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Methodology to assess the progress in Lisbon strategy Smilovice, 5 th December 2007

Methodology to assess the progress in Lisbon strategy Smilovice, 5 th December 2007. Alexandr Hobza Unit E-1: Coordination of structural reforms and their macroeconomic implications DG ECFIN, European Commission. Outline of presentation.

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Methodology to assess the progress in Lisbon strategy Smilovice, 5 th December 2007

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  1. Methodology to assess the progress in Lisbon strategySmilovice, 5th December 2007 Alexandr Hobza Unit E-1:Coordination of structural reforms and their macroeconomic implications DG ECFIN, European Commission

  2. Outline of presentation 1. Lisbon strategy: structural reform process in Europe 2. Methodology to assess progress with Lisbon Strategy 3. Tracking reforms 4. Multi-step methodological approach to identifying growth-enhancing policies 5. Modelling effects of reforms

  3. Lisbon strategy Economic perspective • Need to deal with economic challenges • Low growth potential and adjustment capacity (euro area) • Globalisation • Ageing • Climate change • Response • Macroecomic policies geared towards stability and growth • Comprehensive coordinated process of structural reforms

  4. Lisbon strategy Historical perspective • Continuation of pre-Lisbon coordination processes • Politically driven process – European Council meetings and headline targets • Mid-term review in 2005 and re-launch of the Strategy

  5. Lisbon strategy Procedural perspective • Rationale for coordination • Coordination of economic policies in EMU • Lisbon: structured coordination based on soft tools • Integrated Strategy for Growth and Jobs– new governance arrangements • National ownership as a solution • Political economy elements (wider participation, more focus, integration of policies) • The national key challenges at the core of the EU strategic approach

  6. Spillovers of structural policies

  7. Complementarities between reforms

  8. Economic policy coordination in EMU Monetary policy stance Monetary policy ECB Article 105 Exchange rate Council (+ECB/Commission) Article 111 Integrated Guidelines Package Commission, Council, EP, European Council Broad Economic Policy Guidelines Article 99 Employment Guidelines Article 128 Macroeconomic Dialogue Cologne Resolution Stability and Growth Pact Stability/Convergence Programmes Article 104, Amsterdam Resolution and Council Regulations Community Lisbon Programme National Reform Programmes Macroeconomic conditions Budgetary stance Smoothly operating markets, potential growth

  9. Types of policy-making in the EU

  10. Types of policy-making in the EU

  11. Lisbon strategy: governance structure • Overall policy objectives set by Heads of State of Government (Spring European Council) + Integrated Guidelines as a blueprint for policy design • Some common targets, e.g. employment rates of 70% by 2010, to raise spending on R&D to 3% of GDP, reduce administrative burden in complying with regulations by 25% between 2006 and 2010 • Member States (not the European Commission) define their key growth challenges and reform commitments • Reform priorities fixed for a three-year cycle, BUT annual reporting and evaluation exercise which leads to country specific political recommendations

  12. Lisbon strategy: A political process supported by economic analysis • Based on the premise an external constraint and peer pressure can help overcome reform bottlenecks • short-term (concentrated) costs versus uncertain long-term (dispersed benefits • rent-seeking interest groups can capture policy makers • Also recognises that there are economic spillovers (trade, internal market) and political economy spillovers (institutional learning, demonstration effects, peer pressure) in coordinating at EU level • Combination of evidence-based analysis supported by a political process can generate results • Can take years to “frame” a consensus on the nature/scale of policy challenge, and on the policy reforms needed to tackle them

  13. Work on the Lisbon evaluation methodology • A three-pronged approach I: Tracking structural reforms II: Quantifying their impact on growth and jobs III: Modelling • Practical arrangements ECFIN working together with other lead DGs, i.e. SG, ENTR and EMPL Developing analysis working with new Lisbon Methodology (LIME) Working Group attached to the EPC

  14. Method I – trackingstructural reforms • Developing institutional databases on reforms -LABREF: an operational database of enacted labour market reforms - MICREF : a database of microeconomic reforms, currently being developed • Reporting tables/grids attached to NRPs - working with LIME group to streamline format and content

  15. LABREF database • database on enacted labour market reforms in 9 areas covering labour taxation, unemployment and social benefits, ALMPs, EPL, disability and early retirement schemes, pension systems, wage bargaining, working time organisation, immigration and mobility. • completed for 2000-2006 period (except BU and RO)

  16. LABREF database

  17. MICREF database • database of microeconomic reforms developed in cooperation between DGs ECFIN/ENTR and EPC with assistance from JRC • includes policies such as market integration, competition policy, sector specific regulation, start-up conditions, business environment, R&D and innovation, education) • Further steps - back-dating to 2004/5 by Spring 2008 - development of Internet interface underway

  18. Reporting tables <------------------------------------------------ ------ ESSENTIAL --------------------------------------------> <---------------- DESIRABLE ------------->

