For the third consecutive year, the economies of central and eastern Europe and the Commonwealth of Independent States will outpace the world economy in 2003, growing at 4.7%, says the latest transition report from the European Bank for Reconstruction & Development (EBRD).
Output in the region is forecast to accelerate to 4.7% this year from 3.8% in 2002. Growth is expected to be highest in the CIS, at 6.2%, compared with 3.3% in Central Europe and the Baltic States (CEB) and 3.9% in Southeast Europe (SEE). In Russia, the region’s largest economy, growth is expected to rise to 6.2% from 4.3% last year.
Willem Buiter, chief economist at the EBRD, cautions, however, that despite the impressive macroeconomic figures, potential obstacles loom. In the oil-rich CIS countries, growth has been fuelled not only by a welcome rise in investment but also by high natural resource prices. These may not be sustainable, and therefore, these countries need to diversify their economies. Growth in CEB has stemmed partly from brisk government spending, which has contributed to growing budget deficits. Many EU accession countries now face a painful process of fiscal tightening if they want to maintain economic stability and have a reasonable chance of early eurozone entry, Buiter says. SEE countries must continue the process of political stabilisation and regional integration, which has supported growth in recent years.
An important element of the region’s economic resilience has been continued progress on reforms. Some 14 of the 27 countries of the region have scored higher marks than last year in the transition indicators the EBRD uses to assess reform progress.
The most significant advancements were made by reform-minded countries in SEE and the CIS, such as Bosnia and Herzegovina, Russia and Serbia and Montenegro. Elsewhere, however, reforms have virtually stalled, raising the prospect that countries such as Belarus, Uzbekistan and Turkmenistan may be left behind as the wider region advances market reform and increasingly integrates into the world economy. Development in these countries is not only held back by a lack of reform but also by their distance from important markets. The acceleration of reforms, as well as deeper integration and regional cooperation, is central to the growth prospects of all those countries that will not accede to the EU in 2004.
In CEB the prospect of EU membership in May 2004 is a driving force for reform, but the report argues that accession will not be the end of the process of transition to full market economies. Further reforms will be needed, especially to improve public administration, advance restructuring in strategic sectors like heavy industry and agriculture, and strengthen the financial sector.
The divergent patterns of economic reform across the region are mirrored by political developments. The most advanced countries have made strong progress towards liberal, constitutional democracy, while the countries that lag behind are increasingly characterised by weaker checks on the power of the state, and in some cases, by political repression.
Integration and regional cooperation
The subject of this year’s special section of the report is integration and regional cooperation. The integration of trade and capital into the world economy has progressed well but is not yet complete, it finds. Important impediments to trade remain and foreign investment is highly concentrated in the EU accession countries and extractive industries. Furthermore, labour markets remain poorly integrated across the region.
There has been progress in opening economies and redirecting trade away from the artificial trade links of the Soviet-era Council of Mutual Economic Assistance. But the countries still trade far less than economies of their size, location and characteristics would be expected to. In the CIS, and to a lesser extent SEE, poor trade policies, weak institutions and high transit costs (poor transport infrastructure, cumbersome customs procedures) can explain much of this gap.
The report argues that the institutional and structural reforms needed for better trade integration could be accelerated by a parallel opening of global markets. Opportunities to trade with the West can help build constituencies for reform, Buiter says, and in this way increased openness can be a catalyst for sector reform.
The report also shows that foreign direct investment has a positive impact on enterprise performance. Firms that have benefited from foreign direct investment report significantly higher sales per worker than other enterprises. FDI can also benefit non-recipient firms by raising the performance of suppliers and competitors.
Increased regional cooperation could be one way to reduce transit costs – and boost regional trade – as it would streamline customs procedures. The need for closer cooperation with their neighbours is particularly strong for the landlocked countries of Central Asia, and for the countries of SEE where many regional links were destroyed over years of civil war. The report cautions, however, that regional cooperation needs to be designed to increase trade volumes, rather than simply divert trade flows.