Transition Report 2013 Stuck in transition?

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Facts at a glance

2% projected growth of the transition region in 2013, the lowest rate in 15 years (with the exception of the 2009 recession).

IN 15 countries support for markets declined after the crisis.

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The year by which most transition countries had closed the productivity gap, compared to other countries at similar income levels.

1% estimated average boost to long-run annual growth of GDP per worker in non-EU transition countries resulting from institutional reform.

Convergence at risk

Potential causes of lower long-term growth

It is often argued that the crisis might have damaged long-term growth prospects in transition countries because it may imply permanently lower levels of external financing. Pre-crisis growth in many countries in the transition region was boosted by large and ultimately unsustainable inflows of debt and foreign direct investment (FDI).1 The crisis triggered a sharp reduction in FDI and portfolio flows, which have not recovered and are forecast to remain below those earlier levels in the medium term (see Chart 1.2). Similarly, there has been a sizeable decline in the cross-border exposures of foreign banks. Coupled with a rise in local deposits, this signals a shift away from the foreign-financed banking model that has prevailed until now in many countries in the transition region.

The capital inflows seen in the mid-2000s are not, however, a relevant comparator when analysing long-run growth potential. In Chart 1.2 the projections for future years look low by contrast with the 2004-07 boom, but are comparable to the levels seen in the late 1990s and early 2000s (a period when many CEB countries grew vigorously). It would therefore be wrong to argue that the crisis has plunged transition economies into an unprecedented era of weaker capital flows which is likely to constrain growth.

Chart 1.2

Source: International Monetary Fund World Economic Outlook (IMF WEO) database and projections, October 2013.
Note: Net capital flows are calculated as the sum of net FDI, net portfolio flows and net other investment.

While concerns about weaker capital inflows may be overblown, there are other – more fundamental – reasons to expect a long-term slow-down. These relate to the nature of the catch-up in productivity that followed the recessions in countries in the transition region in the early 1990s, the slowing of structural reform since the mid-2000s, and the political and social repercussions of the crisis and the low growth seen since 2008.

See EBRD (2009), Becker et al. (2010) and World Bank (2012). [back]