UNUnited Nations Economic Commission for Europe

Press Releases 1999

[Index]      

Geneva, 5 May 1999

ECE/GEN/99/6

ECONOMIC COMMISSION FOR EUROPE OPENS FIFTY-FOURTH SESSION

Holds informal seminar on the consequences of the financial crisis in the ECE region

Speaking as the ECE began its fifty-fourth session, Miroslav Somol, Czech Ambassador to the United Nations in Geneva and President of the Commission, said that the first day of the session would be devoted to a seminar. Eminent economists and policy makers led the discussions on three main topics: the impact of the global financial and economic crisis upon the UN/ECE region, with special emphasis on western and central Europe; overcoming the crisis of the Russian economy; the global financial crisis; and the threats to the transition process in other economies.

The first session of the seminar, chaired by Miroslav Somol, dealt with the impact of the global financial and economic crisis on the ECE region, with special emphasis on western and central Europe. A diagnosis was offered of the causes of the crisis, its likely effects on economic growth in the region, and the extent to which these might be offset by policy responses. Panellists asked whether such shocks could be avoided or at least mitigated in the future.

The second session, chaired by Antonio Costa, Secretary-General of the European Bank for Reconstruction and Development, upon overcoming the crisis of the Russian economy, started with a discussion on the causes of the crisis and its implications for future policy. Panellists and participants in the discussion expressed support for the point of view of the ECE secretariat that the crisis reflected a more radical failure to reform the country's economic and political institutions to restructure the enterprise sector and so to lay the basis for a sustained economic recovery.

The third session, chaired by Bernhard Molitor, Chairman, OECD Economic and Development Review Committee, concentrated on some threats to the transition process in other economies, especially those stemming from the global financial crisis. It was argued that some transition economies that had moved strongly ahead with basic reforms, are less vulnerable to disturbance. At the same time others that are falling behind and are often showing signs of increasing economic stress, are also much more prone to shocks and crisis.

Tomorrow morning at 10 a.m. the Commission would reconvert into a formal segment for a general debate which would inter alia draw lessons from the discussions of the previous two days. The agenda of the 54th session would also be adopted then.

Panel discussion on the consequences of the financial crisis in the ECE region

Jorge Braga de Macedo, of the Faculty of Economics, Nova University at Lisbon, said that the key of the Eurocentric view was that it enabled governments to change their economies towards stability. Regional solutions could divide the world in blocks, while the Eurocentric view was a broad view, giving a chance to countries to change, based on the external discipline imposed by the Eurozone. There was still a need for open partnerships on an open basis, where good policies, corporate governance and open markets were accepted in larger and larger numbers.

Christian de Boissieu, Professor, La Sorbonne, Paris, said that the international financial crisis was not over. The shock in practice turned out to provoke important repercussions and divergence in economic performance. The issue for the future was whether these discrepancies in terms of performance growth would expand or narrow. A number of critical gaps had been disclosed by the crisis. Structural reform was necessary. Exchange rates were often overly rigid, and this had catalysed the financial crisis. The prudential structure in banks and financing should be refined and strengthened.

Laszlo Csaba, Budapest University of Economics and KOPINT-DATORG, spoke of the causes and the implications of the crisis, and how to ward off future crises. Possible causes were indulging in weaknesses in the affected economies, the herd instinct of financial investors, lack of memory or history, and the small-country syndrome. Issues at stake were the negative impacts on growth and welfare. An aim for lower growth would contribute to greater stability and would be more sustainable. Liberalisation was important, but not sufficient to ward off a future financial crisis. The European Union could be a source of stability in the case of a future financial crisis.

Antonio Costa, Secretary-General, European Bank for Reconstruction and Development, said that the recent crises had perturbed investors. The crisis had been particularly severe in countries that had not lived up to their transition commitments, such as policy reform and liberalisation. A good process of market reform was fundamental. The impact of the crises on Central European markets was diminished regional growth and had set a trend to differentiation. Fall-out from Russia was substantially limited to close trading partners. The outlook for the Central European Markets was for further differentiation, but these could expect a better performance than other emerging markets.

Daniel Gottlieb, Senior Adviser to the Governor of the Bank of Israel, said that a country could ward off crisis, by correcting the difference between planned and actual budget deficit. This could improve the current account deficit, which was important in an open economy. Continuing liberalisation was vital. Letting the economy face the true turmoil was probably the best way to get the economy and its agents used to the issue.

A discussion then took place on the issues of the effects of the Russian crisis on central and western Europe, investment rates, whether further liberalisation was an effective or acceptable solution, structural reform, potential reactions to future crisis, the sky-rocketing interest spreads for emerging markets, the divergence and rigidity of the world economy, the lack of resource allocation to cover the outflow of capital, the link between progress in reforms and geographic location, speculative capital flows, and the attitude of international investors.

It was noted that there are no instruments to predict such crises. However, institutional stability is important to prevent a crisis. Banking supervision needed to be global as well as national, and was vital for all countries in transition. Liberalisation without proper rules, institution building or confidence building does not enhance stability. The systemic implication of the crisis needed to be contained. Refining and tightening of banking regulations was important, but there was a danger that financial protectionism could be the beginning of trade protectionism.

The Chairman of the session said that the speakers had contributed extensively to the understanding of the subject in hand, most especially during the interactive debate with the floor.

