 Good afternoon everyone. Let me open this second session of our conference on the institutional quality and sustainable economic convergence in central eastern and southeastern European countries. The session is on challenges and policies to attain sustainable convergence, so that will be very much building on the insights we got in the first session, and it will be very much informed by the first session actually. A lot of issues came in the discussion already, so we're here to take it further, to discuss the policy consequences of the lessons learned from the past years of convergence, which were discussed this morning. So what are the policy steps to be taken to improve, to change, to overcome convergence fatigue, as it may be called, which was discussed this morning, to step up TFP growth, to achieve sustainable convergence towards the EU. And we may by the way discuss, and that was already a little bit this morning, but we can come back to the discussion on what really is the meaning of convergence, towards what do we want to converge, given that the EU itself and the eurozone itself hasn't shown a great performance in terms of convergence. So it would be interesting to discuss also where you want to converge here. And it's also an opportunity to take further the discussion on some of the key drivers of convergence, in particular the institutional issues which were addressed this morning, but with a more forward-looking view. So we have six excellent speakers. I'm not doing much of an introduction because they are very well known, but just to list them, we'll have two keynote introductions by Yurik Dekresin, who's deputy director at the European department at the IMF, and by Isfange Kelly, who's director at the European Commission, Ekvin. And then the presentations will be discussed by Keline Christophe, who's the deputy governor at the Bulgarian National Bank, by Debora Rivoltella, who's director of the economic department at the EIB, by Ghent Seiko, who's the governor of Albania, and by Boris Votis, who's the governor in Croatia. So that's really a very well-diversified and very competent panel. So without due delay, I give the floor to Yurik for the first presentation. Good afternoon. Thank you very much to the organizers for inviting me. So the title of my presentation is Convergence and Institutions. I will go very quickly over Convergence and spend more time on institutions because we established already many findings this morning. So this chart just simply shows you in a red line the path of per capita GDP in Korea in percent of U.S. per capita GDP. And along it, we have plotted for the years 2000, 2008, the Convergence path of many central, eastern, and southeastern European economies. What you can see is basically what we said before, the pace of Convergence has in many countries been quite fast, comparable to that enjoyed by Korea. You can put the exact same chart now, but starting in 2009. And we have this lowdown in Convergence that has happened. We have established this also this morning. And you can then ask yourself the question, well, what's driven this lowdown? We have done this also this morning. Was it labor, capital, or TFP? And when you break it down, the change is really driven by much slower TFP growth or even negative TFP growth. We have tried to throw a battery of explanatory variables at this and haven't found much that sticks except that the variable TFP growth slow elsewhere was the best explanatory factor for TFP growth slowing in central, eastern, and southeastern Europe. In other words, there is not that much that we know. We have some hypotheses that the literature is pursuing, but not altogether a convincing explanation. Now, let's look ahead a little bit and let's start with the various inputs. Let's worry first about labor. Here, what I'm showing you is an index for the working age population. What you can see is that in central, eastern, and southeastern Europe, outside Turkey, the working age population is projected to fall quite appreciably. So this will make for a significant headwind to growth prospects over the medium term. Part of this will likely be appreciable emigration from the region. This chart here gives you a little bit of perspective on history. On the left, you can see the cumulative outflow of people from central, eastern, and southeastern Europe. And since 1990, it's more than 20 million people. So somewhere between 20 and 24 million people. We have in a staff discussion note on the impact of emigration on growth. Calculated the losses for real GDP. They are plotted on the right-hand side. They have been very large, particularly large for smaller countries like Albania that have lost a large share of people, but also large elsewhere. It is likely that going forward, many, but not all of these countries, but many will continue to experience outflows. Some may even experience inflows, but most of them are likely to experience further outflows of people. And so emigration will also weigh on growth going forwards. Let's then talk a little bit about prospects for more capital-intensive growth. We've already established this morning that the catch-up process in central, eastern, and southeastern Europe was largely driven by GFP. And that capital played, for example, a smaller role than it did in Korea. Can this change? Well, here on the left-hand side, you see gross investment in 2016. And on the right-hand side, gross domestic savings expressed in percent of GDP. What you see is that let's start with saving. That it is relatively low compared to the EU 15 average. And certainly a very different picture than the one that you would have if you were to put Korea down there. So there are constraints in terms of how much investment you can generate without running, again, large external imbalances in this regard, unlike before the crisis, the financial conditions have become tighter on this front. And so prospects for capital-intensive catch-up are also not particularly good, unless one changes something about domestic savings. So this leads me to the part on institutions. We and us have had many experiences in these countries. And you've already heard many people this morning concluding that better institutions will be key for restarting the convergence process after this crisis. It'll be key to improve prospects for attracting foreign investment, but also key to transform these economies to an innovation-based economies that, again, experience a different type than of TFP growth. Our sense is therefore improving institutions is very important and that there is much that can be done. This chart here expresses what can be done. It's a different version of some charts you've seen this morning. There's on the left-hand side a rule of law indicator from the World Bank Governance Indicators Database, and on the right-hand side an indicator of protection of property rights, which comes from the World Economic Forum. Obviously these data are all to be taken with a grain of salt, as many other data. But the general picture that emerges is that in northwestern Europe you have countries that are among those that are considered to be the strongest with respect to the rule of law and protection of properties right. While in southern and in southeastern Europe, the picture is much more fixed. There is room for improving institutions, notably the economic aspects of the rule of law and the judiciary. This chart shows you the same, but for judicial independence impartiality of courts. These are perception-based indicators drawn from World Economic Forum. Again, there is room for improvement in central, eastern, and southeastern Europe, but also elsewhere in southern Europe, you know, in terms of these institutions. Here we have yet another set of indicators on the left-hand side. It's this time a quantitative indicator on case resolution rates that's been put together by the European Commission of Justice project. What you can see there, which is supposed to capture a little bit the efficiency of the judiciary, you can see that the central, eastern, and southeastern European economies are not comparing badly to the EU-15, but there is much more variation. In general, those that are outside the EU are not doing as well as those inside the EU. Now, remember this is efficiency, one indicator of efficiency, and that is of course not all the justice systems about as much more to it. On the right-hand side, from Eurobarometer, a perceived perception index on independence of courts. Again, there you see now a significant gap in central, eastern, and southeastern Europe relative to the rest. So we wanted to basically step away from these data and rather survey the history of