Press Release ECE/GEN/00/18
Geneva, 3 May 2000
Ten Years of Transition: Is the End in
Sight?
UN/ECE holds its Spring Seminar
Speaking at the beginning of
the United Nations Economic Commission for Europe (UN/ECE) Spring Seminar entitled "From
Plan to Market: the Transition Process after Ten Years", Mr Yves Berthelot, Executive Secretary of
UN/ECE, welcomed all participants and speakers. Since 1990, he said, 27 member
countries of the UN/ECE had become known as "transition economies". The task of
transition was enormous, and had been underestimated ten years ago. At present, there were
very few countries whose transition processes were reaching the end.
The changes that had taken place over the past 10 years would become
evident during the day’s meetings, Mr Berthelot said. The four different panels would
all have the aim of showing the successes and failures of the policies. He emphasized that
there was still significant work to be done in all countries. There were still wide income
gaps between the countries of Europe, and the hopes of convergence were thin. These
disparities were a subject for concern both for the individual countries and for Europe as
a whole. All of the lessons that could be drawn from these seminars would help maintain
Europe’s cohesion.
Mr Berthelot also announced his impending retirement and introduced his
successor, Ms. Danuta Hübner, currently his Deputy. He
was sure that under her leadership such seminars would continue to be developed.
Mr Berthelot then introduced the speakers of the first part of the
seminar, entitled "From plan to market, from regime change to sustained growth in
central and Eastern Europe".
Ivan Berend (Hungarian Academy of
Sciences and UCLA, Los Angeles), author of the paper on this subject, began
by introducing his topic. He spoke of the "market concept" that had been
promoted by the West, which maintained that market reforms and privatization would cause a
market mechanism to appear and prosperity would follow. The adoption of the Western
"laissez-faire" model was thus seen to be the perfect solution to the problems
of the transition economies. However, the economies themselves had shown that this was not
the case. These countries, on the periphery of Europe, had lagged behind, without becoming
industrialized, with low economic growth, ever since the Industrial Revolution.
Private and market economies could not generate prosperity in that part
of the world, Mr Berend continued. These countries had been lost for over 100 years.
Growth and "catching up" were not automatic when the market concept had been
adopted. The problem had been precipitated ever since the oil shocks in the 1970s, and had
continued right through the 1990s, in an ever more dramatic way. What had happened was not
just a recession but a "Great Depression", caused by the structural and
technological upheavals that had taken place.
These countries had been unable to adjust to the new technological and
structural requirements of a modern economy. The countries of western Europe had adapted,
and established a new, ever more successful economy. The eastern countries had tried to
find an exit by preserving the old structures, and by trade protection.
The adjustment to the new requirements had begun in that area, although
economic performance was still poor. Some countries had been more successful than others.
The gap between East and West was wider than ever before. However, in some countries, new
communication technologies were emerging, as well as computerization and some competitive
industries, all of which were very positive signs. Full adjustment was, however,
impossible without major foreign investment. However, these foreign investments were very
poorly distributed among the countries in need.
According to the more optimistic scenario, some of the more favoured
countries, about 1/3 of the area, could be expected to catch up with the rest of Europe
over the next 20-30 years. For the other countries, the outlook remained bleak.
Erik Berglöf (Director
of the Stockholm Institute of Transition Economics and East European Economies (SITE),
Stockholm School of Economics) took the floor to discuss Mr Berend’s
position. He focused on: the main lessons of this first transition, from plan to market;
the second transition, to sustained growth thanks to direct foreign investment (FDI),
which was still to come; and the role of the European Union in bringing about this second
transition.
Sustainable growth was rare in the region, and no country had yet
caught up, he said. It was becoming more and more difficult to say which policies had been
the most successful in the first transition. Geographic determinism had become one of the
most popular explanations. Noting that the Washington consensus was too limiting, he
suggested that a new policy consensus was emerging. The role of the State in providing
opportunities, the institutions, and the local form of political economy, were all
important.
The core of the second transition lay in enforcement. However,
legislators, legal texts, courts and enforcing agencies all lacked legitimacy. Ultimately,
legitimacy would come only through the democratic process.
The importance of the FDI varied across countries, and was not always
only a positive development. In the new economic geography, it was clear that integration
led to divergence. What was necessary to bring about the second transition was a virtuous
circle of sustainable growth. It was not clear which strategy for catching up was the
best.
