UNUnited Nations Economic Commission for Europe

Press Releases 2000

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Press Release ECE/GEN/00/31
Geneva, 6 December 2000

UN/ECE Regional Conference on
"FINANCING FOR DEVELOPMENT" Opens; Main Problems Discussed

Panel Notes Disparities in Wealth, Development

A two-day conference on boosting financing for "transition" economies in Central and Eastern Europe opened this morning with a panel discussion on the major problems affecting official assistance and foreign direct investment in such countries.

The session, entitled the "UN/ECE Regional Conference on Financing for Development," is organized by the United Nations Economic Commission for Europe (UN/ECE) in cooperation with the European Bank for Reconstruction and Development (EBRD) and the United Nations Conference on Trade and Development (UNCTAD). One aim of the meeting is to offer input to a High Level Intergovernmental Event on Financing for Development to be convened next year by the United Nations General Assembly.

ECE Executive Secretary Danuta Hübner said in her opening remarks that the meeting was intended to provide regional visibility for European issues at next year's High Level Event but also was important for its own sake -- that it would help European countries devise steps that could be taken at home to tackle the problems of economic transition.

The Chairman of the session, Jorgen Bøjer of Denmark, who is also Chairman of the Preparatory Committee of next year's High Level Event, told the meeting that financing for development was an innovative process that took a holistic approach to the challenges and opportunities posed by economic globalization. All relevant actors and stakeholders had to be involved for the process to succeed, he said.

A panel discussion followed on the theme of "Financing the Process of Transformation and Development in the ECE Transition Economies: What are the Main Problems?" at which a series of participants contended that transition issues needed more attention and resources from the more privileged corners of Europe.

Harald Kreid, Chairman of the ECE, said the countries of the West had to be aware that development was not a zero-sum game and that a "beggar-thy-neighbour approach" would not work. Rich countries had an interest, economically, in turning poorer countries into rich ones with whom they could trade, he said, and because the transition process had proved more difficult and longer-lasting than anticipated, there was a danger of disenchantment in transition countries -- confidence in free-market democracy and in Government institutions could erode, causing security, migration and other difficulties for all of Europe.

Other panellists were Ignacio Garrido, Vice Governor of the Council of Europe Development Bank; Lambe Arnaudov, Deputy Minister of the Economy of the Former Yugoslav Republic of Macedonia; Willem Buiter, Chief Economist of the European Bank for Reconstruction and Development (EBRD); Ms. Hübner, Executive Secretary of the United Nations Economic Commission for Europe (UN/ECE); Marcelo Selowsky, Chief Economist of the World Bank for the Europe and Central Asia Region; Michael Tutty, Vice President of the European Investment Bank (EIB); and Alexei Ulyukaev, First Deputy Minister of Finance of the Russian Federation.

The Conference will resume at 3 p.m. with two parallel panel sessions, one on "mobilizing financial resources for transformation and development -- the domestic dimension" and the other on "the role of official assistance in creating conditions for sustainable development."

Opening statements

DANUTA HÜBNER, Executive Secretary of the United Nations Economic Commission for Europe (UN/ECE), said the meeting was intended to provide regional visibility for European issues at next year's global High Level Event, but also would be important for its own sake, within the region, in terms of finding solutions for the problems faced by European transition countries. Much could be done "at home," within Europe, and she hoped the session would result in a clearer vision of what to do and how to do it.

JORGEN BØJER of Denmark, Conference Chairman and Chairman of the Preparatory Committee of the 2001 High Level Intergovernmental Event on Financing for Development, said financing for development was an innovative process that took a holistic approach to development and to the challenges and opportunities posed by economic globalization. All relevant actors and stakeholders had to be involved. He was glad that, within Europe, such a useful regional conference could be held.

At the intergovernmental level, the Preparatory Committee had established contacts with the Bretton Woods institutions, Mr. Bøjer said, and useful interactions had been held with representatives of civil society, but to date progress in designing next year's global conference had been slower and more laborious than anticipated; the name, for example, was still to be settled -- it was not, one would hope, to be called, in the end, a "High Level Event". There was resistance in some quarters to holding another "world conference", but the chief difficulties centred around different perceptions of globalization held by the countries of the South and North. There was truth to the views held by both sides, and coordinated leadership was needed to find the common ground on which all countries could work. He hoped the outcome of this regional session would include an enrichment of the fund of shared analysis of how financing for development might come about, Mr. Bøjer said -- that would be even more important than commitments for financial aid.