a number of these countries to learn how they have changed their institutions and specifically how they have changed the economic aspects of the rule of law and the judiciary since the transformation process started and why they have been different outcomes across different countries and what one can learn from these. So the six countries that we are working on now are listed over there, but what I will do here is just focus on two to try and explain to you a little bit what we've been finding and the two are Estonia and Romania. So, and what I will say, it's important that you bear in mind that institutions are often seen as the outcomes of struggles for political and economic power in societies. The basic idea is that in societies where there are no dominant players, so where both economic and political power is fairly evenly distributed, the institutions that emerge are better and more efficient institutions. So bear this in mind as I'm telling you this, the findings of our ongoing research. So here you see indicators again of rule of law, judicial independence and protection of property rights, the economic aspects of it for these two countries and you can see that Estonia is in a different place than Romania. Estonia actually compares favorably with a number of Western European economies. Romania is not at that level but has also improved a lot over time. So there's been a lot of improvement in both but to different to different degrees and the question is of course what can we learn from this? And so I'll spend some time on this chart here. What can we learn from this? Five points. Initial conditions matter, distribution of resources matter, transparency matter, state capacity and the role of the EU and I'll tell you about each of them in some detail. So starting with initial conditions in Estonia right at the beginning of the transition there was a very clear break with Soviet communism which was seen basically as an occupying force. Estonia was occupied, was part of the Soviet Union, it wasn't part before the Second World War, it was seen as an occupying force to be rejected. It developed a fairly strong civil society in the 1980s which in 1989 led to a singing revolution where a large chain of people was formed across the Baltics agitating for democracy and in 1991 it declared formal independence during the Soviet coup in Moscow. The history of Romania in that regard and I'm simplifying I realize it was different. In Romania the country struggled with the economy during the 1980s, there was dissatisfaction and in the end when Ceausescu was overthrown a so-called National Salvation Front took over. This National Salvation Front comprised many people, members were intellectuals, students, army officers, however the leadership of this National Salvation Front was also largely composed of former communist officials so there was not that clear break with the past in Romania. Distribution of resources, the policies that were pursued in Estonia and Romania with respected transformation differed. In Estonia for example privatization actively sought a broad ownership and equal access for domestic and foreign players to entities that were supposed to be privatized. Domestic entities that were more than one third state owned couldn't even participate in bidding for privatization and the economy was generally very quickly opened up to foreign trade and investment. The result was a fairly within the realm of central, eastern, south-eastern economies a fairly broad disperse ownership with disperse, fairly disperse centers with a large number of smaller centers of power including foreigners that were brought in. In Romania it proved much other, the previous elites were part of the new government because many communist members state. Privatization was contentious and to the extent it happened there was also a good deal of asset stripping and sale at fire prices. Moreover nationalist forces opposed the participation of foreigners. What resulted was a dispersion of ownership that was much less broad than in Estonia which then had consequences for the institutions that shaped up later. Transparency helped. In Estonia there was media freedom very early on and an active civil society. In Romania it happened in the course of EU accession when freedom of information legislation was adopted. A civil society began to form and that civil society then took advantage of this information to expose corrupt behavior by politicians and to launch anti-corruption campaigns. So transparency has been very important. State capacity has been key too. In Estonia after a new constitution was adopted in 92 there was a very broad and comprehensive reform of the civil service. Many people were made to leave and the new ones that were recruited were recruited on the basis of merit. It was one of the most comprehensive administrative reforms in the region. In Romania administrative reform was stop and go partly because all political elites stayed in the new government. Lastly the role of the EU. The role of the EU what we conclude is the EU can act as a catalyst but it cannot be a substitute for a very domestic reform movement. In Estonia one can say that the a key communitaire mainly provided benchmarks that society independently wanted to meet. In Romania it was a more complex interactive process. I gave you one example how EU accession led to freedom of the adoption of freedom of information legislation which then prompted an active civil society to agitate for reform. So the EU there has played a role but there has been back and forth in terms of the progress and ultimately what's driving reform in Romania is the domestic forces and civil society. So with all of this you may wonder where does this leave us? What are the conclusions we draw from this and the other country cases and also some general reading of the literature. So we all agree that strengthening institution is a priority for the next generation of reforms. We see the formation of economic institutions as a political economy process. Institutions have consequences for the distribution of economic resources and the economic resources in turn have consequences for the institutions. So they are these feedback loops. External policy interventions by the Commission or us or the ECB, other multilateral institutions can help but they cannot replace a domestic reform drive. But both external and domestic policy makers, and here's the way I would put it, can notch the process in the right direction. And the question is what measures can we take to notch the process forward? First, strengthening transparency and accountability. I've mentioned the example of freedom of information legislation adopted in the context of EU accession. We at the IMF are dealing with standard encodes. The ECB is dealing with respect to the laws and accountability of the national central banks. So we are all in various ways involved in this business. So strengthening transparency and accountability, number one, number two, investing in state capacity. What often happens and has happened in these countries is there was a large systemic change, new rules, new laws were adopted, lawsuits flooded the courts, the civil service, the lawyers themselves, the judges were overworked. At the same time, you've had massively new opportunities in the private sector, to which then some of the judges and lawyers were drawn. You had long wait times and all of this made, provided fertile ground for corruption to emerge as far as the implementation of the laws was concerned. So it's important to invest in state capacity. We do this in various ways with our technical assistance, especially with our technical assistance, but also it's an issue for budget policies and payments of civil servants and so forth. So number two was investing to state capacity. And now the last conclusion, which is we need to consider very, very carefully the distributional fallout of the economic policies that we recommend, right? And these economic policies concern not only privatization, competition policy, but also especially fiscal policy. We may have some good objectives in mind. But then when these objectives are realized and come with a skewed distribution in resources and political power over time, they can get to the undoing of the very reforms that we have implemented. So emphasizing the distributional fallout of our policies is the third item to which we would draw your attention. And with this, thank you very much for your attention. Thank you very much, Jorg. So the, I mean, that slide provides for a, I think, a very nice transition to Isvan since it ends with the role of the EU. So now Isvan, the floor is yours. I would like to start