15 Levels (Total household debt, % of GDP, 2000 to 2009) EU10 EU Candidates EU Neighborhood 60 60 60 50 50 50 40 40 40 30 30 30 20 20 20 10 10 10 0 0 2000 2003 BGR POL CZE ROM 2006 EST SVK HUN SVN 2009 LTU EU15 LVA 0 2000 2003 ALB MNE BIH SRB 2006 HRV TUR 2009 MKD EU15 2000 2003 ARM MDA AZE UKR 2006 BLR EU15 2009 GEO Source: EBRD Transition Indicators, European Credit Institute, and authors’ calculations. Note: Includes all types of household debt. Work in Progress – Preliminary Findings 28 § Question Five Are enterprises in Europe over-regulated? 29 European Enterprises have largely delivered European enterprises have done well since the mid 1990s Growth performance of European sub-regions and benchmark countries, 1995 to 2009 Employment Productivity Participation 95 * EFTA 74 EU15 EU12 Neighboring 33 USA 70 Japan 2.0 59 4.4 2.9 51 17 2.8 41 4.3 22 56 0.6 7.8 3.8 3.2 13 10 21 22 11 9 13 67 53 19 22 0.1 35 11 24 0.2 33 24 32 4.6 -1.5 28 China 75 1.3 39 60 50 27 57 2.4 40 35 1.6 2.6 51 36 15 1.1 1.3 47 Brazil Russia 7.6 70 0.0 LAC 34 30 1.0 66 East Asia 3.1 49 42 54 2.5 Goods/SVC Export / GDP ‘09 36 62 1.1 1.1 Goods/SVC Export / GDP ‘95 61 1.0 2.3 N.America&Occ. PPP-adjusted level ’09; $K 1.7 2.4 52 31 India 1.3 48 Accession Annual Growth 95-09 ** 1.5 57 Perip Africa Annual Growth 95-09 ** Export 23 30 25 7 11 20 11 27 20 29 28 Source: World Bank staff, based on WDI and ILO KILM Work in Progress – Preliminary Findings 30 Employment, productivity and exports The East giving chase, the South lagging in productivity growth and exports Employment, productivity and exports, 2002-2007 EU-27 Sub-regions EU-15 North Employment growth (annual %; 02-07) EU-15 Continental EU-15 South EU-12 Continental EU-12 South EU-12 North 5.4 1.9 1.3 1.5 2.8 3.3 1.5 7.9 8.7 6.7 Productivity growth (annual %; 02-07) 1.7 2.7 1.8 0.1 60 49 Export over GDP (%; 2007) 46 36 54 42 28 Source: World Bank staff, based on Eurostat, WDI Work in Progress – Preliminary Findings 31 A region of exporters Exporting—Central Europe’s specialty Export share in GDP, 2002 and 2008 2002 2008 EU15-North EU15Continental EU15-South EU12Continental EU12-East EU12-North 58 56 53 47 38 42 39 38 38 34 26 28 Source: World Bank staff, based on World Development Indicators. Work in Progress – Preliminary Findings 32 A region of investors The East has become more attractive to investors, the South less FDI inflows into Europe, all sectors, 1985-2009 Europe total 1,200 FDI inflow 1,000 ($ billion) 800 600 400 200 0 Inflow share among subregions (%) 100% EU15 South 80% EU15 North, Continental, EFTA 60% 40% Accession/ Neighboring 20% 0% 1985 EU12 1990 1995 2000 2005 2009 Source: World Bank staff, based on UNCTAD data. Work in Progress – Preliminary Findings 33 Varying productivity levels—quite normal Productivity levels were lower in the South and lower still in the East Average value added per worker in 2002, thousands of 2005 US$ EU15-North 71 63 60 EU15-Continental 66 EU15-South EU12South EU12-Continental EU12-North 71 61 59 60 63 49 45 36 26 15 16 16 16 22 7 5 9 10 14 GBR SWE DNK FIN DEU FRA NLD BEL AUT ITA ESP GRC PRT POL CZE HUN SVK SVN ROM BGR LTU LVA EST Work in Progress – Preliminary Findings 34 Diverging productivity—not normal The East has been catching up, the south has been falling behind Average productivity growth in EU27, annual rates, 2002-2007 EU15-North EU15-Continental EU15-South EU12South EU12-Continental EU12-North 11.7 9.4 7.6 6.2 5.7 6.0 8.8 8.9 6.4 7.2 4.4 3.8 2.5 0.9 1.7 2.0 1.5 1.2 1.9 0.6 0.1 -0.1 -1.8 GBR SWE DNK FIN DEU FRA NLD BEL AUT ITA ESP GRC PRT POL CZE HUN SVK SVN ROM BGR LTU LVA EST Work in Progress – Preliminary Findings 35 FDI helps make enterprises