The United Nations Economic Commission for Europe (UNECE) began its annual session this morning with an in-depth review of the situation in the Caucasus and Central Asia, with government officials and academics saying that such impediments as armed conflicts and a shortage of business confidence and new entrepreneurial firms were limiting prospects for growth.

The morning's debate focused on a general overview of progress and problems. The discussion, entitled "Business enterprise and economic growth in the Central Asian and the Caucasian countries: creating a supportive and secure environment", will continue this afternoon with the focus shifting to privatization, regulatory reform and enterprise development; and living standards and social policy.

Summarizing the state of affairs in the Caucasian republics, Michael Kaser of the University of Birmingham (United Kingdom) said among other things that all three Caucasian countries -- Armenia, Azerbaijan, and Georgia -- had suffered conflict in the post-Soviet era which had deterred foreign investment, provided fertile ground for corruption, and created insecure environments for business.

Teimuraz A. Beridze, Chairman of the Department of Statistics of Georgia, told the meeting that further regional trade cooperation would help the south Caucasian nations resolve internal problems, improve their participation in the world economy, and perhaps make resolution of regional antagonisms more possible.

Reviewing the situation in Central Asia, Pradeep Mitra, the World Bank's Director for Poverty Reduction and Economic Management for Europe and Central Asia, said the region's performance had been subpar compared with that of Central European and Baltic transition countries, and that among other things it was necessary for Central Asian nations to discipline the "old" sector -- to limit theft and apply the rule of law -- and to encourage the new sector through, inter alia, creation of sound fiscal policies and a level playing field for firms just starting out.

Rafkat Hasanov, Senior Consultant for the Fiscal Reform Project of the Prime Minister's Office of the Kyrgyz Republic, said the countries of Central Asia had recently shown healthy rates of growth, but on the other hand they had not yet climbed back to their economic levels of 1991. There was still a need for greater economic freedom, for greater private investment, for better governance, and for the elimination of trade barriers.

It is a tradition for the ECE annual session, which will conclude Friday, 11 May, to devote its first day to in-depth discussion of a matter of importance to the ECE region. The Commission will reconvene at 3 p.m.

Introductory remarks

HARALD KREID of Austria, Chairman of the annual session, said the meeting was not only the occasion for a thematic debate but also allowed member States to take account of the ECE's work and its relevance in a rapidly changing environment. The organization needed to be flexible enough to confront emerging issues, and his impression was, yes, it had done so, but. . . Yes, because thought was being given to how to increase the ECE's relevance through its major and subsidiary bodies. "But", because the situation could be improved -- the cohesion of the Commission could be better strengthened to ensure that policy dialogues were not conducted in watertight compartments without much communication between the compartments. The subsidiary bodies had been strengthened during the mid-1990s reform process within the ECE, but now it was important not to lose track of their work and important not to let their discussions become so technical that they appeared blurry and were hard to explain to the outside world.

The ECE's developmental dimension also had to be enhanced. He and the Executive Secretary had appealed to some countries for further financial support to be provided to expand the technical assistance provided to countries in transition; the response, he had to say, had been modest, which was understandable -- resources were scarce and the ECE didn't typically ask for such help from donor countries, which already had established lists of those seeking aid. It was important for the ECE to demonstrate that it made efficient and telling use of such funds. It also was important for the Commission to continue its tradition of being a forum for open and equal dialogue among all States of the region.

DANUTA HÜBNER, ECE Executive Secretary, said the secretariat felt that last year had been a good one for its work in its traditional areas of expertise. In reaction to the increasing importance of development issues, shifts also had been made in the focus of various secretariat efforts, including through initiatives for regional and sub-regional cooperation. Countries in the region were at different levels of development and at different levels of transition, and much had been done to support economic recovery and to support peace-building where conflict or post-conflict situations existed. The ECE was often well suited for such tasks because of its status as a regional organization. It had discussed some months ago, for example, the issue of financing for development; and it had been involved in policy statements on quality of life and on energy supply and development.

Two upcoming activities with a strong regional emphasis would be the Rio +10 review and the Ministerial Conference on Ageing, Ms. Hübner said. Adjustments had been made to the Commission's annual session aimed at increasing its substantive content and at using, whenever possible, such debates to focus ECE work to meet emerging challenges. It was clear that one such challenge was to reduce development gaps among countries and regions. Another was sustainable development, on which much progress had been made.

Review of the situation in the Caucasian republics (Armenia, Azerbaijan, Georgia)

MICHAEL KASER, of the University of Birmingham (United Kingdom), said that 50 years ago he had joined the ECE secretariat, and moreover, in 1949, while working for the British Foreign Office, he had been based in Moscow and had visited Georgia. No one at the time would have believed in the disintegration of the Caucasian Republics either politically or economically, when these republics were in the hands of GOSPLAN and the Soviet planned economy. Commerce and economics were arranged from the centre and radiated out like the spokes of a wheel, and some 90 per cent of the trade of the Caucasian republics were with other Soviet Republics. However, by 1999, such trade with each other and with other former Soviet republics had dropped drastically. Further, such trade was not complementary and relied on natural resource exportation.

