1 Andreas Wörgötter OECD Economics Department Prospects of Economic Integration: Are the Candidate EU Member States from the Balkans Ready to Catch-Up in the Wider EU? THE COMING ENLARGEMENT OF THE EU WITH ROMANIA, BULGARIA AND CROATIA ECONOMIC, POLITICAL, AND SECURITY CONSEQUENCES International Seminar for Experts in the series Great Debates organised by the Cicero Foundation 12 October 2006

2 GDP per capita in per cent of Greece in constant 2000 PPP in USD

3 How to get ready for EU Enlargement Past – Present – Future Benefits Pre-conditions Convergence: Going for Growth Bulgaria, Romania Croatia Western Balkan

4 Past – Present - Future Earlier enlargements were different EU was less integrated Entering countries were less different Transition phases were longer and more substantive Current (EU10 EU25) enlargement is a success Entering countries are growing strongly Old members reap benefits: Win-win situation Future enlargement is a challenge Bulgaria and Romania are much poorer Old member countries are worried about costs (migration)

5 Benefits of enlargement Elemination of entry barriers Better allocation of resources according to comparative advantages Freeriding on institution building (euro) Anchoring of sound policy frameworks

6 Pre-conditions Decision making in the EU Separation between Private and Public Economic Units Macroeconomic stability to generate stable framework conditions Clear property rights to maintain incentives to save and invest Low entry/exit barriers in labour and product markets to facilitate reallocation of resources

7 A comparison of investment expenditure shares Capital goods expenditure in per cent of GDP in average OECD prices Bulgaria9.9 Croatia15.0 Romania11.8 Slovenia24.0 Turkey Greece

8 The Worldbank Doing Business Ranking Rank Bulgaria62 Croatia118 Romania78 Slovenia63 Turkey Greece 93 80

9 Relative prices of expenditure for education Relative price in per cent of GDP Bulgaria31 Croatia77 Romania21 Slovenia74 Turkey31 Greece71

10 OECD recommendations for growth friendly policies I Macroeconomic policy framework, which does not add further noise to the business cycle: Medium term budgeting framework with expenditure ceilings based on cautious assumptions and responsible public sector managers, which can decide about how to best use available inputs to reach maximum outputs Independent monetary policy, which establishes a credible anchor for expected inflation

11 OECD recommendations for growth friendly policies II Structural policies to strengthen property rights reduce administrative burden on doing business reduce entry/exit barriers on product and labour markets foster competition reduc e distortionary taxation on labour eliminate fiscal incentives to withdraw from activity

12 Growth decomposition

13 GDP per capita: Growth and level differential vis-à-vis U.S.

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16 The OECD PMR indicators system

17 Analytical work on key aspects of performance The OECD Jobs Study (1994) Work on ageing –OECD-wide study: Maintaining Prosperity in an Ageing Society (1998) Work on the determinants of participation rates –Retirement decision –Female participation Work on product markets regulation The growth project (2002) –The Sources of Economic Growth

18 Indicators of policy stances in various areas Indicators of product market policies –Product market regulation database, 1998 and 2003 –Producer support estimates in agriculture, annual Indicators of policies mainly affecting labour markets –Tax wedges –Implicit tax rates on continued work –Minimum wages and labour costs –Unemployment benefit replacement rates –Employment protection legislation –Disability/sickness beneficiaries –Educational attainment and achievement

19 The stocktaking exercise: key features A regular cross-country structural surveillance based to an important extent on benchmarking performance and policies on best practice. The key objective: Increase GDP per capita and speed up convergence in living standards. Five policy priorities: –Three priorities based on explicit benchmarking –Two priorities determined on the basis of country expertise A thematic part: an examination of the link of a particular policy area to growth.

20 Conclusions Bulgaria and Romania should not waste any time to make use of the granted EU membership Main attraction of EU membership is not the access to EU structural funds EU membership should be used to amplify the impact of growth friendly policy Croatia should be even more ambitious to compensate for having to wait for membership Western Balkans should demonstrate to be ready for membership, by (re)integrating with neighbours, whith whom they will find themselves in an enlarged EU