Jan Svejnar (Executive
Director, William Davidson Institute and Professor, University of Michigan Business School) then took the floor. He addressed the critique of the laissez-faire concept of the
transition in Central and Eastern Europe and the newly independent States (NIS). He
wondered whether the relative success visible in Central Europe was not in fact due to the
very laissez-faire approach that Mr Berend’s paper had criticized.
The laissez-faire policies were stressed as important stages in a
complex situation. Most proponents of this policy also advocated the development of the
legal system, for example, and other changes, all of which took time. The long-term
historical interpretation, he continued, had only limited power in explaining the GDP
decline in Central and Eastern Europe in the 1990s. Structural change did not necessarily
bring destruction without creation, and this could be argued against
Mr. Berend’s example of Latin America. The theory and evidence showed that
Central and Eastern Europe could compete economically with the help of devaluations, which
had many positive repercussions. Central and Eastern Europe could have done better with
State regulation and policy, and with an efficient State sector, in theory. In practice,
this was probably not the case. Policies could make a big difference, bringing in
investment, for example. By combining market forces with the traditional policies of the
region, success could be achieved.
Paul Welfens (Jean Monnet
Chair in European Economic Integration, University of Potsdam) then took the
floor. He said that the crucial topic of the paper was the question of sustained economic
growth, without which neither transformation nor democracy could survive in Eastern
Europe. There were ways of overcoming stagnation in an economic peripheral situation, as
Ireland had shown. Economic growth required restructuring and the rule of law. The role of
trade should also be focused on.
The problem in Eastern Europe had been that there were many inherited
distortions, and economists required an appropriate analytical basis to understand this.
The uncertainties of the market economy had proved very daunting to many in the transition
economies. The role of trade needed to be further emphasized in both policies and analyses
of what had and would take place in the transition economies. In a world of globalization,
an efficient trade sector would emphasize a reliance on imports where they made sense
economically. The unfulfilled challenge of sustained transition was continuing.
Questions were then put to the speakers, and comments were made. These
included whether historical methodology was useful for forecasting the future, and whether
it was the lack of full implementation of the new policies that was causing the economic
problems.
Mr Berthelot then introduced the speakers of the second part of the
seminar, entitled "The social costs and consequences of the transformation
process".
Michael Ellman (Professor,
University of Amsterdam), author of the paper on the topic, took the floor. He
drew attention first of all to the costs of the process of change in transition economies.
The first was impoverishment. The next was the decline in employment. Then came an
increase in inequality, a striking deterioration of public services and polarization of
their provision, a drop in education along with a polarization of the provision of
educational services. The spread of disease had also become clear, including an incredible
growth in tuberculosis and HIV. The decline in fertility, the increase in mortality,
mostly due to the collapse or failure of State structures, had become obvious. A number of
countries were experiencing a process of de-population, notably the Russian Federation.
This was normally treated as a negative economic development, but it could have positive
results, for example in workers’ wages, as workers became scarcer.
There was also a marked process of criminalization in these countries,
characterized by the close links between the criminal and political worlds, as shown in
the increase in corruption. The number of recent armed conflicts had not helped the
situation. They also had very negative impacts on many segments of the population. Savers
had also been hard hit. The interesting issue of the minimal political protest against the
process of transition, despite its many victims, was explained by an "exit" from
the political process by the majority.
The transformation of the system had serious social consequences for
much of the population, but the costs were less than previous changes in the local system.
Some of the negative social phenomena were not in fact caused by the transition, although
they were observed during the process and were often ascribed to it. The transformation
had led to the growth of a variety of socio-economic pathologies. There were sharp
differences between the transition countries, notably in such factors as criminality,
corruption and democracy. The neo-liberal policies did not necessarily enjoy widespread
local support. The transformation had brought both social costs and social benefits
(including modern contraception, and entrepreneurship).
Alexandru Athanasiu (Professor,
University of Bucharest; Minister of Labour, 1997-1999; Prime Minister ad interim,
December 1999) then took the floor. He addressed the issues of social costs,
including family benefits and unemployment. He pointed out some major issues of the social
policies of the countries in transition. The effects of the repression of the former
system had caused a deep mutation in the social sector. There had been a significant
increase in unemployment. Some legislative measures had determined the distortion between
the taxpayers and the beneficiaries. He illustrated this statement by using Romania as an
example. The structure of unemployment had grown considerably over the decade of
transition, being now well spread among very young people.