with thanking the organizers to inviting me. It's really an honor and pleasure to be here, also because I'm actually originally from the region, and part of my family is still living in the region. I was a little bit afraid of talking after so many bright people, and I was wondering what I could add to all this, but then now I realize that I can stand on their shoulders and reach higher. Let me start with the theoretical framework for convergence. And I think we practically all share this, and this is basically the Atomoglu-Agion-Zilabotti framework, where the distance from the frontier has a enormous implication on what is happening in this economy. Consequently, what sort of reforms are critical for the country to further progress and reach towards the, or move towards the frontier. This also means that over time, and depending on the success of the economy, this will continuously change, and this managing this change is a critical part of the process. I will argue in my presentation throughout that countries in the region, many of them, reached close enough to the frontier where a new regime has to kick in, and we already talked about this, which is basically moving from imitation to innovation, to have an innovation-based system where the accumulation of appropriate human capital to support this innovation becomes critical. Firm creation and their internal workings also become critical, since innovation that boosts growth actually takes place inside the firm. And given the nature of innovation and the rapid structural change, dealing with enterprise failure or financing risky projects and taking the consequences of failure becomes absolutely essential. So a quick look at the chart where what I do in all my charts is that since we are talking about this framework, everything is measured against the frontier where the frontier is defined as basically the average of Sweden, Denmark, Netherlands and Austria. And the beauty of this is that it's a European frontier, but at the same time it's actually a global frontier as well, because these countries are also at the global frontier on many, many aspects, including actually in the first place income. And what we'll do in this, many of the other charts is to show everything, some of the fundamentals, again, relative to the frontier and compare it to the income level. The important thing about this chart is two very important observations. One is that countries moved up, you know the whole kind of range moved up. The range did not get much smaller, so the differences across countries did not diminish much, but the upper part became much more populated. So we used to have only two countries that were relatively close to the frontier. Now we have actually five of them and some others are also coming up, most importantly Poland, which is an important case and I feel I refer to this several times. Now if you look into these countries in terms of where are they in terms of innovation, then not surprisingly we see essentially an Eastern Europe being from moderate to modest innovators. Modest is the lowest, moderate is one much up. And not surprisingly the frontier that we chose are actually the innovation leaders. Perhaps Austria is a little bit of a borderline case there when it comes to innovation as measured in this scoreboard. Now while properly selected and designed reforms are essential to maintain fast and sustainable convergence, regretfully not all countries are implementing such reforms. In some countries reforms are neglected to such an extent that these countries continuously and significantly diverge from the frontier. Worse still now we see countries in the region that reverse reforms, sometimes fundamental reforms. Unless they reverse the reversal, these countries too will at some point start losing their relative income position. Now political economy, and this is where I can stand on the shoulders of Yergh, he said it's a political economy process, I cannot agree more, political economy has made important contributions on how to deal with timing consistency, how to achieve reforms in democratic societies with uninformed voters or non-credible and myopic governments. But we have no models that can explain the kind of reversals that we observe in the region or actually beyond the region as well. Moreover, the aggregation problem has become bigger, so distribution impacts are important as was pointed out also by Yergh before. In my view, however, there is more to this matter than just this. Professor Oman argued recently in Lindo at the meeting of the Nobel Prize winners with young researchers that people need to want things. Without want, incentives will just not work and there is not much scope for economic policy and reforms. Sometimes people don't want things that would be good for them, like a healthy diet and I'm following in this category for sure. And typically they want things for reasons other than what they actually need those things for. That is, as Professor Oman put it, there's a need for design, for mechanism design. There should be a broad motivating, there should be broad motivating goals that people want for whatever reason, rendering them willing to support reforms that are perceived as useful or necessary to achieve these goals. This would in turn create an environment where politicians want to embark on those reforms and that public sentiment works in favor of reforms and convergence and not against it. If you look back into the recent history of the region, we can trace these themes. With the collapse of the old political system and newly acquired national sovereignty, it became possible to unwind the centrally planned economic system and create a market economy. People wanted this because they wanted the life they perceived people in the West had. Very soon they realized that the process of transition was much more complex and would impose on them often very negative short-term costs. Hence came the disillusionment and the subsequent swinging back of the political pendulum. EU membership was the next big motivating goal. It had the promise of joining the West in an institutional form. People wanted it because they wanted to live in a Western country. So the design for mechanism design was there and made use of the incentives. People actually worked towards supporting reforms and joining the EU. Reform design, however, was not always careful enough. Some countries entered the EU, but particularly when the crisis hit the regions, reform started to be reversed in many places and areas. In some cases, populists worked against reform and convergence and also against integration. European adoption, sorry, Euro adoption could be next large motivating goal, as it was for some following EU accession. But people will need to want it. EU and EU area membership has, in many cases, promoted fast and sustainable convergence. However, the experiences of some of the not sufficiently reforming old member states, and this is the chart that it shows, demonstrate that this is not a guarantee. Here we see that divergence from the fontier can occur, but also that they are dominantly driven by lack of reforms towards the national level. I will return to this point later. This, the Euro area membership offers high rewards to reforming countries, but it may also deliver stronger punishments for countries that have not done their reform homework. Reform reversals and major economic crisis are forms of relatively rare, disruptive or even tail events. The impact on convergence in both directions may however be more important that we presently perceive. Poland's outstanding performance during the recent crisis is a positive case in point for the region. We need to understand better how reform reversals and their negative impact on convergence can be minimized, how performance during crisis periods can be improved by better reforms and institutional design, or broadly speaking, how resilience can be improved, and actually there was a discussion of the Eurogroup on this recently. There is a growing awareness of the possible impacts of globalization and integration on income distribution, perception of fairness, and uncertainty surrounding individual situations. Let me suggest that distributional issues in a broader sense are also central to making convergence fast and sustainable. If human capital, particularly the type needed for innovation, firm creation, growth, and employment in dynamic firms, is accumulated only by a privileged few or only in a small part of a country. Convergence to the frontier will be the privilege of only a few and certainly not sustainable for the country as a whole. Moreover, as the example of Italy clearly shows, if institutional