Hilary

It is nice to have visions

At a recent EBRD (European Bank for Reconstruction & Development) presentation, Hilary Benn, State Secretary and head of DfID (the Department for International Development) of the Government of the United Kingdom, stated that the recent entries to the European Union now have less need of EBRD help. He said that in terms of the EBRD's transition mandate success depends on how far ordinary people benefit from the market reforms it promotes. In terms of raising many out of poverty, he said there was a need for more and better jobs as a means of ending poverty.

This is the given market logic but in practice, what has been hailed a successful enlargement, will soon turn into a significant economic problem.

Ongoing analysis, studies and research at the EBRD (European Bank for Reconstruction and Development) and SEEL (Systems Engineering Economics Lab) show that the past optimism will be tempered by a realization that Central European economies face some serious problems. These are related to population dynamics and inadequate long term manpower planning.

Eric

The EBRD points to a problem area

On the question of population dynamics, The Economist newspaper reports that Eric Berglöf, chief economist of the EBRD, recently mentioned the implications of population dynamics in Central Europe. He emphasised that because of declining population Central European economies will slow down in the coming period. For example the absolute percentage falls in total populations for Hungary, the Czech Republic and Slovakia are show in the diagram on the right.

Mr. Berglöf also added that there will also be an added negative impact of a slow down in the rate of inward foreign investment.

SEEL adds some details

According to Hector McNeill, systems coordinator at SEEL the fall in growth related to population decline will be far greater than the aggregated statistics suggest. There is a possibility that growth could decline to no growth or even recession. This is because of the rapid rise in the absolute numbers of untrained people entering these workforces.

The above figures were generated by CESS on the basis of a datum line GNP of Euro 125 billion. CESS can generate timeframe population sets (1984 through 2025) and annual transects of relative income impact analyses. Users can vary most variable factor assumptions.

McNeill who heads the CESS Project (Cigány Economy Simulation System) says that within these economies there are two distinct population and labour force segments.

Hector

One is a rapidly growing Roma population and the other a declining non-Roma population. The Roma component has been subjected to state policies which have segregated their children and denied them a useful education. As a result the capacity of the Roma manpower segment to earn an income equivalent to non-Roma is severely compromised. With active employment discrimination the Roma also face higher levels of unemployment. The impact of this on GNP is all too evident. At the moment, for example, 15% of the Hungarian workforce is Roma and they are able to earn 20% of the average wage when employed. SEEL estimate that currently the cost of this reality to the Hungarian economy is something like Euro 15 billion each year (based on a datum line GNP of Euro 120 billion or roughly Euro 12.500/capita). This is directly attributable to the legacy of segregated educational denial.

Impacts of differential population growth

During the last 20 years the Roma population has been increasing at a steady rate of some 2% each year. On the other hand, the non-Roma population is decreasing at the rate of around -0.5%. Roma are becoming an increasing proportion of the population. Within 15 years the Roma will make up some 25% of the Hungarian worforce.

These facts have a range of inevitable consequences for the Hungarian economy and Hungarians in general. With an international debt equivalent to almost half of its its GNP, and falling international investment, McNeill confirmed Berglöf's analysis that there will be slower growth. However, McNeill expects that this slowdown could turn into a serious recession. This is because the changing make up of the population continues to be accompanied by ongoing government policies of enforced denial of education and training. This is directly undermining the medium to long term productivity of the economy.

Hungary will face as a result several negative economic impacts:

• increased difficulty in paying off international debt
• difficulty in supporting the income of pensioners
• difficulty in managing fiscal debt
• a shrinking tax base
• real incomes falling in comparison with the EU
• inability to meet Euro requirements
• proactive and accelerating withdrawal of private investment

By 2025, SEEL estimate that the under-performance of the Hungarian economy resulting from the state's lack of investment in the Roma could rise to around Euro 25 billion by 2025.

A long term structural issue means only a long term solution

This is a structural issue and cannot be reversed within a short time. If by some miracle the government could act now the results would only kick in some 25 years from now (2030) as educated and trained Roma begin to enter the labour force. The full beneficial impact would be felt in substantive terms of rising average real income levels in about 30-35 years.

In the invervening period things will get difficult. There is likely to be a significant acceleration in the brain drain from Hungary, the Czech republic and Slovakia and which, according to McNeill, has already started. On the basis of current "no action" scenarios, during the next 20 years the largest growth in income for Hungarians will be gained by those who have emigrated to countries like the United Kingdom.

Enlargement a success?

McNeill is one of the world's few specialists in Roma economics, having worked on low income rural groups in transition economies since 1992. He says that the accession of the Central European states is not a success story. He feels that too much emphasis has been placed on the political transition, which he considers is largely promoted by political parties. In terms of laying the foundations for sustainable medium to long term economic growth, capable of securing growth in per capita incomes, he considers that all the signs point to failure. This is a direct result of politicians regarding low income minority groups as an inconvenient social problem and drain on society. Such politicians have encouraged and supported policies which exacerbate the problem by denying such people a relevant education and training. What politicians have failed to grasp is that the Roma are the single most important economic resource to the future viability of these economies. This lack of objectivity is all to evident in the fact that there are no serious national human resource plans in any of these countries which recognise the significant potential economic contribution of the Roma population.

An EBRD task?

McNeill says that the assumption that the EBRD should be winding down its Central European EU member state activities is based on a lack of information. Europe faces a very significant challenge here. The EBRD could play an important role. Besides funding there will the need to pay particular attention to the quality of fund commitment in terms of useful and effective education and training provisions. This will not be easy to achieve.

---

Credit: European Options, 15 June 2006.