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CSOB, Prague April 2004 Jan Svejnar

EU Entry and the Czech Economy in a Comparative Perspective. CSOB, Prague April 2004 Jan Svejnar. 1. European Union (2002). Population : 379.7m GDP: 10,011.7 (in 1995 bn US$) Unemployment: 7.6% ; CPI: 2.3% Merchandise exports within EU (2001): 1,417 (US$ bn)

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CSOB, Prague April 2004 Jan Svejnar

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  1. EU Entry and the Czech Economy in a Comparative Perspective CSOB, Prague April 2004 Jan Svejnar 1

  2. European Union (2002) Population : 379.7m GDP: 10,011.7 (in 1995 bn US$) Unemployment: 7.6% ; CPI: 2.3% Merchandise exports within EU (2001): 1,417 (US$ bn) Merchandise exports world-wide (2001): 874 (US$ bn) 2 Source: http://news.bbc.co.uk/hi/english/static/events/the_launch_of_emu/euro_facts/map/default.htm, OECD, WTO

  3. Europe: Economic Associations 3 Source: The European Commission

  4. Account for 5% of EU GDP and 20% of EU population Transition-related challenges mostly overcome Open economies, proceeding with integration into EU Accession Countries: Basic Facts 4

  5. Private Sector Share of GDP 5 Source: EBRD Transition Report various issues.

  6. All accession countries have been growing much faster than the EU Have been able to withstand EU slowdown Economic Growth 6

  7. Real GDP Index (1990 Base Year) 7 Source: IMF World Economic Outlook 2003 and EBRD Transition Report 2003

  8. Real GDP Index, 1989 - 2004 (1989 Base Year) 8 Source: William Davidson Institute based on the IMF World Economic Outlook 2003, and Davidson Institute Forecasts

  9. Most accession countries contained budget deficits in the 1990s But serious budget deficits emerged recently Social transfers Tax harmonization with EU Electoral cycle Compensating for demand slowdown in EU Budget Deficit 9

  10. Government Budget Balance (as % of GDP) *Estimate / ** Projection. Note : Actual Figures for Czech Republic for 2002 10 Sources: 2003 - IMF World Economic Outlook 2003; 1990 to 2003 - EBRD Transition Report 2003; EU - IMF World Economic Outlook 2003; Ministry of Finance of the Czech Republic

  11. Containing inflation has been the single greatest success Many countries started with high or even hyper-inflation Now most in middle to low single digits Role of central bank interest rate policies Inflation 11

  12. Consumer Price Inflation (annual percentage change) * Forecast 12 Sources: William Davidson Institute forecast, IMF World Economic Outlook April 2003, EBRD Transition Report 2003, OECD Economic Outlook 2003, and Czech Statistical Office.

  13. A major problem, especially in some countries Low but rising in the Czech Republic Social, political and macro economic problem Slows down the rate of increase in wages Unemployment 13

  14. Unemployment Rate (in percent) * Estimate / ** Forecast Note: For most countries data based on ILO methodology. 14 Sources: William Davidson Institute based on ILO, World Bank, EBRD various issues, and OECD based on labor force surveys. Russian data from Sabirianova & Earle 2001 using LFS figures, reported in Goskomstat (2000c), Goskomstat (1999a),

  15. Accession countries are a focal point in the world Broad and diverse investor base Czech and Slovak republics the largest regional recipients on a per capita basis FDI drives productivity and exports Foreign Direct Investment 15

  16. Foreign Direct Investment (Net inflows per capita, in US Dollars) * Estimate 16 Sources: WDI Staff calculations based on the World Bank World Development Indicators 2003 and on the EBRD Transition Report 2003.

  17. Foreign Direct Investment (Net Inflows, in Millions of US Dollars) * Estimate 17 Sources: World Bank World Development Indicators 2003 and EBRD Transition Report 2003.

  18. Moderate short run (static) effect on the Czech Republic (accession countries in general) EU rules already in place Tariffs and other protection measures limited Banking sector competitive and increasingly efficient => limited trade and competitive effects and strong pressure to complete the legal and regulatory reform Liberalization and regulatory changes will affect sectors such as pharmaceuticals, telecoms, transport, and steel Autos, food and banking will benefit from growth Long run dynamic effects can be sizable (relocation) Overall Impact of EU Accession on Entrants 18

  19. Small but positive effect In economic terms, adding the new countries is like adding an economy of the Netherlands Exporters will benefit Import substituting producers will feel greater competition Impact on Existing EU Countries 19

  20. Positive but limited in the short run Virtually all banks are already foreign owned and adequately capitalized Ready for Basel II capital adequacy rules Most large banks are profitable and produce financial statements based on local as well as international accounting standards Many new financial products on the market Will benefit from faster growth driven by the enlargement, rising personal incomes and further efficiency gains Long-run: effect of global competition Impact on the Czech Banking Sector 20

  21. Most likely a 4-6 year horizon for adoption Beneficial for accession countries to eliminate currency risk with their largest trading partners ERM2 – enhanced risk of financial instability/crisis Adoption of Euro 21

  22. Budget deficit Pension and healthcare reform Legal, regulatory and institutional reforms Restructuring of firms privatized to domestic owners Speed of EU recovery Prices of raw materials (oil) Current Challenges for the Czech Republic 22

  23. Davidson Institute Emerging Market Forecasts (DIEMF) (April 2004) F : Forecast Sources: William Davidson Institute calculations. 23

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