Press Release
ECE/GEN/00/20
Geneva, 3 May 2000
Speaking
as the United Nations Economic Commission for Europe (UN/ECE) began its fifty-fifth
session, its Chairman, Ambassador Harald Kreid, said that
the first day of the session would be devoted to a seminar (see press release
ECE/GEN/00/19 for his opening statement). Eminent economists and policy makers led the
discussions on "Regenerating the economies of South-East Europe: do we need a new
approach to the transition process?" Mr Yves Berthelot, Executive Secretary of
UN/ECE, also made some introductory remarks, linking the topic to that of the previous
day.
Hans Peter Lankes (Director, Transition Strategy, Office of
the Chief Economist, EBRD) spoke of the transition strategies related to
South-East Europe suggested by various institutions and bodies during the past
12 months. What stuck out, however, was the agreement between the participants. The
key drivers of the longer-term strategy of economic regeneration were vital. It was, for
example, important to compare the countries of South-East Europe with those of Central
Europe, although the two areas were very different. South-East Europe experienced a
mismatch between the indicators of human capital and the actual physical capital. This
suggested that the human capital was there to take advantage of any economic opportunities
that might appear. There was, however, a need to deal with the lack of trust caused by the
economic situation. The key questions were how to generate growth and how to change the
political structures to this end. The key answers were integration and entrepreneurship.
Change, however, needed to come from
within, so as to allow for reform and growth. Privatization and restructuring, as imposed
from outside, were not a solution to the problems of the transition economies. There was a
need to move on many fronts simultaneously: to be careful with stabilization policies
relying on monetary austerity; to target financial intermediaries so as to encourage the
development of SMEs; to engage in a targeted policy dialogue at many levels, but mostly at
the local level; and to create small networks to promote small and local businesses and
entrepreneurs.
There was a political momentum behind
integration, and this should be encouraged. Economic integration could help to anchor
economic reforms. Trade within the region was minimal, and the historical links that did
exist should also be encouraged.
Infrastructure would be the driving force
behind the restructuring in the region. Building regional infrastructure could be vital in
reinforcing a local economy and bringing it forward. It was often hampered, but as a vital
tool in growth, it should be further encouraged. It was an opportunity for kick-starting
growth that should not be ignored. Much remained to be done, but there were now positive
examples.
Ivo
Bicanic (Professor, Faculty of Economics, University of Zagreb) discussed the relationship of growth and "crony capitalism". The south-eastern
area of Europe had been steadily falling behind not only Europe but also behind the other
economies in transition. In terms of growth, there were grounds for much concern. There
were however other problems and issues that made the region a special case.
Crony capitalism was a distinguishing
feature of the economies of the area. It was usually the result of corruption, and was, in
some countries, the rule rather than the exception. It was also the result of a weak
State, which could be seen in the monetary policy. A weak State needed accommodating
policies, soft monetary policies. This kind of economy did not produce growth, which was
why it was important to study the implications of dismantling such a system, and thus
creating the conditions for economic growth.
Re-establishing the legitimacy of the
transition was important, as was the re-establishment of a corruption-free economy. The
second transition needed to be from one regime to another, of a more positive type, within
this area. Crony capitalism needed to be dismantled, but the conditions were now much
worse than they had been during the first transition, since the social and human capital
had been used up over the past decade. There was also a considerable amount of transition
fatigue.
There was a majority in favour of change,
but it would impose a major demand on the system, which it could probably not sustain. The
dismantling of crony capitalism, no matter how difficult, was a precondition for economic
growth. Experience had shown that this was a task that needed to be done internally.
Daniel
Daianu (Professor, University of Bucharest, and Minister of Finance
1997-1998) said that people no longer understood transition as a regime change to
a miraculous state of market economy. Mistakes had been made, and there was still a lot of
intellectual bigotry. What was now evident was the need to catch up and to grow. There
were no quick fixes. South-East Europe’s transition economies did not seem to benefit
from the lessons of the rest of the world. However, it was important not to take the
region out of its geographical and historical context.
Non-economic factors had played a most
important role in the economic situation of the region. There were far more questions than
there were answers. Besides, donors’ intervention always reflected the donors’
own interests. Unless there was a big crisis, it was hard to believe that the donors would
react positively to the situation in the area.
