 Although the region has largely reduced barriers to external trade, and has made substantial progress in opening up to foreign investment, a host of secondary challenges remain that can hinder the impact of these reforms on growth and poverty reduction. These include: behind-the-border policies that hinder investment; a spaghetti bowl of trade agreements which create complexities for traders and investors; and numerous border and transit disputes which stymie the flow of goods especially to landlocked countries. In addition, the region now faces the challenge of liberalizing trade in services, the fastest growth segment of the world trade flows.
“Behind-the-border” policies are as critical to a country’s investment climate as its external trade policies. These include regulations and institutions overseeing local and foreign investment, capital markets, customs, taxation, labor, private ownership, legal recourse, and so on. Many transition states have yet to achieve a reasonably level playing field for private investors – both domestic and foreign – that can allow resources to be allocated efficiently in pursuit of opportunities in the global economy. For example, in a number of countries, key export sectors remain dominated by state participation (despite large scale privatization programs) and face issues in terms of governance, pricing, financing, A myriad of regional free trade agreements and customs unions have been formed, e.g. 39 bilateral free trade areas in South Eastern Europe (SEE) and among the CIS countries. However, these have become enormously complex, focusing heavily on the exchange of trade preferences and hindering commercial decisions by traders and investors. A main challenge is how to rationalize this “spaghetti bowl” into region-wide arrangements, and to increase multilateral cooperation on related issues such as transit facilitation and liberalization of trade in services. The political tensions associated with the establishment of new states in Eastern Europe and Central Asia has also yielded numerous border and transit disputes that hinder the free flow of goods within and beyond the region. These are particularly crucial for the many land-locked states in the region. Additionally, some countries maintain remnants of the Soviet-era restrictions on the physical movement of both people and goods, such as internal transit checkpoints, which create rigidities even inside domestic boundaries and raise the costs of delivering goods to market. Finally, reforming the service sector is a further regional challenge as it can deliver greater and more sustainable growth. Service industries have emerged as a dynamic force in economic growth in the EU8 and SEE countries. Telecommunications, transportation, banking, and tourism are some of the big revenue generating sectors that have been core targets of reform. However, new, higher technology sectors, are now beginning to emerge within the region. |
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