Conclusions from the Financial Crisis in Eastern Europe
In the fall of 2008, Central and Eastern Europe became a flashpoint in the global financial crisis. The region was in a state of severe overheating in all regards. Inflation surged everywhere and to double digits in Bulgaria, Estonia, Latvia, and Lithuania. Wages and real estate prices skyrocketed, rendering these countries ever less competitive, which further undermined their current account balance. Output plunged and unemployment soared. The country with the greatest overexpansion, Latvia, was feeling a credit crunch already in 2007, as its banks seemed overstretched with excessive lending, and the risk of a fall in real estate prices with ensuing credit losses was evident. The big blow was the Lehman Brothers bankruptcy on September 15, 2008. All of a sudden, world liquidity dried up, and vulnerable Eastern Europe was left with no credit.
However, in less than two years, by March 2010, the crisis in that region had more or less abated. Public attention moved from Latvia—the country that suffered the most pain in the East European crisis—to the PIGS (Portugal, Italy, Greece, and Spain), in particular to Greece. The issue was no longer why Latvia must devalue but what Greece could learn from Latvia.
The East European financial crisis was a standard credit boom-and-bust cycle leading to a current account crisis. What lessons can be drawn from it for Southern Europe and the rest of the European Union? What happened during the East European financial crisis, and how was it resolved so quickly?
Senior Fellow Anders Еslund brings home the lessons from this episode before it fades from public memory, because nothing is more easily taken for granted than success. Crisis resolution in these countries was decisive and successful, and the entire region is likely to return to economic growth by the second half of 2010.
Baltic countries–did the strategy of deep integration fail in the financial crisis?
Widely diverging political-economic strategies were adopted during the collapse of the Soviet Union. The Baltic countries entered deep integration with Western Europe, including accession to the European Union and Euro-Atlantic organizations. Economically they aimed to join especially North-Western European markets in ways which precluded development of purely domestic markets and severely limited domestic economic policy tools through fast liberalization, currency-board like arrangements and privatization to foreign owners. Ensuing years brought extremely fast growth but also an exceptionally steep decline in 2008-2009.
This strategy and its outcomes can be contrasted with those pursued by post-Soviet states.
The role of external institutional factors in the transformation
The paper discusses the role of regional public goods vs. global goods in influencing postcommunist transition in Central and Eastern Europe and former USSR with special attention given to three particular factors: (i) external anchoring of national reform process; (ii) international trade arrangements and (iii) international financial stability.
Our main finding is that that the EU, through the Eastern enlargement process, acted as the very effective regional public (club) good provider, whose influence across time and countries was correlated with better transition outcomes. In particular, the consolidation phase in democratization, institution building and structural transformation was successful in countries reforming under EU accession conditionality, but not under other forms of conditionality provided, for example, by the Bretton Woods institutions. In the area of trade, gains from WTO accession were dwarfed by the impact of the opening of the EU trading block for accession countries. Finally, countries participating in EU integration showed more discipline in maintaining macroeconomic stability, while IMF programs were less effective in inducing stability in the absence of the European factor.
This the main reason why CIS countries which got neither the EU accession perspective, nor even trade liberalization offer on the EU lag behind Central European, Baltic and Balkan countries in terms of democratization, rule of law, institutional stability and market-oriented economic reforms. However, due to observed ‘enlargement fatigue’ in the incumbent EU, the future attractiveness of the EU integration perspective and strength of the accession associated incentive system (in respect to countries of Western Balkans, CIS and Turkey) comes under question. There is also unclear whether European experience in providing regional public goods can be easily repeated in other geographic regions and to which extended can be used by the providers of global public goods.
Pension reforms in the CIS and Eastern Europe
Pension reforms in the former socialist countries are considered. These countries have many common features: they started transition with similar initial conditions, have close demographic characteristics. They also share inherited overall generous and untargeted social policy stance. Still the CIS and East European countries have substantial differences in the present state of their pension systems. Possible explanations of differences in the pension policies are discussed. They include inherited factors (for instance, retirement age at the start of transition), readiness of economy to particular measures (like financial development), overall radicalism in implementing transition, et al.
