Download - Centrope Business And Labour Report 2007

CCEENNTTRROOPPEE

BBUUSSIINNEESSSS && LLAABBOOUURR RREEPPOORRTT

Study carried out by

In co-operation with

Institute for Structural Policy (IREAS), Czech Republic,

The West Hungarian Research Institute, Hungary

The Slovak Academy of Sciences; Slovakia

CENTROPE Business and Labour Report, No. 0, 2007 2

Executive Summary The CENTROPE region is one of the most important transnational economic areas at the former Eastern borders of the European Union. Located at the intersection of four countries, comprising two capital cities as well as several further major cities (Brno and Győr) and covering some of the most dynamic regions in the Central and East European countries as well as some of the most prosperous regions within the EU (Vienna), CENTROPE is a region of enormous economic potential. Situated at the crossroads of important European transport corridors and disposing of efficient international airports, CENTROPE offers excellent accessibility and short distances to all European key markets. Given its large and expanding market together with its favourable location and high accessibility, CENTROPE is one of the European key areas for both large and small to medium scale investment. The high number of institutions of research and development and higher education in CENTROPE add to this, and are a key factor to attract highly innovative industries and services, which in turn are the basis for a sustained period of economic growth and prosperity.

The economic ties and cross-border activities within CENTROPE have increased significantly over the last decade and a half. It can be expected that these ties will strengthen further in the near future, as the planned measures to close existing gaps and eliminate bottlenecks in the cross-border transport network as well as to step up the modernisation of the existing infrastructure will improve internal and external accessibility. However on the institutional front the still existing institutional and physical barriers, e.g. in the fields of labour mobility and transport infrastructure (especially with respect to the Austrian regions of CENTROPE), hamper the full exploitation of the economic potential of CENTROPE.

Thus, one consequence of the increasing economic integration of the regions forming CENTROPE, is a necessary parallel evolution of cross-border policy making. In consequence, to facilitate economic cooperation, cooperation in the fields of economic policy is a must. In the end, a successful development of CENTROPE depends crucially on the integration of policy makers, with respect to sharing similar goals and as a consequence also the same decisions.

The broad aim of the CENTROPE “Business and Labour Report” is to base these decisions on accurate, comparable and timely analysis of the economic development of CENTROPE and its regions. As such this report intends to assist all the relevant actors (e.g. economic agencies, networks of entrepreneurs, trade unions, politicians and administration) in monitoring the economic development of the transnational economic space. Additionally this report intends also to serve as a basis for discussion of labour market and employment issues and policies, as well as of investment and location policies, to make CENTROPE an attractive region for local and foreign investors.

Importantly, it must not be forgotten that this first issue of the CENTROPE “Business and Labour Report” is a pilot project. This implies that beyond writing this report, much effort from all participating institutions was spent in making this report feasible at all. Thus, before actually drafting the report a lot of background work had to be done.

In detail this means that the current report is the results of an intensive work programme that included four work packages.

The first work package was concerned with setting up a multilateral working group. Therefore, to gain as detailed as possible knowledge of the individual regions within CENTROPE the aim was to find one competent partner from each CENTROPE country. Each partner, given his experience and knowledge of local regional development had at least three tasks to fulfil, namely to act as a contact person for any questions concerning his region/country, to gain access to the relevant statistical data and to write


the report for his country. Thus, a multilateral working group was established. The partners in the group consist of the Austrian Institute of Economic Research (WIFO) and the Vienna Institute for International Economic Studies (wiiw) from Austria, Institute for Structural Policy (IREAS) of the Czech Republic, the West Hungarian Research Institute from Hungary and the Slovak Academy of Sciences.

The second work package centred around finding an appropriate set of contents for the pilot CENTROPE “Business and Labour Report”. At this stage all partners worked together, to establish a common set of topics that realistically could be covered, given the differences of data availability across countries.

The third work package dealt with data and methodological issues. A main aspect in this package was to create one basic set of indicators that are common and comparable across the CENTROPE countries, in order to ensure that in its essential results the “Business and Labour Report” is homogenous. Besides this common data set, it was decided that each partner should if possible use any available additional data, which might not be comparable to data from other countries, to deepen the analysis and interpretation in the report.

Finally the fourth work package consisted of drafting and writing this proto-type version of the CENTROPE “Business and Labour Report”.

In a sense this first version of the CENTROPE “Business and Labour Report” is symbolic for the character of CENTROPE. On the one hand, five institutions of CENTROPE were gathered together, and every participating institution was highly ambitious to jointly work on this report, in order to make it valuable source of information. Thus several different parties worked to together on a worthwhile project, which is also what CENTROPE in toto is about.

At the same time the joint work has not been without difficulties. Different methodologies and experiences of the partner institutions, and even more the heterogeneity of available data sources, made it difficult to present this report and the chapters therein in a homogeneous way. This is reflected in the different styles the individual chapters in this report are written. It is also reflected in the fact that the country chapters focus on a small, though important, set of indicators, namely income, output and employment, while a number of important other indicators had do be discarded as they were not available in the course of this project. Thus important variables like wages (on a sectoral level), prices, foreign trade etc. were disregarded. Though the feeling among the participating institutions was that these indicators should and -in principle- could be used, the acquisition of such data was beyond the scope of this project.

The end result of this endeavour is the current CENTROPE “Business and Labour Report” which represents a first time concise description of the economic development of CENTROPE, and thus provides a significant value added. But also the problems that arose in the course of the project provide important information, as they show the tasks for future work in order to make this report an even more valuable project. This is another aspect in which CENTROPE “Business and Labour Report” reflects CENTROPE idea and project: To work open-minded and jointly on the existing problems, in order to make this report and the whole CENTROPE better ever time.

Macroeconomic developments of the CENTROPE countries

During the last few years the CENTROPE countries were marked with strong economic growth, in terms of income, industrial output and exports, and recently also in employment. Though GDP growth rates will be somewhat lower in 2008, especially for Hungary, the CENTROPE countries will grow at a respectable pace – compared to the EU-27. Exports from the CENTROPE countries are expected to grow further, given the favourable international environment, the growing import demand of the


region’s main trading partner countries, as well as the continuing competitiveness of the three new member states within CENTROPE. Limitations for economic growth in the CENTROPE countries potentially come from the increasingly tight labour markets, where the lack of highly skilled labour might dampen the future development of high value added activities.

Still, the outlook for the CENTROPE regions is optimistic. It becomes even more optimistic, if the substantial funding from the European Cohesion Policy is taken into account. From 2007 onwards the countries in Central and Eastern Europe will receive on a net basis around +2.5 to +4% of their GDP. The importance of these funds is illustrated by the fact that from 1948 to 1952 Western Europe received in the course of the „European Recovery Programs“ (Marshall Plan) financial assistance from the USA, which was on average 2.1% per year of the ERP countries GDP.

The optimistic outlook for the CENTROPE countries is good news for the individual CENTROPE regions within these countries. Given the high correlation between country growth and the economic development of its regions it can be expected that the regions will be able to enjoy economic prosperity just as much as the countries as a whole. This is especially true for the CENTROPE regions. With few exceptions the CENTROPE regions belong to the most prosperous and most dynamic regions within their countries. Hence, given the past development of these regions, as well as their economic structure it can be expected that the CENTROPE regions will not only benefit from the good macroeconomic development in their country, but to also be a major contributor to the economic growth in the CENTROPE countries.

The Economic Situation of the CENTROPE Region

Despite these favourable conditions CENTROPE is located in neither the economic nor the geographic centre of Europe. Rather it is a region that lies at the intersection between the European Economic centres, which are located to the West of the region, and the less developed but rapidly growing centres of Eastern Europe. Thus CENTROPE is a “transitory” region, in which good accessibility from the economic centres of Western Europe and from the rapidly growing Eastern European countries shape comparative advantages. These – as is documented by a number of recent spectacular foreign direct investments – in general lie in a strong industrial base in particular in ancilliary industries (such as automotive components), a strong orientation on medium skill and niche products and in particular in the Eastern part of CENTROPE rapid technological catching up and low wage costs.

Similarly the CENTROPE region is still less integrated relative to regions within one country. Economic ties and cross-border activities within CENTROPE have increased significantly over the last one and a half decades. According to recent surveys, around a quarter of the firms located in the region holds cross-border relationships (in the form of ownership, delivery relationships and/or other forms of co-operation). Yet, cross-border exchange in particular in the labour market still remains limited due to existing institutional impediments and bottlenecks in infrastructure.

It can, however, be expected that these ties, too, will further strengthen in the near future, as the planned measures to close existing gaps and to eliminate bottlenecks in the cross-border transport networks as well as plans to step up the modernisation of the existing infrastructure will improve internal and external accessibility. Furthermore, on the institutional front the still existing institutional and physical barriers, e.g. in the fields of labour mobility, which hamper the full exploitation of the economic potential of CENTROPE, can be expected to be removed within the next years.

Despite these common features, CENTROPE is by no means a homogenous region. This comes as no surprise. Covering a territory of more than 44.000 square kilometres and a population of almost 6.5


million inhabitants, the region is similar in size to many medium sized or smaller countries of the EU. Thus substantial internal disparities exist. These disparities can be structured along two dimensions. First, there are significant differences between those regions of CENTROPE located in different countries and second there are substantial differences between the cities, their environs and more rural areas.

Although in many respects the economic development of the region is closely linked to the economies of the "twin-capitals" of Vienna and Bratislava and the large agglomerations of Brno and Győr, CENTROPE is not a typical central region in the European context. Its settlement structure on average is not dominated by large cities. Rather – as in most parts of Central Europe – medium-sized towns dominate. At the same time CENTROPE neither is a peripheral region. Only some parts of CENTROPE (such as for instance Southern Burgenland, the Waldviertel in Lower Austria and parts of Southern Moravia and Vas County) may be considered rural peripheries. Thus the best characterisation of CENTROPE is that of a region characterised by strong centres located at the intersection of two economically very different types of territories of the EU.

Due to the legacies of the communist regimes the main dividing line within the region was and still is the division between the new member states and Austria: While in the Austrian parts per capita GDP approaches or exceeds the EU average, all of the CENTROPE-regions in the new member states – except for Bratislava region – currently qualify for EU funding under “Objective 1” supporting the catch-up progress of structurally week regions; their GDP per capita is much below the EU-25 average. In the richest region of CENTROPE (Vienna) GDP per capita at purchasing power parity was at 172.3% of the EU-25-average, while in the poorest region (Trnava) it was at 55.8% of the average.

However, not all differences in CENTROPE follow purely national lines. For instance the capital city of Bratislava can claim a per-capita-GDP that is comparable to the Austrian regions and is above the EU-average; together with its “twin city”, Vienna, Bratislava is one of the economic strongholds of CENTROPE. Burgenland, on the other hand, has been an “Objective 1” region until recently; its GDP per capita is not only below the EU-average but also below the CENTROPE average.

While the new member states’ regions in general may be considered “poorer” than the Austrian regions, they are also considerably more dynamic. Since 1995 GDP growth rates in the new member states regions of CENTROPE ranged between 7% and 12% and clearly outperformed the Austrian regions (with growth rates of 3% to 4%). The rapid catch-up process of the Central and Eastern European countries thus makes the whole CENTROPE region more dynamic than the European average.

Similarly, the structure of the labour force and infrastructure endowments differ significantly across regions. Aside from national differences, disparities in education systems are also closely associated with urbanisation: In general CENTROPE is characterised by a highly qualified workforce that has its strongholds in the secondary and upper secondary education levels. In particular in the regions of the Czech Republic and Slovakia around 80% of the employed have a completed secondary education. The share of population with a tertiary education is, however, below the European average in all regions except the capital cities of Vienna and Bratislava, where around a quarter of the workforce has a completed tertiary education. High shares of the workforce with only a completed primary education can only be found in Western Transdanubia. Infrastructure endowments, accessibility and innovation indicators tend to follow these patterns. In particular, indicators of research & development activity (such as R&D expenditures, patents per 1000 inhabitants) and infrastructure quality are clearly above the EU averages for the large agglomerations (in particular Vienna and Bratislava), but not for the more peripheral region.


Finally, the employment structure of the region differs between the Austrian and the new member states’ regions. In the new member states’ CENTROPE regions a significantly larger share of the employees (29.5% relative to 16.4% in the Austrian regions) works in manufacturing and a smaller share works in services. (In particular employment in public services is around 5 percentage points lower in the new member states regions' than in the Austrian part of CENTROPE.)

As with aggregate GDP, however, the new member states regions are also the more dynamic regions in terms of structural change. For instance, indicators of structural change at a high level of sectoral aggregation suggest that the new member states' regions in CENTROPE are also converging in structure to the Austrian regions and have experienced a structural change that was almost twice as high as in the Austrian regions.

The Labour Market Situation in the CENTROPE Region

Considering the labour market, in a European context the CENTROPE region is a region with relatively low unemployment rates and a labour market participation that is equal or slightly higher than the EU average. Labour market disparities within the region seem to be less influenced by national borders than other indicators of economic development. Only one region in CENTROPE (Trnava) was characterised by double digit unemployment rates according to EU Regio data in the year 2005. Vienna and South Moravia had unemployment rates of 9.1% and 8.1%, those of all other regions were around 5 to 6% - as compared to 9% in the European average.

Furthermore, employment rates exceeded the European average of 63.7% in all but the Hungarian CENTROPE regions and Trnava. The highest shares were to be observed in Lower Austria (69.9%), Bratislava (69.6%) and Burgenland (68.1%). Vienna and South Moravia were very close to the European average.

CENTROPE is thus in its majority composed of regions that are – relative to the EU-average – privileged in terms of the labour market situation. Yet, some labour market problems persist. These may be summarised as follows:

Due to a history of early retirements and the downsizing of the labour force in the course of industrial restructuring, employment rates of the population aged 55 and above are low relative to the EU level in four regions of CENTROPE. In Bratislava and South Moravia the rate is above the European average of 42.5%, in the Hungarian CENTROPE regions it remains only slightly below this value. In all Austrian regions where early retirement was particularly popular until recent changes in the pension system, employment rates of the elderly are around 30%; they are even lower in Trnava (28.8% - for corresponding NUTS II region West Slovakia).

Aside from low employment rates of the elderly, youth unemployment rates are above the EU-average in Vienna, South Moravia and Trnava, but below this average for CENTROPE as a whole. Youth unemployment has recently also been on the decline in most Austrian provinces.

Given the low overall unemployment rates the share of long term unemployed is relatively high in some of the new member states' regions of CENTROPE but low in the Austrian CENTROPE regions. In the year 2005 Bratislava and the Hungarian CENTROPE regions were below the European average, while Southern Moravia and the Slovak CENTROPE region around Trnava stayed above. This indicates a severe mismatch problem of the qualifications of the unemployed with the requirements of prospective employers, as would be expected in economies with the speed of restructuring of the CENTROPE region.


Finally, lack of skilled labour is reported very frequently across the region. This applies both to the automotive industry (in the Czech Republic and Slovakia in particular), as well as to many segments of the high-skill service sector such as health-care personnel, architects, civil engineers and IT experts. These developments may also be partly attributed to the large inflow of FDI, which spurs the demand for skilled labour.

Thus in summary the labour market situation of the CENTROPE region as viewed from aggregate indicators can be described as relatively favourable when compared to the EU average. Furthermore – and perhaps more surprisingly – labour market patterns in the CENTROPE regions are more similar and less strongly influenced by cross-country differences than often perceived. When clustering all EU member states' regions according to the above-mentioned labour market indicators, we find that all CENTROPE regions are clustered into what may be considered a typical Central European Labour market group encompassing – aside from CENTROPE – southern Germany, Northern Italy and the remaining provinces of Austria.

An analysis of labour market developments with respect to different skill types, however, shows that the CENTROPE region has a supply structure which differs from that of the most developed EU-countries: CENTROPE has a significantly smaller proportion of people with low levels of education as well as a smaller proportion of people with the highest levels of education.

Despite having a small number of people with the lowest levels of education in their labour force, the employment and unemployment rates the position of this group in the labour market of the new member states’ regions of CENTROPE is much worse compared to the same group of workers in the EU-15 labour markets (a gap of 20 to over 30 p.p. in employment and unemployment rates). This is due to the combination of heavy industrial restructuring in the last decade, which has led to massive shift of labour demand to more highly qualified occupations, and a narrowly defined professional education system which contributes to low flexibility of labour markets.

On the other hand, the employment rates of the medium- and highly educated do not differ much between the NMS and the EU. At the high-skill end of the labour market, an interesting phenomenon is to be seen: in this segment of the labour market there are clear signs of the situation being much tighter in CENTROPE than in the EU: In view of high and rising employment and very low unemployment rates, the demand for highly skilled labour currently exceeds the supply. The situation is even tighter where the 25-35 year age group is concerned.

CENTROPE regions: Austria

The regional growth pattern in Austria in 2006 was mainly determined by the regions sectoral patterns of economic activity. The export oriented manufacturing sector dominated regional developments and its dynamics also spilled over to other sectors. This resulted in a clear West – East differential in regional growth in 2006, such that the CENTROPE provinces of Austria in general exhibited below average growth. Among these provinces Burgenland and Vienna showed the lowest GDP growth in Austria. In Burgenland the balance was slightly improved by a booming construction sector. In Vienna the total weight of restaurants and accommodation and the energy sector, which grew stronger than in the rest of Austria was not high enough to compensate the low growth of other sectors. The only exception to this is Lower Austria, where, given its strong manufacturing base, aggregate real GVA growth amounted to +3.8% in 2006.

Besides manufacturing producer services and in particular the knowledge intensive services tended to grow significantly in Austria in 2006. Though in general the western provinces auf Austria expanded employment more in these sectors, the highest increase in employment in knowledge intensive


industries was recorded in Lower Austria. By contrast Vienna and Burgenland experienced below average increases in employment both in the knowledge intensive employment sector as well as in the “other market services” in total.

In tourism the number of tourist nights spent stagnated relative to 2005 in Austria. This is, however, primarily due to the trend to shorter stays. Tourist arrivals increased by 2.7%. This trend towards shorter stays was accompanied by an increase in expenditure per night spent, so that despite a reduced number of overnight stays turnover in tourist revenues was by 4% higher than last year. The CENTROPE regions in Austria, especially Vienna performed on average better than other Austrian regions in tourism. Given the fact that city tourism is one of the fastest growing segments of the Austrian tourism industry, Vienna was the region with the largest increase in the number of tourist nights in Austria in 2006.

The strong income and output growth caused substantial labour demand growth in 2006. Nation wide employment grew by 1.7%. Employment growth, however, was regionally strongly differentiated and followed the general lines of regional development: As with GVA growth, the western non CENTROPE provinces of Austria and the provinces with a strong industrial base, expanded employment more rapidly than the eastern CENTROPE provinces of Austria, which are less export oriented. In total employment growth in the Austrian parts of the CENTROPE region amounted to 1.3% in 2006. From a sectoral point of view employment growth was primarily driven by the increase in employment in market oriented services, in particular producer services. However, also all other major sectors of the economy such as construction, and non market services (and in the western provinces of Austria even manufacturing) expanded employment in 2006.

The below average employment growth in the Austrian CENTROPE region is primarily due to slow employment growth in Vienna. Vienna had the lowest employment growth rate among all Austrian provinces in 2006. This reflects a long term development due to the major restructuring processes that affected Vienna in the last decade, especially with respect to employment in manufacturing industries. In addition to this traditional decline in manufacturing employment the year 2006 was also marked by a noticeable reduction in trade employment.

The high employment growth led to a relatively evenly distributed reduction in regional unemployment rates in 2006. The average unemployment rate in Austria decreased by 0.5 percentage points to 6.8% (according to national methodology) in 2006. Vienna was once more the province with the highest unemployment rate in Austria and the reduction in the number of unemployed was also smaller than in the remainder of Austria. The number of long term unemployed, however, reduced by 40.6%, which is the strongest decrease in long term unemployment among the Austrian provinces.

CENTROPE regions: Czech Republic

The Czech CENTROPE region South East is formed by South Moravia. This region was amongst the fastest growing regions in the Czech Republic during the transformation period but also during the latest years.

A major role in successful regional development of South Moravia is played by the Brno agglomeration. Being the second largest city in the Czech Republic, it is one of the main centres of economic activity in the Czech Republic. Due to Brno’s relatively high economic potential, as well as due to its function of a location for higher education and for research and development, it has a significant influence on the general sectoral pattern of activity in South Moravia. Thus, despite its strong industrial base South Moravia has -in Czech terms- a relatively high share of services (and a relatively lower share of agriculture) in output and employment. Additionally Brno is also one of the main factors of the relatively high amount of foreign direct investment South Moravia received over the


last decade. These inflows of foreign capital in high-tech manufacturing industries and commercial services and increasingly also in R&D played a significant role in the economic restructuring process and are the foundations for further economic growth of South Moravia.

During the transformation period employment patterns in the Czech Republic as well as in its regions underwent significant structural changes. Most significantly, employment in the primary sector decreased while contrastingly employment in services, like financial services and tourism, increased. These general trends were apparent in the whole of the Czech Republic, though not without a certain regional differentiation. In South Moravia the intensity of structural changes regarding employment was less pronounced than in the rest of the Czech Republic. Thanks to higher employment growth in the tertiary sector the employment decline was essentially lower in South Moravia than elsewhere. At the same time the structure of employment has continually advanced towards the employment structure in West European countries. The most important sector in terms of its share in total employment is still the manufacturing industry, which employs more than a quarter of all employed in South Moravia. Second most important are business services, as well as wholesale trade and repair followed by the construction business.

From 2005 to 2006 employment increased especially in the majority of manufacturing industry branches. Thus, the highest employment growth rates occurred in the production of transport facilities, in the production of computers and business machines and the production of television sets. Other branches with the significant employment growth of are business service and construction Contrastingly, the number of employees in agriculture and forestry has decreased from 2005 to 2006, while in the sectors relating to public services the employment situation was stable.

The outlook for the Czech CENTROPE region South East, and its sub-region South Moravia is in general positive. Especially with respect to future inflows of FDI expectations are optimistic as both regions have a tradition in institutional business support, especially in establishing industrial and development zones. Furthermore, given the availability of a highly educated workforce, the high innovation potential of the region and its good accessibility it is expected that (foreign) investments will be made in the fields of higher technology intensive manufacturing industries and services. This will not only transform the regions economic structure to a more modern shape, but also be the basis for a sustained period of economic prosperity.

CENTROPE regions: Hungary

The Hungarian part of CENTROPE comprises the counties of Győr-Moson-Sopron and Vas both located in the NUTS II region of Western Transdanubia. This region belonged to the ten fastest growing NUTS II regions in the EU in the last decade (only the Baltic countries, Ireland and two other Hungarian regions – Central Hungary and Central Transdanubia – had higher growth rates). The unemployment rate in the region was at 5.9% according to the Labour force survey in 2005 and thus the second lowest in Hungary.

The Hungarian CENTROPE regions greatly benefited from economic transition by attracting international investors; however, the internationalization process and the economic development it induced differs significantly within the region: Income levels are highest in the most northern region of Győr-Moson-Sopron and decrease as one moves southward, with Vas still growing significantly above the national average and the region of Zala (which does not belong to the CENTROPE region) lagging behind.

This uneven intraregional development is due to differences in industrialisation (Vas is much more burdened with a high share of labour intensive industrial employment than Győr-Moson-Sopron) but also to different responses to internationalisation. Győr-Moson-Sopron has attracted more


international capital and the firms coming into the region on average execute more "headquarter functions" than international firms in Vas. In addition to production-oriented activities, research and development is increasingly carried out at the Hungarian location as well. Consequently, the firms' competitiveness relies less on low labour cost, which reduces their vulnerability to increases in Hungarian wages and salaries. In addition, while companies in Vas seem to have little business links with local firms, regional supplier networks and clusters are formed in Győr-Moson-Sopron. The higher level of regional embeddedness of international firms in that region provides an important impulse to the regional economy.

Despite its privileged role in previous years, in 2005, total real GVA declined in the Hungarian CENTROPE. In all of Hungary real GVA growth ranged between +7.6% (in Central Hungary) and -1.8% (in West Transdanubia). Real GVA in the Hungarian CENTROPE region, which is part of Western Transdanubia, reduced by -1.3% relative to the previous year in 2005, with Vas experiencing a reduction of real GVA of -2.8% and Győr-Moson-Sopron performing much better but also far below the national average (-0.4%). Since the decrease of the GDP growth has continued in Hungary, in 2006 (+3.9%) and the first half year of 2007 (+2.7%, lowest among the CENTROPE countries), we expect that the relative position of the Hungarian CENTROPE region regarding indicator on GDP per capita in PPS should also have declined, recently.

In addition to the austerity package which impacted on all Hungarian regions, the Hungarian CENTROPE was also influenced by a number of region specific developments: In particular, due to a combination of regional policy concentrating more on the poorer regions of Hungary and a natural catching up of these regions, Western Transdanubia – as the best developed region in Hungary - also experienced a slower growth than many of the other regions in Hungary and in a number of key industries (e.g. textiles and manufacturing) relocation of production sights further contributed to the decline.

The trend regarding unemployment has by contrast shown a better picture in the Hungarian CENTROPE region than in the rest of the country. While the changes in number of registered unemployed1 in total and by sex indicate a relatively moderate decrease nationally, and even some increases in some regions, those indicators significantly decreased in the Hungarian CENTROPE region.

Regarding the future of labour market development there is a better view for Győr-Moson-Sopron than Vas within the Hungarian CENTROPE region. While the offers for jobs increased in Győr-Moson-Sopron, they decreased in Vas in 2006. In turn, the gap between non-occupied vacancies and number of unemployed (searching for job) increased in Vas and decreased in Győr-Moson-Sopron. As a result of this in Győr-Moson-Sopron there were 2 unemployed searching for 1 vacancy in 2006 compared to 4 in 2005. In Vas this indicator increased from 8 to 10.

CENTROPE regions: Slovakia

Both, Bratislavský kraj and Trnavský kraj, which form the Slovak CENTROPE regions, are the most economically prosperous regions in the Slovakia. Yet, they are not directly comparable.

Bratislavský kraj has enormous locational advantages and excellent starting conditions as a capital city. The inflow of foreign direct investments together with domestic investments are one of the relevant driving forces in its robust economic development. The urban character of this region predetermines the Bratislava region to be the centre of economic, financial and scientific progress in

1 Since 2006 the expression of ’registered unemployed people’ has changed to ’registered people searching for job’ in Hungary. By its content the meaning of the indicator is the same. To keep the unity of the text of the whole report, we use the traditional term for Hungary, too.


Slovakia. The capital city character shapes this region as centre for many headquarters and public administration institutions which implies the creation of jobs with high labour productivity.

Trnavský kraj draws its economic advantage from the proximity to the Bratislavský kraj, to the Czech Republic and northwest Hungary with their developed transport infrastructure. In the development of this region there is a north-south growth gap: The area near the Czech border is fast growing while the south-eastern area is somewhat lagging behind. The uneven inflow of foreign direct investments mostly to the western and north-western parts of the region only confirms and further deepens this trend. The south-western districts of the region are characterized by a typical combination of rural and small urban areas with a few key industries and a low level of diversification. The restructuring of industrial activities led to decline in several important enterprises in this region. Some of these key industrial branches were able to cope with the ongoing restructuring and revived their production, but they were not able to restore previous level of employment. An important characteristic of the southern, lagging behind area of this region is demographic depression, i.e. ongoing out-migration.

The leading role of both regions, but also the differences across the two regions is seen in the labour market. Hence in Bratislavský kraj the economic activity rate is about 4 percentage points above the Slovak average. The economic activity rate in Trnavský kraj is higher compared to the Slovak average, but still behind the rate of Bratislavský kraj. This is mainly due to the southern part of Trnava with large shares of agriculture and the north-west districts characterized by mountainous relief and an underdeveloped local infrastructure. The lagging districts are characterised also by a significant share of voluntary and long term unemployment.

The unemployment rate in Bratislavský kraj is the lowest in the Slovak Republic. It is close to the natural unemployment rate and has mainly frictional character. The unemployment rate in Trnavský kraj is also traditionally below the Slovak average. Within the Trnavský kraj a similar pattern as in the case of the economic activity rate is observable. From a macroeconomic perspective of the labour market, Bratislavský and Trnavský kraj can be seen as non-problematic.

The favourable position of Bratislavský and Trnavský kraj is visible also from their economic structure. The total number of industries in Bratislavský and Trnavský kraj comprise about 24% of all enterprises in the Slovak republic. Notably, West Slovakia and Bratislavský kraj together inhabit more than 52% of Slovak enterprises. The share of value added of Trnavský and Bratislavský kraj has grown from 32% in 2000 to more than 42% in 2005. In 2005 in Bratislava and West Slovakia more than 63% of total value added in Slovakia has been produced.

One of the economic sectors considered important is tourism. When comparing Bratislavský and Trnavský kraj there are similar conditions with respect to number of lodging facilities. In comparison with Trnavský kraj, Bratislavský kraj is in better position in number of available beds. This can be explained by larger number of bigger hotels. There is also difference in the number of visitors. There have been over three times more visitors in Bratislavský kraj in the year 2005 as in Trnavský kraj. On the other hand, Bratislavský kraj seems to be less attractive for long term staying tourists compared to Trnavský kraj, which is due to the frequent number of one night stays and conference/business tourism which is characteristic for Bratislavský kraj, compared to leisure time tourism in Trnavský kraj.

As far as changes in the economic development are concerned, both Slovak CENTROPE regions are the leading regions in Slovakia. Looking at labour productivity development from 2001 to 2005, it increased in the Slovak Republic by 42%. In the Slovak CENTROPE regions the increase was more than average. Hence labour productivity growth in Bratislavský kraj was around 55% and in Trnavský kraj around 54% in the same period of time. Restructuring of the industrial sector in these regions as well as steady increases in labour productivity in already operating enterprises play the most


significant role in the growth of productivity. The difference in labour productivity is reflected in the changes in nominal monthly wages. The average nominal monthly wage in Slovakia has increased in the years 2001 - 2005 by 36%. Given the higher productivity growth in Bratislavský and Trnavský kraj the growth of wages in the former was more than 2 percentage points and in the latter by 1 percentage points higher than the Slovak average.

The high economic growth contributed also to higher employment rates in Slovakia and in the CENTROPE regions as well. The overall Slovak employment grew by 2.8% between 2001 - 2005. Again, the Slovak CENTROPE regions performed much better. Bratislavský kraj recorded an employment increase of 7% and Trnavský kraj an increase of 5.7%. From a sectoral point of view most jobs in Bratislavský kraj were created in real estate activities, public administration and financial intermediation. The largest decline in employment was in education and agriculture, hunting and forestry. The highest employment growth in Trnavský kraj was recorded in manufacturing, construction, public administration, hotels and restaurants, and real estate activities (1,070 jobs). The sharpest decline was observed in agriculture and wholesale and retail sale and in education. Concluding, the general outlook for the CENTROPE regions with respect to employment can be seen as quite promising. In addition the growing number of IT industries can be seen as positive as well. The steady growth rates of the secondary and tertiary sectors provide jobs opportunities for a large share of citizens, create favourable economic and social conditions thus accelerating the necessary convergence process to the EU average.

Policy recommendations

In summary, thus, the CENTROPE region can be characterised as a heterogeneous transitory region, which is located at the intersection of the high income western European centres and the rapidly growing Eastern European countries. Economic ties and cross-border activities within CENTROPE, however, have increased significantly over the last decade and a half since one quarter of the enterprises in the region are co-operating across borders. On the institutional front, however, the still existing institutional and physical barriers, e.g. in the fields of labour mobility and transport infrastructure (especially with respect to the Austrian regions of CENTROPE), hamper the full exploitation of the economic potential of CENTROPE. It can be expected that these ties will strengthen further in the near future, as the planned measures to close existing gaps and eliminate bottlenecks in the cross-border transport network as well as to step up the modernisation of the existing infrastructure will improve internal and external accessibility.


-> Strengthening comparative advantages

In this respect one of the central objectives of economic policy is and will be to secure and improve the regions attractiveness as a location for investments. Given the comparative advantages of CENTROPE as a location for ancilliary industries, developing and deepening existing cross-border supply chains should be one of the priorities for policymakers. In the field of SME policy the key issue in this respect is to provide highly visible information on potential partners for cross-border co-operation.


-> Fostering cross-border innovation systems

In the long run the competitiveness of the CENTROPE region, like the competitiveness of all other regions in developed countries, will, however, strongly depend on its capability to compete in international markets for technologically advanced products. Thus activities aiming to maximize cross-border knowledge spillovers and to establish an efficient cross-border innovation system will be central for the future development of the region. This suggests that initiatives which aim at increasing the mobility of researchers and university students within the region as well as initiatives to increase cross-border co-operation in the field of research and development should receive high priority in the future.

-> Investing in public infrastructure

Developing cross-border co-operation will, however, also require investments in infrastructure. While the insufficient state of road and more generally transport infrastructure in CENTROPE has been often lamented, recent investment plans suggest that policy is at least partly responding to the bottlenecks that still exist. However, other areas of public infrastructure development should also be increasingly considered from a cross-border perspective. Co-operation activities in the schooling system are a good example of the returns that can be gained from such initiatives. Co-operation should, however, become increasingly common in all fields of public service provision ranging from communal services to healthcare.

-> Developing cross-border actor networks

Closely related to this, substantial efforts should be put into further developing decentralised cross –border actor networks and bringing these networks to deliver services and policies, which represent a noticeable improvement of the living conditions for the population of CENTROPE. In some areas (such as in the field of labour market policy) such actor networks already exist. Here the key to further development will be to demonstrate the achievements also to the wider public. In other areas (such as communal and public services), by contrast, such networks will have to be more forcefully developed, to better identify areas of co-operation.