Such data did not cover unregistered or informal trade, and GDP statistics also did not cover informal activities, including corrupt and illegal activities, making it hard to make accurate comparisons with trade and economic activity in the Soviet period, when there was very little unmeasured activity. Efforts to do so indicated that informal activity now amounted to half or more of the economic performance of these countries. As far as he could tell, Mr. Kaser said, trade as a whole had increased as these economies had become more open to trade, involving mainly other primary natural resources. Meanwhile, trade between the three countries had withered reflecting the contentiousness of their relations and various minority conflicts. The economies of Georgia, Armenia and Azerbaijan were now almost entirely dependent on exploitation of natural resources -- their manufacturing sectors had declined notably.

All three Caucasus countries had suffered conflict in the post-Soviet era, which deterred foreign investment and provided fertile ground for corruption, Mr. Kaser said. The insecure environments created by conflicts made things difficult for domestic businesses. Peace would allow a potential healing of national economies and of course greatly increased trade between countries which were after all neighbours. Currently, there were gains to be made by converting unregistered trade into registered trade, and obviously tax revenues would increase if more informal economic activity was made formal. Transport through the region also would greatly benefit from an end to ongoing conflicts. Confidence would be increased by structural reforms to make economic activities more transparent, less susceptible to corruption and more along the lines of the western European economies. Unfortunately, to date the transition process in the three countries had been slow and incomplete -- after a decade, transition was perhaps half accomplished. He hoped the 17 million people there would not have to wait another decade for the process to be completed.

TEIMURAZ A. BERIDZE, Chairman of the Department of Statistics of Georgia, said a decade seemed to him a short time, especially for major economic and social transition to be carried out in the region of the Caucasus. In his opinion, a socio-cultural approach was most important in regarding the situation in the territory of the former Soviet Union, including the south Caucasus. The transition experience there had been unique.

Georgia, till 1995, had had a tumultuous period; from '95 to '98 there had been some revival and growth; but thereafter, there had been the financial crisis in Russia and its consequences. Over the region the first period of transition had seen a steep decline in production and high rates of inflation. Energy was a serious problem for the three countries – the adverse impact on their economies of limited energy supply, especially electricity, was pronounced. Steep drops in investment had seriously damaged production capacities and construction. Living standards had fallen correspondingly.

Foreign direct investment (FDI) in Georgia had peaked in 1998, Mr. Beridze said; it had fallen somewhat since. Much of it was in the oil sector and in related pipelines and infrastructure. Trade between Azerbaijan and Armenia was very limited because of the state of relations between the two countries, although Georgia had extensive trade with each of those countries. Further regional trade cooperation would help the south Caucasian nations resolve internal problems, improve their participation in the world economy, and perhaps make resolution of regional antagonisms more possible.

Discussion from the floor consisted of statements by representatives of countries in the region.

A representative of Azerbaijan said that in comparison with other newly independent states, Azerbaijan had started economic transformation much later, as for the first four years the country had been plagued by deep internal instability caused mainly by aggression from Armenia which had resulted in occupation of 20 per cent of Azerbaijan's territory and had flooded the rest of Azerbaijan with some 1 million displaced persons. Only after a ceasefire was achieved and some internal stability established could economic transformation be undertaken. Nonetheless, recent economic figures were encouraging in terms of GDP growth, inflation rates, and trade. The Government considered exploitation of its oil and gas reserves to be a tool for securing economic growth and stability, internal security, and regional security. Among the Government's main aims were to develop the non-oil-based economy, improve regional transportation links, battle poverty, and reduce corruption. The conflict with Armenia, the representative said, was not based on economic issues but on matters of territory; unless the conflict was fairly settled and the territory of Azerbaijan fully restored, economic links in the region and political relations could not be given a normal footing.

A representative of Armenia said it was important to focus on economics, so he wouldn't reply to some of the points made by his Azerbaijani colleague, as that would get the meeting off track, nor would he blame Armenia's slow transition solely on the war and other problems involving Ngorno-Karabakh. The country, despite all this, had made much progress and had begun a privatization programme very early. In spite of embarking upon a market economy, the country had seen inter-regional trade in the Caucasus diminish; the quest for independence there had gone parallel with conflict and inter-regional differences, leading to these reductions. The problem of regional cooperation was indeed a sensitive one -- what should come first: regional cooperation or conflict resolution? Armenia felt they should go in parallel with each other, when and if the military conflicts were resolved. A stable ceasefire and a durable peace would allow a joint approach to be attempted. International organizations involved in conflict mediation could play a useful role. More involvement was needed from such agencies as the World Bank and the International Monetary Fund. Integration of the south Caucasus countries into the European architecture would also help. Armenia had recently been admitted into the Council of Europe -- a step that would lead to much harmonization of the country's democracy and economy with European standards. The ECE, it was hoped, would do more to energize regional cooperation in the south Caucasus.

