Growing inequality undermines support for reform process – Bank invested €336 million in 2016
The European Bank for Reconstruction and Development (EBRD) has warned about the rising dangers of populism in the face of continued inequality in post-communist societies 25 years after they embarked on the road towards open-market economies.
The warning is contained in the EBRD’s latest annual Transition Report: “Transition for all: Equal opportunities in an unequal world”.
The report was presented by EBRD Director of Research, Ralph de Haas, in Zagreb today. He said: “Our report shows both the massive advances in reforms since the beginning of the transition process, but also the difficult moment we have arrived at. Perceptions of growing inequality and a lack of fairness can undermine progress and risk triggering backlashes which would hurt everyone.”
The report tracks the remarkable successes that have been achieved in post-communist societies, stressing that market economies have, on average, achieved impressive economic growth. Even if the path towards the market economy has involved short-term pain, this has been a price worth paying.
The report also shows that the “happiness gap” has finally closed with people on similar incomes in other regions.
But it points out that not everyone has benefited from growing prosperity. Even where inequality has declined, a perception of rising inequality often persists. Moreover, a belief that reforms have been designed for the benefit of others has led to reversals in political and economic transition and opened the way to anti-reform populism.
The publication stresses the importance of designing reforms that do not simply deliver long-term growth on average but provide economic opportunities to broad segments of the population, thus cementing support from the majority.
As the EBRD’s Chief Economist Sergei Guriev writes in his foreword to this year’s Transition Report: “(A) well-functioning market economy should be more than just competitive; it should also be inclusive, well governed, environmentally friendly, resilient and integrated.
“This is necessary in order to ensure that reforms are politically sustainable: reforms should deliver benefits to the majority of the population in both the short and the long term, preventing populism both in times of crisis and in normal times.”
The Transition Report analyses the factors behind inequality of opportunity, including parental background, gender and geographic location.
It proposes policy responses that could help to address the challenges of inequality and also to tackle poverty and excessive concentration of wealth.
The report says an excessive concentration of wealth has the potential to cause a backlash against institutions that support market economies and this could ultimately lead to weaker growth. In response, the taxation of wealth may be an effective method of fiscal redistribution, as well as a means of raising additional revenue.
The presentation of the Transition Report was followed by the presentation of a study on stimulating long-term growth in Croatia, by Peter Tabak, EBRD Regional Lead Economist, and an overview of the EBRD’s plans for investments and initiatives, presented by Vedrana Jelušić Kašić, EBRD Regional Director for Croatia, Hungary, the Slovak Republic and Slovenia.
The Croatian economy returned to growth in 2015 after a protracted recession, and growth picked up further in 2016. Economic analysis, according to Tabak, shows that Croatia has significant potential to raise its long-term convergence through policies addressing population ageing, increasing productivity growth and further improving the business environment. State-owned enterprises have a larger role, but lower economic and financial efficiency, than in other central European or eastern-European countries. Efficiency improvements or privatisation can raise budgetary revenues or reduce subsidies and thus can support much-needed structural fiscal consolidation.
Ms Jelušić Kašić emphasised the EBRD’s commitment to continue delivering strong support to the Croatian economy through good projects and engagement with the authorities in policy dialogue. For this, the Bank can build on its results for 2016, when it invested €336 million in 14 projects and supported financial resilience, strengthening the local capital market and promoting inclusion. Looking ahead, in 2017 major priorities will include enhancing the country's competitiveness and resource efficiency, she said.
The presentation of the EBRD Transition Report in Zagreb took place with the cooperation of the Croatian Employers’ Association (HUP). Participants included Martina Dalić, Deputy Prime Minister and Minister of Economy, Entrepreneurship and Crafts, Davor Majetić, HUP Director General, Višnja Ljubičić, Ombudswoman for Gender Equality, Viktoria Horvath, Ambassador, Ministry of Foreign Affairs and Trade of Hungary, Veronika Pountcheva, Board Member, Leading Executives Advancing Diversity and Global Director, Corporate Responsibility, METRO Group, and Maria Anargyrou Nikolić, General Manager, Coca-Cola HBC Croatia, Slovenia, and Bosnia and Herzegovina.