-> Coordinating labour market policies

Finally, in the field of labour market policy future activities should increasingly focus on the exchange of best practice measures for active labour market policy and for tackling the shortage of skilled labour that is by now almost ubiquously felt in CENTROPE. Establishing efficient channels for cross-border placement activities for workers will be another important issue in cross-border labour market management. Given the similarity in many labour market problems in CENTROPE and the increased demand for cross-border placement of workers that can be expected to emerge when current institutional impediments to cross-border labour mobility will be removed, much can be expected from such measures.


Table of Contents 1 Introduction..................................................................................................................................... 15 2 Macroeconomic Developments in the CENTROPE countries ....................................................... 17

2.1 Global environment................................................................................................................. 17 2.2 Economic growth in the CENTROPE countries and its sources ............................................ 17

3 The economic situation of the CENTROPE-regions in a European context.................................. 31 3.1 Introduction ............................................................................................................................. 31 3.2 Economic Development of CENTROPE................................................................................. 34 3.3 Cross Border Flows ................................................................................................................ 40 3.4 Labour Market Development of CENTROPE ......................................................................... 42

4 Regional Development in the Austrian Part of CENTROPE.......................................................... 51 4.1 Introduction ............................................................................................................................. 51 4.2 Manufacturing Sector Development in the CENTROPE Regions .......................................... 54 4.3 Construction, Energy & Services in the Austrian CENTROPE Region .................................. 57 4.4 Tourism in the Austrian CENTROPE...................................................................................... 59 4.5 The Labour Market in the Austrian CENTROPE .................................................................... 60 4.6 Labour Market Developments at district level......................................................................... 63

5 Czech Republic - South Moravia.................................................................................................... 66 5.1 Introduction ............................................................................................................................. 66 5.2 Development of Gross Domestic Product............................................................................... 66 5.3 Development and structure of Gross Value Added ................................................................ 67 5.4 Employment ............................................................................................................................ 70 5.5 Development and structure of unemployment ........................................................................ 71 5.6 Foreign Direct Investment....................................................................................................... 72 5.7 Conclusions - critical issues.................................................................................................... 74

6 Regional Development in the Hungarian Part of CENTROPE....................................................... 75 6.1 Introduction ............................................................................................................................. 75 6.2 Manufacturing Sector Development in the CENTROPE Regions .......................................... 79 6.3 Construction, Energy & Services in the Hungarian CENTROPE Region............................... 82 6.4 Tourism in the Hungarian CENTROPE................................................................................... 84 6.5 The Labour Market in the Hungarian CENTROPE Region .................................................... 86

The Slovak Regions .............................................................................................................................. 90 6.6 GENERAL BACKGROUND ON REGIONAL DEVELOPMENT OF SLOVAK REGIONS ...... 90 6.7 FUTURE DEVELOPMENT PROSPECTS OF NUTS II REGIONS ........................................ 91 6.8 ECONOMIC AND SOCIAL DEVELOPMENT OF CENTROPE REGIONS IN SLOVAKIA..... 92

7 Summary & Policy Conclusions ................................................................................................... 101 7.1 Macroeconomic developments of the CENTROPE countries .............................................. 101 7.2 The Economic Situation of the CENTROPE Region ............................................................ 101 7.3 The Labour Market Situation in the CENTROPE Region ..................................................... 103 7.4 CENTROPE regions: Austria ................................................................................................ 104 7.5 CENTROPE regions: Czech Republic .................................................................................. 105 7.6 CENTROPE regions: Slovakia.............................................................................................. 108 7.7 Policy Conclusions................................................................................................................ 109 7.8 References............................................................................................................................ 114


1 Introduction

The CENTROPE region is one of the most important transnational economic areas at the former Eastern borders of the European Union. Being located at the intersection of four countries, comprising two capital cities as well as several further major cities (Brno and Győr) and covering some of the most dynamic regions in the Central and East European countries as well as some of the most prosperous regions within the EU (Vienna), CENTROPE is considered a region of enormous economic potential. Situated at the crossroads of important European transport corridors and disposing of efficient international airports, CENTROPE offers excellent accessibility and short distances to all European key markets. Given its large and expanding market together with its favourable location and high accessibility, CENTROPE is one of the European key areas for both large and small to medium scale investment. The high number of institutions of research and development and higher education in CENTROPE add to this, and are a key factor to attract highly innovative industries and services, which in turn are the basis for a sustained period of economic growth and prosperity.

The economic ties and cross-border activities within CENTROPE have increased significantly over the last decade and a half. It can be expected that these ties will strengthen further in the near future, as the planned measures to close existing gaps and eliminate bottlenecks in the cross-border transport network as well as to step up the modernisation of the existing infrastructure will improve internal and external accessibility. However on the institutional front the still existing institutional and physical barriers, e.g. in the fields of labour mobility and transport infrastructure (especially with respect to the Austrian regions of CENTROPE), hamper the full exploitation of the economic potential of CENTROPE.


The broad aim of the CENTROPE “Business and Labour Report” is to base these decisions on accurate, comparable and timely analysis of the economic development of CENTROPE and its regions. As such this report intends to assist all the relevant actors (e.g. economic agencies, networks of entrepreneurs, trade unions, politicians and administration) in monitoring the economic development of the transnational economic space. Additionally this report intends also to serve as a basis for discussion of labour market and employment issues and policies, as well as of investment and location policies, to make CENTROPE an attractive region for local and foreign investors.

Importantly, it must not be forgotten that this first issue of the CENTROPE “Business and Labour Report” is a pilot project. This implies that beyond writing this report, much effort from all participating institutions was spent in making this report feasible at all. Thus, before actually drafting the report a lot of background work had to be done.

In detail this means that the current report is the result of an intensive work programme that included four work packages.

The first work package was concerned with setting up a multilateral working group. Therefore, to gain as detailed as possible knowledge of the individual regions within CENTROPE the aim was to find one competent partner from each CENTROPE country. Each partner, given his experience and knowledge


of local regional development had at least three tasks to fulfil, namely to act as a contact person for any questions concerning his region/country, to gain access to the relevant statistical data and to write the report for his country.

In the end, after a longer than expected search, a multilateral working group was established. The partners in the group consist of the Austrian Institute of Economic Research (WIFO) and the Vienna Institute for International Economic Studies (wiiw) from Austria, Institute for Structural Policy (IREAS) of the Czech Republic, the West Hungarian Research Institute from Hungary and the Slovak Academy of Sciences.

The second work package centred around finding an appropriate set of contents for the pilot CENTROPE “Business and Labour Report”. At this stage all partners worked together, to establish a common set of topics that realistically could be covered, given the differences of data availability across countries.

The third work package dealt with data and methodological issues. A main aspect in this package was to create a basic set of indicators that are common and comparable across the CENTROPE countries, in order to ensure that in its essential results the “Business and Labour Report” is homogenous. Besides this common data set, it was decided that each partner should if possible use any available additional data, which might not be comparable to data from other countries, to deepen the analysis and interpretation in the report.

Finally the fourth work package consisted of drafting and writing this proto-type version of the CENTROPE “Business and Labour Report”.

In a sense this first version of the CENTROPE “Business and Labour Report” is symbolic for the character of CENTROPE. On the one hand five institutions of CENTROPE were gathered together, and every participating institution was highly ambitious to jointly work on this report, in order to make it valuable source of information. Thus four different parties worked to together on a worthwhile project, which is also what CENTROPE in toto is about.

At the same time the joint work has not been without difficulties. Different methodologies and experiences of the partner institutions, and even more the heterogeneity of available data sources, made it difficult to present this report and the chapters therein in a homogeneous way. This is reflected in the fact that the country chapters focus on a small, though important, set of indicators, namely income, output and employment, while a number of important other indicators had do be discarded as they were not available in the course of this project.

The major achievement of this report is, however, that for the first time this report shows in a concise way the economic development of CENTROPE, and thus already provides a significant value added. But also the problems that arose in the course of the project provide important information, as they show the tasks for future work in order to make this report an even more valuable project. This is another aspect in which the CENTROPE “Business and Labour Report” reflects the CENTROPE idea and project: To work open-minded and jointly on the existing problems, in order to make this report and the whole CENTROPE better ever time.

The structure of the report is as follows: Chapter 1 presents a short introduction, chapter 2 highlights the macroeconomic developments in CENTROPE, chapter 3 analyses the role of the CENTROPE regions in the EU-25, chapter 4-8 present the economic development of the CENTROPE regions in the individual countries and chapter 8 provides a summary and conclusions.


2 Macroeconomic Developments in the CENTROPE countries

Author: Roman Römisch, Vienna Institute for International Economic Studies

2.1 Global environment

In 2006 global economic growth amounted to 5.4% and world trade expanded close to 9%. Rising oil prices coupled with rapid global economic growth initially raised fears of inflationary pressures only to recede when oil prices dropped in the second half of the year. Economic performance in the European Union (EU) registered 3% growth in 2006, with expansion in the Eurozone being the best in six years: 2.7%. The engine of growth in the EU was domestic demand, with investment in machinery and equipment taking the lead. Private consumption only expanded at a moderate pace. Net exports supported growth, especially in the last quarter of 20062.

Global growth is expected to remain strong in both 2007 and 2008, yet somewhat less robust than in 2006, mainly due to a more pronounced decline in the US growth rate: down from 3.3 to 2.2%. It is assumed that the EU and Japan will record the same (or only marginally lower) growth rate in 2007 as in the previous year. In world trade, less buoyant activities in global manufacturing will yield a robust rate of growth, albeit 1.5 percentage points lower than in the previous year. Oil markets will remain tight in 2007.

Survey data in the European Union hint at the continuation of robust growth. The European Commission’s spring 2007 forecast assumes 2.9% in the EU and 2.6% in the Eurozone. Whereas growth in consumption will lag behind that of GDP, the rate of investment growth is expected to expand vigorously; it will be backed by solid corporate profitability, a high rate of capacity utilization, favourable financial conditions and the challenges posed by the rapid development of new technologies. Employment will increase by 1.4%, accompanied by a substantial 0.7 percentage point decline in the unemployment rate: down to 7.2%. Both the government deficit/GDP ratio and the government debt/GDP ratio are expected to improve over the current year. Consumer-price inflation in the EU-27 and the Eurozone will amount to 2.2% and 1.9%, respectively. As in the previous year, the current account deficit/GDP ratio in the EU-27 will remain negligible.

The risks on which the EU forecast is predicated are for the most part on a par with those that global development faces. EU-specific risks might possibly include: a more buoyant upswing in consumer spending than expected owing to a rise in employment; wage pressures as a consequence of tightening labour markets; and a boost to consumer confidence which might ultimately give rise to inflationary pressures in late 2007 and 2008.

2.2 Economic growth in the CENTROPE countries and its sources

Growth

Overall the year 2006 was a good year for the CENTROPE countries in terms of economic growth (see Table 1). Slovakia recorded its most rapid expansion since transition began (+8.3%), while the Czech Republic maintained robust growth. Only Hungary was an outlier – at least among the new

2 Economic forecast Spring 2007, European Commission.


Member States of the EU (NMS) in CENTROPE – as growth of GDP was less than 4% as a consequence of the austerity package introduced in the middle of 2006. Austria, though growing at a slower pace than its Eastern neighbour countries still recorded a GDP growth rate of more than 3% - for the first time since 6 years.

In total, the CENTROPE countries grew faster than the EU-25 in 2006 in terms of real GDP, thus prolonging the period, that started in 2004 for Austria and already 2001 for the other three countries, of growing ahead of the more advanced EU member countries. With that the catching-up process of Hungary, the Czech Republic, and Slovakia to the level of development of the ‘old’ EU has continued, and in the case of the latter two countries even accelerated over the last couple of years.

The first quarter of 2007 brought about a considerable acceleration of economic growth in Slovakia, yet in the same period a remarkable deceleration was registered in Hungary. The Czech Republic recording a more modest pace, while Austrian GDP continued to show a rising trend.

Table 1

Gross domestic product

real change in % against preceding year

2002 2003 2004 2005 2006 2006 2007 2007 2008

1st quarter forecast

Austria 0.9 1.1 2.3 2.0 3.3 3.2 3.5 3.4 2.4

Czech Republic 1.9 3.6 4.6 6.5 6.4 6.6 6.1 5.0 5.2

Hungary 4.4 4.2 4.8 4.1 3.9 4.9 2.7 2.7 3.1

Slovak Republic 4.1 4.2 5.4 6 8.3 6.7 9 8.5 8

CENTROPE-countries 2.8 3.3 4.3 4.6 5.2 5.3 4.9 4.3 4.3

EU 25 1.2 1.3 2.4 1.8 3.0 3.2 3.4 2.9 2.4

Source: wiiw, WIFO, Eurostat.

The sources of economic growth in the CENTROPE countries were, however, differentiated (Table 2). On the one end Slovakia showed a mix of sources of growth, as half of the country’s growth came from consumption and a quarter from investment, with net exports contributing a considerable amount. This trend seems to have continued in the first quarter of 2007. The increase in consumption is expected to grow at a somewhat slower pace than GDP. Although investment could increase more dynamically, it still keeps pace with the GDP expansion. In the first quarter of 2007, the net export position was strongly positive; the Slovak growth path can thus be seen to be broadly based and appears sustainable. In the Czech Republic the mix of growth components is more or less balanced, without any specific deterioration of net exports. In Austria consumption as well as net exports contributed slightly more than 40% each to growth, while investment demand was more sluggish and contributed around one fifth to overall growth. This trend seems to have reversed in the first quarter of 2007, as – given the more optimistic expectations of entrepreneurs - investment demand picked up significantly. At the same time consumption as well as net exports started to grow at slower pace than one year before. In Hungary though, the sources of growth in 2006 and the first quarter of 2007 reflect the impact of the austerity package. Consumption growth decelerated and declined in the first quarter, whereas net exports improved on a spectacular scale. While both effects were as expected given Hungary’s convergence programme, the drop in investments came as a surprise. A revival in


investment is an important prerequisite for returning to a growth path with substantially more dynamic expansion.

Table 2

Contributions (percentage points) to the GDP growth rates

2002 2003 2004 2005 2006 2006 I Q

2007 I Q

Austria

GDP growth rate (%) 0.9 1.1 2.4 3.3 3.4 3.2 3.5 Consumption 0.4 1.0 1.3 1.3 1.3 1.3 1.0 Gross fixed investment -1.5 1.4 0.1 -0.1 0.7 0.6 2.6 Trade balance 1.9 -1.3 0.9 0.8 1.4 1.7 0.7 Other items* 0.2 0.0 0 -0.1 -0.3 -0.4 -0.7

Czech Republic GDP growth rate (%) 1.9 3.6 4.6 6.5 6.4 6.6 6.1 Consumption 2.6 4.7 0.8 1.7 2.4 2.6 3.1 Gross fixed investment 1.5 0.1 1 0.6 1.9 1.6 0.4 Trade balance -2.2 -0.9 1.3 4.8 1.2 2.3 -0.4 Other items* 0.0 -0.3 1.5 -0.6 0.9 0.1 3.0

Hungary GDP growth rate (%) 4.4 4.2 4.8 4.2 3.9 4.9 2.7 Consumption 6.8 5.8 2.1 2.5 1.2 2.9 -0.6 Gross fixed investment 2.5 0.5 1.7 1.2 -0.5 1.6 -0.4 Trade balance -2.0 -2.5 0.5 2.9 3.7 2.0 2.2 Other items* -2.9 0.4 0.5 -2.4 -0.5 -1.6 1.5

Slovak Republic GDP growth rate (%) 4.1 4.2 5.4 6.0 8.3 6.7 9.0 Consumption 4.0 0.9 2.7 3.8 4.3 5.1 4.2 Gross fixed investment 0.1 -0.6 1.3 4.4 1.9 3.1 1.9 Trade balance -0.3 5.4 -0.9 -2.6 1.5 -1.8 4.6 Other items* 0.3 -1.5 2.3 0.4 0.6 0.3 -1.7

*Other items include change in stocks and statistical discrepancies

Source: wiiw estimates incorporating national sources.

As for the 2007 outlook in the current year, high GDP growth will continue to be characteristic for all CENTROPE countries, with the exception of Hungary. Slovakia will probably manage to exceed the rate of expansion it achieved in 2006, remaining in top form in terms of components of growth, with consumption increasing dynamically (albeit somewhat below GDP expansion), investments booming and net exports improving. The picture is less rosy for the Czech Republic. Although GDP growth will decelerate in 2007 by about 1.4 p.p., that is no reason for concern. More worrisome will be the unfavourable shift in components of growth. Consumption growth will outstrip GDP growth, while investment growth will slow down considerably. The first quarter results already point to a deterioration in the net export position. Within the framework of the country’s austerity programme, the Hungarian economy will hit rock bottom this year in terms of economic growth, attaining only about half of the GDP growth rate achieved by the NMS-53 as a group. Consumption will decline slightly, investments will grow modestly and the net export position will improve in a spectacular manner. Austrian GDP will grow at a somewhat slower pace than in 2006 only in 2008. According to the latest (autumn) WIFO forecast the Austrian economy will grow by 3.4% in 2007 and by 2.4% in 2008. Based upon more

3 The NMS-5 group consists of the Czech Republic, Hungary, Poland, Slovakia and Slovenia


optimistic outlooks investments will continue to grow at around 6.3% in real terms in 2007, but the strengthening of the Euro, contagion effects from the increase in the German VAT as well as an expected slowdown of the world economy will dampen Austrian exports, which are expected to grow by 9.0% this year, and by 6.5% in 2008. Furthermore, due to the moderate increase in wages in Austria, consumption growth will also be slightly lower in 2007 (with a forecasted growth of 1.9) as well as in 2008 (2.1%).

Industrial Production

Industrial production expanded dynamically in the CENTROPE countries, well above the rate of GDP growth (see Table 3). A considerable acceleration in industrial growth occurred in Slovakia (+6.6 percentage points from 3.3 to 9.9%), where the foreign owned manufacturing cluster has shifted into the top gear this year in terms of exports. The industrial output growth acceleration was also impressive in Austria (+4.4 percentage points), and though overall industrial production grew at a marginally slower pace than in the other CENTROPE countries (approximately 8%), the growth rate was around twice as high as in the Eurozone or the EU-27 aggregate. In the Czech Republic and Hungary, industrial output grew at approximately the same rate as in Slovakia (around 10%), though in the former countries acceleration of industrial growth was less spectacular, basically because industrial output grew already at high rates the years before.

Forecasts for 2007 point to modest deceleration in industrial output growth in Austria, the Czech Republic and in Hungary, while a further acceleration of growth is expected for Slovakia.

Table 3

Industrial production

real change in % against preceding year

2005 20061) 2006 2007 2007 2008


Austria 4.4 8.4 6.0 8.5 5.0 3.0

Czech Republic 6.7 9.7 14.8 12.4 8.0 9.0

Hungary 7.0 10.1 13.3 8.8 8.0 9.0

Slovak Republic 3.6 9.9 9.5 15.2 14.0 10.0

CENTROPE countries 5.4 9.0 10.7 10.2 7.8 7.3

1) Preliminary.

Source: wiiw Database incorporating national statistics, forecast: wiiw

Unit labour costs - competitiveness

In the course of 2006 and continuing in the first months of 2007, unit labour costs in industry increased substantially in Slovakia and Hungary. In the Czech Republic they remained roughly constant, albeit with some fluctuations. At the same time productivity in industry increased at double digit or close to double digit rates in the three NMS countries of the CENTROPE region. Thus, increasing unit labour costs are primarily the outcome of strong appreciation of national currencies in the countries concerned.


This, however, had no detrimental effect on the these countries’ cost competitiveness, especially in those manufacturing branches where foreign investors are heavily represented (such as electrical and transport equipment). Though unit labour costs are an important indicator of competitiveness, the marked expansion of exports in Slovakia and Hungary points to other important factors governing competitiveness, probably related to upgrading the quality of commodity exports.

The Austrian manufacturing sector by contrast was characterised by a moderate wage growth (of 2.3%) but rapid productivity growth (+7.3%). Thus unit labour costs improved once more in 2006. Thus Austria further improved its competitiveness in 2006, which also documented in a substantial improvement in the balance of trade.

Figure 1

Unit labour costs in industry, 2004-2007

EUR-adjusted, year-on-year, growth in %

Source: wiiw Monthly Database incorporating national statistics. Legend CZ=Czech Republic, HU=Hungary, SK=Slovakia, AT=Austria

Foreign trade

Customs statistics show an unanimous trend in foreign trade in goods in CENTROPE. Thus in all four CENTROPE countries export growth rates not only increased steadily over the period 2005-2006 and in the first quarter of 2007. They also were in general higher than the import growth rates, thus improving the trade balance significantly, and even turning into an export surplus in the first quarter of 2007.

Current account

The CENTROPE countries are characterized by marked differences in the current account. While throughout the last years Austria incurred a surplus in the current account (2004: +0.5%, 2005: 1.3% of GDP), the new member state countries showed persistent, high deficits (Czech Republic: 2004: -5.3%, 2005: -1.6% of GDP, Hungary: -8.4%, -6.9% of GDP, Slovakia: 2004: -7.8%, 2005: -8.7 of GDP). At the same time foreign trade has been characterized by substantial structural change in

-20

-10

0

10

20

30

40

ápr.04 aug.04 dec.04 ápr.05 aug.05 dec.05 ápr.06 aug.06 dec.06 ápr.07

CZ HU SK AT


particular in the new member states among the CENTROPE countries. This structural change was marked by increased intra – industry trade and an upgrading of the technological content of products, which led to a continuing convergence of trade structures with the old member states.

Table 4

Foreign trade of the CENTROPE countries

(based on customs statistics)

2004 2005 20061) 2007 1Q 2005 20061) 1Q 06

- 1Q 07

EUR mn change in % Austria Exports 89847.6 94705.5 103742 27543 5.4 9.5 11.1 Imports 91094.4 96498.9 104200 27318 5.9 8.0 9.7 Balance -1247 -1793 -459 224 Czech Republic Exports 53995 62738 75645 21075 16.2 20.6 17.5 Imports 54824 61441 74078 19757 12.1 20.6 16.1 Balance -829 1297 1566 1318 . . . Hungary Exports 44630 50093 58442 16032 12.2 16.7 18.4 Imports 48550 52996 60418 16321 9.2 14 15 Balance -3920 -2903 -1977 -289 . . . Slovakia 2) Exports 22427 25771 33273 9789 15.8 29.1 37 Imports 23686 27748 35733 9868 18.2 28.8 27 Balance -1259 -1978 -2460 -79 . . . CENTROPE countries

Exports 210900 233308 271102 74439 10.6 16.2 17.4

Imports 218154 238684 274429 73264 9.4 15.0 14.7 Balance -7255 -5377 -3330 1174 . . .

1) Preliminary. - 2) From 2005 data refer to trade excluding value of goods for repair.

Source: wiiw.

In 2006 the consequences of the austerity programme such as a less dynamic increase in consumption-related imports, sluggish investment and rapidly expanding exports led to an improving capital accounts to GDP (CA/GDP) ratio (from -6.9% in 2005 to -5.8% in 2006) in Hungary. In Slovakia, the comparatively high deficit in both 2005 and 2006 (2006: -8.3%) was partly caused by high profits accruing to foreign owned enterprises. This will also remain an important factor in the future. Despite the surplus in the first quarter of 2007 and the very dynamic expansion of exports, the CA/GDP ratio in Slovakia will come close to -5%, albeit only about half as high as the previous year. In the Czech Republic the export/import growth rate gap narrowed and the profits earned by foreign owned companies increased; this has resulted in a deterioration in the CA/GDP ratio from -1.6% in 2005 to -3.1% in 2006). In Austria the WIFO estimates a current account surplus of 2.2% of GDP for 20064.

In many new member states, the deterioration of the current account is explained not by worsening trade balances or unfavourable changes in customary income positions, but by the ever greater role played by profits earned by foreign owned enterprises, which appear in their full volume as debit in the current account. A considerable part of these profits are reinvested, but this appears in the capital account as part of the FDI inflows.

4 There is no detailed analysis of the Austrian current account, because of a methodological change in the data collection. (Marterbauer et al. 2007)


Table 5

Foreign trade of the CENTROPE countries by partner countries, exports

2005 in mn € 2005 shares in total growth 2002-2005, rate in % AT CZ HU SK AT CZ HU SK AT CZ HU SK TOTAL 94705 62738 50093 25771 100.0 100.0 100.0 100.0 22.4 54.0 37.2 68.8 CENTROPE countries

7788 10640 5766 6917 8.2 17.0 11.5 26.8 17.1 66.1 51.7 59.9

Austria . 3514 2801 1821 . 5.6 5.6 7.1 . 55.9 8.4 55.3 Hungary 3223 1708 . 1459 3.4 2.7 . 5.7 -3.4 69.0 . 75.3 Slovak Republic 1640 5417 1433 . 1.7 8.6 2.9 . 53.9 72.5 172.2 . Czech Republic 2925 . 1532 3637 3.1 . 3.1 14.1 30.2 . 122.1 56.8 EU27 69302 53616 40435 22442 73.2 85.5 80.7 87.1 21.0 53.7 31.1 64.5 EU15 55449 41402 32799 14863 58.5 66.0 65.5 57.7 19.2 48.6 19.5 60.7 Germany 30108 21103 15073 6718 31.8 33.6 30.1 26.1 21.5 42.2 16.3 69.2 NMS10 13776 12214 7636 7579 14.5 19.5 15.2 29.4 29.4 74.0 124.8 72.4 SE-Europe 2048 576 1542 145 2.2 0.9 3.1 0.6 24.3 18.7 77.1 -30.0 USA 5350 1670 1519 808 5.6 2.7 3.0 3.1 33.4 43.5 19.2 265.9 ROW 9459 4741 4446 1701 10.0 7.6 8.9 6.6 32.6 73.5 99.1 157.9 Russia 1701 1130 940 402 1.8 1.8 1.9 1.6 77.7 107.1 95.2 164.5

ROW=Rest of the World, Source: wiiw, WIFO.

Table 6

Foreign trade of the CENTROPE countries, imports

2005 in mn € 2005 shares in total growth 2002-2005, rate in % AT CZ HU SK AT CZ HU SK AT CZ HU SK TOTAL 96499 61441 52996 27748 100.0 100.0 100.0 100.0 25.2 42.8 32.7 58.4 CENTROPE countries

7349 7127 6227 5568 7.6 11.6 11.7 20.1 22.7 43.6 41.2 43.9

Austria . 2452 3501 1054 . 4.0 6.6 3.8 . 31.3 26.5 42.9 Hungary 2464 1324 . 1003 2.6 2.2 . 3.6 -3.6 56.7 . 109.6 Slovak Republic 1696 3351 1202 . 1.8 5.5 2.3 . 41.4 48.9 66.7 . Czech Republic 3189 . 1523 3512 3.3 . 2.9 12.7 42.6 . 65.1 32.3 EU27 73368 43921 36950 17489 76.0 71.5 69.7 63.0 24.2 40.9 42.6 37.3 EU15 62548 35455 30792 11450 64.8 57.7 58.1 41.3 23.4 36.9 37.1 29.9 Germany 40733 18483 14653 5799 42.2 30.1 27.6 20.9 31.0 32.3 51.2 46.4 NMS10 10795 8466 6158 6039 11.2 13.8 11.6 21.8 28.6 60.9 78.4 54.0 SE-Europe 759 91 328 248 0.8 0.1 0.6 0.9 55.2 6.0 99.9 88.7 other OECD 10925 6078 4732 2118 11.3 9.9 8.9 7.6 11.4 45.2 -2.6 83.7 USA 3175 1547 889 389 3.3 2.5 1.7 1.4 -15.0 10.2 -39.9 4.1 ROW 11446 11351 10985 7894 11.9 18.5 20.7 28.4 48.3 49.6 22.1 125.8 China 2981 3159 2861 894 3.1 5.1 5.4 3.2 112.2 58.7 29.6 144.9 India 275 194 84 68 0.3 0.3 0.2 0.2 52.4 81.9 -0.7 65.5 Russia 2262 3512 3912 2977 2.3 5.7 7.4 10.7 119.1 80.4 61.5 35.4

ROW=Rest of the World, Source: wiiw, WIFO


From 2007 onwards the 3 new member state (NMS) countries in CENTROPE will receive substantially more transfers from the EU budget than in their first three years of membership. For these countries these transfers will amount to about 2% of their GDP in 2007, double that of 2006. In 2008 and 2009 it will rise to around 3% of GDP. The overwhelming proportion of this inflow will, however, appear in the capital account of the balance of payments statistics, and not in the current account. This diminishes the relevance of the current account position as a benchmark for evaluating the external equilibrium of the countries concerned.

Foreign Direct Investment (FDI) – a counterweight to trade deficit

The FDI inflows into the NMS countries in CENTROPE altogether were lower in 2006 than in preceding years; the increase of FDI inflows in Slovakia was opposed by substantial declines in the Czech Republic and Hungary, which to some extent was to be anticipated given that the 2005 peak that was known to have been largely due to major privatization deals.

Foreign exchange inflows through FDI play a considerable role in securing the external equilibrium of the recipient NMS by counterbalancing foreign exchange outflows due to deficits in the current account. Last year the Czech Republic managed to receive amounts of FDI (net) higher than their current account deficit. The opposite was the case in Hungary and Slovakia, whereby; the coverage of current account deficit through net FDI was especially weak in Hungary.

Austria, by contrast is the only country among the CENTROPE countries, where outward FDI exceeds inward FDI. This is owed in particular to the important role played by Austrian investors in the new member states. Due to the investments in this region – and more recently also to countries in the former Soviet Union (FSU) - the outward FDI deficit, which was a major concern in the policy debate in the late 1980s in Austria, turned into a surplus.

In 2007 it is expected that the FDI coverage of the current account deficit will to some extent be smaller than in the previous year in the Czech Republic and will remain low in Hungary. For Austria the increases in outward FDI are expected to continue at least in the medium term as firms strive to improve their market position in the new member states as well as in the former Soviet Union.

Table 7

Inflow and stocks of Foreign Direct Investment

2004 2005 2006 2007

forecast 2004 2005 2006

2007

forecast 2006

EUR mn FDI net, % of CA stock

EUR mn

Austria 3134 7273 1749 – –89 –15 –33 –

Czech Republic 4009 9354 4760 5000 68 572 104 81 58813

Hungary 3633 6099 4874 4000 40 69 47 43 62096

Slovakia 2441 1694 3324 3000 93 48 83 112 180001)

CENTROPE Countries

Note: CA means current account deficit. FDI net is defined as inflow minus outflow.

1) wiiw estimate.

Source: National Banks of respective countries; wiiw forecasts.


Labour market situation improves

Labour market conditions in the CENTROPE countries mainly improved in 2006. Following the trend in the EU-25 unemployment dropped significantly in Slovakia (from 16.3 to 13.4%) and moderately in the Czech Republic (from 7.9 to 7.1%). The already quite low unemployment rate in Austria (5.2%) fell to 4.7%. Only in Hungary there was a slight increase in the unemployment rate – from 7.2% in 2005 to 7.5% in 2006.

Table 8

Harmonized unemployment and unemployment rates, LFS

2004 2005 2006 2004 2005 2006

in 1000 persons rate in %

Czech Republic 426 410 372 8.3 7.9 7.1

Hungary 253 302 317 6.1 7.2 7.5

Austria 188 208 196 4.8 5.2 4.7

Slovakia 483 430 355 18.2 16.3 13.4

EU25 19724 19763 18209 9.1 9.0 8.2

Source: Eurostat

The drop in the unemployment rate is largely attributable to rising employment on the back of the strong GDP growth (see Table 9). Despite these general improvements, some structural features of unemployment remain unchanged or have even deteriorated. Regional disparities in the NMS are still widening and interregional mobility is low. Thus, in a number of countries labour shortages in some regions or branches co-exist with high unemployment in other regions. In the NMS, labour shortages occurred much earlier than might have been expected after years of almost jobless growth and high unemployment. High unemployment had persisted for a long period of time, resulting in a large proportion of long-term unemployed, who in principle are unemployable as their skills have eroded, they lack any motivation to work and their level of education is low.

Table 9 Employment, LFS definition, annual averages

2006 2004 2005 2006 2006

in 1000 persons change in % against preceding year Index 2000=100

Czech Republic 4828 -0.2 1.6 1.3 103.1

Hungary 3930 -0.5 0.0 0.7 102.6

Austria 3928 -1.3 2.2 2.7 105.9

Slovakia 2302 0.3 2.2 3.9 109.5

CENTROPE countries

14334 -0.5 1.4 1.9 104.7

EU 25 201555 0.7 1.8 1.7 106.7

Source: Eurostat

Lack of skilled labour is reported for most countries, not only in the automotive industry in the Czech Republic and Slovakia in particular, but also in segments of the high-skill service sector such as health-care personnel, architects, civil engineers and IT experts. These developments may also be


partly attributed to the large inflow of FDI. In attracting skilled workers from abroad to fill the vacancies, the Czech Ministry of Labour and Social Affairs already launched a programme entitled ‘Selecting qualified workers from abroad’ as far back as 2003, offering permanent residence permits to those who had lived and worked in the country for two and a half years.

The increasing demand for labour also puts pressure on wages. Available data point to an increase in the wage bill in industry in Slovakia and the Czech Republic, where only recently workers at the Skoda car plant went on strike for higher pay.

An analysis of labour market developments with respect to different skill types (see Table 10) shows that CENTROPE has a supply structure, which differs from that of the EU 25: the CENTROPE countries have a significantly smaller proportion of people with low levels of education as well as a lower proportion of people with the highest levels of education.

