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. Last Updated: 07/27/2016

Crisis Shows Flaws in Model of Growth

LONDON — Flaws in Eastern Europe’s model of growth have been exposed by the financial crisis, and commodity-reliant countries like Russia must expand their industrial base to make them more resilient, the European Bank for Reconstruction and Development said Monday.
The bank also said in its annual report that risks arising from financial integration must be better managed. Countries have been over-reliant on foreign banks and inflows to drive growth in the boom years, leaving them highly vulnerable during the global credit crunch.
“The EBRD economists concede that financial integration has brought disadvantages, by encouraging credit booms, over-borrowing and a trend toward foreign currency borrowing,” the bank said in the report.
But while this has deepened the region’s recession, the EBRD said financial integration with the West remained a source of growth and should not be reversed.
“This means addressing the bias toward foreign currency lending through macroeconomic policies, regulation, and the creation of legal frameworks and market infrastructures supporting local currency finance,” the EBRD said.
Commodity-rich countries among the 29 economies in which the EBRD operates also came in for criticism for failing to reduce dependence on income generated by their natural resources.