BA-CA / wiiw study:
The new European tigers
Over the past decade, productivity has increased faster in CEE than in any other of the world's major regions, except for China.
The NMS countries do particularly well in terms of productivity growth, and they are increasingly competing on high quality.
Western Europe will retain its competitive advantages in business services, while CEE will further strengthen its position as a strong basis for industrial activities, especially in engineering including the automotive industry and machinery.
Over the last decade, the CEE countries have gained a strong competitive position in a global comparison. This is reflected in a strong growth performance and narrowing trade deficits. The GDP of the new EU member states (NMS) is now more than 50% higher than it was 10 years ago. Their foreign trade deficits decreased from an average 7% of GDP to less than 3% between 1999 and 2005. This decrease reflects substantial gains in productivity: over the past decade, the NMS increased productivity by an average 4% per year (measured by per capita GDP) compared with only 2% for the EU 15 and 3% for the Asian tiger economies 1.
However, the story is not only about productivity: A study commissioned by Bank Austria Creditanstalt (BA-CA) and conducted by The Vienna Institute for International Economic Studies (wiiw) shows that the NMS have moved rapidly in changing the composition of industrial production and exports in the direction of a strong proportion of medium-high tech industries, i.e. industries with a higher technology and know-how content. It is especially in these industries - largely engineering industries including transport equipment - that they have developed strong positions, often in the context of cross-border production networks in which transnational companies from the old EU member states play an important role.
The excellent performance in the medium-high tech area is mainly supported by four countries: Slovakia, Hungary, the Czech Republic and Poland. On the other hand, when looking at the ‘low tech’ industry grouping, Romania did extremely well in this ten-year period in terms of both market share gains and product quality upgrading. Among the countries in the high-tech industry group, Hungary and the Czech Republic also achieved strong market share improvements.
The NMS have gained market share and price-setting power by increasing productivity and moving towards the high end of production: in the 1990s, the NMS and the candidate countries sold their export products on the EU-15 markets at substantially lower prices compared with the average EU-15 imports of the same goods; only China competed at even lower prices. In the more recent past, since 2002, the price discount has shrunk quite dramatically from over 20% to less than 10% (for China it remained at close to 30%).
“In the medium-high tech industries, such as the automotive industry, the NMS gained markets and price-setting power faster than anyone else”, says Marianne Kager, Chief Economist of Bank Austria Creditanstalt (BA-CA). “In this segment, they clearly outpace the Asian tiger countries of the first wave and the second wave, as well as China and India”, she adds.
CEE is likely to go further in this direction. The more advanced Western European economies will probably maintain a comparative advantage in business services. CEE will further strengthen its positions as a basis for industrial activities by deepening specialisation and by competing on quality.
FDI plays a major role in this development, which is supported by good business-related infrastructure. The gap between the NMS and the most advanced countries is surprisingly small in terms of infrastructure (human resources, telecommunications), the ease of doing business (time required for starting a business, exporting) and economic freedom.
This rather strong performance of the NMS is not yet fully matched by an equally strong performance in institutions guaranteeing a reliable and sound business environment. “More needs to be done here”, says Julia Wörz, trade economist at the wiiw. “The European integration process will promote the performance of the NMS and the candidate countries in this respect in the near future”, she adds.
Quite generally, the candidate countries (Croatia, Bulgaria, Romania) rank lower in all aspects of competitiveness. This means that they have to defend their positions more intensively against competition from the second tier of Asian tiger countries and emerging market economies such as Turkey and Mexico. The two giant emerging markets China and India still have a long way to go to catch up in infrastructure and business environment indicators, while they show strong cost competitiveness in production as well as structural shifts to higher value-added production.
1) Tiger 1 countries = Hong Kong, Korea, Singapore
Tiger 2 countries = Indonesia, Malaysia, Philippines, Thailand
Bank Austria Creditanstalt, International Press Relations
Edith Holzer, firstname.lastname@example.org, phone: +43-50505-57126