Privatization as Scapegoat: Three Theses
Despite the oft-cited economic benefits of privatization, public opinion polls in the postcommunist world reveal a simple conclusion: Everyone hates privatization. Some observers link this lack of support for privatization to the legacy of property relations under communism that yielded a broad distaste for private property. Moreover, many citizens in the postcommunist world support private property even as they oppose privatization. Other observers blame privatization for economic decline in the post-communist world yet this claim is difficult to establish for a number of reasons. Perhaps most importantly, political conditions in many countries precluded more efficient privatization strategies. In sum, attempts to link privatization to economic outcomes, whether negative or positive raise challenging methodological issues. Finally politicians intent on redistributing formerly state-owned assets to their supporters often justify their actions by blaming privatization. In sum, for all its undeniable problems, privatization has been too easily blamed for a variety of ills in the postcommunist world over the last 20 years.
Russian Economy: 20 years ago and 20 years ahead
Russia was at the center of the events that took place in Eastern Europe and the Soviet Union 20 years ago. It is natural that it was the center of the Eastern bloc.
It is crucial that Gorbachev began democratization, even though it, along with the economic crisis has led to the collapse of the “empire”. Yeltsin and Gaidar held market-based reforms, perhaps the most radical. They became possible due to democratization, but the democratization itself was soon stopped. Old Russian and Soviet traditions increasingly reminded about themselves. Nevertheless, despite the severe recession and high inflation, despite the fact that the transformational crisis took 8 years, I believe the reforms were successful: we got a market economy and from 1999 to 2007 returned to democratic standards. However without serious modernization. Now after the crisis of 2008-2009 prospects are uncertain. There are two alternatives: 1. preservation of stability and then a gradual decline in growth rates due to lack of maturity of institutions. 2. implementation of the modernization on the basis of complex institutional reforms, including political ones. And then there is a possibility for higher growth rates and innovative economy based on growth in business activity.
Success and failure in National Systems–Change Strategies: Impact of the EU Eastern Enlargement
The paper presents a world-system view on the Central European transformation.
a. In this frames the transformation first of all a geopolitical event, where the social impacts and local-national political events are only of secondary importance. Collapsed the most longstanding and global alternative project to the capitalist world system in its center, and not in Central Europe. In the first moment its European periphery reacted to that moment with similar strategies and rhetoric. But very soon the differences in the different nation states became more significant. Since that the history of transformation can be interpreted as history of changing models of adaptation to the international system in their national varieties.
b. Those changing environment generating reaction of the national elites can be understood in 3 phases: b1. 1989-95/6. Americans as liberators. Non systematized, weak framing. Major world system integrators here would be diffusion of the"democracy" concept and the international business. b2. 1996/7–2008 new integrator–the triumphant EU. This is an attempt to strong framing. Europeanisation of law and formally of the political system. The Eastern Enlargement in 2004 in this sense a formal turning point, but this type of integration starts earlier in the candidate countries and ends with the economic crisis in 2008. b3. from 2008. weakening ties in the crises and "post-crises" due to the growing individualization of political and growing unification of economic adaptation strategies with a common outcome: minimization and partial dismantling of the local welfare states.
The Russian political system: the emergence, evolution and prospects of transformation
The report examines three stages of formation of the political system in contemporary Russia.
In the first phase latest Soviet system was remained, which arose in the years of perestroika, which led to an irreconcilable confrontation of powers, followed by force resolution of the conflict.
The second stage is characterized by the adoption of the 1993 Constitution that gives the president such authority, which actually means the restoration of political monopoly.
In the third stage, associated with the name of Vladimir Putin, we see strengthening of the monopoly through the integration in the presidential "power vertical" the legislative and regional power.
To date, this system has revealed its ineffectiveness, however, the prospects of its transformation are not viewed as neither in elite nor in the community there aren’t any actors able to provide such transformation. It’s more likely that transformation of the current system and its direction will be determined by spontaneous processes in society and by the nature of its reaction to the inefficiency of the system.
