to introduce today the presentation by payata yavartik is an important economist she is the chief economist at the european bank for reconstruction and development ebrd she's the first woman to um the institution takes care of the economy of 27th country in central europe and asia and it includes a number of offenders institutions such as the eu as well professor yavartik is the first woman being interested in the full tenure of economics at the oxford university and she's an expert in international mechanism including international trade direct investments and all what is concerned with uh competition issues in her cv includes another important poster she's been senior economist at the world bank director of the program for international trade at cpr the center for economic policy research in london she's again the chief economist at the european bank of reconstruction development supporting the investment of this international organization in 27 countries top institution there are 42 members supporting the activity of this bank including again as i was saying the eu and the european bank for investment that uh we're all familiar with in italy because a lot of bonds of the european bank are bought by italian households because they are a hundred percent uh safe and secure my introduction ends up here because i'd like to give the floor over to professor javorczek who's been here with us uh hi nice to meet you thank you professor yanez good morning thank you very much for the kind introduction and thank you very much for the invitation okay it's a pleasure to be joining you today to talk about the return of the state the title of my presentation the state strikes back is both a statement of fact and a warning it is a statement of fact because as i will show you shortly the state presence in the banking sector has already increased tremendously over the last two decades it is a warning because the growing role of this state poses the risk of undermining the private sector and entrenching political interests of the ruling elites in countries with weak institutions in my presentation i will focus on the countries where my institution the ebrd operates but many of these conclusions carry over to other countries to other emerging markets and other countries with weak level of governance and low quality institutions so let me start with some basics the size of the state we can measure the size of the state as a share of government spending in the gdp and as you see here um the state accounts for about 40 of gdp in terms of its spending in advanced economies about 35 in post-communist countries and these figures have been quite stable over the last 25 years where you saw an upward trend is in low-income countries and in other emerging markets which are depicted here with the blue line of course during the covet pandemic we saw a huge increase in state spending but that's a temporary phenomenon and i would expect the figures to go back to their long-term averages now what makes post-communist countries different is the size of state employment now in the 1990 the vast majority of employment in those countries was public employment by the mid-1990s this figure went down to about a half by now there is the size of public employment it's only about a quarter of total employment but nevertheless this figure is much higher than what we see in advanced economies or in other emerging markets and in the graph on the right hand side i depicted the share of public employment in total employment against the size of government spending and the red dots are the post-communist countries and you can see that they lie mostly above this line this means that in post-communist countries state employment is much more important is larger than in other economies with similar size of government spending and this difference is on average seven percentage points now a lot of state employment takes place in state-owned enterprises and here on the left hand side you can see that in belarus two-thirds of total employment is in the public sector and half of total employment is in state-owned enterprises and state-owned enterprises account for a very large share of employment in places such as tajikistan azerbaijan and uzbekistan but also in western balkans in baltics for comparison you can see that in italy state-owned enterprises command a very small share of total employment while public employment accounts for about fifth of total employment this is italy is right here and germany is next to it now if you look at where state-owned enterprises are active you will see that they can be found primarily in utilities in transport sector in infrastructure and in that sense this distribution of state-owned enterprises is quite similar in post-communist countries as in advanced economies now why do we see more of those state-owned enterprises in post-communist countries part of the reason is weak administrative capacity the state doesn't have to be a direct provider of services to households you can subcontract private sector you can ask private firms to provide universal coverage so to provide uh services to everyone in the country and if you are concerned about the prices being too high for poor households you can give benefits to those households by means test means testing who should get those benefits but to set up such a system you need quite a sophisticated public administration and in many post-communist countries such sophisticated public administration is lacking and that's why state-owned enterprises are used to provide these basic utilities or transport services to the population it's quite interesting to look at who works for the public sector and in particular for state-owned enterprises there is a tacit agreement state-owned enterprises provide stable employment but they don't pay particularly well so this stability is this additional benefit that compensates people for low for relatively low wages and you can see in this graph that older workers are much more likely to work for state firms as are women as our people working in rural