Date: 23 November 2004
Speakers: Willem Buiter, Chief Economist, European Bank for Reconstruction and Development;
Julian Exeter, Senior Economist, EBRD
The eleventh annual issue the European Bank for Reconstruction and Development’s (EBRD) Transition Report is divided into a structural part – a recurrent feature of the report, which analyses general economic trends – and a specific part on infrastructure. Among other conclusions, the report highlights the importance of the nexus to the EU – in terms of membership prospects – as an exmplanatory factor for a country’s observed economic reforms.
Willem Buiter began his presentation by stating the differences between the initial phase of transition, consisting of small-scale privatisation, price, trade and foreign exchange liberalisation and the second, more complicated, phase of institution building (competition policy; set-up of banking and non-banking financial institutions; enterprise restructuring). In the past year 17 transition countries out of a total of 27, made progress in structural reforms, while the remaining countries stayed in a reform status quo. The countries detaining a candidate status for EU membership (Bulgaria, Croatia, Romania) achieved the strongest reform progresses, while the momentum slowed somewhat down for the New Member States, as “the carrot (the incentive to join the EU) had been eaten”. This contrasts with the observation of an evident lack of incentives for other countries in the wider EU neighbourhood, and the CIS in particular, to pursue reform efforts. Breaking down transition indicators by country groups and by reform type, one observes that the Central European and Baltic countries are furthest in types of initial and second-phase reforms, while the CIS are lagging behind. In between, the South-Eastern European countries bear certain lags due to their late reform start. A sector analysis reveals that most reform progress has been achieved in the banking sector.
Growth rates in transition economies have been very high in 2003 and 2004. The drivers of this growth were the external effects – the world economy having its highest growth in 30 years – a credit boom, which spurred private consumption and the beneficial effects of past reforms. It is furthermore noteworthy that despite stagnating exports to the EU-15, the New Member States followed a different (upward) growth path.
The report points out the poor fiscal performance of the New Member States, which is contrasted by the fiscal conservatism of the CIS countries, which is voluntary in some cases (Russia), but the corollary of an inability to borrow, due to high debt, in others. The current account balances generally mirror the fiscal stances, revealing reservations about investments in the home economy (Russia) on the one hand and remittances and strong foreign aid on the other (South-Eastern Europe). The latter are however set to diminish over time, which will create the need to attract FDI inflows.
A further striking phenomenon that is observed in the transition economies is the rapid credit growth since 2001. This credit boom is a source for concern, according to Willem Buiter, as it risks threatening the financial stability with regulators often lacking the means and skills to monitor banks sufficiently. Then again, risks of run-away inflation are not to be seen, even though they remain a possibility.
In the second part of his presentation, Buiter focussed on the infrastructure in transition economies. He stressed that regulators face enormous challenges, as they have to devise and implement a tariff system that promotes efficiency and environmental sustainability in production and consumption, guarantees universal access to essential services, and encourages investment and modernisation. They need to promote, where possible, competition and to ensure that all operators – incumbents and new entrants – have access to infrastructure networks on equal terms.
The Report also looks at the development and extent of private-sector participation (PSP) in telecommunications, energy, water and transport services across the region. Indeed, the telecommunications sector has attracted most private-sector interest, followed by urban transport and, to a lesser extent, the power sector. Private involvement in water, roads and railways infrastructure has lagged behind. Buiter explained this by the view held by the public, that the latter “goods” were in fact basic “rights” – i.e. public goods which should not be charged separately. PSP has been most evident in CEB and the EU candidate countries of SEE. The bulk of investment has come from western – mostly European – utilities. However, utilities from within the transition region and small local investors are becoming increasingly important. Governments have promoted PSP for a number of reasons – to enhance the effectiveness of risk mitigation and risk sharing in infrastructure investment, to improve the performance of utilities and to reduce the pressure on fiscal resources. Nevertheless, it is clear that PSP has helped to commercialise services and, in some cases, to improve access to finance.
In the future, local investors are likely to play an increasing role in PSP. There is also likely to be a move away from outright asset sales to concessions and management contracts, which harness the expertise of the private sector but limit its financial exposure. Outside the telecommunications sector, regulatory weaknesses have resulted in tariffs that have made it difficult to earn a rate of return on equity that adequately reflects the equity risk being taken by the private investors. This mirrors what is happening in other emerging markets.
See the slides of Mr. Buiter’s Presentation.