REGIONAL ECONOMIC ISSUES
Faster, Stronger Growth in Central, Eastern Europe
October 21, 2013
- Without countermeasures, region facing prolonged slow growth
- Economic convergence with West Europe has stalled
- Active labor market policies needed to boost employment
Central, Eastern, and Southeastern Europe may be confronting a period of slower growth after years of robust expansion, says the International Monetary Fund in a new report which looks at how the region might increase its growth potential.
In the leadup to the global financial crisis, there was a widespread expectation that this region would likely “converge” on the living standards of its richer, Western neighbors.
In an interview with IMF Survey, the IMF’s regional resident representative for Central and Eastern Europe, James Roaf, suggested measures that might return this region to greater prosperity,
IMF Survey: Central, eastern and southeastern Europe—the region covered in this new report, is geographically large and heterogeneous, but despite that, are there overarching themes common to the countries of this region?
Roaf: These countries are very different from each other but there are still a lot of very important crosscutting themes common to the countries in the region. For example, most of these countries have been in transition from a socialist economic model, and that has a lot of implications for the economy. One, is that these countries tend to have very high and persistent unemployment—that’s a legacy of that transition. The European Union accession process is extremely important in the region. We’ve seen countries that have already joined the EU, countries have even joined the euro from the region. Other countries are still in the process of joining, others have yet to become candidates. We see financial systems which are dominated by Western European banks. This often has big implications for the region.
Also, most of the countries have some similarities in demographics. An aging population is a huge issue for this region. And in general, because the countries are all together in one region, we have common shocks that can affect the countries. These could come through trade, through the financial sector, and through what has happened in the eurozone.
IMF Survey: How did the economies of these countries perform after the fall of the Berlin Wall and up to the beginning of the present?
Roaf: That’s a very long period. We saw very difficult times for many countries through the 1990s, through the trials of the transition process. But then, into the early 2000s, these countries were generally all growing very strongly, and at that time I think it appeared that convergence was some kind of automatic process; that these countries were going to rapidly converge on the living standards of their Western European counterparts. And what this report is looking at is how that convergence process has slowed down in recent years.
Since the crisis, some countries have even gone backwards in convergence. We now see convergence as something that will still happen going forward but at a slower pace and that pace will depend on the policies the countries follow.
So, there’s really a premium on countries following the right policies that can take advantage of their proximity to the European Union and their ties to the EU to ensure that they do grow as quickly as they can.
IMF Survey: You’ve mentioned convergence, one of the major themes in this report. Another major theme is unemployment—a huge issue in this region. How serious a problem is this?
Roaf: Unemployment is a hugely serious issue in the region. It’s high across a large number of countries in the region and very high in some—particularly in some of the Balkan southeast European countries. For example, Macedonia, Bosnia, Serbia, all have unemployment rates now above 20 percent. There is a legacy of long-term persistent unemployment in these countries coming from the transition from socialist times. But on top of that, unemployment has been hit by the crisis over the last few years and the slowdown in growth, and the recessions that we’ve seen. So we’ve seen unemployment go from already high levels to even higher levels.
Countries need to follow policies that can improve the functioning of the labor markets to ensure that people have better opportunities to work. I’m talking about, for example, training, apprenticeships, job matching programs, what’s known in the jargon as “active labor market policies”. And I think there’s a large role for those in the region.
IMF Survey: So, you’ve outlined some formidable challenges facing the region: the slowdown in convergence, some slipping back, the high levels of unemployment. What are some of the policy recommendations which the International Monetary Fund is making in this report?
Roaf: There are a number of recommendations that the report makes. First and foremost, from the Fund’s point of view, is the need to restore or maintain macroeconomic stability. There’s really not going to be any sustainable long-term growth in the region in countries that do not maintain a stable macro economy. And we’ve seen a number of countries, especially in Southeast Europe and the Balkans, that have come out of the crisis with significant fiscal imbalances. These need to be addressed credibly.
Another issue from the macro point of view is the legacy of the crisis in the banks where bad loans have risen to extremely high levels, and these need to be dealt with. They need to be restructured. They need to be taken off the banks’ balance sheets so that the banks are able to start lending again and corporations and households, which are very heavily indebted, need to be able to see these loans restructured so that they can continue with their activities.
IMF Survey: You have mentioned the advantage of Eastern Europe’s proximity to the more wealthy neighbors to the west of it, so how can this region encourage more investment from the West?
Roaf: There’s still a long way to go in many of these countries in improving the business environment, and making the countries more attractive to investors. We need to see the simplification of regulations, strengthening of competition, investor protection and contract enforcement, and in general, a reduction in state involvement in the economy in a number of the countries.
IMF Survey: You personally, have had a very longstanding interest in the region. You are not only in the position that you are in, but after the fall of the Berlin Wall you visited a number of countries in the region. What sort of changes have you seen in the intervening period?
Roaf: Yes, I traveled around the region in the early ‘90s after the wall came down, just as a tourist. I then worked in Russia in the ‘90s and lived in Bulgaria in the mid-2000s. So I’ve seen the region through this period and it really has been an incredible change. On the surface you notice a change from much more agrarian, poorer economies coming out from the transition period to now very advanced, modern societies. Even in countries like Albania, which I recently visited, you see a very vibrant and dynamic society compared to what there was before.
So I think this sort of experience is something we, in the regional office, try to build upon, looking across the different experience of the countries, how countries have developed at their different paces, tackling sometimes the same issues in different ways and learning from each other. So we, in the regional office, are trying to be part of that learning process.
IMF Survey: The IMF has had a very longstanding relationship with this region after the fall of the Berlin Wall. That’s correct, isn’t it?
Roaf: Absolutely. This has been an incredibly important region for the IMF over the years. We’ve been deeply involved in all of the countries in the region since the start of the transition. In fact, our first program was with Poland just a few months after the Berlin Wall came down, and we’ve had lending programs with most of the countries. As the transition has developed, we’ve moved to more of an advisory role. And then after the global crisis in 2008-2009, we suddenly found ourselves lending again to quite a number of the countries in the region affected by the crisis.
So we have this long-shared experience of policy discussion with the countries, and I think a huge amount of mutual respect. This dialogue is something that continues now in my role and part of that dialogue is about how we learn lessons from what we’ve seen over this long period and how we can help use that experience to improve our advice to the countries.