David Michael Gould
December 14, 2018 Vienna, Austria
CRITICAL
CONNECTIONS:
Promoting Economic Growth
and Resilience in Europe and Central Asia
For more details, data and the full report, please visit:
http://www.worldbank.org/en/region/eca/publication/critical-connections
Why this report?
• The Europe and Central Asia (ECA) region has a rich history of regional integration and connectivity to the broader world economy.
• In ECA, regional and global connectivity has been a tremendous “convergence machine.”
• But the global economic crisis and various commodity price shocks, underscored the importance of understanding the benefits and potential risks of increased connectivity.
• Recent political developments (Brexit, elections, etc.) reflect underlying skepticism of the benefits to deepening cooperation, with voters increasingly favoring parties seeking greater national autonomy instead of greater regional and global
integration.
• ----Its key to understand the impact of connectivity
CRITICAL CONNECTIONS: PROMOTING ECONOMIC GROWTH AND RESILIENCE IN EUROPE AND CENTRAL ASIA
What is unique about this study?
• Connectivity—or “globalization”—and its relationship to economic growth is often viewed in only one dimension (i.e., trade, migration, FDI, etc.)
• But various connections are often complements
• Ideas are transmitted through complementary connections
o Migration, trade, FDI, internet, finance, transport, etc.
• To whom you are connected to might be just as important as the type of connection
• Trade with Germany may be more important than trade with Algeria—not only due to the level of technological potential embodied in exports/imports— but also the connections of your partner’s connections
• Connectivity being “multidimensional” implies that shocks in one dimension (e.g., trade) can have adverse affects in other dimensions (e.g., FDI) as well.
Critical Connections: Promoting Economic Growth and Resilience
Key findings
• ECA’s various forms of connectivity facilitates the transfers of technology that are critical to growth and shared prosperity. These connections complement each other.
• The depth of overall connections and the geographic composition of the connections both matter and emerge from firm linkages in global value chains as well as foreign ownership and management that generate local spillovers.
• Deep integration of countries into EU has generated important benefits to growth through knowledge transfers. Central Asia, Russia, and Turkey have benefited from regional connections as well, but the depth of connections is less pronounced.
• Increased connectivity can expose ECA countries to external shocks, particularly those emanating from countries at the center of international economic transactions.
• The remedy is not isolation—which sacrifices growth—but broadening the range of connections to reduce those risks and to cope with shocks
Critical Connections: Promoting Economic Growth and Resilience
What does ECA’s connectivity look like?
CRITICAL CONNECTIONS: PROMOTING ECONOMIC GROWTH AND RESILIENCE IN EUROPE AND CENTRAL ASIA
Trade has grown within ECA with Germany as the key hub, although China is taking a larger share
The size of each country-node reflects the total volume of trade. Each node has two outgoing links, which point to the country’s two top export partners
Critical Connections: Promoting Economic Growth and Resilience
2000 2014
Source: Authors’ calculations based on UNCTAD data.
ECA countries are shades of blue
ECA’s inward FDI has grown, but inflows have increased from outside the region
Total FDI stocks (incoming and outgoing) of the country. Each country has two outgoing links that point to the two main FDI destinations for each country
Critical Connections: Promoting Economic Growth and Resilience
2002 2012
Source: Authors’ calculations based on UNCTAD data. ECA
countries are shades of blue
ECA’s intra-regional migration has increased and is a larger share of global migration
Critical Connections: Promoting Economic Growth and Resilience
Foreign-born individuals in country plus the number of native-born citizens living outside the country. Outgoing links are the largest destinations of each country
2000 2010
Source: Authors’ calculations based on OECD data. ECA
countries shown in shades of blue
The case of FDI and foreign management
CRITICAL CONNECTIONS: PROMOTING ECONOMIC GROWTH AND RESILIENCE IN EUROPE AND CENTRAL ASIA
How do connections transfer knowledge?
Process of knowledge transfer through firms
Critical Connections: Promoting Economic Growth and Resilience
How technology flows from global frontier firms (GVC lead firms) to the rest
of the ECA firms
Greater participation in GVCs is associated with higher export value added
Critical Connections: Promoting Economic Growth and Resilience
Growth in participation in supply chains
(2000-2011) Exports of value added per country
(2000-2011)
-10 0 10 20 30
Change in the ratio of exports over value added (in pct points) TUR
CZE POL BGR DEU SVK ROU SVN RUS HUN
0 5 10 15 20
Average growth per year (in percent) TUR
POL ROU BGR SVK CZE RUS DEU HUN SVN
Do foreign-owned and managed firms do better than domestic-owned and managed? Are there spillovers?
