Macroeconomic performance and prospects
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Strong growth has returned to most transition countries. The recovery that began in Russia and many other countries around the middle of 1999 is now in full swing and average growth for the region as a whole is estimated to be close to 5 per cent in 2000. Moreover, almost all countries now have relatively stable exchange rates and low inflation rates. Perhaps the most striking aspect of the current recovery is that for the first time since the start of transition it is broadly based across the region. Indeed, growth rates in a majority of countries in the Commonwealth of Independent States (CIS) in 2000 will exceed those achieved in central and eastern Europe and the Baltic states (CEE). In 2000, for the first time, the region’s largest economy, Russia, is expected to grow faster than the region’s second-largest economy, Poland.
While these are encouraging trends, differences in overall performance between the advanced transition countries in CEE and the less advanced reformers further east remain significant. For instance, while CEE as a whole has almost reached its pre-transition output level, it would take the CIS at least a decade of comparably high growth rates to recover the output lost during the first decade of transition. Moreover, growth rates will have to exceed those in CEE for several generations if the CIS is to catch up with the income levels in the more advanced transition economies. Fiscal and external imbalances also vary substantially across the region, as do their underlying causes. Such differences reflect not only different progress in reforms but also deeper variation in economic structure and levels of development, many of which were already present under central planning.
This chapter assesses recent developments in the region and considers some of the risks that might derail the current positive trends. The main findings of the chapter are:
Recovery across the region has benefited from a favourable global environment. Surging manufacturing exports to western Europe are driving growth in most of CEE. Similarly, the economies of the CIS countries have benefited from higher demand and prices for their commodity exports. Nevertheless, the CIS is mainly reaping the benefits of large currency devaluations, sheltering their producers from import competition.
The countries of the region have overcome the direct effects of the financial crises in Asia and Russia. Modest corrections to macro policy have allowed most countries in CEE to survive the turbulence of the past years without much damage. The impact on the CIS was much larger, and some of the effects will be less transitory. All countries excluding Armenia have experienced a drastic real depreciation of their currencies. While this has created opportunities for import-substituting industries, it has also caused external debt burdens to increase dramatically, raising questions about their sustainability.
In most transition countries the size of governments is still large when compared with OECD economies. For the EU accession countries this poses a risk of widening fiscal imbalances caused by the high public expenditure required for accession. Financing this from increased taxes will be difficult, given already high tax burdens. The challenge will therefore be to streamline expenditure, enhance the efficiency of public administration and improve the effectiveness of social assistance. In the CIS public finances are increasingly dependent on a few commodity sectors and are exposed therefore to the volatility of commodity prices. Rising debt service payments will increase the urgency to shift to a broad and more reliable tax base.
The advanced countries of CEE will have to continue to attract large capital inflows, reflecting their relatively low domestic savings rates and the need for high investment rates to fuel growth. For the CIS the main risks to the external balance arise from the dependence on commodity exports, from high external debt service and from continued capital flight.
The analysis in this chapter is based on a set of macroeconomic indicators collected for all transition countries over the past ten years and reported in Annex 3.1. Further macroeconomic data for each country can also be found in the country assessments at the back of the Report. It is important to recognise the limitations of official statistics in many transition economies. While significant improvements have been made, inadequate price deflators, large shadow economies and inconsistencies in the underlying data concepts create serious distortions in the official data and complicate cross-country comparisons.
As in previous years, the EBRD has surveyed a number of institutions with expertise in the region to find out their assessment of growth and inflation in 2000 and 2001. These forecasts are in Tables A.3.10 to A.3.13 in Annex 3.1.
Section 3.1 examines recent economic developments and prospects across the region. Sections 3.2 and 3.3 examine key risks to the macroeconomic outlook for the region, focusing on fiscal deficits and external imbalances respectively. Section 3.4 provides some conclusions.
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