UNUnited Nations Economic Commission for Europe

Press Releases 2000

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UNECE CONTINUES REVIEW OF SITUATION IN CAUCASUS AND CENTRAL ASIA

Afternoon Meeting Focuses on Privatization, Regulatory Reform,
Living Standards and Social Policy

Geneva, 8 May 2001

The United Nations Economic Commission for Europe (UNECE) completed a day-long discussion of the status of transition countries in Central Asia and the Caucasus by reviewing issues related to privatization, regulatory reform, enterprise development, living standards, and social policy.

Economists joined Government officials from the region in noting that privatization efforts needed to be expanded, social protections augmented, corruption reduced, informal economic activities made legitimate, and legislation related to business activities made transparent and thorough.

The session, along with one held this morning that provided a general overview of the situation, marked the opening of the ECE's fifty-sixth annual gathering, which will conclude Friday, 11 May. The day's discussion was entitled "Business enterprise and economic growth in the Central Asian and Caucasian countries: creating a supportive and secure environment".

The first of two afternoon panel debates, entitled "Privatization, regulatory reform and enterprise development in Central Asian Republics and Caucasian Republics", featured an address by Zhannat Zh. Ertlessova, Deputy Head of the Presidential Administration of Kazakhstan, who reviewed efforts by the Kazakh Government to reform social and pension systems and to encourage privatization and the development of new enterprises.

Also on the panel was Rasim Hasonov, Director of the Center for Economic Reforms of Azerbaijan, who remarked that privatization was quite justly called the keystone of transition -- it changed the basic economic system and property relations, changing all else as a result. But he added that problems of privatization were not only economic but broader and deeper, involving questions of authority, of how citizens defended their interests, of corruption, and of social impacts; and he said that in most transition countries, including Azerbaijan, there had been tremendous mistakes made in privatization programmes.

The second panel discussion, on living standards and social policy, began with an address by Munira Inoyatova, Secretary of State and Adviser to the President of Tajikistan, who said among other things that despite dire circumstances that including recovering from a civil war and coping with extensive poverty, the country had focused on political reform and democratization and on bolstering social protections. She noted that political reforms had had social payoffs in terms of strengthening democracy and establishing a free media, while extensive measures to enhance economic performance had recently achieved encouraging results.

She was joined by Jane Falkingham, Director of the ESRC SAGE Research Group, London School of Economics (United Kingdom), who remarked that economic transition had been hard on the children of the Central Asian Republics -- that the region, which was already poor before independence from the Soviet Union, had since become poorer; that health and education budgets had been trimmed; and that figures showed, among other things, that 70 per cent of children in Tajikistan and 50 per cent in Kyrgyzstan lived below the poverty line, and that undernourishment in the region was so pronounced that many children were suffering stunted growth.

Summarizing the day's discussion, Commission Chairman Harald Kreid said that it had been clear from the addresses made how intricate and difficult it was to carry out transition programmes; clear that among the consequences of transition were that vulnerable sectors of society were particularly the victims of weakened social safety nets and eliminated institutions -- that the human cost of transition had been high, and that this had to be remedied; that there was a need for further assistance to the transition process in the region, as through development cooperation and the provision of technical advice; and that the ECE, for its part, could do more to support integration programmes in the Caucasus and Central Asia.

The next public plenary of the Commission was scheduled for 9:30 a.m. Thursday, 10 May.

Panel discussion on privatization, regulatory reform and enterprise development in Central Asian and Caucasian Republics

ZHANNAT ZH. ERTLESSOVA, Deputy Head of the Presidential Administration of Kazakhstan, said among other things that her country had just achieved 10 years of independence -- 10 difficult years under which it had had to do many things, such as establishing an independent currency and major economic reforms. Now it was embarked on a second-stage policy aimed at ensuring stable long-term economic growth. Recent figures on such matters as inflation, industrial growth, and trade balances were encouraging. However, global prices had had a strong impact on fuel exports with major positive effects for the country that perhaps couldn't be expected to continue.