Use firm-level data (Orbis) from ECA countries
There is a wide variation in foreign ownership/management across ECA (UK and Ireland about 30%, Hungary almost zero)
Foreign connections confer benefits to firms, allowing them to have higher growth in operating revenues, jobs, and average wages
Foreign ownership is linked to better management practices that can be transmitted from host to home countries
There are also spillover benefits to local firms
Critical Connections: Promoting Economic Growth and Resilience
Foreign owned and managed firms perform better than local firms
Critical Connections: Promoting Economic Growth and Resilience
0 5 10 15 20 25 30
Growth in Operating Revenues Growth in Jobs Growth in Average Wages
Locally owned, Foreign-managed Foreign-owned, Locally managed Foreign owned and foreign managed
Source: Based on regression analysis. Growth period 2010-2013.
All of the underlying coefficients are statistically significant.
The case of ECA Transport Infrastructure
CRITICAL CONNECTIONS: PROMOTING ECONOMIC GROWTH AND RESILIENCE IN EUROPE AND CENTRAL ASIA
How is infrastructure facilitating
connections?
Transport connectivity (cost and time) between and within ECA countries varies across ECA
Critical Connections: Promoting Economic Growth and Resilience
Passengers
Freight
0 10 20 30 40 50
Average Passenger Cost (€) Russia
Turkey Advanced Europe Central Europe Eastern Europe Central Asia Western Balkans South Caucasus
0 5 10 15 20
Average Travel Time (Hrs.) Russia
Central Asia Turkey Eastern Europe Central Europe South Caucasus Advanced Europe Western Balkans
Cost vs. Travel Time by Region - Domestic Passenger
0 500 1,000 1,500 2,000 Average Container Sending Cost(€) Russia
Central Asia Turkey Advanced Europe Eastern Europe Central Europe South Caucasus Western Balkans
0 .5 1 1.5 2
Average Container Delivery Time (dys) Russia
Western Balkans Turkey South Caucasus Eastern Europe Central Europe Central Asia Advanced Europe
Cost vs. Delivery Time by Region - Container Domestic
0 50 100 150
Average Passenger Cost(€) Russia
Central Asia Turkey Advanced Europe South Caucasus Eastern Europe Central Europe Western Balkans
0 10 20 30 40 50
Average Travel Time (Hrs.) Central Asia
Russia South Caucasus Turkey Eastern Europe Advanced Europe Central Europe Western Balkans
Cost vs. Travel Time by Region - Regional Passenger
0 1,000 2,000 3,000 Average Container Sending Cost(€) Russia
Turkey Central Asia Advanced Europe South Caucasus Eastern Europe Central Europe Western Balkans
0 .5 1 1.5 2 2.5
Average Container Delivery Time (dys) Russia
Central Asia Turkey South Caucasus Advanced Europe Western Balkans Eastern Europe Central Europe
Cost vs. Delivery Time by Region - Container Regional
Time Time
Time Time
Cost
Cost
Cost
Cost
Cost-driven criticality in network of containers for Europe and Central Asia
Critical Connections: Promoting Economic Growth and Resilience
What is Multidimensional Connectivity and its impact on growth?
CRITICAL CONNECTIONS: PROMOTING ECONOMIC GROWTH AND RESILIENCE IN EUROPE AND CENTRAL ASIA
Intuition behind Multidimensional Connectivity
Critical Connections: Promoting Economic Growth and Resilience
Individual network layers are related to each other
Multidimensional Network
(collapsed)
Empirical Results of Individual Connections on Growth
Critical Connections: Promoting Economic Growth and Resilience
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7
Trade
Connectivity FDI
Connectivity Migration
Connectivity ICT
Connectivity Portfolio
Flows Airline Connectivity Overall growth
*** ***
*
*
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7
Multidimentional Connectivity
***
Note: Significance level: * = 10 percent, ** = 5 percent,
*** = 1 percent
Multidimensional connectivity varies by ECA-subregion, with the highest connectivity in the western part of the region, and lowest connectivity in the eastern part of the region
Critical Connections: Promoting Economic Growth and Resilience
ECA Sub-regions Multidimensional
connectivity Trade FDI Migration ICT Airline Portfolio
flows Global ranking, from the best to worst in combined connectivity (lower is better)
High connectivity
Western Europe 6 6 6 9 9 15 19
Northern Europe 12 12 17 26 21 23 22
of which Baltics 30 28 36 38 50 28 21
Southern Europe 25 24 26 21 28 23 22
Central Europe 31 27 34 36 41 46 46
Medium Connectivity
Russian Federation 55 53 61 28 63 64 83
Turkey 57 51 67 33 73 79 40
Eastern Europe 62 59 60 81 54 57 76
Low Connectivity
Western Balkans 88 75 97 45 88 86 99
Central Asia 94 99 93 101 101 103 101
South Caucasus 104 104 102 64 104 104 93
Which countries are most affected by shocks?
