DUSHANBE, July 3, 2008, Asia-Plus — The World Bank has published a report “From Transition to Convergence in Eastern Europe and Former Soviet Union.”
Press release issued by the World Bank says that Countries of Eastern Europe and the former Soviet Union have put the crisis of the 1990s behind them, but they need to innovate, include all their citizens in the development of their countries, and integrate with the broader global economy if they want to sustain growth, says a new World Bank report.
Launched on July 2in Brussels, the study, Innovation, Inclusion, and Integration: From Transition to Convergence in Eastern Europe and the Former Soviet Union, finds that:
– Productivity growth – the only viable route to lasting prosperity – depends on there being a supportive business environment, specifically one that delivers competition, a deep financial sector, good governance, and superior skills and infrastructure;
– Key aspects of the business environment, such as competition and finance, that shape the behavior of firms are maturing and converging towards those in the developed market economies of Western Europe. This convergence is more pronounced in the new member states of the European Union. The Commonwealth of Independent States (CIS) are followers, though some distance behind;
– Employment growth has been sluggish almost everywhere, and has reflected the interplay between (a) job growth in new private firms that were able to occupy market niches nonexistent under central planning; and (bi) downsizing in state-owned and privatized firms;
– Productivity growth and public transfers fed by rising fiscal revenue have moved 50 million people – out of 400 million – out of absolute poverty (those with an income of less than $2.15 a day in purchasing power parities) between 1998-99 and 2005-06. While nearly one in five people – or 85 million – lived in poverty around 1998/99, only one in twelve – or 35 million – did so around 2005/06.
– Countries in Eastern Europe and the former Soviet Union now face a third transition – aging populations, which will slow economic growth unless more of the population is brought into the labor force, resources are used more efficiently, and pensions and health care systems are reformed to avoid them becoming sources of acute fiscal pressure.
The transition from command to market economies saw a pattern of deindustrialization and an expansion in the services industry. Oversized industrial sectors contracted towards norms more characteristic of market economies. Services, which had been repressed under central planning, expanded everywhere.
Employment growth, which has been sluggish almost everywhere, has reflected the interplay between (i) job growth in new private firms that were able to occupy market niches nonexistent under central planning; and (ii) downsizing in state-owned and privatized firms.
A key reform at the beginning of the transition, according to the report, was price liberalization – opening domestic markets of tradable goods to international prices and setting in motion the integration of the countries of Eastern Europe and the former Soviet Union into the world economy. Merchandise exports and imports in those countries expanded from just over 15 percent of GDP in 1994 to nearly 35 percent in 2006. Services, a low priority under central planning, emerged as a dynamic force in such sectors as telecommunications, transportation, energy, and banking, boosting services trade to nearly 7 percent of GDP. But the nature of trade varies greatly across transition groups. Countries that joined the European Union in 2004 are much more open to trade – exports and imports made up 60 percent of their GDP in 2006.
Domestic and external factors worked in harmony as the new member states of the European Union used the anchor of prospective EU accession to lock in the reforms of policies and institutions necessary for rapid productivity growth and deeper integration into the world economy.
However, as if twin political and economic transitions of the past have not been challenging enough, according to the report, many countries in Eastern Europe and the former Soviet Union now face a third transition – aging populations. Demographic projections suggest that by 2025 the average Slovene will be 47 years old, giving the country one of the oldest populations in the world. One in five Bulgarians will be over 65. Ukraine’s population will shrink by a fifth, and Russia’s by more than a tenth. Aging will lead to the share of the working age population (15-64 years) in total population declining rapidly after 2015 – less than a decade from now – in the EU8, Southeastern Europe, and middle income CIS countries. This is similar to the change projected for the EU15, deeper than in the United States, shallower than in