Hungary: Legitimation Crisis of 1989 and the Delayed Revolt of Masses
The paper deals with a major question: what gave more advance in the Central European transformation–elements of the civil society, semi-democratic and pseudo-market experiments of some countries before 1989 in comparison with more brutal systems of the others, or intensity of the pre-soviet modernization of some confronted with the others. Practically, which would be the first "Western" state and society in the region: Hungary or the Czech Republic? Until the late 90ies Hungary has short term comparative advantage gave better chances to the westernization but from the late 90ies the historically accumulated Czech modernization was more successful offering to the country a rapid catching-up. That generated in Hungary growing de-legitimation of the transformation as such and the emergence of a radical populist regime, dismantling important symbolic and systematic elements of 1989, however not from left-wing, but national rightist positions.
East Germany’s Economy on the Path from Transition to European Integration: Achievements, Shortcomings and Challenges
East Germany’s economy is on the path from transition to European integration. The disappearance of the “Iron Curtain” has led to a considerable structural change in East Germany. After experiencing a sharp decline in production and employment, gross value added and productivity started to grow. Productivity came up to 80% of the West German productivity level in 2010. Nonetheless, catching up in terms of productivity shows certain stagnation beginning in the mid 1990ies.
Economic and social development in East Germany shows numerous positive changes, such as a modernized infrastructure (e.g. high standard in the health care system, large investment in the public research and education sector, improvement of roads/highways and railroad tracks, development of the urban wastewater treatment system), the modernization of the firms’ capital stock and the protection of the environment. To sum up, living conditions in East Germany have improved substantially since 1990.
Despite considerable achievements a number of shortcomings resulting from the centrally planned economy’s legacy continue to exist: weak R&D activities in the private business sector due to a lack of large firms, deficiency of headquarters, below-average export-intensity. Moreover, transition has gone along with decreasing in birth rates and increasing out-migration from East to West Germany. So, the great future challenge for the East German economy will be to ensure stable economic growth with a shrinking and aging population.
Good living vs. bad feelings
Today most East Germans enjoy much better living conditions than two decades ago. However the political system of the unified Germany faces still a lot of scepticism. At the same time there is a growing tendency of whitewashing the dictatorship which ruled the German Democratic Republic. The presentation will briefly discuss five possible explanations for this paradoxical trend.
- Citizens of the GDR had to pass through a very complex adaptation process in a very short time. In general they did so successfully. However a feeling of having lost parts of their identity is widespread since then.
- Despite of effective social security systems there is still a feeling of inequality and second class citizenship in East Germany.
- Many people do not understand or accept that many of the shortcomings in the economic sphere are results of the centralized planned economy.
- After leaving the restricted but relatively secure environment in a socialist economy East Germans had to participate in intensifying global competition, which made their lives more challenging and less predictable.
- East Germans did very well in adapting to the formal institutions of a democratic state and a market economy. However, for many of them it takes more time than expected to become active players in the diversified and complex environment they live in.
Economics and politics in Polish transition
The success of the Polish transformation was facilitated by relatively low level of social expectations; by the fascination and dependence upon the West; by the "epistemological chaos", the difficulty of the people to understand their own interests, which contributed to demobilization of the society and depoliticization of the reform process. High quality of independent elites and the fact that they remained relatively united and supported the modernization project strongly contributed to the Polish success story.
Czech Republic: Economic Development 1991-2011
The paper deals with the Czech macroeconomic development as indicated by standard macroeconomic figures. Crucial changes in macroeconomic trends are analysed and explained in depth. Czech data are compared with data for selected neighbouring countries. Special attention is devoted to the process of re-orienting of the Czech foreign trade and to changes in the competitiveness of the Czech economy.
Czech Republic: Report on Current Reforms
Paper focuses on currently discussed economic and social reforms in the Czech Republic, especially the pension system, educational system and national anti-corruption strategy. Development of the Index of Economic Freedom for the Czech Republic is followed and the latest data are compared with data on selected neighboring countries. Political conditions such as government stability are shown to be a crucial factor for a reform’s successful implementation.
