beyondbrics

First, the good news for central and eastern Europe: its economies are growing faster than previously thought, says the European Bank for Reconstruction and Development, and will expand by 2.2 per cent this year.

Now the reality check. The EBRD points out that emerging Europe was hit harder by the global slowdown – and is recovering slower from it – than any other emerging region. “We have reasons to be concerned,” says its chief economist, Erik Berglof. But he may be setting too high a standard.

The EBRD’s new forecast for 2010 growth is a significant increase from the 1.7 per cent predicted back in July. (The 2011 forecast for central Europe and the Baltics does slip slightly from 3.1 to 3.0 per cent.) The whole EBRD region – which encompasses 29 countries in eastern Europe and central Asia – is now predicted to grow over 4 per cent in both years. The bank attributes the upgrade primarily to faster European (read German) growth, along with a revival in oil prices, capital flows and remittances.

That’s still not good enough, says Berglof. He says that eastern European countries were once “very successful emerging markets” thanks to their deep structural reforms, and that they should now improve competitiveness through another round of reform, in transport and the like. After all, he adds, emerging European countries are emerging markets, with the associated potential to benefit from improvements in corporate governance, law enforcement and other aspects of the business environment.

But emerging European countries might well ask to be cut some slack. Berglof himself admits that external factors limit the prospects for renewed structural reform. In the past, the carrot of EU and eurozone membership has encouraged reform, but the crisis has made that a more distant prospect for several countries.

And western Europe’s shadow reveals itself in another way too. Lacking strong internal demand, emerging Europe’s growth depends on its richer neighbours. So, with the eurozone recovery fragile, it’s not surprising that the region lacks Chinese-style oomph. As the graph below shows (with IMF forecasts), it’s the poorer countries in the EBRD’s region – the commodity exporters of central Asia – which have managed to accelerate their growth since 2005.

Another piece of data out this week hints at another limitations for eastern Europe. Hungary’s population has fallen below 10 million for the first time since 1960, according to a census. Unlike Asia and Africa, emerging Europe largely has populations that are ageing, shrinking and emigrating. There’s a demographic reality to its growth performance.

None of which means the EBRD shouldn’t be ambitious. But comparing emerging Europe with emerging Asia is a recipe for dissatisfaction.

Eastern Europe and central Asia:
growth vs. wealth
(click to enlarge)