1. 1 Reflections on the State of the Danube Region Rumen Dobrinsky Senior Research Associate Vienna Institute for International Economic Studies 1st Annual Forum of the EU Strategy for Danube Region Regensburg, 27-28 November 2012

2. 2 STRUCTURE OF THE PRESENTATION 1.Overview of recent economic performance in the Danube Region 2.The broader picture: What is happening to growth in Europe? 3.Policy implications for the Danube Region and the EUDRS

3. 3 PART 1 Overview of recent economic performance in the Danube Region

4. 4 THE DANUBE REGION

5. 5 THE DANUBE REGION ECONOMY GDP of countries and regions at PPS in 2011, bn

6. 6 THE DANUBE REGION ECONOMY GDP of countries and regions as % of the region's aggregate GDP in 2011

7. 7 THE DANUBE REGION ECONOMY Per capita GDP in countries and regions in 2011, ths. in PPS

8. 8 GDP growth in the Danube region economies, %, 2001-2012

9. 9 Unemployment rates in the Danube region economies, %, 2001-2012

10. 10 General government balances in the Danube region economies, % of GDP, 2001-2012

11. 11 Public debt in the Danube region economies, % of GDP, 2001-2012

12. 12 PART 2 The broader picture: What is happening to growth in Europe?

13. 13 Main indicators of EU-27 economic performance in 2001-2011 2001-20072008-2011 Annual rate of GDP growth, %2.3-0.1 Annual rate of growth of hourly labour productivity, %1.70.3 Annual rate of growth of the GDP deflator, %2.31.6 Gross fixed capital formation, % of GDP19.918.9 Annual net inflow of FDI, % of GDP3.31.3 Change in world export share, index, beginning of period=100100.088.3 Annual rate of growth of nominal ULC, %1.82.1 Annual rate of growth of real ULC, %-0.50.5 Private sector annual credit flow as % of GDP11.03.9 Private consolidated gross debt, % of GDP100.0118.3 Total general government revenue, % of GDP42.541.2 Total general government expenditure, % of GDP44.746.3 Annual general government balance, % of GDP-2.2-5.1 Government consolidated gross debt, % of GDP61.375.7

14. 14 FACTORS OF GROWTH Gross fixed capital formation and GDP growth in the EU-27, 2001-2007

15. 15 FACTORS OF GROWTH Attracted FDI and GDP growth in the EU-27, 2001-2011

16. 16 FACTORS OF GROWTH Exports and GDP growth in the EU-27, 2001-2007

17. 17 FACTORS OF GROWTH Real unit labour costs and GDP growth in the EU-27, 2001-2007

18. 18 FACTORS OF GROWTH Real unit labour costs and export growth in the EU-27, 2001-2011

19. 19 FACTORS OF GROWTH Innovation and GDP growth in the EU-27, 2001-2007

20. 20 FACTORS OF GROWTH Domestic+foreign savings and GDP growth in the EU-27, 2001-2007

21. 21 FACTORS OF GROWTH Private credit flow and GDP growth in the EU-27, 2001-2007

22. 22 The model of growth in the EU, 2001-2011 Summary of stylized facts Factors 2001-20072008-2011 Productivity of labour++.. Fixed investment++.. FDI+.. Exports++.. Real ULC/ Competitiveness-.. Innovation++.. Gross domestic savings.. Attracted foreign savings (current account balance)++.. Domestic and foreign savings++.. General government balance..- Total tax burden.. Total banking sector liabilities++.. Private sector credit flow++ Private sector debt++.. Government debt-- Government + private debt++.. « + » positive correlation ; « - » negative correlation ; «.. » no correlation

23. 23 Government and private debt in the EU-27, % of GDP, 2000-2011

24. 24 GDP growth and growth of indebtedness in the EU, 2001-2011 EU-27EU-17 ( Old EU)EU-10 (CEE) 2001- 2007 2008- 2011 2001- 2011 2001- 2007 2008- 2011 2001- 2011 2001- 2007 2008- 2011 2001- 2011 Cumulative growth of GDP, % 17.5-0.416.916.3-0.815.339.36.447.6 Cumulative growth of indebtedness, % of GDP of which: 18.231.950.117.532.149.731.526.357.8 Cumulative growth of government debt, % of GDP -1.524.022.5-1.724.522.91.713.915.6 Cumulative growth of private debt, % of GDP 19.77.927.619.27.626.829.812.542.2

25. 25 Change in government debt and bond spreads Selected EU countries, 2008-2011

26. 26 PART 3 Policy implications for the Danube Region and the EUDRS

27. 27 The dominant factor boosting growth in the boom period was the mobilization of new resources, in the first place financial resources EU growth during the past decade has been very expensive, and – comparing mobilized resources and outcomes – rather inefficient This model and pattern of growth led to the accumulation of large, in some cases unsustainable, public and private debt The level of public sector indebtedness appears as the single most important factor that weighs of the growth prospects of individual countries SOME GENERAL CONCLUSIONS ON THE EFFECTS OF THE CRISIS

28. 28 The crisis rejected the previous growth model on the grounds of its unsustainability but a new model has not emerged yet Countries (both governments and businesses) will have to learn to live with less resources (in the first place financial) at their disposal One factor for reviving economic activity is raising the efficiency of resource utilization, including raising the efficiency of utilization of public funds and the efficiency of public policy Thus the policy motto for the foreseeable future is shaping as:Doing more with less Nevertheless, being relatively less burdened with public debt, governments of most DR countries have more degrees of fiscal freedom than the more indebted EU economies SOME GENERAL IMPLICATIONS FOR DANUBE REGION ECONOMIES

29. 29 The EUDRS and its Action Plan set very ambitious objectives; at the same time the crisis has generated new challenges Doing more with less is easier said than done – but not impossible! To address these challenges we need bold new policy approaches and policy innovation I discuss two possible approaches for addressing some EUDRS objectives against the backdrop of the current challenges: Internal restructuring of the set of existing policy instruments with greater emphasis on non-financial policy instruments and with a particular focus on those promoting innovation Wider application of participatory policies HOW TO ADDRESS THE EUDRS CHALLENGES IN THE CURRENT CONDITIONS?