Table 10

Educational structure of working-age population, 15-64, 2000 and 2006

low skill medium skill high skill

2000 2006 2000 2006 2000 2006

Austria 28.3 24.8 59.4 60.4 12.3 14.8

Czech Republic 19.6 16.4 70.9 72.2 9.5 11.4

Hungary 33.3 27.2 55.2 57.8 11.5 15.0

Slovakia 22.1 18.9 69.7 69.2 8.2 11.9

CENTROPE countries

26.1 21.9 63.4 64.7 10.5 13.4

EU 25 38.1 33.5 44.3 45.9 17.6 20.6

Source: Eurostat

Table 11

Employment rates, 15-64, 2000 and 2006, by skills

total low medium high

2000 2006 2000 2006 2000 2006 2000 2006

Austria 67.9 70.2 47.8 49.6 73.7 74.8 85.8 85.5

Czech Republic 64.9 65.3 29.1 23.2 72.8 71.9 85.1 83.9

Hungary 55.9 57.3 29.1 27.6 66.7 65.1 82.0 81.2

Slovakia 56.3 59.4 17.5 14.5 65.2 67.5 84.9 83.9

EU 25 62.4 64.7 48.9 48.5 68.5 69.5 82.5 83.2

Source: Eurostat


Despite having a low number of people with the lowest levels of education in their labour force, the employment and unemployment rates place the CENTROPE countries in the NMS in a much worse position in the labour market compared to the same group of workers in the EU-25 labour markets (a gap of 20 to over 30 p.p. in employment and unemployment rates). On the other hand, the employment rates of the medium- and highly educated do not differ much between the NMS and the EU 25. This is due to the combination of heavy industrial restructuring in the last decade, which has led to massive shift of labour demand to more highly qualified occupations, and a narrowly defined professional education system which contributes to low flexibility of labour markets.

At the high-skill end of the labour market, an interesting phenomenon is to be seen: in this segment of the labour market there are clear signs of the situation being much tighter in CENTROPE countries than in the EU 25, with high and rising employment and very low unemployment rates. The situation is even tighter where 25-35 year age group is concerned.

Table 12

Unemployment rates, 15-64, 1998 and 2006, by skills

low medium high

2000 2006 2000 2006 2000 2006

Czech Republic 22.8 24.8 7.9 6.4 3.0 2.5

Hungary 11.6 16.7 6.5 6.9 1.4 2.8

Austria 8.2 9.4 4.2 4.1 2.3 2.6

Slovakia 40.5 48.6 18.4 11.8 5.2 3.3

EU 25 12.4 11.9 9.4 8.4 4.9 4.6

Source: Eurostat

Inflation

From 2005 to 2006 Austria was the only CENTROPE country where the (consumer price) inflation rate dropped (from 2.1% to 1.5%). Despite the rise of energy prices by around one fifth, inflation in Austria was dampened by moderate wage increases, which led to only modest increases in real consumption and disposable income as well as by a stable price level of industrial goods.

In the Slovak Republic inflation rose to 4.5% in 2006, compared with 2.7% in 2005, mainly because of rising prices of energy but also rising healthcare and housing rents as well as due to increased consumer borrowing. The inflation rate in the Czech Republic somewhat increased, whereby approximately one third of the inflation is the direct effect of rising indirect taxes and regulated prices (utilities). Interestingly, higher oil prices did not seem to have secondary impacts, while also wage drift was slower than one might expect, given the growing demand for labour (which in certain sectors is even higher than the supply with labour). In Hungary the inflation rate rose from 3.6% in 2005 to 3.9% in 2006, given the Hungarian government’s decision to embark on a stabilisation programme in the 2nd half of 2006, which reversed previously declining inflation trends. The rise inflation was supported by a weaker exchange rate, rising oil prices as well as rising nominal wages.


The Czech Republic and Slovakia managed to reduce consumer price inflation in the first quarter of this year. While the Czech Republic has been a low inflation country for years, this does not apply to Slovakia, where back in 2006 the inflation rate stood at 4.5% and the current rapid economic growth could easily trigger higher inflation without the counterbalancing effect of a strong nominal appreciation of the national currency. In Austria and Hungary inflation accelerated in the first quarter of 2007. In the former years the increase was quite moderate (from 1.5% to 1.8% at an annual basis) and mainly due to rising prices of energy, clothing, and food. By contrast Hungary experienced a steep increase in inflation (to 8.5% in the first quarter of 2007) as a series of administrative price rises were introduced within the context of the austerity package in order to diminish public expenditures on subsidies.

Taking the consumer price inflation reference value for price stability according to the Maastricht criterion (currently 3.0%) Austria, the Czech Republic, and Slovakia met the Maastricht criterion in the first quarter of 2007. With regard to the forecast for CPI inflation for 2007, the Czech Republic and Slovakia are seen to be on the verge of non-compliance. Given its aspirations to introduce the euro as early as 2009, Slovakia will have to make every effort to remain on the safe side of inflation up until 2008.

For the year 2007 inflationary pressure may become still stronger in the NMS countries of CENTROPE, given the high rates of GDP growth (Slovakia), the increasingly frequent labour shortages (Czech Republic and Hungary) as well as high rates of capacity utilization (Czech Republic, Hungary and Slovakia). A strong euro against the dollar will ease this pressure; nevertheless, the most effective weapon against (imported) inflation remains nominal appreciation. It has been strong throughout the first quarter of the year and is expected to remain so throughout 2007.

Table 13

Consumer price inflation change in % against preceding year

2004 2005 2006 1) 2006 2007 2007 2008


Austria 2.0 2.1 1.7 1.5 1.8 1.9 2.0

Czech Republic 2.8 1.9 2.5 2.8 1.6 3 2.8

Hungary 6.8 3.6 3.9 2.5 8.5 7.0 3.5

Slovak Republic 7.5 2.7 4.5 4.3 2.8 3 2

Source: wiiw, WIFO

Public finances – deficits below and above the 3% benchmark

Periods of strong economic growth are ideal for improving public finance balances, especially when they are essential to meeting the Maastricht criteria for general government position/GDP ratio (a deficit not higher than 3% of GDP).

In Slovakia the deficit/GDP ratio increased slightly in 2006 despite the robust expansion of the country’s economy. This was on account of the increased budgetary expenditures initiated by the new Slovak government to fulfil at least some of its pre-election promises to address social tensions that have emerged following the radical reforms introduced by the previous government. Helped by the


booming economy, by 2008 the country’s deficit/GDP ratio will have been reduced to below the requisite level of 3%, thus removing one obstacle in Slovakia’s path to introducing the euro in 2009. The Czech Republic will not be able to sustain the less than 3% deficit/GDP ratio it achieved last year. In all likelihood, the revenue-reducing effect of the planned reforms in taxation will not be matched by additional revenues from cuts in various social benefits and public health–care expenditures. Hungary suffered an extremely high public deficit in 2006. It was the regrettable consequence of irresponsible economic policy driven by political cycles, further to being aided and abetted by all the major political parties since 2001. After the spring elections in 2006, the incoming ‘new-old’ government had no choice but to break with the policy. The austerity package and a wave of public finance reforms (partly launched, partly in the pipeline) already took effect in 2006, without which the deficit would have been even higher. The full impact will be felt in 2007 and 2008, thus by 2009 the general government deficit/GDP ratio will have come close to the Maastricht criterion. Nevertheless, the reforms have been extremely unpopular. There is every risk that political considerations pertaining to the next elections will slow down the reforms and the final stage of the deficit reduction programme will not materialize. In Austria, which has the lowest deficit/GDP ration within CENTROPE, the budget balance improved from a deficit of 1.6% of GDP in 2005 to a deficit of 1.1% of GDP in 2006. Though the corporate tax rate was lowered in 2005 (to 25%) this - so far - had no negative effects on budget revenues, as company profits, because of overall economic growth, grew sufficiently. As the revenues from other taxes increased dynamically this overall led to a reduction of the budgetary deficit. For 2007 a further reduction of the deficit can be expected in Austria, given the continuing trend of increasing tax revenues and the increase of the tax on mineral oil.

Table 14

General government budget balance in % of GDP 1)

2003 2004 2005 20062) 2007 2008

forecast

Austria -1.8 -1.3 -1.6 -1.2 -1.1 -1.1

Czech Republic -6.6 -2.9 -3.5 -2.9 -4.2 -3.5

Hungary -7.2 -6.4 -7.8 -9.2 -6.3 -4.0

Slovak Republic -2.8 -2.4 -2.8 -3.4 -3.0 -2.8

1) EU definition: net lending (+) or net borrowing (-) according to ESA'95, excessive deficit procedure. - 2) Preliminary.

Source: Eurostat; wiiw forecasts.

Summary

During the last few years the CENTROPE countries were marked by strong economic growth, in terms of income, industrial output and exports, and recently also in employment terms. Though GDP growth rates will be somewhat lower in 2008, especially for Hungary, the CENTROPE countries will grow at an respectable pace – compared to the EU-25. Exports from the CENTROPE countries are expected to grow further, given the favourable international environment, the growing import demand of the region’s main trading partner countries, as well as the continuing competitiveness of the three new member states within CENTROPE. Limitations for economic growth in the CENTROPE countries


potentially come from the increasingly tight labour markets, where the lack of highly skilled labour might dampen the future development of high value added activities.

Still, the outlook for the CENTROPE regions is optimistic. It becomes even more optimistic, if the substantial funding from the European Cohesion Policy is taken into account. From 2007 onwards the countries in Central and Eastern Europe will receive around 3.2% to 3.8% of their GDP annually from the Structural Funds and the Cohesion Funds. Adding another 0.3% to 1% in the form of agricultural subsidies plus smaller amounts of funds from other positions in the EU-Budget, the total transfers from the EU to the new member states will be around 3.5% to 5% of GDP annually, from 2007 to 2013. Since the contributions from the new member states to the EU budget will be around 1% of GDP annually, their net (receiver) position will be around +2.5% to +4% of their GDP. To illustrate the importance of these funds: after the Second World War (from 1948 to 1952) Western Europe in the course of the „European Recovery Programs“ (Marshall Plan) received financial assistance from the USA, which was on average 2.1% of the ERP countries GDP5.

The optimistic outlook for the CENTROPE countries is good news for the individual CENTROPE regions within these countries. Given the high correlation between country growth and the economic development of its regions it can be expected that the regions will be able to enjoy economic prosperity just as much as the countries as a whole do. This is especially true for the CENTROPE regions. With few exceptions the CENTROPE regions belong to the most prosperous and most dynamic regions within their countries. Hence, given the past development of these regions, as well as their economic structure it can be expected that the CENTROPE regions will not only benefit from the good macroeconomic development in their country, but to also be a major contributor to the economic growth in the CENTROPE countries.

5 Richter, S., 2006, The miracle of Brussels: a compromise on the long-term budget of the European Union, wiiw monthly reports 01/2006.


3 The economic situation of the CENTROPE-regions in a European context

3.1 Introduction

In terms of NUTS 3 regions the "CENTROPE" region covers the Austrian provinces of Burgenland, Lower Austria, and Vienna; the Czech region of South Moravia; Trnava and Bratislava in Slovakia as well as the Hungarian counties of Gyõr-Moson-Sopron and Vas. Its territory measures over 44,000 square kilometres and it has a population of around 6.5 million inhabitants. In some cases, however, EUROSTAT sources do not provide NUTS3 level data. Thus in this chapter we sometimes also will use of NUTS 2 level data. Here CENTROPE covers the Austrian provinces of Burgenland, Lower Austria, and Vienna, the Czech South East planning region; Bratislava and Western Slovakia in Slovakia as well as Western Transdanubia in Hungary (see Figure 2). When operating on this NUTS 2 level data CENTROPE thus covers a territory of 66,000 square kilometres and has 8.5 million inhabitants.

Figure 2

The CENTROPE Region

Burgenland

Lower AustriaVienna

South East

West Transdanubia

BratislavaWestern Slovakia

AT111

AT112

AT113

AT121AT122

AT123

AT124 AT125

AT126

AT127AT130

CZ062

HU221

HU222

SK010SK021

NUT 2 level Definition Nuts 3 level Definition

Source: Regiograph, WIFO

Irrespective of the data used, CENTROPE is, however, considered one of the most important transnational economic areas at the former Eastern borders of the European Union. Located at the intersection of four countries, comprising two capital cities (Vienna and Bratislava) as well as several further major cities (Brno and Győr) and covering some of the most dynamic regions in the Central and East European countries as well as some of the most prosperous regions within the EU (Vienna), CENTROPE is considered a region of enormous economic potential.

From a historical perspective, the region was characterised by strong functional ties within a single state up to the early 20th century. It was only the political events of the 20th century which made it a


border region. While the reminders of this shared history can still be found in a number of cultural similarities and the existence of minorities in some locations, the current economic and social situation has been more strongly influenced by the experience of the iron curtain and systemic reforms in the formerly communist countries. The experience of almost complete separation of the region along the iron curtain, has prevented functional specialisation in the region (for instance along the axis Vienna – Bratislava). It also led to the orientation of infrastructure away from the region (and to the depopulation of many of the more peripheral regions in the area), which in further consequence has led to a number of still existing (and often criticised) bottlenecks in particular in transport infrastructure and in some instances caused a duplication of infrastructure that would not have emerged if the region had developed jointly.

Figure 3

Market Potential in the European NUTS 2 Regions

Market Potential 2002

<= 20.49820.498 <= 40.99640.996 <= 61.49361.493 <= 81.99181.991 <= 102.489

Note: Figure displays the distance weighted demand potential of European NUTS 2 regions. Source: Eurostat, Feldkircher and Palme (2004)

Furthermore, despite favourable conditions, CENTROPE is located in neither the economic nor the geographic centre of Europe. It is also not a central region in terms of urbanisation. While CENTROPE is in many respects closely linked to the economies of the "twin – capitals" of Vienna and Bratislava, it is not a typical central region in the European context. Its settlement structure on average is not governed by large cities. Much rather – as in much of Central Europe - medium sized towns dominate.


In terms of accessible demand potential (i.e. the distance weighted GDP of all neighbouring regions) CENTROPE is dominated by more western locations in Europe. This can be seen in Figure 3 where the distribution of the accessible demand potential in the EU member states is shown. As can be seen the regions with the highest accessible demand potential (and thus the central regions of Europe from an economic point of view) are located at the border of France and Germany and in the southern UK. The CENTROPE region by contrast belongs to a large group of regions in the EU that are characterised by an intermediate market potential.

Figure 4

Growth of Market Potential in the European NUTS 2 Regions

Growth of Market Potential1995-2002

<= 1,19<= 1,39<= 1,65<= 1,93<= 2,69

Note: Figure displays the growth of distance weighted demand potential of European NUTS 2 regions. Source: Eurostat, Feldkircher and Palme (2004)

On the other hand CENTROPE, is also not a peripheral region. (Only some parts of CENTROPE such as for instance Southern Burgenland, the Waldviertel and parts of Southern Moravia may be considered rural peripheries in terms of national developments.) The regions which are characterised by an extremely low accessible market potential in the European Union are located further to the East. These regions have also grown more rapidly than the EU average in the last decade. Thus CENTROPE is also located very close to those regions in the EU that have experienced the fastest growth of market potential in the last decades (see Figure 4).


The best characterisation of CENTROPE is thus that of a region characterised by strong centres located at the intersection and border of two economically very different territories of the EU. It is a “transitory” region, in which good accessibility from the economic centres of Western Europe and from the rapidly growing Eastern European countries shape comparative advantages. These – as is documented by a number of recent spectacular foreign direct investments - in general lie in a strong industrial base - in particular in ancillary industries (such as automotive components) - , a strong orientation on medium skill and niche products and rapid technological catching up and low wage costs (in particular in the Eastern part of CENTROPE).

3.2 Economic Development of CENTROPE

GDP and GDP Per capita

This characterisation implies that the region is characterised by sharp internal disparities. Due to the legacies of the communist regimes the main dividing line within the region was - and still is - the division between the new member states and Austria. While in the Austrian parts per capita GDP approaches or exceeds the EU average, all of the CENTROPE regions in the new member states - except for Bratislava - currently qualify for Objective 1 status; their GDP per capita is much below the EU-25 average. In the richest region of CENTROPE (Vienna) GDP per capita was at 172% of the average (in the year 2004), in the poorest region (Trnava) it was at 56% of the average (see Figure 5).

Figure 5

GDP per capita 2004 at PPS

19,305

22,440

38,632

14,990 15,89613,870

27,802

12,515

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Bur

genl

and

Low

er A

ustri

a

Vie

nna

Sou

th M

orav

ia

Gyo

r-Mos

on-

Sopr

on

Vas

Bra

tisla

va

Trna

va

EU average

- - Centrope

Source: Eurostat.


Figure 6

GDP growth 1995/2004

Average annual change in %

9.59.8

8.7

3.7

7.8

2.72.7

11.6

0

2

4

6

8

10

12

Bur

genl

and

Low

er A

ustri

a

Vie

nna

Sou

th M

orav

ia

Gyo

r-Mos

on-

Sop

ron V

as

Bra

tisla

va

Trna

va

EU average

- - Centrope

Source: Eurostat, WIFO-calculations

However, not all differences in CENTROPE follow purely national lines. For instance the capital city of Bratislava can claim a per-capita-GDP that is comparable to the Austrian regions and is above the EU-average; Burgenland, on the other hand, has been an Objective 1 region until recently; its GDP per capita is not only below the EU-average but also below the CENTROPE average.

Thus while there are important national differences within CENTROPE, a second important division line is the division line between the large urban centres and more rural regions. CENTROPE’s favourable economic position, with a GDP per capita slightly above the EU-average, thus mainly goes back to the twin cities of Vienna and Bratislava, while some more rural regions in both the Eastern as well as the Western part of CENTROPE are clearly lagging behind in this respect.

While the new member states regions may be considered poorer than the Austrian regions, they are more dynamic. GDP growth rates in the Czech, Hungarian and Slovak regions of CENTROPE ranged between 7.8% and almost 12% and clearly outperformed the Austrian regions (with between 3% and 4%). The rapid catch-up process of the Central and Eastern European countries thus makes the eastern part of CENTROPE more dynamic than the European average. Most recent data from Eurostat (see Figure 6) sources suggests that the regions which have shown above EU average GDP growth within CENTROPE in the last decade are all located outside Austria. The slightly below EU - average growth performance of the CENTROPE region is thus due primarily to the below average performance (and high weight) of the Austrian CENTROPE regions, while the Eastern part of CENTROPE has been characterised by an extremely rapid catching up process, with most of the CENTROPE regions also growing substantially faster than their respective national average.


Specialisation and Sectoral Structure

These dividing lines within CENTROPE illustrated above are also reflected by the economic structure in the region. Focusing on the sectoral employment and gross value added (GVA) shares in agriculture, industry and services in the NUTS 3 regions of CENTROPE (see Table 15) indicates that in total the structure of CENTROPE does not differ significantly from the EU average sectoral structure. The share of agriculture and industry in GVA are both by 0.1 percentage points lower in CENTROPE than in the EU average and the share of services is by 0.2 percentage points higher. These small differences, however, mask the substantial structural heterogeneity within CENTROPE, which once again reflects the dividing lines between the new member states and Austria on the one hand, and the urban regions and other regions on the other hand.

In general, with the exception of Bratislava, the share of industry in GVA and employment is higher in the CENTROPE regions of the new member states than in the Austrian part of CENTROPE. Only in Lower Austria, which is considered an industrial region in the Austrian context, the share of industry in employment and unemployment attains a level that is comparable to that of the less heavily industrialised among the new member state regions of CENTROPE (such as Southern Moravia). In addition, in most of the more heavily industrialised regions within CENTROPE (such as Trnava and the Hungarian CENTROPE regions) the share of industry in GVA exceeds the 40% level.

The exception to this rule, however, is Bratislava, which (as its “twin city” Vienna) has a high share of services in both GVA and employment (and a low shares in both agriculture and industry). Still, tertiarisation is much less advanced in Bratislava compared to Vienna, with the difference in the share of service employment accounting for over 10%.

Table 15

Sectoral Structure of GVA and Employment in CENTROPE * (NUTS 3 level 2004)

Share of Agriculture Share of Industry Share of Services

Structural Change1)(2000-

2004)

GVA Empl GVA Empl GVA Empl GVA Empl

EU 27 2.2 - 26.2 - 71.6 - 2.00

South Moravia 4 4.7 35.6 37.5 60.3 57.8 2.05 1.54

Czech CENTROPE 4 4.7 35.6 37.5 60.3 57.8 2.05 1.54

Győr-Moson-Sopron 4.4 5.5 45.5 40.3 50.1 54.2 7.48 1.85

Vas 4.8 5.2 44.1 45.1 51.2 49.7 6.76 1.73

Hungarian CENTROPE 4.5 5.4 45 42.2 50.5 52.5 7.23 1.30

Burgenland 5.8 6.8 30.4 35.0 63.8 58.3 0.34 1.04

Lower Austria 3.8 4.3 35.7 36.7 60.6 59.1 1.07 1.73

Vienna 0.2 0.6 16.3 14.6 83.5 84.7 2.17 2.64

Austrian CENTROPE 1.7 2.6 23.7 25.3 74.6 72.1 1.79 0.77

Bratislava 0.9 1.6 23.5 22.7 75.6 75.7 3.52 2.71

Trnava 5.7 6.1 49 39.5 45.3 54.4 0.42 2.61

Slovak CENTROPE 2.3 3.2 30.9 28.7 66.7 68.1 2.67 1.30

CENTROPE 2.1 3.3 26.1 29.6 71.8 67.1 1.57 1.07

*excluding extra-territorial organizations and bodies, 1) measured by the index of structural change, which is defined as half the sum of the changes in sectoral shares in the time period 2000 to 2004 with 0 implying no structural change and the maximum value being 100. Source: EUROSTAT, WIFO calculations


In addition, most of the new member states regions of CENTROPE (in particular Trnava and - to a lesser extent - the Hungarian CENTROPE regions) have a slightly higher share of agriculture in GVA and employment (which ranges at over 5% for employment and over 4% for GVA shares) than the Austrian regions. However, rural Austrian CENTROPE regions such as Burgenland approach (or even exceed) these shares – thus manifesting the second line of division between the urban and more rural regions of CENTROPE.

In summary, CENTROPE is not only characterised by significant disparities in terms of economic development, but also in terms of sectoral specialisation. The eastern part of CENTROPE is characterised by a substantially higher share of manufacturing in both employment and GVA, while service sectors tend to be underrepresented. This is reconfirmed when moving to NUTS 2 level data (Table 16), where we see that the lower service sector share in GVA in the new member state CENTROPE regions applies to almost all service sectors , but is most pronounced in real estate and business services, thus pointing to particular structural deficits in these activities the new member states’ regions of CENTROPE.

Table 16

Sectoral Structure of GVA in CENTROPE (2004-NUTS II Level)

Czech South East

West Tramsdanubia Burgenland Lower

Austria Vienna Bratislava Western Slovakia

Agriculture 5.6 4.8 5.8 3.8 0.2 0.9 6.0

Industry 31.8 37.9 20.5 26.8 11.2 19.2 39.8

Construction 7.2 5.0 9.9 8.9 5.1 4.3 6.2

Trade 11.5 7.7 9.7 12.9 16.6 15.8 12.4

Hotels and Restaurants 1.8 2.3 4.3 3.0 2.8 1.3 1.3

Transport 9.6 6.9 5.6 7.4 9.0 12.4 6.4

Financial Services 1.5 2.0 5.2 3.8 8.0 11.9 2.0

Real Estate 13.4 13.5 13.9 13.3 23.6 17.3 12.7

Public Administration 5.3 7.7 8.4 6.1 6.5 8.1 4.5

Education 5.1 5.0 6.5 5.4 4.7 2.8 3.5

Health Services 4.3 4.5 6.7 5.7 6.0 2.1 3.4

Other Public and Private Services 2.9 2.8 3.2 2.8 6.1 3.9 1.7

Private Households 0.0 0.0 0.3 0.3 0.2 0.0 0.0

*(excluding extra-territorial organizations and bodies), Source: EUROSTAT, WIFO calculations

While structural differences persist within CENTROPE - as with aggregate GDP, the new member states regions are also the more dynamic regions in terms of structural change. For instance, indicators of structural change show that most of the new member states' regions in CENTROPE are converging in structure to the Austrian regions and have experienced a process of increased tertiarisation and de-industrialisation, which is combined with structural change that was almost twice as high as in the Austrian regions.


Education, R&D and High Technology Resources

Similarly, the structure of the labour force and infrastructure endowments differ significantly across CENTROPE regions. Aside from national differences in education systems these are also closely associated with urbanisation: In general CENTROPE is characterised by a highly qualified workforce that has its strongholds in the secondary and upper secondary education levels. In particular in the regions of the Czech Republic and Slovakia around 80% of the employed have a completed secondary education. The share of population with a tertiary education is, however, below the European average in all regions but the capital cities of Vienna and Bratislava, where around a quarter of the workforce has completed tertiary education. High shares of the workforce with only a completed primary education can only be found in Western Transdanubia. Infrastructure endowments, accessibility and innovation indicators tend to follow these patterns. In particular, indicators of R&D activity (such as R&D expenditures, patents per 1000 inhabitants) and infrastructure quality are clearly above the EU averages for the large agglomerations (in particular Vienna and Bratislava), but not for the more peripheral regions.

Figure 7

Structure of the Workforce in CENTROPE

36.429.2 24.4 20.3

30.6

17.825.5 25.4

38.3

53.957.6

56.3 68.551.2

59.5

66.0 60.543.5

9.7 13.119.3

11.2 10.322.7

8.6 13.2 18.1

0%

20%

40%

60%

80%

100%

Bur

genl

and

Low

er A

ustri

a

Vie

nna

Sou

th M

orav

ia

Wes

tTr

ansd

anub

ia

Bra

tisla

va

Wes

tern

Slo

vaki

a

Cen

trope

EU

25

low skill medium skill high skill

Legend: High skill – ISCED groups 0-2, Medium Skill – ISCED Groups 3-4, High Skill – ISCED Groups – 5-6

CENTROPE’s relative comparative advantages in general are thus rooted in a strong industrial base in particular in ancillary industries (such as automotive components), a strong orientation on medium skill and niche products and in a rapid technological catching up and low wage costs (particular in the Eastern part of CENTROPE).


Figure 8

R&D Expenditure in % of GDP (2002)

0.330.55

0.63

0.83

3.3

1.01

0.950.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Burgenland Lower Austria Vienna South East Bratislava Western Slovakia West Transdanubia

Regions EU 25 Czech Republic Hungary Austria Slovakia

Source: EUROSTAT

Table 17

Patents per 100 Inhabitants and share of high tech employment in CENTROPE

Patents per 1000 Inhabitants(2002)

Employment share in High-Tech Branches

2006

South East 14.7 4.64

West Transdanubia 4.2 6.87

Burgenland 54.8 3.12

Lower Austria 134.5 4.31

Vienna 201.4 6.79

Bratislava 31.9 5.38

Western Slovakia 6.3 4.48

Source EUROSTAT

This finding is also reconfirmed when considering the limited data available on regional R&D expenditure, patenting and employment in high technology sectors available from Eurostat. These data suggest that CENTROPE is in general not a typical high tech location in the EU. Among the NUTS 2 regions of the EU only Vienna could claim an R&D expenditure (in % of GDP) that is higher than the EU average in the year 2002. All other NUTS 2 regions of CENTROPE have an R&D expenditure (in % of GDP) that is clearly below the EU average. Furthermore, this fact is not only due


to the organisation of national innovation and research systems around national capital, since also all of the CENTROPE countries – aside from Austria – have a below average R&D expenditure (in % of the GDP) (see Figure 8).

Among the CENTROPE regions, however, both the capital city of Bratislava, and the other CENTROPE regions rank behind in Vienna in terms of R&D expenditure. This suggests that cross border co-operation in R&D could potentially create additional value added to the region.

Thus while CENTROPE does not perform well in a European context, when R&D expenditure is considered, (which may amongst other things also be due to tight public budgets, which reduced publicly financed R&D in the last years), CENTROPE performs slightly better when patents statistics and employment in the high technology sector are considered (see Table 18). Reflecting the industrial specialisation of CENTROPE, the amount of patenting and high tech employment is relatively high and are indicative of the innovation potential of the region. This applies in particular to Lower Austria, where the number of registered patents is the second largest in the region and Western Transdanubia, where the share of employment in the High Tech sector already exceeded that of Vienna in 2006 according to Eurostat data.

In summary, from a structural perspective CENTROPE may be considered a heterogeneous cross border region, marked on the one hand by the differences between the old and the new member states and on the other hand by the differences between rural and urban regions located in the region. Furthermore, available evidence suggests that individual regions within CENTROPE have a substantial innovation potential but that R&D expenditure could still be expanded.

3.3 Cross Border Flows

Cross –border co-operation in the enterprise sphere

One area where substantial progress has been made in recent years was in terms of integration of the different parts of CENTROPE. As mentioned in the last chapter trade between the CENTROPE countries has grown well above the EU average since the 1990’s, and by now for each of the CENTROPE countries the other countries in the region belong to the list of the most important trade partners. In addition, in particular Austria and the city of Vienna have profited substantially from the Austrian foreign direct investments going to the new member states of the European Union (such as in the banking sector). These investments have changed the long term capital account in Austria in the last 20 years. While at the end of the 1980’s Austria was a net importer of capital, since 2004 Austria has a capital account surplus, with Austrian firms investing more abroad than foreign firms invest in Austria.

This increased co-operation activity in the enterprise sphere is also documented in recent questionnaire based evidence on cross border enterprise co-operation in CENTROPE (see: Huber et al, 2007, and Table 18). According to this evidence around one quarter of all enterprises in CENTROPE have at least one cross border relationship with another enterprise in the form of (partial) ownership, delivery or other forms of co-operation. Furthermore, a more detailed analysis of the cross border enterprise networks suggests that:

1. Cross-border delivery networks and other forms of co-operation are well established in CENTROPE by now. Around 15 percent of the interviewed enterprises stated that they have bought products from suppliers from across the border and 9% have bought services from such suppliers. This form of co-operation is particularly common in the Hungarian CENTROPE. Around


15% of the enterprises hold other forms of co-operation, which may range from loose forms of co-operation to R&D networks as well as contractual forms of co-operation in the form of franchising.

2. Relationships based on ownership by contrast seem to be somewhat less frequent. Less than 5% of all interviewed enterprises stated that they have (partially) owned or founded an enterprise in another country of CENTROPE. Furthermore, these relationships are more concentrated in the capital city regions. Since most headquarters are located in capital city regions, this form of co-operation is particularly akin to these regions. Thus the highest share of such relationships is found in Vienna and in the Slovak part of CENTROPE.

Table 18

Cross-border Enterprise Cooperation in the CENTROPE region

Form of Enterprise Relationships

Bought/Founded enterprises Delivery Networks Others At least one

Founded

EnterpriseBought

Enterprise Part of

Enterprise Buy

Products Buy

Services Other

Cooperation Of any kind N

In % Absolute

Vienna 6.7 3.0 4.2 16.6 10.4 16.6 25.0 404

Lower Austria 3.4 1.0 3.8 14.3 7.8 9.2 18.4 293

Burgenland 5.1 0.0 2.5 12.7 10.1 17.7 29.1 79

Czech CENTROPE

2.0 0.3 0.6 10.6 4.2 9.2 21.6 357

Slovakian CENTROPE

6.3 1.2 3.9 15.6 14.8 25.4 35.9 256

Hungarian CENTROPE

0.6 0.6 1.2 20.7 12.4 20.1 30.8 169

Total CENTROPE 4.2 1.3 2.8 14.9 9.4 15.4 25.6 1558

N= Sample size, Source: LAMO, Huber et al, 2007

Cross –border labour market mobility

While integration in the enterprise sphere is progressing rapidly, the CENTROPE region is still less integrated compared to regions within one country. In particular, cross-border exchange in the labour market (migration and commuting) still remains limited due to existing institutional impediments and bottlenecks in infrastructure. This can be exemplified using migration data from Austria (see Table 19). In total, less than 11% of the foreign workers (and less around 1.5% of employees in Austria) came from the CENTROPE countries to Austria. The only region where workers from the CENTROPE countries indeed represent a sizeable group of the labour market is Burgenland. This is also due to a special institutional arrangements (the so called “Grenzgängerabkommen”) between Austria and Hungary, which allows Hungarians to commute to the Austrian border regions, according to a separate quota.

It can, however, be expected that these ties, too, will strengthen in the near future. Recent poll evidence (see Huber et al, 2007) suggests that the willingness to migrate or commute across borders within CENTROPE will not exceed the levels usually found within national borders and will remain relatively focused on migration and commuting from the new member state regions to the Austrian part of CENTROPE.


Table 19

Employees from CENTROPE countries employed in Austria in 2006

Vienna Lower Austria Burgenland Total Austrian

CENTROPE

Hungary 2,582 2,817 5,543 10,942

Czech Republic and Slovakia 4,212 5,177 561 9,950

Total Foreign employees 123,950 54,312 10,705 188,967

Total Employees 763,871 541,863 86,248 1,391,982

Total CENTROPE in% of foreigners 5.5 14.7 57.0 11.1

Total CENTROPE in% of Employees 0.9 1.5 7.1 1.5

Source: Austrian Social Security, WIFO calculations

Another aspect of cross-border ties that has often been heavily criticised are the numerous bottlenecks in transport infrastructure within the region. Here, however, recent investment plans in particular in the Austrian CENTROPE suggest substantial improvement in the next years.

Thus, relative unemployment rates to a much lesser degree follow the standard lines along which regional disparities develop in CENTROPE than indicators of regional development. In particular there is no clear indication that the CENTROPE regions of the new member states of the European Union have unambiguously higher or lower unemployment rates than the Austrian CENTROPE regions. Both the region with the lowest unemployment rate (Győr-Moson-Sopron, which together with Lower Austria, had an unemployment rate of 4.3% in 2005) and the region with the highest unemployment rate in CENTROPE (Trnava, 10.5%) is located in the new member states of the EU.

3.4 Labour Market Development of CENTROPE

The structure of employment and unemployment rates in the NUTS 2 regions of CENTROPE

Considering the labour market in a European context, CENTROPE can be considered a region with relatively low unemployment rates and intermediate or slightly higher labour market participation. Only one region in CENTROPE (Trnava) was characterised by double digit unemployment rates according to Eurostat data in the year 2005. Vienna, Vas and South Moravia had unemployment rates between 7% and 9%, with Vienna showing an unemployment rate slightly above the EU25 average and South Moravia and Vas having an unemployment rate which was 1 percentage point below the EU-average. All other CENTROPE regions had unemployment rates substantially below the EU average (of 9%), ranging between 4% and 6% (see Figure 9).