Panel discussion on overcoming the crisis of the Russian Economy

Grzegorz Kolodko, Professor at Warsaw School of Economics, Deputy Premier and Minister of Finance of Poland 1994-1997, said that the nature of the crisis was different from any previous crisis. It was due to ill-advised economic policies being implemented to transform the economy, without structural reforms and institution building, and without addressing the structural and institutional implications of the post-Communist events. The systemic vacuum was filled by informal institutions, which had a negative impact on the economy. Russia should start by addressing the issues over the long-term.

Andrei Swinarenko, Deputy Minister of Economics of the Russian Federation, said that structural and institutional reform of the Russian economy was vital. Fiscal policy and the banking payment system needed to be improved. The normalisation of the payment situation would improve the federal budget and lower the deficit, lowering inflation. Strengthening the national currency, improving fiscal policy and ensuring an appropriate fiscal climate would be required on a macro-economic level. Measures to stabilise the recovery of the economy, and creating an appropriate environment for growth would be possible by the year 2000.

Rumen Dobrinsky, Economic Affairs Officer of the UN/ECE, said the Russian crisis was deeply rooted in the underlying economic structure and the political structure. The institutional arrangement was insufficient, causing a discrepancy between expectations and outcomes. Institutional reform was repeatedly set back. The crisis reflected major failures in the transformation model undertaken in Russia. The reform of State and Public Administration was necessary, as was a long-term programme of reform and institution building.

A discussion then took place upon such issues as whether it were possible to predict crises in the context of an early-warning system, and how to deal with political blocking of institution reform. The early-warning system was important mainly in the context of detecting vulnerability. Due to the evolution of the global economic system, the nature of potential crises was constantly mutating. There was need for credible long-term policies to reassure consumers and investors. In the case of transition economies, short-term solutions did not work. Reform should be undertaken only in the context of structural and institutional reform.

Yves Berthelot, Executive Secretary of the ECE, commented that the sequencing of reform and institution building was important, but this was not sufficient to ensure successful reform. Three factors were indispensable for development, but not sufficient on their own: there was need for leadership; consensus on how to put the economy on a competitive edge; and dialogue between policy makers and the public. Addressing the issue of post-communist reform ought to take place by combining all the different issues.

Panel discussions on threats to the transition process in other economies

Daniel Daianu, Former Minister of Finance of Romania and President of the Romanian Institute for Free Enterprise, said that most transition economies fared poorly in the respect of proper institutions. There were increasing gaps and differences among the transition economies. Financial markets should be developed, but only in the context of the speed of restructuring of the rest of the economy, otherwise disaster loomed. The notion of convergence was not validated by globalization. There were looming gaps between the transitional economies, with some becoming more and more vulnerable. There was a need for dramatic policy changes.

Lutz Hoffman, President, DIW, Berlin, said that today's problems were not just of economic nature, but of a political nature. Domestic policies were unsatisfactory: governments did not understand what needed to be done to remedy the situation; there was a lack of co-ordination of policies to form a consistent strategy package; and there was a lack of political clout to carry through those policies that were absolutely necessary. If these three political points were resolved, then there would be a lesser threat to the transition economies.

Igor Mitiukov, Minister of Finance of Ukraine, said that the Ukraine suffered from the financial crisis in a number of different ways and for a number of different reasons. The Ukraine had applied certain measures to combat the crisis, such as continuing to work with other trade partners, to avoid trade protectionism and to keep trade at the highest possible level. More emphasis was placed upon privatisation and de-monopolisation. The budget was used to realistically reflect expectations of revenue. Due to these efforts, the Ukraine managed to avoid the negative effects of the Russian crisis.

Brigita Schmögnerová, Minister of Finance, Slovak Republic, said that the financial crisis had had negative impacts on the ability of the Central European countries to attract foreign investment. The role of international financial institutions should increase in a globalized world, and start to emphasise not only stabilisation policy, but reform policy. There was a need for an appropriate set of indicators to pick up on growing vulnerability. The Governments of the Central European Economies should respond by prudent fiscal policy, and sustainable stabilising policy by restructuring the economy.

Timo Summa, Director, Directorate-General IA, European Commission, Brussels, said that transition was a difficult and painful process. Macro-economic stabilisation could be reached in a short period of time, but was not sufficient on its own. All economies in transition had a potential for good economic growth, and there was a need to fulfil this potential by sound economic policies and a renewed commitment to transition. The creation of a more efficient social security net and the reform of the pension system were necessary for wide support of reforms.

There was discussion of the impediments to the transition process, of the difficulty to find the correct balance between restrictive monetary policies without hindering economic growth, the importance of the capacity to transform B politically, socially and economically for countries under crisis, and the usefulness of the learning process entailed by reforms. Not enough attention had been paid to the political economy dimension in the context of transition. Choices between re-structurisation and stability were important in the context of sequencing of the reforms.

The Chairman, Mr. Molitor, in his concluding remarks, said that the discussion had been most enriching. The base of the whole discussion was that transition was not an easy process, since it meant fundamental changes and took time. The principle was learning by doing, and the trial and error method. Crises were different from one country to another, but could be the catalyst for improvement and learning. A solution to the problems of transition was very often a matter of political rationality, rather than one of economic rationality. Solutions were thus individual to countries.

The crisis in transition countries was not due to the Asian crisis: the nature of the individual crises were quite different. What is necessary was transparency, continuity and reliability of the reform process. Domestic problems need to be resolved before external problems could be addressed. A legal framework, including transparency and rules for accountability is necessary, as was global re-structurisation. International financial organizations should concentrate on their role as solution-finders, not stability enforcers.

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