quality widely differs among regions inside the country, the country as a whole will not be successful. Market forces tend to produce strong agglomeration effects, which are very good for winners, but without counteracting public policies can be devastating for the losers. This emphasizes the importance of ensuring good quality governance throughout the country and reform design that pays attention to distributional effects in a broader sense. The right composition of reforms is also necessary to make convergence fast and sustainable. I argue that productivity enhancing innovation inside a firm is a key element. This is part of what I term as a broader institutional design, including private institutions. Having highly educated people with the right skills and relative strength of a country, which is a relative strength in the country, and this is shown in the table, gains always relative to the frontier and rescaled, in this case, the human capital indicator index is rescaled to have the same average and the same standard deviation, so the difference between the two columns is meaningful. This is necessary, but not a sufficient precondition for innovation, as empirical work clearly suggests. It is always the bottleneck in the system that can ultimately cap progress. This emphasizes the importance of comprehensive approach. So looking ahead, why should these countries want reform? In what type of reforms should we hope they want? Global convergence trends stand out to hold major implications for the progress in the region. As the chart shows, the share of world population at the income level, where these countries are relative to the worldwide average, change tremendously during the past few decades. The share of world population at the average income level of the countries in the region has increased dramatically, and if you look at the lowest part of the panel, the red part is what comes from developing countries, and it's a very steep curve, so if you are just a little bit further to the left, the share of population, world population that is at that level in your niche is actually increasing rapidly. So looking ahead, this means that the reforms will have to take into account what happens in the rest of the world. So reforming relative to your past may not be enough if the world moves faster. Similar trends can be seen actually in human capital accumulation. For example, as the chart shows, Poland increased significantly the share of people with tertiary education, the share of population, but South Korea increased even faster. Now if you look into the secondary level of education, this changes even more dramatic to the supply of this kind of knowledge structure in the rest of the world increased dramatically. So as a consequence, the scarcity value of the other-than-frontier knowledge, this is the type of knowledge this region has, declined significantly and will decline even faster in the future. So let me come back to reversals in light of these global trends. The reversal of long-standing or significant reforms risks both unraveling hard-won progress, but also stifling future reform momentum, possibly forever. Reform reversals are no doubt hindering convergence, but they will do so significantly more if the rest of the world is moving ahead fast. Let me take the example of educational attainment. Allowing the quality of skills to deteriorate as it seems to be happening in Hungary, and this is what the chart shows using the PISA test results, or leaving some groups in society behind as it is the case with Roma people in many countries in the region, puts these young people in a very disadvantageous situation as the world is moving ahead fast. As a crisis response, the EU put forward major initiatives to promote the single market for services and the digital single market. Theory predicts that small, very open economies in the region stand to be major beneficiaries of such reforms, but firms must be well prepared. Furthermore, flanking reforms at the national level may be essential to help firms to benefit from the opening of borders and the increasing competition and to maintain public support for reforms designed at the EU level, which is frequently perceived by people in the region as being far away. National reforms that allow firms to enter the markets, minimize the short-term cost of reforms, reabsorb displaced capital or labor, and adequately support those who lose out are critical in this regard. Exporting firms, new firms and particularly new innovating firms are best placed to benefit but are also subject to much higher risk of failure. Hence, reforms to make firm creation and resolution easier and cheaper will be important. Capital markets union is another major area of EU level reforms that can help convergence, particularly in countries closer to the frontier where innovation becomes much more important. For SMEs and new firms, innovation is an especially risky venture and equity is a much more adequate source of finance than loans. As equity finance is underdeveloped in the region, easy access to sources from abroad via the capital market union can be a major help. Many of the most successful startup firms in the region have relied on foreign source of equity and the knowledge set that came with this financing. The EFSI is also a particularly helpful EU level reform in this regard but countries in the region need to do more to better position their firms to benefit from opportunity. Quality of government in distance from the frontier are closely linked with causality running in both directions. The closer the country gets to the frontier, the more essential this factor becomes. Given the importance of governments in education and providing the legal and institutional framework for innovation and risky finance, as the chart shows, some of the countries are well positioned to move ahead because they have a better fundamentals than their income level would suggest. But some countries have somewhat less. Important point out that Romania, which seems to have somewhat less, is very further away from the frontier so it is not as binding as it is on the left-hand side of the curve. The same applies to, sorry, now I made a critical mistake. Someone should start. Okay, sir. I went to the last chart. You're reaching the conclusion anyway. Yes, I'm reaching the conclusion anyway. Okay. So, let me try to summarize my findings. To sum up, the speed and sustainability of convergence in the region will crucially depend on reform efforts. As these countries get closer to the frontier, reforms that support innovation, selection and allocative efficiency will become more important. The quality of government, corruption, education, firm creation and resolution, financing of innovation and innovative firms will be key areas for reforms. The commission has recently made policy recommendations very much in line with these considerations. Looking forward, the more focused and adequate to the country's position relative to the frontier, the more useful policy and policy recommendation from the outside will be to promote sustainable convergence. You and your area membership serve as a useful anchor for such reforms, but apparently this was more so before accession. Membership in itself does not guarantee sustainable convergence. Looking forward, your adoption could serve as a motivating goal that boosts and focuses reforms towards in the region. But for this factor to work, people in the country is concerned will have to want your adoption. Finally, reform reversals deserve particular attention. Thank you very much. Thank you very much, Isvan. I have to say it was very telling that you spent part of your presentation discussing the pitfalls of convergence or the risk of not converging to the frontier based on a slide which actually shows four eurozone countries. So that also tells us that a lot of the lessons that we'll learn from our discussion tonight are also relevant for us here in the eurozone. So we should take it seriously also for ourselves. So we now move to the next speakers. I think we'll do it in a theoretical order as the program suggests. So, Kaleen, the floor is yours. Thank you. Thank you, Benoar. First, I want to thank you for the invitation and for the opportunity to present my views on this very broad topic and very philosophical topic. So I would like to narrow down and be a more micro view on the, and can a specific view on the convergence and especially on why we see a slower convergence after the great recession and what we might draw as factors that are affecting this. I already said this point that convergence is what also Dubravku said. Convergence is not God-given. So it's not