Productivity surge boosts growth and living standards in Eastern Europe and the former Soviet Union

May 14 2008

Big gains in the productivity of workers in Eastern Europe and the former Soviet Union during the past decade have helped boost growth and living standards, but more must be done to eliminate red tape and barriers to enable firms to become more productive in a rapidly globalizing world, says a new World Bank report.

The rapid surge in the Region's productivity - the amount each worker produces in a period of time - has boosted economic growth, raising income per capita by more than 50 percent between 1999 and 2007, while lifting about 50 million people out of poverty, says the new report, Unleashing Prosperity - Productivity Growth in Eastern Europe and the former Soviet Union.

"The transition from centrally planned to market economies has freed up an entrepreneurial energy that always existed, but rarely had the chance to make itself felt," said Shigeo Katsu, Vice-President for the World Bank's Europe and Central Asia Region. "The rise in productivity in the region has brought higher sales and more profits to businesses so they can pay more in wages and invest in new technologies. At the same time, it is critical that the countries of the region do not relax, but rather, build on this success and become even more productive, thus competitive, so that they can achieve their aspiration of catching up with Western European living standards."

In the 1990s, the countries of the Region, particularly in the Commonwealth of Independent States (CIS), saw their output and productivity plummet during the early phase of transition to market economies. But since 1999, output per capita recovered strongly in many countries, especially in the countries of the former Soviet Union. In most countries of the Region, improved domestic polices and greater trade and global integration have played a big role in stimulating investment, spurring innovation, and promoting productivity and growth.

Still, the study says more must be done to improve the productivity of the Region's workers. It points to the large differences in annual incomes of people in the region, ranging from about purchasing power parity (PPP) $950 per year in Tajikistan to PPP $17,991 in Slovenia. Even the EU10 new member states such as Hungary and the Czech Republic have a long way to go to catch up with the incomes of the EU-15 member countries.

"Productivity growth is the only lasting route to prosperity," said Pradeep Mitra, Chief Economist of the World Bank's Europe and Central Asia Region. "As such, productivity growth is important for poverty reduction in the low income countries in the South Caucusus, Central Asia, and the Western Balkans. It is also urgently needed in the new member states of the European Union as well as Belarus, Russia, and Ukraine where populations are aging rapidly. This is because a shrinking share of individuals of working age in the population requires each worker to be more productive."

The Unleashing Prosperity study calls for countries to pursue reforms in five areas to enable workers to become more productive:

• Promoting good governance and macro stability
• Strengthening competition
• Investing in labor and technology
• Investing in infrastructure
• Deepening the financial sector

The study's main author, Paloma Anós Casero, says the types of reforms needed depend on where the countries are in their stage of transition, which falls broadly into two groups.

In those countries that are more advanced in economic reforms, such as the EU10 and Turkey, most of the gains in productivity have been made through big changes in the economy and workers moving from unproductive manufacturing positions to underserved service jobs. In those countries, further improvements must now be done by individual firms becoming more efficient.

"The advanced reformers have already achieved much in integrating their goods, services, and capital markets into the world economy," said Anós Casero, Senior Economist in the Poverty Reduction and Economic Management Network at the World Bank. "But to compete globally, they need to do more to spur innovation, enable workers to become more mobile, and invest more in research and development."

Meanwhile, those countries which are less advanced in economic reforms, such as those countries in Southeast Europe and the CIS, show lower levels of productivity, and most of them are still dealing with the legacy of central planning.

"Changes in the less advanced reformers should focus on speeding up reforms to address the legacy of transition. Better investment policies, streamlined regulations, and stronger competition would encourage the entry of new, more productive firms and the exit of obsolete firms, thereby boosting productivity. Along with these reforms, though, it is essential that governments strengthen social safety nets to help ease the transition for workers," Anós Casero said.

For the full report and more information, please go to: http://www.worldbank.org/eca/productivity

For more information on the World Bank's work in Europe and Central Asia, please visit: http://www.worldbank.org/eca