Transitions can be good for growth
Indicators of personal happiness rank Bulgarians as the saddest people on earth. In contrast, Poles are in good spirits, somewhere between Canadians and Japanese.
A big difference between Bulgaria and Poland is what happened in the years since 1989. Both countries experienced income declines in their first years of transition, but then growth patterns diverged. Poland’s real GDP more than doubled from 1990 to 2010, well above the average for middle-income countries of about 85 percent. In contrast, Bulgaria expanded by only 52 percent over the same period. Poland shows a 30 percent improvement in control of corruption between 2000 and 2010 (the years for which Transparency International‘s data are available); in Bulgaria, corruption remained unchanged. These distinct experiences highlight that transition to a new form of government provides the opportunity to improve, but is no guarantee.
Many of the Middle East and North African countries are embarking on transitions with the goal of developing more open and accountable governments. Like the East Europeans and others before them, they will face challenges in the short run, as business is disrupted and investors wait for uncertainty to be resolved. Evidence from 47 recent transitions shows that growth declines by about 3-4 percentage points, on average, during such transitions. The good news is the decline tends to be short lived, with the dip lasting only one year and growth then resuming or exceeding pre-transition levels.
Our recent Economic Development Prospects (EDP) report estimates growth declines from earlier forecasts of a similar magnitude for Egypt and Tunisia, two countries starting the transition process. Income growth is also expected to decline in some of the other countries in the region that are facing continued unrest and uncertainty.
This income shortfall means that social protection for the poor is of utmost importance. Social policies protect the neediest and help maintain support for reform. In Poland, for example, payments to individuals increased from 10 to 20 percent of GDP in the first four years of transition. Countries in the Middle East show a similar expansion in social measures—raising transfers to the poor, expanding labor-intensive public works, developing training programs, and offering tax cuts, as also highlighted in the report. A worrisome trend, however, is the potentially distortionary nature of some of the policies. Expansion in civil service and broad food and energy subsidies do not target the neediest and will be both costly and difficult to remove, and public sector wage increases can exacerbate unemployment. While some of these may be desirable for noneconomic reasons; shifting funds to temporary and targeted measures is likely to use scarce resources more efficiently. Another potential concern in some countries is the use of social measures to delay real reform, as opposed to supporting it.
An additional challenge for the MENA region today is high commodity prices. Here, there is perhaps more similarity with Greece, Spain, and Portugal—countries that emerged from dictatorship in the mid-1970s. Indeed, as with food prices this year, the oil price shock of 1973 has been cited as a catalyst to regime change in Greece. High commodity prices bring the risk of inflation, and high food prices threaten the nutrition of the poor. The MENA region is the largest global wheat importer in the world, and while many countries benefit from rising oil prices, there are a number of oil importers in the region. The EDP report also discusses implications of high commodity prices for the region, and presents a new set of country-specific pass-through estimates measuring the degree to which international food price increases are transmitted to domestic food prices.
Overall, the message of the report is that while transition presents significant short-run challenges, it also offers a tremendous opportunity to build a path to more inclusive growth. Evidence from countries that have gone through political transitions points to a short period of slow growth, followed by improved governance and more robust growth. But there are also exceptions—as highlighted above contrasting the examples of Bulgaria and Poland. Some countries follow a slower path and others move more rapidly. Let’s hope that the MENA countries are able to use this opportunity wisely.