It was believed that it was not enough to
compare South-East with Central Europe. There was a need to go far deeper, and to analyse
the huge imbalances, for example, in unemployment and savings. The rise in the number of
protectorates was obvious. The state of the Balkans was extremely complicated,
economically and politically. There was a need for massive assistance, and the way things
were going, more help was needed from the Western countries. The dynamics of the region
were very negative, and could lead to a state of conflict. What could have an impact on
policy dynamics in the region was the attitude of the donors and advisers to the Balkan
countries. There was a need to look at and redesign trade arrangements with the EU;
economic assistance needed to be massive and to rely on grants and soft loans,
unemployment needed to be alleviated to send a clear signal to show the people of the area
that help was on its way.
Questions were then asked, covering such
topics as the lack of a support network for SMEs, and what could be done to remedy this
situation; whether there should not also be political reforms established in parallel to
market and economic reforms so as to stabilize the situation further; and the potential
impact of the cultural aspect on crony capitalism. The speakers responded to the
questions, making comments and clarifying issues.
The second segment of the morning then
began, and the Commission addressed the issue of "Can regional cooperation help to
overcome some of the key problems of the transition period?" The Chairman
introduced the speakers.
Vladimir
Gligorov (Vienna Institute for International Economic Studies (WIIW)) began the discussion, saying that regional cooperation could indeed help. He first defined
precisely what region was the topic of discussion, as a useful tool for defining what
areas required what help, and what were their specific problems. However, this definition
was very difficult, since the region was very disintegrated. This disintegration was seen
in three forms: inter-regional disintegration, with too may borders and too little trade;
disintegration in relations with the EU with a multiplicity of agreements; and
disintegration of the prospects for integration.
The key problems in the area were
under-development, unemployment, failing and weak States, high debts, and disintegration.
Regional cooperation, given these problems, could address security; the liberalization of
trade; and policy coordination on trade, the fiscal issue, monetary issue, and
development. Direct policy coordination could be a possible solution to the issue of which
type of regional cooperation would function; however, the area dynamics were not conducive
to such an approach. The most feasible approach would be an egalitarian, indirect
approach, via the EU.
Genc Ruli (Director, Albanian Institute for Contemporary Studies, Tirana, Minister of Finance
1991-1993, Member of Parliament) continued the discussion, talking about the
options for cooperation. He spoke of the problems encountered in the region, like ethnic
issues, return of refugees, fight against organized crime, which could only be addressed
together. There could be no stability until the region as a whole was stable. Indeed, the
problems of the area were regional in character. Inter-regional cooperation was therefore
a pre-requisite for stability and for future integration, both regionally and with the EU.
The policies towards the region were
motivated by geo-political aspects, since the whole region was receiving attention from
the EU and the world. The conflicts of the past decade had led Europe and the United
States into seeking a solution for the Balkan case. The cost of indifference was higher
than the cost of support. Cooperation and dialogue in the Balkans were not however
starting from scratch; and contacts between people of the region had recently increased.
The obstacles and opposing factors for
regional cooperation remained. The area was the most dissimilar on the continent. There
were areas where conflict remained a possibility. They were also nailed down by a painful
transition, and were riddled by economic crises and political and social turmoil. The
cultures of the area were traditionally isolated from each other. Thus, nationalism was
ever more harmful. The region lacked a centre of power to play the role of leader and
mitigator. There was a need to focus on high political matters when it came to
cooperation. However, it was hoped that all this would change with EU integration, since
the region required partnership.
Thomas Price (Coordinator of OSCE Economic and Environmental Activities, Vienna) concluded the discussion. If the key problems of the area were instability and chronic
tension leading to conflict, poverty, deteriorating environmental problems or a long list
of have-nots, then the answer to the posed question would be yes, since regional
cooperation would be essential for resolving such problems.
Disparities between as well as within
countries and regions could be very dangerous. The EU was working to reduce such
disparities within countries. There was concern for the disparities between the countries
of south-eastern Europe. The sine qua non for aid should be cooperation between the
countries of the region. It was perceived that it was the 50 years of closed borders that
had caused such a negative attitude towards neighbouring countries. This needed to be
changed in order to establish cooperative relationships that could eventually remedy the
situation.
