jaromír Šindel eces real and nominal convergence process - different methods of comparison the...

Jaromír Šindel

ECES

Real and Nominal Convergence Process

-Different Methods of Comparison

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

Topics• International Comparison

– Purchasing parity concept, …

• CEE countries and European Union– Importance of CEEC, desegregation of GDP,

…

• Alternative measure– Process of the real appreciation of national

currency, …

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

Internatinal Comparison – PPP Concept• PPP

• Comparative Price Level

• Exchange Rate Deviation Index

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

Real and Nominal Convergence

Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, 2005.

GPD per capita (in PPP $) and Comparative Price Level (OECD 30 = 100) in 2002

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

GDP growth - Slovakia

Source: www.sme.sk

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

Real and Nominal Convergence

Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, 2005.

PPP Development in Vysegrad Countries

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

Real convergence process GDP per capita in PPS (EU-12 = 100)

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

eSource: Ministry of Finance, Czech Republic. 2005

Portugal

Slovenia

Slovakia

Poland

Greece

Czech R.

Hungary

Nominal convergence process GDP per capita in euro (EU-12 = 100)

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

eSource: Ministry of Finance, Czech Republic. 2005

Portugal

Slovenia

Slovakia

Poland

Greece

Czech R.

Hungary

Comparative Price Level Comparative price level development

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

eSource: Ministry of Finance, Czech Republic. 2005

Portugal

Slovenia

Slovakia

Poland

Greece

Czech R.

Hungary

Real and Nominal Convergence

Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, 2005.

GPD per capita (in PPP $) and Comparative Price Level (OECD 30 = 100)

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

PPP and Exchange rate comparison

Source: Vintrová, R.: Co neodhaluje HDP při analýze ek. růstu a reálné konvergence. Working Paper CES VŠEM No. 1/2005

Average wage in comparison with Austria in 2003 – which columns are in exchange rate terms and which one in PPP?

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

EUR Austria = 100 EUR (PPP) Austria = 100

Czech Rep. 531 21 994 43

Hungary 541 22 968 41

Poland 497 20 1 006 43

Slovakia 346 14 719 31

Slovenia 1 083 43 1 443 62

Estonia 430 17 751 32

Latvia 298 12 620 27

Lithunia 311 12 645 28

Austria 2 499 100 2377 100

International Comparison in 2002

Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, 2005.

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

International Comparison in 2002

Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, 2005.

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

International Comparison in 1999

Source: OECD: Purchasing Power Parities and Real Expenditures 1999 BENCHMARK YEAR, 2002.

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

International Comparison in 2002

Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, 2005.

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

KV (expenditures p.c.) and CPL (both OECD 30 = 100) and PPP (per 1$)

International Comparison in 2002

Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, 2005.

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

KV (expenditures p.c.) and CPL (both OECD 30 = 100) and PPP (per 1$)

International Comparison in 2002

Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, 2005.

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

KV (expenditures p.c.) and CPL (both OECD 30 = 100) and PPP (per 1$)

International Comparison in 2002

Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, 2005.

KV (expenditures p.c.) and CPL (both OECD 30 = 100) and PPP (per 1$)

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

Alternative measure of growth or real convergence process

• GDP growth in euro currency– The real convergence process of CEEC will be finished in

Eurozone– The growth will be announced in euro currency– The cohesion of the real and nominal convergence

process

• Concept ot the Real Gross Domestic Income– Terms of trade development

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

Alternative measure of growth – GDP growth in euro

• Euro– The real convergence process of CEEC will be finished in

Eurozone– The growth will be announced in euro currency

• Price convergence process– Later, but it has two channels – price differential and

exchange rate development – real exchange rate appreciation

– Case study of Czech Republic

• Alternative measure– Growth in euro currency

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

Growth in national currency & in euro

  1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Avg.

CZ -0,3 2,7 5,8 4,4 4,4 -0,8 -1,0 0,5 3,3 2,0 2,1

SVK -3,7 5,2 6,5 5,8 5,6 3,9 1,3 2,2 3,3 4,4 3,4

HUN -0,6 3,1 1,4 1,4 4,5 4,9 4,2 5,2 3,7 3,2 3,1

PLN 3,8 5,1 7,1 6,0 6,9 4,8 4,0 4,0 1,0 1,3 4,4

EU-12 -0,8 2,3 2,3 1,5 2,4 2,9 2,8 3,5 1,5 0,8 1,9

EU-15 -0,3 2,8 2,5 1,7 2,6 2,9 2,8 3,4 1,6 0,9 2,1

Source: Šaroch, S., Tomšík, V., Srholec, M. (2003) www.ieep.cz

Growth in national currency in 1993-2002 (avg.=average)

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

  1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Avg.