CRITICAL CONNECTIONS: PROMOTING ECONOMIC GROWTH AND RESILIENCE IN EUROPE AND CENTRAL ASIA
Most effected countries are those that derive connectivity via one or a few countries—not necessarily the most connected
Critical Connections: Promoting Economic Growth and Resilience
Critical Connections: Promoting Economic Growth and Resilience
Transmission of shocks depends on which type of link is affected
Critical Connections: Promoting Economic Growth and Resilience
Largest origin countries of shocks due to a 10 percent shock in Trade, FDI and Migration
ECA Region
Affected Trade Shock FDI Shock Migration Shock
Central Asia Russia/China Russia/China Russia/Germany
Central Europe Germany/ Netherlands Germany/Austria Germany/Austria Western Balkans Italy/Germany Austria/Hungary Italy/Germany South Caucasus Turkey/United States Russia/Kazakhstan Russia/Ukraine Eastern Europe Russia/Germany Russia/Germany Russia/Poland Russia Germany/United States Germany/Switzerland Germany/Ukraine
Turkey Germany/Italy Belgium/Netherlands Germany/Netherlands
Southern Europe Germany/France Belgium/Netherlands United Kingdom/Poland Northern Europe Germany/Netherlands Belgium/Netherlands Finland/Norway
Western Europe Germany/Netherlands Belgium/Netherlands Italy/United Kingdom
Relative impact of Brexit (hypothetical) on the UK, EU, and others
(UK decreases all forms of connectivity with EU27 by 10%)
Most Affected (Ranking 1=largest impact)
1. United Kingdom 15. Italy
2. Malta 16. Poland
3. Ireland 17. Germany
4. Cyprus 18. Latvia
5. Netherlands 19. Finland
6. Denmark 20. Hungary
7. Luxemburg 21. Czech Rep.
8. Sweden 22. Senegal
9. France 23. Libya
10. Spain 24. Surinam
11. Norway 25. Slovenia
12. Greece 26. Fiji
13. Portugal 27. Iceland
14. Belgium 28. Austria
Critical Connections: Promoting Economic Growth and Resilience Note: The table ranks countries according to the impact on the countries from Brexit, with a ranking of 1 indicating the greatest impact.
What is the progress on ECA connectivity policies?
CRITICAL CONNECTIONS: PROMOTING ECONOMIC GROWTH AND RESILIENCE IN EUROPE AND CENTRAL ASIA
Progress on lowering barriers has stalled
Critical Connections: Promoting Economic Growth and Resilience
FDI restrictiveness index
Restrictiveness in Telecom and Transport
Critical Connections: Promoting Economic Growth and Resilience
Note: FDIRRI = Foreign Direct Investment Regulatory
Restrictiveness Index
Technical and sanitary and phytosanitary barriers are increasing
Critical Connections: Promoting Economic Growth and Resilience
Note: SPS = sanitary and phytosanitary; TBT = technical
barriers to trade
EBRD Infrastructure Indicators
Critical Connections: Promoting Economic Growth and Resilience
Key messages
Being well-connected in the global network of countries of is important for long-run inclusive economic growth.
Because of complementarities in types of connections, a balanced connectivity profile is more important than being well connected in a
single dimension. Deep and comprehensive FTAs, BITs, migration policy, and transport are a way to achieve this.
Increased connectivity can expose ECA countries to external shocks, particularly those emanating from countries at the center of
international economic transactions.
The remedy is not isolation—which sacrifices growth—but broadening the range of connections to reduce those risks and to cope with shocks.
Critical Connections: Promoting Economic Growth and Resilience
Thank you!
CRITICAL CONNECTIONS: PROMOTING ECONOMIC GROWTH AND RESILIENCE IN EUROPE AND CENTRAL ASIA