Transition Report 2022-23

Motivated by the invasion of Ukraine, this chapter provides an overview of the impact of wars and post-war recoveries over the last two centuries. The most damaging wars see GDP per capita decline by 40 to 70 per cent, while post-war recoveries vary widely. In 29 per cent of cases GDP per capita returns to the trend levels observed in comparator countries without wars within five years, but in almost half of all instances it remains below those levels 25 years after the conflict. Reconstruction is particularly difficult if peace is fragile. Furthermore, even if GDP does recover, there may still be lasting scars affecting labour and capital.

The number of people being forcibly displaced – either internally or across international borders – has grown considerably in recent years. Low and middle-income countries host the vast majority of the world’s refugees, with the three countries that host the most in relative terms all located in the EBRD regions. Attitudes towards refugees have improved since 2021. Ukrainian refugees in Europe have been granted access to labour markets, and survey results suggest that they tend to be satisfied with the help and support they have received from locals, as well as their living conditions, access to education and housing conditions. Ukrainian refugees are more likely to head for places with higher tax revenue per capita and areas that already had large Ukrainian communities before the war.

International trade has grown significantly since the 1990s thanks to reforms and innovation in telecommunications and logistics. This has led to the deepening of global supply chains, which are characterised by geographically fragmented production and supply processes. The EBRD regions have benefited from these developments by increasing and diversifying their exports. Recently, however, disruptions in supply – particularly on account of Covid-19 and Russia’s invasion of Ukraine – have exposed some inherent weaknesses in supply chains. Firms across the EBRD regions, especially those with direct suppliers in China, have adjusted to these disruptions, primarily by increasing stocks of inputs and sourcing from larger numbers of suppliers. The climate crisis is likely to bring more disruption in the future.

After years of rising indebtedness, financially weak firms are constraining business dynamism across parts of the EBRD regions. Zombie lending – the evergreening of cheap loans to unviable firms – is especially prevalent when banks are undercapitalised or state-owned and when insolvency frameworks are weak. Zombie firms then create negative spillovers for healthy companies: strong firms see weaker growth in investment, revenue and employment when they operate in sectors with more zombie firms. Such negative spillovers are particularly pronounced along the value chain. On the upside, the large-scale government support provided during the Covid-19 pandemic is unlikely to have exacerbated the zombification of firms in the EBRD regions.

This chapter presents the latest assessment of transition challenges in the EBRD regions, tracking progress in the area of structural reform. It focuses on six key qualities of a sustainable market economy, looking at whether economies are competitive, well governed, green, inclusive, resilient and integrated. Since 2016, reform scores have converged in most areas, notably as regards competitiveness, resilience and economic integration. This contrasts sharply with the divergence seen in the area of green reform. To some extent, patterns in terms of reforms are aligned with citizens’ preferences in corresponding policy areas. This chapter also surveys the wide range of measures that have been adopted across the EBRD regions in response to high and rising food and energy prices.

Country assessments – which are only available online – provide a comprehensive overview of macroeconomic developments, policy responses and structural reforms in individual economies over the past year, as well as identifying key priorities for 2022.