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Eastern Europe regains its stride, says the EBRD’s Transition Report, but more must be done to create new jobs
Central and eastern Europe (CEE) and the Commonwealth of Independent States (CIS) are set to achieve growth this year of almost 5 per cent – the highest rate since the break-up of the Soviet Union – according to the Transition Report 2000 published today by the European Bank for Reconstruction and Development (EBRD). Having clearly shrugged off the effects of the Russian crisis, the region is now also seeing the greatest reform progress since 1997. Moreover, with the election of a new president in Yugoslavia, one of the last vestiges of communist rule in eastern Europe has been overcome.
However, the Transition Report warns that while growth has now spread to almost all countries of CEE and the CIS, the benefits have been unevenly distributed. With a special focus on employment and skills, the Report shows that the people of the region have demonstrated tremendous resilience and ingenuity in the face of dramatic change. But while some have seized on the new economic opportunities and set up new businesses, many others have had to take on more than one job and work in the shadow economy to make ends meet. In the CIS, skilled employees often find themselves locked into dead-end jobs in declining industries.
"It is clear that the two most abundant assets in eastern Europe – the people and their skills – are under-employed," said Willem Buiter, the EBRD’s Chief Economist. "This considerable potential can be unlocked through significant improvements in the business climate, particularly those that help start-ups. In many countries, there is also an urgent need to overhaul social safety nets to reduce resistance to painful but inevitable industrial restructuring."
While the Transition Report provides a positive assessment of the economic outlook for the region – reflecting renewed reform efforts, closer European integration and significant unused production capacity in the CIS – it highlights the lack of restructuring and technological innovation in the CIS as a brake on long-term growth. The impact on people can already be seen in a widening skills gap between the countries of CEE and the CIS. Moreover, the marked decline in the quality of education in some CIS countries raises serious concern about the future economic opportunities for younger generations.
The Report also provides a special assessment of the stabilisation and reform challenges in Yugoslavia. While the economy is in crisis, having been subjected to a decade of misrule, conflict and international isolation, the prospects for recovery are favourable. Yugoslavia occupies a key strategic position in south-eastern Europe and has a potentially large market that is of interest to foreign investors. It also has a large and once vibrant SME sector.
The Report urges the introduction in Yugoslavia of a comprehensive economic reform programme that significantly improves the climate for both domestic and foreign investors. Mr Buiter said: "The key to prosperity in Yugoslavia lies with its private entrepreneurs. Overcoming entrenched industrial and power structures will be painful, however. The international community is aware of the need to provide assistance."
The Transition Report 2000 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 prospects and of private capital inflows. The series of Transition Reports beginning in 1994 provide a valuable journal of record of the historic political and economic reforms in CEE and the CIS and their impact on economic performance.
Key developments in transition
In 2000 there was more progress in transition in the countries of CEE and the CIS than in any year since 1997, as measured by the EBRD’s transition indicators. The greatest gains were made in less advanced countries emerging from economic or political crises, such as Bulgaria, FYR Macedonia, Georgia and Tajikistan. The EU accession candidates have also made significant advances.
Institutional reform continues to lag behind progress in liberalisation and privatisation particularly in the less advanced countries. Significant improvements in the legislative framework have often not been matched by measures to improve the rule of law. "Capture" of state institutions by private interests, weaknesses in public finances and arbitrary bureaucratic behaviour still pose significant obstacles to improved institutional performance and private investment.
With the election of a new president in Yugoslavia, one of the last vestiges of communist rule in eastern Europe looks to have been overcome. Over the past 10 years of transition, democratic and accountable government has played a key role in advancing reforms.
Highlights of macroeconomic performance and capital flows
Growth is expected to rise to 4.8 per cent in 2000, up from 2.5 per cent in 1999. Strong growth of 6.5 per cent in Russia is driving rapid recovery in the CIS, whereas sustained high growth in the accession countries has been bolstered by a recovery in export demand from the EU. Inflows of foreign direct investment are set to reach US$ 27 billion in 2000, the highest level since the start of transition.
Macroeconomic stability has been regained throughout most of the region. However, substantial capital inflows into oil-exporting countries and higher oil prices are putting upward pressure on inflation in much of the region.
The main macroeconomic policy challenges in CEE are to bolster private savings and to reduce the size of government in the face of persistent current account deficits and looming expenditure requirements, including those for EU accession.
In the CIS, establishing an adequate and stable revenue base to finance basic public services will be key to maintaining stability, as several countries have exhausted the scope for further foreign financing due to high debt levels and mounting debt service.
Employment, skills and transition
While employment fell less rapidly than output during the initial years of transition, it has also been slower to recover. In CEE, several years of strong growth are now paying off with falling unemployment and growing private sector job opportunities. However, in the CIS, many employees remain locked in dead-end jobs, while new job opportunities remain limited.
People have responded differently to the opportunities and constraints offered by labour markets. While some people, mostly in the advanced countries, have successfully started new businesses, many others have been forced by the lack of formal job opportunities into multiple job holdings and the shadow economy, at high cost to their incomes.
Foreign and domestic investors report a significant skills gap between employees in transition economies and in industrialised market countries. The skills gap is larger in the CIS than in CEE. This calls into question the common assumption of high-quality skills in transition economies. There is urgent need to improve the incentives for skills upgrading and training if the transition economies are not to fall further behind, particularly with rapid technological change in the global economy.
At the same time, barriers to business start-ups – particularly in the CIS countries – need to be reduced. A weak business environment is stifling the creation of new jobs in many countries. Moreover, a social safety net that encourages individual risk taking and reduces resistance of employees to much-needed industrial restructuring is essential. Without such support, there will be little redeployment of productive assets – both human and physical – to better uses.
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