A representative of Georgia said the three states of the subregion shared a number of economic development issues, and there were good prospects for progress if cooperation could be enhanced. There was a two-way street involved: conflict resolution would favour economic development, and economic development would make conflict resolution more feasible. Georgia maintained good relations with the two other countries of the south Caucasus; it had become a member of the World Trade Organization and was participating energetically in the Black Sea economic process. Georgia favoured the project now under way in the ECE to enhance cooperation and economic growth in the south Caucasus in such fields as energy production, transportation, and trade. Increased cooperation in the region would help to stabilize relations among the countries involved.

Responding, Mr. Kaser said he did think that conflict in the region was not economy driven, that the potential for conflict in the region had existed for a long time prior to transition; but that such factors as greed and various types of economic misbehaviour could add fuel to existing or potential conflicts.

Mr. Beridze said in response to the debate that regional cooperation would, in his opinion, be vital for overcoming non-economic problems in South Caucasus.

Review of the situation in Central Asia

PRADEEP MITRA, the World Bank's Director for Poverty Reduction and Economic Management for Europe and Central Asia, said the Central Asian region, it should be noted, was as large as Western Europe. It was a region where economic performance, unfortunately, had been disappointing and where poverty had increased. Also, there had been increases in economic inequality which were worrisome.

Why had some transition economies performed better than others? In Central Europe and the Baltic countries, progress in reforms and economic performance had been significant. In Central Asia, there had been massive declines of output followed by limited recoveries; when prices were liberalized many industries had become unviable based in part on their huge transportation costs which had been sustained by the artificial prices of the old planned economies. There were declines in productivity; and there had been a lack of discipline among old firms, including those that had been privatized but had a hard time shaking off old habits. Small firms, which typically were new ones, had started in greater numbers and had helped to bolster national employment and profits much more in Central Europe and the Baltic countries than they had in Central Asia. There SMEs had simply failed to take off. It was necessary to discipline the old sector -- to limit theft and apply the rule of law -- and to encourage the new sector through, inter alia, creation of sound fiscal policies and a level playing field for old and new firms if the situation in Central Asia was going to change.

Among the difficulties of the region were that oligarchs and insiders had shown an ability to capitalize early on reforms and then, once established, had stymied other players from entering the game, derailing the reform process, Mr. Mitra said. It was apparent after a decade of efforts by all the transition countries that a key source of future growth was new entry of firms, not restructuring; that insufficient attention had been paid to "tunneling" of State assets and to theft; and that political competition promoted new entry and reduced rents and theft. The Central Asian republics must take steps to address these issues if they wished to improve their economic prospects.

RAFKAT HASANOV, Senior Consultant for the Fiscal Reform Project of the Prime Minister's Office of the Kyrgyz Republic, noting that he was speaking on his own behalf and not as a representative of his Government, said the statistics showed that the transition countries that had chosen the path of liberalization had achieved better economic growth and sustainability. The republics in Central Asia had recently shown healthy rates of growth, but on the other hand they had not yet climbed back to their economic levels of 1991. There was still a need for greater economic freedom, for greater private investment, for better governance, for the elimination of trade barriers. That was true of Kyrgyzstan and of other countries of the region.

Kyrgyzstan had not had shock therapy, Mr. Hasanov said. The currency had only recently been stabilized. Among other things there were limits to free trade and incorrect government direction. Exports had fallen, except in the year 2000, when there had been a drought and neighbouring countries had bought energy from Kyrgyzstan -- if not for that, the country would have had negative export growth in 2000 as well. Trade with other CIS countries had fallen dramatically for the Kyrgyz Republic, and it had not been possible to reorient the trade system, which used to be focused on these neighbouring countries.

Some of those neighbouring countries, moreover, in attempts to protect themselves, had created trade barriers, Mr. Hasanov said -- this was something the ECE might help with. There also were restrictions on transit. Institutions for liberalization were needed within the Kyrgyz Republic; the liberalization process needed basic and fair support or the process would not take place effectively. There had to be legislative stability, a well-established legal environment, and an end to the distortion of functions necessary for normal economic development. The less stability there was, the less the progress.

A number of national representatives spoke from the floor, saying among other things that more attention needed to be paid to the agricultural sector in both the Central Asian republics and the Caucasus, as agriculture used to be a major conduit of trade for these nations, had potential for the future, but had suffered greatly during the transition period so far; that there often were conflicts between political antagonisms and what was best for establishing secure business environments; that the loss of former ensured markets under the Soviet system and the obsolete industrial structure of that era had burdened the countries involved with special problems in carrying out transition; and that more political courage had to be found to enact reforms that were sufficiently deep and far-reaching.

Mr. Mitra, responding to the debate, said he wished to stress that Central Asian countries were dealing with some especially difficult and complex problems as they attempted economic transition. There were no magic bullets. To go forward, it was necessary to work on a number of fronts, and these were as much political as economic.

Mr. Hasonov said it had been asked what needed to be done, and he felt in part that cooperation as a whole was important -- there had to be cooperation between countries as well as within them, especially in the Central Asian region. Business progress in one country otherwise could suddenly be limited by trade barriers set up by another nation.

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