Thus, relative unemployment rates to a much lesser degree follow the standard lines along which regional disparities develop in CENTROPE than indicators of regional development. In particular there is no clear indication that the CENTROPE regions of the new member states of the European Union have unambiguously higher or lower unemployment rates than the Austrian CENTROPE regions. Both the region with the lowest unemployment rate (Győr-Moson-Sopron, which together with Lower Austria, had an unemployment rate of 4.3% in 2005) and the region with the highest unemployment rate in CENTROPE (Trnava, 10.5%) is located in the new member states of the EU.


Figure 9

Unemployment rate 2005

in %

6.0

4.3

9.1

8.1

4.3

7.9

5.3

10.5

0

2

4

6

8

10

12

Burgenland Lower Austria Vienna SouthMoravia

Gyor-Moson-Sopron

Vas Bratislava Trnava

EU 25

- - Centrope

Source: Eurostat

In addition there is no clear indication of a urban – rural unemployment rate differential in CENTROPE. Vienna is one of the regions with one of the highest unemployment rates in CENTROPE, while Bratislava is one of the regions with relatively low unemployment and the regional unemployment rate is largely independent of sectoral specialisation. The coefficient of correlation of the regional unemployment rate with the share of agriculture, industry and services in total employment in the region is very low (with -0.03, -0.08 and 0.08, respectively), which suggests that there is no close (linear) relationship between regional unemployment rates and sectoral specialisation in CENTROPE.

Analysing labour market developments in more detail, suggests that regional labour market disparities in CENTROPE are closely related to a number of more latent national and institutional differences between the countries concerned. For example, considering regional employment rates suggests that in a number of regions of CENTROPE low unemployment rates are accompanied by low employment rates. This implies that low unemployment is due to low labour market participation. Especially in the Hungarian regions, despite below average unemployment rates, employment rates are below the EU-25 average (of 63.7%). In Western Slovakia employment rates are the lowest among the CENTROPE regions, despite high unemployment rates (see Figures 9 and 10).

In general, however, the average employment rate in CENTROPE is 64.7% and thus exceeds the European average of 63.7% in all regions but Western Transdanubia region (62.1%) and Western Slovakia (60.6%;). The highest shares were to be observed in Lower Austria (69.9%), Bratislava (69.6%) and Burgenland (68.1%). Vienna (68.3%) and the Czech South East (64.1), by contrast, are very close to the European average.


Figure 10

Employment Rate 2005

in %

68,1

69,9

62,1

69,6

60,6

63,864,1

54

56

58

60

62

64

66

68

70

72

Burgenland Lower Austria Vienna South East WestTransdanubia

Bratislava WesternSlovakia

Centrope

EU 25

Source: Eurostat.

Table 20

Share of Part Time Employment in Total employment in the CENTROPE regions (2005)

Total Male Female

European Union (27 countries) 17.8 7.4 30.8

South Moravia 5.4 2.7 9.0

West Transdanubia 3.3 1.8 5.0

Burgenland 21.0 n.a. 43.1

Lower Austria 19.7 5.4 37.2

Vienna 20.9 9.8 33.2

Bratislava 3.4 1.5 5.5

Western Slovakia 2.5 1.4 3.9

n.a. – data not available due to small sample size, Source: EUROSTAT, European Labour Force Survey

Another difference in the regional labour markets of CENTROPE, which may distort regional unemployment rates, relates to the share of part time employment. This may have an impact on unemployment rate statistics, since a larger share of part time employed -ceteris paribus- implies lower average working hours per employed. Thus for a given volume of working hours more people will be employed (and fewer unemployed) as the share of part time employment increases.

In this respect the labour markets of the new member states of the EU have been shown to be characterised by a substantially lower share of part time employment, than old EU member states. This difference also applies to the CENTROPE regions of these countries (see Table 20). While in the


Austrian CENTROPE the share of part time employed in total employment ranges between 19.7% (Lower Austria) and 12% (Burgenland) and thus is above the EU average (this difference arises primarily due to the higher share of females in part time employment), the regional labour markets of the new member states have part time employment shares, which are substantially lower than the EU average and lower than 6% in all of the new member state regions of CENTROPE. Thus comparisons of regional unemployment rates in the CENTROPE regions are also distorted by differences in the share of part time employment between the new member state regions of CENTROPE and the Austrian CENTROPE regions.

Table 21

Share of Long Term Unemployment in Total Unemployment in the CENTROPE regions (2005)

2002 2003 2004 2005

EU 27 45.3 46.07 45.3 46.08

South Moravia 47.07 45.09 48.42 50.31

West Transdanubia 38.97 34.38 38.31 40.08

Burgenland 19.21 28.98 34.28 28.97

Lower Austria 26.12 27.19 30.42 27.55

Vienna 36.23 39.27 37.98 29.71

Bratislava 53.29 46.91 46.68 39.11

Western Slovakia 69.81 66.25 68.52 69.60

Source: EUROSTAT

Figure 11

Employment Share of the Elder 2005

Age 55 to 64, in %

29,531,8 31,7

45,8

41,6

52,2

28,8

0

10

20

30

40

50

60

Burgenland Lower Austria Vienna South East WestTransdanubia

Bratislava WesternSlovakia

EU 25

Centrope

Source: Eurostat.


Aside from this, the structure of unemployment and employment rates in CENTROPE also varies substantially across the individual regions. Given the low overall unemployment rates, the share of long term unemployed is relatively high in most of the new member states' regions of CENTROPE and low in the Austrian CENTROPE. In the year 2005 despite a favourable macro-economic development of the regions in question, the share of long term unemployed increased in all of the new member states regions of CENTROPE except for Bratislava (where a spectacular seven percentage point reduction was experienced), while the share of long term unemployed in total employment reduced in all of the Austrian CENTROPE regions (see Table 21).

Figure 12

Unemployment rate of the Younger 2005

Age 15 to 24, in %

8.9

19.7 19.9

13.5

9.8

22.5

0

5

10

15

20

25

Lower Austria Vienna South East WestTransdanubia

Bratislava Western Slovakia

EU 25

Centrope

Note: Due to the small sample size fort he Burgenland the Youth unemployment rate for this region is not reported in Labour Force Survey data, Source: Eurostat.

Furthermore, Bratislava and West Transdanubia were the only two new member state regions where the share of long term unemployed in total unemployment (with 39.1% and 40.1%, respectively) was below the EU27 average, while the three other new member state CENTROPE regions stayed above, with the share of long term unemployment in total unemployment exceeding 50% throughout. The Austrian CENTROPE regions, by contrast have a share of long term unemployed in total employment that is 10 percentage points below the level of Bratislava, which is the region with the lowest share of long term unemployed in the new member states regions in CENTROPE. For the new member states, this indicates a severe mismatch problem of the qualifications of the unemployed with the requirements of prospective employers, as would be expected in economies with the speed of restructuring of the new member state regions of CENTROPE.


Figure 13

Unemployment Rate by Gender 2005

In %

4,9

3,8

10,2

6,7

4,2 4,4

8,6

4,8

9,9

4,5

8,4

6,2

12,8

7,5

7,9

7,4

0

2

4

6

8

10

12

14

Burgenland Lower Austria Vienna South Moravia Gyor-Moson-Sopron

Vas Bratislava Trnava

MenWomenMen EU 27Men CENTROPEWomen EU 27Women CENTROPE

Source: Eurostat.

Additional labour market problems specific to CENTROPE may be summarised as follows:

- Due to a history of early retirements and the downsizing of the labour force associated with industrial restructuring, employment rates of the elder (i.e. those aged 55 and older) are low relative to the EU level in four of the seven regions of (see Figure 11). In Bratislava (52.2%) and the Czech South East (45.8%) the rate is above the European average of 42.5%, in West Transdanubia (41.6%) it remains only slightly below. In all Austrian regions where early retirement was particularly popular until recent changes in the pension system, employment rates of the elderly are around 30%; they are even lower in West Slovakia with 28.8%.

- Aside from low employment rates of the elderly, youth unemployment rates are above the EU-average in Vienna, the Czech South East and West Slovakia, but below this average for the CENTROPE region as a whole. In Bratislava and West Transdanubia regional youth unemployment rates are substantially below the EU average and the total youth unemployment rate in CENTROPE is below the EU average

- Finally, in a number of the new member states regions of CENTROPE traditionally low gender gaps in employment rates have rapidly increased in the last years. However, West Slovakia is still the only CENTROPE-region where the unemployment rate of females (as well as that of males) is above the European average; in West Slovakia and Vienna the rate of male unemployed is higher than the European average. In all other CENTROPE regions both male and female unemployment rates are below the average of the EU 25.


Summarizing, the labour market situation of CENTROPE is relatively favourable when compared to both the EU average as well as the respective national averages. Furthermore - and perhaps more surprisingly - when clustering all EU member states' regions according to the labour market indicators suggested by the European Commission for benchmarking progress in the employment initiative, for the year 2002 in Huber and Gacs (2002) we found that the labour market situation within CENTROPE does not differ significantly between regions6. All CENTROPE regions (except for Western Slovakia) are clustered into what may be considered a typical Central European labour market group encompassing – aside from the CENTROPE region - Southern Germany, Northern Italy and the remaining provinces of Austria. This group of regions comprises the (by European Standards) low unemployment rate regions in Central and Northern Europe as well as a few low unemployment southern European regions. Furthermore, in this group of regions the total employment rates only slightly above the EU average, while the employment rates of the elder are relatively low.

Figure 14

Unemployment rates and their development in CENTROPE

in %

Total Younger

0

2

4

6

8

10

12

14

16

18

20

2000 2001 2002 2003 2004 2005

Burgenland Niederösterreich WienSouth East Bratislava Western SlovakiaWest Transdanubia

0

5

10

15

20

25

30

35

40

2000 2001 2002 2003 2004 2005


Men Women

0

2

4

6

8

10

12

14

16

18

20

2000 2001 2002 2003 2004 2005


0

2

4

6

8

10

12

14

16

18

20

2000 2001 2002 2003 2004 2005


Source: Eurostat

6 In Gacs and Huber (2004) we collected information on 45 NUTS II regions of 9 candidate countries for the years 1998 to 2001 and the 184 NUTS II regions of the 15 current EU member states and use the indicators used by the European commission to evaluate the labour market situation in EU member states, (the employment rate (in percent of total working age population), the gender difference in employment rates (as the ratio of male employment to female employment rates) and the employment share of the elderly (employment of those older than 55 relative to total employment) on the "employment" side. On the "unemployment" side we focused on overall unemployment, gender difference in unemployment rates, long-term unemployment (relative to total unemployment) and the unemployment rate of the young (relative to total labour force) as well as the participation rate and gender differences in participation rate to perform a cluster analysis dividing both EU and candidate countries' regions into four groups.


Development of the Unemployment and Employment Rates 2004 -2005

Aside from being relatively favourable the labour markets of the CENTROPE region have also been very dynamic in recent year. These dynamics have to a large degree been marked by country specific developments.

• Among the CENTROPE regions in particular the Slovakian regions experienced a substantial decline in regional unemployment rates in 2005: In Trnava the unemployment rate decreased by 2.1 percentage points and in Bratislava the reduction was – 3 percentage points. In particular in Trnava declining unemployment rates also seem to be of a long run nature. Since reaching an all time high of 18.1% in 2001 unemployment rates have continually declined by more than one percentage point each year. In the Slovak regions also all other labour market indicators improved most noticeably among the CENTROPE regions, youth unemployment decreased in both NUTS 2 regions of the Slovak CENTROPE and employment rates increased both for the aggregate as well as for males, females and the elder (although these developments were stringer in Western Slovakia than in Bratislava)

Figure 15

Employment rates and their development in CENTROPE

in % Total Elder

45

47

49

51

53

55

57

59

61

63

2000 2001 2002 2003 2004 2005Burgenland Lower Austria ViennaSouth East Bratislava Western SlovakiaWest Transdanubia

15

20

25

30

35

40

45

50

55

2000 2001 2002 2003 2004 2005

Burgenland Lower Austria ViennaSouth East Bratislava Western SlovakiaWest Transdanubia

Men Women

45

50

55

60

65

70

2000 2001 2002 2003 2004 2005

Burgenland Lower Austria ViennaSouth East Bratislava Western SlovakiaWest Transdanubia

40

42

44

46

48

50

52

54

56

2000 2001 2002 2003 2004 2005Burgenland Lower Austria ViennaSouth East Bratislava Western SlovakiaWest Transdanubia

Source: Eurostat

• A moderate decline in unemployment rates was also registered in South Moravia, where however, the decline in unemployment was solely due to the decline in male unemployment (from 7.3% to 6.7%), while female unemployment increased from 9.7% to 9.9%. Similar tendencies can also be


found for the NUTS 2 region of the Czech CENTROPE. Here the overall employment rate stagnated. This again was due to a fall in the female employment rate accompanied by an increasing employment rate of males.

• The Hungarian CENTROPE, by contrast, was characterised by a substantial increase in unemployment rates in Vas (by 1.3 percentage point) and a more modest increase in Győr-Moson-Sopron. Furthermore, in the NUTS II region of West Transdanubia Youth unemployment and a stagnating employment rate (which increased for males but declined for females) was registered

• Finally in Austria, too, regional unemployment rates increased in all of the Austrian provinces, with the largest increase being felt in Burgenland (+0.4 percentage points). At the same time youth unemployment rates increased in all of the Austrian regions for which the European Labour Force Survey reports data (Vienna and Lower Austria), while employment rates increased only in Burgenland and decreased in both Lower Austria and Vienna. The only indicator which showed a clear sign of improvement in the Austrian CENTROPE was the employment rate of the elder. This increased in all of the Austrian CENTROPE provinces.


4 Regional Development in the Austrian Part of CENTROPE

Author: Peter Huber, Gerhard Palme, WIFO

4.1 Introduction

The Austrian part of CENTROPE is composed of three provinces (Bundesländer). These are the eastern provinces of Austria (the capital city of Vienna, Lower Austria and Burgenland). Traditionally this region was characterised by below average GDP and employment growth. This situation, however, changed in the beginning of the 1990’s, when the eastern provinces aside from Vienna were marked by above average growth rates and the traditional West-East growth differential in Austria was reversed. Since the turn of the century, however, the traditional growth rate differentials were re-established and the Eastern region once more was characterised by below average growth than the more western regions.

The Austrian CENTROPE region is, however, also marked by substantial heterogeneity:

Vienna – has around 1.7 million inhabitants and is the country’s capital. It is a typical urban region with a high share of services in GDP (around 85%), high population density and important national administrative functions. Vienna’s GDP per capita in 2005 amounted to 172.3% of the EU average, which makes Vienna the region with the 5th highest GDP per capita among the NUTS2 regions in Europe. Among the Austrian regions Vienna is unique due to its high productivity growth. This and the substantial structural change, that was driven by rapid deindustrialisation (since 1995 over 40% of the manufacturing workplaces were lost in the city) has led to low employment growth and high unemployment in the last decade. As a result Vienna is also the Austrian province with the highest unemployment rate (2006: 9.3% according to national methodology)

Lower Austria – which surrounds Vienna and hosts 1.6 million inhabitants is the largest of the Austrian provinces in terms of area. The large area covered by the province also makes it heterogeneous, with the areas located on the outskirts of the city of Vienna being typical suburban regions. These regions have profited from increased relocation of services and manufacturing from Vienna in the last decade. By contrast some of the northern regions (such as the Waldviertel) as well as the south-western regions have a more rural-peripheral character. In these regions the remote location paired with a high share of agriculture and emigration have led to below average development. In general, however, Lower Austria is marked by a high share of manufacturing in GVA and is considered one of the Austrian industrial provinces. The province in total is marked by third highest share of manufacturing in GDP in Austria (27.9%), where in particular metal working, machinery as well as oil processing belong to the important branches of the region. The unemployment rates of this region are traditionally in the middle ranges of the Austrian provinces, in 2006 they were at 6.9% (according to national definition).

Burgenland - finally was the only Objective 1 region among the Austrian provinces and still is the poorest of the Austrian provinces (with a GDP per capita of 93% of the EU average (according to EUROSTAT). It is also the smallest Austrian province. Only around 280.000 people live there. In large parts (in particular in the south) it is characterised by rural-peripheral regions. In the last decade, however, due to a combination of EU funds and improved accessibility due to the fall of the iron curtain, Burgenland has also been marked by the highest GDP and the second highest employment growth among the Austrian regions. In particular EU-Funds have led to the emergence of new industries in the region (most notably the attraction of major manufacturing plants as well as the


development of a number of spas in the south). This in turn has reinforced the tendencies of convergence and has led to a substantial catching up of the region. Despite this, the (by Austrian standards) high unemployment rates of 8.5% (according to national definition) which are driven by high seasonality and dynamic labour supply (in particular of women) remains one of the unresolved problems in the region.

These structural differences among the provinces also strongly influenced the most recent economic development. The year 2006 was marked by a noticeable increase in GDP growth in Austria. Real GDP increased by 3.3%. This growth was mainly driven by high export demand and increased investments, while private consumption continued to be weak.

Increased export demand as well as higher investments spurred manufacturing sector growth, which boomed by expanding real gross value added by +8.8%. In particular the western provinces of Austria, which do not belong to the CENTROPE region and are characterized by strong export links (see Table 22), showed strong growth. By contrast the provinces of Vienna and Burgenland, which belong to the CENTROPE region and are more dependent on internal demand, exhibited much slower growth.

Aside from strong export growth, however, 2006 was also marked by growth of some major components of internal demand. This applies mainly to increased construction investments, which were supported by the warm weather in the 4th quarter, and to energy demand. The increasing demand of the public sector and the increased housing demand led to a substantial increase of real gross value added in construction (+4.9% relative to 2005). In this sector too, the western (non-CENTROPE) provinces profited disproportionately. Among the provinces belonging to CENTROPE only Lower Austria exhibited a higher than average GVA growth in construction.

Austrian Energy production increased by 4% in 2006. This expansion, however, remained concentrated only on a limited number of provinces such as the CENTROPE provinces of Lower Austria and Vienna, as well as the non-CENTROPE provinces of Tyrol and Styria.

Table 22

Factors influencing regional growth in Austria in 2006

Exports GVA in Manufacturing

% of total GVA

Austria = 100

2004 2006

Vienna 60.5 9.2

Lower Austria 99.3 27.9

Burgenland 68.5 20.2 Austrian CENTROPE 74.2 16.1

Styria 91.1 28.8

Carinthia 77.9 22.7

Upper Austria 131.3 32.7

Salzburg 96.9 18.4

Tyrol 120.9 20.8

Vorarlberg 131.3 30.6

Austria 100.0 22.0

Source: Statistik Austria, WIFO-Calculations.


Aside from this 2006 was also a good year for the enterprises working in the Austrian financial sector. The gross value added of this sector increased by 3.8% in real terms. Regional growth differences were, however, small. Real GVA growth ranged between 5% (Tyrol) and 3.5% (Vienna). In the production service sector by contrast regional disparities were somewhat larger. In this sector regional growth correlated with manufacturing growth. Thus again the CENTROPE provinces of Austria, with the exception of Lower Austria, showed a below average gross values added growth relative to the rest of Austria. Similar observations apply to transport services.

Weak consumption growth by private households also led to more modest growth of consumption close service sectors such as trade and restaurants and accommodation. In both sectors GVA growth amounted to only 1.3%. Trade registered the sixth consecutive year of only moderate growth. A slightly improved performance was visible only in the western provinces of Austria.

The modest development of restaurants and accommodation was also influenced by a relatively weak summer season in tourism. In this sector, however, due to a favourable development of city tourism, some of the CENTROPE provinces of Austria (Vienna and Lower Austria) showed above average GVA growth.

Figure 15

GVA growth of Austrian provinces in 2006

Excluding agriculture, real (on Basis of Prices of the previous year), Changes relative to 2005 in %

+ 3.8

+ 2.6+ 2.9

+ 3.7

+ 3.2

+ 3.3

+ 4.1

+ 2.2

+ 3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Vienna Lower Austria Burgenland Styria Carinthia Upper Austria Salzburg Tyrol Vorarlberg

Year 2006Austrian CentropeAustria

Source: WIFO. Preliminary Estimate.

These sectoral patterns also shape the general picture of regional growth in Austria in 2006. The export oriented manufacturing sector dominated regional developments. Its dynamics in part also spilled over to other sectors (such as construction, producer services and transport). This resulted in a clear West – East differential in regional growth, such that the CENTROPE provinces of Austria in general exhibited below average growth.

Among these provinces Burgenland and Vienna showed the lowest GDP growth in Austria. In Burgenland the balance was slightly improved by a booming construction sector. In Vienna the total


weight of restaurants and accommodation and the energy sector, which grew stronger than in the rest of Austria was not high enough to improve aggregate regional GVA growth.

Figure 16

Sectoral GVA Growth of the Austrian CENTROPE Region and in Austria

Excluding agriculture, real (on Basis of Prices of the previous year), Changes relative to 2005 in %

Source: WIFO. Preliminary Estimate.

The only exception to this is Lower Austria, which is also the only of the Austrian CENTROPE provinces that has a strong manufacturing base and an almost average export share. In this province aggregate real GVA growth amounted to +3.8% in 2006 and nearly all sectors (with the exception of trade) showed an above average growth performance.

4.2 Manufacturing Sector Development in the CENTROPE Regions

The Austrian manufacturing sector profited substantially from increased growth in 2006. In particular the better macro-economic performance of the major trading partners of Austria spurred manufacturing sector growth. Manufacturing enterprises increased their turnover by 10.8%. This growth was associated with substantial productivity increases. (Technical production per employee increased by 7.8 %.) This increased efficiency was also higher than wage increases, so that unit costs in manufacturing improved once more. Furthermore, despite increased productivity manufacturing also increased employment for the first time in ten years, in 2006.

-1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

Others

Public Services

Real Estate

Financial Services

Transport Services

Restaurants and accommodations

Trade

Construction

Energy

Manufacturing

Centrope

Austria


Table 23

Manufacturing sector development in the Austrian CENTROPE Region 2006}

Sold production

Technical production

Production index

Change relative to 2005 in %

Vienna +7.7 +5.9 +6.8 Lower Austria +11.8 +12.2 +7.1

Burgenland +8.4 +7.7 +0.2 Austrian CENTROPE +10.3 +9.7 n.a.

Styria +9.7 +9.1 +10.2

Carinthia +11.6 +13.9 +8.9 Upper Austria +10.5 +10.1 +7.5

Salzburg +12.6 +15.9 +13.6

Tyrol +13.6 +15.6 +12.8

Vorarlberg +13.4 +14.4 +10.5

Austria +10.8 +10.9 +8.5

Source: Statistik Austria, WIFO-Calculations. Including Mining. n.a.- data not available due to missing weights

Most manufacturing branches profited from this cyclical upswing. Basic materials production expanded its output as in previous years. In contrast to 2005, however, also the processing sector as well as the technology sector expanded their production substantially. Processing profited from increased demand for intermediate products and the technology sector’s growth was spurred through higher investment demand. By contrast the branches of the manufacturing sector oriented more towards domestic demand (such as construction and food products) experienced somewhat slower growth. Only the clothing sector declined. This, however, is owed less to business cycle developments than to a long run tendency of this sector to decline as a consequence of increased competition from low wage countries.

The favourable development across almost all sectors contrasted to weaker manufacturing growth in Vienna and Burgenland. In these two provinces the turnover of the manufacturing sector increased by 7.7% and 8.4%, respectively. In Vienna the export orientation of the technology sector in manufacturing is low, thus its growth rate was substantially smaller than in the rest of Austria. In Burgenland similar observations apply to processing. In addition Burgenland was also the only Austrian province in which unit labour costs increased in 2006. The complete increase in production was achieved by an increase in employment (+7.6%), while productivity stagnated. Similarly, in Vienna productivity increases were the second lowest among the Austrian provinces and unit cost reductions were only modest.

The exception in the CENTROPE region was Lower Austria. Here turnover grew by 11.8% (i.e. by one percentage point faster than in the Austrian average). This development was owed to a particularly strong increase in productivity and a sizeable decrease in unit labour costs.


Table 24

Development of the manufacturing sector in the Austrian CENTROPE regions by branches 2006

Vienna Lower Austria Burgenland Austrian

CENTROPE Austria

Foodstuffs and Beverages +0.2 +4.8 -1.6 +2.8 +4.7

Tobacco . . . . -5.9

Textiles +9.4 -1.5 . . -0.5

Clothing ±0.0 +1.4 . . +2.5

Leather processing . -22.2 . . -14.0

Wood processing +12.9 +2.2 +19.8 +4.1 +13.8

Paper +5.9 +8.4 . . +7.3

Printing +5.1 +11.2 -3.4 +5.9 +5.9

Oil Processing . . . . +15.6

Chemical Production +82.0 +14.9 . . +17.7

Rubber +2.2 +8.4 +28.7 +9.5 +13.4

Glass, Stone and Earth Products +20.2 -3.0 +22.0 -0.1 +7.7

Metalworking -3.9 +19.4 . . +14.5

Metal products +12.1 +18.9 +9.4 +16.5 +16.7

Engineering +10.6 +9.9 +57.1 +10.5 +15.2

Office Machines, computers . . . . -36.0

Machinery for Electricity Supplies +54.1 +15.0 +6.8 +21.3 +17.4

Radios, Televisions +0.8 . . . +4.4

Medical and Optical machinery -2.9 +11.8 +60.0 +4.6 +13.0

Cars and car components -14.1 +30.2 . . +8.1

Other Vehicles -6.0 . . . -1.8

Furniture, other manufactured products +2.3 +8.9 +4.5 +7.3 +6.1

Recycling . +75.4 . . +52.3

Total +7.7 +11.8 +8.4 +10.3 +10.8

Source: Statistik Austria, WIFO-Calculations. Sold Production.

Table 25

Employment Development in manufacturing

Employees4)

Productivity1) Wages2) Employees3)

Total

Mining and

Special Materials

Supplies Clothing Processing Technology

Change relative to previous years in %

Vienna +4.3 +3.0 +1.5 -0.9 +11.5 +1.7 -8.3 -2.1 -1.6 Lower Austria +9.9 +2.6 +2.0 -0.4 -0.6 -1.0 -4.0 -0.4 +1.0

Burgenland +0.1 +1.4 +7.6 -0.2 +0.3 -0.2 -2.0 +4.2 -7.6 Austrian CENTROPE +7.3 +2.6 +2.2 -0.5 +2.1 -0.2 -4.9 -0.6 -0.7

Austria +7.8 +2.8 +2.9 +0.1 +1.5 +0.2 -4.3 -0.1 +0.6

Source: Hauptverband der österreichischen Sozialversicherungsträger, Statistik Austria, WIFO-Calculations. Ó 1) technical production per employee. Ó 2) Gross Labour Compensation per Employee. Ó 3) According to Business Cycle Survey. Ó 4) According to Hauptverband der österreichischen Sozialversicherungsträger.


4.3 Construction, Energy & Services in the Austrian CENTROPE Region

Construction & Energy

After a weak year in 2005 the improved business cycle conditions in 2006, led to the most sizeable upturn in the construction sector since over a decade in Austria. Aside from the good weather conditions in the 4th quarter this was also driven by increased public sector infrastructure expenditure and increased demand for housing. Production increased by 16.4% relative to the last year. Investments in housing construction increased by even more.

This development, however, shows no clearly visible regional pattern. Among the Austrian CENTROPE regions Lower Austria and Burgenland belong to the provinces with above average growth rates. In Lower Austria all sectors profited about equally from increased growth, while in Burgenland secondary construction work lagged behind slightly. Vienna by contrast experienced a below average growth rate of construction. Here in particular civil engineering and public sector construction stagnated.

Table 26

Production in Construction and Energy Production in the Austrian CENTROPE region 2006

Construction 1) Construction (excluding secondary construction work) Energy and Water Supply1)

Total Building Construction

Civil Engineering

Public Sector Construction

Change relative to 2005 in %

Vienna +10.5 +4.7 +10.3 -2.3 -0.5 +21.0

Lower Austria +22.4 +22.9 +20.0 +24.6 +13.4 +28.1

Burgenland +19.8 +8.6 +8.3 +10.3 +7.0 -3.2 Austrian CENTROPE +16.0 +12.2 +13.6 +10.7 +5.8 +21.6

Austria +16.4 +13.2 +12.6 +13.4 +9.8 +17.5

Source: Statistik Austria. 1) Sold Production.

In the Energy sector production once more increased substantially (by 17.5%), although this growth rate implies a halving relative to the previous year. Among the CENTROPE regions Vienna and Lower Austria experienced increases in energy production by over 20% while in Burgenland output reduced.

Retail Trade

Despite only modest increases in consumption, retail trade registered a 0.7% increase in real turnover in 2006. This increase was, however, largest in the Austrian provinces not belonging to CENTROPE. In the Austrian CENTROPE increases in real turnover in retail trade were below average throughout. In particular in Vienna real retail trade turnover reduced. Only retailers located in shopping centres still experienced increases. Retailers located in the large shopping streets and in central locations both experienced declines in real turnover. This reflects the structural problems faced by retailers in the city, which are increasingly coming under pressure due to the competition of the shopping centres located at the outskirts of the city.


Table 27

Retail trade Turnover in the Austrian CENTROPE region 2006

Nominal Real

Change relative to previous year in %

Vienna +0.7 -0.1

Lower Austria +1.4 +0.4

Burgenland +1.3 +0.4

Austrian CENTROPE +0.8 +0.1

Austria +1.4 +0.7

Source: KMU Forschung Austria.

In contrast to previous years; however, purchasing power outflows from the city of Vienna did not support increased retail trade growth in the neighbouring CENTROPE provinces of Lower Austria and Burgenland. In these regions real retail trade turnover increased by a modest 0.4% only.

Producer Services

Information concerning the development of producer services in Austria in 2006 can at the current time only be gained from employment data. This causes problems of interpretation, since information on productivity and recruiting behaviour over the business cycle is not available. Nonetheless according to these data the NACE two digit branches (ÖNACE 60-74) increased their employment by 3% in 2006. In particular the knowledge intensive services sectors increased their employment substantially (by 7.7%).

Table 28

Development in market services and knowledge based services in CENTROPE 2006}

Other market oriented Sevices1)

Knowledge intensive Services2)

2006 2006


Vienna +2.0 +4.9

Lower Austria +5.2 +18.0

Burgenland +1.8 +3.3

Austrian CENTROPE +2.9 +7.6

Austria +3.0 +7.7

Source: Hauptverband der österreichischen Sozialversicherungsträger, WIFO-Calculation. – 1) NACE-2-digits: 60-74. 2) NACE-2-digits: 72-74.

Regionally the dynamics of employment in these services was also dominated by the development of knowledge intensive service sectors: These by and large developed in accordance with the overall economic development. The western provinces expanded employment more. The highest increase of employment in knowledge intensive industries was, however, experienced in Lower Austria. By contrast Vienna and Burgenland experienced below average increases both in the knowledge intensive employment sector as well as in the “other market services”.


4.4 Tourism in the Austrian CENTROPE

In Austria the number of tourist nights spent stagnated relative to 2005 last year. This is, however, primarily due to the trend to shorter stays. Tourist arrivals increased by 2.7%. This trend towards shorter stays was also accompanied by an increase in expenditure per night spent, which is reflected in a particularly strong growth of nights spent in better hotels, so that despite a reduced number of overnight stays turnover in tourist revenues was by 4% higher than last year.

Tourism development was hampered by a reduction in tourist arrivals from Germany, which still account for around for 40% of the tourists in Austria. This reduction is primarily a structural phenomenon – the changing demand in destinations by German tourists has led to a continuous reduction of arrivals of German tourists for the last 15 years. In 2006 this structural decline could not be compensated by increases in the number of tourist nights from the new member states of the EU (which increased by 8.5% in 2006) and from other Eastern European countries (which increased mostly by double digit figures).

Furthermore, due to cold weather in August a substantial part of the decline in tourism nights occurred in the summer season, while the winter season was characterized by a better development.

Table 29

Tourist nights spent in the calendar year 2006

Total Natives Foreigners Commercial Accommodation Private accommodation

In 1000

Change against previous year%

Total German Others Category 5/4-Star

Category 2-Star

Category2/1-Star

Vienna 9,349 +6.7 +18.1 +4.5 -0.7 +6.4 +4.7 +14.3 +3.6 -28.4 Lower Austria 6,065 +3.8 +7.3 -2.3 -8.5 +3.8 +9.6 +0.8 -1.8 +3.2

Burgenland 2,576 +1.4 +2.0 -0.5 -6.2 +19.0 +9.0 +5.8 -3.8 -14.1 Austrian CENTROPE 17,990 +5.0 +8.1 +2.7 -3.7 +6.3 +6.3 +8.4 -0.5 -3.2

Austria 119,361 +0.1 +2.0 -0.6 -4.4 +4.8 +4.9 +0.6 -5.8 -7.4

Source: Statistik Austria.

The Austrian CENTROPE, however, was less strongly influenced by these trends. The major tourist attraction of the region is the city of Vienna. Since city tourism is one of the fastest growing segments of the Austrian tourism industry (which is also less dependent on weather conditions than both the bathing and hiking tourism, which prevails in the summer season, and the skiing tourism in the winter season in the remainder of Austria), Vienna was the region with the largest increase in the number of tourist nights in Austria. In addition cultural tourism associated with the Mozart year 2006 has also boosted tourism in Vienna. This seems to primarily have attracted native tourists, whose overnight stays in Vienna increased by 18.1%.


