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Eastern Europe resists the global slowdown
Poor use of region's energy resources hinders growth and hurts the environment
Growth in central and eastern Europe (CEE) and the Commonwealth of Independent States (CIS), weakened only slightly in 2001, as most countries in the region proved more resilient to the global economic slowdown than other emerging markets says the latest Transition Report, published today by the European Bank for Reconstruction and Development. It says that after 5.5 per cent growth in 2000 the region is set to expand by 4.3 per cent this year.
The resilience arises from the ongoing reform efforts of countries to meet the conditions for EU accession, as well as from Russia's recovery, spurred by high-energy prices and a competitive currency. However the Report warns that the region is not immune to the risks of a protracted global economic slowdown and will have to confront weakening demand for its exports, lower prices of oil and other export commodities and their continued volatility.
Sustained progress in reform remains vital even in the relatively advanced countries in central Europe. These efforts help countries cope with uncertainty and change in the global economy. In a special section, the Report acknowledges that energy wealth has been a boon in recent years to Russia and the oil and gas-rich countries in the Caspian region. However, it argues that too little has been done to turn this wealth into a source of long-term growth. The energy sector - and avoiding the "energy curse" it sometimes confers on countries - remains a critical challenge for the future.
Willem Buiter, the EBRD's Chief Economist, said emerging Europe remains one of the few bright spots in an otherwise dim global economic landscape. He said growth is likely to continue in 2002, albeit at a slower pace - about 3 per cent - and that an extended world-wide slump would further weaken the outlook. Mr Buiter emphasised that the relative resilience of the region rests in part with the strength of its reforms, but that greater fiscal consolidation and an enhanced domestic saving effort are required going forward.
The Report's special section on the energy sector concludes that the region's potential as an energy producer and exporter is far from fully developed and that serious impediments to investment in the sector remain major obstacle. Moreover, the countries of the region can do much more to promote the efficient use of energy.
Russia and the Caspian region, argues the Report, need to strengthen corporate governance and create the markets and regulatory institutions necessary for promoting competition in the transportation of gas and oil. In addition, poorly targeted consumer subsidies and the frequent granting of privileges to favoured producers have wasted potential revenues from energy resources. These should be eliminated and revenues used instead to build the foundations for sustained economic development, including the development of skills and investment in plant and equipment.
As a whole, the region remains highly inefficient in its use of energy, using between four (central Europe and the Baltics) and 13 (CIS) times as much energy relative to GDP as in western Europe. Part of the solution, says the Report, lies in raising energy prices for households and industrial consumers, while building an institutional framework that supports private investment in the power sector and subsidises those unable to afford higher energy prices.
Summary of the general progress in transition
- The prospect of EU accession has had a significant influence on the extent of reforms in central Europe, the Baltics and southeastern Europe. To sustain this momentum, the credibility of the accession process must be maintained through the effective reform of EU institutions and measures to reduce and help meet the costs of accession in the candidate countries.
- Benefiting from favourable political and economic developments in southeastern Europe, Bosnia and Herzegovina, the Federal Republic of Yugoslavia and FYR Macedonia have all made significant advances in reform over the past year. Yugoslavia has in fact witnessed the most dramatic progress in structural reform in the past year among all EBRD countries of operation.
- The implementation of reforms in the Commonwealth of Independent States has gained noticeable momentum.
- In Russia, controlling shareholders and managers are beginning to act in ways that increase share values rather than to strip corporate assets and income for private gain.
- The priority for the CIS is to promote greater international trade and investment through accession to the World Trade Organisation, particularly by Russia, but also Ukraine, Kazakhstan and Uzbekistan. The adoption of more liberal and open trade regimes in these countries would generate significant benefits for the smaller CIS economies, some of which have already acceded to the WTO.
- As a longer-term objective, the European Union and the United States could consider the prospect of entering into free trade agreements with Russia to help in bolstering domestic support within these countries for greater economic openness.
- Legal reform has also accelerated across the region in 2001 with many countries implementing new commercial laws.
- Public participation in environmental decision-making is evolving across the region through the adoption of Environmental Impact Assessment laws and procedures. It is important to ensure that these laws and procedures are effectively implemented.
Macroeconomic performance and prospects by region
- Central Europe and the Baltics are particularly exposed to a slowdown in export trade with the European Union and a reduced supply of foreign direct investment and other risk capital.
- While exports remained resilient until April, growth has increasingly relied on buoyant domestic demand. As net exports fall, the baseline forecast is for growth in the region to decline moderately to below 3 per cent both this year and next.
- There will be a need to support growth without exacerbating already high fiscal and external deficits. A combination of fiscal tightening and more flexible monetary policy offers the best chance.
- These actions will require particular political determination as elections are approaching in most of the major economies in the region.
- Growth in southeastern Europe is likely to remain strong in 2001, at 4 per cent, largely due to recovery in Romania and Yugoslavia. However the prospects for 2002 remain more uncertain due to the global economic slowdown.
- The region should focus efforts on encouraging foreign investment inflows through improvements in the investment climate, continued privatisation and perhaps through well-targeted investment incentives, such as tax incentives and support relating to the infrastructure.
- The Commonwealth of Independent States will record high but declining growth in 2001-02, largely as a result of reductions in the pace of expansion in Russia, Ukraine and Kazakhstan. Growth for the region in 2001 is expected to be 5.8 per cent.
- Russian growth - expected to be 5.5 per cent in 2001 - is likely to slow down over the next months, with negative repercussions for trading partners in the region.
- As the outlook for oil prices remains uncertain, the forecast deceleration in Russian growth might be more pronounced than currently forecast, with knock-on effects for the remainder of the CIS.
- Russia can help mitigate the impact of oil price volatility through careful fiscal and financial management - for example earmarking funds earned when commodity prices are high for more difficult times when they are low. Some progress has been made in this regard.
- Countries that are exposed to the possible security threats from conflict in Afghanistan are likely to require assistance from Western governments and international financial institutions. This assistance will be most effective if coupled with a renewed emphasis on structural reforms.
Press copies of the Transition Report 2001 are available from the EBRD Communications Department (Loretta Martikian):
Tel: +44 20 7338 7805
Fax: +44 20 7338 6754
The Transition Report 2001 may be purchased for £30
Available from:
EBRD Publications Desk
Tel: +44 20 7338 7553
Fax: +44 20 7338 6102
E-mail: pubsdesk@ebrd.com
The Transition Report is also available through booksellers.
The Transition Report 2001 provides a detailed assessment of progress in transition, combining both region-wide and country-by-country analysis of the reform process. It also provides an account of macroeconomic performance and looks at the region's prospects. The series of Transition Reports began in 1994 and provide a valuable record of the historic political and economic reforms in CEE and the CIS and their impact on economic performance.
Also available in French, German and Russian
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