something that divine right in every country have to achieve it. It's first and second, countries have to do a right policy to achieve this. And second, convergence comes in the context of the area that your economic area that you are integrated. So that's why I put these slides just to, it's a derivation basically of the two periods, one period 2001, 2008, and it's estimate the cumulative convergence for this period of the countries. And then on the vertical axis you see the cumulative convergence after the global financial crisis, which is 2009, 2016. So basically, three conclusions from this side, all central European and South Eastern countries they converge in both periods before the crisis and after the crisis, with exception of Slovenia and Croatia, it was mentioned this morning that after the crisis they basically have deviation backtracking from the convergence. But all of these countries converge in both periods. And of course, something that was seen this morning, these countries in the second period were converging slower. Then we have the Euro area countries with excluding excluding Luxembourg and Ireland because Luxembourg is out and Ireland did a very big revision in the GDP so it's difficult to explain there. Then we see three groups in the Euro area. One of the first group that they converge very fast in the boom period but then after the crisis they showed significant divergence, especially Greece, Cyprus, Spain and Finland. Then we have a second group that and it's also visible in the Eastern side. Second group that's in both periods in global boom and after the crisis they were diverging from the EU mean. So basically this EU mean, EU 28 per capita on the PPS. So we have these groups that are diverging and then we have this third group which is other Euro area countries that basically were not converging in the first period but they're doing better after the crisis. So the point here is on sustainability basically central Eastern European countries they show sustainable conversion over both periods before the crisis after the crisis and that is that when you have a very mixed very mixed performance some of it driven by excessive developing real estate sector, financial sector or government sector I mean inefficiency in the fiscal policy unsustainable fiscal policy. This basically affects the converging countries in two ways. One is first in the first period that they were attacking a lot of FDIs and what the info was. This slowed down in the second period. So these countries need foreign savings in order to invest more because they start with well saving, creating more capital accumulation. So this one factor that was affecting convergence post-crisis because they were not getting that much info of capital and second they were not getting that much external demand because some of the countries was adjusting that way so there was a very external demand and all of these countries are very linked to European Union to the trade channels and to the integration in value added chains. This is basically the big story which is there are two channels one is domestic policy and second channel is external policy. So what you face outside within your trading partners and within the relations with the economies that you are importing capital and you are integrated financially and economically. Then it's already been said that TFP was going down in all of these countries. There was not much about investment I mean that's why we... It's a working part but we did a paper that trying to explain why investment in Bulgaria was so weak after the crisis. So because all of these countries were having very big very strong increasing investment before the crisis and after that there was a downward suggestion they remain at the very low level. So it's a standard model structural vast models that are common in the literature and ECB has something like this in published last year. And basically measuring the factor that affects investment. What's interesting which confirms the first point that when you regress investment conditional on uncertainty conditional on external demand return on capital on access to financing also to European funds contribution to investment. So the most significant factors for the post crisis period external demand and then uncertainty uncertainty derived by service of expectation for companies expectation European Commission service. And then you have effect on return on capital and after that you have other effects like European funds. So external demand and external uncertainty was playing very significant role in this one of the point that I wanted to make in this. On the top of this when you work on the convergence there another big factor is shrinking labor force. Shrinking labor force due to migration. There are two channels one is workers going to work abroad due to the wage differential and the second channel is young people going to study abroad and they do not return which is a very strong challenge because it's related also with the export of human capital and this relate with the second and then this shrinking population driven by aging and migration and then on the top of this the quality of this labor force is also not improving because they are part of the labor force which is not going to school basically minorities and aromas minority that they access they have access to school but they have no culture to go to school and then the institutions do not press that much the families to attain the school so it's a strong channel with the shrinking labor force we see that also the quality of this labor force and then finally I have some other thing but I finally on the euro area because you should say you need to have a willingness to go to the U.S. and how and there is also in the question and it's related with the investment how five presidents reports of reflection reflection paper affects thinking there is one thing with tax harmonization that is going to depress the convergence because countries that are currently converge like most of central european countries they have very low capital taxation on capital and taxation on labor in particular my country and it's natural because when you have a low capital stock in the economy you don't tax capital because you want people to accumulate capital and then you have a shrinking labor force and outfall of people you do not tax that much labor but you provide very low taxation on labor and you tax consumption people to save and to provide saving for investment in capital so tax harmonization is going to play a very negative if going in the direction of increase of corporate and income tax level in europe we go to the harmonization of I'll stop here then I will take part in the discussion Thank you Thank you Kaleen I think you're raising an important issue at the end which is I mean I'm not saying I agree with you by the way but I think it's important to raise the issue that it's not only about the challenges that you're facing as a converging country it's also that you're converging towards a moving target which is the rest of the EU in particular the eurozone which is itself undertaking a process of rejuvenation if I may say so or hopefully and the question one of the question will be which kind of externalities that it creates for the for the other countries and certainly that should be an important part of the discussion and in particular on eurozone reform that way it's also about the other countries and we're not alone so I agree with that Deborah please of course yours Thank you very much I think entering at this stage of the debate a large part of my the first part of my presentation is completely redundant so I just share the view with everybody else that the region has to change the ground model and take more ownership of creating a business environment that is much more competitive and this has to do with institutions but also with investment and then what I will focus on is mostly on the investment part and I wanted to show a few very few slides that come from two recent big study that we put in place at the European Investment Bank one is an investment survey that is looking at 12,500 firms in Europe is very complementary to SAFE because we really focus on investment and not only on the financial side but I think it gives us very much the idea of what are the constraints for firms to invest to investment and what are they looking for in terms of becoming more competitive and on the other side we did a second survey this year on 600 municipalities in Europe and to me that comes out with very interesting messages on the I would say if I'm very strong in the message incapacity of planning on the usage of some of the