World Bank Presents Trade in Transition, the Latest Economic Update for Europe & Central Asia

Hans Timmer, the World Bank’s Chief Economist for the Europe & Central Asia (ECA) region, released Trade in Transition, the latest Economic Update for Europe and Central Asia, at a media launch held in the World Bank Tbilisi office on May 11. Other World Bank offices also participated in the discussion online, along with Tbilisi chosen to host the presentation and media launch.

“After a period of uncertainty, Georgia’s microeconomic fundamentals are back on track, contributing to an improved economic performance and we’re really eager to hear from Hans how Georgia and other countries in the region are doing,” Mercy Tembon, World Bank Regional Director for the South Caucasus said, as she introduced Hans Timmer, and gave a brief introduction of the newly published economic update.

“While the ECA is a very diverse region, there are still general trends,” Timmer noted in his opening remark during the media launch. He then went on to summarize the most common of these, focusing on the role of trade, and analyzing how these general trends are reflected on countries.

The first observation introduced by Timmer was that despite a lot of political uncertainty and political tensions within the region, the European Union struggling with Brexit, and anxiety among sections of population, the economic news is more optimistic than it was six months ago, and the situation has even improved for most countries.

“The South Caucasus is an exception to that, with a somewhat downgraded the forecast, but the general picture is optimistic. If you look at the western part of the region, unemployment is rapidly falling. In many countries, unemployment is lower now than it was before the 2008 crisis. We see that labor participation is higher than it was 10 years ago and when we look at inflation, we see a normalization of the picture in Western Europe - most countries having inflation around 2%,” Timmer said.

“Examining the east of the region, and especially the oil exporters, a very sharp increase in prices is no longer found and inflation has come down in most countries, with a normalization of the cyclical phase, which in policy terms means that countercyclical fiscal stimulus is no longer needed in most of the countries,” the World Bank Chief economist emphasized.

Moving on to the second observation from the latest economic update, Timmer noted that despite all the positive tendencies, difficult structural challenges remain. Most countries need to restructure their economy because the old growth model, in which there were large inflows of resources, either through high revenues or remittances, no longer works. “Those inflows are substantially lower now and will remain so, meaning that countries can no longer grow through importing a lot, stimulating their domestic demand by growing through their construction and non-tradable sector. The big challenge is to change it and to create jobs in what we call the ‘tradable’ sector, the sectors that are competing with other countries. For that, it’s important not to continue with the countercyclical fiscal policy, because that tends to reinforce the old structure,” he emphasized, going on to describe the second challenge, which, as he mentioned, because of the technological changes, the growth of ICT sector, digital development, labor relations, production methods and even the way we trade across borders, is changing dramatically- something that “the countries will have to adapt to”.

“They will have to change the way the labor market is organized,” Timmer stressed, noting that despite a lot of pessimism and concerns seen throughout the world regarding trade, the recent economic update shows that there is no slowdown in trade for Europe and Central Asia. On the contrary, trade in goods and services in the ECA is on the up. According to the report, the reason for that is the global numbers dominated by the change in growth in China. At the same time, Timmer says, “trade has also been a very positive force in the ECA in changing the domestic economy”.

“The shift from trade in goods to trade in services, a shift that is happening globally, sees more and more services becoming tradable across borders. Tourism is very important and is growing, but also in sectors like education, cross-border trade is increasing,” he said, highlighting the need to be open to the global markets, and especially to integrate more into the Asian markets.

Georgia, according to the report, in some ways differs from most countries in the region, because, as Timmer explained, the external shock from the oil prices came later than the shock from the financial crisis for other countries, meaning the negative impact came later, too. It was a difficult shock for Georgia as it resulted in a decline in remittances and export opportunities.

“There’s less emphasis on countercyclical fiscal stimulus; growth comes from the sectors where it should and the recent data is very promising- there are lots of opportunities for new jobs in new sectors and there’s a very promising growth in tourism; lots of start-ups in information and technology and all focused on creating new opportunities for trade across borders. [Georgia’s] recent signs are very positive and I see that Georgia is going forward and really fits the picture that we’re seeing for the region as a whole,” Timmer concluded.

Georgia’s economic growth is forecasted to reach 3.5 % in 2017 according to the economic update, compared to 2.7 % in 2016, with the potential to grow in future to 4.0% in 2018 and 4.5 percent in 2019. Poverty, according to the report, is “expected to decline modestly in 2017 as economic growth recovers and translates into higher labor income”. “Continued disturbance in some of Georgia’s main exports market and the longer-term stagnation in the EU” are listed as among the key risks and challenges, along with a slow-down in poverty reduction, though rural poverty risks are still to remain high “if agricultural productivity does not increase and non-agricultural employment opportunities do not continue to expand”.

Nino Gugunishvili