The banking sector was now quite stable; in the sphere of State finances a treasury had been established, extra-budgetary funding measures and special accounts practices had been eliminated, and a State investment programme had been set up. A national oil fund acted as a stabilizing force for the State budget and helped to set up financial security for the future. On the other hand, a further reform of state finances was required, programming for State planning and the budget were inadequate, and it was necessary to have a good system of inter-budgetary relations. Specific changes were needed in budgetary planning -- currently stress was being laid on having local authorities administer budgets with the resources they had; and there had to be better distribution of tax revenues, including through allowing local authorities to more effectively administer tax systems. Pension reforms had begun based on monetary benefits instead of payments in kind. The existing system of social benefits was based on the idea of high social solidarity but benefits and individual contributions had to be brought more closely together. Today all citizens received equal State benefits regardless of their incomes or whether they were working at all.

Legislation had to be made more complete and transparent, and to be based on meeting needs rather than based on subsidies, Ms. Erlessova said. Discussions had begun on reforming the system of social protection so that it had a "mixed" character, reflecting some aspects of social solidarity and also reflecting payments made into the system by employees. The area of least reform was the sector of goods and services; natural monopolies existed which had to be addressed, as they affected the enterprise culture of the country. Again incomplete legislation was a problem, and monitoring of existing legislation was weak. International and regional action was needed to ease problems related to water and energy supplies in Kazakhstan and in nearby countries. There also were problems related to corruption and to the country's informal sector, which was large and influential.

RASIM HASANOV, Director of the Centre for Economic Reforms of Azerbaijan, said that in many transition countries, privatization was quite justly called the keystone of the process -- it changed the basic economic system and property relations, changing all else as a result. The problems of privatization were not only economic but broader and deeper: they involved questions of authority, among other things, and changed the pattern by which citizens defended their own interests. Privatization meant shifting the economy to new structures. It was profoundly social and in most transition countries mistakes had been made; Azerbaijan had been among them, unfortunately. Among the problems were a lack of laws and resources; and ignorance of rules of the game had made things more difficult for the foreign entrepreneurs the country had managed to attract. Often workers in privatized enterprises had had to be laid off, causing social problems; and the country had learned that simply selling off a State-owned business wasn't enough to ensure its success. In addition, the balance-sheet value of such enterprises had often turned out to be higher than their actual value -- finding a fair price had been difficult, and buyers had frequently found they had inherited large and unexpected debts. Many investors, faced with these difficulties, either had found new buyers or had failed to meet their payment obligations to the State.

Finding markets for products had been difficult in a number of situations, since they were saturated with competing products, Mr. Hasonov said. Things simply hadn't fallen into place successfully for many privatized firms. Taking into account social and political aspects of privatization, the Government of Azerbaijan had opted for massive privatization; but the economic outcomes had not been good, those citizens holding privatization coupons had received little in return on them, and there had been mounting opposition to the privatization process. The first six years of transition had been further marred by Armenian aggression, the Armenian occupation of Ngorno-Karabakh, and instability elsewhere in the country. Still, privatization shares had been provided to citizens, and further shares made available for purchase. The process had had its flaws, and some of the enterprises privatized had not been attractive to investors. Problems of corruption had surfaced, leading to regrettable consequences. To date, privatization had focused on smaller enterprises; larger operations would be the next target, and perhaps given the lessons learned the process would go more smoothly. Recently, meanwhile, new small enterprises had been forming at an encouraging rate.

Comments from the floor included reviews of privatization programmes carried out in Belarus and Georgia. Speakers noted that privatization should result in "real" owners with dedicated and profound interest in their properties and endowed with the extensive rights that went with property ownership, whether the owners were foreign or domestic; and that international assistance and advice were important for privatization, as such undertakings were unfamiliar and complicated.

