Global Crisis Hits Home in Emerging Europe and Central Asia

October 3, 2009

World Bank urges governments to protect poor and vulnerable in face of sharp rise in unemployment and poverty.

ISTANBUL, October 3, 2009 — The global economic crisis has reversed the impressive economic growth of recent years in Emerging Europe and Central Asia, hitting families hard with higher unemployment and lost wages.  Financially weaker governments will need to protect poor people while strengthening institutions and infrastructure to attract investors, the World Bank said today at a press briefing at the World Bank/IMF Annual Meetings.

“The global financial and economic crisis has literally hit home in many parts of Emerging Europe and Central Asia,” said Philippe Le Houérou, World Bank Vice-Presidnt for Europe and Central Asia. “What started as a financial crisis has become a social and human crisis.  The global crisis has come on the heels of the food and fuel crises, which had already weakened people in the region by reducing their purchasing power. Today, rising poverty and joblessness are pushing households into poverty and making things even harder for those already poor. There has been a lot of talk about green shoots but in the end, these are only indicators that measure production and industrial output. They are welcome because they may bring the first signs of the end of the crisis. But they do not put food on the table.”

For the past decade, many countries of Emerging Europe and Central Asia notched up impressive growth, moving them closer to the living standards of Western Europe and other advanced economies. But the crisis has hit them hardest and stopped that convergence. Growth has plummeted from a fast clip of 7.6 percent in 2007 to 4.7 percent in 2008, and is projected at negative 5.6 percent in 2009.

“For years now, Emerging Europe and Central Asia has roared along in high gear,” said Le Houérou. “But the global crisis and the drying up of external private financial flows are stalling the engine of growth, prompting many to downshift and some to even slip into reverse. The job now for the governments in the region is to speed up reforms. The role of the international community is to help countries get back in gear. For us at the World Bank, that means essentially focusing our support to governments in their efforts to clean up the banking sector so that banks can provide a lifeline for firms and businesses to grow and create jobs, improve the business climate to attract private capital flows, make public spending more efficient so that the benefits reach working families, and continue to finance key public investments in infrastructure.”

Unemployment and deficits on the rise

The global crisis has hit some countries worse than others but today there is a danger that the region faces a weak and jobless recovery. Some countries, such as Poland, have fared better than others.  Still, the number of jobless in the region has jumped from 8.3 million in 2008 to 11.4 million in 2009. It has doubled in the Baltic countries, grown by 60 percent in Turkey, and by one-third in other countries in the region.

“Instead of the number of poor falling by 15 million in 2009, we now project poverty to increase by about 15 million,” said Indermit Gill, World Bank Chief Economist for the Europe and Central Asia Region. “There are already 145 million poor people in the region – or almost one-third of the total population. For them, the crisis has made an already tough existence even tougher. Much of the world is getting good economic news this autumn. But for workers and their families in Emerging Europe and Central Asia the news is not encouraging. To them, the talk of recovery may seem premature.”

In the face of the unprecedented crisis, governments in Emerging Europe and Central Asia will have many hard choices to make, given that government deficits will increase from 1.5 percent of GDP in 2008 to 5.5 percent in 2009, said Gill. This will put more pressure on governments to make spending more efficient.

“Social spending makes up more than half of government expenditures so governments will need to make education, health care and social security more efficient,” Gill said. “School systems need to be resized to fit shrinking enrollment numbers due to falling fertility. Health care has to be restructured because many countries now have the health problems of high-income countries with the fiscal resources of middle-income economies.  And social security has to be restructured to recognize that many countries in the region have aged before they have become wealthy.  Reforms will help make governments fiscally healthy, economies robust, and societies more fair.  Every responsible policymaker should take a hard look at these reforms.”

Also, governments must continue to improve their business environment to attract investment. During the last decade, countries in Emerging Europe and Central Asia have made progress in improving the climate for doing business. The region has been the top performer in the World Bank’s Doing Business ratings for the last six years—led first by countries in central and southern Europe and more recently by those in the Caucasus and Central Asia. This year, five of the top ten reformers were from the region: Krygyz Republic, FYR Macedonia, Belarus, Tajikistan, and Moldova.

World Bank supporting reforms through lending and advice

While governments are in the lead, the World Bank is helping countries navigate their way through the crisis, Le Houérou said.  For its part, the World Bank is providing budget support to countries to support promising reform efforts. During the past year, the World Bank has increased financial support to the region by 60 percent, from $8 billion last year to $12.5 billion this year with the aim of mitigating the impact of the crisis on the poor, stabilizing banks, and positioning countries for post-crisis recovery. In September 2009 alone, the Bank approved $2 billion in budget support to Hungary, Latvia, and Ukraine.

Along with funding, the Bank is offering analytical support and encouraging governments to expand selected social safety net programs. Currently, most countries in the region have good programs that could be expanded during the crisis, such as those in the Kyrgyz Republic, Albania and Georgia where benefits are most likely to reach the neediest people. At the same time, the Bank is advising governments on how to fix less efficient programs to ensure benefits are reaching the right target audiences. Although many countries in the region have excelled on improving the business environment, many countries have not improved social service delivery.

The World Bank’s client countries in Emerging Europe and Central Asia are currently using Bank funds for 53 projects spanning institutional reform, infrastructure and interventions to help the neediest. Also, through the World Bank’s private sector arm, the International Finance Corporation (IFC), the Bank has teamed up with the EBRD and EIB on a $31 billion fund to support the banking sector and to fund lending to businesses hit by the global economic crisis through equity and debt finance, credit lines, and political risk insurance.  And the Bank’s political risk insurance arm, MIGA, has made up to $3 billion available for investments in the heavily hit economies of the region. Guarantees worth nearly half of a $1 billion were issued in support of shareholder loans made by parent banks to their subsidiaries in Ukraine and Russia.

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