Regional Economic Issues (REI): Central, Eastern, and Southeastern Europe: Effective Government for Stronger Growth, November 2016

Europe, November 1, 2016

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Regional Economic Issues (REI): Central, Eastern, and Southeastern Europe: Effective Government for Stronger Growth, November 2016

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Bibliographic details

• Published: November 1, 2016
• Series: Europe

Macroeconomic overview and outlook

• Economic growth remains solid in much of Central, Eastern, and Southeastern Europe (CESEE).
• Outside the Commonwealth of Independent States (CIS), growth has continued at a good pace on the back of accommodative macroeconomic policies and buoyant consumption supported by strong real wage and employment growth.
• In Russia, the pace of economic contraction has moderated as the economy appears to have adjusted to lower oil prices and the sanctions shock.
• Other CIS economies are gradually exiting from recessions on improved external demand.
• For the region as a whole, GDP growth is projected to reach 1.3 percent in 2016 and 2.1 percent in 2017, largely reflecting the improved outlook in the CIS.
• Signs that output gaps appear closed outside the CIS: unemployment rates are falling to pre-crisis levels, real wages are growing strongly, and credit growth is reaccelerating.
• Inflationary pressures are still low and external balances healthy.
• Given subdued productivity growth and adverse demographics, sustaining strong growth without a renewed widening of external imbalances may be difficult.

Risks to the outlook

• Some downside risks have diminished (examples noted: pace of monetary normalization in key advanced economies; refugee crisis in Europe).
• Other risks have become more pronounced, particularly those associated with rising political discord.
• The longer-term effects of Brexit are yet unclear, given uncertainty about new U.K.-EU economic arrangements.

Policy guidance: near-term balance and fiscal space

• Monetary policy: expected to remain accommodative or to ease in countries where it is tight, which seems generally appropriate given expected inflation.
• Fiscal policy: appears to be neutral or expansionary in many countries; in economies running above potential and with closing output gaps, this stance is no longer appropriate.
• Recommendation: use relatively good times to rebuild fiscal buffers by following growth-friendly fiscal consolidation, which would also help reduce still high external debt levels.

Defining challenge: re-accelerate potential growth and convergence

• Achieving higher potential growth requires a new round of structural reforms to raise investment and productivity.
• Priorities vary across countries and include:
  • strengthening governance and institutions;
  • improving labor supply by increasing participation rates and reducing structural unemployment.
• This report focuses on measures to improve public investment management and tax administration.

Public investment management: findings and recommendations

• Rationale:
  • High-quality public investment can help boost potential growth given large infrastructure gaps relative to advanced Europe and generally low investment rates.
  • Many CESEE countries face sizeable fiscal imbalances; improving public investment management can create fiscal space for investment or fiscal consolidation.
• Key finding:
  • Public investment in many CESEE countries, except the Baltic states, is less efficient than in other European countries.
• Estimated gains:
  • By reducing efficiency gaps (estimated relative to the income level-specific benchmarks), CESEE countries could generate between 2 and 4 percent of GDP in fiscal space annually that could be used either for public investment or for fiscal consolidation.
  • Based on the standard estimates for public investment multipliers (see the October 2014 World Economic Outlook), such additional public investment could increase the level of GDP by 2–4 percent over the medium term, with the exact numbers depending on the degree of slack in the economy and on the efficiency of public investment.
• Specific upgrades recommended:
  • Improve allocation and implementation frameworks and procedures.
  • Strengthen project appraisal and management by building capacity.
  • Publish cost-benefit analyses of major projects.
  • Develop procedures for project adjustment.
  • Conduct ex-post evaluations.
  • Note: In CESEE EU countries, stronger public investment management institutions are associated with higher absorption of the EU structural and cohesion funds.

Tax administration: findings and recommendations

• Key finding:
  • Tax efficiency gaps—and in particular, tax compliance gaps—remain a challenge in much of the region.
• Areas for reform:
  • Unify tax collection in a single body or create a functional structure in line with best practice where lacking.
  • Modernize and upgrade online services: many CESEE countries lag due to outdated and fragile systems that constrain reform efforts, including adoption of a strategic management approach to tax compliance.
  • Improve operational performance, particularly in countries with high tax debt.
• Objective:
  • Reducing compliance gaps to increase tax collection efficiency and create fiscal space.

Political economy and reform implementation

• Successful reforms require accounting for political economy factors.
• Political-institutional constraints:
  • Poor accountability;
  • Low quality of bureaucracy;
  • Weak control of corruption in politics.
• These features tend to be negatively correlated with the strength of public investment management and tax administration.
• Reform design should include elements that reduce resistance and build support for successful completion.

Source: Regional Economic Issues (REI): Central, Eastern, and Southeastern Europe: Effective Government for Stronger Growth, November 2016

Content in this bundle

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  • _rei1116mp (PDF)
• Effective Government for Stronger Growth
  • Effective Government for Stronger Growth (Markdown version)
  • Effective Government for Stronger Growth (PDF)
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  • Rei1116ru (PDF)

References

• Emerging Europe: Mostly Growing, but Questions Remain About Medium-Term Growth
• Central, Eastern and Southeaster Europe Reports Archive
• Regional Economic Outlooks
• Other IMF Regional Reports
• https://www.imf.org/external/ns/cs.aspx?id=29
• https://www.imf.org/external/pubs/ft/gfsr/index.htm
• https://www.imf.org/external/ns/cs.aspx?id=262
• Regional Economic Reports
• Africa
• Asia & Pacific
• Europe
• Middle East & Central Asia
• Western Hemisphere
• https://www.imf.org/external/pubs/ft/ar/2016/eng/index.htm
• https://www.imf.org/external/pubs/ft/fandd/2016/09/index.htm
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