Manufacturing industry in CEE moving in the fast lane towards EU
- EU imports: Central and Eastern Europe has overtaken Japan.
- Strong growth and quick restructuring process in CEE's industrial sector.
- Manufacturing industry continues to drive economic growth in candidate countries for EU accession.
The industrial sector in Central and Eastern Europe (CEE) is gaining importance within the European Union. Over the past few years, manufacturing industry in CEE has achieved a substantial increase in productivity, boosting its market share within the EU. Since 1995 industrial productivity in CEE countries has grown by almost ten per cent annually, about four times as fast as productivity in the EU. Some twelve per cent of EU imports of manufactured goods now come from the accession candidates in CEE, which have thus overtaken Japan (1995: 12%, 2001: 9%) as suppliers of industrial goods to the EU. Since 1995, the CEE share has risen by almost four percentage points. This is the result of a recent study conducted for Bank Austria Creditanstalt by the Vienna Institute for International Economic Studies (WIIW) and presented at the Euromoney CEE Issuers & Investors Forum in Vienna.
"The restructuring activities and privatisation efforts of the accession candidates have been successful," says Marianne Kager, Chief Economist of Bank Austria Creditanstalt. From a low in 1992, manufacturing output in the accession countries has risen by almost 40%, although the number of employees in the industrial sector has been reduced by some 40% since the reform process started. While the impact on manufacturing industry had been particularly strong when the transformation crisis started, the industrial sector has been the driving force behind economic growth since the middle of the 1990s.
Structural changes in the candidate countries' manufacturing sector are further proof of their progress on the way to catching up with the EU: patterns of industrial production in the candidate countries have become similar to those in the European Union.
Economists continue to see lower wage costs in Central and Eastern Europe as the strongest competitive advantage. This is a particularly important factor in labour-intensive industries with comparatively low productivity (e.g. textiles). "In the medium term, however, the competitive advantage resulting from low wage costs cannot be maintained and must be offset by higher productivity," Marianne Kager explains.
The advantage of lower wage costs is weakening
Most of the candidate countries still benefit from a significant advantage in terms of wage costs. But strong economic growth in these countries has been accompanied by an increase in wages which has not yet been fully offset by productivity increases. This means that in the area of labour costs, the candidate countries' competitiveness has declined over the past few years. From 1995 to 2001, unit labour costs increased in all candidate countries except Hungary (-5% p.a.): between 1.5% p.a. in Slovakia and 13.8% p.a. in Lithuania. The authors of the study expect further growth in the next few years.
Winners and losers
Developments seen during the structural changes in the various sectors of manufacturing industry have varied widely over the past few years: in almost all countries, electrical engineering, the production of motor vehicles and the furniture industry have made above-average progress in productivity. In the Czech Republic, Poland, Slovakia and Estonia, mechanical engineering recorded a significant increase in productivity. On the other hand, below-average progress in productivity was seen in the following sectors: food, textiles and clothing, leather and footwear, timber, paper and chemicals. "As a rule, technology-intensive industries are among the winners. Traditional industries often use standard technologies. Thus they are lagging behind in terms of productivity and have become less competitive with regard to costs," says Waltraut Urban, industry analyst at the Vienna Institute for International Economic Studies.
In line with this development, exports of high-technology products have shown above-average growth. They account for an increasing proportion of total exports. "Motor vehicles, automotive accessories, office machines, TV and radio sets are among the fastest-growing groups of exports," says Doris Hanzl-Weiss of the Vienna Institute for International Economic Studies.
Changes are also seen within the various industries. In labour-intensive sectors (e.g. textiles or timber), where cost pressure has increased, the candidate countries are usually to be found in the higher price segment. In technology-intensive sectors (e.g. motor vehicles or electrical engineering) they are to be found in the lower, more price-elastic quality segment.
"Electrical engineering and the motor vehicles sector are among the big winners. These industries demonstrate the course which Central and Eastern Europe must pursue to continue the process of catching up with the European Union: further productivity growth. This could be achieved through a continued shift from low to high tech," says Marianne Kager.
Enquiries: Bank Austria Creditanstalt Group Public Relations
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