Conditions for Convergence; From nominal to real and back

Erasmus University Rotterdam

Contents

• Objectives

• Nominal convergence

• Real convergence

• Policy challenges

• Competitiveness

• Bulgarian situation

• Conclusions

Nominal convergence

• Macro and monetary conditions set by EU for participation in EMU;

• Maastricht criteria

• Stability and Growth Pact

• Conditions set by applicant country

• Balance of cost and benefits

• Constraining growth or not?

Growth differences and growth determinants• In past considerable differences between

EU countries• Some have used instrument of exchange

rate• Now very limited influence of

international and national macro factors• European Commission estimates that

75% of growth differences in euro-zone is due to structural factors

0

1

2

3

4

5

6

7

1990 1992 1994 1996 1998 2000 2002 2004 2006

Euro Zone US Germany

Growth Differentials (Standard Deviations)

Real convergence

• Main objective of • National and EU policy• Defined as convergence of wealth levels;

(not of growth rates)• Key elements:• Differentiated growth of productivity;• Accelerated change in sectoral structure• Enhanced conditions for competitiveness

Past performance of EU

• Long term convergence of wealth levels

• Catching up of the poor members

• Recent stop of trend

• Determining factors from EU:

• Market access;

• Structural Funds

• Institutional change

Real convergence in the long term

Type of Region 1950 2000 Central 150 132 Intermediate 1 114 114 Intermediate 2 95 95 Peripheral 33 54

Competitiveness: Challenge for policy makers• Whole list of points to take care of (see

competitiveness tree)

• For each of them policy instruments have been developed and tested

• Question remains: what works, why and and where (OMS/NMS)?

• Risk of bewildering and opting for fashion solutions

Enhancing Competitiveness in practice• Analysis made of programmes of OMS

(Obj1), NMS and CANS

• Show very little differences in objectives

• All include Lisbon agenda

• Few real priorities: keep options open

• Tendency to go for hard infrastructure

• Underrating of capacity building

Public efforts

• Each aspect demands considerable efforts of the public sector

• Both important investment and important annual outlays

• These are confronted with limited resources (NAT + EU)

• So harsh choices to be made with or without EMU membership

A few lessons

• Learn from bad and best practices of others

• Orient your budget to competitiveness oriented outlays and not on redistribution

• Within competitiveness make choices and set priorities

• In line with national and local potentials

Bulgarian situation

• Trying to come to grips with challenges

• EU money is coming in large amounts

• On conditions: e.g.

• Co-financing safeguarded

• Compliance with rules of the game

• Big risk: Under-utilization due to non compliance

Enhancement of absorption capacity is essential• Definition of projects

• Prioritization of projects

• Consistency of programme

• Institutional set-up and staffing

• Administrative capacity

• Capacity of beneficiaries and stakeholders to join in

Conclusions

• Nominal convergence is easier with a more resilient economy

• To that end quick restructuring and diversification is needed

• Competitiveness is key to change and hence to real convergence

• Absorption capacity is key to enhancement of competitiveness