europe view no 88

EUROPE

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Red turns grey and gloomy

Jul 3rd 2008
From Economist.com

Keep an eye on the mood of the unlucky millions

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WHETHER you call it transition or convergence, the message is the same. Cut off from the outside world by decades of totalitarian rule, the ex-communist countries have mostly caught up fast. That contrasts pleasantly with the years after the change when poverty soared, trade slumped, and public services frayed. In the six years since the Russian financial crash of 1998, 50m people (out of 400m in the whole region) moved out of poverty. High oil prices aside, competition, banks, brains, roads and good government have emerged indubitably as the fuel for growth, and the more you have of them, the better the results.

The idea of inevitable and accelerating progress is comforting. But as a comprehensive new study from the World Bank shows, the policies that worked in recent years are not enough to keep the future rosy, particularly for the ex-Soviet countries likely to stay outside the European Union in the next decade or so. They are still dependent on low-skilled business and natural resources. Competition, both internal and from foreign firms, is lower; as a result productivity lags. Even the more successful countries shouldn’t be complacent: labour shortages, not unemployment, are already a problem; that will get worse because of bad education systems and a fast-ageing workforce.

The danger is that a lucky globalised few enjoy the benefits of integration in the world economy, while ill-educated chunks of the population and backward regions get left behind. That’s both a waste, and politically dangerous.

The World Bank’s main message is “more of the same”. Competition, for example, drives up standards. So reducing barriers to foreigners (such as clogged ports and peculiar local standards) is one key; avoiding political favouritism at home is another.

The bank also suggests a cocktail of new policy measures, under the headline “Innovate, Include and Integrate”. Labour-market reform and better training for adults would for example, improve the participation rate (strikingly bad among over-50s). Pension ages need to be higher and health policy needs to focus more on keeping older people fit for work.

Diagnosis and prescription are the easy bits. The real difficulty is getting the patient to take the medicine. As the report notes, EU accession gave a big boost to reform efforts. But now that has run out of steam, both in its effects on new members, and in the likelihood of any big further expansion.

So what to do? Marcin Piatkowski, chief economist at Poland’s biggest bank, PKO Bank Polski, has put forward a commendable idea that he calls “For your (economic) freedom and ours” (it has pleasing echoes: the slogan was first used at a Polish rally in support of the Decembrists on January 25th, 1831).

He wants to put economic flesh on the political bones of the “Eastern partnership” recently launched by his country and Sweden, with backing from the Czech Republic and others. It offers closer ties to the EU for ex-Soviet countries and Russian regions that want it. So far, the plan has been about improved border crossings and the like. But Mr Piatkowski wants to include opening the labour markets in countries that sign up for it, plus free trade in goods and services. That would serve three purposes. Legalised migration from Ukraine and other countries would cool overheated labour markets in Poland and in other new member-states. It would export know-how and expertise eastwards. It would change the debate in the EU, away from navel-gazing towards understanding how to promote growth and good government. And, most importantly, it would change expectations: if you think competition is going to intensify, you smarten up your act.