Merging economies can break through reform stagnation, says EBRD report

Reviving reforms is essential to put economic convergence back on track

Emerging countries are in danger of forever trailing the living standards of more advanced market economies, but the EBRD argues in its Transition Report 2013 that they can still break through obstacles that stand in the way of greater prosperity.

The publication notes that the reform process has been stalling since before the onset of the global crisis and that this lack of reform has weighed on both the investment climate and economic growth.

The report – “Stuck in Transition?” – identifies a clear correlation between insufficient economic and political reform and a lack of economic progress. However, it argues that countries can escape this vicious circle.

“The evidence suggests not only that time is on the side of reform, but that the return of reform can be promoted and accelerated, particularly if international integration, domestic leadership and broader social movements work hand in hand,” the Chief Economist of the EBRD, Erik Berglof, writes in the foreword to the report.

EBRD economists say that without further improvements in economic and political institutions, the convergence process, whereby developing economies gradually align with the most advanced economies, will stall in some countries, and will slow to a crawl in many others.

“Only the central European and Baltic countries would reach or exceed 60 per cent of EU-15 average per capita income in the next 20 years. Most transition countries would remain far below this threshold,” the report adds.

The report reveals how successful economic and political institution building can reinforce each other and concludes that support for market-based reform and private sector-led growth can strengthen democratic progress.

It cautions that this relationship is more tenuous in countries with abundant natural resources and therefore advises further efforts to diversify the economic base in such countries.

Just as stronger economic institutions support democracy, so democratic change can influence the quality of economic institutions, the authors of the Transition Report argue.

Economic institutions can see improvements on the back of political reforms. The report points out that even if political change is difficult at the national level, it is often more feasible at the regional or local level.

International integration is also seen as a key element in strengthening the reform process through enhanced trade and financial links and by reaching out to higher international standards of education and training.

In addition, the report places a strong emphasis on the role that both traditional and new media as well as civil society can play in supporting reforms by increasing the transparency of public decision-making and encouraging public officials to become more accountable.

In this context, the report shows how countries can enhance their reform-supporting education systems by providing universities with better funding and by freeing them from political interference. Drawing on new data, the Transition Report also explains the importance of social inclusiveness in the reform process. “Reforms that benefit only a minority will sooner or later lose support,” it says.
The EBRD, owned by 64 countries and two intergovernmental institutions, is supporting the development of market economies and democracies. Follow us on the web, Facebook and Twitter.
(EBRD)