Table 30

Tourism development by summer and winter season in 2006

Average duration of stay

Arrivals Nights spent

Days Total Natives Foreigners Total Natives Foreigners

Total German Others Total German Others


Winter Season (November 2005 to April 2006)

Vienna 2.4 +7.9 +8.8 +7.6 ±0.0 +10.4 +9.3 +10.5 +9.1 +7.8 +9.5

Lower Austria 2.8 +11.2 +12.1 +9.6 -1.3 +15.2 +5.6 +5.7 +5.4 -3.8 +11.4

Burgenland 3.0 +20.0 +20.8 +13.5 +10.9 +16.6 +13.5 +14.3 +7.9 +5.7 +11.4 Austrian CENTROPE 2.6 +9.9 +12.5 +8.1 ±0.0 +11.4 +8.5 +8.7 +8.4 +5.0 +9.8

Austria 4.3 +3.9 +6.6 +2.9 -1.4 +8.0 +1.2 +2.7 +0.8 -3.4 +6.7

Summer Season (Mai to October 2006)

Vienna 2.4 +5.3 +21.4 +1.7 -5.3 +4.1 +5.1 +21.3 +2.2 -2.5 +4.1

Lower Austria 2.7 +3.6 +10.1 -3.3 +7.4 +0.1 +2.0 +7.2 -5.9 -10.6 -0.4

Burgenland 3.5 -2.5 -3.0 -0.4 -7.1 +15.5 -2.8 -3.1 -2.0 -7.5 +19.6 Austrian CENTROPE 2.6 +3.7 +9.4 +0.3 -6.2 +3.5 +2.6 +6.5 ±0.0 -6.0 +3.7

Austria 3.7 +2.1 +4.7 +0.7 -2.6 +4.0 -1.1 +1.5 -2.2 -4.8 +1.6

Source: Statistik Austria.

In part also Lower Austria, which borders on Vienna, profits from this trend, since tourists visiting Vienna may stay overnight in Lower Austria. In addition, Lower Austria also profits from shorter stays from Austrian tourists in the vicinity of Vienna (in particular in the winter season). Thus the increase in the number of tourist nights (of 3.8%) is exclusively due to increased demand from Austrian tourists. In this segment tourist nights increased by 7.3%

Finally, Burgenland profits from the trend towards shorter holidays in particular from Austrian tourists, who primarily visit Neusiedlersee and the various spas located in the region. Here the number of tourist nights spent by Austrian tourists increased by 2.0% while the number of tourist nights of foreigners declined by 0.5% due to the weak summer season, caused by cold weather and the associated decline in bathing tourism on the Neusiedlersee. (In the summer season tourist arrivals decreased by -3.0% for Austrians and -0.4% for foreign tourists) During the winter season by contrast the number of arrivals increased by 20.8% for natives and by 13.5% for foreigners.

4.5 The Labour Market in the Austrian CENTROPE

Increased GDP growth also caused substantial labour demand growth in 2006. Nation wide employment of employees (excluding people on parental leave and persons completing military service) grew by 1.7%. A similar expansion was last registered at the beginning of the 1990’s. Employment growth, however, was also regionally strongly differentiated and followed the general lines of regional development: As with GVA growth, the western non CENTROPE - provinces of Austria and the provinces with a strong industrial base, expanded employment more rapidly than the


eastern CENTROPE provinces of Austria, which are less export oriented. In total employment growth in the Austrian parts of CENTROPE region amounted to 1.3% in 2006.

Table 31

Employment growth in the CENTROPE provinces in 2006

Employees

Total1) Male1) Female1) Foreign Employees

Native Employees

Absolute Change relative to Previous year in %

Vienna 738,579 +1.0 +0.8 +1.2 +4.5 +0.3

Lower Austria 523,631 +1.7 +1.5 +1.9 +4.0 +1.2

Burgenland 83,709 +1.4 +1.2 +1.8 +5.0 +0.8 Austrian CENTROPE 1,345,919 +1.3 +1.1 +1.5 +4.4 +0.7

Austria 3,161,932 +1.7 +1.3 +2.1 +3.4 +1.2

Source: Hauptverband der österreichischen Sozialversicherungsträger, WIFO-Calculations. Ó 1) Excluding Persons on parental leave and on military duty.

Table 32

Sectoral employment growth in the CENTROPE provinces in 2006

Agriculture Manufacturing Construction Market Services Public Sector

Total Trade Producer Services1)


Vienna -0.8 -0.9 +1.6 +1.5 -0.4 +5.4 +0.6 Lower Austria -10.9 -0.4 +2.0 +3.0 +1.5 +12.7 +1.9

Burgenland +2.9 -0.2 -0.2 +2.3 +2.5 +3.8 +1.7 Austrian CENTROPE -5.6 -0.5 +1.6 +2.1 +0.6 +6.8 +1.1

Austria -1.8 +0.1 +2.0 +2.4 +1.6 +7.0 +1.7

Source: Hauptverband der österreichischen Sozialversicherungsträger, WIFO-Calculations. Ó 1) NACE 70-74.

From a sectoral point of view employment growth was primarily driven by the increase in employment in market oriented services (+2.4%) and in particular producer services (+7.0%). However, also all other major sectors of the economy such as construction, and non market services (and in the western provinces of Austria even manufacturing) expanded employment in 2006.

The below average employment growth in the Austrian CENTROPE region is primarily due to slow employment growth in Vienna. Vienna had the lowest employment growth rate (+1.0%) among all Austrian provinces in 2006. This reflects a long term development, due to the major restructuring processes that have affected the city in the last decade. These have caused manufacturing employment to reduce most strongly among all Austrian provinces. In addition to this traditional decline in manufacturing employment the year 2006 was also marked by a noticeable reduction in trade employment. In particular wholesale trade reduced its employment levels noticeably (by -2.8%).

In Burgenland employment grew by 1.4%, which is also below the national average of 1.7%. There it was primarily the construction sector and manufacturing which reduced employment levels (by -0.2% each), while market as well as non-market service grew substantially.


The only province in the Austrian part of CENTROPE which experienced an employment growth, which paralleled the national average is Lower Austria. Here, however, the evaluation of sectoral employment developments is complicated by the high growth in producer services, which is primarily due to the reclassification of a producer from the primary sector. Other than this also construction sector employment increased substantially in 2006.

Regional labour market development in Austria was, however, also marked by a substantial increase in labour supply, which was driven by increases in female (1.6%), but also male (0.8%) participation as well as increased labour supply from foreign workers. The majority of the increase in native labour market participation seems to have been driven primarily by persons who re-enter the labour market after withdrawing their labour supply during the recession, since the coefficient of correlation of labour supply growth with employment growth is 0.97 and thus very high. Thus labour supply increases in the Austrian CENTROPE region in 2006 closely follow the trends in labour demand. In general they were lower than in the Austrian average with Vienna showing below average increases and Lower Austria approaching the national average.

Table 33

Labour supply development in the Austrian CENTROPE region 2006

Labour Supply Persons in Training

Total adjusted 1) Total Foreigners


Vienna +0.5 +0.5 +3.6 +10.3

Lower Austria +1.1 +1.0 +3.3 +26.0

Burgenland +0.8 +0.8 +4.4 +20.7

Austrian CENTROPE +0.8 +0.7 +3.5 +15.4

Austria +1.1 +1.1 +3.4 +18.3

Source: Arbeitsmarktservice Österreich, Hauptverband der österreichischen Sozialversicherungsträger, WIFO-Calculations. Ó 1) Excluding Persons on parental leave and on military duty.

The high correlation of labour supply and labour demand increases also led to a relatively evenly distributed reduction in regional unemployment rates in 2006. The average unemployment rate in Austria decreased by 0.5 percentage points to 6.8% (according to national definition) in 2006. Furthermore, unemployment among the males reduced more strongly than unemployment of females and both youth unemployment and unemployment of the elder as well as long term unemployment reduced by more than the total number of unemployed.

Vienna was once more the province with the highest unemployment rate in Austria (with 9.3% according to national definition) and the reduction in the number of unemployed was also smaller than in the remainder of Austria. The number of long term unemployed, however, reduced by 40.6%, which is the strongest decrease in long term unemployment among the Austrian provinces.

In Burgenland unemployment rates lay at 8,5% (down by 0.5 percentage points according to national definition) and due to a low reduction in the number of female unemployed the decline in the number of unemployed was also lower than in the Austrian average.


Table 34

Unemployment developments in the Austria and the Austrian CENTROPE region 2006

Unemployed Unemployment rate

Total Men Women Youths1) Elder2) Long term Unemployed3) Level Change to

prev. Year

Change relative to previous years in % In % Percentage points

Vienna -4.1 -3.5 -5.0 -3.9 -5.3 -40.6 9.3 -0.4 Lower Austria -5.4 -6.3 -4.3 -9.1 -9.4 -30.5 6.9 -0.5

Burgenland -4.9 -6.1 -3.5 -8.2 -0.2 -30.9 8.5 -0.5 Austrian CENTROPE -4.6 -4.5 -4.7 -6.2 -6.4 -35.4 8.3 -0.5

Styria -5.8 -7.0 -4.2 -10.0 -2.7 -22.9 6.8 -0.5

Carinthia -2.2 -1.7 -2.8 -9.5 +9.0 -0.6 7.9 -0.3 Upper Austria -8.3 -9.5 -6.7 -10.9 +0.9 -16.4 4.3 -0.4

Salzburg -10.3 -13.0 -6.8 -14.2 -2.4 -18.8 4.5 -0.6

Tyrol -4.2 -5.9 -2.3 -7.5 +1.4 +0.6 5.5 -0.3

Vorarlberg -6.8 -9.0 -4.5 -9.2 -5.4 -20.5 6.2 -0.5

Austria -5.3 -5.9 -4.6 -8.4 -4.0 -29.7 6.8 -0.5

Source: Arbeitsmarktservice Österreich, Hauptverband der österreichischen Sozialversicherungsträger, WIFO-Calculation. Ó 1) Aged 15 to 24. Ó 2) 55 years or older. Ó 3) 1 year or longer. Data according to national definition, which differs from that of EU Data in chapters 2 and 3

Finally, in Lower Austria unemployment rates were at 6.9% (down 0.5% according to national definition) which is the lowest among the CENTROPE provinces of Austria, but still higher than in the national average. Here the decline in the number of unemployed was approximately equal to the national average reduction. In this province, however, youth unemployment and unemployment of the elder reduced more strongly than in the remainder of Austria.

4.6 Labour Market Developments at district level

The marked sectoral differences in employment growth in the year 2006 also impacted on the growth of regional employment at the lowest tier regional level in Austria. In particular suburban districts and medium sized cities experienced the highest employment growth rates. By contrast (both industrialized as well as tourist) peripheral regions showed the slowest employment growth.

Regional employment growth in the CENTROPE region differed from this general development: All types of regions except for medium sized towns and tourist peripheries had lower employment growth rates than their counterparts in the rest of Austria. In particular due to the lower export orientation of the region both physical capital intensive (i.e. intensive industrial and intensive tourist) districts as well as peripheral (in particular industrial peripheries) showed a slower employment growth in CENTROPE regions of Austria than in the Austrian average. Human capital intensive regions (i.e. metropolitan, urban, and suburban districts as well as medium sized towns) in total showed only a modestly lower employment growth in CENTROPE than elsewhere in the region, although for individual types of human capital intensive regions (e.g. suburban regions) differences were substantial.


Figure 17

Employment Growth by region types

July 2006, Change against the previous year in %

Source: Hauptverband der österreichischen Sozialversicherungsträger, WIFO-Calculations

Despite the below average labour market performance of the Austrian CENTROPE regions a number of districts were characterized by high employment growth rates in 2006. This applies in particular to St. Pölten (the capital of lower Austria), which had the highest employment growth rate (with +6.0%) among all Austrian districts in 2006. In addition the suburban district of Wien Umgebung (+5.3%), which has experienced high employment growth in the last two decades due to spill over effect from Vienna, and the districts of Neusiedl am See (+5.2%) and Oberpullendorf (+4.8%) in Burgenland belonged to the ten districts with the largest employment growth rate in Austria.

Districts belonging to the CENTROPE region, however, were also well represented among the 10 districts with the lowest employment growth rates. In Horn in Lower Austria employment decreased by -8.4%. This made it the district with the highest employment decline in Austria in 2006. Furthermore, the Lower Austrian districts of Krems (-4.3%), Zwettl (-3.6), Melk (-2.6) and Scheibbs (-1.3) also experienced high reductions in employment.

While thus employment growth differences at a district level were characterized by large disparities both within CENTROPE and between CENTROPE and Austrian regions in 2006, unemployment reductions were more equally distributed. In the Austrian average, the strong upward trend in manufacturing, caused intensive industrial and urban regions to show the strongest decline in unemployment, while the less favourable development of tourism and the bad labour market development in the city of Vienna, led to more modest declines in unemployment in (both peripheral and intensive) tourist as well as metropolitan districts.

-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Industrial peripheries

Touristic peripheries

Extensive industrial

Intensive touristic

Intensive industrial

Medium-sized towns

Suburban

Cities

Metropolitan

Rural

Physical capital intensive

Human capital intensive

Centrope

Austria


Table 35

Unemployment growth by Region types

CENTROPE Austria

Registered Unemployed Registered Unemployed

Total Male Female Total Male Female


Human capital intensive regions -4.6 -4.2 -5.1 -5.5 -5.5 -5.6

Metropolitan -4.1 -3.5 -5.0 -4.1 -3.5 -5.0

Urban . . . -8.2 -8.9 -7.2

Suburban -6.0 -6.2 -5.7 -5.8 -5.9 -5.7

Medium Sited towns -5.9 -6.8 -4.7 -5.9 -6.8 -4.8

Physical capital intensive regions -8.0 -9.1 -6.6 -6.3 -8.0 -4.4

Intensive Industrial -8.0 -9.1 -6.6 -7.9 -9.5 -6.1

Intensive tourist . . . -3.7 -5.5 -1.7

Rural -3.7 -5.3 -1.6 -4.0 -5.6 -1.8

Extensive Industrial -6.7 -8.9 -3.7 -5.2 -6.6 -3.4

Tourist Peripheries -7.9 -7.4 -8.5 -4.6 -6.4 -2.2

Industrialised Peripheries -1.5 -3.3 +0.8 -2.0 -3.8 +0.6

Source: Arbeitsmarktservice Österreich, WIFO-Calculations. Annual Average

Changes in the number of unemployment in the CENTROPE regions by and large followed this development. The only difference being the substantial higher decline in unemployment in extensive industrial districts and the tourist peripheries in the CENTROPE regions. At the district level Lillienfeld (-16.7%), Waidhofen and der Ybbs (-12.8%) and Berndorf/St. Veit (-11.9%) all located in Lower Austria belonged to the 10 Austrian districts with the highest decline in unemployment, while the district of Zwettl (+3.3%) and Hollabrunn (+3.1%) also located in Lower Austria had the highest increases in unemployment in all of Austria.


5 Czech Republic – South Moravia

Authors: Martin Pelucha, Viktor Kveton, IREAS, Institute for structural policy

5.1 Introduction

South Moravia (Jihomoravsky Kraj) and Vysočina (territorial units NUTS III) together form the cohesion region South East of these only South Moravia belongs to CENTROPE. It comprises 6 districts (NUTS IV level). Within the EU its neighbours are Slovakia and Austria and within the Czech Republic it neighbours with South Bohemia, Pardubice, Olomouc, Zlín and Vysočina. As a consequence of administrative changes of South Moravia’s borders on January 1st 20057, the current surface area of South Moravia is 7,196 km2 and the population size is slightly above 1.1 mio. inhabitants. In total South Moravia has 672 municipalities; 42 of them have city statutes. The most important city is Brno, which is the second largest city in the Czech Republic. It is the seat of many institutions of national importance, especially judiciary; it is also an important centre of culture and higher education.

During the transformation period but also during the latest years South Moravia was amongst the fastest growing regions in the Czech Republic. Though, in 2006, the intensity of entrepreneurial activity was only moderate in comparison with other regions, research and science expenditures (per inhabitant) were the third highest in the country. Still, despite South Moravia’s high ranking in the comparison of educational and science indicators, it ranks low in terms of labour market indicators (employment and especially the unemployment rate).

A major role in successful regional development of South Moravia is played by the Brno agglomeration. Being the second largest city in the Czech Republic8, and given its location on the crossroads of key motorways, it is one of the main centres of economic activity in the Czech Republic.

5.2 Development of Gross Domestic Product

South Moravia belongs to the Czech regions with the highest level of economic performance. This is indicated by the region’s high ranks in the comparison of various indicators with respect to GDP:

- South Moravia’s share in the GDP of the CR is around 10,2 % ( in the year 2005), i.e. the third highest in the Czech Republic

- GDP per capita was 267 463 CZK (approximately 8 981 EUR), i.e. fourth rank in the Czech Republic

- GDP per employee (aggregate productivity) was 671 165 CZK (approximately 22 537 EUR), i.e. third rank

- regional GDP per capita in PPS amounted to 67,4 % of the EU-27 average for the whole South-East NUTS II region (including both South Moravia and Vysočina ).

7 25 municipalities were moved from Vysočina to Jihomoravský, thus extending the surface area by 13 thousand ha, i.e. by 1.8%. The region’s population increased by more than 7 thousand (0.6%). (CZSO Brno: Statistical Yearbook of the Jihomoravský region 2006) 8 CZSO Brno: Statistical Yearbook of the Jihomoravský region 2006


Over the longer run South Moravia’s GDP growth was slightly above the national average during the period of 1999 – 2004. Though there is a general lack of statistical data analysing the period of EU-membership, the available information concerning the pre-accession period confirms the high economic potential of South Moravia. Thus South Moravia and Moravia-Silesian regions are the most prosperous regions within the Czech Republic in terms of GDP growth. To a large extent the specific position of these regions can be attributed to the high amounts of FDI both regions received.

In 2005 the per capita GDP in South Moravia reached 92,2 % of the Czech Republic average and 67,9 % of EU-25 average. In the Czech Republic only Prague shows higher figures (201,8 % and 143,0 %, respectively). The high level of GDP per capita in Prague is, however, due to considerable inflows of foreign capital and its position as the capital city , which makes it difficult to compare Prague to other regions in the Czech Republic. More importantly, the low level of GDP per capita -in terms of the EU-25 average- has major implications for South Moravia, as well as for the Jihovychod (South-East) NUTS-2 region it belongs to – together with Vysočina. As the average GDP per head of the Jihovychod region is only at around 63,4 % of the EU-25 average GDP per head, this region is eligible for receiving EU-support under the “Convergence” Objective (previously Objective 1).

Figure 18

Regional GDP per capita by regions in the Czech Republic in 2005

0

50 000

100 000

150 000

200 000

250 000

300 000

350 000

Stře

doče

ský

kraj

Jihoče

ský

kraj

Plz

eňsk

ý kr

aj

Kar

lova

rský

kra

j

Úst

ecký

kra

j

Libe

reck

ý kr

aj

Krá

lové

hrad

ecký

kraj

Par

dubi

cký

kraj

Vys

očin

a kr

aj

Jiho

mor

avsk

ýkr

aj

Olo

mou

cký

kraj

Zlín

ský

kraj

Mor

avsk

osle

zský

kraj

CZ average including Prague CZ average excluding Prague

5.3 Development and structure of Gross Value Added

South Moravia thus is a dynamic region due to its regional metropolitan area of the city of Brno. Yet, over the latest years some positive changes in the economic development path and also in the economic potential of each region emerged. There are several reasons for this. The most important positive factor for a comprehensive development of South Moravia is the current EU membership and geographical location in Central Europe

Since the beginning of transition in the year 1993 the sectoral composition of the regional economy changed considerably in South Moravia. The primary and secondary sector lost in importance, while services became more prominent. Hence agriculture, forestry and fishing accounts for 3.5 % of the


regional GDP, being slightly above the Czech average of 2.9%. Industry (including mining and quarrying, manufacturing and electricity, gas and water supply) accounts for 29,0% of South Moravia’s GDP. This is around 2.6 percentage points less than this sector contributes to GDP on average in the Czech Republic9. The structure of gross value added of South Moravia differs from the structure of the Czech Republic primarily because of the construction industry and commercial services. Developing construction accounts for 7.8% in total regional gross value added, wholesale and retail trade and repair for 13% and the so-called commercial services for around 16.0 %10.

Table 36

Structure of gross value added: by CZ-NACE

South Moravia

2003 2004 2005

Gross value added, total 100.0 100.0 100.0

Agriculture, hunting, forestry 3.6 4.0 3.5

Fishing 0.1 0.0 0.0

Mining and quarrying 1.0 1.1 1.4

Manufacturing 23.4 23.7 24.0

Electricity, gas and water supply 3.3 3.3 3.6

Construction 7.7 7.6 7.8 Wholesale and retail trade, repair of motor vehicles, motorcycles and personal and household goods

13.4 12.7 13.0

Hotels and restaurants 1.6 1.8 1.6

Transport, storage and communications 10.1 9.9 9.3

Financial intermediation 1.9 1.5 1.3

Real estate, renting and business activities 15.3 15.4 16.1 Public administration and defence; compulsory social security 6.1 5.9 5.9

Education 5.4 5.4 5.4

Health and social work 4.0 4.5 4.2 Other community, social and personal service activities 3.0 3.1 3.0

Activities of households 0.0 0.0 0.0

Extra-territorial organizations and bodies 0.0 0.0 0.0

Source: CZSO Regional Office Brno (2006), CZSO Regional Office Jihlava (2006)

9 Ministry for Regional Development of the Czech Republic (2005), pate 113; CZSO Regional Office Brno (2006) 10 CZSO Regional Office Brno (2006), page 23


Figure 19

Annual regional GDP growth (previous year = 100) in both regions, cohesion region South-East and the Czech Republic during the period 2001 – 2005.

Source: Regional accounts 2005. Czech Statistical Office, Praha, 2006

Future development

Concluding, South Moravia possesses some progressive and dynamic branches and sectors, given the expansion especially of the construction industry, the manufacturing sector and of commercial services. The improvements in industrial production11 resulted from a sharp increase in productivity, from the inflow to this region of international companies/investors in the services sector, as well as from important structural changes. Overall, most sectors including trade, financial intermediation, and energy added to the economic growth12. The new Regional Operational Programme for the South-East region highlighted the role of developers and SME: „The structure of industries is influenced by big developers coming to the region. An increasingly significant role is also played by SME with innovation production programmes. The association of these enterprises into industrial branch-oriented clusters may considerably strengthen the region’s position in both scientific-technical and industrial development. In order to encourage the inflow of (namely foreign) investments there is a range of industrial zones newly established in the region.“13

Summarizing the South-East cohesion region comprises two regions, of which only one (South Moravia) is part of CENTROPE. With respect to the economic growth potential in the cohesion region

11 The industry with the most prominent position in the region is engineering, namely power engineering, mechanical engineering and electric engineering. These are followed by the electronics industry and textile manufacturing which is experiencing a long-term recession. 12 CZSO Regional Office Jihlava (2006), Ministry for Regional Development of the Czech Republic (2005), Cerge-EI (2006), page 18 13 Regional authority of Jihomoravsky region and Vysocina region (2006)

100

102

104

106

108

2001 2002 2003 2004 2005

Czech Republic NUTS2 Jihovýchod Jihomoravský kraj


South-East the main centre of development is the Brno agglomeration which is located in South Moravia. A favourable image of the locality attracts foreign investors (largely to Brno), especially those engaged in high-tech manufacturing industries and increasingly also in R&D. The favourable geographical location of Brno and transport accessibility represent an important precondition for further development.

Figure 20

Gross value added in South Moravia region: by selected CZ-NACE, 2005

Source: Czech Statistical Office, regional accounts 2005

5.4 Employment

During the transformation period employment patterns in the Czech Republic as well as in its regions underwent significant structural changes. Most significantly, employment in the primary sector the total decreased while contrastingly employment in services, like financial services and tourism, increased. These general trends were apparent in the whole Czech Republic, though not without a certain regional differentiation.

In South Moravia -during the nineties- the intensity of structural changes regarding employment was less pronounced than in the rest of the Czech Republic. Thanks to higher employment growth in the tertiary sector the generally observed employment decline was essentially lower in South Moravia than

3%

30%

8%

15%9%

6%

5%

4%

20%

3%

32%

7%

14%10%

6%

4%

4%

20%Agriculture

Industry

Construction

Trade, Hotels

Transport

Public Administration

Education

Health

Financial & other services

Czech Republic

South Moravia


elsewhere. At the same time the structure of employment has continually advanced towards the employment structure in West European countries.

The most important sector in terms of its share in total employment is still the manufacturing industry, which employs more than a quarter of all employed in South Moravia (27.5%). Second most important are business services, as well as wholesale trade and repair (11.6%), followed by the construction business that has a share of around 10% in total employment. Transport services are also relatively important (7.4%), just as education (8.0%) and housing services (7.4%). In comparison with the Czech Republic South Moravia has a modestly higher share of construction and agriculture in total employment14. On the other hand the manufacturing industry, public services, business services as well as mining are less prominent in South Moravia. Though in general the current structure of employment corresponds more or less to the employment structure in the Czech Republic, there are significant differences in the employment structure at the microregional level (districts and microregions). These are due to historical developments as well as to specific conditions for each sector and branch. For example, the city Brno differs from the rest of the region by a substandard share of agriculture and industry and a dramatically above average share of business services and research and development etc. On the other hand the Znojmo districts -compared to the Czech average- have a more than twice as high share of agriculture and forestry in total employment.

Evaluating the changes in the employment structure between 2005 and 2006, we find an important increase in the majority of manufacturing industry branches. The highest growth rate of employees is apparent especially in the production of transport facilities (index of change 129.315), in the production of computers and business machines (index of change 126.5) and the production of television sets (index of change 120.5). Other branches with the significant growth of employees are service activities in the field of property and apartment rentals (index of change 117.5) as well as the construction sector (index of change 113.3). Contrastingly, the number of employees in agriculture and forestry has decreased from 2005 to 2006 (index of change 94.3). The employment situation was stable in sectors relating to public services (education, health services etc.).

5.5 Development and structure of unemployment

Development of unemployment

In the Czech Republic the rate of unemployment was very low from the start of the transformation period until 1997. The average rate was under 4% in Czech Republic and also in every region. Since 1997 the national and regional unemployment rates have started to increase, though not without significant differences across the Czech regions. Overall the unemployment rate of the cohesion region South East is around the Czech average rate. Nevertheless there are large internal disparities in unemployment in the South East region. The most disadvantaged districts and micro-regions have an average rate of unemployment that is four times higher than the most prosperous South East districts. Common features for these high unemployment areas are an unsatisfactory accessibility with public transport, a peripheral location in context of the key regional centres, an unsatisfactory level of social and infrastructure facilities and a lower qualification level of the labour force16. The key problems in the labour market are the growth in long-

14 CZSO Brno: Statistical Yearbook of the Jihomoravský region 2006 15 Index of change represents number of employees in 2006 / number of employees in 2005. The value 100 means the same situation in both years and higher value represent increasing number of employees. 16 Regional Operational Programme South East for the period 2007 - 2013


term unemployment, the growth of unemployment among young people and the shortage of vacancies.

At the end of 2006 the unemployment rate was 8.8% in South Moravia. i.e. the fifth highest rate among the Czech NUTS-3 regions. Only in structurally depressed regions in the Czech Republic a higher unemployment rate was observed (e.g. Ústecký 13.8% and Moravskolsezský 12.6%) by comparison, the average unemployment rate of the Czech Republic was 7.7% in 2006. Still compared to the year 2005, the unemployment situation has improved as the unemployment rate declined by 1.4 p.p. from 2005 to 2006. This positive trend is also visible in the change of the ratio of job applicants per vacancy. While at the end of 2005 on average 10.9 job applicants per vacancy were registered, this ratio reduced to 6.9 job applicants per vacancy at the end of 2006. Over the long term South Moravia belongs to the group of regions with unemployment rates above the national average rate, mainly because of the absence of new job opportunities in the region.

5.6 Foreign Direct Investment

Since the start of the transition the Czech Republic has been a major location for foreign investors, and the foreign direct investment per capita is the highest among all transition economies in Central Europe. Yet, it can be assumed that the regional distribution of FDI within the Czech Republic is highly skewed in favour of the capital city of Prague. (see Table 37). To illustrate, approximately 54% of the investments coming to the Czech Republic in 2005 were in companies seated in the capital city. Central Bohemia had the second largest inflow of FDI among Czech regions, that is around 10% of total FDI went to this region. Contrastingly, only a small amount of investments are directed towards the CENTROPE South-East region. In 2005 South Moravia received nearly 4% of total FDI in the Czech Republic (i.e. the third place amongst all Czech regions) and Vysočina around 2.4%.

As far as the future development of FDI in the Czech Republic and its regions is concerned, locational factors – more than policy factors as in the past – will become increasingly important. For example the Copenhagen Economics Institute17 in a recent study suggests „a move away from policies based on traditional regional FDI incentive packages towards policies recommending the integration of modern regional inward investment agencies into regional growth strategies aiming at informing and helping foreign investors see the potentials of their region and help the region overcome regulatory barriers.“ Given this approach, to attract foreign investors via the regions specific advantages the Czech government (especially of the Ministry for Industry and Trade) will be a pressurized to attract more FDI in the field of activities and technologies with a higher added value. This is also a challenge for South Moravia, which is one of the most innovative regions in the Czech Republic, despite its good infrastructure and accessibility, its highly educated workforce and its high level of spending on R&D18. Still compared to other regions it is to be expected that South Moravia is going to be a more dynamic and attractive region for FDI than the rest of the Czech South East in the nearest future. Still, both regions have the advantage of an attractive geographical location, illustrated by the long term trend of higher FDI intensity in regions closer to Western Europe. Another positive regional factors for FDI are the location of an international airport near the city of Brno, as well as the policy approach to innovation development in the Brno agglomeration.

17 European Commission (2006), page 5 18 European Commission (2006), page 4


Table 37

Code Region Total FDI In thousand CZK

Share In %

CZ TOTAL 1,491,563,988 100.00 CZ011 Capital city Praha 801,100,204 53.71 CZ021 Středočeský region 159,697,528 10.71 CZ031 Jihočeský region 56,947,624 3.82 CZ032 Plzeňský region 48,535,866 3.25 CZ041 Karlovarský region 16,040,296 1.08 CZ042 Ústecký region 61,917,740 4.15 CZ051 Liberecký region 46,116,259 3.09 CZ052 Královéhradecký region 24,511,297 1.64 CZ053 Pardubický region 36,014,415 2.41 CZ061 Vysocina region 35,261,902 2.36 CZ062 SOUTH MORAVIA REGION 58,965,713 3.95 Of this CZ0621 Blansko 4,043,663 0.27 CZ0622 Brno-city 35,994,384 2.41 CZ0623 Brno-countryside 7,440,990 0.50 CZ0624 Břeclav 3,459,619 0.23 CZ0625 Hodonín 2,523,240 0.17 CZ0626 Vyškov 2,450,599 0.16 CZ0627 Znojmo 3,053,219 0.20 CZ071 Olomoucký region 28,078,704 1.88 CZ072 Zlínský region 29,546,656 1.98 CZ081 Moravskoslezský region 88,829,782 5.96

Positive expectations with regards to future FDI inflows are supported by the fact that South Moravia has a tradition in institutional business support, especially in establishing industrial and development zones (e. g. the business park of Brno and the technology park Brno). Key institutional support is provided by several institutions like economic and regional departments of the regional authority, the regional economic chamber (Regionální hospodářská komora), the regional office of CzechInvest, the regional development agency, the business and innovation centre, R&D centres of regional universities etc. These institutions are crucial in formulating a comprehensive regional development strategy and its implementation. The Statistical Yearbook for South Moravia stressed the importance of regional capacity and institutional building. This institutional aspect is further emphasized: „The formation of micro-regions is an important and positive trend for common advocacy of interests and plans in particular in the rural communes with the aim of achieving desirable changes in all of the municipalities of a certain area. Among the main priorities of the Region’s development are the development of the “Pomoraví” euroregion and cross-border cooperation, support of the conceptual development of the area, development of cooperation on the euroregional level mainly in the spheres of science, education, social welfare services, culture and sport also belong among the priorities of the development of the Jihomoravsky Region.“19

19 CZSO Regional Office Brno (2006)


5.7 Conclusions - critical issues

South Moravia is well endowed with a number of factors that are important for further economic growth. One of the most important factors is certainly the Brno agglomeration, which is the key economic driver of the whole region. Nevertheless there are other potential centres for further developments, mainly alongside of D1 highway. Concerning the attractiveness of the region the analysis has shown the following list of positive factors.

- A highly educated regional workforce – caused by regional universities

- High innovation potential of the region (R&D)

- Location of regional clusters – e.g. Business park Brno, Component car industry in Vysočina region

- Good Accessibility – high quality of transport systems and technical infrastructure

The unemployment and employment in the region are to a large extent influenced by the situation in the labour market of the Brno agglomeration. Yet despite this there are territorial differences in labour market developments. These differences depend on natural conditions, economic specialization patterns, settlement patterns and long-term historical developments. The structure of employment by basic sectors of the economy has changed considerably during the transformation period but at present the situation is stabilizing. The process of job losses in the primary sector is still continuing as the structure of employment continually advance towards employment structures in Western Europe.


6 Regional Development in the Hungarian Part of CENTROPE

Author: Mihály Lados, WHRI of HAS CRS

6.1 Introduction

The Hungarian CENTROPE includes the counties of Győr-Moson-Sopron and Vas. Both of these are NUTS III regions. These two counties account for 70.7% of the total population of West Transdanubia (which is the NUTS II region in which these two counties are located) and 7.0% of total Hungarian employment. The total number of inhabitants in the Hungarian CENTROPE has been stagnating in recent years due to a negative natural population growth and a positive internal migration balance. It currently numbers around 703,000 persons. In the context of the European Union, both counties – as most of the CENTROPE regions in the new member states - belong to the Objective 1 areas (Table 38). The average GDP per capita of the Hungarian CENTROPE was 68.3% of the EU-average in 2005, which is by 3.2 percentage points higher than the Hungarian average. In 2005, however, the relative position of the Hungarian CENTROPE with respect to GDP per capita declined by -2.0 percentage points.

