Geneva, 2 July 1999
ECE/GEN/99/11
ECE WARNS THAT
THE TASK OF ECONOMIC REGENERATION IN SOUTH-EAST
EUROPE IS BEING UNDERESTIMATED
The second issue of this year's Economic Survey of Europe will be made available to the annual meeting of
the ECOSOC next week. In addition to an update on the current
economic situation and outlook in the ECE region, the Survey opens with a discussion on the economic problems facing the
countries of south-east Europe in the wake of the Kosovo
conflict.
Postwar Reconstruction and
Development in South-East Europe
Without minimizing the direct impact of
military operations on Yugoslavia or of the considerable burden
of caring for the refugees in The former Yugoslav Republic of
Macedonia and Albania, the Survey stresses that the
economic consequences have been severe also for Bulgaria,
Bosnia-Herzegovina, Croatia, and Romania. These seven countries
constitute "south-east Europe", for the purposes of
discussion in the Survey.
Although the seven countries vary
considerably in many respects, together they constitute the
poorest region of Europe: in terms of GDP per head they are as
far behind the more advanced transition economies of central
Europe as the latter are behind the average for the European
Union. The economic distance to be travelled by the south-east
European economies before they reach anywhere near the income
levels of western Europe is not only vast but has been increasing during the 1990s.
These are countries where the transition
process from central planning to market economy has proved
extremely difficult - partly because of highly unfavourable initial
conditions, the lack of historic traditions in institutional
development, their distance from the major west European
economies, and not least a long series of external economic
shocks starting with the collapse of the CMEA and passing by the
effects of international sanctions on Iraq and Yugoslavia, and
ending at present with the Kosovo conflict.
History matters, and the Survey stresses that if south-east Europe is not to continue to be a
source of instability and of threats to European security then
the chronic poverty and economic stagnation of the region must be
addressed. Simply repairing the damage incurred as a result of
the Kosovo conflict will only return the region to the status
quo ex ante, which itself was a major factor in the crisis to
begin with. Hence the stress on reconstruction and development of the region as a whole.
The persistent failures of reform in
south-east Europe cast considerable doubts on the wisdom of the
basic policy approach - exemplified by the "Washington
Consensus" - pursued for the past decade. This approach is
just not effectual when the basic institutional framework for a
market-based economy is missing or incomplete, and when the scale
of economic restructuring and institution building is simply too
great to be able to keep up with rapid liberalization. For these
reasons, the Survey supports recent calls for a "Marshall
Plan for South East Europe"
and tries to spell out what this implies in practice for
effective programmes of reconstruction and development in the
region.
Given the scale of structural problems in
the region and the need to start dealing with them promptly, in
order to create positive expectations and a momentum for change,
the Survey argues that the best way to get things moving
is to follow the example of the United States vis-à-vis western
Europe in 1948 and supply them with significant amounts of grant
aid, although this would remain subject to agreed programmes
being carried out. Increasing the foreign debts of countries,
some of which are already heavily indebted, is obviously not the
best way to provide them with assistance and establish the
confidence required to attract foreign investors.
The Survey emphasises that in any
reconstruction and development programme for south-east Europe,
Yugoslavia must play a central role. A relatively large economy
in the region and strategically located on the main transport
routes to western Europe, it is both an important market for
neighbouring countries and a key transit country (see table). If the Yugoslav economy remains in its present
state it will not only impede the economic recovery of the other
south-east European economies, but will inevitably generate
political and social tensions throughout the region.
An important lesson to be drawn from the
much-mentioned Marshall Plan for western Europe in the late 1940s
is that it represented a realistic and far-sighted appraisal of
what was required to ensure long-term economic and political
stability in western Europe - and,
as it turned out, the intelligent pursuit of self-interest proved
to be compatible with generosity towards the less fortunate and
more vulnerable. West European leaders will need to demonstrate a
similar degree of farsightedness and commitment now that the
bombs have stopped falling in Serbia and Kosovo. If they do not,
economic backwardness and stagnation in south-eastern Europe will
simply preserve an environment in which threats to the security
of Europe as a whole will continue to recur.
The Economic Situation in the ECE
Region in mid-1999
In its mid-year update of the economic
situation in the ECE region, the secretariat sees no significant
change from its previous assessment in March for the short-run
outlook in the western market economies. Real GDP is still
expected to increase in western Europe in 1999 by some 2 per cent
and by more than 3 per cent in the United States (see table).
These forecasts assume that growth will
strengthen in the second half of the year in western Europe and
weaken in the United States. At mid-year these relative changes
are still not visible in the statistics. Nevertheless, in western
Europe there are a number of factors which could lead to faster
growth: the lagged effects of recent cuts in interest rates
should stimulate domestic demand; fiscal policy is on balance
neutral and in some cases slightly expansionary; and the
depreciation of the euro should improve the competitiveness and
growth of exports.
For the transition economies the
outlook has generally deteriorated quite sharply since the
beginning of 1999. The worsening of their situation began in
mid-1998 and was triggered by a series of shocks starting with
the Russian crisis and ending with the Kosovo conflict.
In the first quarter of 1999 industrial
production has fallen in most of the transition economies B for
eastern Europe this is the first decline in aggregate industrial
output since 1993 B and unemployment rates have risen sharply and
often to their highest levels since 1989. By the end of March
there were at least 20 million people unemployed in the
transition economies (7.6 million in eastern Europe and the
Baltic states, 12.4 million in the CIS) (see table).
With a widespread deterioration in export
performance and generally tight borrowing conditions on the
international capital markets many transition economies are
likely to be faced with an increasing balance of payments
constraint on their economic growth during the course of the
year.
In the last three months the governments
in a number of transition economies have lowered their growth
forecasts for the current year, and according to the official
forecasts available at mid-June, the authorities in seven of the
27 ECE transition economies expect falling GDP in 1999. As there
are no obvious signs at mid-year of a reversal in the present
negative outlook, it may well be that a still larger number of
transition economies will end the year in recession or
stagnation.
Further information can be
obtained from:
Paul Rayment
Economic Analysis Division
United Nations Economic
Commission for Europe (UN/ECE)
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Tel: ++ (4122) 917 27 18
Fax: ++ (4122) 917 03 09
E-mail: [email protected]