CZ 23,3 9,4 10,4 11,6 0,6 7,8 -1,3 8,2 9,4 11,2 8,9

SVK 17,0 9,9 11,3 9,5 10,8 5,1 -0,8 15,2 5,9 6,9 9,0

HUN 12,7 3,0 -5,2 4,7 10,2 3,6 8,0 9,9 11,6 11,8 6,9

PLN 16,3 8,2 14,9 21,1 12,8 5,9 1,6 16,9 12,4 -4,0 10,4

EU-12 -0,8 2,3 2,3 1,5 2,4 2,9 2,8 3,5 1,5 0,8 2,0

Growth in national currency in 1993-2002 (avg.=average)

Case study – Czech Republic   1993 1994 1995 1996 1997 1998

average1993-1998

GDP growth in CZK -0,3 2,7 5,8 4,4 -0,8 -1,0 1,7

Inflation in CZE 20,8 10,0 9,1 8,9 8,4 10,6 11,2

CZK/EUR 34,11 34,06 34,31 34,01 35,75 35,89 34,68

Nominal appreciation CZK/EUR 6,8 -0,1 -1,5 0,9 -5,1 -0,4 0,0

Inflation in EU-12 4,0 3,2 3,0 2,5 1,9 1,4 2,7

Inflation differential 16,8 6,8 6,1 6,4 6,5 9,2 8,6

Real appreciation CZK/EUR 23,6 6,7 4,6 7,3 1,4 8,8 8,5

GDP growth in EUR 23,3 9,4 10,4 11,6 0,6 7,8 10,3

Source: Šaroch, S., Tomšík, V., Srholec, M. (2003) www.ieep.cz

GDP Growth in Czech Republic, 1993-1998

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

GDP Growth in Czech Republic, 1999-2002

  1999 2000 2001 2002average

1999-2002average

1993-2002

GDP growth in CZK 0,5 3,3 3,1 2,0 2,2 1,9

Inflation in CZE 2,1 3,9 4,7 1,8 3,1 7,9

CZK/EUR 36,87 35,61 34,06 30,81 34,32 34,54

Nominal appreciation CZK/EUR -2,7 3,4 4,3 9,6 3,6 1,4

Inflation in EU-12 1,2 2,4 2,7 2,2 2,1 2,4

Inflation differential 0,9 1,5 2,0 -0,4 1,0 5,6

Real appreciation CZK/EUR -1,8 4,9 6,3 9,2 4,6 6,9

GDP growth in EUR -1,3 8,2 9,4 11,2 6,8 8,9

Case study – Czech Republic - Conclusions

• First period– Price differentials were higher in first period – No nominal exchange rate appreciation

• Second Period– Nominal exchange rate appreciation was the stronger

channel in the second period

• But in 2010 euro instead of CZK– The real convergence process of CEEC will be finished in

Euro zone– The growth will be announced in euro currency, but no

nominal appreciation (overflow into inflation)

• Implications to ERM-II and Euro zone– Inflation and ER development – later …

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

Alternative measure - critique• Nominal and real convergence process put together

– Yes, it is true, but …

• Process of real exchange rate appreciation– !! Appreciation has to be sustainable

– Quality measure error– Deregulation of prices – Balassa-Samuelson problem

– FDI inflow with positive effect on current account development

– Better conditions for exports – customs duty, political restrictions, psychological restrictions, transaction costs, …

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

eSource: Šaroch, S., Tomšík, V., Srholec, M. (2003) www.ieep.cz

• Data– Use data from Deutsche Bank database

• Conclusions

Case studies – CEE countries - Conclusions

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

Concept ot the Real Gross Domestic Income

Source: Vintrová, R.: Co neodhaluje HDP při analýze ek. růstu a reálné konvergence. Working Paper CES VŠEM No. 1/2005

Terms of Trade Development

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

Czech Rep.

Germany

Austria

France

Hungary

Poland

Slovakia

Slovenia

Concept ot the Real Gross Domestic Income

Source: Vintrová, R.: Co neodhaluje HDP při analýze ek. růstu a reálné konvergence. Working Paper CES VŠEM No. 1/2005

Index of GDP growth per capita

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

Rank of countries – GDP or RGDI development (average in 2001-2004)

Source: Ždárek, V.,Ekonomická výkonnost země (alternativní pohled). Bulletin CES VŠEM, č. 8, 2005.

Czech Republic

Slovakia

Hungary

Poland

In turn of Diffence (perc. points)GDP RGDI

Czech Rep. 4 1 - 1,1

Hungary 2 4 - 0,2

Poland 5 5 0,4

Slovakia 1 2 0,7

Slovenia 3 3 - 0,5

Concept ot the Real Gross Domestic Income

Source: Vintrová, R., Ždárek, V.: HDP zrychluje, ale reálný důchod zpomaluje. (2005), ekonom.ihned.cz

Different Development of RGDI and GDP in Czech Republic

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

RGDI GDP Differences (percentage points)

2000 2,1 3,9 -1,8

2001 4,3 2,6 1,7

2002 3,7 1,5 2,2

2003 3,3 3,2 0,1

2004 4,6 4,4 0,2

Average 1996-2000 2,1 1,5 0,6

Average 1996-2004 2,9 2,1 0,8

Average 2001-2000 4,0 2,9 1,1

1st half of 2005 3,7 4,9 -1,2

Comparative Price Level

Source: ČNB: ANALYSES OF THE CZECH REPUBLIC’S CURRENT ECONOMIC ALIGNMENT WITH THE EURO AREA.2005. and Vintrová, R.: Co neodhaluje HDP při analýze ek. růstu a reálné konvergence. Working Paper CES VŠEM No. 1/2005

Comparative price increases with real exchange rate appreciation

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

Czech RepublicSlovakiaHungaryPoland

Increase in p.p.

CR = 1002003

Nominal convergence process GDP per capita in euro (EU-12 = 100)

Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

eSource: Ministry of Finance, Czech Republic. 2005

Portugal

Slovenia

Slovakia

Poland

Greece

Czech R.

Hungary

Comparative Price Level – Private Final Consumption – September 2005 Th

e Pu

zzles of C

entral an

d E

astern E

uro

pe T

ransfo

rmatio

n an

d In

tegratio

n E

CE

S, P

ragu

e

Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, 2005.