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Eastern Europe/Former U.S.S.R.: Countries Progress Toward Market Economies

London, 5 November 1996 (RFE/RL) -- A report published yesterday says the Central and Eastern European countries, the Baltic states and the Commonwealth of Independent States (CIS) nations have made impressive advances towards a market economy, but have yet to tackle some of the more difficult transitional tasks.

The report, "Economic Transition In Eastern Europe and the Former Soviet Union," is issued by the London-based European Bank for Reconstruction and Development (EBRD).

The report says the Eastern economies have been transformed since the fall of the Berlin Wall. Market-oriented systems have replaced old command economies. In most countries, more than half of gross domestic product (GDP) is now being generated by the private sector. Some economies have the long-term potential to grow at "east Asian" (Singapore, etc.) rates. Inflation is coming down in most countries.

Nick Stern, chief EBRD economist, said future historians will view the pace of progress since 1989/90 as "remarkably rapid." But he said the legacies of a command economy cannot be overcome in a few years. He said major tasks remain in taking the reform process further.

Price and trade liberalization and privatization of small enterprises have been undertaken relatively quickly, but more complex processes such as enterprise restructuring, the rebuilding of infrastructure and the creation of financial and legal institutions are only now being addressed.

The past three years have seen strong economic growth in the Central and Eastern European countries and the Baltic states and a slowdown in the pace of declining output in the CIS nations.

Growth in Eastern and Central Europe (except Bulgaria) and the Baltic states was strong in the first half of this year and is expected to be four percent for the year as a whole, only marginally down from the "impressive" five percent achieved in 1995. In the medium to long-term, prospects remain strong for the most advanced reforming nations.

But growth has been held back by the weakness in demand from stagnating West European economies, notably from Germany which has become the main export destination for the central European nations.

The largest CIS nations (including Russia and Ukraine) still await the initial appearance of positive growth. But eight of the smaller CIS nations saw increases in industrial output in the first half of 1996.

In the case of Russia, industrial production and oil output have recently stabilized, indicating the worst point of its recession is over.

The countries that have reached the most advanced stages of transition are Czech Republic, Hungary, Poland, the Slovak Republic, Slovenia, Croatia, Estonia, Latvia and Lithuania. GDP in all these countries (except Slovenia) is generated mainly from the private sector.

Some of these countries saw industrial output grow by about ten percent in the first half of 1996. The output increase was accompanied by an increase in domestic demand and a deteriorating trade balance.

Countries at intermediate stages include Albania, Bulgaria, Macedonia and Romania and most of the CIS -- Armenia, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Ukraine and Uzbekistan. They have all moved decisively to strengthen market competition by liberalizing prices, cutting subsidies and privatizing small enterprises.

Countries still at early stages of transition are Azerbaijan, Belarus, Tajikistan and Turkmenistan. In all of them, the private sector accounts for less than 20 percent of GDP. Market liberalization is far from complete. Foreign trade is heavily regulated. There is limited currency convertibility.Many prices remain subject to governmental control.

By the end of 1995, no country in Eastern and Central Europe and the Baltics was suffering from annual inflation of more than 40 percent. In fact, inflation fell in 1995 to single digit levels in six: Albania, Croatia, the Czech Republic, Macedonia, the Slovak Republic and Slovenia.

Inflation in Russia has declined from more than 800 percent in 1993 to about 37 percent in August, 1996. Year on year inflation in Ukraine fell to 80 percent in July this year but edged higher in August, partly on account of a rise in rents for government-owned housing.

Armenia, Azerbaijan, Georgia, Kazakhstan and Uzbekistan have all seen inflation fall from 1,000 percent in 1994 to less than 100 percent by mid-1996. At the most successful end of the scale, Moldova, Georgia and Kyrgyzstan have reduced inflation to less than 30 percent (but it is still raging at 200 percent or more in Tajikistan and Turkmenistan.)

The increased financial stability in the transitional countries has helped trigger a sharp rise in inflow of investment money from abroad. World Bank figures point to an increase in the flow of lending, foreign direct investment and shareholding. By one estimate, this investment in the Eastern nations reached a record $45 billion in 1995.

In the early 1990s, much investment in the Eastern countries came from official agencies like the IMF, the World Bank and EBRD.

By contrast, much of the new funding flooding into the region are from private sources. However, most foreign investment is being received by only four countries: Hungary, the Czech Republic, Russia and Poland. (The main recipients of foreign investment, in per capita terms, are Hungary, the Czech Republic, Estonia and Slovenia.)

The report concludes by saying that the medium-term growth prospects for eastern Europe, the Baltics and the CIS are likely to be determined by the organization and better use of labor, raw materials and capital as well as the level of investment in human and physical capital.

In that respect, it says, prospects look bright. For Eastern and Central Europe, anyway, most forecasters predict growth of about four or five percent per year for the remainder of the decade.