World Bank recommends privatization and fiscal reforms in the ECA region
14 September 2007
A recent World Bank report on Eastern and Central Asia "proposes structural reforms in areas where expenditure pressures are acute and suggests how to create fiscal space in other areas critical for growth."
A recent study by the World Bank, "Fiscal Policy and Economic Growth: Lessons for Eastern Europe and Central Asia," found that public spending of Southern and Eastern Europe -- averaging 45% of GDP -- is too high to maintain strong economic growth. It also stated that high labor taxes create a tax wedge that slows growth by deterring job growth and labor force participation. The region has experienced strong economic growth over the past decade, second only to Asia-Pacific, and the Bank sites strong indicators in health and education, income equity and distribution.
Despite the region's impressive, robust growth as a whole, large governments combined with weak governance are sited as a threat to future economic competitiveness. Further, unfavorable demographics such as an aging population and a low birth rate may exacerbate the fiscal problems, the authors find. The study compared the region with fast growing middle income countries in Latin America and Asia, and produced a set of recommendations for fiscal reform in the sectors of health, education, pensions and infrastructure. The World Bank recommends removing certain infrastructure subsidies especially in the power and water utilities in order to encourage privatization and lessen government spending. Reforms in the traditionally high social protection and pension systems would create the fiscal space for growth-enhancing public spending. Eastern European countries have also had high investments in social welfare such as health and education, and the Bank recommends that they move away from high cost programs to more cost sharing alignments. As for government revenue, the study advises lower labor taxation and combination of flat-rate income tax reforms with modernization of tax administration.