After sustaining a sharp decline in output during the global financial crisis and recession, economic growth is returning across the Europe and Central Asia (ECA) region. Every country in the region is expected to record positive growth during 2011. But growth is more tepid in Central and Southeastern Europe relative to the Commonwealth of Independent States (CIS) where elevated commodities prices have lifted net exports, and increased migrants’ remittances and private consumption. Higher food and energy prices are also a source of vulnerability for net importers, as these threaten to increase poverty, particularly in lower income economies in the CIS such as Armenia, Krygyz Republic, and Tajikistan, and add more macroeconomic pressures across the region.

ECA governments will need to plan for the medium-term adjustment of the large fiscal imbalances that emerged during the crisis and which, outside of the energy exporters of the CIS, are expected to remain sharply higher than their pre-crisis levels for a number of years. At the same time, in some cases, targeted social assistance programs for poor households affected by higher fuel and food prices will need to expand.

Taking advantage of improved global growth prospects will require new, deeper structural reforms to improve international competitiveness while ensuring that financial sector vulnerabilities are resolved transparently. In addition, the region faces long-standing economic and social challenges from rapidly aging populations, potential skills shortages, infrastructure constraints, and vulnerability to climate change.

Going Forward – A Tougher World for ECA Countries

Countries in the ECA region are projected to recover from the crisis more slowly than in other regions. GDP grew at a robust rate of about 7 percent in 2007 before contracting to about –6.5 percent in 2009. Growth in 2010 reached around 4.5 percent and prospects for 2011 and 2012 are only slightly better, as compared to over 5.5 percent in Latin America and about 9 percent in developing Asia in 2010.

The region has faced the greatest fiscal pressures among all the world’s regions during the global economic crisis. Average fiscal deficits were -5.5 of GDP in 2009 and are expected to be -4 percent in 2010. By comparison, the 2010 figures are -2.6 percent in Latin America and about -2.9 percent in East Asia.

Governments in Emerging Europe and Central Asia across the income spectrum also spend more than their developing country counterparts in other regions. General government spending in the region’s middle-income countries such as Poland, Russia, Ukraine, and Turkey is now higher than 40 percent of GDP in contrast with the 30 percent for middle-income countries in other regions. Ensuring that governments can strengthen inclusion and address food and fuel price increases will become more difficult with tighter budgets, unless government spending is made more efficient. Tightening fiscal constraints offer an opportunity to pursue social sector reforms for inclusive growth, as social inclusion and equal access to opportunities will be critical in order to ensure human capital needed for future growth, particularly in rapidly aging societies.

The ECA region also faces a big agenda on climate change. The region has the highest energy intensity of production, more than twice as high as developing Asia and Latin America. According to Adapting to Climate Change in Europe and Central Asia, a report issued in 2009, the impact of climate change will be more significant than expected. This is due to a lingering legacy of environmental mismanagement and the poor state of much of the region’s infrastructure, leaving the countries ill-prepared to adapt.

World Bank Strategic Directions in ECA

To help ECA countries address these challenges in 2011 and beyond, the World Bank programs in the region are focusing on three strategic directions:

I. Deepened Reforms for Improved Competitiveness

Restoring growth and convergence will require tackling bottlenecks to competitiveness, faster productivity growth, and more integration. In a post-crisis world that is projected to have less global liquidity and more risk aversion, governments throughout the region will be challenged to create the necessary environment for a more diversified and competitive economy. A recent survey of 10,000 firms in the region highlighted that infrastructure and skills have emerged as the key bottlenecks to growth. Key areas for improvements are the investment climate and governance, relevant skills, stable and efficient financial intermediation, energy and transport infrastructure, composition and efficiency of public spending, and revenue mobilization.

