World Bank: former Soviet nations doing poorly in global recession

December 3, 2009 | by Poverty News Blog |

A lot of reports to report today, this one comes from the World Bank.

The Bank says that former communist countries have been hit hard by the global economic recession. Former Soviet-led republics had seen great growth after the Iron Curtain fell. But, the same thing that stimulated that growth also led to the drop in their economies during the recession.

From Radio Free Europe, writer Andrew F. Tully interviews a representative from the World Bank on their latest study. The piece contains no countering viewpoint.

A new report by the World Bank says countries emerging from Soviet-era managed economies have been especially hard hit by the current global recession.

Titled “The Crisis Hits Home — Stress-Testing Households In Europe And Central Asia,” the report finds that several former communist countries have lost many of the gains they made against poverty since the fall of the Iron Curtain.

The reason is a bit ironic, according to Luca Barbone, the director for poverty reduction and economic management in the World Bank’s Europe and Central Asia region.

He says these countries were too successful at embracing Western economic models.

“One of the main reasons why the region was so hard hit by the recession is that it had actually been very successful over the past few years at opening up and integrating,” Barbone says. “And by doing so, it had exposed itself to vulnerabilities, particularly on the financial-sector side, and to a certain extent also on the trade side, as well.”

Barbone says the middle class in the region began to emerge in the late 1990s, in some cases quite quickly. But like their counterparts in the West, they were caught unawares by the economic collapse of 2008.

“The problem that’s hitting the middle class now is that they’ve become much more equal to, if you like, the West,” he says. “And so in the same way that the Western middle class in the U.S. and in Western Europe is being hit by unemployment on the one hand, and then being hit on the credit side by defaults and risk of foreclosures, this has become true also for many elements of the middle class in those countries.”

Severe Impact

Barbone notes that 15 or 20 years ago, these countries had no mortgage markets. If you wanted a house, you either had to build one or save up for it. Since the end of the Cold War, he said, there’s been a quickly expanding use of consumer credit in the region, along with the attendant risk.

Between the Russian economic crisis of 1998 and 2006, fully 50 million people moved out of poverty in Central and Eastern Europe and in Central Asia.

The current global recession has had a severe impact on 160 million people in the region. That number includes nearly 40 million who are living in poverty and about 120 million who are on the verge of it.

The financial crisis, of course, also has affected the budgets of governments in the region, Barbone says, and the World Bank has taken a leading role in advising these governments in bringing their budgets back into balance through strict economies to minimize the risks associated with debt.

At the same time, the World Bank is mindful of the need for so-called “social safety nets” that meet the needs of people who otherwise would be plunged into poverty because of economic hardship.

‘Difficult Balance’

Barbone admits that economizing while keeping social safety nets in place is “a very difficult balance” for governments, but not impossible.

“One recommendation that we have been giving, and I think the countries are really looking at very attentively, is to try to make sure that the elements of the safety net are targeted and are kept afloat,” Barbone says. “And then we have seen it in country after country that fortunately the socialist systems that can reach the children, the elderly, the parts of the population that are most likely to be affected by the recession — they have been kept.”

At the same time, the World Bank is offering loans to some of these countries to help them keep functioning until the world economy rights itself again. He says the World Bank has tripled its lending to governments in the region since late 2008.

But Barbone says the bank’s most important work might be as an adviser. He says it helps these struggling governments make the choices necessary to maintain a balance between cutting spending while maintaining the safety nets for their most vulnerable citizens.

“There’s this combination of ‘try to protect [social] programs that are proven,’ and then, at the same time, try to find economies by maybe finishing reform agendas of the past,” Barbone says. “But, you know, the situation’s very tough in many countries. Just propping up the banking system to avoid collapse has cost a lot of money. And so I think governments are really faced with very tough choices in this.”

And those choices aren’t likely to get any easier soon.

Copyright © 2009. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036.