Panellists' statements

IGNACIO GARRIDO, Vice Governor of the Council of Europe Development Bank, said the bank focused on social development; it sought the social cohesion that development could produce and was a fairly old institution -- it had been created in 1956. There were 35 member countries, of which 14 were transition countries; according to its statutes the institution could only intervene through loans or guarantees; it currently financed social projects in some 15 countries in transition.

Long-term loans were particularly sought and needed in this part of Europe; the bank's conditions for granting a loan in Eastern Europe were the same as for elsewhere in Europe; that was true even if more risk was involved and the recipient country had limited access to regional and world markets. Among the purposes of loans were to deal with the consequences of population movements and natural disasters; and to foster education, housing, rural modernization, job creation through capacity building and training, development of small- and medium-sized enterprises, and conservation of historical patrimony.

LAMBE ARNAUDOV, Minister of the Economy of the Former Yugoslav Republic of Macedonia, said Macedonia was trying for inclusion to the greatest extent possible in economic globalization, as that seemed vital for a nation that currently had a low level of development. Maintenance of macroeconomic balance and economic stability were of great concern to the Government; priority was being given to the creation of conditions that would increase production and business activity, and major changes had been made to the country's financing, foreign-trade, and tax systems in the hope of attracting increased foreign investment. An agreement had been signed with the World Bank and International Monetary Fund.

The Government's plan through 2003 envisaged a substantial rate of real growth, Mr. Arnaudov said, and efforts were being made to meet international criteria for stimulating foreign investment. It was hoped that Macedonia would become a centre of its region and a hub for transport and business activity between neighbouring countries, but a much greater injection of foreign capital would be required to achieve such goals.

WILLEM BUITER, Chief Economist of the European Bank for Reconstruction and Development, said the external financing problems faced in the region differed from country to country -- one could easily distinguish six different "sub-groups" of countries, ranging from those relatively far advanced in their transitions to those less well-embarked. The five poorest countries of the area posed special problems. The EBRD was active in 26 -- it hoped soon 27 countries -- but in the future would change its strategies and focus.

For almost every country, public finance problems were harder to solve than external-transfer problems, Mr. Buiter said. There were problems in maintaining spending programmes designed to meet OECD standards; in other countries there were problems in raising sufficient funds simply to carry out the "night watchman" functions of the State. First fiddle always had to be domestic funding and domestic performance. In the more advanced transition countries a serious difficulty was that investments in such matters and transportation and environment had to be increased and maintained, for example. Private capital was increasingly widely available in these countries, fortunately, meaning that there was less need for bilateral and multilateral aid to overcome problems related to potential market failures. Russia was a special case -- it had huge assets and a positive balance of assets, in a sense, except that so many of these resources were privately held, and held externally so that they contributed little to the tax base and to Government funding. In those countries least well off, where external foreign investment was a trickle, there was the greatest need for direct bilateral and multilateral aid.

DANUTA HÜBNER, Executive Secretary of the ECE, said "diversity" best described the situation in Europe. Diversity is both good, which allows to exploit the potential for cooperation, and bad in the sense that there is a great disparity in wealth and living standards, as well as in advancement of institutional and structural reforms. Only few countries with economies in transition fall into a high level of the human development category.

Ms. Hübner emphasised the fact that nearly half of the countries of our region face a combination of transition and development problem. In most of those countries there has been a continuous fall in economic activities for a decade, there are massive restructuring needs; while macroeconomic stabilisation is a must, so is the need to accelerate catching up and reforms. To achieve a noticeable improvement in living standards, these countries need many years of high growth. A well functioning efficient mechanism of development financing is badly needed. Our advantage is that good examples of efficient and effective development financing exist in Europe and can be shared with others.

HARALD KREID, Chairman of the ECE, said no region in the world had such disparities between rich and poor countries. The countries of the West had to be aware that development was not a zero-sum game; a beggar-thy-neighbour approach would not work -- in the end, both partners would be poorer off. Wealth in Europe should be created in a mutually reinforcing process; rich countries had an interest, economically, in turning poorer countries into rich ones with whom they could trade. This might seem obvious, but the way things were going, apparently it wasn't -- there was too much concern with immediate consequences in terms of job losses or other shifts in prevailing circumstances.

