With Poland an The CzechRepublic as examples, the IMF predicts that Russia has the potential to outstrip European expansion, Alex Brummer in Washington
WHEN the countries of the former Soviet Union and Eastern Europe – including Russia – finally emerge from the transition to capitalism they could achieve growth levels on a par with much of the rest of the developing world, according to the International Monetary Fund (IMF).
A new analysis by IMF staff, released at its annual meeting, suggests that once reforms are in place the countries concerned have the potential for long-term growth rates of between 4 and 5% per annum – far higher than that being achieved by their counterparts in the European Union.
Inevitably, the focus in Washington is on Russia and the need to maintain the impetus there on the reform process despite the current infirmity of President Boris Yeltsin.
At a series of bilateral meetings, and in a special meeting with the G7 at the weekend, Russia was urged to go beyond the fiscal and monetary disciplines imposed on it by the IMF – in exchange for more than $10,2- billion of credits – and focus on other structural issues, including reform of capital markets.
In macro-economic terms, the IMF staff believe that, barring unexpected setbacks, the dramatic drop in Russia’s output seen over the past five years could come to an end in 1997.
This year the IMF is forecasting that output will be only marginally down, by 0,6%, against the 4% decline in 1995 and the calamitous 15% reduction in output in 1994. However, given that the reform process continues, the IMF believes 1997 will see Russia returning to growth.
The IMF staff hold up Poland as the best example of what can be achieved, with a growth rate this year of 5,5%, following two previous years of robust expansion.
This means Poland is now growing at levels above those seen when it was a centrally planned economy.
Using a model developed by the IMF’s deputy managing director, Stanley Fischer, the staff believe that Russia has now been through the necessary changes to move into a growth pattern.
Inflation has been brought down this year to 22% (in the first eight months) against 190% in 1995. As long as downward pressure is kept on the Budget deficit, through improved tax collections, it is expected that growth can be established.
In the view of the IMF staff, the experience across the former Soviet Union and Eastern Europe over the past five years suggests a number of important lessons.
* First, the reduction of inflation from high levels is critical for halting and then reversing the decline in output which follows the reform process.
* Second, growth is unlikely to resume unless there is substantial progress on reform in a variety of areas from the banking system to privatisation.
* Finally, the enterprise culture has to be changed, even if this means that there are high levels of transitional unemployment.
In the IMF’s view, unemployment can be dealt with, provided the reforming economies adopt greater flexibility in the labour market and establish retraining schemes for displaced workers focusing on the faster growing sectors of the economy.
All this has to be accompanied by social safety nets in order to lessen the hardship associated with the transition.
But if all this is done, then, in the IMF’s view, the laggards in the former Soviet empire could begin to catch up with those like Poland and the Czech Republic which have been powering ahead as free market economies.