Győr-Moson-Sopron and Vas also belong to the group of regions, which may be termed ‘winners of transition’ among the Hungarian and also the Central European regions. The NUTS II region of Western Transdanubia (Nyugat-Dunatul) belonged to the ten fastest growing NUTS II regions in the EU in the last decade (only the Baltic countries, Ireland and two other Hungarian regions – Central Hungary and Central Transdanubia – had higher growth rates). The unemployment rate in the region was at 5.9% according to the Labour force survey in 2005 and thus the second lowest in Hungary.

This better than average development of the Hungarian CENTROPE is primarily based on more successful internationalisation during transition. The Hungarian CENTROPE has a leading role in this respect, where the share of export was close to 90% of sold production in manufacturing in 2006 (Table 39). Furthermore, the Hungarian CENTROPE regions greatly benefited from economic transition by attracting international investors.

Table 38

GDP development in the Hungarian CENTROPE Region 2005

GDP per capita in PPS Changes relative to previous year EU27=100,0 percentage points In %

Győr-Moson-Sopron 72.3 -1.6 +1.2

Vas 61.6 -2.9 -1.1 Hungarian CENTROPE 68.3 -2.0 +0.5

Hungary 65.1 +1.2 +5.4

Source: Based on CSO Hungary WHRI calculation

There are, however, also important differences within the Hungarian regions of CENTROPE, with the northern part of the region (i.e. Győr-Moson-Sopron) having substantially higher GDP per capita levels and being substantially more internationalised, than the southern part (i.e. Vas). This uneven


intraregional development is due to differences in industrialisation (Vas is much more burdened with a high share of labour intensive industrial employment than Győr-Moson-Sopron) but also to different responses to internationalisation. Győr-Moson-Sopron has attracted more international capital and the firms coming into the region on average execute more "headquarter functions" than international firms in Vas. In addition to production-oriented activities, research and development is increasingly carried out at the Hungarian location as well. Consequently, the firms' competitiveness relies less on low labour cost which reduces their vulnerability to increases in Hungarian wages and salaries. In addition, while companies in Vas seem to have little business links with local firms, regional supplier networks and clusters are formed in Győr-Moson-Sopron. The higher level of regional embeddedness of international firms in that region provides an important impulse to the regional economy.

Table 39

Factors influencing regional growth in Hungary in 2005

Share of export in Manufacturing

GVA in Manufacturing1

GVA in Producer Services2

% of sold production3 % of total GVA

Győr-Moson-Sopron 89.1 32.6 13.9

Vas 81.1 30.9 12.5

Hungarian CENTROPE 87.3 32.0 13.4

West Transdanubia4 85.1 30.4 13.6

Central Transdanubia 79.5 34.4 12.9

South Transdanubia 64.8 10.8 14.2

South Great Plain 49.5 15.4 12.9

North Great Plain 62.9 17.4 12.3

North Hungary 63.3 22.9 11.3

Central Hungary5 54.7 14.5 24.9

Hungary 68.4 18.9 18.3

1) Including Mining; 2) NACE-2-digits: 3) in 2006; 4) Győr-Moson-Sopron, Vas and Zala counties; 5) Including Budapest. Source: Based on CSO Hungary, WHRI-Calculations.

Despite its privileged role in previous years, in 2005, total real GVA declined in the Hungarian CENTROPE (Figure 21). In all of Hungary real GVA growth ranged between +7.6% (in Central Hungary) and -1.8% (in West Transdanubia). Real GVA in the Hungarian CENTROPE, which is part of Western Transdanubia reduced by -1.3% relative to the previous year in 2005 with Vas experiencing a reduction of real GVA of -2.8% and Győr-Moson-Sopron performing much better but also far below the national average (-0.4%). Since the decrease of the GDP growth has continued in Hungary, in 2006 (+3.9%) and the first half year of 2007 (+2.7%, lowest among the CENTROPE countries), we expect that the relative position of the Hungarian CENTROPE region regarding indicator on GDP per capita in PPS should also have declined, recently.

This decline in GVA also had the consequence that the CENTROPE part of Western Transdanubia lost ground in terms of long run GDP growth in Hungary. After 10 years of relatively fast growth of this area, which made Győr-Moson-Sopron (behind Budapest) the second fastest growing region of


Hungary Győr-Moson-Sopron is now to the third fastest growing region in Hungary (Table 38) in a long term comparison. Similarly the fourth position of Vas changed to the fifth.

Figure 21

GVA growth of Hungarian NUTS II regions in 2005

Real (on basis of prices of the previous year), Changes relative to 2004 in %

1,7 -1,8-0,7-0,5-0,57,6 1,4

-4,0

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

CH CT NH ST NGP SGP WT

CH – Central Hungary, CT – Central Transdanubia, NH – North Hungary, ST – South Transdanubia, NGP – North Great Plain, SGP – South Great Plain, WT – West Transdanubia. Source: Based on CSO Hungary edited by WHRI.

Table 40

The position of Hungarian CENTROPE Region in GDP development 1995-2005

1995 1996 1997 1998 1999 2000 2001 2001 2003 2004 2005

GDP growth (current price, previous year =100)

Győr-Moson-Sopron 132.7 125.2 123.0 130.7 122.8 123.1 102.2 111.0 113.2 105.1 102.6

Vas 130.4 126.1 129.2 120.5 114.0 114.8 100.6 109.5 117.7 103.7 99.7 Hungarian CENTROPE 131.8 125.5 125.4 126.6 119.5 120.1 101.6 110.5 114.7 104.6 101.6

Hungary 128.6 122.8 123.9 118.1 112.9 118.7 112.9 112.5 110.2 109.4 106.5

GDP per capita in the national average (%)

Győr-Moson-Sopron 108.7 110.5 109.4 120.8 130.7 134.3 121.1 118.0 120.7 115.6 111.1

Vas 106.6 109.5 114.1 116.5 117.8 114.5 102.0 99.3 106.1 100.8 94.6 Hungarian CENTROPE 107.9 110.1 111.2 119.1 125.7 126.7 113.8 110.9 115.2 110.0 104.9

County rank according to GDP per capita

Győr-Moson-Sopron 2 4 3 2 2 2 2 2 2 2 3

Vas 3 3 4 3 4 4 4 4 4 4 5

Source: Based on CSO Hungary WHRI calculation

Hungarian Centrope: -1,3

Total Hungary: 3,3


One of the reasons for this decline in real GVA as well as relative GDP per capita was the overspending of the public budget in Hungary in 2002. This led to the requirement of a strong intervention by the national government to ensure Maastricht criteria in the next 5 years. As an effect of the Convergence Programme of the Hungarian government, real earnings and parallel real private consumption became weaker. Consumption growth dropped back from +6.8% (2002) to -0.6% (first half year of 2007) and growth of gross fixed investments declined from +2.5% (2002) to -0.4% (first half year of 2007). Currently, the only sources of GDP growth in Hungary are the increasing demand of export and the growing positive trade balance (-2.0% in 2002 and +3.7% in 2006, strongest among the CENTROPE countries).

In addition to these factors, which impacted on all Hungarian regions, the Hungarian CENTROPE was also influenced by a number of region specific developments: In particular, during the austerity policy, regional growth was even more strongly centred on the capital city of Budapest. (In 2005 Central Hungary, which is the region where Budapest is located, was the only region that experienced an above average growth rate.) Thus while the growth gap to the Hungarian average is substantial, a comparison to the second placed Central Transdanubia (which grew by +1.7%) reduces the growth gap substantially.

In addition to this statistical effect, due to a combination of regional policy concentrating more on the poorer regions of Hungary and a natural catching up of these regions, Western Transdanubia – as the best developed region in Hungary - also experienced a slower growth than many of the other regions in Hungary and finally, in a number of key industries (e.g. textiles and manufacturing) relocation of production sights further contributed to the decline (see below).

Figure 22

Sectoral GVA Growth of the Hungarian CENTROPE Region and in Hungary 2005

Real (on basis of prices of the previous year), Changes relative to 2004 in %

-8,0 -6,0 -4,0 -2,0 0,0 2,0 4,0 6,0 8,0 10,0 12,0 14,0 16,0 18,0 20,0

Others

Public Services

Real Estate and Producer Services

Financial Services

Transport services

Restaurants and Accomodations

Trade

Construction

Energy

Manifacturing

Agriculture

Hungarian Centrope

Total Hungary

Source: Based on CSO Hungary edited by WHRI.


These factors also contributed to a below average performance of almost all sectors in the Hungarian CENTROPE in 2005 relative to the national average. In the Hungarian CENTROPE region only two sectors have experienced real GVA growth. These were financial services (+19.1%) and other services (+0.7). The lowest performance was registered in transport services.

This said there were, however, also significant differences between Győr-Moson-Sopron and Vas, which are related to the structural differences between the two regions. The below average development of Vas was mainly caused by the strong decline of demand in the service sector (real estate and other producer services -11.2%, transport -10.5%, restaurants and accommodations -8.1%, public administration -8.1%), and construction (-7.4%). The smaller decline of real GVA in Győr-Moson-Sopron by contrast was caused by sharp declines in public administration (-10.5%) and agriculture (-7.3%) and more moderate declines in transport services (-5.6%) and trade (-5.4%) while other sectors still had a positive growth.

Among the factors which contributed positively to growth in the Hungarian CENTROPE export developments and financial service sector growth are the most important. With respect to export growth, the strong real export growth of the Hungarian CENTROPE region (+7.8% relative to 2005) was based exclusively on the performance of Győr-Moson-Sopron (+10.7%), while Vas registered a decrease of -1.7% in 2006.

In addition the financial sector contributed noticeably to real GDP growth in the Hungarian CENTROPE in 2005. This too reflects more long term trends in regional specialisation. When ignoring Budapest the financial sector is slightly better developed in the Hungarian CENTROPE region than in the rest of Hungary. While this sector provides 2.3% of the total GVA (2005), the share of the financial sector is 2.5% in this region. This indicator has increased by 25.0% relative to 2004 in the Hungarian CENTROPE region.

6.2 Manufacturing Sector Development in the CENTROPE Regions

Furthermore, as in Austria, the manufacturing sector profited substantially from increased export growth in Hungary in 2006. The Hungarian manufacturing sector is highly export driven. In particular the better macro-economic performance of the major trading partners of Hungary, like Germany and Austria spurred manufacturing sector growth. Manufacturing enterprises increased their turnover by +7.7% relative to 2005 (Table 41) and the export intensity of manufacturing further increased, since real export growth was by +1.4 percentage points higher than the growth of sold production. In addition manufacturing growth in Hungary in 2006 was also associated with substantial productivity increases.

This ‘export led growth’ in manufacturing had positive effects on the - in general more internationalised - economies of the Hungarian CENTROPE. Most of the indicators on the development of industrial production except for exports are slightly above the Hungarian national average. Only export growth was by 1.3% lower than the Hungarian average on account of the weak performance of Vas, which is also mirrored in the below average growth of sold and technical production in Vas and reflects the lower international competitiveness in that region. Indicators of Győr-Moson-Sopron, by contrast, reflect the competitiveness of the region and are more favourable than the national average throughout.


Table 41

Manufacturing sector development in the Hungarian CENTROPE Region 20061

Sold production2 Exports2 Technical

production3 previous year = 100

Győr-Moson-Sopron 110.7 110.7 108.8

Vas 99.1 98.3 99.3 Hungarian CENTROPE 107.8 107.8 106.3

West Transdanubia 108.0 108.6 103.1

Central Transdanubia 113.3 113.6 115.5

South Transdanubia 88.3 87.7 94.4

South Great Plain 105.6 103.2 100.6

North Great Plain 110.4 119.1 109.2

North Hungary 113.9 116.6 110.4

Central Hungary 102.6 102.6 95.6

Hungary 107.7 109.1 105.3

1) Including Mining, excluding Energy20, 2) data related to organisations over 49 employees; 3) Value of production, data related to organisations over 4 employees. Source: Based on CSO Hungary WHRI calculation

These contrasts between the two regions of Vas and Győr-Moson-Sopron also apply to many other indicators. The much smaller increase of productivity of Vas originates from the larger decrease of employment (-1.9%) than technical production (-0.7%). Additionally, the relative growth of earnings and parallel the unit cost of manufacturing was faster than the productivity in Vas. Győr-Moson-Sopron, by contrast, experienced higher productivity growth (+1.3%) than the national average with a similar growth of unit cost (+3.3%) and a small increase (+0.4%) of employment.

Table 42

Productivity, earnings and employment Development in manufacturing in the Hungarian CENTROPE regions 2006

Employees3

Productivity1 Earnings2

Total Food (15, 16)

Textiles (17-19)

Wood (20-22)

Chemistry (23-25)

Machinery(29-37)

Previous year = 100

Győr-Moson-Sopron 110.1 103.3 100.4 102.1 87.6 102.6 99.0 98.9

Vas 101.0 102.7 98.1 91.7 96.6 103.0 97.9 96.5

Hungarian CENTROPE 108.4 103.1 99.4 97.7 93.2 102.8 98.7 98.0

Hungary 108.8 103.3 99.7 94.7 85.9 96.3 98.0 102.4

1) Technical production per employee; 2) Average monthly gross earnings per employee; 3) Enterprises employed more than 49 employees. Source: Based on CSO Hungary WHRI Calculations.

20 In the Hungarian statistics the ’Total Industry’ also includes the Energy sector. To make Hungarian statistics comparable to the statistics in the rest of the report, we subtracted the data on the energy sector from ’Total Industry’.


In addition most manufacturing branches registered faster growth in the Hungarian CENTROPE than in the national average (Table 43) in 2006. The only exceptions are machinery, the leading sector of this region and food in Győr-Moson-Sopron and textiles in Vas.

The below average development in machinery is primarily due to policy interventions and catching up of other regions as well as spill over effects of the Budapest agglomeration to Central Transdanubia (+17.8% in sold production). In particular regions, where new motorways have been built in recent years like North Hungary (+37.5%) and North Great Plain (+22.6%), starting from low levels, have experienced very high growth rates. The other factor contributing to the slow growth in the machinery sector is the slowing down production in Vas (-4.7% relative to 2005) with continued high growth in Győr-Moson-Sopron (+10.8%). This decline in Vas originates from the decreasing export demand on the one hand, and a relocation of some important production sights to lower wage countries, on the other hand. The favourable result of Győr-Moson-Sopron is based on the prosperity of vehicle and automotive industry which provides 96% of production in machinery. Despite this difference employment in the machinery industry has declined in both Győr-Moson-Sopron (-1.1%) as well as in Vas (-3.5).

In the food and textile industries the development differs significantly between the two counties of the Hungarian CENTROPE. The prosperity of textile industry (+13.6% in sold production and -3.4% in employment relative to 2005) in Vas is based on the increasing export demand for leather products which hides the decline of textile production (domestic demand for textile production dropped by 40% over the last one year). By contrast, in Győr-Moson-Sopron the primary branch in this industry is the textile industry, which is continuing its traditional decline (-14.3% in sold production and -12.4% in employment relative to 2005). Several factories closed or moved to lower wages countries or cut back their production in Győr-Moson-Sopron in the last five years. At the beginning of the economic transition textile industry was the second largest branch with manufacturing in Győr-Moson-Sopron both by production and employment. Nowadays textile industry provides only half of the production compared to 2001.

Thus the traditional pre-transition sectors remained in decline in the Hungarian CENTROPE in 2006. The new emerging branches (such as chemistry, non-metallic and metal products), by contrast, show a much more favourable development. All these sectors have much higher relative growth in each Hungarian CENTROPE region than in the national average.

Table 43

Development of the manufacturing sector in the Hungarian CENTROPE regions by branches 20061

Győr-Moson-Sopron Vas Hungarian

CENTROPE Hungary

previous year = 100

Foodstuffs and Beverages, Tobacco 107.8 90.9 102.8 95.2

Textiles, Clothing, Leather processing 85.7 113.6 101.8 96.4

Wood processing, Paper, Printing 102.3 105.3 103.6 98.7

Chemical industry2 113.4 107.4 110.9 100.5

Non-metallic mineral products3 119.1 --- 119.1 111.4

Metalworking, Metal products 129.5 130.4 129.8 110.0

Machinery end equipments4 110.8 95.3 107.5 113.2

Total 110.7 99.1 107.8 107.7

1) Sold Production, data related to organisations over 49 employees; 2) Oil Processing, Chemical Production, Rubber; 3) Glass, Stone and Earth Products; 4) NACE-2-digits: 29-37. Source: Based on CSO Hungary WHRI calculation.


6.3 Construction, Energy & Services in the Hungarian CENTROPE Region

Construction & Energy

Construction is considered a sector with high growth potential in Hungary because of the forthcoming new Structural Fund period, where it is expected that a substantial part of the money will be devoted to the improvement of infrastructure. Aside from Central Hungary, all Hungarian regions are Objective 1 areas. In the Hungarian CENTROPE region, however, the development of the construction sector has been based on private investments, mainly by foreign direct investments rather than on government funds. As relatively developed region within Hungary, West Transdanubia, including the Hungarian CENTROPE has traditionally had worse access for government funds related to regional development. Thus, while due to decreased budgetary expenditure, production in construction grew only at a modest 1.7% in Hungary in 2008, the production growth of the sector is still close to +8.0% in the Hungarian CENTROPE region (Table 44).

Table 44

Production in Construction and Energy Production in the Hungarian CENTROPE region 2006

Construction1 Energy and Water Supply1

previous year =100 Győr-Moson-Sopron 107.7 +111.6

Vas 108.0 ... Hungarian CENTROPE 107.8 +111.6

Hungary 101.7 97.2

1) Sold Production, data related to organisations over 4 employees. Source: Based on CSO Hungary WHRI calculation.

Energy production by contrast is still underdeveloped in the Hungarian CENTROPE. Lacking basic materials and due to the closeness to the western border, the Hungarian CENTROPE region had no energy production, traditionally. The situation has started to change over the last decade, as the restructuring of the energy sector started in Hungary. Alternative and renewable energy sources will play a larger role according to the European objectives of sustainability. In this respect, Vas has a great potential to utilise biomass production based on the cross-border know-how (Güssing). By its geographic position, Győr-Moson-Sopron has the greatest potential to use wind energy in the whole of Hungary. Some developments have started close to the Austrian border. Currently, approximately 200 wind mills development applications are in the area of Győr-Moson-Sopron. Based on its central heating company, the Győr municipality invested in a gas power station three years ago. Today, beside central heating, the company generates and sells electricity, too. This new capacity is indicated in the real growth of energy sector in Győr-Moson-Sopron. Győr wants to increase electricity production by three fold in five years.


Retail Trade

Information concerning the development of retail trade in Hungary can be gained only from employment and number of enterprises data (Table 45). This causes problems of interpretation, since information on productivity and recruiting behaviour over the business cycle is not available. In 2006, similarly to the other CENTROPE and Central European regions belonging to the new member states, the expansion of shopping mall and supermarket chains has continued in Hungary. TESCO and SPAR reached smaller cities like Csorna and Kapuvár, at the same time, professional stores (like KIKA, PRACTIKER) expanded their activity in the large centres (Győr, Sopron, Szombathely). 2006 is the first year when the number of retail trade enterprises has declined in Hungary since 2000. The increased competition generated by the expanded capacity of retail trade chains had a negative effect on the existence of small private shops and led to a continued concentration of retail trade, which has only started recently in most Hungarian regions.

Beside the counties of Central Hungary (Budapest and Pest county) and South Great Plain (Bács-Kiskun, Békés and Csongrád), Győr-Moson-Sopron was the only county where the number of enterprises increased in 2006 relative to 2005. This trend has been continuous in this county since 2000. The expansion of larger shops, in contrast to the effect on the change in number of enterprises, resulted in higher employment in two-thirds of the counties and in every region excluding North Great Plain.

Table 45

Retail trade employment in the Hungarian CENTROPE region 2005

Number of enterprises Employment

Nominal change Changes relative to previous year in %

Győr-Moson-Sopron +28 +0.4 +2.2

Vas -70 -1.6 +0.4

Hungarian CENTROPE -58 -0.3 +1.6

Hungary -1,092 -0.7 +3.8

Source: Based on CSO Hungary WHRI Calculation.

Producer Services

Similar as with retail trade, information concerning the development of producer services only employment data is available in Hungary in 2006. Nonetheless according to these data the NACE two digit branches concerned (NACE 60-74) slightly increased their employment by 1.5% in 2006 (Table 46). In particular the knowledge intensive services sectors had a double as high increase of employment (+3.3%) than the entire market oriented service sector.

The growth rate in the Hungarian CENTROPE exceeded this Hungarian average by a factor of four in total market oriented services and by a factor of two in knowledge intensive services. Once more, however, Győr-Moson-Sopron and Vas followed very different developments. Győr-Moson-Sopron itself provided six times higher employment growth in the entire sector than the national average. At the same time, the employment of the sector in Vas decreased. By contrast, in Vas the knowledge intensive services sector increased employment by +10.9%, which is more than three times higher than the national average. The same indicator for Győr-Moson-Sopron is only 1.5 times higher than


the national average. However, the absolute increase is 300 employees in both counties. Győr-Moson-Sopron has started from a much higher employment level of this sector, which ranks fourth in terms of employment share in the county (after Budapest, Pest and Fejér).

Table 46

Development in market services and knowledge based services in the Hungarian CENTROPE region 2006

Other market oriented Sevices1)

Knowledge intensive Services2)

Changes relative to previous year in %

Győr-Moson-Sopron +9.8 +4.6

Vas -0.9 +10.9

Hungarian CENTROPE +6.2 +6.7

Hungary +1.5 +3.3

1) NACE-2-digits: 60-74. 2) NACE-2-digits: 72-74. Source: Based on CSO Hungary WHRI Calculation.

6.4 Tourism in the Hungarian CENTROPE

The achievements of tourism were below the expectations in Hungary in 2006. The number of guest nights dropped by -3.5% relative to 2005 (Table 47). This is primarily due to the loss of foreigners (-8.8%). This process is related to, first of all, the strong decrease of German guests (-16.8%), the leading visitors of Hungary. The losses in guest nights were also caused by the trend to less arrivals and shorter stays. Tourist arrivals decreased by -1.3%, and parallel the average stays decreased from 2.8 to 2.7 nights. A restructuring of tourists between foreigners and natives has also started. Arrivals of natives have increased by +3.0%, and their nights spent by +2.8%. The decline of guest nights was also 6.5 times smaller in hotels than in other accommodations.

Behind that the results of the new national policy on the development of domestic tourism can be identified on both the supply and the demand side. Since the beginning of the new decade national government funds (Széchenyi Plan 2001-2002, National Development Plan 2004-2006) supported the capacity and quality development of spa and wellness tourism. Over the last five years, the program has resulted in a significant change of the structure of accommodations. Hotels with higher value (four and five star hotels) are getting a much higher share in its composition. Parallel to this process, the government installed a tourism voucher system. Employers may provide this voucher to their employees until a certain limit (HUF 65,500 in 2007) without tax and social security burdens both for employees and employers. This policy has generated fast growth in the utilisation of this facility. The main beneficiaries of the increasing demand on domestic tourism have been the new spa and wellness capacities. The attitudes of native tourists have also changed due to the new voucher system. Beside the longer – one to three weeks – summer holiday, Hungarians started to go for shorter weekend holidays (long weekend holidays around national holidays). This has also increased the number of visitors and nights spent mainly in spa and wellness locations, significantly.


Table 47

Tourist nights spent in the calendar year 2006 (Changes relative to 2005 in %)

Total Foreigners

In 1000 Change Natives

Total German Austrian Slovak Czech Others Hotels

Other Commercial

AccommodationGyőr-Moson-Sopron

893 -0.9 -0.8 -1.1 -7.6 -1.5 +1.6 +58.2 +4.5 +2.8 -6.8

Vas 857 -5.7 -0.5 -9.8 -17.3 +1.3 -52.3 +19.4 -11.2 +9.3 -17.3 Hungarian CENTROPE 1,7501 -3.3 -0.7 -6.2 -13.7 +0.3 -37.3 +24.6 -1.6 +6.0 -11.9

Hungary 19,038 -3.5 +2.8 -8.8 -16.8 -2.7 +1.3 -6.3 -5.5 -1.2 -8.1

Source: Based on CSO Hungary WHRI calculation.

In the Hungarian CENTROPE tourism development in 2006 was similar to the national average. However, as in other sectors, the losses were larger in Vas (-5.7%) than in Győr-Moson-Sopron (-0.9%). 2006 has been the first year since 2000 when the number of nights spent was higher in Győr-Moson-Sopron than in Vas. There are three significant differences between the national and the Hungarian CENTROPE region’s development, and some additional differences within the region. First, tourism of natives is stagnating in the Hungarian CENTROPE, nationally it is increasing. Second, the demand for hotel rooms has increased significantly in the Hungarian CENTROPE region (+6.0%), nationally it has decreased slightly. Third, nights spent by Czech tourists show a very fast growth in the Hungarian CENTROPE (+24.6%), nationally this decreased by -6.3%.

Regarding the increase of guest nights in hotel rooms, Vas had 3.5 time higher growth than Győr-Moson-Sopron. These differences are also caused by the different development strategies in these counties. Utilising the national funds, large scale spa and wellness developments were implemented in Vas, mainly in the traditional spa areas like Bükfürdő and Sárvár, additionally in Szombathely. The development of tourism capacities in Győr-Moson-Sopron, by contrast, was characterised by smaller scale new initiatives (e.g. Lipót, Dunakiliti). In future, however, larger increases may be expected in Győr-Moson-Sopron, because this county will be a new target area in the forthcoming years. Two new hotels with larger capacities were already opened in Győr in 2007, and there are four additional planned in the next three years.

The structure of foreign tourists draws different pictures within the region. Austrian visitors slightly decreased their guest nights in Győr-Moson-Sopron, at the same time they increased slightly in Vas. There is an opposite process with Slovak visitors. Győr-Moson-Sopron experienced a little growth, at the same time, guest nights spent by Slovaks dropped to half of the previous years in Vas. Out of the CENTROPE area Győr-Moson-Sopron attracted more tourists in 2006 than in 2005, at the same time, Vas lost one tenth of their guest nights. Nights spent by visitors from Slovenia (+107.6%), Israel (+101.7%), Canada (+101.0%), Poland (+85.6), the USA (+60.0%) provide the largest change in Győr-Moson-Sopron. A significant loss (-54.1%) originated by visitors from Serbia and Montenegro. In Vas visitors from Ukrajna (+436.2), China (+143.9%) and Poland (+66.1%) show the fastest increase. Parallel, strong losses can be identified in guest nights spent by the visitors from the U.K. (-61.1%), Romania (-43.3%) and Croatia (-26.8%).

By the quality of accommodations, the most dynamic growth was in five and four stars hotels, and places based on attraction of health resorts, spa and utilisation of wellness and recreation facilities in both counties in 2006. In Győr-Moson-Sopron, guest nights have increased by 2.3 times in five star


hotels, and by +14.7% in four star hotels. In Vas the same indicators show an increase by +9.0% in five star hotels, and +8.0% in four star hotels. Their share was 40% in the total guest nights spent in Vas.

By seasons, number of visitors and nights spent are 1.6 times higher in winter than in summer within the Hungarian CENTROPE. This difference is smaller than the national average. The average duration of stay is longer by one day in Vas. The reason for this is that the major capacity of Vas is in health tourism, especially in Bükfürdő and Sárvár. This kind of tourism is characterised by longer (usually one week) stays. The tourism of Győr-Moson-Sopron is more diversified. That is why the average stay is shorter in this county.

Table 48

Tourism development by summer and winter season in 2006

Average

duration of stay

Arrivals Nights spent

Days Total Natives Foreigners Total Natives Foreigners

Changes relative to previous years in %

Winter Season (November 2005 to April 2006)

Győr-Moson-Sopron 2.1 +8.6 +4.5 +15.3 -1.2 -5.0 +5.9

Vas 3.0 +2.9 +1.4 +5.6 +5.3 +10.4 +0.7

Hungarian CENTROPE 2.5 +6.1 +3.1 +11.3 +2.0 +1.4 +2.7

Hungary 2.6 +2.8 +7.9 -2.5 +6.3 +9.6 +3.7

Summer Season (Mai to October 2006)

Győr-Moson-Sopron 2.3 +5.4 +15.7 -6.3 +11.1 +22.0 -2.0

Vas 3.5 -5.4 -1.3 -11.6 -7.3 -0.6 -12.1

Hungarian CENTROPE 2.7 +1.1 +8.5 -8.2 +1.4 +11.6 -7.9

Hungary 2.9 +0.1 +5.5 -5.2 -2.3 +4.9 -8.0

Source: Based on CSO Hungary WHRI calculation.

Accommodations accumulated HUF 9.2 billion (approx. € 36.8 million) in Győr Moson-Sopron, and HUF 8.9 billion (approx. € 35.6 million) in Vas county in 2006. The real growth of turnover was faster in Győr-Moson-Sorpon (+6.3%) than in Vas (+2.8%). In both counties, half of the turnover originates from the fee of accommodations. The rest of the turnover comes from catering and other services. In 2006, every fourth forint of turnover came from tourism vouchers provided by the employer to their employees.

6.5 The Labour Market in the Hungarian CENTROPE Region

Demand on the labour market stagnated both in Hungary and the Hungarian CENTROPE region in 2006 (Table 49). Mirroring the developments of GDP and GVA in 2005, and the technical production in manufacturing, Győr-Moson-Sopron experienced an increase in employment of +1.2% while in Vas there was a decrease in employment of -0.7%.


Table 49

Employment growth in the Hungarian CENTROPE region in 2006

Employees

Absolute Changes relative to previous year in %

Győr-Moson-Sopron 120,302 +1.2

Vas 69,502 -0.7

Hungarian CENTROPE 189,804 +0.5

Hungary 2,789,700 +0.1

Source: Based on CSO Hungary WHRI calculations.

The only sector which experienced employment growth in 2006 relative to 2005 was market services. In general, the Hungarian CENTROPE, however, has a more favourable labour market position than the rest of the country. There is no significant difference between national figure and the Hungarian CENTROPE regarding manufacturing and the public sector employment growth. Both sectors have a below average decline. In agriculture the decrease of the region is almost double that of the national average, but while the Hungarian employment in the construction sector dropped by -7.3%, the Hungarian CENTROPE registered a small increase (+1.6%) and employment in market services expanded substantially faster than in the Hungarian average.

Table 50

Sectoral employment growth in the Hungarian CENTROPE region in 2006

Agriculture Manufacturing Construction Market Services Public Sector

Total Trade Producer Services1)

Changes relative to previous year in % Győr-Moson-Sopron -7.3 -0.3 +0.5 +9.8 +2.2 +4.6 -1.2

Vas -9.1 -1.0 +3.4 -0.9 +0.4 +10.9 -0.8 Hungarian CENTROPE -8.0 -0.6 +1.5 +6.2 +1.6 +6.7 -1.1

Hungary -4.4 -1.3 -7.3 +1.5 +3.8 +3.3 -1.2

1) NACE 70-74. Source: Based on CSO Hungary WHRI calculations.

The high correlation of labour supply and labour demand decreases affected Hungarian regions differently in 2006 (Table 51). In Hungary the most lagging regions (North Hungary and North Great Plain) had larger, and the most developed regions (Central Hungary and the Hungarian CENTROPE) had smaller increases of the unemployment rate. Among the regions with decreasing unemployment rate South Transdanubia was the best (-1.0%). Within the Hungarian CENTROPE, the unemployment rate increased by +0.3 percentage points in Győr-Moson-Sopron, and decreased by -0.6 percentage points in Vas. The Hungarian CENTROPE thus once more had the lowest unemployment rate in Hungary in 2006 and Győr-Moson-Sopron had the lowest rate (4.3%) among all Hungarian counties. (The second was Fejér with 5.3%, and the third was Budapest with 5,5%.)


The trend regarding unemployment has also shown a better picture in the Hungarian CENTROPE than in the rest of the country. While the changes in number of registered unemployed21 in total and by sex indicate a relatively moderate decrease nationally, and even some increases in some regions, those indicators significantly decreased in the Hungarian CENTROPE. Countrywide the decrease in female unemployment was two times higher than for males. In the Hungarian CENTROPE there is no significant difference between men and women in this respect. However, the number of unemployed women is slightly higher than that of men in Győr-Moson-Sopron. The situation in Vas is just the opposite. Behind this difference the structure of employment can be identified. While ‘men related’ machinery is running well in Győr-Moson-Sopron, the ‘woman related’ textile sector is declining. The trend of these sectors is just the opposite in Vas.

Table 51

Unemployment developments in Hungary and the Hungarian CENTROPE region 2006

Unemployed Unemployment rate

Total Men Women Youths1) Elder2) With diploma) Level Change to prev. year

Changes relative to previous years in % in % Percentage points

Győr-Moson-Sopron -16.8 -16.6 -16.9 -26.1 -5.1 -8.2 4.3 +0.3

Vas -16.2 -16.3 -16.0 -21.2 -9.4 -5.9 7.6 -0.6 Hungarian CENTROPE -16.5 -16.5 -16.5 -23.8 -7.0 -7.3 5.4 +0.1

West Transdanubia -9.7 -10.9 -12.4 -20.8 +2.3 -5.4 5.6 -0.4

Central Transdanubia -4.3 -4.9 -3.7 -9.6 +9.6 +2.3 5.8 -0.4

South Transdanubia -2.1 -0.5 -3.9 -9.2 +14.4 +9.2 9.3 -0.1

South Great Plain -0.8 -2.3 +0.8 -7.3 +15.6 +4.1 7.4 -1.0

North Great Plain +1.5 +1.2 +1.8 -2.4 +17.9 +6.4 10.5 +1.1

North Hungary -2.3 -1.9 -12.3 -2.6 +5.4 +1.4 11.1 +0.9

Central Hungary +1.0 +1.5 +0.6 -6.5 +11.2 +9.5 5.5 +0.3

Hungary -1.6 -1.7 -3.6 -6.3 +10.9 +4.9 7.5 +0.2

1) Aged 15 to 24, 2) 55 years or older, 3) University (M.Sc) or College (B.Sc.) degree. Source: Based on CSO Hungary WHRI calculations.

