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ECE WARNS THAT THE TASK OF ECONOMIC REGENERATION IN SOUTH-EAST EUROPE IS BEING UNDERESTIMATED

Published:02 July 1999

The second issue of this year's Economic Survey of Europe will be made available to the annual meeting of the ECOSOC next week. In addition to an update on the current economic situation and outlook in the ECE region, the Survey opens with a discussion on the economic problems facing the countries of south-east Europe in the wake of the Kosovo conflict.

Postwar Reconstruction and Development in South-East Europe

Without minimizing the direct impact of military operations on Yugoslavia or of the considerable burden of caring for the refugees in The former Yugoslav Republic of Macedonia and Albania, the Survey stresses that the economic consequences have been severe also for Bulgaria, Bosnia-Herzegovina, Croatia, and Romania. These seven countries constitute "south-east Europe", for the purposes of discussion in the Survey.

Although the seven countries vary considerably in many respects, together they constitute the poorest region of Europe: in terms of GDP per head they are as far behind the more advanced transition economies of central Europe as the latter are behind the average for the European Union. The economic distance to be travelled by the south-east European economies before they reach anywhere near the income levels of western Europe is not only vast but has been increasing during the 1990s.

These are countries where the transition process from central planning to market economy has proved extremely difficult - partly because of highly unfavourable initial conditions, the lack of historic traditions in institutional development, their distance from the major west European economies, and not least a long series of external economic shocks starting with the collapse of the CMEA and passing by the effects of international sanctions on Iraq and Yugoslavia, and ending at present with the Kosovo conflict.

History matters, and the Survey stresses that if south-east Europe is not to continue to be a source of instability and of threats to European security then the chronic poverty and economic stagnation of the region must be addressed. Simply repairing the damage incurred as a result of the Kosovo conflict will only return the region to the status quo ex ante, which itself was a major factor in the crisis to begin with. Hence the stress on reconstruction and development of the region as a whole.

The persistent failures of reform in south-east Europe cast considerable doubts on the wisdom of the basic policy approach - exemplified by the "Washington Consensus" - pursued for the past decade. This approach is just not effectual when the basic institutional framework for a market-based economy is missing or incomplete, and when the scale of economic restructuring and institution building is simply too great to be able to keep up with rapid liberalization. For these reasons, the Survey supports recent calls for a "Marshall Plan for South East Europe" and tries to spell out what this implies in practice for effective programmes of reconstruction and development in the region.

Given the scale of structural problems in the region and the need to start dealing with them promptly, in order to create positive expectations and a momentum for change, the Survey argues that the best way to get things moving is to follow the example of the United States vis-à-vis western Europe in 1948 and supply them with significant amounts of grant aid, although this would remain subject to agreed programmes being carried out. Increasing the foreign debts of countries, some of which are already heavily indebted, is obviously not the best way to provide them with assistance and establish the confidence required to attract foreign investors.

The Survey emphasises that in any reconstruction and development programme for south-east Europe, Yugoslavia must play a central role. A relatively large economy in the region and strategically located on the main transport routes to western Europe, it is both an important market for neighbouring countries and a key transit country (see table). If the Yugoslav economy remains in its present state it will not only impede the economic recovery of the other south-east European economies, but will inevitably generate political and social tensions throughout the region.

An important lesson to be drawn from the much-mentioned Marshall Plan for western Europe in the late 1940s is that it represented a realistic and far-sighted appraisal of what was required to ensure long-term economic and political stability in western Europe - and, as it turned out, the intelligent pursuit of self-interest proved to be compatible with generosity towards the less fortunate and more vulnerable. West European leaders will need to demonstrate a similar degree of farsightedness and commitment now that the bombs have stopped falling in Serbia and Kosovo. If they do not, economic backwardness and stagnation in south-eastern Europe will simply preserve an environment in which threats to the security of Europe as a whole will continue to recur.

The Economic Situation in the ECE Region in mid-1999

In its mid-year update of the economic situation in the ECE region, the secretariat sees no significant change from its previous assessment in March for the short-run outlook in the western market economies. Real GDP is still expected to increase in western Europe in 1999 by some 2 per cent and by more than 3 per cent in the United States (see table).

These forecasts assume that growth will strengthen in the second half of the year in western Europe and weaken in the United States. At mid-year these relative changes are still not visible in the statistics. Nevertheless, in western Europe there are a number of factors which could lead to faster growth: the lagged effects of recent cuts in interest rates should stimulate domestic demand; fiscal policy is on balance neutral and in some cases slightly expansionary; and the depreciation of the euro should improve the competitiveness and growth of exports.

For the transition economies the outlook has generally deteriorated quite sharply since the beginning of 1999. The worsening of their situation began in mid-1998 and was triggered by a series of shocks starting with the Russian crisis and ending with the Kosovo conflict.

In the first quarter of 1999 industrial production has fallen in most of the transition economies B for eastern Europe this is the first decline in aggregate industrial output since 1993 B and unemployment rates have risen sharply and often to their highest levels since 1989. By the end of March there were at least 20 million people unemployed in the transition economies (7.6 million in eastern Europe and the Baltic states, 12.4 million in the CIS) (see table).

With a widespread deterioration in export performance and generally tight borrowing conditions on the international capital markets many transition economies are likely to be faced with an increasing balance of payments constraint on their economic growth during the course of the year.

In the last three months the governments in a number of transition economies have lowered their growth forecasts for the current year, and according to the official forecasts available at mid-June, the authorities in seven of the 27 ECE transition economies expect falling GDP in 1999. As there are no obvious signs at mid-year of a reversal in the present negative outlook, it may well be that a still larger number of transition economies will end the year in recession or stagnation.

Further information can be obtained from:

Paul Rayment

Economic Analysis Division
United Nations Economic Commission for Europe (UN/ECE)
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Tel: ++ (4122) 917 27 18
Fax: ++ (4122) 917 03 09
E-mail: info.deap@unece.org


United Nations Economic Commission for Europe

Information Unit

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CH-1211 Geneva 10, Switzerland

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