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Despite the war in Iraq, the gyrations in world capital markets and the post 2000 global economic slowdown, the former communist countries are posting bigger increases in economic growth than many expected. Leading the way is Russia, the region’s largest economy, which is forecast to grow by over 6 per cent this year. The region as a whole is forecast to post the growth of gross domestic product of nearly 5 per cent in 2003, with a similar increase expected next year. The outlook for the region for 2004 also appears promising, assuming that the current recovery in the US continues, the forecast pick-up in western Europe materializes and oil prices, a key factor in Russia, remain strong. However, there are also serious potential threats to further rapid growth, ranging from a sudden collapse in oil prices, delays in market-oriented reforms in the former Soviet Union, and the excessive government borrowing in central Europe.
Economists expect that the economies of the 27 states which emerged from the former communist bloc will grow by about 4.5 to 5 per cent this year, compared with earlier prediction of 4 per cent. The countries of the Commonwealth of Independent States, which the EBRD predicted would grow by 4.5 per cent in 2003, are now likely to post an average growth rate of over 6 per cent. The more advanced economies of Poland and other central European states heading for the European Union membership next year are growing more slowly than expected a few months ago. This sub-region is likely to grow this year by 3 to 3.5 per cent, in sharp contrast to the 1990s, when it consistently led the way for the ex-Communist bloc. In south-east Europe, which is recovering from the after-effects of the wars of the former Yugoslavia, growth this year is likely to fall slightly compared with 2002 — the about 4 per cent.
For next year, most economists’ forecasts fall in a range of 4 to 5 per cent for the region as a whole. However, the geographical balance is likely to change, with the central European states performing rather better this year, as long as Poland’s hesitant recovery from stagnation is sustained. Russian growth could slow, especially if oil prices weaken, and any deceleration would hit the CIS trading partners, such as Ukraine. In central Europe, governments face a serious challenge in managing the public finances as they prepare for the European Union enlargement. Budgets are buckling under the combined weight of bloated social security and pensions obligations and the growing need, over the coming years, to co-finance the EU-aided projects. The Czech Republic and Hungary are pushing through deficit-cutting budgets for 2004. Poland, anxious to accelerate growth, is postponing serious reductions until 2005.
In south-east Europe, political instability in the former Yugoslavia still casts a long shadow, notably in Serbia and Montenegro. However, Romania, the largest economy in the Balkans, is growing steadily following the success of a macro-economic stabilization programme which has seen inflation brought under control for the first time since the fall of communist. In Russia there are concerns that efforts to diversify the economy away from its dependence on oil and gas are bearing little fruit. In the electricity industry and in banking, liberalization is going ahead slowly. In gas, it has been repeatedly postponed. Without further serious reforms, the economic growth in Russia will grind to a halt.
Taking advantage of high oil prices and the competitive advantages gained by the sharp rouble devaluation of 1998, the corporate Russia has responded with vigour. Economists are forecasting that the Russian GDP could expand 7 per cent in 2003, making the economy one of the fastest-growing in the world this year. Now the private economy is growing, the rouble is stable, gold reserves are more than $60 billion, Moscow residents live better than in Prague, Warsaw and east Germany, and the main problems in the city are parking and ecology. Whatever the explanations, the results have been impressive. The real GDP grew 10 per cent in 2000, 5 per cent in 2001, 4.3 per cent in 2002 and is expected to touch 6 per cent this year.
Whereas, the privatized oil companies have rationalized their assets, invested in new technology raised production, and attracted outside investors, the largely state-controlled gas sector has done little to restructure itself and has saddled itself with enormous debts. Large parts of the economy remain heavily criminalized or underground. The shares-for-loans privatization programme, which resulted in a handful of oligarchs controlling large swathes of the country’s natural resource assets, has concentrated prodigious wealth in the hands of the very few. These big financial-industrial groups have also corrupted the political, governmental, legislative, and judicial processes to their advantage making it all the harder for the state to pursue further reforms that would benefit the majority of the populations.
Since 1991, the state’s role in the economy has certainly changed markedly, partly by design, but largely by default following the financial crisis of 1998. As a result of the collapse of its domestic debt market, the government has had little option but to put its public finances in order. This has forced the government to focus on how it collects and spends revenues, leading to the introduction of a flat-rate tax and some radical fiscal reform. The government’s finances have swung from a nominal budget deficit of 8.6 per cent last year. The government has load initiated, if not fully implemented, administrative and judicial reforms. A former finance minister, says that Russia’s macro-economic outlook is surprisingly durable at present but that further micro-economic reforms will be needed to sustain a longer-term recovery. A lot depends on the oil price and the remnants of devaluation.
The most important micro-economic challenges will be to restructure the gas, electricity and banking sectors and to pursue effective administrative and judicial reforms. While many important reforms have been adopted, most of the reforms that will really transform Russia are still lagging behind. Cyprus remains one of the largest foreign investors, a proxy for Russian money returning to the market — and a clear sign that those who know the country best consider it a good place to put their capital again, after years of uncertainty. But other, genuinely foreign, investors are also starting to arrive. The Shell and the Exxon have both made multibillion dollar, multi-year commitments to developing oil and gas fields off Sakhalin in the Russian far East. The Ikea, Metro, Auchan and other retail groups have begun expanding fast. The Pilkington, UK-listed glass-maker, recently began work on a factory, and the Ford and the General Motors are working on car assembly plants.
In 2002, the Kazakhstan’s economy continued its strong performance, despite the weak world commodity markets; the GDP growth of 9.5 per cent exceeded the 7 per cent government target. Fueled by past large investments and an improved transport infrastructure, production of crude oil and gas condensate expanded by 17.3 per cent to 47 million metric tons in 2002, resulting in a 9.8 per cent increase in industrial output (which accounts for about 30 per cent of the GDP. Growth in the manufacturing sub-sector slowed to 7.7 per cent from 14.8 per cent in 2001, mainly due to moderation in external demand. Agriculture sector output grew by 2.7 per cent, growth in the livestock sub-sector was strong, but the grain sub-sector recorded only a modest rise due to a decline in crop productivity. Construction output rose sharply by 19.3 per cent, largely as a result of rapid infrastructure development for the new capital, Astana, and rapid continued growth (at over 9 per cent) in the services sector, mainly due to large rises in transport and telecommunications.
