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Business conditions in eastern Europe improve
EBRD region outperforms many other world regions with 5.3 per cent growth
There are fewer business constraints on companies across central and eastern
Europe and the former Soviet bloc than at any time since the start of the
transition process 15 years ago, says the EBRD in its latest Transition
Report. Economic performance in the region is also strong, with average growth
of 5.3 per cent.
The findings, highlighted in the report, are from the latest EBRD/World Bank
Business Environment and Enterprise Performance Survey (BEEPS) of over 9,500
firms, measuring the extent to which firms believe obstacles such as poor
regulation, a weak judiciary, corruption or crime impede their growth.
The region as a whole showed improvements in regulation, taxation and crime,
and to a lesser extent the judiciary and corruption. But arbitrary red tape,
weak institutions and poor access to finance are still considered to be major
obstacles to businesses in transition countries. Overall, the survey shows the
business environment in the region has not yet reached the standard of mature
market economies. One notable exception is labour constraints such as skill
shortages and labour market regulation, which are considered more of an
obstacle in mature market economies than in most transition countries.
These business obstacles hit hardest those firms that can bring the most
benefits to the economy, and those most likely to generate growth and new
jobs, such as private firms, exporting companies, those that re-invest
profits, and micro and small businesses. The business environment is also more
difficult for firms located outside capital cities – sharing the benefits of
transition more widely remains a challenge in all transition countries.
While the business environment has a significant impact on firm performance,
it is not the only factor affecting the growth and productivity of
enterprises, says the report. Competition in the domestic or international
markets, for example, can prompt firms to improve their efficiency. Throughout
the region, foreign-owned firms are more competitive and productive than
domestic firms, suggesting that the promotion of foreign investment can help
to boost growth.
Economic growth across the transition countries slowed to 5.3 per cent in 2005
from a record 6.6 per cent in 2004, but nonetheless remains strong,
outperforming many world regions including the eurozone. By sub-region,
highest growth is expected in the Commonwealth of Independent States (CIS) at
6.2 per cent, driven mainly by high commodity prices. However, the report
warns that these countries must control rising inflation and resist pressure
to spend fiscal surpluses generated by high oil revenues if competitiveness in
the non-oil sectors of their economies is to be maintained and improved. In
terms of reform, progress in the CIS was confined mainly to a few countries in
the Caucasus and the western CIS, such as Georgia and Moldova, where political
turnover and/or changes in policy direction added new momentum to democracy
and market reform. Elsewhere, the pace of reform remained slow. In Russia,
progress in financial sector reform was balanced against an increase in state
ownership and control in the oil and gas sector – resulting in an EBRD
transition downgrade in privatisation, the only one issued in 2005.
Growth in south-eastern Europe (SEE) is set to reach 4.8 per cent in 2005,
supported by political stability and the prospect of EU accession for
Bulgaria, Romania and Croatia. The region witnessed significant overall
improvements in the business environment, according to the BEEPS. There was
however a slowdown in the pace of reform in much of the region, including a
pre-accession pause in reform by the EU candidate countries. Serbia and
Montenegro is one exception, which underwent significant reforms, including in
large scale privatisation, trade liberalisation and institutional development.
The Western Balkan countries, meanwhile, must move ahead with comprehensive
reform agendas to promote investment, private entrepreneurship and trade,
especially as donor funding in this sub-region begins to recede.
In Central Europe and the Baltic States (CEB), growth is predicted to reach
around 4.2 per cent. Eighteen months after joining the European Union these
countries continue to benefit from the accession process, but still face
significant challenges in adopting the Euro. Strong exports have boosted
growth, and businesses have responded favourably to earlier reforms and
improvements in the business environment.
The BEEPS results show that CEB is well ahead of SEE and the CIS in this
respect. Over the last three years there are clear signs of improvement, with
firms indicating lower costs associated with corruption and excessive
regulation. However, in some countries, such as the Czech Republic and
Hungary, obstacles to business actually increased from 2002 when a similar
survey was conducted.
One sign of the growing confidence in the transition region is the rapid
expansion of bank credit to the private sector, including households. While
this is a sign of growing confidence, the report warns that rapid credit
growth – if coupled with weaknesses in individual banks or financial systems –
may increase macroeconomic vulnerabilities. The report highlights a need for
careful credit assessment procedures, effective banking supervision and fiscal
restraint to make room for private borrowing.
Steven Fries, Acting Chief Economist at the EBRD, said countries from the EBRD
region continue to perform strongly on the back of a better business climate
and greater competitiveness. Their growth is also being driven by a resilient
global economy. But big challenges remain for each part of the region and
individual countries, especially in further tackling corruption and
bureaucracy, building their legal and financial sectors, safe-guarding
macroeconomic stability and ensuring that the benefits of growth are widely
shared, said Mr Fries. Only by addressing these challenges will the countries
of this region step up their progress in reaching the living standards of the
more mature market economies, he added.
Note to editors: Hard and electronic press copies of the Report are available
from the EBRD Communications Department.
Contact:
Loretta Martikian
Tel: +44 (0) 20 7338 7805;
Fax: +44 (0) 20 7338 6754 ; E-mail: MartikiL@ebrd.com
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