Boris Vujčić: Macroeconomic developments and structural issues in CEE countries Speech by Mr Boris Vujčić, Governor of the Croatian National Bank, at the Roundtable on Macroeconomic Developments of the 16+1 Economies, Magyar Nemzeti Bank (the central bank of Hungary), Budapest, 9 November 2018. * * * Accompanying slides of the presentation. Economic expansion in the CEE region can be expected to continue in the near term supported by still favourable cyclical conditions. However, in many countries pace of growth might moderate, partly due to supply side constraints and maturing business cycles. Potential growth estimates indicate that in all countries output gaps are positive or have been closed, and unemployment rates are close or below pre-crisis levels, pushing-up the wage growth. While such a positive outlook for future growth is somewhat disturbed by rising risks to the global economy, such as escalation of trade tensions or tightening of financial conditions, CEE countries seem to be in a generally good shape to withstand the impact of negative shocks. Current account positions have improved and in many countries turned into surplus, while international liquidity positions are ample. Also, economic recovery coupled with efforts to push through fiscal adjustment programs led to improvement of general government balance and public debt was put on a declining path. Furthermore, financial systems in most countries remain robust and resilient, as attested by withstanding the shocks emanating from the global financial crisis and the European sovereign debt crisis.
And data support such outcome, here on a sample of emerging market countries. There is a strong positive relationship between quality of institutions and human capital on one side and growth on the other. Furthermore, in the context of new EU member states, countries with better institutions tend to withdraw more EU funds, which is another channel through which the government can help to increase the growth potential of a country. When it comes to quality of institutions, developments are not encouraging. If quality is proxied by World Bank’s Worldwide Governance Indicator, there has hardly been any convergence towards Germany, which can arguably be used as a benchmark. Notable exceptions are the Baltic countries where we have seen positive developments also in the aftermath of global financial 1/2  BIS central bankers' speeches  crisis. CEE countries also lag behind when it comes to the quality of human capital compared to those EU countries that achieve the best results in PISA test in Math and Science (Finland, Sweden, Austria, and Germany). Developments over time are also not encouraging as in many countries the PISA results have actually worsened during the last decade, which is a phenomena not confined only to the CEE region, but to the wider Europe. Such developments are on the one side worrisome, but on the other give us the opportunity to streamline and speed up reforms because potential gains can be substantial.