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Growth Returning to Emerging Europe And Central Asia, But Concerns Center on Jobless Recovery

October 8, 2010

WASHINGTON, October 8, 2010 - Economic growth has returned to the Emerging Europe and Central Asia (ECA) Region, but it has come with concerns about its jobless nature and doubts about its durability, according to the World Bank at a press briefing during the World Bank/IMF Annual Meetings 2010.

The good news is that economic growth has returned to Emerging Europe and Central Asia, after the region suffered a sharp decline during the global economic crisis,” said Philippe Le Houérou, World Bank Vice President for the Europe and Central Asia Region. “Today, the region is back on the road to recovery. Thanks to stronger economies in Poland, Russia, and Turkey, growth went from a negative 5.1 percent dip in 2009 to a projected 3.9 percent growth in 2010.”

Le Houérou cautioned, “But this recovery is not uniform – it masks a differentiated picture across the region of 30 countries. Most countries experienced growth this year, but there are still others that have not returned to growth. Also, employment has not kept pace with growth. In fact, joblessness has stayed stubbornly high in most of Central and Eastern Europe and it continues to rise in the countries of the Commonwealth of Independent States. This slow and painful recovery is being felt by many families who are struggling to make ends meet.”

Emerging Europe and Central Asia is a diverse region. Different initial country situations resulted in varying impacts from the crisis – this is now defining their prospects for recovery. The rebound in growth has not been felt in all the countries. Croatia, Latvia, Kyrgyzstan, and Romania have still not returned to growth. 

According to the press briefing, this was a differentiated crisis so there will be a differentiated recovery, putting more pressure on some countries than others to address weaknesses related to the nature and durability of the recovery.

The Region still lags

The ECA region was hit harder than any other region in the world by the global financial and economic crisis because of its tight integration in international trade and financial markets, and policy weaknesses in some countries. As a result of these close international linkages, the decline in global economic activity resulted in the region experiencing the sharpest decline in economic activity, fiscal balances, and capital inflows among all developing regions. 

The World Bank reports that the region’s prospects for 2010 improved, but is the weakest among emerging economies. The region is projected to grow 3.9 percent in 2010, as compared to approximately 5 percent in Latin America and the Caribbean, and about 9 percent in developing Asia.

According to Indermit Gill, World Bank Chief Economist for the Europe and Central Asia Region, “While most economies in the region contracted in 2009, most countries are expected to grow in 2010. It will be a recovery led by exports, mainly to Western Europe. This means that emerging Europe is now even more coupled with the EU15 than before the crisis. The prices of manufactured goods, oil, metals, and food are up, which is helping many countries. For others, recovery will be through large official transfers, and better terms for private capital inflows.”

But the recovery has two shortcomings,” said Gill. “The first is that with just a few exceptions such as Turkey, employment has lagged output. If current trends persist, the region may not recover the jobs lost during the recession until the end of 2012. The second is that growth in Western Europe has been weak, outside of a few economies such as Germany. With currencies getting stronger, growth will now have to come from reforms at home and dynamism in Western Europe.”

Metal prices are close to the pre-crisis peak, and oil and food prices are back to 2007 prices. And because of both official transfers and private portfolio flows, capital inflows are up in ECA but not nearly to the levels seen before the crisis. Industrial production has increased, but also has not reached pre-crisis levels in much of ECA.

The briefing stressed that, Emerging Europe and Central Asia’s recovery will depend a lot on how Western Europe and Russia fare in the post-crisis environment – that more and more, the economies of Emerging Europe and Central Asia are deeply integrated with the EU15. So as Western Europe recovers, the countries to its east will benefit. Even Russia is not an exception. Almost all of Central and Eastern European remittances come from Western Europe, so do half of those to the Commonwealth of Independent States (CIS). In return, 75 percent of Central European exports go to the European Union. In the same way, many of Russia’s neighbors increasingly depend on growth in Russia to prosper – growth in the eastern part of the Europe and Central Asia region is increasingly correlated with Russia’s. 

While the prospects for growth depend on outside forces, according to the briefing there are also policies that countries can pursue that will help make the recovery more pro-poor. First, countries need to continue improving their business environment to attract the investment needed to spur growth and job creation. Second, public spending should be made more efficient by cutting waste. Third, by targeting assistance through “smart” social safety nets which help the poorest through these difficult economic times without weakening the incentives to find work.

The World Bank is supporting the recovery

During the global crisis, the World Bank responded quickly to requests from countries in the region for help, and provided advice on dealing with the crisis and record lending in the last fiscal year of $10.8 billion, including $10.2 billion in IBRD loans and $600 million in IDA credits. Much of the lending – $8 billion – was delivered in the form of development policy loans (DPL). For example, a $1.3 billion DPL is helping restore growth and employment in Turkey; Kazakhstan’s $1 billion DPL supports fiscal and financial reforms; a $400 million DPL is helping rehabilitate Ukraine’s financial sector; and two DPLs of $100 million each for Serbia aim to improve the efficiency of the country’s public sector and further strengthen the environment for private sector-led growth.

In addition, in February 2009, the World Bank Group, the European Bank for Reconstruction and Development, and the European Investment Bank launched the Joint International Financial Institutions (IFI) Action Plan to support banking systems and lend to the real economy in Central and Eastern Europe. A total of €27 billion has been made available, exceeding the original commitment of up to €24.5 billion for 2009-2010.

Along with funding, the Bank provides country and regional analytical work to inform its financial support in the region, and offers analytical support and encouragement to governments to expand selected social safety net programs. 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.

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