youth funds and that is something that where we can have a very strong improvement going forward I... If I... No How did you move? Sorry Okay This I can skip Just... Okay On this one only I just wanted it's almost invisible but I just wanted to focus on the graph on the left that is basically showing for me it's very interesting because I also saw the one of the you periphery and other countries basically we have the blue line is investment the red line is saving what I find very interesting is that the current account the correction in the region and these are the you countries so basically cancer from some increase in saving but from a big drop in the investment side so this is the kind of painful correction because it's not in the periphery you have a much more stronger increase in saving and then investment remaining stronger and I think here for the region is a message that the grow model has to come and to stay a little bit self-sustainable and with more investment support coming from policies on the investment side we see the recovery and we see the recovery we saw the recovery particularly related before 2016 what I wanted to pass as a message is that incredibly incredibly strong dependency in the region for the you funded public investments and this is very important for tourism on the one side because absorption of these funds and proper absorption of these funds is very important on the one side on the other because the European Union is starting to discuss the new multi-annual financial frameworks and there are very strong pressures coming from everybody particularly following Brexit on where to cut so I think that using the resources available in this funding period in the right way is extremely important because it's not so much granted how much new resources will the entity of the resources in the second in the next multi-annual financial framework if we look at the in this in the first graph what I wanted to show is coming from this survey on investment and this looking at how much where do investment where do firms invest in the region the share devoted to intangible is much lower than the rest of the U and it's interesting because it's not only related to research and development but for all the different form of intangibles and we really think that all different form of intangible are important not only the research and development part and a large part of the policies implemented at the national but also at the European level are only targeting R&D while there are other areas like skills development etc. that are particularly important so one message that I think is very important in terms of policies target all intangible and really try to do something more in terms of incentivizing intangible investment in the region the second graph is a little bit more complicated is showing that they will at the dispersion of a marginal product of capital and labor and basically gives you an idea of inefficiency in the allocation of resources and there you have the cohesion countries periphery and other you can think of core Europe because there is the UK we didn't call it anymore core but it's called other as you see the dispersion is increasing all over and also in cohesion so the misallocation of resources is increasing all over Europe and also in cohesion so there is a room to do in term of reallocating resources it's not only a story for the region but it's a story for all over Europe sorry just to understand the figure is it the dispersion across branches I mean at which level at which level of granularity is the dispersion being observed is it across across branches or across companies within a country or is it just it is just within between countries it's estimated firm level data with a panel with all the European firms I can't move anymore okay I'm talking about the inefficiency related to inefficient allocation of resources they think this is something very interesting that comes out always from our survey and this is the different behavior of foreign and domestic order firms in the region and this gives you an idea I don't want to say that the foreign firms are necessarily always the best but what you see is that some of the domestic firms are kind of lagging behind in term of their innovation capacity this I think it's very important particularly they are much less active in implementing innovation that is new to the world and also have much higher share of firms that don't innovate at all so not even adopt innovation the domestic firms are investing less there is a lower percentage that is investing and we also ask in the survey to self-assess the quality of the capital stock it's a self-assessment so it's qualitative but you see that foreign firms tend to to state that they have a better quality of the capital stock so there is a difference in term of resources and there are probably policies to look at domestic firms and understand why there is this very strong divide between the two and whether you should have some more flexibility in the system that leads also either the domestic to innovate or to keep the peace adopt innovation compared to the others or some readjustment in the system to take place I'm looking here in the first graph we ask to firms what are the main impediment to investments and they are the most interesting this is the second year that we do the survey last year the main impediment was uncertainty this year the main impediment is availability of people with the right skills in the region this is extremely important and it's related obviously we know it we also see from the other graph from how to work the migration in the region but the problem is a problem okay, it's a problem all over Europe and again on that point of view I think policies have really to look at what to do in terms of skills and skills is not only a matter of the top skills it's also a matter of mismatch of skill at the lower level I have a last slide and that is coming from what I was mentioning in terms of the study that we are doing on municipalities and here the message comes out on asking to municipality what are the most important barrier to their own investment and here there are two interesting elements the first barrier is a budget constraint or if you want also it's related to these debt ceilings that has to do with really the fiscal constraint for the municipality but there is a part that is also related to length of procedure to competencies etc but the most striking number that comes from this survey and I'm finishing is that is not in the graph but that 40% of municipalities actually take an investment decision based on economic rate of return calculation of the project so there is a lot of investment decision that are not based on economic rational that happen at the municipal level and this is something very important and if I have to sum up whatever I was saying I think that the main priority for the region is try to have much more prioritization and planning in term of economic usage of economic means in term of public policies and also trying to to create the right incentive for the business sector in the right sector so related to innovation and intangible investment Thank you very much Deborah so let's move to again the floor is yours Thank you Thank you very much I will try to tackle the specifics which are mostly with my country and similarities with other countries of the region because most of the topics and points were already tackled from the distinguished speakers previously however each country has its own specifics despite of the similarities we will briefly talk about the SCEE Convergence process and the Convergence in the region and then in Albania basically the long term political future and the economic prosperity of the SCEE region is firmly linked to the EU Convergence and integration processes while individual countries have differences a common specific they all share is the economic and political benefits from the process SCEE countries benefited from the rapid efficiency gains due to large scale liberalization reforms during the transition period there have been a lot of reforms undertaken in all SCEE countries many were presented even here however whatever has happened during the transition period the economic and financial crisis had the heat on the speed and acceleration of the reforms and also in the Convergence of dynamics for the region Convergence slowed down due to the diminishing returns from the capital and labor as well as from fading efficiency gains it was already mentioned from preliminary speakers that the risk or risk of failing into middle income trap that because of the low level of innovation pure quality of institutions and