July 27, 2017

Dubrovnik, Croatia. Countries in the region should continue working on good governance for higher growth 

In many ways, Central, Eastern, and Southeastern Europe is an incredible success story. In less than a generation, countries moved from centrally-planned economies to market-based ones—transforming their legal systems, public administrations, and economic policies, to name a few key elements. Yet, for the sake of higher growth in the future, countries need to continue enhancing institutions and good governance.

Enhancing institutions and good governance—the efficient governing of a country—remains at the core of the reform agenda to raise prosperity to advanced European living standards. Many countries have joined the European Union, a vital anchor toward these goals, and others are aspiring to join.

Uneven convergence

Average income per capita in real terms (without inflation) in this region has almost doubled over the past two decades and near-term growth in most countries is robust. But convergence with advanced Europe has slowed since the global financial crisis. Growth potential has almost halved from its pre-crisis level—largely because of a slowdown in productivity growth. In addition, many higher-skilled workers have left this region in search of better opportunities abroad.

A new wave of reforms is needed to revive growth sustainably. This will be more difficult than during the initial transition, including because the low hanging fruit of reforms has already been picked. Importantly, the region’s adverse demographics and skill shortages pose challenges ahead. And the external environment is less conducive than before: despite the present recovery, potential growth in the euro area remains subdued and prospects for further EU enlargement uncertain.

A common thread

While priorities differ across countries in the region, there is a common thread in the need for more effective institutions and better governance. This can improve government efficiency and provide better services, facilitate state-owned enterprise restructuring, and strengthen banking systems so that new firms can emerge and small ones can expand. Because these reforms are complex and take time to bear fruit, now is the time to redouble efforts.

Better governance is something that is needed in many countries in the world and hence has relevance well beyond this region.

Good governance can play a crucial role in speeding up the convergence process. It leads to higher productivity, more durable growth, a greater level of trust within society, and a greater ability to share the benefits of growth among the many, not just the few.

Three routes to improve governance

How can better governance be achieved? This is a tough question and we don’t understand well why some countries succeed and others don’t. The EU will continue to play a critical role in this region. Yet, I see three domestic economic policy priorities that may help achieve better governance:

First, increase transparency and accountability. This means, for example, designing budgets that are understandable and widely available to the public. It also means using transparent procedures for public procurement, and providing clear information about the performance of state-owned enterprises. E-government (the use of information and communication technologies in the activities of the public sector) can play an important role in this.

Moreover, several countries need to make the ownership structures of financial institutions and corporations more transparent, while providing more information about the ultimate beneficiaries of loans and improving financial disclosures.

All these initiatives can empower citizens and civil society organizations in the fight against systemic corruption.

Second, promote fair participation and a level playing field. That means, for instance, having a system of government spending and taxation that ensures an equitable distribution of resources and broad access to education and health care to provide opportunities to all citizens to actively participate in society.

Many policies can impinge on whether the playing field is level or tilted. We can learn from privatization experiences. In some countries, privatizations were designed to ensure wide participation across society, with a positive impact on institution building. In other countries, we saw a concentration of privatized resources in the hands of a few individuals.

Third, boost the operational capacity of the state. This means making justice systems more effective and impartial. The state will work better with competitive and merit-based recruitment and promotion of public officials, and by limiting political interference in public administration.

All these policy priorities can amplify the positive changes brought about by the concurrence of good governance, high productivity, and strong and inclusive growth.

That is why the IMF is promoting good governance in its everyday workthrough policy advice, lending, and capacity development. Take for example the fiscal transparency code, the financial sector assessment program, the anti-money laundering initiative, or measures to improve public procurement and fight corruption in Fund-supported programs.

Of course, promoting good governance is not an easy task. Nor is it a new challenge.

We will need to continue learning how to improve governance both from what worked and what didn’t. Sometimes this takes us out of our comfort zone, but this means that we are discussing the crux of the matter. We recently brought together policymakers, academics and civil society organizations to discuss these issues in a conference jointly organized with the Croatian National Bank. All agreed that good governance and strong institutions can play a crucial role in making growth more durable and inclusive. That is a good start.