OREANDA-NEWS. On November 26, 2008 The EBRD said countries in its region could substantially improve their long-term economic growth prospects by adopting policies that raise educational levels and skills, reported the press-centre of EBRD.

In its Transition Report 2008, the EBRD added many countries had failed to capitalise on the relatively strong educational and skills base that existed at the start of the transition process. Without changes in priorities and policies targeted at improving education, it would be hard for these countries to sustain rapid growth.

The report also argues that the growth outlook depends on what countries produce and, particularly, the sophistication and product mix of a country’s export basket. It further concludes that, under certain circumstances, industrial policies can help long-run growth, especially by stimulating innovation.

“Selective government intervention can substantially increase long-term growth prospects of the transition countries and help them catch up with the technological frontier”, the Report said.

In its analysis of growth, the EBRD highlighted several key areas where government policy could be particularly effective. Arguing for the need to invest more across all levels of education to improve the skills base, the EBRD said resource-rich countries had paradoxically suffered most from lack of investment in education and the resulting decline in the quality of the labour force.

Even non-resource-rich countries had the scope to sustain investment in education. Such investment could help ensure long-term sustainable growth by developing the human capital needed to use and adapt available technology.

The report also highlights the importance of competition and the need for countries to continue removing entry and trade barriers while also strengthening or establishing effective competition agencies, especially in the resource-rich countries of the former Soviet Union and Mongolia.

In analysing the structures of production and trade in the transition countries the report emphasises the role that a country’s trading pattern can play in driving growth.

The report said many transition countries had increasingly developed more sophisticated export baskets and were trading to a larger extent with advanced economies, particularly in Western Europe. However, this was far less the case in the natural resource rich economies – such as Kazakhstan and Russia – that have less diversified economies.

A number of these countries had found it difficult to develop new products and achieve a more sophisticated product mix, it noted.

A key issue throughout the region concerns the role that government policy can play in stimulating growth. The report argues that selective use of industrial policies can be helpful.

It said horizontal policies that provide a suitable framework in which firms and consumers function were widely accepted but there might be scope for the use of vertical policies targeted at specific industries or sectors. “In the transition countries, where market failures and other constraints are significant, there can be justification for also using targeted or vertical policies,” the report said.

Such policies could draw on public resources to help promote the growth of new activities by, for example, improving credit and infrastructure.

However, the report also warned that such policies must build in at the design stage key elements of market discipline, so as to avoid the pitfalls of weak public institutions and poor governance that are still a feature of the region, especially in the CIS and Mongolia.

The success of industrial policies would depend on how they are designed and the effectiveness of their implementation. “Adopting vertical or targeted policies is likely … to be far more problematic in countries with weak institutional environments,” the report concluded.