Regional cooperation, whilst important,
was however not the ultimate solution. There was a need for positive national
developments, such as a rise of the middle class, and a certain amount of nation-building
for the newly independent countries in a way that did not impede the regional approach,
but enhanced it by providing diversity.
The informal seminar then addressed the
question "How should international financial and technical assistance be designed
and organized?" and "What exactly should it support, to be really
effective?" Ambassador Harald Kreid, Chairman of the Economic Commission for
Europe, introduced the topic.
Catherine Day (Deputy Director General, External Relations Directorate, European Commission,
Brussels) spoke of the shock felt by the members of the European Union at the
conflicts taking place on their very own doorstep. The events in South-East Europe over
the past 10 years had had an important political effect on the EU. Lessons had been learnt
from this experience, and the EU was building a framework of assistance designed to help
these countries to take the "road to Europe".
The ultimate aim of Europe Union
membership had a unifying effect among the countries of South-East Europe. It also
provided a benchmark in policy-making. The EU system was thought to be sufficiently
flexible to accommodate the wide diversity of situations found in the region under
discussion, helping to provide focus, without losing flexibility.
It was obviously necessary to tailor aid
to the specific situation. The EU therefore provided aid through national institutions,
with the aim of improving regional integration, and was guided by the impact of the aid.
Assistance would be focused on improving institutions and on raising investment over the
next few years. Investment was most important in economic and social development,
stimulating growth until a self-sustaining system was achieved. There would be a serious
need for aid over the next few years, but it would have the aim of helping the countries
to help themselves.
Financial assistance should take place in
a political framework designed to foster regional integration, which the EU was
developing. Assistance should be targeted clearly on priority areas, notably institution
building and investment. Self-help was an important criterion for providing aid.
Michael
Landesmann (Research Director, WIIW, Vienna) said that it was
important to consider the effect of the instruments used for assistance on the relevant
countries. There was a catastrophic labour situation in these countries, and this should
be kept in mind when devising policies. The crucial issue of human capacities and labour
forces in the area was linked to the collapsed, or collapsing, economic systems.
External and internal disequilibria were
obvious, with States relying on foreign aid. The regional disruption was grave, and was
discouraging foreign capital. The consequences for financial and technical assistance were
therefore challenging. There was a need to think of the region as an area where
development policies had to be emphasized, and not just a transition area. Government
structures needed to be reinforced.
From a development perspective, there was
a need to re-emphasize industrialization and encourage indigenous economic activity. The
employment policy area was seriously under-represented, as were policies towards SMEs.
There was a need, however, to tailor these policies to the local conditions. A quick move
in the direction of good banking structures with assisted inducements for foreign banks
would have a positive effect.
Milivoje
Panic (Selwyn College, Cambridge University) emphasized the
relevance of the discussion for the countries of South-East Europe. Post-war
reconstruction applied to a number of countries, and economic development applied to them
all, as did systemic transition. External assistance did not always work, especially if it
had not been appropriately used, and sometimes it caused more harm than good. Loans,
whatever the terms, could be very damaging if they were not used properly. Some loans were
meant to finance projects that were not viable. Such failures were damaging and costly,
particularly if external assistance was limited.
Financial assistance to South-East Europe
was limited to the basics, since these countries were not stable and could not offer a
decent return. Technical assistance could be provided on the scale and period required.
The important thing was to remember that the political and economic situation in that part
of Europe had been such over the past 10 years that private foreign direct investment
was not to be expected on a large scale. The question was what could be done to make
limited assistance fulfil the expectations.
It was essential to specify clearly the
most important economic and social objectives the countries had set themselves, so that
these goals could be fulfilled and prioritized. It was only after assessing the means
available that the goals -- liberalization, privatization, globalization -- could be
fulfilled. It was also necessary to take fully into account the differences between
countries, as it was to coordinate very carefully all external assistance, since
duplication caused waste.
Questions on such topics as the political
settlement of the Kosovo situation without the involvement of Yugoslavia, how to make
economic aid more effective, and on aid addiction were then asked by the audience.
The speakers responded to the questions in detail.
The fourth segment dealt with the topic
"Can strategies for economic policy and regional cooperation ignore the political
context, and if not, how should they adapt?"