  19. Method II – analysing the impact of reforms on growth and jobs • Starting point is a focus on growth drivers through decomposition of GDP - quantify the sources of per capita GDP gaps in the EU - quantify the determinants of growth over 2000-2005 using a growth accounting approach decomposed into 12 components (especially detailed on the labour market side) • The purpose is - to provide an analytical benchmark for analysing the impact of structural reforms on growth and employment - verify that policies are focussing on the most important growth drivers

  20. Growth determinants and policy measures

  21. Method II – a multistep approach • Step 1: Identifying the components of GDP where MSs are underperforming (in terms of level and growth) relative to a given benchmark through GDP accounting. • Step 2: Identifying the conceptual links between policy interventions, a list of indicators and the underperforming GDP components. • Step 3: Using performance and policy indicators to identify the most problematic policy areas/issues, which are likely to be responsible for the income gaps/weak growth components. • Step 4: Bringing together the results of step 1 (GDP accounting) and step 3 (indicator-based assessment of policy area performance) and supplementing them with country-specific expertise and data • Step 5:Present the result in a policy context (link with NRP and Key Challenges

  22. Step 1: Growth accounting

  23. Step 1 – Growth accounting Y total GDP H the annual hours worked per person employed L total employment, whichthe product of POP, PART and (1-ur) α the share of labour in total value added, which is set equal to 65% in all countries POP total population SWP the working age population share (15-64) in total population PART total labour force participation rate ur the overall unemployment rate QL indicator of labour quality K the stock of capital TFP total factor productivity as a residual

  24. Step 1 – Growth accounting To capture the change in average quality of labour, we compute the average relative productivity of a person employed compared to those with low educational attainment: Where Es and Ws are respectively employment and hourly wage (without overtime) for each educational attainment (ISCED-3).

  25. Step 1 – Growth accounting g denotes a rate of growth POP-M native population m net migration rate

  26. Explaining the gaps in GDP per capita across countries

  27. Czech Republic: Growth accounting

  28. Step 1 – Growth accounting • New features of the growth accounting - very detailed decomposition - accounting for the quality of labour - contribution of migration • Caveats - descriptive approach, does not inform about causality - results affected by assumptions of technical nature – e.g. Cobb-Douglas PF, no economies of scale, calibration of labour share (though widely accepted) - growth and its components can be affected by the business cycle - developments in each component might be difficult to interpret in practice

  29. Step 2 – Making the link with policies • Need to link growth accounting with policy interventions and performance on indicators • need to draw on a wide body of economic research • The structure of the fiches • Definition and scope of the policy area • Impact on growth components (theoretical mechanism and transmission channels); direct and indirect • Evidence and estimated elasticities in recent literature • Possible spillovers and complementarities with other policy areas • Non-exhaustive list of relevant indicators

  30. Step 2 – Making the link with policies

  31. Example: LS of older workers Policy area GDP components Policy and performance indicators Specific labour supply measures for older-workers) Older-worker participation Policy indicators Implicit tax on continued work (Net change in pension wealth if retiring at 65 instead of 62 -2004 (-) Coverage of early retirement 2004 (-) Life-long learning: Participation of the population aged 55-64 in education and training 2000-2006 (+) Performance indicators Average exit age from the labour force 2001-2005 (+) Employment rate of older workers aged 55 to 64 - Women (%) 1992-2006 (+) Employment rate of older workers aged 55 to 64 - Men (%) 1992-2006 (+)

  32. Step 3: Scoring system Score = (Indicator-EU15 average)/Standard deviation *10 • trimming the score (3 stdev.) so as to avoid giving too much weight to outliers • not rounding the final value in the maquette but presenting it without decimal • reporting the EU15 average and the stdev. as well as the distance to alternative benchmarks (EU27, five best values, EU5, the Lisbon target)

  33. Step 3: Scoring system Under normal distribution EU15 16% ++ =2 Average+one stdev. E(X)+ (X) 19% + =1 E(X)+0.4 (X) 31% 0 =0 EU15 Weighed average E(X) 0 E(X)- 0.4 (X) 19% - =-1 E(X) - (X) 16% - - =-2

  34. Step 3: Scoring system

  35. Improvements to the methodology • Robustness checks • Correlations between indicators • Taking account of cyclicality • Extending growth accounting to include sectoral decomposition or environtal dimension • Aggregate score based on a narrower set of indicators • Extending growth accounting to include forecast • Presentational issues

  36. Next steps Questionnaire to MSs to seek clarification on: new scoring scheme cyclical adjustments robustness checks presentation of results etc. « Final » proposal to be presented in January 2008 Methodology to be applied by May 2008

  37. Mechanical application: overall results

  38. Example: Making work pay

  39. Example: Female and older worker LS

  40. Example: Business environment

  41. Example: R&D, innovation and ICT

  42. Method III - Modelling the impact of structural refroms Simulations included in 2007 APR [1] Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal, Spain, Sweden, United Kingdom.

  43. Main results

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