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East: Report Says Old Habits Hurt Some Transition Economies

It has been about 10 years since the Soviet Union and Eastern Europe emerged from decades of communism. Some countries are making successful transitions to market economies, while others are struggling. The World Bank has issued a new report on the countries that are not faring well, and why.

Washington, 16 January 2002 (RFE/RL) -- A new report by the World Bank says many of the former communist states of Eastern Europe and Central Asia are stagnating economically, primarily because they continue to devote economic resources to old state enterprises rather than to new companies.

The document -- titled "Transition: The First Ten Years" and released on 15 January at a news conference in Washington -- says this practice tends to favor those who control the assets of the older state businesses.

Pradeep Mitra, the co-director of the World Bank report, said it is economically unfeasible for these countries to focus their resources on the old industries.

"Experience shows that doesn't work. As long as old firms enjoy preferential treatment, new entrants will not face a level playing field, which is absolutely essential for growth," Mitra said.

The report notes that by contrast, new companies in Poland and other fast-growing Eastern European countries comprise the leading source of employment for their economies.

According to the document, the practice favoring older industries in the Commonwealth of Independent States (CIS) and in some Eastern European countries has led to an increase in poverty. It says that in 1998 -- the most recent year for which data are available -- fully 20 percent of the non-Baltic CIS population lived on less than $2.15 a day, compared with 4 percent 10 years earlier.

The World Bank is calling for reforms, including further liberalization of trade, welcoming competition with state enterprises, and a stronger set of laws to protect the rights of creditors and shareholders.

It also calls for companies that were the early beneficiaries of economic reform agree to further reform, and to contribute their fair share of earnings to society for the benefit of all.

"The report recommends that a government with a reforming agenda must employ measures that would require early winners from reform -- who often oppose further reform -- to pay their taxes so they can be used to support worker retraining and severance payments, pay pensions and cash transfers, and maintain school and health services."

The report gives several examples of how industries that date from their communist past remain drags on the economies of many transitional countries. For example, it says countries like Georgia, Kyrgyzstan, Moldova, Russia, and Ukraine give financial incentives for energy consumption to older companies that waste energy, while newer companies that are more energy efficient receive no such allowances.

According to the report, Romania and Bulgaria permit farm collectives and state industries to incur debts that they may not be able to repay. As a result, it says, fewer loans are available to newer, better-managed companies that are more likely to be good credit risks.