UNECE CONVENES
SPRING SEMINAR WITH DISCUSSION OF MARKET INSTITUTIONS AND ECONOMIC PERFORMANCE
Panel Discussions Held on Public and Corporate Governance
and Institutional Change and Economic Performance in Transition Economies
Geneva, 7 May 2001
The United Nations Economic Commission for Europe
(UNECE) opened its annual spring seminar this morning with panel discussions focusing on
the topic of "market institutions and economic performance". Most of the
discussion focused on the economies of eastern Europe and the Commonwealth of Independent
States (CIS).Two panel debates were held based on papers submitted by William
Lazonick of the University of Massachusetts at Lowell (United States of America) and the
European Institute of Business Administration (INSEAD); and by Paul Hare of Heriot-Watt
University of Edinburgh.Introducing his paper, entitled "Public and corporate governance:
The institutional foundations of the market economy", Mr. Lazonick said among other
things that what was needed to spur economic development in the transition economies was
an effective theory of innovation -- that it was important to understand and apply
measures that enabled new ventures to become going concerns that employed many people and
positively affected economies.Serving as panellists for the debate on Mr. Lazonick's paper were
Victor Polterovich of the Central Economics and Mathematics Institute of Moscow, and
Eugen Jurzyca of the Institute for Economic and Social Reforms of Bratislava (Slovakia).Mr. Hare noted in the introduction to his paper, entitled
"Institutional change and economic performance in the transition economies",
that the transition process from its beginning in 1990-91 had run into mistakes and
misjudgements, such as the emphasis on privatizing state-owned enterprises rapidly, and on
creating institutions for doing that, rather than focusing on creating new enterprises
from scratch, and creating institutions that would help that process along. He said it
also was clear that the delicate and complicated process of encouraging economic growth
under fledgling market economies required viable and established nation States -- which
hadn't always been the case in transition regions -- and required changing the behaviour
of enterprises.Serving as panellists on Mr. Hare's paper were Danica Popovic of
Belgrade University and Laszlo Csaba of Central European University of Budapest.The morning meeting began with welcoming remarks by Danuta Hübner,
Executive Secretary of the UNECE, who said among other things that in understanding
developments in the region it was useful not only to know the rules of the game but the
players; and from Paul Rayment, Director of the Economic Analysis Division of UNECE, who
served as Chairman of the session.The UNECE Spring Seminar will reconvene at 3 p.m. for panel discussions
on the topic of "tackling institutional failure".
Introduction
DANUTA HÜBNER, Executive Secretary of the Economic Commission for
Europe (UNECE), said among other things that in understanding developments in the region
it was useful not only to know the rules of the game but the players -- the governments,
the businesses and other decision-makers and the social and cultural backgrounds from
which they came. Growth in Europe was necessary, and everyone knew at this point how high
the cost could be of institutional failure; institutional frameworks could provide
stability and continuity, but that was not in itself sufficient for growth; what was
needed was institutional change; the highest payoffs came from effective behaviour within
institutional frameworks that allowed sustainable change that enabled business to thrive.The revolution of 1989 had destroyed a great deal of the institutional
frameworks in what were now known as transition economies, Ms. Hübner said; rebuilding
them on market models had been slow and difficult. The hope that such a transformation
could be achieved quickly had not been borne out. Merely copying institutions from market
economies wasn't enough; what was required was a process that established effective
institutions taking into account the cultures and histories of the countries involved, and
the careful application of incentives that encouraged effective market behaviour and acted
to prevent corruption and the sort of manipulation that only served the aims of certain
vested interests. Ms. Hübner said she hoped that during today's discussion everyone would
learn how to get started -- would learn what was the minimum package of reforms necessary
to encourage and convince enterprises and investors that reform was under way and to give
them confidence that it would continue.PAUL RAYMENT, Director of the Economic Analysis Division of UNECE, said
the day's schedule had been clearly outlined. The topics were broad ones and couldn't be
covered extensively in one day, but certainly a basic review could be made based on the
four excellent papers before the session.