The Political Economy of Latvia's Economic Development: The Twin Roles of the Natural Resource Curse and Ethnic Divisions
It is given a critical look at Latvia's economic development over the last twenty years and compare its experience both to its ex-Soviet peers and to Estonia and Lithuania in particular. Specifically, I will attempt to formulate two political economy explanations for Latvia's underperformance relative to its two neighbors (Lithuania and Estonia) - the ethnic divisions and the 'natural resource curse.
The evolution of institutional trust in a post communist society: a challenge of running a country themselves
During the recent crisis citizens trust to various state institutions fell to all times low ( e.g. only 15% of populations trusted the Cabinet of Ministers and Parliament). It is stark contrast to enormous poplar support to the government 20 years ago. Although there have been many improvements since the end of the Soviet era–income growth, more transparency, more citizen participation etc–the general level of trust to the institutions and social organizations remains (or has gravitated to) low. It is widely recognized that higher level of trust in general and institutional trust in particular facilitates more sustainable growth of a given country. The paper attempts to explore possible causes, implications and change potential of the institutional trust regime. The lessons from the case of Latvia might serve as a god analogy to understand societal processes in other post-Soviet countries.
Lithuanian way to (and out) the market economy
Lithuania was titled the Baltic Tiger, as market oriented reform put the stable background to the economic growth. Sound money, privatization, little business regulation and rule of law constituted the founding pillars for the economy to develop. The deeper reforms followed soon after: the education reform, pension reform, implementation of favorable tax regime. Combined with the relatively free trade reforms provided for significant changes in the economic life of the people and country in general. However, at some point, and it overlaps with the global economic crisis, the new anti –market mentality started to strengthen. That was demonstrated in the governmental decisions as well: denouncing the pension reform to some extent, tax increase, heavier business regulations. The vicious circle of less prosperity may be twisted. People tend to value things more if they become scarce. Is this valid for the economic freedom as well?
Lithuania: uneasy way out of the post soviet space
14 years following Declaration of Restoration of Independence, Lithuania finally left post soviet space, when it became a member both of the EU and NATO on May 2004.
On the road from the post soviet space to the membership of the EU and NATO Lithuania had to overcome and still has many challenges, which are typical for post communist countries in Central and Eastern Europe and for post soviet space countries.
But EU and NATO membership brought Lithuania into totally different geopolitical space with security guarantees and opportunities for economical development, which do not have countries remaining in the post soviet space. Lithuania is not vulnerable to the pressure from other countries in the post soviet space, which developed to energy and even military conflicts among them.
The only issue, which still have been left unsolved and make Lithuania vulnerable from post soviet space countries it is dependence on energy supply, particularly following closing down Ignalina nuclear plant. To find alternative sources of energy supply additionally to those from post soviet space countries would mean also independence in the energy field.
It is very important to understand both differences and similarities between countries in these two geopolitical spaces and to develop a positive agenda of relationship, which would bring them to the new level of cooperation and understanding of each other.
From a "brotherly Soviet republic" to a "boring Nordic Country": Estonia's political and economic path
20 years after the collapse of the Soviet Union, Estonia has become a functioning market democracy, a member of the European Union and NATO. Early and bold reforms, conducted in a legally clean manner can be seen as the key to success. The role of the first post-regime-change elite, but also the influence of neighbors, such as Finland and Sweden, must be emphasized. Estonia's aspirations to join the EU and NATO were crucial as well.
The challenges ahead are: creating a more sophisticated economy, increasing the influence of civil society, full integration of the Russian minority and finding our own role in international politics.
WEDNESDAY, MAY 25
De-communization of Bulgaria`s Economy: 1987-2011
Bulgaria is different from most new Europe countries in one respect: it launched and completed the most comprehensive policy of restitution of previously expropriated properties – from real estate to financial assets, and process (at least as far as it concern ownership of land and forest) goes back to 19th century.