unfavorable democratics in the future we talk a lot for the institutions it's very crucial very important institutional role in our countries because they are the actors who are responsible for undertaking and performing the reforms in this context it is very imperative to prepare our economies from a graph for a gradual transition from efficiency gains systems into innovation even swans this is easily to say I mean innovation as my colleague spoke previously seen mostly in the foreign investors in the foreign firms and domestic firms however efforts should be done and a lot of tries and thoughts and ideas and initiatives should be undertaken in terms of the innovation for any country in order to increase competitiveness of the country productivity towards the EU member countries as mentioned quality of institutions is paramount in the fallicilitating to the move to the next development stage quality of institution it's it's really critical I mean this is related it's very complex it's absolutely very complex because it's relating with many elements first of all is related with the quality of the human resources which is related also with education and with many reforms that should be undertaken it's been undertaken but it's also with inherited tradition and many other things however this is a process this is a fight that should never end and no one should give up but it should continue to improve the institutions as mentioned also previously institutions first of all about people then anything else so there is a necessity for intelligence the target being structural reforms definitely structural reforms serve the ones that will be addressing all the matters that we are talking and the structural reforms as major objectives to promote business environment to implement the rule of law innovation capacities and competitiveness and so on with regard to Albana but I mean talking about my country many other countries in the region especially neighboring countries are having almost the same issues the institutional setup has been largely contributing to the convergence process and macroeconomic policymaking which has been improved considerably during the last times talking briefly about the central bank it's absolutely clear we are all central bankers we're central bankers here and mostly we are central bankers here and the independence of the institution is playing a crucial role and we are specifically following an inflation targeting regime by law actually we have the price stability of course the financial stability it's one of our main objective but price stability it's by law the number one as a central bank we are having we are seeking an inflation targeting regime and the and following a free floating exchange rate we seek to reach an inflation targeting by next year on the other side fiscal policy is on a steady consolidation path and debt reducing fiscal rule is adopted we have approved last year a low in the fiscal rule actually as many other countries my country as well is we're suffering for a very high public debt it was on the level of 72% and we have already approved the fiscal low new a new low which obliged us to decrease continuously the the public debt in the next coming years and the intention is to go up to the level of 60% in a few years there is a range of structural policy initiatives to strengthen financial stability as well in terms of financial stability luckily despite of the crisis despite of whatever has happened during this years we have had quite a very stable financial stability situation and this is due to certain elements and certain factors first of all the same as many other countries in the region in Albania as well there are mostly European member EU member country banks as a foreign direct investors that are representing most of the financial market in the banking sector and they brought a lot of know-how and technology in the beginning and they raised also in terms of lending as well they contributed in the graphic of economy but at the moment after the crisis they became a bit sluggish and a bit not contributing as much as before the crisis due to their own issues the leveraging process and so on so basically we have been suffering from a high MPL after the crisis MPL became an issue which were which were really inducing pessimism and not optimism in the decision decision taking process in terms of lending in the banking sector and lending is very crucial because we really had the very low lending level after the crisis we came from the very high levels that we don't seek in fact to cause still in the same levels because by growing 25 or 30 percent each year in lending of course will crash again and there is a potential huge risk to produce again MPLs where the central bankers are conservative and we intend to have a potential lending but still we need to banks are intermediate financial intermediaries and they need to they need to play their role the major role that we need for the growth and the acceleration of the convergence is first of all before before innovation is landing and in this context MPL there was a detailed plan that we followed and finally it's a result in successfully as we are bringing this down however that was one of the major reforms or efforts that we have spent in the terms of the financial sector in the market there have been a certain laws being approved with regard to financial financial sector for execution of collateral still for the effects of the MPL but as well for the bank resolution I mean we did approve the bank so the Greek crisis the difficulties that we face two years ago with the Greek crisis and the financial system put us put us made us aware that we might face really serious difficulties in terms of financial system and we needed to to revise our legal framework very carefully and see ourself and test ourself we did the stress testing and so on so basically there have been a certain laws but the most important one was the one that was the most recently approved as well it's important to mention that the dependence and efficiency of a financial stability authority FSA in the country and the positive insurance agency has to be strengthened further because with these two authorities which are separated from the central bank we definitely has to cooperate so basically in order to conclude because many things were were already mentioned in Ubenia I mean to accelerate the economy convergence to your countries we need to to engage in continuous structural reforms aiming to improve institutional development business sophistication innovation capacity techno technological readiness financial markets development and rule of law and quality of the judiciary judiciary reform has been one of most important reforms taken recently that we face a lot of political implications however from the legal point of view this is done now we have to implement this is another challenge many reforms has been undertaken that had the real real positive effect in the growth we come from 1% to 4% growth this year due to undertaking certain reform during last three years there were also under the IMF program education reforms active labor market reform judicial reform as I mentioned energy sector reform and so on pension system and so on so reforms needs to be undertaken but reforms need to be undertaken based on priorities that each country have we saw our gaps and our our difficulties and reforms were set up based on these priorities however we need to continue I mean basically the reform agenda is ongoing the structural reforms I would say are very important for for each of us not only for the central bank but all the actors in order to progress thank you I will stop it here thank you very much I'm pressing all of you a little bit to keep to the timeline but then we have plenty of time for the discussion so don't worry if there is anything you forgot or you wanted to say you will have an opportunity to come back so Boris last but not least so far as yours thank you very much Benoit thanks for inviting me again to this event and as you know they say that being 12 person speaking at the day conference on the same topic is a little bit feeling like a seventh husband of Elizabeth Taylor poor guy coming back home and wondering what can I do that has not been done here before so this is pretty much how I feel at least you know put a little bit different light on some of the issues that have already been raised to make the further discussion more interesting so one thing that has been discussed is the convergence this picture you've seen five times at least today but let me let me say that there are three things that I would like only to be tanker for granted we have