OREANDA-NEWS. Economic growth across the EBRD region is expected to hit a record high this year but the global credit crunch that began this summer could result in slower growth in the longer term, the EBRD said in its Transition Report 2007, reported the press-centre of EBRD.

The Report projects average growth of 7,0 per cent in all EBRD countries in 2007, up slightly from 6,9 per cent in 2006. Economic growth across the transition region has been underpinned by a combination of factors among which are strong domestic demand, rising investment including foreign direct investment, significant remittances from workers abroad, rapid growth in domestic and foreign bank lending and, in some cases, high energy prices.

The EBRD Report said the broad economic outlook remained favourable and noted that transition countries were in the relatively enviable position of facing the recent financial market problems from a position of economic strength. Growth for 2008 is forecast to moderate slightly to 6.1 per cent, with resource-rich CIS as the fastest growing region.

Spill-overs from problems in the US mortgage market are nevertheless likely to have an impact, most notably in the form of a rise in the cost of external finance and, in some cases, a reduction of the amounts of external finance that is available. This might help the overheated economies in the transition region cool down; however, “in a less benign scenario, countries with high external funding needs may experience a stronger economic downturn,” the Report said.

The region’s vulnerability to current and future financial market turbulence must be addressed through continued structural and institutional reforms, aimed particularly at shoring up the financial sector and stimulating entrepreneurial activity, the Report advises. At the same time, the pace of reforms as measured by the EBRD transition indicators has slowed relative to previous years. While countries in south-eastern Europe continue to catch-up with the more advanced reformers in the new EU member states, reforms elsewhere were more uneven.

The Report distinguishes among first phase market-enabling reforms – in price and trade liberalisation and small scale privatisation – which are largely complete across the region, and second and third phase reforms. The second phase of market-deepening reform – large-scale privatisation and financial sector reform – had progressed in new EU member countries but was less advanced elsewhere. Third phase, market-sustaining reforms – including governance and enterprise restructuring, competition policy and infrastructure – remain unfinished even in the most advanced countries in central eastern Europe and the Baltic states and are at an early stage elsewhere in the transition region.

People in Transition
The slowdown in reform momentum is in part the result of a general weakening of public support for difficult second and third-phase reforms, as evidenced by the widespread discontent with reform-minded leaders in many countries and the more frequent changes in government in recent years. The contrast between strong growth and improving living standards on the one hand and broad dissatisfaction on the other is one of the key questions addressed in the Transition Report’s special section on People in Transition.

Making extensive use of the EBRD/World Bank Life in Transition Survey (LiTS), which surveyed 28,000 people in 28 out of 29 EBRD countries, the Report reveals how 17 years of transition has affected people’s daily lives, average consumption patterns, attitudes towards markets and democracy, employment opportunities and expectations from government and the private sector. The main findings are:

More people are satisfied than dissatisfied with their lives and most feel that their living standards are better today than when the transition began;

By contrast, a large majority of people feel that their household wealth relative to others has deteriorated since the start of transition, perhaps owing to the increase in inequality in many parts of the region;

There is very strong support for democracy as a system of political governance and strong support for the market economy, with comparatively weak support for authoritarian politics and a centrally planned economy;

However, political and economic attitudes are still less liberal than in mature market-oriented democracies in Europe and North America and they do not appear to be converging over time;

Those who have benefited most from the transition – younger people, better educated, more mobile segments of the population – tend to be more satisfied and more supportive of markets;

There is a significant middle class emerging in the region (though the size varies considerably by country) and their values and attitudes tend to be more democratic and liberal;

Transition has taken a toll on people’s employment status and prospects, given the massive reallocation of labour from the state to the private sector and from manufacturing to services, leaving many people out of work and unable to find jobs that fit their skills;

Major upheaval in the labour markets has left many workers worse off, which has negatively affected their attitudes towards markets and reform;

People with less education and fewer skills have faced poorer prospects, leading to lower levels of life satisfaction and a greater reliance on government intervention to solve economic problems;

People in general expect more from their governments in delivering public services – especially health and education where quality is perceived to have deteriorated and informal payments are increasingly needed to obtain service.

The Transition Report provides a detailed analysis of these findings and suggests policy responses related to employment, the labour market and the increased involvement of the private sector in delivering public services.

The Transition Report 2007 will be available to the general public from Tuesday 13 November 2007.

However, journalists can download electronic copies of the report from http://press.ebrd.com. If you are a journalist and would like access to these pages, send your details to coppolas@ebrd.com.