The World Bank is warning that the countries of Eastern Europe and the former Soviet Union could experience a slowdown in economic growth as a result of the downturns in financial markets in the United States and Western Europe.

The World Bank says the poor will be hardest hit by the global financial crisis. For that reason, the bank is urging governments in Eastern Europe and Central Asia to restructure their public expenditures in order to make room for spending that will cushion the blow to the most vulnerable members of society. 

Shigeo Katsu, the World Bank`s vice president for Europe and Central Asia, told reporters in Washington on April 10 that years of reforms have helped make the region`s economies resilient to financial shocks, and that the fundamentals of the Europe and Central Asia (ECA) economies are still "pretty good." But he said there is no room for complacency in the tightening international financial environment.    

“There are strong inflationary pressures that have come both through energy price increases but also food price increases," Katsu said. "And it will be very important for the governments to adopt timely measures, while maintaining the growth momentum and the reform momentum also, to make sure that the poorest segment of the populations are considered and proper, targeted provisions are being applied.”

The World Bank briefing came ahead of the spring meeting of the bank and the International Monetary Fund in Washington on April 12-13.

From 1998 to 2006, per capita income in the ECA region, which comprises 460 million people, rose by $3,000 -- from $5,600 in 1998 to $8,600. That increase lifted an estimated 50 million people out of poverty, the bank said.

But while economic growth has been strong in the region, it is now expected to slow in light of the global instability of financial markets, which was sparked by the subprime mortgage crisis in the United States. 

Continue With Structural Reforms

Pradeep Mitra, the World Bank`s chief economist for Europe and Central Asia, says economic expansion is already slowing in countries like Romania, Ukraine, Latvia, and Hungary, and is expected to slow in Croatia, Kazakhstan, Poland, and the Czech Republic. Mitra recommends that governments continue with the structural reforms that most have already begun. He says that will help reduce their economies` vulnerability to inflation and market instability.  

Those reforms should include tightening fiscal policy where it has been lax, intensifying banking supervision, and improving the investment climate to attract foreign direct investment.

Volatile financial markets aren`t the only problem, though. Across the region, food and energy prices are rising.

"Inflation is back," Mitra says. "It was something that countries thought they had put behind them, but not only is it back, it`s back in double digits. Often for reasons that the countries themselves -- certainly the oil importers -- are not in a position to control." 

Energy prices have risen more than 30 percent in what the World Bank calls "low-income" CIS countries, which include Armenia, Azerbaijan, Georgia, Kyrgyzstan, Moldova, Tajikistan, and Uzbekistan. Food prices have risen the most -- 20 percent -- in the category of "middle-income" CIS countries, which include Belarus, Kazakhstan, Russia, and Ukraine. But all countries in the region have seen food costs increase. 

This has put enormous financial pressure on the poorest citizens of these countries. According to the bank, the average family in Central Asian countries -- excluding Kazakhstan -- spends more than half its total household budget on food. That means that any rise in prices, however slight, could push the poorest citizens into deep crisis.

"Some calculations that we`ve done suggest that a 5 percent increase in food prices increases poverty rates by 2 to 3 percentage points in some of the low-income CIS countries," Mitra says. "Two to three percentage points is not a small number. This is a kind of ECA-specific phenomenon. A lot of the poor in low-income CIS countries are pretty close to the poverty line. So a little change in prices can tip them in the wrong direction."

`Top Up` Social Assistance

To protect these vulnerable citizens, the World Bank is urging governments to restructure their public expenditures and spend on social assistance. 

"Given what we know about the impact of food price increase on poverty, it is important that countries ‘top up’ their targeted social assistance schemes," Mitra says. "A number of countries in our region have fairly well-functioning social assistance schemes – it`s important that they ‘top up’ whatever assistance is necessary in order to help the poor."

As to how governments might confront rising energy prices, the bank has fewer suggestions. Mitra says the region`s energy efficiency has traditionally been very low, so one recommendation is to implement widescale energy-saving measures wherever possible.

Overall, Mitra says the regions` central banks have a challenge ahead. He is urging them to "stay focused on inflation management" and especially refrain from imposing controls on trade, which could work against the food supply in the longer term.

By Heather Maher of Radio Free Europe