Some measures needed to be taken in the field of social
protection. There was a need for a special programme addressed to young people, creating
employment, based on social partnership, at the regional, local and national level. This
would also ideally increase employment among vulnerable groups such as women and Roma. He
concluded by saying that there was a need to find a process that would end the transition,
since it was exhausting and becoming counter-productive.
Martina Lubyova (Institute for Forecasting, Bratislava) then
took the floor. She spoke of two key groups of losers in the transition process. These
included pensioners, who had been sentenced to poverty. Those close to the retirement age
also suffered, since retirement was used to alleviate unemployment. The ageing population
in these countries was also a clear problem. However, this group formed the majority of
the voters. Pensioners had incredible political leverage.
The second group harmed by the transition was the Roma. They formed an
ethnic group that had traditionally lived in the worst conditions under socialism, and had
now suffered considerably. However, their fertility had not dropped, on the contrary their
population had increased. If these trends were to continue, they would become a very
powerful political and social group, which could lead to increased social disruption.
EU policies towards Central Europe (free movement of tourists coupled
with strict protection of the local labour market) had in fact a perverse impact as it
forced short-term job-seekers from central Europe into the grey or informal economy: they
would take informal jobs in the neighbouring EU countries while being registered as
unemployed in their home country.
Alena Nesporova (Senior Specialist, Employment Strategy
Department, International Labour Office, Geneva) then took the floor. She said
that over the past decade, the transition countries had been exposed to several shocks,
social, economic and political. These had had many negative effects, including ethnic
conflicts, a drop in employment, and others. It was too easy to look back and say that
things should have been done differently. The trends shown in Mr Ellman’s paper were
all results of this transition process, which had caused divergent economic, social and
political paths.
The decline of the social sector was due to large hidden unemployment
and under-employment. There was a trend towards higher labour-market flexibility. The
transition had led to a much higher mobility of the labour force, including cross-border
mobility and occupational mobility. The winners were in general more competitive in terms
of education, flexibility, access to power; whereas the losers were disadvantaged in terms
of age, health, and family situation, for example.
Due to poor targeting of social policies, a passive approach to
employment problems, but mainly due to the fact that employment and social policies had
been isolated from other policies, they had had negative effects on the transition
process. There was a need for further reforms in employment and social policies, and a
strong need to back them up with educational and social policies.
Questions were then asked, covering the growth of socio-economic
pathologies during the transition process, and the actual cost of the transition process.
The third part of the UN/ECE seminar was devoted to "Macroeconomic
policies and achievements in transition economies, 1989-1999". Paul Rayment, Director of EAD/ECE, introduced this session.
Stanislaw Gomulka (London School
of Economics and Advisor to Poland’s Minister of Finance) introduced his
paper on the topic, which contained two parts: the first, a broad discussion of policies
adopted by various countries; the second, a response to the questions put to him by the
organizers of the conference, UN/ECE. These included: how far had the transition economies
been able to establish the required conditions for macroeconomic growth? What
distinguished the more successful from the less successful? And what was the contribution
to growth of the technological or catching-up factor?
Mr Gomulka said that only one country, the former GDR, underwent real
shock therapy after the re-unification of Germany. The rest of the transition economies
followed what he called "rapid adjustment". Rapid adjustment strategy had two
forms: one weak, the other strong. The weak form had been applied by the majority of the
CIS countries, and the strong by many Central European countries. The difference lay in
macroeconomic policies, but had narrowed down during the ‘90s.
In response to the first question, Mr Gomulka said that he had selected
eight criteria to judge success. Credible disinflation policies were a positive factor, as
were the reduction of the government budget deficit, the lowering of public debt and of
public spending. Moreover, exports should exceed short-term foreign debt, direct taxes and
social interest contributions should be low, as should the lending rate.
Mr Gomulka then answered the second question, noting that rapid
privatization, liberalization and freedom had not always led to the expected macroeconomic
growth. It was the new private sector, not the privatized one, that was driving
macroeconomic growth. These factors were important to force the privatized sector to
liberalize and re-develop, but were not as important as had been thought. Achievements
could be linked to rapid liberalization, as well as to many other factors. The
conventional view, however, overestimated this issue. The success of transition depended
above all on the creation of conditions conducive to the development of the private
sector.
It had paid off to start early and move fast. A stable macroeconomic
environment and structural reforms were indeed vital for sustainable growth.
