Economic determinants of doing business in the Central and Eastern European countries Lecture 3

Learning objective The Framework for macroeconomic analysis The main economic indicators, data, and types of variables The economic position of the CEE countries in Europe and in the world The 2007-2009 recession in CEE countries and the debt crisis The main economic prospects of economic growth in CEE countries, their weak and strong sides

The main questions to establish international business are: Where to enter? When to enter? How to enter?

Political and Legal System Where to enter? Economic Performance Political and Legal System Cultural Environment

Economic performance as a factor of internationalization The international marketer needs to pay attention to the economic development and performance of a country in international business. The stage of economic growth within a country has a great impact firms’ international strategies. Economic growth affects a countries attitude towards foreign business activity, the demand for goods and the distribution system found within the country. So, a study of the economic climate is important especially to gain understanding with regard to developing countries and secondly in respect to market potential and market growth. The existing level of economic development allows the firm to estimate the degree of market potential as well as allowing them to prepare for economic shifts and emerging markets.

Macroeconomic analysis Macroeconomic analysis is the study of performance, the structure and dynamic adjustment of national economies, regions and the world. The main issues of macroeconomic analysis is to recognize: long-run economic growth, business cycles/fluctuations and macroeconomic policy. Macroeconomic analysis helps firms, consumers and governments make better decisions.

Data Economic statistic (data) - quantitative or qualitative (surveys) measures describing economy, past or present. Official statistics (data) - statistics published by government agencies (central statistical office) or other public bodies such as international organizations (IMF, OECD, EBRD, Eurostat, UN ect.)

The main macroeconomic data GDP – quarterly (Q), yearly (Y), nominal, real, level, in countries' currency, in euro in $, index (q/q-1), q-q-12), seasonally adjusted (s.a), not seasonally adjusted (n.s.a.). Labor market - number of working people, unemployment, labor costs, the quality of labor, National Debt Inflation, interest rates.

The main sources of data for CEE countries National statistical offices Central banks Eurostat: http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ OECD: www.oecd.org IMF: www.imf.org

Dynamic CEE growth since early 90’s Steady and fast growth Transformation recession recovery recession recovery

The GDP in short-run Since the financial crisis 2007-2009, CEE growth has not rebounded, and on the begennig of 2016 slowed down The structure of GDP growth in CEE The consumption is main driving force of GDP. Deterioration in investments and export. The fastest growing economy in 2016 was Roamanie (4.6%), Bulgaria (3.2%).

Prior to the crisis 2007-2009, the CEE economies were the fastest growing in the world. From 2000 to 2008 GDP per capita in CEE countries grew by 4.8 percent annually , reaching in 2011 $19 000 in PPP terms. In 2011 the CEE region consists of 100 mln people and $1.3 trillion of GDP in nominal terms.

Contribution of emerging markets to the world economy Emerging Economies - all fast developing countries including CEE region, excluding BRICs BRIC – Acronym for the emerging economies of Brazil, Russia, India, and China Developed Economies - Group of 20 countries with highest GDP per capita in PPS

But they still did not achieve the level of EU-15 = 1; (the gape to EU-15) The GDP in PPP or PPS represents pure volume, after subtracting for price-level differences between countries.

Convergence, after recession slowed down everywhere, but particularly in CEE region CEE countries relative to advanced economies

Changes in the Structure of the Economy

Changes in living standards

Public Debt in Europe as % of GDP 2014

Government Debt as % of GDP With the exception of the Hungary government debt rates are much less than those of average for EU. The lowest rate of debt has Estonia (6% of GDP). The highest rate of debt has Slovenia (83%) and Hungary (73%)

Inflation (HCPI) 2015 -2016 the CEE countries suffered from deflation (except Romania).

CEE faces big demographic challenge in coming decades

The employment rate is still below EU-15 and EU-28 DK, SE, UK FR,DE,BL, EU-15 CEE

Unemployment Rate The lowest unemployment rate has Czech Rep. (4%). The highest unemployment rate has Croatia (14%) and Slovakia (11%). In many CEE countries with high unemployment rate the serious problem is structural unemployment.

Employment growth and vacancies rate Since 2014 a steady growth in the number of vacancies has been observed in CEE countries, although employment growth has not accelerated. This discrepancy may indicate that companies have struggled to find qualified employees, especially bearing in mind the fact that the employment rate in the majority of CEE economies was exceptionally high at the end of 2015.

The labor market has still the capacity

The CEE region offers an educated workforce and substantially lower labor costs than the EU-15

The scolarisation index for Poland and EU-15

Unit labor costs in % of EU-15 in 2009

Labor productivity growth rate

Productivity, level, 2012, USA=100

The growth in CEE economies has been driven in part by high average hours worked

Productivity and wages The low labor costs = low wages, which was the cause of low income of households and incresed the sourness and dissatisfaction of the society. During last two years we can observed fast growth in nominal wages (7%-8% y/y) in the Baltic states, Romania and Bulgaria. High wage growth in those economies is also a result of minimum wage increases, which were often suspended during the crisis. Wage growth in those economies, in particular in the Baltic states, has for a longtime exceeded labor productivity growth, harming their competitiveness. On the other hand, wages in other economies of the region have been growing at a moderate pace, despite a significant decrease of the surplus of labor supply over labor demand, without causing the risk of competitiveness loss. Rising wages are reflected in a high growth of the wage bill which in 2015 was the basic source of growth in household disposable income in the region.

How to boost the productivity?

The largest productivity opportunities are in some manufacturing sectors, agriculture, construction, transportation, energy, retail and wholesale.

Innovation-Research and Development spending as % of GDP

DEMOGRAPHY

Biggest obstacle for long term prospects in CEE countries MIDDLE INCOME TRAP As wages rise, manufacturers often find themselves unable to compete in export markets with lower-cost producers elsewhere. Yet, they still find themselves behind the advanced economies in higher-value products. This is the middle-income trap which saw, for example, South Africa and Brazil languish for decades in what the World Bank call the “middle income” range (about $1,000 to $12,000 gross national income per person measured in 2010 money). Typically, countries trapped at middle-income level have: (1) low investment ratios; (2) slow manufacturing growth; (3) limited industrial diversification; and (4) poor labor market conditions.

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