productive Foreign firm are more productive Productivity 2008 and growth of value added, 2003-2008 Average productivity 2008 1,000 USD per employee Annual value add growth %; 2003-2008 45 Czech Republic 54 26 Poland 7.1 49 12.4 25 Slovenia 5.6 41 10.1 23 Croatia 4.1 34 6.6 22 19 Estonia 2.4 2.9 12 BiH 10.4 17 14.0 17 14 Serbia 10.4 14.3 11 12 Romania Ukraine Domestic Foreign 3.8 4.3 4 5 5.9 2.6 -1.6 3.7 Source: World Bank staff, based on Amadeus Work in Progress – Preliminary Findings 36 Multinational enterprises are more productive In the EU-15, firms with a foreign presence are more productive and grow faster Productivity levels 2008 and growth of value added, 2003 to 2008 Productivity level 1,000 USD per employee; 2008 70 France 3.7 137 47 4.8 -0.9 111 79 3.4 1.0 110 71 2.0 0.9 103 3.5 75 Sweden Finland 3.6 68 Belgium Italy Domestic International 0.9 149 Norway Spain Annual value add growth %; 2003-2008 3.2 102 63 4.4 2.2 87 4.8 Source: World Bank staff, based on Amadeus. Work in Progress – Preliminary Findings 37 What helps enterprise in emerging Europe? Infrastructure, credit, FDI, and regulations improve firm performance in the EU-12 Correlation between country dummies and policy variables in EU-12 countries Skills Credit Inward FDI Outward FDI Business environment Manufacturing Services 0.79 0.76 Infrastructure 0.41 0.33 0.57 0.33 0.40 0.31 trde Entry Operation Institutional 0.74 0.68 empl 0.65 0.58 0.52 0.57 permt tax 0.44 0.36 Source: World Bank staff, based on Amadeus data. Work in Progress – Preliminary Findings 38 What helps enterprise in advanced Europe? FDI (manufacturing) and regulations (services) are the correlates of productivity in the EU-15 Correlation between country dummies and policy variables Manufacturing Services Skills start 0.39 0.49 Infrastructure closing Inward FDI 0.37 property Outward FDI Business environment 0.53 Entry 0.41 Operation Institutional 0.35 trde 0.37 empl 0.39 0.57 permt tax Source: World Bank staff, based on Amadeus Work in Progress – Preliminary Findings 39 § Question Six Are Europe’s innovation fundamentals flawed? 40 Europe has some of the most innovative economies Europe’s leaders invest as much in R&D as the US and Japan 3 R&D Expenditure: Business Public % of GDP 2.5 2 1.5 1 MKD CYP SRB GRC BGR LVA POL ROM SVK LTU TUR MLT HRV EST ITA HUN ESP PRT NLD CZE NOR GBR IRL SVN LUX EU27 BEL FRA ISL DEU AUT DNK CHE SWE FIN 0 IND BRA RUS CHN USA JPN .5 Source: IUS (2010). Work in Progress – Preliminary Findings 41 Europe does less well in R&D-intensive sectors Europe specializes in sectors with medium R&D intensity, the US in high intensity Relative Technological Advantage (RTA) indices by sector Europe US Aerospace & Defense 1.50 1.13 Computer hardware & services 0.08 1.39 Health care equipment & services 0.70 1.86 Internet 0.00 2.54 Pharmaceuticals 1.27 1.16 Semiconductors 0.50 1.72 Software 0.51 2.05 Telecommunications equipment 1.38 1.09 Note: RTA are calculated as the share of the region in total sectoral R&D relative to the share of the region in overall R&D. A RTA value higher than 1 reflects that the region is technology specialized in this Source: Bruegel and World Bank, on the basis of IPTS R&D Scoreboard data Work in Progress – Preliminary Findings 42 Europe’s innovation deficit: Fewer “Yollies” Yollies spend the most on R&D and US Yollies are the most R&D intensive 10 8 6 4 2 0 Europe USA All Firms JPN RoW Yollies World Ollies Source: Bruegel and World Bank, on the basis of IPTS R&D Scoreboard data Work in Progress – Preliminary Findings 43 § Question Seven Are Europe’s workers making it uncompetitive? 44 The European Work Model A trade-off between flexibility and security? 