areas you also may be surprised to find out that people with bachelor's degree or advanced academic degrees such as masters or phds are more likely to work for state-owned enterprises and then if you focus on those with university degree and you ask who is more likely to work for state enterprises you find that it's people who dislike risk people who are more risk averse find it much more attractive to have stable employment in public enterprises so state ownership matters there is a bright side of state ownership there are good things about state ownership when we conducted a survey last summer and asked households about job losses due to the covet pandemic we saw the lowest job losses reported in belarus that's not surprising because belarus has half of employment accounted for by state firms and state firms are stable employers and we already saw it during the global financial crisis state-owned firms were much less likely to let people go than private firms so in that sense state ownership acts as automatic stabilizer we also see that state-owned firms are often very important employers in lagging areas in backwards in poorer regions but there is a dark side to state ownership we have decades of evidence indicating that state-owned enterprises are less productive less efficient and they are also less innovative they are less likely to introduce new products new production processes they are less likely to obtain patents to engage in research and development and what's also very important when we think about the dark side of state ownership state firms can be abused by politicians to further their interests to further interest of their political parties and to remain in power now let's think about effects of covet and who was mostly affected by the pandemic in economic times now if you think about who dislikes risks in the population you can clearly see that people who earn less are much more risk averse so here you see the results of a survey ebrd conducted prior to the pandemic where we ask people how likely how much they like taking risk and what you see is that the people with income in the lowest decile one third of them says we dislike risk and then this openness to risk increases as you move on towards people who make more money the same is true if you compare people with just elementary education those people are very unwilling to take risks why people with university degrees are much more open to taking risks now this is not unexpected because people who make less money typically don't have much savings and therefore any adverse shock is much more difficult for them to cope with now what's very striking about the covet pandemic is that it hit particularly hard those people who dislike risk so on the right hand side you see the number the percentage of respondents who reported that they themselves or someone in their household lost a job due to covet pandemic so this is survey that was conducted in countries where the ebrd operates last summer and you saw that the poorest people so people who have the lowest wages were much more likely to lose their jobs than those who make the most money and this relationship is um very striking here the same holds when you compare people with just elementary education to those who have secondary education to those who have university degrees right people with more education were less hit by the pandemic in terms of jobs now these were the blue bars now if you look now at the white dots these are figures from western european countries and two of two observations emerge first the extent of job losses was lower and that's because western european countries were able to question this shock with greater government spending and second the relationship between education and the likelihood of losing the job was much less pronounced than in emerging markets so why am i showing you this because the fact that the pandemic hit particularly hard people who are unable to bear risk is going to increase demand for the state to step in and ensure people going forward to provide insurance against various risks including risks of of job losses so there will be pressure on the state to renegotiate the social contract and become a more important player as a provider of insurance you know over the last decade we saw emergence of gig economy of temporary contracts of zero hour contracts so we saw firms pushing the risks onto workers and very often they were pushing risks onto workers with low earnings and i expect that now there will be much more pressure to do something about it for governments to step in and either provide insurance or force employers to take on more of this risk burden now more on top of the trends that were brought about by the covet pandemic we have already seen over the last two decades growing public support for the increased role of this state in the economy so here you see the results of the world values survey this is a survey conducted in more than 100 countries all over the world and the survey asks people do you think the state should be playing a greater role in firms and industry and the economy and the dashed line shows the replies from about 20 years ago and back then in advanced countries less than 30 percent of people were supporting increasing role of the state in the economy two decades later this figure is about a third and what's quite interesting is that in advanced economies um there is no much difference between young people and old people the line is quite flat now when we look at post-communist countries it's quite striking that the support for growing role of the state in the economy is much stronger it's about 40 5 on average moreover you see that this support has increased over the last two decades and it has increased within cohorts so people born in the same year 20 years later are more have a more positive view of the state now than they did two decades ago and what you also see is that older people uh particularly people who were adult when the berlin wall fell at that time these people are have a much more positive view of