Ms. Ertlessova said in response that the state of development of Kazakhstan could be discerned not only by looking at growth rates and financial measures but at the rate of creation of institutions. It was true that the country was in relatively good shape among countries of the region; and Kazakhstan was certainly interested in further economic integration with its neighbours. As for privatization, the most important thing wasn't privatizing but establishing an environment where privatized firms could prosper and grow. That was the much more difficult challenge.

Panel discussion on living standards and social policy

MUNIRA INOYATOVA, Secretary of State and Adviser to the President of Tajikistan, said among other things that the countries of the region were confronting problems related to living standards and social policy every day; she thought the papers presented to the ECE session should be translated into the languages of Central Asian countries and distributed, as such expert input was valuable. Tajikistan was mountainous, with only 7 per cent of its territory populated, and the characteristics of the national terrain had led the country to establish a university project for the study of economic development in high, mountainous regions, and to train entrepreneurs to establish enterprises in such an environment. Currently, 42 per cent of the country's population was under age 14. There were many problems. Unemployment was high, and a high percentage of citizens worked in agriculture. In GDP per capita, Tajikistan was at the bottom of the list among Central Asian countries -- most people were very poor. There were great natural resources, but also a lot of snow and ice which limited access to those resources. The country did have, thanks to its mountains, clean and abundant water resources, and that was not a small thing these days. Exploitation of coal and mineral resources would require attention to the environmental effects.

Current difficulties were based in part on recent history: Tajikistan had received much of its income from the former Soviet Union, which then collapsed; the country's civil war had killed 50,000 people and had nearly completed the destruction of what remained of social services; the war also had caused more than US$7 billion in damages; and the region had been the poorest section of the former USSR to begin with. The situation had worsened after independence. In these difficult circumstances, the country had focused on political reform and democratization; on economic reform; on establishing peace; and on bolstering social protections. It was unfortunately true that the economic sector generally took precedence over the social sector. This runs counter to aspirations around the world that development in the new century would be truly people-centred. Nonetheless, political reforms had had social payoffs: strengthening democracy and establishing a free media had resulted in the social goods that sprang from wide participation in government and from the exercise of free expression. An emergency economic reform programme had targeted absolutely essential problems, such as ensuring there was enough food to alleviate famine. Land had been sold off to small farmers; a credit system had been established; and foreign trade had been liberalized.

Religious and cultural ideas, along with thousand-year-old traditions, made enacting change in the country difficult, Ms. Inoyatova said. It had been decided that highest priority should be given to fighting poverty, in the logic that economic growth would follow. Anti-poverty efforts and programmes to enhance standards of living had been coordinated into a policy document developed in cooperation with international organizations.

JANE FALKINGHAM, Director of the ESRC SAGE Research Group, London School of Economics (United Kingdom), focused on child poverty in Central Asia. As the transition process had begun, little attention had been paid to the effects that it would have on poorer populations -- on the relative shares of the pie, rather than the overall size of the pie. Over time it had become clear that lack of attention to this matter could threaten social cohesion, national development, and overall economic progress. Children were numerous in Central Asia -- there were over 23 million under age 18 in the Central Asian Republics; they ranged from 35 per cent of the population in Kazakhstan to 48 per cent in Tajikistan. Today's children were tomorrow's citizens, and if they suffered too much economic and social exclusion, there could be major consequences in the future.

Increasing unemployment, rapid inflation, and declining wages hit children hard, Ms. Falkingham said; children also, under transition systems, suffered losses in kind as governments cut budgets for social programmes. Children depended heavily on health, education and social services. Providers could respond to social cuts by increasing the costs to the users, leading to a vicious circle where poor children were concerned -- lower household income coupled with higher costs for education and health services. Parents, after a while, tended to withdraw children from school; or schools ceased to function normally: the teachers were often absent working a second, paying job; or schoolhouses were too cold for lack of fuel; or children were too undernourished to learn. Even prior to independence the Central Asian Republics had been poor; but afterward poverty had deepened considerably. Over 70 per cent of children in Tajikistan now lived in poverty; in Kyrgyzstan the figure was 50 per cent. Rates of anaemia and malnutrition were high – and in many cases the growth of children was stunted as a result of chronic undernourishment.

