Ewald Nowotny: European integration in a global economic setting -
CESEE, China and Russia
Opening remarks by Prof Dr Ewald Nowotny, Governor of the Central Bank of the Republic
of Austria, at the Conference on European Economic Integration (CEEI) 2011: "European
Integration in a Global Economic Setting - CESEE, China and Russia", Vienna,
21 November 2011.
* * *
Good morning, ladies and gentlemen,
It is a great pleasure for me to welcome you to the Conference on European Economic
Integration 2011 on "European Integration in a Global Economic Setting - CESEE, China
and Russia". A particularly warm welcome goes to Governor Erkki Liikanen from Suomen
Pankki - Finlands Bank and to all the representatives of the Finnish central bank who have
joined us here in Vienna for the conference. Moreover, I am pleased to welcome, for the first
time, all our viewers at Suomen Pankki who are watching a live webcast of the CEEI on
screen in Helsinki.
In the history of the CEEI, this is a very special year. While there has been international
cooperation in organizing the CEEI in the past, for example with the ECB or the IMF, this is
the first CEEI we have jointly organized with a Eurosystem NCB - the Finnish central bank.
Moreover, this is the first time we have extended the conference topic to include new
economic areas - China and Russia.
Of course, there are several very good reasons both for this cooperation and for broadening
the conference topic.
Some of you may know that the OeNB focuses its economic analysis and research on
Central, Eastern and Southeastern Europe (CESEE), mainly because of Austria's strong
historical and economic links to the region. Similarly, Suomen Pankki - or more specifically
the BOFIT, the Bank of Finland Institute for Transition Economies - has a regional research
focus, namely on Russia and China, thus covering two of the most interesting and promising
emerging markets of the world. Given this year's conference topic, it was therefore only
logical to invite our Finnish friends to organize the CEEI 2011 with us - and we were very
pleased that they accepted our invitation and supported us with their valuable expertise.
For two decades, this conference series has been devoted to spreading and deepening the
knowledge of European economic integration with a particular emphasis on CESEE
economies in transition. Yet we decided to expand our focus this time. Of course, you might
think that dealing with the CESEE region alone would provide topics for at least a dozen
further conferences. Definitely, we would not run out of interesting CESEE-related topics,
especially as the countries in this region are so different and there are so many aspects to
look at: different stages in the catching-up process, different stages of EU integration,
different stages of monetary deepening, etc.
At the same time, however, this country-by-country approach contains a certain risk: the risk
of overlooking fundamental economic developments that take place elsewhere and might
affect the CESEE region as a whole. Developments in Russia, and even more so in China,
seem to fall into this category. Given their huge size and market potential alone, it is quite
obvious that economic developments in these two countries would have an impact on the
CESEE region. In turn, the CESEE region as a whole - and the euro area as well - may well
have an impact on Russia and China, too.
So to be able to see - and understand - European integration in a wider context of global
economic developments, expanding the focus of the CEEI 2011 to include two major
emerging economies was not only an obvious, but also a highly necessary step.
During the next two days, we will investigate the economic impact of China and Russia as
emerging global economic players on the catching-up process in CESEE. In doing so, we will
try to answer questions such as: Does competition from the two large and growing emerging
market economies constitute a drawback for CESEE? Or do opportunities prevail?
Let me briefly address these questions by first comparing some key indicators for the three
economic areas in question and then looking more closely at the economic impact of China
and Russia on CESEE.
Although we all have an idea about the actual size of these areas, let us look at the figures.
Chart 1:
Country size and population in 2010
Source: OeNB calculations based on IMF data.
On this chart, we can see at first glance that the CESEE-10 - that is the group of CESEE EU
Member States - are very small in terms of population and landmass compared to China and
Russia. China stands out with its large population (almost 20% of world population) - which
means, of course, that the country's workforce is enormous.
Chart 2:
GDP per capita in 2010
Turning to GDP per capita, we see a different picture. While the CESEE-10 cover a
comparatively small area, in 2010 their GDP per capita in purchasing power standards was
on average almost three times higher than that of China. As you can see, the income level in
Russia was close to the GDP-weighted average in the CESEE-10. But does this mean that
CESEE (and Russia) can lean back?
No, on the contrary: China's impressive growth path over the past 15 years constitutes a
challenge to all other economies, including CESEE and Russia. Data on GDP growth show
that China stands out with a remarkable real GDP growth of 309% over the period from 1995
to 2010. China had chosen a highly controlled opening-up strategy. The Chinese growth
model relies upon a large pool of domestic savings and investment (which, to a large extent,
comes from abroad), lower labor costs and thus labor-intensive exports.
By contrast, in CESEE and Russia, central planning was overthrown in the late 1980s and
early 1990s, when a major shift in economic, political, cultural and sociological paradigms
occurred in these countries. Russia's growth model has, to a large extent, rested on
industrial production and, increasingly, on energy exports. In the CESEE-10, by contrast,
capital inflows - mainly from Western Europe - together with institutional reforms and EU
accession have spurred export-led growth. Even if CESEE and Russia started out from
higher GDP per capita levels than China, their growth performance has still been remarkable.