Long-term benefits, and benefits beyond purely economic matters, had to be considered, Mr. Kreid said -- it was in the rich countries' interests to foster prosperity in eastern Europe and the former Soviet Union within a reasonable span of time; that would pay dividends in terms of enhancing security, limiting extremism, reducing migration, and increasing standards of living everywhere. It was true that the transition process had proved more difficult and longer-lasting than anticipated; there was a danger of disenchantment now; confidence in free-market democracy and in Government institutions could erode. It would not be wise to turn away from these challenges; the wealthier nations had a moral obligation to provide more intensive aid to the transition countries, and it also was in their best interests.

MARCELO SELOWSKY, Chief Economist of the Europe and Central Asia Region for the World Bank, said external financing should complement internal reform. From the countries that had been most successful, several lessons had emerged. One was the fostering of small and mid-sized enterprises; if there was a large growth in such firms, good things followed. A second was growth in foreign direct investment. Fiscal discipline was important -- firms that were subsidized, didn't pay their debts, that sucked up resources and were privileged in various ways, used up goodwill and capital in a dead-end way that choked off the opportunity for growth in new sectors and for small and medium-sized enterprises. Tax systems and funding had to be transparent. Hard budget constraints had to be imposed while conditions for the entry of new firms and new capital had to be made attractive.

Governments had to create institutions that supported new markets and created the fiscal space to socially support the reallocation of recourses between "old" and "new" sectors, Mr. Selowsky said. Infrastructure also had to be maintained and developed, as difficult as that might be -- businesses couldn't grow without utility services and roads.

MICHAEL TUTTY, Vice President of the European Investment Bank (EIB), said that if Ireland, where he was from, had "caught up" recently with Europe, it was because it had finally, somehow, got all its policies going in the right direction. It was not easy -- you could get some things right, but if you didn't get them all right it was likely that development wouldn't come. For a long while, for example, Ireland had run public deficits that were too high; when it finally tackled that difficulty in 1987 and got its public finances in order, the country became much more attractive to foreign investors and domestic entrepreneurs. Even then, it had taken some six years before a development turnaround was well-established. Another crucial factor had been education. Ireland had done that for years, yet because it didn't have other factors in order, all that had resulted for years was that Ireland's well-trained young people had got on planes to the United States and other places and had worked overseas. It was only recently that they had been returning.

In transition countries, a number of key areas had to be addressed, Mr. Tutty said; the environment needed attention, including the development of environmentally friendly energy supplies; infrastructure had to be maintained and enhanced. The EIB was working in these and other areas, providing loans mostly for broad policies and projects, such as for building up bond markets and other aspects of the financial system.

ALEXEI ULYUKAEV, First Deputy Minister of Finance of the Russian Federation, said this year Russia had 7 per cent GDP growth and 10 per cent growth in industrial production; various other indicators were looking up. External developments in the world economy were in part responsible, but also involved were changes in internal economic policy. For Russia the problem wasn't external investment but in applying resources to development. The resources existed within Russia, but they had not, in the past, been used constructively, in part because of currency and other risks. Currently the Government was trying to ensure 100 per cent of budget commitments -- failure to meet announced obligations in the past had been hurting public confidence. Now risks were being reduced. There were also problems related to the rigidity of certain limitations on business activities, including matters related to bankruptcy and to the establishment and registration of new businesses.

Transparency in budgetary matters was being enhanced, also to reduce business risks, Mr. Ulyukaev said. It was hoped that such steps would lead to more predictability and stability. Investment had grown 19 per cent this year, but more investment had to come from banks and other traditional sources of financial flows rather than from businesses themselves. The basic capital flows were still not sufficient, and exchange rates had to be less vulnerable.

Discussion

A number of comments were offered from the floor, including remarks from France, which spoke on behalf of the European Union and noted that the EU had provided a "non-paper" to the conference on the matter of financing for development. The representative said the EU felt the matter had to be considered from both global and regional perspectives and that domestic policies and appropriate regulatory frameworks had to be established in transition countries -- were in fact vital for attracting foreign direct investment.

Representatives of several transition countries spoke, outlining domestic measures taken to establish secure environments for business and investment but noting difficulties ranging from influxes of refugees to unemployment rates as high as 50 per cent and imbalances in foreign financial imputs that could result, as a spokesperson for Bosnia and Herzegovina characterized the situation in his country, in a "Frankenstein economy". Coordinated policies were called for and achievements noted, particularly that of Ireland, which a number of speakers cited as a hopeful example of a European nation accomplishing substantial, sustained economic growth and development.

For further information please contact:

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