Via Financial Times

A failure to curb corruption or protect the rule of law has as powerful an effect in fomenting emigration from middle-income countries as the prospect of a substantial pay rise abroad, according to new research.

The findings, in a report by the European Bank for Reconstruction and Development, are intended as a warning to illiberal governments, particularly in central and eastern Europe, which has experienced large-scale emigration to wealthier parts of the EU over the past 10-15 years.

Many countries of the region also have low birth rates and are running out of spare workers, pushing up wage costs. With their attractiveness diminishing as places for cheap manufacturing — a trend amplified by automation — they need to lean on innovation and entrepreneurship as sources of growth. But these are more dependent on good governance.

“The challenge these countries have is that if you want to move to higher value-added growth, you need to have an excellent business climate and that needs good governance,” said Beata Javorcik, EBRD chief economist, who cited a need for democracy, the rule of law, freedom of the press and confidence in government.

Many countries in central and eastern Europe implemented sound macroeconomic management after the end of communism and have enjoyed robust growth in recent years after joining the EU.

But progress on improving governance has slowed and in some countries, such as Hungary and to a lesser extent Poland, it has gone into reverse.

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The EBRD research found that improved governance would lead to higher productivity growth and better life satisfaction, which would make people less likely to leave their home country in search of a better life elsewhere.

It found, for example, that if someone in Albania was persuaded that the government in Tirana was working to tackle corruption, it would have the same impact on his or her propensity to emigrate as a rise in monthly wages of almost $400. That sum is roughly three-quarters of the average increase in wages that person could expect after a move abroad.

If Ukraine were as well-run as Croatia, it would increase its per capita potential growth by 1.2 percentage points a year over the long term, mostly because of higher investment, the EBRD calculated.

“Moreover, governance deficits may be particularly detrimental for upper-middle-income economies, where innovation and entrepreneurship matter more for growth than cheap labour, economies of scale and imported technology,” the EBRD study observed. “This is because innovation and entrepreneurship are particularly sensitive to the quality of governance.”

Dismantling democratic checks and balances or unpicking the rule of law has had little impact so far on economic performance in countries such as Poland and Hungary, which recorded gross domestic product growth of 5.1 per cent and 4.9 per cent in 2018, respectively.

But Ms Javorcik said nationalist rhetoric in the region could eventually backfire economically.

“If you play populist politics there is an immediate temptation to say we don’t want foreigners running our economy,” she said. “That sends the wrong message.”

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