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Eastern Europe: Transitional Economies' Output May Triple

London, 23 June 1999 (RFE/RL) -- The chief economist of the European Bank for Reconstruction and Development, Nick Stern, says the total output of Europe's transitional economies could triple over the next 10 years, bringing higher living standards for many.

Stern spoke at a business conference in London yesterday on the economic prospects for the 26 transitional economies of Central and Eastern Europe and the former Soviet Union.

Noting that November will mark the 10th anniversary of the fall of the Berlin Wall, Stern offered what he called "a mildly optimistic" overview of the transitional economies' prospects for the next decade. He said that he is hopeful most transitional economies will follow Poland and Hungary, whose economic and institutional reforms have been deeper and broader than elsewhere. If so, the transitional countries should be able to achieve at least 4 percent annual growth.

"What we see is that countries which have reformed strongly, particularly Poland, a big important example, have been growing four to five percent on average over the past few years. It surely should be possible for most of the countries of the region, if we take a 10 to 15 year view, to achieve those kinds of growth rates."

But to achieve this, Stern believes, the transitional economies must press ahead with privatization, restructuring of enterprises, price liberalization, competition policies, and banking and other institutional reforms.

Stern said Argentina offers an interesting model for the transitional economies because its economic reforms have resulted in a four-fold increase in its gross domestic product (GDP) -- the total output of its goods and services -- in the past 10 years. Stern said it is possible that the GDP of the eastern region as a whole could triple in the next decade from the present 1 trillion dollars to 3 trillion. He also said the transitional economies' share of the world's output of goods and services is set to grow:

"Whereas the 26 transitional economies constitute around three percent of the world's gross domestic product, with perhaps eight or nine percent of the world's population, it may well be the case that they will have nine percent of the world's GDP 10 years from now. In other words, roughly the same share as their population."

Stern said another way of putting this is that, 10 years from now, income per capita in the Eastern countries as a whole "may be roughly the same as average world income per capita." While this sounds optimistic, in reality, it suggests that their transition, and their prospects of improved living standards, "still have a long way to go, "in Stern's phrase.

Stern noted that the Central and East European countries --particularly, Poland, Hungary, the Czech Republic, Slovakia, Slovenia and Croatia -- have done most to reform their economies. But reform has been much slower in southeastern Europe and the CIS. He said the Central Asian nations have done the least to embrace reform.

He said those countries which have pursued reform most strongly have "seen the returns both in terms of growth and stability." In addition, they have benefited from the most foreign direct investment, as the market is now strongly differentiating among former communist countries.

Stern said investors now have a very different perception of economies like Poland, Hungary and Slovenia, compared with Russia, Ukraine, Kazakhstan and Romania. He said investors understand the need to distinguish between these economies.

"They have different histories and geography, they had different experience in terms of length of time under the communist regimes, they had different experiments with reform, different economic structures, they inherited different debt structures, and so on. So the differentiation among the 26 countries is absolutely vital. And they have also progressed in different ways in their transition."

Stern said some economists used to assume that the CIS countries would follow the same path of economic reform as the Central and East European nations. They assumed that, because changes to the regimes in the CIS countries came later than in Central and Eastern Europe, economic reform would be delayed by two or three years, but would broadly follow the same path -- in his phrase, "tracking and catching up" with the Central Europeans' reforms.

But now, he said, economists see this assumption was wrong. What is actually happening in the CIS countries, they believe, is very different from what has happened in Poland or Hungary. In particular, the CIS countries have failed to undertake institutional reforms, to improve their governance, and they lack confidence in the reform process.

As a result, Stern said, whereas it used to be assumed that these economies were set to experience real and positive growth, "we now have to suspend our judgment on when this will occur."

Stern also said economists realize the transition process has many different dimensions, that there is no "unique destination" for the former command economies. Noting that Germany's market economy looks very different from that of the U.S. or Britain, he said that "there are many possible economic structures. There's no single goal."