Restitution proceeded along with other forms of decommunization, such as legal and illegal privatization, de-etatization of controls and spontaneous redistribution of state and municipal assets and real estate. The process went is parallel to and affected political changes – systemic and electoral, and in some sectors was launched before 1989. The redistribution of financial assets has, by and large, failed (as a result of a home-made crisis of 1996-1997) but privatization and restitution may be regarded as a success from an economic point of view. This does not necessarily created a situation of political satisfaction and fairness of the transition.
The rise of populism in Central Europe and its Impact-the case of Bulgaria
In pre-crisis Central Europe the rise of populism was interpreted not as an outcome of the failures but of the successes of post-communist transition. David Ost explains the paradox as follows “By presenting their policies not so much as “good” ones but as “necessary” ones, not as “desirable” but as “rational”, liberals left their supporters no acceptable way to protest or express dissatisfaction”. The rise of populism was believed to be a revolt against a certain form of elite controlled democracy without choices in which the voters can change governments but not policies. The post-crisis populism is more radical in its nature. It questions not simply the outcomes of the transition but its very objective.
In Bulgaria in the last decade twice extra-parliamentary parties have won parliamentary majority on an anti-elite ballot, making the country the poster child for the trend of making elections less a choice between policy alternatives and more public executions of parties in power.
The only question is can liberal democracy survive the permanent change of elites. Is it not the de-institutionalization of democracy as the outcome of the constant inflow of newcomers one of the least discussed dangers of the rise of protest politics and populists’ march in the institutions?
Economic transition in Serbia: from market socialism to non-market capitalism
The main advantage of Serbia in its economic transition came from being a latecomer, since its effective economic transition started in year 2000. The main drawbacks are well established rent seeking coalitions during the period of the local wars and international military interventions, accompanied by a widespread public sentiment that market socialism worked well. Accordingly, the window of opportunity in the early 2000s closed very fast and huge chunks of the institutional reforms has not even started yet. Serbian economy is still dominated by huge and inefficient public sector, widespread government intervention, substantial compulsory income redistribution and unfriendly business environment. The growth in last ten years was based on investments mainly in non-tradable sectors funded by foreign savings, i.e. huge foreign capital inflow, appreciated domestic currency and substantial domestic demand. The recent crises demonstrated that this growth model is not sustainable, but the country did not change the model yet.
Political transition in Serbia: from competitive authoritarianism to hiccup democracy
Political transition in Serbia has been overwhelmed by the unsolved constitutional issue and national security. These issues dominated both stages of the transition. The first one (competitive authoritarianism) was strongly influenced by the local wars and international military interventions. The second one (hiccup democracy) has been strongly influenced by the proclaimed political commitment towards the EU integration and conditionality policies of the international community. The competitive authoritarianism started with majority representation, political strongmen and sharp division of the constituency evolving to the most extreme version of the majority representation in the hiccup democracy, strong political parties and still divided constituency, although not that sharply. More international pressure should be expected, focused to the constitutional issues, hence their dominance on the political agenda continues, though democracy itself (with all its hiccups) is still not endangered.
Transition to a national and market economy: a Slovenian gradualist approach
Slovenia has been often considered “a success story” of transition. Economic performances were satisfactory and social costs of transition were rather low. The reasons for that can be looked for in two major directions: initial conditions and patterns of transition. First, many essentials of a market economy were created before 1989; enterprises were autonomous, basic market institutions existed and government used many standard economic policy tools. Second, Slovenia could afford to implement macroeconomic stabilization cautiously with pragmatism and risk aversion while refusing patronage of financial institutions and foreign advisers.
Four periods can be distinguished in actual economic performance: a short period of transformational depression was followed by period of balanced economic and social development between 1993 and 2004. In three “gambling” years 2005-2008 characterized by high but also extremely unbalanced growth “the success story” became questionable. Indeed, after years of steady convergence towards EU average in terms of GDP per capita, small and very open Slovenian economy has been severely hit by the global crisis in 2008. The imbalances from the previous period, growing political instability, and social discontent have severely hindered recovery.