the state playing a role in industry in firms and in economy in other emerging markets the support for the state in the economy is about 50 percent is even larger than in post-communist countries and what is quite striking is that globally people have people are much more supportive of democracy than of private ownership so if you look at this graph you see that in pretty much every country except for lebanon more than three quarters of people say it is important to live in a democracy but now if you look at the horizontal axis where you look at the percentage of people who support private ownership expansion of private rather than public ownership the numbers are much lower three-quarters of population support private ownership only in a handful of countries in japan us denmark and switzerland in post-communist countries which are depicted here with red dots actually you see quite a range of views in western balkans support for in russia support for private ownership is way below 50 percent why in slovenia bulgaria and croatia support is way above 50 but there are quite a few countries hovering around 50 percent look at poland so the pandemic can potentially shift the majority view in the country if it decreases support for private ownership now let's focus for a bit on state banks as i have already mentioned to you state banks have been on the rise and if you look at the share of state banks in total banking assets you see that in many countries it's above 50 percent or it's and these are the countries shaded in dark orange or in red and if you look in at europe you see that belarus has more than 80 percent of banking assets in state hands russia has more than half but also countries such as poland and ukraine or turkey have very large share of banking assets in that in the state hands and this is a development which became much more pronounced during the last two decades so on this graph we depict an index showing the volume of banking assets in private banks and in state banks and we normalize this index 200 in 2004 and you see that the two lines move in parallel until the time of the financial crisis after the financial crisis the size of banking assets in private banks remained stable but the size of state bank assets takes off enormously for quite a few years uh and only after that remains stable so over the last two decades we saw a huge increase in the state becoming an owner of banking assets in post-communist countries this is true in belarus russia and ukraine in the region it's in it's also true in china and india where the state holds more than half of banking assets and if i showed you this chart for all countries in the world this divergence would also be visible there now this matters because state banks are different state banks have a bright side they can take greater risks because they can always fall back on this state for support and if you look at credit growth during the global financial crisis that's the left-hand side graph you see here that domestic private banks were withdrawing credit in 2008 2009 they were retreating from the market um foreign banks were also not very active they if anything they were also um withdrawing credit so during the time of the global financial crisis stayed in state-owned banks step in they were extending credit and the fact that they were still giving loans help countries helped firms cushion the shock so this greater risk appetite of state-owned banks is a good thing also it's a good thing when it comes to supporting young firms young firms tend to be most innovative but these are also the firms that find it very difficult to obtain credit because they have no credit history they often have no collateral to put up so their access to financing is much more difficult so in the right hand side graph we looked at loan level data from turkey and we look at the share of lending that required collateral by firm age and to p two observations emerge first private banks are much more likely to ask for collateral than state banks and second state banks are have a much greater risk appetite they are much more willing to give loans to young firms firms without credit history firms without collateral so in this way state banks do a good thing they promote innovation in young firms but there is also a dark side to activities of state banks and the dark side is about misusing state banks for political purposes to build support among electorate before elections now how can you how can you see this in the data well what you can do is you can compare lending by state banks to the lending by commercial banks in particular regions and the idea here is that private banks lend based on commercial motivation so if there is a big difference between activities of state banks and private banks that indicate that there is lending driven by something other than commercial motivation that there is some political motivation in statement lengthy so here we look at turkey and we looked at the time around elections local elections and particularly in places where elections were closely contested and we looked at localities where the mayor were local authorities were aligned with the ruling party with the party ruling the central government and the pattern is quite striking in the year before the election state banks were pumping credit to localities where the mayor was aligned with the central government so here the difference between lending by state banks and private banks was 20 percentage points that was quite a large difference and the same difference was observed in the year of elections and right after elections this difference disappeared but now look what happened in provinces where which were in the hands of the opposition party that's where the state banks were withdrawing credit and the i this these patterns show clearly that state banks want to pump credit to localities um which are aligned with the ruling party and hence they are used for political purposes now turkey is not the only place where this happens we see a lot of evidence of such behavior in brazil in india