EBRD region outperforms with 5.3% 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.
The EBRD, owned by 60 governments and two intergovernmental institutions, aims to foster the transition from centrally planned to market economies in central and eastern Europe and the Commonwealth of Independent States. (Source EBRD. www.ebrd.com )