obviously examples of convergence happening for some time then being stalled and we've seen that if you look at the European Union for example versus the US where there has been the convergence then it stopped then there has been the convergence of south of Europe towards the north of Europe and that convergence has also stopped and then it was followed up towards the rest or the east Europe towards the old Europe that convergence has not stopped but has significantly slowed down and now we wonder what's going to happen in the future one thing that we don't want to if you look at the speed of convergence we don't know exactly what the benchmark is what should be the speed of convergence also if we look at the period before the crisis is this exactly where we want to go back to probably not because that has led to some extent to a crisis that was probably in many ways to rapid it was based on a high accumulation of not only of FDIs which is which is a good thing good cholesterol but also on the leverage build up which is a bad cholesterol and something that not only that we don't want to see happening again but will probably in the medium run not happen again because of the different structure that we're seeing now of the of the economics and of the regulation also with the inflow of capital to the East Europe that was the some call it low hanging fruit being harvested in the beginning or no Schumpeterian view as Sergei has said of moving from well inside the production possibilities frontier towards the possibilities frontier in a in a very easy way of reallocation of hugely misallocated resources we've seen inflow of the capital that helped that but with the inflow of this capital from the old Europe some of the malaise of the old Europe might have been also imported into the East Europe and that might be another thing that will make a growth more sclerotic in the future in central East Europe TFP that has been also shown I know more than five times today but what do we really know about the total factor productivity I'm afraid that total factor productivity might be to some extent more consequence of our inability to properly measure what we should measure then anything that we should really put on our slides and comment like what's going with it if you look at here just accumulation of the capital and you look at the Romania this is the green line at the bottom of the on the left hand slide and then you look at the total factor productivity in Romania I wonder does anyone in this room believes this is true I don't so one has to be very careful talking about what's going on with the total factor productivity I'm afraid that it's mostly the consequence of our inability to properly measure the accumulation of capital and the labor well having said that I would of course agree with everyone who previously said that there are things which are positively correlated with the growth and that is the institutional quality and human capital in the first place but having said that these are the two things which even if we had no data at all we would have thought are influencing the growth positively so here it's only that the data do not basically confront what our prior beliefs about that would be now if we move further and then see what has happened really with these two most mentioned factors of probably total factor productivity or something that needs to be influenced unobservables if you want in order to reignite the growth to to have more convergence in the future then we can actually see that not much has happened in the past in the first place there has not been really a convergence in terms of the quality of institutions nor in terms of the human capital very little so we should ask ourselves then how did we converge in the first place up until now if there was no convergence with these two things of which we have been talking so much today in the first place so obviously there has been something else at place what we mentioned easy things reallocation and now we'll have to focus for the first time to really do something serious about the institutions and the human capital in our countries if you really believe and I think we do believe at least when we go public in our countries we speak that these things are important and how they have to be changed and these are the things that we call structural reforms now these are the things which also consist of many measurement errors but we would again agree probably that doing structural reforms of that sort helps increase the potential rate of growth of the GDP but the question really is how to how to get these things right and there are generally as has been also said already today two day measures of structural reforms one is moving closer to efficiency frontier and the other one potential growth rate which is basically expanding the efficiency frontier it has been said that the first one has been happening but if we compare Europe to other emerging countries much less of the second one has been happening and we have to ask why one thing that has been mentioned in the discussion has been the quality of the human capital the other one was also the institutions that in a way hinder competition and do not incentivize the innovation R&D investments etc the third one that we talked about over the lunch and I thought that Benoit will mention but since he didn't I will is the structure of the financial markets I was about to okay is the structure of the financial markets which does not incentivize really those type of the capital investments which turn out to be most productive in terms of the innovation and this is obviously European problem not only the central European problem of two little capital markets too much reliance on the banks so this is something that will have to change and this has been this is one of these things that have been important to central Europe from the west Europe but it will have to also change the structure of the financial markets some things are already changing but changing more I would say because the technology change in the finance like the fintech where you see small companies now raising capital through crowdfunding rather than being really a consequence of the changes in the capital market structure in our countries which were incentivized by the by the government they are actually independent of anything that the government does actually the government is looking at it it doesn't know what to do with it we don't know actually how we are going to regulate all these things further down the road another question is how much do we really know when it comes to all these reforms what are their synergies at which pace and which order they should be implemented should be tried to implement them all which are more important than the other ones what are the diminishing marginal effects of these reforms these are all very difficult questions and I don't I'm not aware that we really understand a lot about that so in a way the safe bet is just to go out and say these are all things that need to be done and then politicians should choose what they want to do and in which order they want to do it and they should be the ones that will calculate the you know diminishing marginal returns or the political costs of doing these reforms without much help from the economists so far as far as I can see it so maybe we can help them a little bit more on that and in that sense you know be more constructive in pushing the reforms that are needed to increase the potential rate of growth in the future one thing which might be a real obstacle to doing reforms in the future and this is taken from EBRD Sergei Stings you talked about that in Dubrovnik less here but this is striking when I was looking at your presentation in Dubrovnik and if you take Germany as a benchmark and you look at these answers in all central European countries and you see what the attitude is of the voters towards some common values which are needed for the reforms like the market economy or democracy versus autocracy or their fate in these institutions like a fair justice systems or law and order then one would assume that in order to do the things that we were talking about today one would first have to change this otherwise it's going to be extremely difficult to as economists to preach to the politicians you have to do this and that but look who is voting look at the value system of the voters if that is not changed and this is not something that we economists deal with typically in what we do then it's very difficult to expect that there will be a possibility real possibility to do the reforms that we were talking about today here thanks thank you very much to all speakers