Transition report 2003 launch

Excerpts of the transcript

The Transition Report 2003 was launched on Tuesday 18 November 2003 by the EBRD Chief Economist Prof Willem Buiter.  Other members on the panel included Julian Exeter, EBRD Senior Economist; Alan Rousso, EBRD Senior Political Advisor and David Hexter, EBRD Deputy Vice President, Banking Department.

"The main lesson contained in the macro-economic part of the story is that our region, for the third year in a row, has done rather better than the global average, and in fact rather better than most significant parts of the known universe, with the exception of emerging Asia.  We have been outpaced as a region by China and India, but we have done better than most other parts of the world.  The whole region grew at 4.7% on average, which is a respectable figure."

Political analysis

"On the political analysis and the political relationships that suggest themselves from the experience of our countries of operations, the relationship between what we call political liberalism and transition is both an old and a very difficult issue, and a very important one for an institution like ours, which has an explicit political clause in its mandate: we are to support the transition process in countries committed to and making progress towards multi-party democracy and an open, competitive system.

So progress in reform in politically less liberal countries is certainly possible, but there may well be a reform threshold where it may be difficult for countries to get into the serious institution building phase for economic efficiency without matching improvements in political freedom.   Further progress will most likely require the political will to expand media freedom, for instance.  The best instrument against corruption is free media, so that they can expose corruption.  Free media attack the roots of mis-governance.  Free media can expose the legal system when it is partial and under the undue influence of the executive.  In that sense they are an important element of a well-functioning economy.  So civil society, of which the media are a part, cannot lag too far behind successful, sustained institutional economic reform."

Next year’s predictions

"For next year, we expect some further pick-up in central Europe and the Baltics, on the back of a hoped-for recovery in the European Union, and a continued pick-up also in the largest country in the region, which is Poland.  In south-eastern Europe we expect something better, again on the back largely of a global improvement in trading conditions.  We do not expect a further boost from high oil prices for the CIS, so we see the average coming down."

Special theme of this year’s TR

"Integration and regional cooperation is the theme of the special section.  With 13 out of 27 countries of operations landlocked – one of them, Uzbekistan, in fact doubly landlocked, a distinction it shares with Liechtenstein – it is clear that, in order to integrate globally, you first have to integrate regionally or locally.  You may not want to trade or have to be able to trade directly with your neighbours, but you certainly have to trade through your neighbours. Trade or transit with your immediate neighbours is thus a pre-condition for achieving economic success.  The smaller CIS countries are a small market. Central Asia consists of 5 countries and 50 million inhabitants, so even the five together are a small market.  Each individual country, even the largest one, Uzbekistan, with a population of 25 million, is not going to attract significant amounts of FDI if the market that this FDI is to serve is just going to be a single national market.  They have to produce either for the regional market or for the global market.  They will need access to their neighbours’ markets and to transit through the neighbours in order to get their goods to the ultimate markets.  A lot remains to be done there, because the level of non-cooperation and regional obstruction is depressing."  

Foreign Direct Investment

"What have been the determinants of FDI?  It is clear why FDI goes to central Europe and the Baltics.  They have historically low unit labour costs.  That has been undermined in the most advanced ones.  The investors no longer go to the richest accession countries for low labour costs because they are not low any more; these countries have to move up the value-added ladder, and get into the high-tech industries rather than try to compete with China on the level that they did five or eight years ago.  Another important determinant which stays the same is the geographical proximity to key investors, and there have been rapid transition programmes supporting institutions.  These countries are all well advanced on the institutional reform index and, of course, in their integration into and standardisation with the EU market, EU standards, EU norms.  The CIS stories are even easier: oil and gas attract investment the way syrup attracts flies.  It does not take a lot of talent or a very good business climate to be able to sign a PSA and do some oil and gas.  To make this spread into the wider economy is a lot harder."

Migration issues

"This raises the issue that, if these barriers were to be significantly lowered, then there could be a significant brain drain.  There is no doubt in my mind that the western European host countries would benefit unambiguously from increased migration from the east, either from the accession countries or from the countries further east and south-east.  But these countries, where these often highly skilled, highly trained, highly educated and highly motivated people were trained, educated at public expense, will suffer if these resources move abroad and pay taxes elsewhere.  This brain drain is damaging for the source country.  So this is an issue that concerns the source country more than the host country.  The kind of immigration we are likely to see, not on a very large scale in any case, would be unambiguously beneficial to the host country because of the quality and the nature of the labour that tends to move."