The labour market position of the young became better compared to other major labour market groups, like older unemployed or unemployed with diploma. The decrease in youth unemployment group is 3.5 times higher in the Hungarian CENTROPE than in the Hungarian average. Regarding older unemployed and unemployed with diploma this region was the only region where the position of this labour market segment improved in 2006. In all other Hungarian regions the number of unemployed increased both in the ‘elder’ as well as in the ‘with diploma’ groups. Within the Hungarian CENTROPE there are clear differences related to the change of situation of these groups. While the ‘youth’ (+4.9 percentage point) and ‘with diploma’ (+2.3 percentage points) group developments were



better in Győr-Moson-Sopron, the position of the ‘elder’ group (+4.3 percentage points) became better in Vas.

Regarding the future of labour market development there is a better view for Győr-Moson-Sopron than Vas within the Hungarian CENTROPE region. While the offers for jobs increased in Győr-Moson-Sopron, they decreased in Vas in 2006. In turn, the gap between non-occupied vacancies and number of unemployed (searching for job) increased in Vas and decreased in Győr-Moson-Sopron. As a result of this in Győr-Moson-Sopron there were 2 unemployed searching for 1 vacancy in 2006 compared to 4 in 2005. In Vas this indicator increased from 8 to 10.


The Slovak Regions

Author: Karol Frank, Slovak Academy of Sciences

6.6 GENERAL BACKGROUND ON REGIONAL DEVELOPMENT OF SLOVAK REGIONS

In the past, the nature of industrialization in Slovakia led to the creation of mono-structural micro regions where often a few large enterprises were located. This limited number of large enterprises, which employed the majority of the labour force in the regions, also presented their main structural weakness. The centrally planned localisation of important industries led to an “unnatural” regional distribution of energy- and environment-intensive production with low value added. Many of the regions were not able to promote further development of these industries. The inevitable restructuring of these industries during the transition period resulted in a severe impact on employment and overall socio-economic development. After the market liberalization many of the main enterprises lost their competitiveness, which caused deep structural problems in most of the present NUTS II regions.

Due to the high redistribution in the centrally planned economy, income and productivity differences in the respective regions were minimal. Changes in property rights and redistribution mechanisms during transition made the differences more evident. However, economic and social policy was not prepared to temper with these changes. Regional policy in Slovakia has been based mostly on proclamations, rather then concrete steps, which could create favourable conditions for economic development of these regions.

The positive effects of cross border cooperation with more developed regions in the western part of the EU were limited to only two NUTS II regions – Bratislavský and Západoslovenský kraj. Stredné Slovensko borders with likewise underdeveloped regions of Poland and Hungary. Similarly, Východné Slovensko borders with underdeveloped regions of Hungary, Poland and Ukraine.

Bratislavský kraj is the only region in Slovakia with a GDP per capita above the EU average (129.3% of EU average in PPP). This region is also known for its lack of labour supply. This makes the region a target for inward migration from other regions. It is a typical urban region; therefore it is difficult to conduct coherent comparisons with other regions of Slovakia, which have dispersed urban areas with dominant rural settlements. The location of this region near Vienna and Győr is also a strong impetus for further economic growth. On the other hand, this position is not favourable for other Slovak regions since central forces are strong. The urban character of this region lays the foundation for its strong growth, no matter what economic policies are enacted by the central government and makes the region more immune to external economic shocks. Bratislavský kraj is beginning to act as a technological leader in comparison with other regions.

Západoslovenský kraj (which is the NUTS II region in which the second CENTROPE region of Slovakia – Trnava – is located) draws its economic advantage from the proximity to the Bratislavský kraj, to the Czech Republic and northwest Hungary with their developed transport infrastructure. In the development of this region there is a north-south growth gap: The area near the Czech border (corridor in proximity of the D1 motorway, Trnava, Ilava, Trečín, Púchov) is fast growing while the south-eastern area is somewhat lagging behind. The uneven inflow of foreign direct investments mostly to the western and north-western parts of the region only confirms and further deepens this trend. The south-western districts of the region are characterized by a typical combination of rural and


small urban areas with a few key industries and a low level of diversification. The restructuring of industrial activities led to decline in several important enterprises in this region (for example Novofruct Nové Zámky, Slovenské lodenice Komárno, Plastika Nitra, Elektrosvit Nové Zámky etc.). Some of these key industrial branches were able to cope with the ongoing restructuring and revived their production, but they were not able to restore previous level of employment. An important characteristic of the southern, lagging behind area of this region is demographic depression, i.e. ongoing out-migration.

6.7 FUTURE DEVELOPMENT PROSPECTS OF NUTS II REGIONS

The further development of NUTS II regions will be mostly determined by their current economic position together with the anticipated effects of regional policy. Positive effects of foreign direct investments, successful application for support by regional development policy and structural funds together with national co-financing should create favourable conditions for further socio - economic development. However, we anticipate that present uneven development of NUTS II regions will continue. Nitriansky and Banskobystrický kraj could serve as an example for regions which seem to appear as not problematic on a NUTS II level, but on the lower NUTS III level their development is highly uneven. As the subsequent analysis will show, CENTROPE regions Bratislava and Trnava are not such cases.

Bratislavský kraj has enormous locational advantages and excellent starting conditions as a capital city and is therefore almost predetermined to achieve an outstanding positive development. It is expected that the inflow of foreign direct investments (FDI) together with domestic investments will be one of the relevant driving forces in the expected robust economic development. The urban character of this region predetermines the Bratislava region to be the centre of economic, financial and scientific progress in Slovakia. The capital city character shapes this region as centre for many headquarters and public administration institutions which implies the creation of jobs with high labour productivity. Non-Bratislava districts may be able to draw an advantage from the proximity to the capital. The most relevant factor of their development will be migration22 from urban to rural areas and by the growing service sector in the districts of Pezinok, Malacky and Senec. In the broader scope of the CENTROPE region, the Bratislavský kraj will be the main driving force for the Slovakian regional development in general.

The main development factor of Západoslovenský kraj will be the proximity to Bratislavský kraj and to regions in the Czech Republic combined with qualified labour force and strong tradition of selected industrial branches. The proximity to the centre will be the main advantage of Trnavský kraj which is the main supply of labour for the Bratislava region. Southern districts of Trnavský kraj can benefit from the proximity to northern Hungary with broad opportunities for employment. The rise of the automotive industry is currently the main driving force in the development of related services and other economic activities. The economic development of Nitriansky kraj seems to be problematic. Its current level of economic development does not lay the foundation for high economic growth in the future, especially in the southern areas of the region with a dominant agricultural sector. Economic assistance from the Cohesion Policy seems to be also problematic, because of the NUTS II division of Slovakia. Nitriansky kraj is grouped together with the more developed regions of Trenčín and Trnava in the NUTS II region of West Slovakia. Therefore its economic position is highly over overrated which makes support from

22 People working in Bratislava moving to live outside the city.


Structural Funds more complicated. Since of this NUTS II region only the NUTS III region of Trnava belongs to the Slovak CENTROPE, the remainder of this chapter will focus only on Trnava.

6.8 ECONOMIC AND SOCIAL DEVELOPMENT OF CENTROPE REGIONS IN SLOVAKIA

A more detailed view at the CENTROPE regions Bratislava and Trnava is offered by the regional statistics. Although most of the data are available only for the year 2005 and, in some cases for 2006, we can observe positive development trends in many areas, especially in the two CENTROPE-regions of Slovakia. However, the lack of data complicates the analysis and prevents us from observing some of the significant structural changes and their influence on the economic development over the last years. The recovery of the Slovak economy since 2001 laid a healthy foundation for the robust economic growth Slovakia is experiencing up to the present. However, economic growth was as usual not evenly distributed among all regions of Slovakia. The two CENTROPE-regions are among those whose economic growth positively influences the overall economic structure and contributes to the improvement of economic and social development elsewhere in Slovakia.

While the area of Bratislavský kraj represents only 4% of the total area of the Slovak republic about 11% of the total population live there. The population density is more than 260% above the Slovak average; it also has the largest share of towns (about 10% of the total number of municipalities (towns and rural areas)) in Slovakia. Bratislavský kraj can be marked as urban region. For comparison, Trnavský kraj represents 8% of the total area and 10% of the total population. The population density is close to the Slovak average (120%). Importantly, Bratislavský and Trnavský kraj represent 12% of total area of the Slovak Republic and 16 % of all towns are located in these regions.

Table 52

Basic indicators of Slovakia and CENTROPE regions

Area (km2) Population % female

population.

Population density

(person/km2)

Number of municipalities

Number of towns

Slovak Republic 49,034.7 5,389,180 51.5 110 2,891 138

Bratislavský kraj 2,052.6 603,688 52.7 294 73 7

Trnavský Kraj 4,147.2 554,172 51.3 134 251 16

Slovak CENTROPE 6,199.8 1.157,860 52.1 192 324 23

Západné Slovensko (West Slovakia)

14,992.5 1,863,056 51.4 124 881 48

Source: Statistical Office of Slovakia

Labour market

The total economic activity rate in Slovakia declined from 2000 to 2005 from 60.5 % to 59.5 %. As in other countries the gender differences are also significant. In 2005, the total economic activity rate of males was above 68%; that of females was only slightly more than 51%. There are also significant interregional differences in the economic participation rate. In Bratislavský kraj the economic activity rate is about 4 percentage points above the Slovak average. The economic activity of males is above 70% and of females more than 6 percentage points above average. The economic activity rate in Trnavský kraj is higher compared to the Slovak average, but still behind the rate of Bratislavský kraj.


This is mainly due to the southern districts (Dunajská Streda, Galanta) with large shares of the agriculture sector and the west-north districts (Senica, Skalica) characterized by mountainous relief and an underdeveloped local infrastructure. These southern districts have a different economic structure and therefore less favourable conditions for creation of job opportunities compared with districts with good highway and railway connections (Pezinok, Trnava, Piešťany, Hlohovec). The lagging districts are characterised also by a significant share of voluntary and long term unemployment. The unemployment rate in Bratislavský kraj is the lowest in the Slovak Republic. It is close to the natural unemployment rate and has mainly frictional character. The unemployment rate in Trnavský kraj is traditionally below the Slovak average. Within the Trnavský kraj a similar pattern as in the case of the economic activity rate is observable. From a macroeconomic perspective of the labour market, Bratislavský and Trnavský kraj can be seen as non-problematic.

Table 53

Labour market indicators (Labour Force Survey)

Total Male Female

2000 2001 2002 2003 2004 2005 2000 2001 2002 2003 2004 2005 2000 2001 2002 2003 2004 2005

Slovakia

Unemployed 4.7% -4.2% -5.7% 4.7% -11.1% - 6.4% -6.6% -6.6% 1.4% -10.5% - 2.6% -1.1% -4.6% 8.6% -11.7% 4.7%

Employed 1.0% 0.2% 1.7% 0.3% 2.1% - 0.7% 1.0% 1.8% 1.4% 3.4% - 1.3% -0.7% 1.8% -1.1% 0.7% 1.0%

Economic activity rate 60.3 60.7 60.2 60.3 60.2 59.5 68.6 69.2 68.5 68.4 68.5 68.4 52.6 53 52.6 52.9 52.5 51.3

Unemployment rate 18.6 19.2 18.5 17.4 18.1 16.2 18.6 19.5 18.4 17.2 17.3 15.3 18.6 18.8 18.7 17.7 19.1 17.2

Bratislavský kraj

Unemployed - 15.6% 1.8% -20.6% 18.4% -36.7% - 20.9% 0.0% -30.2% 25.8% -38.5% - 10.9% 3.5% -11.5% 13.0% -35.1%

Employed - -0.8% -2.1% 2.1% -1.6% 3.4% - -0.9% -1.4% 2.3% -1.2% 4.2% - -0.7% -2.7% 1.7% -2.1% 2.6%

Economic activity rate 65.4 64.8 63.8 63.8 64.2 63.8 72 71.3 70.6 70.2 71.1 71.3 59.5 59.1 57.8 58.1 58.2 57.2

Unemployment rate 7.2 8.3 8.6 6.9 8.2 5.2 6.6 8 8.1 5.7 7.2 4.4 7.9 8.8 9.3 8.1 9.3 6.1

Trnavský kraj

Unemployed - 15.2% -11.3% -18.8% -3.0% -16.4% - 17.2% -19.8% -13.7% -9.5% -21.6% - 13.1% -1.2% -23.5% 3.8% -11.6%

Employed - 3.3% 1.9% 2.2% 3.5% 3.2% - 0.8% 3.6% 1.0% 4.6% 4.5% - 6.4% -0.2% 3.7% 2.2% 1.7%

Economic activity rate 60.9 63.2 62.8 62 62.6 62.3 70.3 71.5 70.9 70 70.8 70.8 52.1 55.6 55.4 54.6 55 54.4

Unemployment rate 16.4 18 16.1 13.2 12.5 10.4 15.3 17.6 14.2 12.3 10.9 8.5 17.6 18.5 18.3 14.2 14.4 12.8

Source: Statistics Office of Slovakia

Economic structure

The favourable position of Bratislavský and Trnavský kraj is visible also from their economic structure. The total number of enterprises23 in Bratislavský and Trnavský kraj comprise about 24 % of all enterprises in the Slovak Republic. Notably, West Slovakia and Bratislavský kraj together host more than 52% of Slovak industries. The share of value added of Trnavský and Bratislavský kraj has grown from 32% in 2000 to more than 42% in 2005. Importantly, in 2005 in Bratislava and West Slovakia

23 Industry includes activities connected with extraction of minerals, industrial production and distribution of electricity, gas and water. Data is produced on all enterprises with dominating industrial activity defined by registration of organization to codes from 10 to 41 of NACE. Indicators for the whole industry include: 1. enterprises with number of employees 20 and more, registered in Business Register 2. enterprises with number of employees up to 19 (including), registered in Business Register 3. natural persons entrepreneuring with the trading certificat according to the Act No 455/1991 Coll. on trading business in wording of later rules (Source: Statistical Office of Slovak republic)


more than 63% of total value added in Slovakia has been produced. The relatively high intermediate consumption share in total production, however, can be seen as problematic. The share of intermediate consumption in gross revenues in the medium term in Slovakia is 77 %, which is rather high. In Bratislavský kraj this share is more than 80% for 2005. It has declined to this level from nearly 85% in 2001. This may be traced back to the low value added in the Volkswagen production that started only as an assembly line for lower and middle class vehicles. The investment made in 2005 and the beginning of the production of semi parts as well as of the high class off-road VW Touareg increased the value added later on. The situation in Trnavský kraj is slightly different. The share of value added on gross revenue went down from more than 30% in 2001 to close to 20% in 2005. This can be explained by the growth of new low value added industries in the region.

Table 54

Development of intermediate consumption, value added and gross revenue 2003 - 2005

Intermediate consumption

(Mio. SKK) Number of enterprises

Value added (Mio. SKK) Gross revenue (Mio. SKK)

2003 2004 2005 2003 2004 2005 2003 2004 2005 2003 2004 2005

Slovakia 917,652 970,713 1,027,698 2,231 2,225 2,376 248,279 286,135 297,097 1,165,931 1,256,848 1,324,795

Bratislavský kraj 400,127 434,395 432,465 260 276 289 63,182 88,184 103,300 463,309 522,579 535,766

Trnavský kraj 75,586 95,708 121,680 257 259 279 30,270 33,031 31,474 105,856 128,739 153,154

Slovak CENTROPE 475,713 530,103 554,145 517 535 568 93,452 121,215 134,774 569,165 651,318 688,92

West Slovakia 219,452 236,154 274,293 898 913 945 88,689 92,896 85,632 308,141 329,050 359,926

Source: Statistic office of Slovakia, own calculations

Table 55

Share of intermediate consumption and value added on gross revenue

Share of intermediate consumption on gross revenue Share of value added on gross revenue

2003 2004 2005 2003 2004 2005

Slovakia 78.7% 77.2% 77.6% 21.3% 22.8% 22.4%

Bratislavský kraj 86.4% 83.1% 80.7% 13.6% 16.9% 19.3%

Trnavský kraj 71.4% 74.3% 79.4% 28.6% 25.7% 20.6%

Slovak CENTROPE 83,6% 81,4% 80,4% 16,4% 18,6% 19,6%

West Slovakia 71.2% 71.8% 76.2% 28.8% 28.2% 23.8%


In the years 2001 – 2005 production of the construction sector has grown by 56%. The growth in Bratislavský kraj has been recorded at 44% and in Trnavský kraj at more than 60%. The situation is different in absolute values: while the growth in Bratislavský kraj was more than 10 billions SKK, in Trnavský kraj it was only approximately 4 billions SKK. The expansion of the construction sector can be also seen in the changes in the number of employees and in nominal wages. The nominal wage in the construction sector is lower than the Slovak average with the difference increasing. While the difference between the average nominal wage and the nominal wage in the construction sector in the


year 2001 was about 2000 SKK, the difference in 2005 was more than 4000 SKK. The low wages in the construction sector can be explained mainly by “informal payments” of employers. There is quite often a situation when employees are officially earning the minimal wage but have a much higher real income. The construction sector is also characterized by a relatively high share of black market and unskilled labour. In Bratislavský kraj the nominal wage in the construction sector is higher compared to the Slovak average (nearly 1000 SKK). On the other hand it is nearly 5000 SKK less than the average nominal wage in Bratislavský kraj.

Table 56

Indicators of Construction Sector

Indicator 2001 2002 2003 2004 2005

Construction production (Mio Sk) 77,903 84,265 91,508 102,088 122,193

Average wage in construction sector (Sk) 11,077 11,570 12,127 13,106 13,903 Slovakia

Number of employed - Statistical evidence (pers.) 125,097 127,824 131,154 133,600 142,751


Average wage in construction sector (Sk) 13,870 14,743 15,792 18,564 19,293 Bratislavský kraj



Average wage in construction sector (Sk) 10,050 10,644 11,181 11,558 11,760 Trnavský kraj


Source: Statistics Office of Slovakia

Table 57

Basic indicators of tourism sector

Year Bratislavský kraj Trnavský kraj

Number of overnight

stays

Number of beds

Number of visitors

Number of lodging facilities

Number of overnight

stays

Number of beds

Number of visitors

Number of lodging facilities

2001 1,241,197 15,086 601,537 158 1,282,963 12,179 244,300 136

2002 1,357,912 18,357 655,558 159 1,356,853 12,166 258,649 141

2003 1,363,138 19,264 656,730 175 1,316,411 12,399 246,211 150

2004 1,432,296 19,043 721,379 167 1,171,840 12,422 236,403 155

2005 1,663,260 20,574 786,266 158 1,162,154 13,300 241,497 152


One of the economic sectors considered important is tourism. When comparing Bratislavský and Trnavský kraj there are nearly similar conditions with respect to number of lodging facilities. In comparison with Trnavský kraj, Bratislavský kraj is in a better position concerning the number of available beds. This can be explained by larger number of bigger hotels (situated mostly in the capital city of Bratislava). There is also a difference in the number of visitors. There have been over three times more visitors in Bratislavský kraj in the year 2005 as in Trnavský kraj. On the other hand,


Bratislavský kraj seems to be less attractive for long term stays compared to Trnavský kraj. The average nights per one visitor in Bratislavský kraj in 2001 – 2005 was 2 compared with 5 in Trnavský kraj. This can be explained by the frequent number of one night stays and conference/business tourism which is characteristic for Bratislavský kraj, compared to leisure time tourism in Trnavský kraj that is attractive also for the population of Bratislavský kraj.

Regional development patterns

The situation in the regions described above is reflected in some basic indicators. These indicators describe the overall situation in the regions covering the production sector as well as population trends.

An important indicator describing production and labour force performance is labour productivity. In the Slovak Republic labour productivity has increased by 42% between 2001 and 2005. The increase in the regions under consideration was more than average. The increase of labour productivity in Bratislavský kraj was more than 55% and in Trnavský kraj more than 54%. Restructuring of the industrial sector in these regions as well as steady increases in labour productivity in already operating enterprises play the most significant role in the growth of productivity. In the regional view, labour productivity is nearly twice as high in Bratislavský kraj compared to Trnavský kraj, which is at the Slovakian average level. The reason may be the more service oriented production in Bratislavský kraj. The position of Bratislava as capital city is also an important factor. The national government is based there as well as institutions and headquarters of Slovak and transnational enterprises.

Table 58

Basic general indicators

2001 2002 2003 2004 2005 index 05/01

Average nominal monthly wage (SKK) 13,350 14,303 15,372 17,014 18,178 136.2%

Average number of employees 551,919 553,721 559,078 558,876 577,214 104.6%

Labour productivity from turnover (SKK)1 1,959,684 2,104,191 2,445,077 2,640,968 2,799,930 142.9% Slovakia

Total revenues (mil. SKK) 1,081,587 1,165,135 1,366,988 1,475,974 1,616,158 149.4%



Labour productivity from turnover (SKK) 4,103,495 4,471,113 6,477,828 6,528,911 6,373,766 155.3%

Bratislavský kraj

Total revenues (mil. SKK) 416,492 463,327 581,809 603,312 626,186 150.4%



Labour productivity from turnover (SKK) 1,780,962 1,952,337 2,113,184 2,492,668 2,757,210 154.8%

Trnavský kraj

Total revenues (mil. SKK) 87,107 91,067 118,941 144,427 184,283 211.6%

1 Labour productivity from turnover is expressed by volume of the turnover per one employee in industry per month.



The difference in labour productivity is reflected in the changes in nominal monthly wages. The average nominal monthly wage in Slovakia has increased by 36% in the years 2001 – 2005. The growth of nominal wage in Bratislavský and Trnavský kraj reflect the growth of labour productivity, which is higher compared with other Slovak regions. The growth of wages in Bratislavský kraj was more than 2 percentage points higher compared to the Slovak average. In the Trnavský kraj the growth of wages was higher by 1 percentage point. A cross regional comparison of nominal wage levels provides a similar pictures. The nominal wage in Bratislavský kraj represents 130% of the Slovak average. The wage in Trnavský kraj is nearly at the Slovak level. Notably, these are nominal wage levels. On the one hand, they do not include the income of small businesses and entrepreneurs, and thus do not represent total income of the citizens. Taking account of this the differences in total income between the regions is likely to be higher than the differences in nominal wages, given the high share of small businesses in Bratislavský kraj. On the other hand, these nominal wages do not take into account differences in regional price levels in Slovakia. However, it can be safely assumed that the price level in the capital city and in Bratislavský kraj is higher than in the neighbouring region of Trnavský kraj and also higher than in the Slovak Republic in total. Hence the differences in real wages (i.e. nominal regional wages deflated by the regional price level) are likely to be smaller across the Slovak regions than nominal wages suggest.

As already mentioned above, high economic growth contributed to higher employment rates in Slovakia and in the Slovak CENTROPE regions as well. The overall Slovak employment grew by 2.8% within the years 2001 – 2005 creating 54,880 jobs. However, the Slovak CENTROPE regions performed much better. Bratislavský kraj recorded an increase of 7% with 25,256 new jobs which is nearly half of all newly created jobs in the whole country. The share in overall employment of Bratislavský kraj grew to 19% in 2005. This development only further supports the leading role of this region in Slovakia. On the other side the rapid development in several sectors leads to lack of skilled workforce which reduces the potential output of this region. From a sectoral point of view most jobs in Bratislavský kraj were created in real estate activities (15,597 jobs), public administration and defence (4,786 jobs), financial intermediation (2,783 jobs). The largest decline in employment was in education (-2,028 jobs) and agriculture, hunting and forestry (-752 jobs).

According to the available data (Figure 23) service oriented sectors take the largest share in total employment in Bratislavský kraj. These include financial intermediation (50% of total employment in this sector of the Slovak Republic), real estate activities (39.4%), transport storage and communication (25%), public administration and defence (23.5%), hotels and restaurants (19.7%) and others. The small share of agriculture (5.5%) and manufacturing (11.1%) only supports the position of Bratislavský kraj as the leading region in the Slovak part of CENTROPE concerning tertiary sector development.


Table 59

Employment structure in Slovakia and NUTS III regions Bratislava and Trnava 2001 - 2005

Slovakia Bratislavský kraj Trnavský kraj

Index

2005/2001

Change against 2001

Index 2005/2001

Change against 2001

Share in total

employment 2005

Index 2005/2001

Change against 2001

Share in total

employment 2005

Total 102.8% 54,880 107.0% 25,526 19.0% 105.7% 11,447 10.4%

Agriculture, hunting, forestry, fishing 83.4% -19,879 87.9% -752 5.5% 84.9% -2,633 14.8%

Manufacturing 103.1% 17,234 100.2% 154 11.1% 113.2% 7,742 11.6%

Construction 117.1% 22,410 103.9% 861 15.0% 122.0% 3,549 12.8%

Wholesale and retail sale 96.7% -11,271 100.7% 551 23.3% 87.2% -4,455 9.1%

Hotels and restaurants 113.9% 5,805 103.1% 281 19.7% 139.3% 1,504 11.2%

Transport, storage and communication 93.7% -9,196 103.7% 1,219 25.0% 103.5% 424 9.2%

Financial intermediation 106.4% 2,194 117.8% 2,738 50.0% 104.7% 95 5.8%

Real estate activities 117.1% 25,586 129.3% 15,597 39.4% 108.3% 1,070 8.0%

Public administration and defence 127.1% 21,637 125.1% 4,786 23.5% 130.6% 2,112 8.9%

Education 93.6% -11,540 92.7% -2,028 15.2% 95.9% -693 9.7%

Health and social work 101.0% 1,335 99.4% -118 15.2% 107.5% 945 10.2%

Other community, social and personal service activities

112.8% 10,565 112.0% 2,237 22.4% 126.3% 1,787 9.2%


The highest growth in the share of Trnavský kraj in overall national employment is recorded in manufacturing (7,742 jobs), construction (3,549 jobs), public administration and defence (2,112 jobs), hotels and restaurants (1,504 jobs) and real estate activities (1,070 jobs). The sharpest decline was observed in agriculture (-2,633 jobs) and wholesale and retail sale (-4,455 jobs) and similar as in Bratislavský kraj in education (-693 jobs). The observable decline in the education sector can be explained as part of the rationalisation measures adopted by the NUTS III regions (besides other new responsibilities, the financing and administering of primary and secondary schools became their sole competence in 2002 – 2004).

Concluding, the general outlook for the CENTROPE regions with respect to employment can be seen as quite promising. In addition the growing number of IT industries can be seen as positive as well (Table 60). The steady growth rates of the secondary and tertiary sectors provide jobs opportunities for a large share of citizens, create favourable economic and social conditions thus accelerating the necessary convergence process to the EU average.

The positive employment development was also reflected in the development of labour costs. Monthly and hourly labour cost grew at steady rate in both Slovak CENTROPE regions. Compared with the national growth rates, an above-average growth was recorded only in Trnavský kraj, but not in Bratislavský kraj. The average monthly labour costs in Bratislavský kraj were 25,153 SKK in 2001, which grew to 31,924 SKK in 2005. Compared with the national average the monthly labour costs


were higher by 29.9 % in 2001 and 24.9 % in 2005. In Trnavský kraj the monthly and hourly labour costs went up from 17,717 SKK to 24,186 SKK and reached 94.6 % of the national average in 2005. Despite the absence of statistical data for the following years, we can assume that the national average was achieved.

Figure 23

Share of CENTROPE regions in total employment in Slovakia (2005)

Source: Statistical Office of Slovak Republic, own calculations

Table 60

Number of IT enterprises

2003 2004 2005

Bratislavský kraj 849 945 1079

Trnavský kraj 297 327 365

Source: Statistic Office of Slovakia

Table 61

Monthly and hourly labour costs growth 2001 - 2005

Slovakia Bratislavský kraj Trnavský kraj

index 2005/2001 index 2005/2001 index 2005/2001

SKK/month 131.9% 126.9% 136.5% Total labour costs

SKK/hour 136.2% 131.7% 138.8%

SKK/month 133.8% 127.3% 139.5% Direct labour costs

SKK/hour 138.1% 132.0% 141.8%

SKK/month 126.8% 125.9% 128.9% Indirect labour costs

SKK/hour 130.9% 130.6% 131.0%


0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

TotalAgriculture, hunting, forestry, fishing

ManufacturingConstruction

Wholesale and retail saleHotels and restaurants

Transport, storage and communicationFinancial intermediation

Real estate activitiesPublic administration and defence

EducationHealth and social work

Other community,social and personal service activities

TrnavaBratislava


Table 62

Inflow and volume of foreign direct investments

Bratislavský kraj Trnavský kraj Slovakia

Inflow of FDI per

year (Mio. USD)

Volume of FDI as at

31.12.

Share on total FDI volume

Inflow of FDI per

year (Mio. USD)

Volume of FDI as at

31.12.

Share on total FDI volume

Inflow of FDI per

year (Mio. USD)

Volume of FDI as at

31.12.

1998 .. 1288,1 .. 176,1 .. ..

1999 .. 1350,5 59,4% .. 202 8,9% 402,5 2272,2

2000 1321,7 2090,5 55,9% 22,4 204,1 5,5% 2155 3738

2001 1064,9 3022,3 62,5% 32,1 238,7 4,9% 1270,9 4836,2

2002 3766,1 5658 71,9% 77,1 341 4,3% 4093,8 7873,9

2003 846,7 7274,5 68,7% 37,4 543 5,1% 1059,7 10586,2

2004 689 9467 68,0% 128 840 6,0% 1057,9 13917,4

2005 230 8739 66,5% 22 776,5 5,9% 705,4 13134,1

2006 1430,3 12151,6 67,0% 52,2 1000,7 5,5% 1941,2 18133,5

Source: National Bank of Slovakia

The dominant position of the Bratislavský kraj is absolutely evident when we take into account the inflow and volume of foreign direct investments (FDI) (Table 62). The share in total volume of FDI grew from 59.4 % in 1999 to 67.0 % in 2006. The high share of FDI volume in some years was caused mainly by privatizations revenues for Slovak Gas Industry in 2002 (Slovenský plynárenský priemysel) and in 2006 for the majority stake in Slovenské elektrárne sold to the Italian energy company Enel. Other important targets for FDI concerned the financial intermediation sector with a 98.5 % share in total investments due to the localisation of headquarters of the financial institutions in the capital city. The residual share of 1.5 % of FDI was allocated in Žilinský kraj.


7 Summary & Policy Conclusions

7.1 Macroeconomic developments of the CENTROPE countries

During the last few years the CENTROPE countries were marked with strong economic growth, in terms of income, industrial output and exports, and recently also in employment terms. Though GDP growth rates will be somewhat lower in 2008, especially for Hungary, the CENTROPE countries will grow at an respectable pace – compared to the EU-27. Exports from the CENTROPE countries are expected to grow further, given the favourable international environment, the growing import demand of the region’s main trading partner countries, as well as the continuing competitiveness of the three new member states within CENTROPE. Limitations for economic growth in the CENTROPE countries potentially come from the increasingly tight labour markets, where the lack of highly skilled labour might dampen the future development of high value added activities.

Still, the outlook for the CENTROPE regions is optimistic. It becomes even more optimistic, if the substantial funding from the European Cohesion Policy is taken into account. From 2007 onwards the countries in Central and Eastern Europe will receive on a net basis around +2.5 to +4% of their GDP. The importance of these funds is illustrated by the fact that from 1948 to 1952 Western Europe received in the course of the „European Recovery Programs“ (Marshall Plan) financial assistance from the USA, which was on average 2.1% per year of the ERP countries GDP.

The optimistic outlook for the CENTROPE countries is good news for the individual CENTROPE regions within these countries. Given the high correlation between country growth and the economic development of its regions it can be expected that the regions will be able to enjoy economic prosperity just as much as the countries as a whole do. This is especially true for the CENTROPE regions. With few exceptions the CENTROPE regions of the new member states belong to the most prosperous and most dynamic regions within their countries. Hence, given the past development of these regions, as well as their economic structure it can be expected that the CENTROPE regions will not only benefit from the good macroeconomic development in their country, but to also be a major contributor to the economic growth in the CENTROPE countries.

7.2 The Economic Situation of the CENTROPE Region

Despite these favourable conditions CENTROPE is located in neither the economic nor the geographic centre of Europe. Rather it is a region that lies at the intersection between the European Economic centres, which are located to the West of the region, and the less developed but rapidly growing centres of Eastern Europe. Thus CENTROPE is a “transitory” region, in which good accessibility from the economic centres of Western Europe and from the rapidly growing Eastern European countries shape comparative advantages. These – as is documented by a number of recent spectacular foreign direct investments – in general lie in a strong industrial base in particular in ancilliary industries (such as automotive components), a strong orientation on medium skill and niche products and in particular in the Eastern part of CENTROPE rapid technological catching up and low wage costs.

Similarly, CENTROPE is still less integrated relative to regions within one country. Economic ties and cross-border activities within CENTROPE have increased significantly over the last one and a half decades. According to recent surveys, around a quarter of the firms located in the region holds cross-


border relationships (in the form of ownership, delivery relationships and/or other forms of co-operation). Yet, cross-border exchange in particular in the labour market still remains limited due to existing institutional impediments and bottlenecks in infrastructure.

Despite the many common features highlighted above, today CENTROPE is by no means a homogenous region. This comes as no surprise. Covering a territory of more than 44.000 square kilometres and a population of almost 6.5 million inhabitants, the region is similar in size to many medium sized or smaller countries of the EU. Thus substantial internal disparities exist.

These disparities can be structured along two dimensions. First, there are significant differences between those regions of CENTROPE located in different countries and second there are substantial differences between the cities, their environs and more rural areas.