30. 30 Non-financial are those instruments that do not involve direct public financial support to actions implemented by non-public bodies They rely on the coordinating capacity and convening power of the state and its role in stimulating linkages between key stakeholders Among the most efficient such instruments are those that promote connectivity among stakeholders Others efficient instrument are those that promote risk sharing among stakeholders through knowledge sharing among them Examples include information brokerage (technology forums, fairs, exhibitions); innovation intermediaries; knowledge services; etc. These are relatively cheap policies in terms of the claims on épublic resources NON-FINANCIAL POLICY INSTRUMENTS

31. 31 Non-financial policy instruments can be especially effective in supporting and promoting innovation and innovative activity They can have a significant positive effect on firms innovative performance and productive efficiency Such policies are already present in national innovation policies as well as in EU programmes The main issue here is that of restructuring the overall policy mix within the available public funds, assigning greater emphasis on this type of instruments Such a restructuring will raise the overall efficiency of the policy mix NON-FINANCIAL INSTRUMENTS PROMOTING INOVATION

32. 32 Non-financial policy instruments promoting innovation address some of EUDRS key objectives and issues: the knowledge society; research and innovation; the competitiveness of enterprises Their wider application will contribute to better connectivity and more linkages between businesses, R&D institutions and other stakeholders in the Danube Region This will contribute to more innovation and higher productive efficiency in the Danube Region Their wider application will not be ascociated with new claims for public (national or EU) financial resources; it will only be a matter of re-prioritizing and internal restructuring of resources They can be applied at the European, national or regional levels THE EU DANUBE STRATEGY AS A VEHICLE FOR PROMOTING NEW POLICY APPROACHES

33. 33 One of the policy answers to the challenge: Doing more with less is through PARTICIPATORY POLICIES Participatory policies and policy processes are policies for empowering stakeholders/people to agree on coordinated actions of shared interest (or seeking to achieve common goals) and their implementation The most trendy segment of this class of policies - smart specialisation is only one brand of participatory policies The same concept can be applied to a range of policy issues at the national or regional levels PARTICIPATORY POLICIES: A WAY TO ADDRESS CURRENT CHALLENGES

34. 34 Participatory policies are about sharing the responsibilities both in the design of policies and in policy implementation with the stakeholder community and with the expected beneficiaries Participatory policies therefore are about further democratisation of the policy process: giving back more power to the people to deal with the issues that are important for them Introducing and applying participatory policies requires supporting social innovation and introducing policy innovation to engage a wide community in the policy process Participatory policies and social innovation are usually based on the new communication opportunities provided by Internet PARTICIPATORY POLICIES: A WAY TO ADDRESS CURRENT CHALLENGES (contd.)

35. 35 Social innovations are new practices for addressing societal challenges, which are adopted and utilized by individuals, social groups and organizations concerned (Source: Centre for Social Innovation, Vienna, 2008, 2012) Examples: Wikipedia Open innovation Social entrepreneurship Spontaneous civic initiatives The common denominator: INTERNET SOCIAL INNOVATION

36. 36 HOW SOCIAL INNOVATION WORKS Active participants Users Potential users Social inventor Idea Active feedback Comple- mentary ideas Dissemi- nate among other user

37. 37 The traditional model of policy making SOCIAL INNOVATION IN POLICY MAKING P o p u l a t i o n V o t i n g c o n s t i t u e n c y Political party 1Political party 2 Political party N GovernmentPolicy making Policy implementation

38. 38 Newly emerging models of participatory policy making SOCIAL INNOVATION IN POLICY MAKING P o p u l a t i o n V o t i n g c o n s t i t u e n c y Political party 1 Political party 2Political party N GovernmentPolicy making Policy implementation Internet community

39. 39 POLICY INNOVATION: PARTICIPATORY POLICY MAKING Participatory policies are policy innovations amounting to mainstreaming public initiatives; they usually involve bringing social innovation into the policy-making process This type of policy making enables large constituencies – and people in general – to implement social practices that are traditionally considered as a prerogative of politics The domains where such new practices policy innovation are still limited but they are growing. Examples include: Local communities compel the local authorities to subject local public investment projects to Internet-based popular vote Public procurement bids are subject to evaluation by the population via Internet-based popular vote Policy agenda setting via Internet-based popular vote Ultimately, in the future this may entirely change the landscape of politics and policy making

40. 40 Applied at the international level (such as the Danube Region) participatory policies can make it possible to engage a wide, cross- border community to address issues of common interest Such policy processes could include the actual setting of the agenda for cross-border cooperation This aproach provide mechanisms to address some of the main underlying objectives of the EUDRS: They contribute to connect people, their ideas and needs They contribute to prioritising inclusion This is a way to empower people and guarantee ownership Finally a word of caution: Participatory policy mechanisms are mostly applicable to socio-economic issues and may not necessarily be applicable to all aspects of the EUDRS INTEGRATING PARTICIPATORY POLICIES IN THE EU DANUBE STRATEGY

41. 41 Thank you! Rumen Dobrinsky E-mail: rumen.dobrinsky@gmail.com Telephone: +41 79 776 9449 THANK YOU!