The Economics of Societies in Transition: The Work of the EAPC Economics Committee

The Tenth Anniversary that we commemorate today happens to coincide with a fiftieth of some relevance. On 22 June 1951 officials from Canada, Denmark, Greece, Netherlands, Norway, Portugal, the United Kingdom and the United States convened in the then London HQ as the first NATO Working Party on the Soviet economy. The context in which I then presented a paper persisted from the 1950s to the end of the 1980s. For the staffs of NATO and its member states, the Cold War evoked economic analysis of Warsaw Pact resources required to maintain or enhance inputs to the military. From the mid-1960s academic economists were called upon to add their findings in at least three annual series. In the UK from 1966 the MoD sponsored annual conferences in the field, held first in the FCO, later in the London School of Economics and for the last in my own Oxford College of St Antony's in 1990, symbolically with NATO funding and Soviet participation. In the US the Congressional Joint Economic Committee from 1965 annually commissioned volumes of research from academics and officials in NATO states on the economies of east Europe, the USSR and China, usually in triennial sequence. And from 1971 NATO's Economics Directorate convened every year (save one, 1972) its important Economics Colloquia, each resulting in a volume published with commendable speed. That held in 1990 was the first to include speakers from the USSR, Hungary and Poland.

The following year the North Atlantic Cooperation Council met in initial session and incorporated the Economics Colloquia into its Work Plan, subsumed into the Action Plan of the Euro-Atlantic Partnership Council by the time of the 1998 Colloquium. That meeting was also a 'first' also in that it met not as earlier in NATO HQ, but in a Partner state, Slovenia. NATO's Strategic Concept, formulated at the Washington Summit of April 1999 committed the Alliance - I quote - 'to a broad approach to security, which recognises the importance of political, economic, social and environmental factors in addition to the indispensable defence dimension'. With the Czech Republic, Hungary and Poland then as members, and Germany unified, the old borderline of the post-war era had been obliterated.

But if there was no longer a politico-military division of the Northern Hemisphere - the EAPC starts and ends at the Bering Straits - the post-communist economies were still differentiated from their market-system counterparts. They had been confronted at the outset of economic transition with the urgency to undertake twin transformations - to transform their economic mechanism from central planning to a market system and to seek macroeconomic stability. Due to the break-up of Czechoslovakia, the Soviet Union and Yugoslavia, 22 of the 27 transition countries had to undertake those transformations in parallel with the establishment of new national structures.

By last year most of the institutional changes had been accomplished, albeit variably among countries and among economic branches within them. The private sector everywhere dominates in agriculture and services, but in mining and manufacturing a substantial state sector remains, while overall in the private sector deficiencies are apparent in public regulation and conformity to law and contract. In some countries at one extreme, some half of economic activity is generated outside measured GDP, while at the other extreme, the informal economy is within the 10% bracket usual in western market economies. Measured and - importantly - hence taxable, GDP is still small per capita relative to the West, ranging from $990 in Tajikistan to $14,800 in Slovenia. Almost everywhere the proportion of population living below a poverty line has increased. Poverty induces conflict and conflict brings poverty, as some transition states have seen. This two-way relationship was demonstrated recently by a World Bank study of quinquennial periods 1960-1999 in which civil war was experienced in 73 such country periods. The start of civil conflict was statistically associated not only with ethnicity, demographic pressure and dependence on exports of primary commodities, but particularly with low, and especially falling, per capita GDP. It is hence heartening that the year 2000 was the first since the collapse of communism in which every transition country registered a positive increment in GDP. However, even if they grow in the present decade at double the rate of the EU, only Slovenia will just reach the average per capita GDP of the EU.

The second major imperative for transition governments has been the assurance of macroeconomic stability and an informed expectation of its continuance for corporate investors and household savers alike. Here again, last year shows a favourable record. There was no inflation in two states (Albania and Armenia), single-digit inflation in twelve countries, inflation of 10 to 30 per cent in eight countries, and more than 30 per cent in just six, of which triple-digit inflation in only one (Belarus). Low inflationary expectations coupled with transparency in corporate and public governance attract foreign direct investment, which helps catching-up both quantitatively and qualitatively. Last year FDI per capita was $256 in the five Central-East European states, $123 in the three Baltic States, $68 in the Southeast European seven but only $12 in the dozen states of the CIS. The terrorist assault of 11 September and fears of a western economic downturn will accentuate a previously-evident decline in worldwide FDI. Opponents of economic globalization may find comfort in such a trend, but diffusion of advanced technology and efficient management practice may be the losses.