Ivan Krastev (Chairman of the
Board, Centre for Liberal Strategies, Sofia) held that the answer was no. However,
he had various problems with the question, for this was one that economists had been
asking political scientists for the past 10 years. Policy was normally a result of a
political process, and without this process, there could be no effective policy. The
blindness to institutional differences could be a possible cause for the failure of the
Stability Pact. There was a need for stability within Serbia for the Pact to be effective.
One of the main problems was that
South-East Europe did not really exist as a region, either trade-wise or ideologically.
The different signals coming from the EU and the Stability Pact needed to be coordinated,
or more problems would be created. The Stability Pact was about the integration of States,
but since the weak States were prevailing in the region, this integration itself would be
weak. There were two alarming trends: the first was criminalization, and the second was
the ethnic aspect of the criminal groups.
There were three approaches to the problem
of weak States: the first was to ignore their status as weak - and this would not work;
the second was to try to bypass the States by limiting their ability to manoeuvre; the
third was to stabilize these States. This last which was the preferred option was to be
done by institutional strengthening. There was a need to make policies resemble normal
politics, thus consensus building would be the main priority.
Susan
Woodward (Centre for Defence Studies, King’s College, London) declared that, over the past 10 years, policy had followed a number of contradictory
assumptions. There had been several different policy phases, including the first, which
assumed that political reform would result from economic reform. This was proven wrong.
The other strategy, of withholding economic assistance until political reform was made,
had also failed. Now the view was that political conditions were necessary for economic
growth and collaboration.
It was not necessarily true that a market
economy would come only once there was a flourishing middle-class - since the very
development of this economy required a middle class. Thus, a third view of the situation
would probably emerge shortly. Even within the area, there was a great divergence of
opinions, at all levels, of what was required to remedy the situation.
Bertrand
Rioust de Largentaye (Ancien Chargé de Mission au Centre d’Analyse et
de Prévision, Quai d’Orsay, Paris) said that in spite of considerable
external assistance, economic recovery was very slow. Aid had not helped to defuse the
bomb that had unsettled the region. This was because political realities had not been
taken enough into account during policy formulation. It was not economic progress that
made political progress possible, it was rather the contrary. Historical forces could
partly explain the current constraints affecting economic growth and regional cooperation.
The weakness of the institutions and the
economic instability of the area showed up the role of organized crime further in the
region. Instability also resulted in the absence of security safeguards. The assurances
provided by NATO, for example, had a direct result on the flow of foreign investment.
However, the absence of safeguards also had another negative impact - the increase in
military spending. To instability was added the deliberate isolation of a country in an
important geo-economic position (Serbia, on the banks of the Danube).
Foreign action was needed to promote
integration, in the form of as generalized a move as possible between bilateralism and
multilateralism, an economic and perhaps a monetary union. Mr Rioust de Largentaye
advocated the removal of sanctions against Serbia. Integration needed to be promoted by
the ever-so-distant prospect of adhesion to the EU. The long-term commitment of the
international community was to give rise to a stable process of growth. However, return on
investments should be guaranteed.
Thanos
Veremis (President of the Hellenic Foundation for European and Foreign
Policy, Athens) concluded the discussion by saying that the Balkans were imitating
mainstream Europe, with a significant time lag. It was hoped that the Balkans could reach
the European status of multi-culturalism within a relatively short time. There were
positive points. A major impediment to the development of a stable economy was State
kleptocracy. Another was, strangely enough, western aid, which could cause aid addiction.
Therefore, the nature of the aid should perhaps be reconsidered so as to encourage
restructuring and development.
The great danger in the Balkans lay in a
repetition of European history in reverse order, from a multi-ethnic culture to ethnically
cleansed fiefdoms. A remedy could be qualified economic aid, by making it focus on
infrastructure, especially in the western Balkans, the destruction of which had caused
negative ripples across the region. A timetable should also be extended, thus avoiding the
trap of aid addiction. Another necessary change was to stop believing that democracy was
exportable and could be grafted onto other societies. Societies needed to mature on their
own in order to accept the principles of democracy. Regional cooperation and local
initiatives needed to be encouraged. There was much hope for the region, however.
Questions on an array of topics, including
how to set the priorities for what needed to be done to remedy the situation in the area;
the sequencing of aid and conditions; and EU accession were then asked, to which the
speakers responded.
The Chairman thanked all participants and
adjourned the meeting.
* *
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