in pakistan but also in german landesbankin german landis bank and systematically adjusts their lending in response to local election cycles and that now this matters and this matters because that means that state banks are directing lending not to firms and places where those funds would be put to the most productive use but rather they are directing lending to places where political support is needed and that results in lower growth in long term as well as high credit defaults after the election because the state banks are misallocating credit so finally let me focus on what all of these observations mean for the future if you remember among post-communist countries support for private ownership was greater among older people and now central europe is undergoing quite a dramatic demographic transition is aging very fast so if anything this support for private for the support for state ownership is going to become even stronger and it's also going to become stronger because as in every country as in every country in the world in eastern europe and central europe it is the older voters who are much more likely to vote than younger people so i would expect that older electorate is going to support government proposals to expand state ownership in firms and in industry moreover if history is in a guide people are going to have more positive views of state ownership as a result of the pandemic now researchers um look at experiences of people during their youth psychologists tell us that what we experienced between ages of 18 and 25 stays with us for the rest of our lives that the views we form then stay with us for the rest of our lives so what researchers have looked at is how people's experiences of um economic downturns of major recessions in their youth have shaped their political perceptions later on and what they've documented is that people who experience recessions and pandemics in their youth are much more suspicious of free market they are much more supportive of redistribution of public ownership and in the graph here you see the results of an exercise we have done at the ebrd and what we found in the data is people who experienced an epidemic in their youth are four percentage points more likely to support public ownership and this four percentage point figure holds for democracies and it's even larger if you consider just high-income countries now moreover at the moment we don't know the true state of the economy many economies are still on life support as governments are still supporting firms and workers we will find out the true state of the economy when this support is withdrawn and then the picture may not be very pretty there may be many firms that will be close to bankruptcies and governments may be tempted to rescue these firms by nationalizing them just like many governments have injected funds into airlines in order to save those airlines now in rich countries this is going to lead to debates about whether the taxpayer is going to get a fair return on this public investment but in emerging markets the issues will be much more riskier in emerging markets this expansion of state ownership through nationalization will lead to debate about whether these assets will ever be privatized again and whether this expansion of state ownership will tilt the playing field against the private sector why am i worried about state ownership undermining the private sector i'm worried about because the framework that governs state ownership in emerging markets is very weak in our last report we analyzed regulations that govern state-owned enterprises and we compared the situation on the ground in post-communist countries to what oecd lists as the best practice and the picture is not pretty first of all soes are rule makers they have power by design in half of post post-communist countries there is no separation between regulation in the sector and ownership of state dome enterprises and in many countries state-owned enterprises themselves have regulatory power moreover moreover state-owned enterprises often enjoy preferential treatment they have access to credit at subsidized rates they have access to concessionary tax rates or to inputs at below market prices and less than a fifth of post-communist countries has laws that present state support giving unfair advantage to state on enterprises so this regulatory framework itself already shows that state on enterprises are in a stronger position than private firms and that there is a real danger that private sector will be undermined by greater presence of state-owned enterprises there is also a danger that poor governance will help will help entrench political interests governments can use state-owned enterprises to direct advertising revenue to friendly media outlets governments can use state-owned enterprises to purchase media outlets they can use state enterprises to give jobs to political allies and supporters and if you look at the regulatory framework i'm not even talking about implementation you see that in less than 20 of countries appointments to boards of state-owned enterprises are based on merit in other words it's very easy to give jobs to friends and political allies moreover these independent boards are often powerless in most countries they have no power to approve budgets they have no power to appoint or dismiss ceo so to close i believe that state-owned enterprises will emerge as winners from the pandemic simply because they can always count on state support i also think that the ranks of state-owned enterprises will swell as governments rush to nationalize private firms to save them from bankruptcies so this enhanced role of the state in the economy will happen with public support because we have seen that public support for state intervention in the economy has grown over the last two decades and is going to grow as a result of covet even further and there is a danger that in countries with weak institutions with poor governance this greater role of the state will undermine the private sector and in this way will lead to slower growth