World Bank warns over reform targets

By Andrew Beatty

Date: 03/11/05

Amid market jitters over the business credentials of Poland's new government, the World Bank this week warned that continued high levels of unemployment in Eastern and Central Europe were undermining reform efforts and the EU's bid to reach its competitiveness targets.

Jan Rutkowski, a senior labour economist at the World Bank, said that public scepticism in the eight new member states from Central and Eastern Europe which joined the EU last year, was hindering moves towards long-term labour market reforms.

His comments come as Polish markets this week reacted badly to news that the Law and Justice Party would form a coalition government without the participation of the liberal-minded Civic Platform.

The move prompted fears that the new government would be less market friendly, with the Warsaw Stock Exchange losing nearly 1% of its value.

"Probably we cannot expect further labour market reforms in countries like Poland because there is not much popular support and the party that is now in power simply does not believe that liberalising labour markets can improve labour market conditions," said Rutkowski.

"Given high unemploy-ment there is a lot of resistance to lowering the firing costs and increasing labour flexi-bility," he added.

A World Bank report, released this week, pointed to a slower than expected transition in 27 former Communist economies, including eight EU members.

Despite high growth many of the countries in the region continue to have high unemployment.

Rutkowski, who co-authored the report, said part of the answer was cutting the cost of keeping employees: "An important constraint to job creation is the high payroll taxes, the high taxation on labour use.

"All the transition economies need to focus on improving the investment climate, making it easier for firms to enter the market, lowering the cost of doing business and improving the business environment."

But, he said, reform efforts needed to be stepped up in Western Europe, too.

"If Central Europe does not see much in the way of employment reforms in Western Europe there is no model to follow.

"In all Europe, in the EU15 [old member states] and the EU10 [new member states] there is not much support for market reforms. They do reform on the margins. Spain reformed its labour market a few years ago because things looked very bleak, but for example, what Germany or France does is just at the margins."

Comments by Jan Rutkowski, a senior labour economist at the World Bank, who said that public scepticism was hindering moves towards long-term labour market reforms in the EU's new Member States in Central and Eastern Europe.