Not only have banking sectors been overhauled but there is development of capital markets and private equity, says Erik Berglof, the EBRD’s chief economist.
“The extraordinary transformation of the financial sector is the focus of this year’s Transition Report,” he writes. “In a little over a decade, this sector has moved from a state-controlled system to one in which a diverse range of financial institutions increasingly provides finance to aspiring entrepreneurs, larger firms striving to enhance their competitiveness and households wishing to improve their living conditions.”
In fact, for the first time since the 1960s all emerging markets, including African ones, are growing faster than Organisation for Economic Co-operation and Development (OECD) countries. But that does not guarantee future success.
There are two great challenges facing eastern Europe. One is education. When the Berlin Wall fell, the transition countries had strong education systems but underinvestment since then means the region faces a skills crisis.
Further, there is the problem of a loss of skills through migration. Highly educated eastern Europeans are often found working in London’s investment banks, and countries such as Poland have endured huge outflows of workers of all types.
However, remittance money flows back home are larger than foreign direct investment (FDI) volumes for most countries. Then it becomes a regulation and capital markets challenge to channel that money into productive investment. If it only flows through informal channels it mostly ends up in consumption. Remittances should be regularised to allow them to be used more productively.
Flows in the mainstream financial system, for example, can be securitised and the funds raised lent out. There are also examples around the world of overseas workers’ bonds. East European bankers in London should get working on it.
