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East: EBRD Report Details Progress, Pitfalls Of Postcommunist Reform

The European Bank for Reconstruction and Development (EBRD) has released its 10th annual "Transition Report" on the economies of Central Europe and the former Soviet Union. RFE/RL spoke with the EBRD's chief economist, Willem Buiter, about the study and filed this report.

Prague, 19 November 2003 (RFE/RL) -- The latest research by the European Bank for Reconstruction and Development (EBRD) finds the economies of the former communist bloc are growing faster than the global economy.

But the bank's chief economist, Willem Buiter, says he still has concerns about economic policies in regions where the EBRD has operated since it was established in 1991 to foster market reforms. "On the whole, the countries that we work in -- the 27 former communist countries of Central Europe and the former Soviet Union -- have been doing reasonably well," he said. "There is, however, a lot of difference among the countries. And the drivers of growth have been different for different reasons."

Buiter's office put together "Transition Report 2003" for release at the EBRD's London headquarters this week. Buiter told RFE/RL that two main engines of growth in the former communist bloc have been high international oil prices and the promise of European Union membership for some countries.

"For the advance succession countries that will join the EU, the prospect of EU accession and loose fiscal policy have been stimulants. In the former Soviet Union, oil and gas prices have pushed [countries like] Russia and Kazakhstan [as well as Azerbaijan and Turkmenistan] along," he said. "Neither of these two drivers are sustainable, so it is important that these countries get out of this current position where they rely on unsustainable fiscal stimuli and unsustainably high real oil prices to provide them with most reasonable growth."

Buiter warned that current oil prices could reduce the incentive of countries such as Russia, Kazakhstan, Turkmenistan, and Azerbaijan to push forward with reforms still considered necessary for sustainable growth.

"We're going to see, at some point, a return to much lower oil prices. When I started my job 3 1/2 years ago, oil prices were just over $10 a barrel. Now, it's $29 [per barrel]. And it doesn't have to go all the way down to $10 a barrel for it to be much harder fiscally, because [of declining] export revenues and in terms of gross domestic product growth generally," he said. "For countries like Russia, Kazakhstan, Azerbaijan, Turkmenistan -- which are very dependent on oil both for exports and for government revenues -- those countries [will suffer from] the next decline [in global oil prices]. When that will be, I don't know. But that there will be such a decline at some point is [certain]."

The "Transition Report" says reforms appear to be stalling in much of the Balkans. For example, there have been no upgrades to Romania's overall score from the EBRD on transitional progress over the last three years.

Serbia and Montenegro, as well as Bosnia-Herzegovina, were singled out for praise on small-scale privatizations and on improved business environments. But the EBRD says the pace of reform appears to have slowed in Serbia and Montenegro compared to the last two years. It says the assassination of Serbian Prime Minister Zoran Djindjic in March initially led to an overdue crackdown on crime and corruption. But it concludes that reform momentum was lost as political parties positioned themselves ahead of presidential and parliamentary elections.

The report says Bulgaria's reforms are still moving forward and that, despite delays on key privatizations, the country appears to be on course for EU membership during the next accession round in 2007.

In Russia, the "Transition Report" says market confidence has strengthened with fewer Russian businesses sheltering their money abroad and with increased foreign investment. Russia's bond and equity markets also are thriving, while reform of the electricity sector is said to be encouraging.

But reform delays continue in Russia's oil and natural-gas sector and on bank restructuring. The EBRD says foreign investors consider the Yukos crisis a reminder of the uncertainties in the Russian business environment.

The "Transition Report" says Ukraine has made progress on small-scale privatizations and some tax reforms. Buiter told RFE/RL that Armenia also is seen as a country that is moving forward on market reforms. "[Ukraine and Armenia] have enormous problems, but they are not in the category of the unreforming countries," he said. "They are moving ahead on the reform front slowly, sometimes hesitantly. But they are still making progress."

Azerbaijan was praised for making many "quasi-fiscal" energy subsidies transparent by bringing them into the state budget.

Progress also was seen in Kazakhstan, Tajikistan, and Belarus. But despite those improvements, Buiter says Belarus is still seen as being in the early stages of reform -- along with Uzbekistan and Turkmenistan.

"We still call for enhanced reform -- especially in some of the countries that have been falling increasingly behind in these last few years," he said. "Belarus, Turkmenistan, Uzbekistan would be the obvious examples. We see this situation emerging where the majority of countries [in the EBRD's area of operations are], indeed, obviously in transition to mature market-economy status. But a group of countries is lagging behind and certainly could turn into 'old-style' developing countries [with] endemic poverty, lack of growth, bad governance."

The "Transition Report" concludes that in most former Soviet republics, reform appears to be held back by weak institutions and the lack of ability or political will to implement new economic policies at all levels of the state.

It says those shortcomings were felt most strongly in Georgia and Moldova, which both saw the discontinuation of their International Monetary Fund programs as a result. It says similar shortcomings continue in Turkmenistan and Uzbekistan.

Ratings issued by the EBRD on reform progress by Uzbekistan and Moldova have been downgraded since last year due to what the "Transition Report" calls "continuing problems of government harassment" in the business environment.