It is in this economic context that activities within the EAPC framework may be calibrated. The efficiency of public expenditure must rank high in such measurement. Effective resource management in defence ministries not only means that funds are spent in accord with governmental judgement on the security capabilities required, but also that an inevitably large share of public expenditure is competitively and efficiently allocated. Last year all but four transition-state governments ran a budget deficit - Ukraine was in balance, Bulgaria, Kazakhstan and the Russian Federation (if regional and local budgets are consolidated with the federal) showed surpluses. NATO and member advice to Partner governments in resource management of defence programmes thus contributes to the major policy goal of macroeconomic stabilization. To achieve democratically-monitored decisions on the allocation of such resources, the Political-Military Steering Committee of Partnership for Peace has arranged seminars guiding administrations towards greater transparency in defence planning and budgeting.

Budgetary expenditure comprises only some of the resources used for defence, notably by defence industries, both state and private. A more efficient defence industry has been promoted by restructuring to meet changed requirements and foreign competition. Conversion to civilian outputs has been required where the end of the Cold War reduced defence procurement. Both trends have applied as much in NATO as in Partner countries, but in transition economies the analysis of practical experience within EAPC in Economic Committee session has had a special place for two reasons. First, the defence industries were not only state-run but fenced-off from the rest of the state sector. Their adaptation to the deconstruction of central planning was thus all the more problematic. Secondly, much military-industrial plant was located in single-industry towns. Though there were cases where the reduction in defence procurement severely affected east European towns (notably in Slovakia), the 'closed cities' within the CIS have faced heavy unemployment, erosion of infrastructure and loss of social services. This regional dimension has taken a significant place in the Committee's remit, as have the similar, but more limited, locational effects of the closure of military bases - naval facilities were especially vulnerable - for which new productive uses have to be found. Environmental problems encountered in the re-use of areas previously defence-dedicated are not least among the concerns of the specialists working on security-related economic issues within the broad framework of EAPC and the NUC. There is work still to be done.

Professor Michael Kaser KSG

Michael Kaser holds an Emeritus Fellowship of St Antony's College, University of Oxford (Professorial Fellow and Reader in Economics to 1993) and since retirement an Honorary Chair at the University of Birmingham, working in the Institute for German Studies and the Centre for Russian and East European Studies. He remains based at Oxford, working principally as General Editor of the International Economic Association (since 1986, and of its Executive from 1974). He is Chairman of the Central Asia and Caucasus Advisory Board of the Royal Institute of International Affairs (of which he was Councillor for twelve years to 1992), of the Council of the Keston Institute and of the Academic Advisory Committee of Cumberland Lodge, Windsor, of which he is a Trustee. He has been a member of the Academic Council (Chairman 1986-92) of the Foreign Office Conference Centre, Wilton Park, and Chairman of its associated Sir Heinz Koeppler Trust; he is a former President of the British Association of Former UN Civil Servants, and of the Albania Society of Britain. He was a member of the Advisory Group on Former Soviet and East European Studies of the Higher Education Funding Council for England between 1995 and 2000.

Born in 1926 in London, he read economics at King's College, Cambridge. His first acquaintance with the Balkans was on a youth delegation to Yugoslavia in 1946 and his period in HM Foreign Service (including HM Embassy, Moscow as Second Secretary, Commercial Secretariat, in 1949) and then the United Nations (Economic Commission for Europe, Geneva, 1951-63) enabled him to take part in missions to many Soviet Republics and to all East European states. Such experience continued throughout his subsequent work in academic research and in various advisory capacities to government and international organizations (including the first UNICEF missions to Albania in 1991and ex-Soviet Central Asia in 1992). He is author and/or editor of 23 books and 350 articles in journals on the East European, Russian and Central Asian economies both under the Soviet-type system and in transition to the market. Among recent work for international organizations, the UN Economic Commission for Europe published in 1997 his chapter on 'The Central Asian Economies 1991-96' in its Economic Survey of Europe in 1996-1997 and in 1998 'The Three Caucasian Economies 1991-97' in its Economic Survey of Europe, 1998, No. 1, and the IMF 'Escape Routes from Post-Soviet Inflation and Recession', Finance and Development, June 1999. He also currently drafts the Quarterly Country Report on Albania for the Economist Intelligence Unit.

He has been honoured by a Papal Knighthood, the Knight's Cross of the Order of Merit (Poland) and the Order of Naim Frasheri (Albania).