in the long term and this is a real danger for post-communist countries which have weak governance in the right-hand side graph we depicted governance quality of institution against income and you see that the blue dots countries where ebrd operates tend to be below the line they have weaker institutions than other economies with similar level of income thank you very much for your attention if you are interested in this topic please look at our transition report entitled the state strikes back thank you thank you very much professor you have a cheque let me start making a few comments myself and perhaps i have a question always with reference to your presentation so you pointed out quite forcefully that the state may influence the decisions by businesses and other in the credit system in the banking system not just with an eye to elections but also in a way strengthening the ruling government in italy we are looking at we are witnessing a concentration in the banking system in 2006 and 2008 uh concentration was experienced and now we're experiencing a similar situation and we do find ourselves in some of the situations that you highlighted as a result of your research indeed we have a serious problem with our demography indeed the dependency rate is extremely high in italy and we've been badly affected compared to other western countries or by the recession that accompanied the pandemics so was asking whether you think that there might be a possibility that the concentration that we are experiencing in the banking system and that we're going to further experience in the coming months may be guided by the same factor that you've been outlining and then i'll have another couple of questions if i may i knew that so you deal with transition economy right and the european union the european commission is guiding the union towards an economic program with a green deal the green deal will be aiming at environmental transition so i'd like to know what you think about the role being played by states in the major framework of this european program and partially think the role for the state-owned department enterprises and state and private enterprises can play i'd like to refer to mariana matsukata another economist i know that you recently commented on her statement with reference to the possibility to supplement in the market economy both the public and the private spheres so me can i may i ask you to add your considerations on what you just said with the reference to meducato's statements thank you and actually so please write down your questions and we shall give you the microphone afterwards okay so we'll raise your questions to come from the public uh afterwards thank you over to you professor yanicek javacik thank you very much so let me start with the question about the green deal i think it's absolutely crucial to send very clear messages about green commitments because the pandemic is not over yet there is a lot of uncertainty and uncertainty is detrimental to investment so if we compound this uncertainty further by not having clear messages about what will happen in green transition that's going um to be to be bad for the recovery and and i worry that even within the european union there will be two groups of countries there will be countries that will enthusiastically embrace the green transition where governments will send clear messages and private sector will react through investment through innovation through adjustment and there will be countries where messaging will be less clear and those countries will fall behind so so that's my first point so the role of government is crucial here and it's crucial twofold um in or we are not going to achieve green transition unless we carry the public opinion with us so here what's crucial is government commitment to taking care of people who will be affected by the transition and if you look at the experience of the last 20 years with technological progress with globalization we don't have a very good record of taking care of losers right we always assumed that those who lose their jobs will be able to find new jobs and the problem is that shocks tend to be geographically concentrated that was true with globalization and this is going to be true with green transition because there are regions which are dependent on mining on heavy industry so we need to better the this time and here the european initiative of just transition is is very important now how does this play how does this connect to my presentation well we see that stated enterprises are often the owners of stranded assets of coal of other fossil fuels so this is an opportunity for governments who directly control state on enterprises to speed up this transition to guide this transition and because workers of state of enterprises work for the state government can credibly help them through this process can shelter them from adverse effects and the role of state-owned enterprises is going to only increase over time in fossil fuels because private sector will increasingly want to move away from from that now regarding marianas masukato view of the benefits from so-called mission led development she often gives the example of u.s agency darpa which was supporting research that helped put astronauts on the moon and as a result of that massive effort a lot of innovation was born a lot of innovation that was not even directly that ended up not being directly related to space exploration and this logic i think applies to green transition now governments can embrace greece transition as this mission for which they need to fund innovation a lot of this innovation can be subcontracted to private sector and it's likely to produce uh inventions that will be of broader relevance not just limited to to green transition and finally on the banking sector as i said there are both good things and bad things about state-owned banks state ownership of banks means that the government can push banks to embrace climate-related financial disclosure actually in many in some countries state owned entities were leading the