6 Relative Position of countries in terms of Protection and Flexibility 4 DNK BEL Protection 0 2 FRA SWE NLD FIN NOR ESP PRT DEU CHE AUT SVN IRL SRB POL HUN ROU GRC SVK ITA HRV B&H LTU LVA -2 MAC BGR CZE TUR GBR EST NZD UKR AUS CAN MDA MNE ARM AZE ALB JPN KOR GEO MEX US -2 -1 0 1 2 3 Flexibility EU-15+ Other OECD countries ECA Note: The graph is based on 1st. principal components of Protection and Flexibility. Higher values indicate more Protection and More Flexibility Work in Progress – Preliminary Findings 45 A deficit of young people To keep the labor force stable Europeans have to work longer, but a demographic deficit of young people will persist Change in Labor Force Between 2005 and 2050 by Variant and Age Group (millions) 40 30 20 Varian t V: m axim um variant 10 0 Va rian t IV : increase in Varian t II: converg ence retirem ent age by 10 yrs to Europ ea n benchm ark countries Variant III: convergence fem ale to m ale -10 -20 -30 Variant I: base variant -40 -50 15 -39 40 -64 6 5-74 Source: Koettl (2010) using UN (2005), ILO (1997) Work in Progress – Preliminary Findings 46 If older workers stop retiring so soon Europeans are retiring at earlier ages than they used to Change in the average effective retirement age of men, number of years difference 1965-2007. 6 4 2 0 -2 -4 -6 -8 -10 -12 -14 a re o K y an m r e G icl b u p e R hc ez C icl b u p e R ka v o lS d na l ceI d na la eZ w e N n e d e w S ad a n a C n a ap J ial ar ts u A s te at S d e it n U ya rw o N m u gil e B m o d gn i K d e ti n U rka m n e D e c e e r G s d n al r e th e N lya tI d n la in F rg u o b m e x u L alg tu r o P d n lar e zt i w S d an l re I iar ts u A o icx e M in a p S e c an rF yr ag n u H y ke r u T d n la o P Source: World Bank staff, using OECD data Work in Progress – Preliminary Findings 47 Europeans are less mobile, even within countries Europeans are less mobile than Americans and Asians Annual cross-border labor mobility, Per cent of the working-age population, 2000-05 US: between 50 states 3.1 Japan: between TL2 level regions 2.2 Australia: between 8 states/territories 2.0 EU15: between NUTS-1 regions within countries 1.0 Canada: between 10 provinces/territories 1.0 EU 27: between NUTS-2 regions within countries 0.8 Canada: between Quebec and 9 other provinces 0.4 EU: commuting across borders 0.4 EU15: between 15 countries 0.1 Source: Eurobarometer (2005), US Census Bureau, Current Population Survey; Eurostat, Labor Force Statistics; Statistics Canada; OECD(2005), Employment Outlook, Chapter 2. Work in Progress – Preliminary Findings 48 § Question Eight Are governments in Europe too big? 49 Public spending (as a share of GDP) has increased Governments in Europe are Bigger The world resized by government spending in dollars, 2009 Source: World Bank staff. Source: OECD, IMF, and WB. Work in Progress – Preliminary Findings 50 Main reason for bigger government: higher social protection spending About 90 percent of the size difference is due to spending on social protection From Gross Public to Net Publicly Mandated Social Protection Spending for OECD countries in 2007 Work in Progress – Preliminary Findings 51 Pension spending is the most critical component Southern Europe spends the most on pensions in the world Public Pensions as Percent of GDP, 1995-2000 and 2007-2008 Work in Progress – Preliminary Findings 52 Pension levels are not the problem—early eligibility is Real Public Pensions Per Elderly, 1980 and 2007 Work in Progress – Preliminary Findings 53 Europe’s Growth Agenda? Government Demographic Shifts Labor Innovation Productivity Growth Enterprise Finance Modern Services Trade Work in Progress – Preliminary Findings 54