The financial crisis, however, has challenged the current growth models not only in these
regions.
Chart 3:
Real GDP growth
Source: OeNB calculations based on IMF data.
Note: 1995=100.
While China has weathered the financial crisis quite well,1 CESEE and Russia were directly
hit.2 Despite these differences, all three markets face common challenges both in the real
economy and on the financial market, such as rising external imbalances and decelerating
external demand for goods, particularly in the face of downward-revised GDP growth
forecasts in many export destinations.
Tomorrow, we will have the opportunity to look at possibilities of how to achieve a
sustainable catching-up process in these emerging market economies. In this context, let me
just point out that the speed of growth and the quality of institutional and economic
adjustment will determine who will be the leading economy in 20 to 30 years.
Against this backdrop, let me now briefly discuss the economic impact China and Russia
might have on CESEE. In doing so, I will mainly focus on trade, FDI and financial
interlinkages.
A closer look at the trade performance of the CESEE-10, China and Russia over the past
15 years shows that the CESEE-10 have doubled their share in world exports,3 while
Russia's market share has increased only slightly - and has, to a large extent, been driven
by the increase in world energy prices. China is expanding its role as an exporter not only of
traditional labor-intensive products, but also of high-tech goods.
Chart 4:
Share of high-tech exports in total exports
Source: OeNB calculations based on IMF and World Bank data.
Note: CESEE-10 exports include intra-CESEE-10 trade.
On the one hand, internationally operating firms have relocated the final production stage not
only of labor-intensive goods, but also of high-tech products from industrial countries, other
Asian tiger economies and possibly CESEE to China. On the other hand, not only this
relocation but also the production or final assembly of new technology-intensive products in
China accounts for this strong rise in China's export market share.
Whether this development will cause CESEE export market shares to decrease largely
depends on whether the CESEE countries compete in similar product categories that have
the same export destinations. This afternoon, we will discuss this question and related
aspects at greater length.
Chart 5:
Annual FDI inflows in % of GDP
Source: OeNB calculations based on UNCTAD, IMF and national statistical
offices data.
Note: CESEE-10 figures are GDP-weighted averages.
Let us now turn to a key term in this discussion: foreign direct investment (FDI). Particularly
in CESEE and in China, increasing openness to FDI has contributed largely to growth
performance. Many empirical analyses have provided evidence on the relationship between
FDI and growth. However, not only the fact that capital inflows take place, but in particular
the way this capital is put to use plays a major role in achieving sustainable convergence.4
Direct FDI linkages between CESEE, China and Russia are very small in terms of volume.5
Our business panel discussion in the late afternoon will give us an opportunity to examine
FDI from a practitioner's perspective.
At this point, let me draw a first conclusion. The relocation of production sites, catching-up in
technology-intensive production and dynamic export growth in general are challenges to any
economy. At the same time, they can be seen as opportunities to adapt institutional settings
to promote sustainable, growth-enhancing development in the home markets. In this sense,
the emergence of China and Russia as global economic players offers clear opportunities.
China and Russia can become attractive target markets for exports - from CESEE as well as
from other regions. Not only is China expanding its role as a supplier of goods, but both
China and Russia increasingly demand final products from abroad. Although the EU-15
remain the major trading partner for CESEE, the region should make active use of China's
and Russia's growing demand for imported goods - particularly in the light of the recent
economic and financial crisis. Russia's forthcoming accession to the WTO will open new
possibilities to strengthen the linkages in the real economy via FDI and trade and to foster
financial linkages as well.
So far, the financial ties between Russia and CESEE have been closer than those between
China and CESEE. Chinese banks have started to invest in CESEE only recently. Moreover,
China's increasing investment in several sectors in Europe proves that the financial linkages
between these two economic areas will gain importance in the future.
In this context, I may add that only two weeks ago the OeNB and the People's Bank of China
took a further step in strengthening their excellent long-lasting contacts by signing an
important agreement that enables the OeNB to invest in Renminbi-denominated assets via
the Chinese central bank.
Ladies and gentlemen,
I have tried to present a snapshot of recent economic developments of - and interlinkages
between - CESEE, China and Russia. Of course, the relations among these three markets
have to be seen in a much broader context of international policy cooperation and
coordination, such as the efforts by the G-20 to rebalance their economies. We also know
that it will be necessary to find solutions for pressing problems at the European level in order
to maintain financial stability and regain fiscal strength.
But this is not enough.
It is about time to adopt a broader perspective. And we will do so at this year's CEEI, which
is dedicated to European integration in a global economic setting. Governor Liikanen and I
are looking forward to a fruitful exchange of views and ideas with academics, policymakers
and financial experts and, of course, with the audience.
Ladies and gentlemen,
It is now a great pleasure for me to welcome, once again, Governor Erkki Liikanen from
Suomen Pankki, who - if I may say that much - will also have a special announcement to
make (CEEI 2012 in Helsinki). Erkki, the floor is yours.