way when it comes to this disclosure so there is a lot of good that can be done in this way but of course what matters is governance the rules um that prevent politicians from using banks for improper purposes okay thank you thank you so much professor yavarchik uh if there's some question from the public attendees for professor javercik i would like to invite you to go to the opposite side of the the place and talk directly to the to the microphone we will gather three two questions for time and then professor javarcik will answer you back please let me ask another question myself i'll go on with my own question to you i would like to ask you there's a question of a tax system that we are trying to fix in italy related to the dimension of the public debt and the new stock of public debt debt that we will assume under the recovery fund the system um do you studied the uh defects of the tax system country from country uh relating to the effects of uh develop of the developing of the economy uh and the difference between state-owned enterprises uh tax system and uh private uh companies in relation to the development and the taxes the taxation um thank you for this question if if i understand you would like to know if there is a difference between um taxation of state-owned enterprises and and private firms so what we see in many countries yes okay what do we see in many countries which are less advanced in transition is that state-owned enterprises are given the mandate of providing subsidized services to the public meaning they provide services below the cost but this this effort these subsidies are not explicitly budgeted for which means that the state-owned enterprises are running losses they have to be bailed out by the government and then again they continue running losses so in many countries the issue is not even how they are taxed the issue is um do they require state bailouts to even continue operating and the solution to this this to this cycle is to explicitly budget for the subsidized services so do accounting which states how much they are allowed to provide in terms of subsidy so that state-owned enterprises have an incentive to actually become more efficient right because at the moment in many countries they have absolutely no incentive because they know they will be saved by the state so that's one part of the answer the other part of the answer is that often if they make profits they are subject to lower taxes which gives them advantage over private firms and and this is the part that i worry about that because they have an advantage over private sector they will emerge as winners from the pandemic they will do better now another group of enterprises that will do better during the pandemic is multinational firms which benefit from from their ability to move revenue across international borders to lower tax jurisdictions and right now as governments have accumulated a lot of debt we already see a lot of interest in closing the loopholes the taxation loopholes so that governments can get more revenue from multinational firms now a proposal for doing so was developed in 2019 by oecd back then it did not seem politically feasible but now the realities have changed and i think governments will be forced going forward uh to be to cooperate internationally to tax multinational firms and i think they will also be forced to look to take a careful look at state-owned enterprises because they're in some cases they may find themselves unable to fund those loss-making enterprises thank you thank you so much i i would like to ask you another question if there is in your studies in your opinion any direct link between the level of the public debt and the level of the flows of foreign direct investments country per country so the the the higher the public debt the lower the foreign direct investments or otherwise thanks well we live in extraordinary times we faced a shock that happens once every 50 years or once every hundred years so it's quite reasonable to increase the debt level uh with the assumption that we will be paying of these debts over next 50 years and because pretty much every country in the world increased the debt level i wouldn't expect huge detrimental effects of this increases in debt on flows of foreign direct investment there is one exception and that's low-income countries which may find themselves in a situation of debt crisis unless the international community steps in now of course if you believe projections that we see from the un they expect international flows of fdi to be very low in the next couple years to be below the levels we observed after the global financial crisis and in countries where we operate as the ebrd we already saw much lower activity of foreign investors and this is bad for growth because of course fdi flows are not just about capital these are flows of knowledge across international borders and also because um fdi is maybe good for environment now people tend to think about multinationals moving their activities to countries with less stringent environmental roles but if you look at the data there is actually the next to no evidence of this happening on the other hand what you see is if you look at foreign acquisitions of firms in developing countries you see that these acquired firms become more energy efficient and that's because foreign investors often bring newer technologies they increase the scale and in this way can improve energy efficiency of those firms so foreign investment can be an ally in our pursuit of low carbon transition as there are no questions for your presentation or your kindness in answering our questions i hope that there will be uh more occasions to hear you about these issues and thank you for being here in italy in the festival the economy at trento with us see you again nice to meet you thank you very much thank you very much for your attention bye-bye thank you very much to the festivals of the economics for providing me the opportunity to spend some time with you and professor yavacek today and see you all soon thank you you