Post-Soviet Belarus: the failure of archaic
Belarus is the only country that began the transition to a market economy and turned back after the presidential election in 1994. One of the main reasons for this shift lies in the peculiarities of the economic history of the country. Here patriarchal values mostly preserved. In Soviet times, the level and quality of life rose to a greater extent than in other former Soviet republics. Therefore, President Alexander Lukashenko was elected, who suggested anti-market slogans and a return to some semblance of the USSR. Now the life of the Belarusian society is organized largely on the principles of small group. At the same time institutions of the extended order (market) are partially preserved, which are used as decorations of the archaic Belarusian model. Success of command economic model is greatly exaggerated. It lacks the possibilities of growth (mainly due to external factors) and at the beginning of 2011 entered into a deep systemic crisis (delayed after the collapse of the USSR).
Belovezh consensus and Belarus today
Agreement on the establishment of the CIS was signed on Dec. 8, 1991 by authorized representatives of Russia, Ukraine and Belarus, is highly appreciated by authoritative international experts, on the one hand, as a "masterpiece of legitimate peaceful diplomacy of the late twentieth century, on the other hand, like a statement of "de jure" the end of Cold War and “de facto” the cessation of the nuclear confrontation.
Quick ratification and immediate accession to the Agreement in Almaty of another 8 subjects–the former Soviet republics–has only added to this kind of evaluation.
Today, however, the political state of the CIS is that the concept of Belovezhskaya Pushcha remains mostly on paper. Community of the potential democracies has become the union of dictatorships or countries where the administrative resource prevail over the canons of democracy and human rights.
On the post-Soviet space Belarus became the leader of anti-democracy and disregarding of human rights largely due to the fact that the Belarusian regime gets serious economic and political support from individual subjects of the CIS. The main benefit for supporters is that against Belarus oppressive authoritarian regimes in the CIS seem relatively democratic for a formal state institutions and nongovernmental organizations of countries with established democracies.
Why is easy-to-do-business in Georgia?
Respectful researches demonstrate that Georgia had successful transformation toward business friendly economy during same 2004-2011. Various statistical data’s reporting significant economic growth and improved living conditions in Georgia during 2004-2011; and this trend is explained by economic reforms toward deregulation of economy, extension of economic freedoms and therefore reduction of arbitrariness and corruption in governmental services. Reforms largely were based on theoretical assumption that more economic and personal freedoms and less government could bust of economic performance. This theory proven to be true in many other cases and this was re-confirmed by Georgian case. More economic freedom (elimination of visa for most nations, low taxes and duties, transformation of antitrust law to law of free trade and completion that framed bureaucratic arbitrariness, state and labor union dominated labor code law to law that gives absolute priority to employer-employee contractual agreements, simplification of business registration and accountability in line with increased transparency of police etc.) is reason for easy-to-do-business in Georgia and this experiment could be repeated and/or improved by any.
The Political Economy of unwanted reforms: lessons of transformation in Ukraine
The history of economic change in Ukraine since 1991 is presented as a specific case of incomplete transformation from the Soviet form of “limited access order” (LAO) (North, Wallis, and Weingast, 2009) towards an “open access order” (OAO) (ibid). The specific form of LAO inherited by Ukraine is described in terms of a hierarchy of “arbiters” solving the coordination problem of their “clients”, whose competition otherwise would exhaust or dissipate the rents. Steady increase in the cost of arbiter’s control and coordination, along with diminishing rents, makes this kind of social order unsustainable in a long run, and force an arbiter to adjust the rent-seeking sector under his control accordingly, thus giving a way to the private property and free market forces along with corresponding political institutions. However, this mechanism of transformation can be very costly if an arbiter fails to make such adjustments timely (as in the last decades of USSR), or the public consciousness is not ready to support the OAO with sufficient prevalence of the respective values (as, supposedly, in the modern Ukraine). This begets the “gap of control” between the arbiter’s power and the OAO institutions that should substitute it. It immediately leads to large-scale coordination failures and also feeds the parasite “intermediate winners” that are interested in further procrastination of the market reforms.
Orange Revolution and Thermidor: Causes, Consequences and Prospects
In this paper the author provides answers to the following questions: What has the Orange Revolution brought to the country and to the region? Why did Yanukovych return to power? Will Ukraine keep the European vector of development?