The World Bank is supporting:

• Private Sector Development and Export Diversification: Helping countries lay out their policy priorities and vision for recovery, improve their investment climate, and diversify their exports through Development Policy Loans (DPLs) (Armenia, Georgia), Guarantees (Serbia Policy Based Guarantee), and analytical work, such as the Turkey ‘Informality: Causes, Consequences, Policies’ report, the ‘Europe 2020 Poland: Fueling Growth and Competitiveness in Poland through Employment, Skills, and Innovation’ report, and the ‘Trends in Corruption and Regulatory Burden in Eastern Europe and Central Asia’ report, which is based on the fourth round of the EBRD-World Bank Business Environment and Enterprise Performance Surveys (BEEPS) covering over 11,000 firms in 29 ECA countries.
  
• Financial Sector Development: Contributing to financial stability and improving access to finance through lending for Credit Lines to support small- and medium-enterprise (SME) access to finance (Turkey, Bosnia, and Croatia), policy loans to stabilize the financial sector (Serbia, Montenegro, Kazakhstan, Hungary), and knowledge products, such as Financial Sector Assessment Programs and technical assistance on bank restructuring.
  
• Public Sector Reform and Fiscal Management: Improving efficiency of public expenditures and fiscal reform through policy loans (Latvia, Romania, Bosnia, Turkey, Georgia, Armenia, Tajikistan, Albania), investment lending for tax administration (Kazakhstan and Ukraine), and justice sector reform (Azerbaijan, Romania and Croatia).
  
• Energy and Transport: Contributing to improvements in infrastructure through investment lending for roads (Kazakhstan, South Caucasus) and improving infrastructure services delivery through public sector reforms to improve governance and delivery of transport and energy, such as with the Functional Reviews of these sectors in Romania.

 II.Social Sector Reforms for Inclusive Growth

The impact of the crisis, as well as of longer-term demographic, economic, and political forces, calls for policies that deliver equitable access to services and inclusive growth. Social spending reform, which has been lagging in many countries of the region, is now more urgent. Safety nets – cash transfers, social pensions, and targeted anti-poverty programs – risk being cut as government revenues fall, but it is precisely these programs that are needed more now than ever before. Increasing employment and access to good quality public services in health and education are other key areas to support inclusive growth.

The World Bank is supporting:

• Social Service Delivery: Improving health and education through investment lending for health system improvements (Montenegro, Tajikistan, Uzbekistan), education quality (Kazakhstan), and analytical work, such as the ‘Long Term Care Policies for Older Populations in New EU Member States and Croatia: Challenges and Opportunities’ report.
  
• Social Protection and Job Creation: Improving social safety nets and insurance through pension reforms (policy loans in Ukraine, Armenia, Serbia, Kosovo), improving the efficiency of targeted social protection (policy loans in Moldova, Georgia, Bosnia, Latvia) and analytical work, including the labor market focused reports ‘Turkey: Female Labor Force Participation’ and ‘The Jobs Crisis: Household and Government Responses to the Great Recession in Eastern Europe and Central Asia’.

III.Climate Action for Sustainable Growth

Many ECA countries, especially the poorest countries, are vulnerable to climate change and need to develop strong adaptation measures. The energy intensity and carbon footprint of GDP are high. In addition to economically sound adaptation and mitigation measures, there are huge opportunities in the region for increasing energy efficiency, which reduces the carbon footprint and is good for growth.

The World Bank is supporting:

• Mitigation: Financing energy efficiency projects in Bulgaria, Croatia, FYR Macedonia, Poland, and Turkey. Programs to improve the energy efficiency of public buildings, schools, and hospitals that also improve educational achievement and health outcomes have been successfully implemented in Armenia, Moldova, and Serbia, using a range of financing instruments and grants, including the Global Environment Facility, Carbon Finance, and the new Clean Technology Fund (Turkey, Ukraine, Armenia). The Bank is also offering lines of credit for energy efficiency (Albania, Turkey), policy lending (Turkey), and helping FYR Macedonia, Poland, Russia, and Ukraine develop and implement their national energy efficiency strategies, for example with the Poland report ‘Transition to a Low-Emissions Economy in Poland’.
  
• Adaptation: Helping ECA countries adapt to climate change through a pilot program that includes knowledge and investments for climate adaptation (Albania, Tajikistan, Moldova, FYR Macedonia, Uzbekistan, Serbia and Croatia).

Back to Top