George Kopits (Assistant
Director, Fiscal Policy Dept., IMF, Washington) commented on these suggestions,
saying that there were five inter-related issues that deserved attention: the obstacles to
macroeconomic stabilization, which had been underestimated by economists; stabilization
and growth, which were most important, and required clear specification in order to be
economically sound; policy lessons, which could be wilfully misinterpreted; the fact that
macroeconomic stabilization should be accompanied by structural reforms; and the role of
the IMF which had proved more effective than was usually accepted or believed.
Silvana Malle (Head, Non-Member
Economies Division, OECD, Paris) took the floor, and said that the paper reflected
the orthodox view of the topic. The repercussions of the Russian crisis, for example, had
been very different on the different countries. Such comparisons reinforced the criteria
used to differentiate countries. On the issue of comparisons, different policy actions
needed to be taken further into account. Ms. Malle was not convinced of the convergence
between the CIS countries and Central European countries, other than on a policy level.
Over-optimism should be avoided, since the CIS countries still had a long way to go.
Joze Mencinger (Professor,
Ekonomski Institut Pravne Fakultete, Ljubljana) then took the floor, saying that
he had been hearing the same divisive arguments for the past ten years. He addressed Prof.
Gomulka’s paper, saying that he believed that the swift pace of transition had been a
major error for several countries. This had been due to the rejection of the role of the
State. The outcome had been a lack of efficiency, and the rise of the mafia. Macroeconomic
conditions had been damaged by policy fluctuations. CIS countries had not followed any
model, taking random advice, and there had been no consistent policy. He then spoke of the
positive situation of Slovenia, which had followed a consistent policy model, and had
grown accordingly. It was also lucky since it had better starting conditions.
Questions were then asked about such topics as "economic shock
therapy", and divergences of enterprise development policies.
The fourth part of the seminar dealt with the "Structural
change in the transition economies since 1989". Danuta Hübner, Deputy Executive
Secretary of UN/ECE, introduced it.
Michael Landesmann (Research
Director, Vienna Institute for International Economic Studies (WIIW), Vienna), author
of the paper, introduced his subject. He had chosen a specific, more traditional
definition of structural change, namely, in terms of compositional changes. The interest
in structural change was due to its provision of an insight into the evolutionary place of
the transition economies in the European structure and division of labour. There were very
wide issues linked to structural change.
Structural change at the broad sectoral level was then examined from
the de-re-agrarization, de-industrialization, and tertiarization angles. The role of FDI
in the performance of manufacturing sectors was examined, and trade structure comparisons
were made. An analysis of the phenomenon of "catching up" at the industrial
level rather than the macroeconomic level was introduced.
Leonid Grigoriev (Director
General, Bureau of Economic Analysis, Moscow) took the floor, saying that
long-term policies and trends were indeed important. The IMF studies had recently shown
that. In Central Europe, the average PPP per capita was much higher than in the CIS. The
term "institutions" had changed over the past 10 years, and this was
problematic for analysis. It was time to look back and reflect on whether privatization
had been wrong or had been the appropriate thing to do at that juncture.
Paul Hare (Professor,
Herriot-Watt University, Edinburgh) said that the structural change was, in the
paper, a part of the process of adaptation or convergence of the transition economies
towards the EU economic structure. However, there was another important aspect, namely the
original situation of the transition economies as economies with a seriously distorted
structure, as illustrated by their low energy prices and other artificially low prices.
Andras Nagy (Professor,
Institute of Economics, Budapest) spoke of the importance of institutional
changes, since these were primarily responsible for the great divergence in economic
performance and evolving structures of the transition economies. Another important aspect
of institutional development was the different scale of the emergence of small private
businesses in the Central and Eastern Europe.
Structural change in trade had two strongly interconnected aspects, he
went on, changes in the commodity composition and in the geographical structure of imports
and exports. Fast changes and significant improvements in the economic performances of the
transition countries was not only possible, but had already started, Prof. Nagy
concluded. If the necessary institutional reforms were introduced and a sound economic
policy was followed, this would continue.
Questions were then asked about such topics as the definition of labour
costs, and their dynamics in the transition economies, notably in the research and
development sector, to which the speakers responded.
Ms. Danuta Hübner concluded the meeting by thanking all
participants.
For further information please contact:
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United Nations Economic Commission for Europe (UN/ECE)
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