EBRD Warns of Wealth Gap in Eastern Europe

Living standards in the majority of emerging economies in eastern Europe may permanently lag behind those of western Europe as the lack of reforms discourages investment and economic growth, warns a report published by the European Bank for Reconstruction and Development (EBRD).

According to the EBRD, without further improvements in economic and political institutions the convergence process – which would allow developing economies to gradually align with the most advanced economies – will slow to a crawl in many countries or even stall completely.

However, the report also suggests that the economies in the region, mainly those that broke away from the former Soviet Union, can still overcome the obstacles that stand in the way of development and achieve prosperity if stalled reforms could be revived and accelerated.

It calls for measures to support market-based reform and private sector-led growth which will strengthen the democratic progress. The reform process could be enhanced by international integration through enhanced trade and financial links.

“Only the central European and Baltic countries would reach or exceed 60% of EU-15 [the European Union’s original 15 member countries pre-May 2004] average per capita income in the next 20 years.” EBRD chief economist Erik Berglof said. “Most transition countries would remain far below this threshold.”

The EBRD was founded in 1991 to help finance eastern Europe’s transition to market democracy, and recently undertook a similar task in Middle East countries affected by the Arab spring.

It has been among the most vocal institutions in warning of the dangers of “deleveraging” by western-owned banks in eastern Europe, as they seek to shore up the balance sheets of parent companies, reducing credit flows.

The new report suggests that the biggest risk now is not capital flows into central and eastern Europe, which “will eventually recover”, but a stagnation in political and institutional reforms that set in even before the 2008 financial crisis. Public opinion has subsequently turned against market reforms, especially in more democratic countries.

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