Primary school enrolment rates in the region remained relatively high, Ms. Falkingham said, but those figures told only part of the story; attendance was often spotty, schools often lacked teachers or supplies, and children often lacked the shoes and clothing they needed to go to school. Gender equality in school attendance was also beginning to erode. Steps that might protect children in the region included fostering labour-intensive economic growth, so that parents could have jobs; ensuring immediate material needs, so that food and shelter were available through cash and in-kind benefits if necessary; restoring and maintaining access to basic social services; and, as progress was made, exploring new ways for targeting and delivering social protections.

Among comments from the floor were that more attention had to be paid to the situations of rural populations, who tended to suffer extensively from transition efforts; that the relation should be explored between poverty among children and trade policy, as the closing of markets through trade barriers often affected agricultural producers and their children in extremely negative ways; that programmes related to economic transition and poverty eradication should be gender-sensitive; and that fostering entrepreneurship among women could have useful results for reducing poverty and improving the situation of children.

Ms. Inoyatova, responding, said among other things that Tajikistan had modified its tax code to make it more effective; that the country's local authorities were acquiring expanded power and responsibilities, many of them related to social spending and programmes; that four internationally backed programmes were now under way to improve the education system and increase access to education; and that many women in the country didn't work, not because they couldn't or were blocked from doing so in various ways, but because of tradition and because they preferred to remain at home.

Ms. Falkingham said among other things that improvements in taxation systems and tax collection did appear to have positive effects on child welfare; that reduction in income inequality appeared to be more effective in improving the situation of children than did increasing economic growth per se; that attention to the agricultural situation of a country, and to gender equality, was effective in helping children; and that it appeared to be especially helpful if aid programmes for agricultural families delivered their benefits to the women of those households.

Completion of morning discussion on "General review of progress and problems in the transition process since 1991" in Central Asia and the Caucasus

Several representatives of international and regional agencies unable to contribute to the morning discussion for lack of time, offered remarks at the beginning of the afternoon meeting, saying among other things that it wasn't necessarily true that economic regression was the cause of conflict since conflicts were also present in a number of countries with thriving economies, including Northern Ireland and Spain in the Basque region; that a regional strategy for sustainable development needed to be established, focusing on local, national and regional peculiarities and strengths; that the region was one where the concerns of the Commonwealth of Independent States (CIS) and the ECE overlapped, and it was important that the two work effectively together; and that efforts were under way, with some difficulty, to establish a free-trade area in Central Asia and the Caucasus.

Concluding remarks

HARALD KREID, Chairman, summarizing the day's debate, said among other things that the countries of Central Asia and the Caucasus for the day's discussion seemed to have certain things in common, including being on the periphery of the Soviet Union and suffering especially difficult circumstances as a result of the collapse of the Soviet Union. They had had to build new institutions and transform their economies and governments. It had been clear from the presentations how intricate and difficult it was to carry out transition programmes. It also had been made clear that among the consequences of transition were that vulnerable sectors of society had suffered most because of the lack of social safety nets and eliminated institutions. It was obvious that this had to be remedied, for among other reasons, in the interest of national cohesion.

Among the difficulties faced by these countries had been conflicts, mutual distrust leading to breakdowns in regional cooperation resulting in costly breakdowns in trade. It was a priority to re-establish regional cooperation, to resolve conflicts, and re-establish trust among neighbouring countries. It had been clear that there were differences in transition approaches -- some had gone quickly, while others had proceeded cautiously; but all, it appeared, were ready to undertake transformation and to establish viable democratic systems of governance.

From the outside, it appeared there was a need to help in a political way with resolving ongoing conflicts; there was a need for assistance to the transition process, as through development cooperation and the provision of technical advice; and there was a case to be made for the solid integration of these countries into various global organizations and systems. It was clear that the ECE, for its part, could do more to support integration programmes in the region.

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
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Website: http://www.unece.org/ead/ead_h.htm

 Ref: ECE/GEN/01/16