CEE and Central Asian economies set for return to growth in 2021

Montenegro is set for the highest growth of any country in Central and Eastern Europe and Central Asia in 2021, according to a new forecast from the World Bank.

Developing economies in emerging Europe and Central Asia are expected to grow by 3.6 per cent this year, as a recovery in exports and stabilising industrial commodity prices partly offset a resurgence of the pandemic late in 2020 and a recent flareup in new cases, says the latest edition of the World Bank’s Economic Update for the region.

The modest growth in 2021 follows a contraction of two per cent in 2020 due to Covid-19 related disruptions.

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The contraction was smaller than anticipated due to rebounding industrial production, increased export demand, higher commodity prices and fiscal and monetary support. Hardest hit are economies that are heavily dependent on services and tourism, since social distancing measures and mobility restrictions led to sustained weaknesses.

Regional growth is expected to strengthen to 3.8 per cent in 2022, as the effects of the pandemic gradually wane and trade and investment gather momentum. The outlook remains highly uncertain, however, and growth can be weaker if the pandemic takes longer than expected to fade; there are delays in vaccination; external financing conditions worsen due to a rise in global interest rates or deterioration in investor sentiment; or due to geopolitical tensions.

Montenegro is forecast to have the highest growth in region in 2021, at 7.1 per cent, followed by Serbia and Tajikistan, which will both see their economies grow by five per cent.

In Poland, the region’s largest economy, the projected rebound in 2021 is set to be 3.3 per cent, weaker than previously anticipated (3.5 per cent), reflecting uncertainty surrounding the emergence of new strains of Covid-19 and the uneven pace of vaccination in Europe.

The World Bank expects that following the moderate recovery this year, growth will accelerate to 4.2 per cent in 2022. The 2022 projection is faster than previously envisioned (3.4 per cent), owing in part to a robust rebound in domestic demand, particularly in investment.

“Although Poland’s GDP declined in 2020 for the first time in 30 years, the well-diversified Polish economy is one of Europe’s least affected amid the Covid-19 pandemic,” says Marcus Heinz, World Bank resident representative for Poland and the Baltic States.

At the other end of the scale, the economy of Belarus is forecast to contract by a further 2.2 per cent: the only country in the region which is not projected to see any kind of recovery in 2021.

Erasing gains

The pandemic is expected to erase at least five years of per capita income gains in several of the region’s economies and raise the poverty headcount, largely due to job losses. Overall, despite the rebound in growth, the recovery in per capita GDP of the region is subdued and below pre-pandemic trends.

“The pandemic continues to cast a shadow on economic activity in Europe and Central Asia. However, as policymakers grapple with the short term impacts on health, education and the economy, they should seize the opportunity to address the long term challenges of boosting productivity, building a more vibrant private sector, improving institutions and moving towards low-carbon, greener and inclusive economies,” says Anna Bjerde, World Bank vice president for Europe and Central Asia.

Fundamental to achieving these long-term development goals, says the World Bank, is good governance.

The pandemic has underscored the need for good governance given the important role governments around the world have played in mitigating the health, economic and social impacts of the virus. The range of measures have included restrictions on movement to control the spread of the infection to vaccination programmes, relief packages to protect individuals and businesses from the economic fallout of the pandemic, and devising ways for virtual learning for millions of school children.

In emerging Europe and Central Asia, good governance is all the more important given the historically large role governments play in shaping the economy.

Government expenditures in the region represent nearly 40 per cent of the economy and governments employ more than a quarter of the region’s most educated and productive workers, with women constituting 57 per cent of public sector employees. And the role of government in the region’s countries is likely to further increase in the coming years, driven largely by the need for expansion of health and long-term care for aging populations and public support for government interventions to tackle inequality and, in the face of Covid-19, improve health and education systems.

The importance of digitalisation

The report also examines the potential role of data and digitalisation in improving governance in the region.

“To effectively address the challenges brought on by Covid-19, improving governance has assumed an even greater importance in the region,” says Asli Demirgüç-Kunt, World Bank chief economist for Europe and Central Asia. “Digital technology and the data revolution offer the potential to increase efficiency, transparency, responsiveness, and citizen trust, all of which directly improve the quality of government.”

Data lays the ground for improved decision making, optimised government functioning, and more effective resource allocation, while digitalisation strengthens these processes and enables greater efficiency and transparency.

To expand the impact of the data revolution, the World Bank recommends enhancing government digitalisation and coordination of decentralised data systems across institutions are necessary. The quality of government is increasingly informed by the extent to which governments harness digital tools and apply technology to government practices to improve management, service delivery and overall state capacity. Governments should implement incentive structures to encourage the adoption and adaptation of data systems within the civil service.

The bank also says that data revolution and digitalisation offer an opportunity to strengthen trust by fostering effective collaboration between governments and civil society. One of the most promising mechanisms for doing so is Open Government Data, which reduces the transaction costs of gathering, analysing, and disseminating public sector data and allows for a more comprehensive understanding of the quality of governance.

Enabling open access to government data could also help counter the spread of misinformation and disinformation across social media channels. Promoting direct feedback mechanisms between citizens and government not only improves provision of public services, but also builds trust and legitimacy.

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