Although in many respects the economic development of the region is closely linked to the economies of the "twin-capitals" of Vienna and Bratislava and the large agglomerations of Brno and Győr, CENTROPE is not a typical central region in the European context. Its settlement structure on average is not dominated by large cities. Rather – as in most parts of Central Europe – medium-sized towns dominate. At the same time CENTROPE neither is a peripheral region. Only some parts of CENTROPE (such as for instance Southern Burgenland, the Waldviertel in Lower Austria and parts of Southern Moravia and Vas County) may be considered rural peripheries in a national (but not a European) context. Thus the best characterisation of CENTROPE is that of a region characterised by strong centres located at the intersection of two economically very different types of territories of the EU.

Due to the legacies of the communist regimes the main dividing line within the region was and still is the division between the new member states and Austria: While in the Austrian parts per capita GDP approaches or exceeds the EU average, all of the CENTROPE-regions in the new member states – except for Bratislava region – currently qualify for EU funding under “Objective 1”; supporting the catch-up progress of structurally weak regions; their GDP per capita is much below the EU-25 average. In the richest region of CENTROPE (Vienna) GDP per capita at purchasing power parity was at 172.3% of the EU-25-average, while in the poorest region (Trnava) it was at 55.8% of the average.

However, not all differences in CENTROPE follow purely national lines. For instance the capital city of Bratislava can claim a per-capita-GDP that is comparable to the Austrian regions and is above the EU-average; together with its “twin city”, Vienna, Bratislava is one of the economic strongholds of CENTROPE. Burgenland, on the other hand, has been an “Objective 1” region until recently; its GDP per capita is not only below the EU-average but also below the CENTROPE average.

While the new member states’ regions in general may be considered “poorer” than the Austrian regions, they are also considerably more dynamic. Since 1995 GDP growth rates in the Hungarian and Slovak regions of CENTROPE ranged between 6% and 7% and clearly outperformed the Austrian regions (with growth rates of 4% to 5%), but also the Czech CENTROPE region, which grew slightly below the European average growth rate

Similarly, the structure of the labour force and infrastructure endowments differ significantly across regions. Aside from national differences, disparities in education systems are also closely associated with urbanisation: In general CENTROPE is characterised by a highly qualified workforce that has its strongholds in the secondary and upper secondary education levels. In particular in the regions of the Czech Republic and Slovakia around 80% of the employed have a completed secondary education. The share of population with a tertiary education is, however, below the European average in all regions except the capital cities of Vienna and Bratislava, where around a quarter of the workforce has a completed tertiary education. High shares of the workforce with only a completed primary education


can only be found in Western Transdanubia. Infrastructure endowments, accessibility and innovation indicators tend to follow these patterns. In particular, indicators of research & development activity (such as R&D expenditures, patents per 1000 inhabitants) and infrastructure quality are clearly above the EU averages for the large agglomerations (in particular Vienna and Bratislava), but not for the more peripheral region.

Finally, the employment structure of the region differs between the Austrian and the new member states’ regions. In the new member states’ CENTROPE regions a significantly larger share of the employees (29.5% relative to 16.4% in the Austrian regions) works in manufacturing and a smaller share works in services. (In particular employment in public services is around 5 percentage points lower in the new member states regions' than in the Austrian part of CENTROPE.)

As with aggregate GDP, however, the new member states regions are also the more dynamic regions in terms of structural change. For instance, indicators of structural change at a high level of sectoral aggregation suggest that the new member states' regions in CENTROPE are also converging in structure to the Austrian regions and have experienced a structural change that was almost twice as high as in the Austrian regions.

7.3 The Labour Market Situation in the CENTROPE Region

Considering the labour market, in a European context CENTROPE is a region with relatively low unemployment rates and a labour market participation that is equal or slightly higher than the EU average. Labour market disparities within the region seem to be less influenced by national borders than other indicators of economic development. Only one region in CENTROPE (Trnava) was characterised by double digit unemployment rates according to EU Regio data in the year 2005. Vienna and South Moravia had unemployment rates of 9.1% and 8.1%, those of all other regions were around 4 to 6% - as compared to 9% in the European average.

Furthermore, employment rates exceeded the European average of 63.7% in all but the Hungarian CENTROPE and Trnava. The highest shares were to be observed in Lower Austria (69.9%), Bratislava (69.6%) and Burgenland (68.1%). Vienna and South Moravia were very close to the European average.

CENTROPE is thus in its majority composed of regions that are – relative to the EU-average – privileged in terms of the labour market situation. Yet, some labour market problems persist. These may be summarised as follows:

Due to a history of early retirements and the downsizing of the labour force in the course of industrial restructuring, employment rates of the population aged 55 and above are low relative to the EU level in four regions of CENTROPE. In Bratislava and South Moravia the rate is above the European average of 42.5%, in the Hungarian CENTROPE regions it remains only slightly below this value. In all Austrian regions where early retirement was particularly popular until recent changes in the pension system, employment rates of the elderly are around 30%; they are even lower in Trnava (28.8% - for corresponding NUTS II region West Slovakia).

Aside from low employment rates of the elderly, youth unemployment rates are above the EU-average in Vienna, South Moravia and Trnava, but below this average for CENTROPE as a whole. Youth unemployment has recently also been on the decline in most Austrian provinces.

Given the low overall unemployment rates the share of long term unemployed is relatively high in some of the new member states' regions of CENTROPE but low in the Austrian CENTROPE. In


the year 2005 Bratislava and the Hungarian CENTROPE were below the European average, while Southern Moravia and the Slovak CENTROPE stayed above. This indicates a severe mismatch problem of the qualifications of the unemployed with the requirements of prospective employers, as would be expected in economies with the speed of restructuring of CENTROPE.

Finally, lack of skilled labour is reported very frequently across the region. This applies both to the automotive industry (in the Czech Republic and Slovakia in particular), as well as to many segments of the high-skill service sector such as health-care personnel, architects, civil engineers and IT experts. These developments may also be partly attributed to the large inflow of FDI, which spurs the demand for skilled labour.

Thus in summary the labour market situation of CENTROPE as viewed from aggregate indicators can be described as relatively favourable when compared to the EU average. Furthermore – and perhaps more surprisingly – labour market patterns in the CENTROPE regions are more similar and less strongly influenced by cross-country differences than often perceived. When clustering all EU member states' regions according to the above-mentioned labour market indicators, we find that all CENTROPE regions are clustered into what may be considered a typical Central European Labour market group encompassing – aside from CENTROPE – southern Germany, Northern Italy and the remaining provinces of Austria.

An analysis of labour market developments with respect to different skill types, however, shows that the CENTROPE region has a supply structure which differs from that of the most developed EU-countries (EU-15): CENTROPE has a significantly smaller proportion of people with low levels of education as well as a smaller proportion of people with the highest levels of education.

Despite having a small number of people with the lowest levels of education in their labour force, the employment and unemployment rates the position of this group in the labour market of the new member states’ regions of CENTROPE is much worse compared to the same group of workers in the EU labour markets (a gap of 20 to over 30 p.p. in employment and unemployment rates). This is due to the combination of heavy industrial restructuring in the last decade, which has led to massive shift of labour demand to more highly qualified occupations, and a narrowly defined professional education system which contributes to low flexibility of labour markets.

On the other hand, the employment rates of the medium- and highly educated do not differ much between the NMS and the EU average. At the high-skill end of the labour market, an interesting phenomenon is to be seen: in this segment of the labour market there are clear signs of the situation being much tighter in CENTROPE than in the EU: In view of high and rising employment and very low unemployment rates, the demand for highly skilled labour currently exceeds the supply. The situation is even tighter where the 25-35 year age group is concerned.

7.4 CENTROPE regions: Austria

The regional growth pattern in Austria in 2006 was mainly determined by the regions sectoral patterns of economic activity. The export oriented manufacturing sector dominated regional developments and its dynamics also spilled over to other sectors. This resulted in a clear West – East differential in regional growth in 2006, such that the CENTROPE provinces of Austria in general exhibited below average growth. Among these provinces Burgenland and Vienna showed the lowest GDP growth in Austria. In Burgenland the balance was slightly improved by a booming construction sector. In Vienna the total weight of restaurants and accommodation and the energy sector, which grew stronger than in the rest of Austria, was not high enough to compensate the low growth of other sectors. The only


exception to this is Lower Austria, where, given its strong manufacturing base, aggregate real GVA growth amounted to +3.8% in 2006.

Besides manufacturing, producer services and in particular the knowledge intensive services tended to grow significantly in Austria in 2006. Though in general the western provinces auf Austria expanded employment more in these sectors, the highest increase in employment in knowledge intensive industries was recorded in Lower Austria. By contrast Vienna and Burgenland experienced below average increases in employment both in the knowledge intensive employment sector as well as in the “other market services” in total.

In tourism the number of tourist nights spent stagnated relative to 2005 in Austria. This is, however, primarily due to the trend to shorter stays. Tourist arrivals increased by 2.7%. This trend towards shorter stays was accompanied by an increase in expenditure per night spent, so that despite a reduced number of overnight stays turnover in tourist revenues was by 4% higher than last year. The CENTROPE regions in Austria, especially Vienna performed on average better than other Austrian regions in tourism. Given the fact that city tourism is one of the fastest growing segments of the Austrian tourism industry, Vienna was the region with the largest increase in the number of tourist nights in Austria in 2006.

The strong income and output growth caused substantial labour demand growth in 2006. Nation wide employment of employees grew by 1.7%. Employment growth, however, was regionally strongly differentiated and followed the general lines of regional development: As with GVA growth, the western non CENTROPE provinces of Austria and the provinces with a strong industrial base, expanded employment more rapidly than the eastern CENTROPE provinces of Austria, which are less export oriented. In total employment growth in the Austrian parts of the CENTROPE region amounted to 1.3% in 2006. From a sectoral point of view employment growth was primarily driven by the increase in employment in market oriented services, in particular producer services. However, also all other major sectors of the economy such as construction, and non market services (and in the western provinces of Austria even manufacturing) expanded employment in 2006.

The below average employment growth in the Austrian CENTROPE region is primarily due to slow employment growth in Vienna. Vienna had the lowest employment growth rate among all Austrian provinces in 2006. This reflects a long term development due to the major restructuring processes that have affected Vienna in the last decade, especially with respect to employment in manufacturing industries. In addition to this traditional decline in manufacturing employment the year 2006 was also marked by a noticeable reduction in trade employment.

The high employment growth was associated with a parallel increase in labour supply in most regions. This led to a relatively evenly distributed reduction in regional unemployment rates in 2006. The average unemployment rate in Austria decreased by 0.5 percentage points to 6.8% in 2006. Vienna was once more the province with the highest unemployment rate in Austria and the reduction in the number of unemployed was also smaller than in the remainder of Austria. The number of long term unemployed, however, reduced by 40.6%, which is the strongest decrease in long term unemployment among the Austrian provinces.

7.5 CENTROPE regions: Czech Republic

The Czech CENTROPE region is formed by South Moravia which is located in the Czech NUTS 2 region of the South East. South Moravia was amongst the fastest growing regions in the Czech Republic during the transformation period but also during the latest years. A major role in successful


regional development of South Moravia is played by the Brno agglomeration. Being the second largest city in the Czech Republic, it is one of the main centres of economic activity in the Czech Republic. Due to Brno’s relatively high economic potential, as well as due to its function of a location for higher education and for research and development, it has a significant influence on the general sectoral pattern of activity in South Moravia. Thus, despite its strong industrial base South Moravia has -in Czech terms- a relatively high share of services (and a relatively lower share of agriculture) in output and employment. Additionally Brno is also one of the main factors of the relatively high amount of foreign direct investment South Moravia received over the last decade. This inflow of foreign capital in high-tech manufacturing industries and commercial services and increasingly also in R&D played a significant role in the economic restructuring process and are the foundations for further economic growth of South Moravia.

During the transformation period employment patterns in the Czech Republic as well as in its regions underwent significant structural changes. Most significantly, employment in the primary sector the total decreased while employment in services, like financial services and tourism, increased. These general trends were apparent in the whole Czech Republic, though not without a certain regional differentiation. In South Moravia the intensity of structural change regarding employment was less pronounced than in the rest of the Czech Republic. Thanks to higher employment growth in the tertiary sector, the employment decline was essentially lower in South Moravia than elsewhere. At the same time, the structure of employment has continually advanced towards the employment structure in West European countries. The most important sector in terms of its share in total employment is still the manufacturing industry, which employs more than a quarter of all employed in South Moravia. Second most important are business services, as well as wholesale trade and repair followed by the construction business.

From 2005 to 2006 employment increased especially in the majority of manufacturing industry branches. Thus, the highest employment growth rates occurred in the production of transport facilities, in the production of computers and business machines and the production of television sets. Other branches with significant employment growth of are business service and construction Contrastingly, the number of employees in agriculture and forestry has decreased from 2005 to 2006, while in the sectors relating to public services the employment situation was stable.

The outlook for the Czech CENTROPE region South East, and its sub-regions South Moravia and Vysočina are in general positive. Especially with respect to future inflows of FDI expectations are optimistic as both regions have a tradition in institutional business support, especially in establishing industrial and development zones. Furthermore given the availability of a highly educated workforce, the high innovation potential of the region and its good accessibility it is expected that (foreign) investments will be made in the fields of higher technology intensive manufacturing industries and services. This will not only transform the regions economic structure to a more modern shape, but also be the basis for a sustained period of economic prosperity.

CENTROPE regions: Hungary

The Hungarian part of CENTROPE comprises the counties of Győr -Moson-Sopron and Vas both located in the NUTS II region of Western Transdanubia. This region belonged to the ten fastest growing NUTS II regions in the EU in the last decade (only the Baltic countries, Ireland and two other Hungarian regions – Central Hungary and Central Transdanubia – had higher growth rates). The unemployment rate in the region was at 5.9% according to the Labour force survey in 2005 and thus the second lowest in Hungary.


The Hungarian CENTROPE regions greatly benefited from economic transition by attracting international investors; however, the internationalization process and the economic development it induced differs significantly within the region: Income levels are highest in the most northern region of Győr -Moson-Sopron and decrease as one moves southward, with Vas still growing significantly above the national average and the region of Zala (which does not belong to the CENTROPE region) lagging behind.

This uneven intraregional development is due to differences in industrialisation (Vas is much more burdened with a high share of labour intensive industrial employment than Győr -Moson-Sopron) but also to different responses to internationalisation. Győr-Moson-Sopron has attracted more international capital and the firms coming into the region on average execute more "headquarter functions" than international firms in Vas. In addition to production-oriented activities, research and development is increasingly carried out at the Hungarian location as well. Consequently, the firms' competitiveness relies less on low labour cost, which reduces their vulnerability to increases in Hungarian wages and salaries. In addition, while companies in Vas seem to have little business links with local firms, regional supplier networks and clusters are formed in Győr-Moson-Sopron. The higher level of regional embeddedness of international firms in that region provides an important impulse to the regional economy.

Despite its privileged role in previous years, in 2005, total real GVA declined in the Hungarian CENTROPE. In all of Hungary real GVA growth ranged between +7.6% (in Central Hungary) and -1.8% (in Western Transdanubia). Real GVA in the Hungarian CENTROPE, which is part of Western Transdanubia, reduced by -1.3% relative to the previous year in 2005, with Vas experiencing a reduction of real GVA of -2.8% and Győr-Moson-Sopron performing much better but also far below the national average (-0.4%). Since the decrease of GDP growth has continued in Hungary, in 2006 (+3.9%) and the first half year of 2007 (+2.7%, lowest among the CENTROPE countries), we expect that the relative position of the Hungarian CENTROPE region regarding indicator on GDP per capita in PPS should also have declined, recently.

In addition to the austerity package which impacted on all Hungarian regions, the Hungarian CENTROPE was also influenced by a number of region specific developments: In particular, due to a combination of regional policy concentrating more on the poorer regions of Hungary and a natural catching up of these regions, Western Transdanubia – as the best developed region in Hungary - also experienced a slower growth than many of the other regions in Hungary and in a number of key industries (e.g. textiles and manufacturing) relocation of production sights further contributed to the decline

The trend regarding unemployment has by contrast shown a better picture in the Hungarian CENTROPE region than in the rest of the country. While the changes in number of registered unemployed24 in total and by sex indicate a relatively moderate decrease nationally, and even some increases in some regions, those indicators significantly decreased in the Hungarian CENTROPE.

Regarding the future of labour market development there is a better view for Győr-Moson-Sopron than Vas. While the offers for jobs increased in Győr-Moson-Sopron, they decreased in Vas in 2006. In turn, the gap between non-occupied vacancies and number of unemployed (searching for job) increased in Vas and decreased in Győr-Moson-Sopron. As a result of this in Győr-Moson-Sopron



there were 2 unemployed searching for 1 vacancy in 2006 compared to 4 in 2005. In Vas this indicator increased from 8 to 10.

7.6 CENTROPE regions: Slovakia

Both, Bratislavský kraj and Trnavsky kraj, which form the Slovak CENTROPE regions, are the most economically prosperous regions in the Slovakia. Yet, they are not directly comparable. Bratislavský kraj has enormous locational advantages and excellent starting conditions as a capital city. The inflow of foreign direct investments together with domestic investments are one of the relevant driving forces in its robust economic development. The urban character of this region predetermines the Bratislava region to be the centre of economic, financial and scientific progress in Slovakia. The capital city character shapes this region as centre for many headquarters and public administration institutions which implies the creation of jobs with high labour productivity.

Trnavský kraj draws its economic advantage from the proximity to the Bratislavský kraj, to the Czech Republic and northwest Hungary with their developed transport infrastructure. In the development of this region there is a north-south growth gap: The area near the Czech border are fast growing while the south-eastern area is somewhat lagging behind. The uneven inflow of foreign direct investments mostly to the western and north-western parts of the region only confirms and further deepens this trend. The south-western districts of the region are characterized by a typical combination of rural and small urban areas with a few key industries and a low level of diversification. The restructuring of industrial activities led to decline in several important enterprises in this region. Some of these key industrial branches were able to cope with the ongoing restructuring and revived their production, but they were not able to restore previous level of employment. An important characteristic of the southern, lagging behind area of this region is demographic depression, i.e. ongoing out-migration.

The leading role of both regions, but also the differences across the two regions is seen in the labour market. Hence in Bratislavský kraj the economic activity rate is about 4 p.p. above the Slovak average. The economic activity rate in Trnavský kraj is higher compared to the Slovak average, but still behind the rate of Bratislavský kraj. This is mainly due to the southern part with large shares of the agriculture sector and the west-north districts characterized by mountainous relief and an underdeveloped local infrastructure. The lagging districts are characterised also by a significant share of voluntary and long term unemployment. The unemployment rate in Bratislavský kraj is the lowest in the Slovak Republic. It is close to the natural unemployment rate and has mainly frictional character. The unemployment rate in Trnavský kraj is also traditionally below the Slovak average. Within the Trnavský kraj a similar pattern as in the case of the economic activity rate is observable. From a macroeconomic perspective of the labour market, Bratislavský and Trnavský kraj can be seen as non-problematic.

The favourable position of Bratislavský and Trnavský kraj is visible also from their economic structure. The total number of industries in Bratislavský and Trnavský kraj comprise about 24 % of all enterprises in the Slovak Republic. Notably, West Slovakia and Bratislavský kraj together inhabit more than 52% of Slovak enterprises. The share of value added of Trnavský and Bratislavský kraj has grown from 32% in 2000 to more than 42% in 2005. Importantly, in 2005 in Bratislava and West Slovakia more than 63% of total value added in Slovakia has been produced.

One of the economic sectors considered important is tourism. When comparing Bratislavský and Trnavský kraj there are nearly similar conditions with respect to the number of lodging facilities. In comparison with Trnavský kraj, Bratislavský kraj is in better position in number of available beds. This can be explained by a larger number of bigger hotels. There is also difference in the number of visitors. There have been over three times more visitors in Bratislavský kraj in the year 2005 as in


Trnavský kraj. On the other hand, Bratislavský kraj seems to be less attractive for long term staying tourists compared to Trnavský kraj, which is due to the frequent number of one night stays and conference/business tourism which is characteristic for Bratislavský kraj, compared to leisure time tourism in Trnavský kraj.

As far as changes in the economic development are concerned, both Slovak CENTROPE regions are the leading regions in Slovakia. Looking at labour productivity development from 2001 to 2005, it increased in the Slovak Republic by 42%. In the Slovak CENTROPE the increase was more than average. Hence labour productivity growth in Bratislavský kraj was around 55% and in Trnavský kraj around 54% in the same period of time. Restructuring of the industrial sector in these regions as well as steady increases in labour productivity in already operating enterprises play the most significant role in the growth of productivity. The difference in labour productivity is reflected in the changes in nominal monthly wages. The average nominal monthly wage in Slovakia has increased in the years 2001 - 2005 by 36%. Given the higher productivity growth in Bratislavský and Trnavský kraj the growth of wages in the former was more than 2 percentage point and in the latter by 1 percentage point higher than the Slovak average.

The high economic growth contributed also to higher employment rates in Slovakia and in the Slovak CENTROPE. Overall Slovak employment grew by 2.8% between 2001 - 2005. Again, the Slovak CENTROPE performed much better. Bratislavský kraj recorded an employment increase of 7% and Trnavský kraj an increase of 5.7%. From a sectoral point of view most jobs in Bratislavský kraj were created in real estate activities, public administration and financial intermediation. The largest decline in employment was in education and agriculture, hunting and forestry. The highest employment growth in Trnavský kraj was recorded in manufacturing, construction, public administration, hotels and restaurants, and real estate activities (1,070 jobs). The sharpest decline was observed in agriculture and wholesale and retail sale and in education. Concluding, the general outlook for the Slovak CENTROPE regions with respect to employment can be seen as quite promising. In addition the growing number of IT industries can be seen as positive as well. The steady growth rates of the secondary and tertiary sectors provide jobs opportunities for a large share of citizens, create favourable economic and social conditions thus accelerating the necessary convergence process to the EU average.

7.7 Policy Conclusions

CENTROPE can thus be characterised as a heterogeneous transitory region, which is located at the intersection of the high income western European centres and the rapidly growing Eastern European countries. Economic ties and cross-border activities within CENTROPE have increased significantly over the last decade and a half since one quarter of the enterprises in the region are co-operating across borders. On the institutional front, however, the still existing institutional and physical barriers, e.g. in the fields of labour mobility and transport infrastructure (especially with respect to the Austrian regions of CENTROPE), hamper the full exploitation of the economic potential of CENTROPE. It can be expected that these ties will strengthen further in the near future, as the planned measures to close existing gaps and eliminate bottlenecks in the cross-border transport network as well as to step up the modernisation of the existing infrastructure will improve internal and external accessibility.

Thus, one consequence of the increasing economic integration of the regions forming the CENTROPE, is a necessary parallel evolution of cross-border policy making. In consequence, to facilitate economic cooperation, cooperation in the fields of economic policy is a must. In the end, a


successful development of CENTROPE depends crucially on the integration of policy makers, with respect to sharing similar goals and as a consequence also the same decisions.

-> Strengthening comparative advantages

In this respect one of the central objectives of economic policy is and will be to secure and improve the regions attractiveness as a location for investments. This study finds that on the one hand, CENTROPE is a region that is best described as a transitory region, located at the intersection between the highly developed – high demand centres of Western Europe and the rapidly growing markets of the new member states and Eastern Europe and that on the other hand that CENTROPE is by no means a homogenous region. These factors shape and will continue to shape the regions comparative advantage.

Market access to both the western European as well as the Eastern European markets is particularly interesting for manufacturing branches, which produce in sectors that use increasing returns technologies. In particular – as evidenced by recent spectacular direct investments in the automotive industry in the region - the comparative advantages of CENTROPE are a good location for ancilliary industries. These industries are particularly dependent on supply chains. Thus developing and deepening existing cross-border supply chains should be one of the priorities for policymakers. This will clearly necessitate providing an adequate infrastructure in the region.

With respect to the mature Western European markets the competitiveness of CENTROPE in the manufacturing sector can thus be further strengthened, by using the internal dividing line, which continues to exist within the region, for an intra-regional division of labour. The differing comparative advantages within the region and the high wage differences allow for functional specialisation and vertical division of labour along production chains on very short distances. Thus classical “network” and “supplier chain” industries can achieve this vertical division of labour at much lower transport costs in this region than elsewhere.

In particular the specific geographical location of CENTROPE should also allow small and medium sized enterprises of both the manufacturing and the service sector, to organise cross border production networks and thus to combine the quality, management and marketing advantages of the Austrian CENTROPE with the cost advantages in the neighbouring countries. Thus in the field of SME policy the key issue in this respect is to provide highly visible information on potential partners for cross-border co-operation.

In the services sector by contrast current cross-border exchange is still hampered by the current transition periods on the freedom on movement of services associated with EU enlargement. However, in this sector, too after the removal of existing barriers a phase of increased sectoral specialisation will occur. In particular the large urban centres of the region (Vienna, Bratislava, Brno and Győr) could profit from this. In this respect existing specialisations suggest that locational advantages are particularly pronounced in the technology intensive service branches in the capital cities of Vienna and Bratislava. Thus aside from sectoral strategies focusing on cross border production networks, development of cross- border service provision networks could also be a further central focus of regional policy.

Furthermore, the broad sectoral base of CENTROPE, which in aggregate mirrors the sectoral structure of the European Union, and the substantial structural differences within the region, suggest that there is also substantial room for cross border co-operation in individual industries, as is currently primarily provided through various cluster initiatives in the region. Furthermore, such “cluster initiatives” can be regionally differentiated within CENTROPE, with initiatives focusing on the high


technology service sectors in the urban core of the region (i.e. in particular in the capital cities of Vienna and Bratislava), on industrial and servo-industrial sectors (such as Electronics, Machinery and Vehicles) in the more highly industrialised regions and on tourism (e.g. wellness tourism) and raw materials oriented (e.g. wood working) activities in the more peripheral areas of the region. Given that noticeable activities exist in all of the regions of CENTROPE in these fields, cross border networking in these areas may yield increased visibility on international markets and provide for increased competitiveness of the respective industries.

-> Fostering cross-border innovation systems

In the long run the competitiveness of the CENTROPE region, like the competitiveness of all other regions in developed countries, will, however, strongly depend on its capability to compete in international markets for technologically advanced products. In this field the report shows that CENTROPE still has some potential to increase R&D activities. In general CENTROPE has its stronghold in a well trained labour force, which primarily has medium skill education levels. Similarly innovation statistics suggest that there is still some distance between the intensity of R&D activities in CENTROPE and the most highly developed R&D centres in Europe, once more the innovation system seems to be focused on the medium tech structure of the manufacturing sector, in general.

Thus activities aiming to maximize cross-border knowledge spillovers and to establish an efficient cross-border innovation system, which makes optimal use of the existing technological resources of the region, will be central for the future development of the region. In this respect co-operation in education and training and in the use of R&D infrastructure within the region, can be expected to yield the highest returns.

In co-operation in education and training the primary objective could be to strengthen the highest level education segment. This can be achieved both by increased co-operation of educational institutions as well as increasing the mobility of researchers. An example of initiatives in this field are the grants which the city of Vienna is providing to polytechnics (Fachhochschulen) for projects, which aim to increase cross-border mobility of students. Such grants could be extended both to other institutions of higher education as well as to other regions.

With respect co-operation in the use of R&D infrastructure co-operation among regional actors (such as technology-centres, science centre and regional technology agencies) as is currently developed in the framework of the project “Business Meets Science” is a promising starting point, which in the long run could provide the critical mass to co-operate efficiently in this field. This seems even more promising since a number of regions located in CENTROPE (Lower Austria, Western Transdanubia, Trnava) have an industrial base in a number of sectors (such as vehicle production, machinery etc.) which are heavily reliant on research activities in securing comparative advantages.

Finally, a further field of activities could be to increase networking activities of scientists within CENTROPE. These activities could either focus on establishing top level research networks within CENTROPE or focus on increasingly integrating CENTROPE researchers into international research networks as are provided for instance in the 7th framework program. Given the limited resources, however, such activities should have a strong thematic focus on fields in which a critical mass already exists in the region (e.g. the automotive industry, life sciences and renewable resources). Furthermore, here too different regions may choose a different focus for such activities. For example while in the urban centres of the region the focus of an R&D strategy will have to incorporate top level research, in the more industrial regions of CENTROPE applied research activities may well be of much greater importance.


-> Investing and co-operating in public infrastructure developing cross-border actor networks

Developing cross-border co-operation will, however, also require investments in infrastructure. The insufficient state of road and more generally transport infrastructure in CENTROPE has been often lamented. Much of the infrastructure in the region is still geared towards the needs of a region that was until recently divided by the iron curtain, so that intra-regional transport networks in CENTROPE are still underdeveloped and oriented away from the region. In particular the infrastructure connection of the urban centres (most notably on the Austrian side between Vienna and Bratislava as well as between Vienna and Brno) still seems in adequate to support the kind of interaction necessary to organise dense co-operation within the region.

Recent investment plans in the Austrian CENTROPE, however, suggest that policy is at least partly responding to the bottlenecks that still exist. Current plans suggest that within this decade the existing bottlenecks in the high level road and rail connections between the urban centres of CENTROPE could be closed. Thus transport infrastructure development should definitely continue to receive the high priority it currently has in particular in the Austrian CENTROPE.

Aside from transport infrastructure, however, also other areas of public infrastructure development and public service provision should be increasingly considered from a cross-border perspective. Existing co-operation activities in the schooling system, which provide for a number of students to be trained in regions outside their home country, are a good example of the returns that can be gained from such initiatives. In addition co-operation could, however, become increasingly common in all fields of public service provision ranging from communal services (where cross-border provision of such services could potentially lead to more cost effective provision of services) to healthcare and other aspects of cross- border public service provision.

-> Developing cross-border actor networks

The identification of those areas where cross border co-operation is most profitable and the conditions under which such co-operation can take place, however, cannot be defined in a top down manner, but requires the interaction of the relevant actors, themselves. This applies in particular to the public sector, where co-operation is less strongly driven by market considerations. Thus substantial efforts should be put into further developing cross –border public sector actor networks (for instance in the fields of innovation, education, public service provision and in labour market policy) and bringing these networks to deliver services and policies, which represent a noticeable improvement of the living conditions for the population of CENTROPE.

In some areas (such as in the field of labour market policy) such actor networks already exist or as in technology policy are beginning to emerge. Here the key to further development will be to demonstrate the achievements also to the wider public. In other areas (such as communal and public services), by contrast, such networks will have to be more forcefully developed, to better identify areas of co-operation.

In general the aim in establishing such networks should be to decentralise the cross-border contacts of the relevant administrations (which are currently often concentrated in only a few departments) to the more operative level in order to guarantee dissemination and visibility of results to the wider public.

-> Coordinating labour market policies

Finally, in the field of labour market policy future activities should increasingly focus on the exchange of best practice measures for active labour market policy and for tackling the shortage of skilled labour


that is by now almost ubiquously felt in CENTROPE. In particular with respect to this skill shortage of many CENTROPE regions organising training and re-qualification in active labour market policies as well as developing instruments to monitor the structure of labour demand in a cross – border context are important elements in the field of cross-border labour market policy.

Aside from student exchange programs (which could also be backed by financial support) possible concrete measures, which could also be provided in a cross- border context include designing exchange programs for the education of apprentices and training programs as well as establishing a system of institutions that can give advise to workers on life long learning in a cross-border context.

Furthermore, given the similarity in many labour market problems in the CENTROPE region a number of further themes for potential co-operation could be developed. These include the possibility to increase the labour market participation of the elder, through integrated policies in which disability prevention, retaining employability and counselling of firms on the possibility to adapt work places to the needs of the elder, could be discussed; the prevention of long term unemployment and the possibilities to reduce the currently high long term unemployment in the CENTROPE regions of the new member states and the potentials to combat youth unemployment.

Finally, establishing efficient channels for cross-border placement activities for workers will be another important issue in cross-border labour market management in the future. Given the increased demand for cross-border placement of workers that can be expected to emerge when current institutional impediments to cross-border labour mobility will be removed, the design of more flexible systems of cross-border placement activities than the currently available EURES system could be envisaged for CENTROPE.


7.8 References

- Cerge-EI (2006); Czech Republic 2006: Accelerated Growth, Charles University in Prague, December 2006, ISBN 80-7343-110-6

- CZSO Regional Office Brno (2006); Statistical Yearbook of the Jihomoravsky Region 2006, Czech Statistical Office, Regional Office Brno, 2006

- CZSO Regional Office Jihlava (2006); Statistical Yearbook of the Vysočina Region 2006, Czech Statistical Office, Regional Office Jihlava, 2006

- CZSO Regional Office Jihlava (2007); Statistical bulletin – Vysočina 2006, Czech Statistical Office, Regional Office Jihlava, 2006

- CZSO Regional Office Brno (2007); Statistical bulletin – South Moravia 2006, Czech Statistical Office, Regional Office Brno, 2006

- Czech Statistical Office (2006); Statistical Yearbook of the Czech Republic 2006

- Czech National Bank (2007); Přímé zahraniční investice 2005 (Foreign Direct Investments 2005), report produced in March 2007

- European Commission (2006); Study on FDI and regional development, Copenhagen Economics in cooperation with Prof. Magnus Blomstrom, Final report, 22 December 2006

- Ministry for Regional Development of the Czech Republic (2005); Czech Republic – Portraits of Regions, Produced by Centre for Regional Development, Brno, ISBN 80-239-6346-5

- Ministry for Regional Development (2006); Regional Development Strategy of the Czech Republic for the period of 2007 – 2013, Prague, May 2006

- Regional Authority of the Vysočina Region (2007); Profil kraje Vysočina (Profile of the Vysočina Region), January 2007

- Jihomoravsky region and Vysočina region (2006); Regional Operational Programme NUTS 2 South-East, version of 22 November 2006

- Regional authority of Jihomoravsky region (2006); Strategie rozvoje Jihomoravského kraje, část Profil Jihomoravského kraje (Strategy of the South Moravia Region, part Profile of the South Moravia region), version April 2006

Download - Centrope Business And Labour Report 2007

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