Complacency could threaten long-term growth in Emerging Europe, EBRD says

The EBRD’s chief economist Erik Berglof warned that governments would be putting long-term growth in emerging Europe at risk if they shied away from implementing crucial reforms just because the region was now pulling out of the global economic crisis. “Complacency would threaten not only recovery, but also long-term growth,” Dr Berglof said in a foreword to the EBRD’s Transition Report 2010. There could be no return to the region’s pre-crisis dynamism without new reform. This year’s Transition Report makes clear that the EBRD region is recovering more hesitantly than other emerging markets and with sharp variations among individual countries. Overall growth of 4.2 and of 4.1 percent is predicted for this year and next, compared with a contraction of 5.5 percent in 2009. In response to this mixed outlook, the Transition Report 2010 outlines a series of recommendations to policy-makers on how to return the region to stronger, more sustainable, growth, including the need to develop local currency and capital markets, to reinvigorate export growth and trade integration and improve the business climate.

The aim of these recommendations is to make growth less volatile and also to rebalance the drivers of long-term expansion. As capital inflows are expected to remain below pre-crisis levels, “the region will need to seek alternative sources of growth”. The Transition Report 2010 also unveils a major overhaul of the way it measures the transition process in emerging Europe, in a move that will make it easier to identify priority areas for reform and which reassesses the role of the state in supporting the reform process. Concluding that, up to now, the measurement of transition had emphasised too starkly the need to reduce the role of the state and to boost the role of the market, the latest report highlights the important role of state institutions that help markets perform better. Referring to the imperative to develop domestic capital markets and local currency finance, Dr Berglof wrote: “More local currency lending, particularly to unhedged borrowers, will make economies less vulnerable to exchange rate depreciations.”

News source: EBRD link: article