Panel discussion on public and corporate governance
WILLIAM LAZONICK, of the University of Massachusetts at Lowell (United
States of America) and the European Institute of Business Administration (INSEAD),
introducing his paper, said fifteen or twenty years ago there was still a debate going on
over whether the market or the "plan" had to be in place to get a viable economy
operating. The message that had been going out from the United States in recent years was
that in the age of globalization a critical factor was the need to encourage
entrepreneurship. How did new ventures become going concerns that employed many people and
positively affected economies? For individuals, obviously, market economies had advantages
and were nice places to live -- when they worked well. But his opinion was that such
markets were the result rather than the cause of economic development; there was a lot of
debate among economists about market imperfections and market failure, but his problem
with that was that the benchmark for such talk was a perfect market economy that didn't
exist and didn't in any case offer a theory of market development. The question was how
did these markets get started?What you needed was a theory of innovation, Mr. Lazonick said, and to
do that you had to focus on the characteristics of successful innovation, which according
to Mary O'Sullivan were collective, cumulative, and uncertain. Resources had to be
allocated in keeping with those characteristics, and in classic situations that often was
not the case. Among the social conditions of innovative enterprises were organizational
integration, financial commitment and strategic control. Financial commitment of a certain
kind was critical -- money had to be allocated to sustain the cumulative innovation
process until it could generate financial returns; in other words investment had to be
dependable. Organizational control, not market control, seemed to be central to the
development of a market economy; and labour and capital mobility only generated
development if innovative enterprises and developmental States could manage the markets so
that resource allocation was organizational, developmental and strategic.VICTOR POLTEROVICH, of the Central Economics and Mathematics Institute
of Moscow, said he would have preferred a more positive evaluation of neo-classical
economics. That school of economics also had a theory of innovation based on macro- and
microeconomic models; these were based on technological progress and noted that such
progress or innovation allowed a particular enterprise to have a brief monopoly on the
product that resulted. Neo-classical theory already contained certain important components
for the innovative process, therefore. There also had to be effective strategic
interactions between owners, operators, and employees to foster innovative behaviour. And
there had to be better explanations of the macro- and micro-economic factors involved in
innovation.A major mistake in the transition economies had been to place too much
emphasis on privatization per se, Mr. Polterovich said; privatized enterprises in
the former Soviet Union hadn't necessarily done better than State-managed institutions;
what mattered was to get effective structure and effective frameworks established;
privatization without that was not going to work very well. Also, institutional
"traps" had to be avoided -- such as corruption -- or the economic backwardness
of a State could be permanent. Avoiding traps and getting out of them required among other
things effective and honest Government; if that did not happen, business development and
investment were not stimulated. The State had to promote growth through balanced and wise
policies. It further was necessary to learn how to repair the damage done by previous
economic cultures that hadn't worked well and were not disposed to deal effectively with
market economies; in the Soviet Union there had been, for example, a culture of
paternalism and dependence. To develop innovation and thriving markets it was necessary to
take into account the cultures of the countries concerned.EUGEN JURZYCA, of the Institute for Economic and Social Reforms of
Bratislava, said Mr. Lazonick's paper was a criticism of mainstream economics and raised a
topic that could fill year's discussion, let alone ten minutes' worth. He liked the paper
because it was provocative and refreshing. The "market" had won over the
"plan" as the best way for organizing and running societies, but it was true
that markets had characteristics of inequality and instability, and these had to be coped
with. The claim that the more perfect the market, the better performing the economy was
not necessarily true. In some transition countries, it had to be noted, the natural
development toward better market systems had been broken, and the question was what to do
and how to respond. The theory of innovative enterprise needed to be developed much more
extensively than it had been to date. He wasn't sure the short-term examples used in the
paper would necessarily bear out in the long-term, and he wasn't sure if it was true
across the board that countries with higher levels of economic freedom were marked by
greater inequality; some research had shown that the factors weren't necessarily related.It was very difficult to recognize an original cause of economic growth
in many cases, Mr. Jurzyca said; one probably had to look at other sciences than economics
for contributing factors, and at different things than merely organizational or market
arrangements. One effective approach for innovation appeared to be the Silicon Valley
model, with its combination of venture capitalists and innovative enterprises.A number of remarks were offered from the floor. Among other things,
speakers asked for further suggestions and advice on macroeconomic regulation in
transition countries that would encourage growth and innovation; asked how, in terms of
policy prescriptions, the findings of Mr. Lazonick's paper could be applied; questioned
whether, in the case of the former Soviet Union, for example, more planning rather than
less was needed for setting up an effective and stable economy; and said the paper seemed
to give insufficient importance to basic economic theory developed over the past
200 years.
Mr. Lazonick, responding to these remarks, said among other things that
he certainly did not mean to say that economic theory wasn't important; on the other hand,
a lot of effective theory had been ignored or had gone unapplied as a system of thought --
one got models that didn't go anywhere or theories that didn't get applied to reality.
Many economists, in fact, used theory as a way of ignoring reality. Theories had to be
integrated and applied to a "reality" that was constantly changing. He felt it
was important that it be understood that market forces had to be regulated -- as markets
developed and became more active and powerful, regulation became necessary. Hence you
might as well say that at the outset. As an economist you couldn't really understand the
world without also, in a sense, being a sociologist and taking history and culture into
account.
