Record economic growth in former Soviet bloc

By Mark Milner

LONDON: Economic growth in the old Soviet bloc this year will be the fastest since the fall of the Berlin Wall and the end of the region's centrally planned economies, according to the European Bank for Reconstruction and Development (EBRD).

The surge in growth, expected to see the region expand by 5 percent this year, is being driven by high oil prices and by the currency devaluations following the Russian debt crisis in 1998, which have boosted competitiveness.

But large areas are still facing poverty, unemployment and skill shortages, and the EBRD warned on Tuesday that the current robust economic performance cannot continue without structural reform.

In its annual report on the progress made by the countries of central and eastern Europe, the Baltic states and the Commonwealth of Independent States in moving from central planning towards market economies, the bank argues that the benefits of reform have not been evenly distributed.

It is concerned that, although the region is receiving a boost from the rise in the price of commodities like oil, one of its most precious resources -- its "human capital" -- is in danger of being frittered away.

At the start of the transition process many countries of the former Soviet Union were expected to benefit from a combination of low labor costs and high educational standards.

But in a special analysis of labor markets in the region the EBRD says that, although there has been tremendous resilience in the face of dramatic change, the conventional wisdom is proving flawed.

Although some workers have been able to take advantage of new opportunities, many others have been forced into the black economy and to talk up more than one job in order to make ends meet.

In the CIS -- broadly the old Soviet Union -- the bank says that despite shortages, skilled employees often find themselves locked into dead end jobs in declining industries.

"It is clear that the two most abundant assets in eastern Europe -- the people and their skills -- are underemployed," the EBRD's chief economist Willem Buiter says. "This considerable potential can be unlocked through significant improvements in the business climate, particularly those that help start-ups. In many countries there is also an urgent need to overhaul social safety nets to reduce resistance to painful but inevitable industrial restructuring."

Among the factors the bank believes are required for successful market economies are secure property rights, respect for contracts, transparent governance and low barriers to market entry and exit.

"Other necessary features are the absence of the use of threats, intimidation, harassment and extortion by private parties or by the state and low levels of corruption, including state 'capture'."

But Buiter said countries in western Europe had a part to play in the transition. Any delay in the timetable for the first wave of eastern and central European countries joining the EU "could really hurt" the countries involved.

Even after the first wave the EU would need to maintain an open market stance towards countries in south eastern Europe and the former Soviet Union. "It is important we don't replace the iron curtain with the Brussels lace curtain," said Buiter.

-- Guardian News Service