With a stable population in the Region, GDP per capita continued to increase at rates of more than 6 percent over 1999 – 2006, which drove up living standards and reduced poverty. The efficiency of labor and capital rose rapidly in the Region, especially in the middle-income countries of the Former Soviet Union. As a result, the Region’s income per capita, in constant PPP dollars, rose from US$5,592 in 1998 to US$8,605 in 2006, lifting 50 million people out of poverty within a population of nearly 460 million. In fact, per capita GDP in the Commonwealth of Independent States (CIS) was about 50 percent higher in 2005 than in 1998, and in the EU10 countries (Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic, and Slovenia), it was 15 percent higher than in 1993.
But while GDP growth remains strong in the Region, it is expected to slow from 7.6 percent in 2007 to 6.1 percent in 2008, or even lower in light of recent developments in global financial markets, Bank officials said. External demand is expected to weaken in the Region overall this year, due to slower growth in the OECD and the Euro Area, and slower domestic demand growth in some countries because of projected lower private consumption and investment growth.
Pradeep Mitra, Chief Economist for the World Bank’s Europe and Central Asia Region, said the risk of slower growth is especially large in economies with fixed exchange rates where booming private sector credit has widened external imbalances, fueled inflation, and raised fears of overheating.
"The financial turmoil arising from the US sub-prime mortgage market has led to tighter and more expensive credit, which raises the risks of a sudden slowdown in economic growth," said Mitra. "Many economies in the Region rely heavily on foreign capital inflows to finance the growth of their financial sectors and thus enable economic growth. A tightening of those flows would hit them hardest. To meet these growing challenges, governments should be prepared to use tighter fiscal policy where this has been lax, improve banking supervision, and speed up structural reforms."
Rising Food and Energy Prices
Food and energy prices have surged in recent months, which in turn have driven inflation upwards. Food price inflation has varied across countries, rising between 2006 and 2007 from 5.6 to 13.8 percent in the new EU member states and from 6.5 to 20.3 percent in the middle income CIS countries. The increases were smaller but still large in the low income CIS countries – from 10.7 to 17.1 percent.
Higher food prices are largely due to last summer’s drought throughout the region, stronger cereal demand in other parts of the world as a result of rising incomes, and switching of land to bio-fuel production. The rising food prices will have a larger impact in low-income countries in the Region while higher energy prices will hit middle-income countries harder, the Bank officials said.
The impact may be particularly large for low income countries since spending on food is a larger percentage of their consumption. In the EU10, food accounts for an average of only 21 percent of the Consumer Price Index (CPI) basket; in the poorer countries in Central Asia, it accounts for 50-60 percent of the CPI (50 percent for low-income CIS, on average). Simulations suggest that for some of these countries, even a 5 percent relative increase in food prices can increase poverty rates by 2-3 percentage points.
Meanwhile, while rising food prices pose a challenge to the Region, an upcoming World Bank study shows that big gains in the productivity of workers in the Region during the past decade have helped slash poverty rates and boost living standards.
The rapid surge in the region’s productivity – the amount each worker produces in a period of time – has boosted economic growth, doubling income per capita from 1999 to 2007, says the report, Unleashing Prosperity – Productivity Growth in Eastern Europe and the former Soviet Union, which will be published in May.
"While policy-makers focus on how to meet the short-term challenges of food and energy prices, it is important that they do not lose sight of the medium-term and longer-term measures that drive stronger economic growth such as productivity," said Paloma Anos Casero, Senior Economist and Lead Author of the report. "Improving the productivity of workers in the region is urgently needed, especially given that many of these countries are ageing and face a shrinking labor force. Because there are fewer workers, each worker must be more productive and it is up to the governments in the region to speed up those reforms that will allow that to happen."