Panel discussion on institutional change and economic performance in
transition economiesPAUL HARE, of Heriot-Watt University of Edinburgh, introducing his
paper, said among other things that the transition process from its beginning in 1990-91
had run into mistakes and misjudgements, such as the emphasis on privatizing state-owned
enterprises rapidly -- and on creating institutions for doing that -- rather than focusing
on creating new enterprises from scratch, and creating institutions that would help that
process. Also it had been found that carrying out serious economic and institutional
reform couldn't occur effectively without established nation States, and a number of
governments among the transition economies had not been fully established and had gone
through changes since the transition process had begun. It was further clear that some
Governments had not necessarily been committed to establishing market economies, and as a
result the extensive and far-reaching reforms necessary had not been effectively
undertaken.There were different theories and definitions that could be employed in
deciding which sorts of institution were helpful for supporting well-functioning market
economies, Mr. Hare said, and choices had to be made among them and among the emphases to
be given to different institutions that would govern such economic functions as private
property rights and contracts; financial markets; labour markets; and social concerns and
safety nets. All of this was complicated by the fact that some of the institutions might
not function well or not even be in existence, and the gaps had to be filled in other
ways, such as through the private sector. Evidence suggested that some countries had
enjoyed earlier and more sustained recovery from post-communist recession as a result of
earlier and more effective macroeconomic stabilization and greater commitment to
market-oriented reforms, including institutional reforms. A key factor in improving
economic performance obviously consisted in changing the behaviour of enterprises; States
must effectively address the matter of how to encourage development of new enterprises and
how to help those that were potentially viable but momentarily struggling.DANICA POPOVIC, of Belgrade University, said she wondered what was the
driving force for creating institutions? And was creating such institutions the new Holy
Grail, and was everyone going to stick with this approach? One mistake at the beginning of
transition process had been the obsession with speed: effective transition wasn't a horse
race; what was important was to think clearly and to act deliberately and to establish
well-designed institutions. Private enforcement of law was a point dealt with by the
paper, but the topic of excessive bureaucratic power, often corrupt or even run by mafias,
was another telling matter -- in Russia and in Yugoslavia, the problem wasn't lack of
institutions but corrupt institutions. "Moderate" competition was recommended in
the paper to enable enterprises to be created and to survive their initial difficulties,
but she wondered, among other things, how long this moderate competition should last.It was clear that effective economic growth wasn't going to be fuelled
by foreign direct investment (FDI) alone or especially; and the argument of transition
countries that they couldn't grow on their own savings because they were too poor should
not be encouraged or repeated, Ms. Popovic said. They had to find a way to sustain growth
from internal resources. It was also clear that these countries had to find a way to
stimulate and sustain internal consumption.LASZLO CSABA, of Central European University of Budapest, said among
other things that it was important to create a synthesis between policies and institutions
-- to look at them as unit rather than getting into chicken-and-egg discussions about
which came first or was more important. Similarly one had to look at both public and
private institutions as neither good nor bad or as one being better than the other but at
making these institutions fair and effective. Very often, when one talked about market
failure the root cause was State failure, which required States to help the markets
through more State intervention, which often meant further ineffective involvement which
made things worse.Mr. Csaba asked about the "vicious circle" scenarios that had
occurred in some transition countries -- what caused them and what one did about them. He
agreed that FDI should not be regarded as something that would save or sustain transition
economies; it rather could work as a pacemaker for a while, allowing enterprises to learn
the new market culture so that they could function effectively and hold their own based on
domestic investment and consumption. What was wanted was somehow to get into a virtuous
circle, such as was now being seen in Hungary and Poland. Could societies learn, and how?
There had to be at least a limited ability for them to learn, especially from their own
mistakes, so as to avoid a stagnating situation and an atmosphere of gloom such as one now
found in some places in Africa.Delegates offering remarks from the floor said, among other things,
that the problem in many countries wasn't a lack of institutions but incorrect functioning
of institutions, and asked what could be done to correct their operations, given that
States had created and supported such institutions; said more understanding was needed of
why market regulation by Governments had failed in some countries, especially Russia,
leading to so-far failed transitions; contended that all the emphasis on the importance of
domestic saving in transition countries didn't appear to be borne out elsewhere in the
world, where the U.S. was doing well with a negative savings rate while Japan had a high
savings rate but was stagnating economically; and that large inflows of foreign capital
could have disruptive currency effects which had to be taken into account in discussions
of plans for external loans and related financing arrangements. Mr. Hare, responding, said among other things that the question of what
was the driving force for creating institutions was a difficult and contentious matter;
private agents of course could press Governments for laws, regulations and mechanisms, and
States could look at situations in other countries and decide they needed similar
institutions, and of course lobbies -- not necessarily well-motivated ones -- could play a
role. He would think about the matter in the course of revising his paper.
"Moderate" competition also was hard to define, but some balance had to be
struck because too much competition did not allow innovation to thrive, especially in its
delicate early stages, while too little made established enterprises feel too safe and
stifled the advantages of healthy market rivalry. He did not mean to say, in pushing for
greater domestic investment and saving, that the role of domestic consumption should be
underplayed; he merely favoured a sharp increase in domestic investment, which he
considered essential.
It was meanwhile correct, as several speakers had said, that the
problem in a number of countries wasn't the absence of institutions but the incorrect
functioning of existing institutions, Mr. Hare said. In arguing for new institutions he
was perhaps saying the same thing, since the existing institutions were often so
drastically different from what they were supposed to be that reforming them amounted to
creating something new. Steps to eliminate corruption were vital; and while an entire
State administration couldn't be dismantled and rebuilt overnight to reduce opportunities
for corruption, measures could be taken quickly in some areas to send a signal that such
behaviour would no longer be accepted while more thorough reforms were more slowly carried
out.
For further information
please contact:
Economic Analysis Division
United Nations Economic Commission for Europe (UNECE)
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Tel: (+41 22) 917 27 78
Fax: (+41 22) 917 03 09
E-mail: [email protected]
Website: http://www.unece.org/ead/ead_h.htm
Ref: ECE/GEN/01/13