Colloquium 1995 Panel V : Conclusions, Perspectives and Security Implications

Opportunities, Constraints and Security Implications Márton Tardos Economic ideologies and textbook cases that are transplanted into the economies in transition will not show these countries the way to effective reform, says Márton Tardos. While some observers say that they 'know the right reform formula', he argues that there are no set rules - primarily because this type of economic situation has never existed before. But he does highlight two practical pieces of advice that hold true for every European economy in transition. Firstly - it is strong investment and trade links with the West, not aid, that will drive reform. And secondly - that each economy in transition must find its own way - and use a 'trial and error' policy to adapt global economic principles to its specific situation. Dr. Tardos is Chairman of the Economic Committee of the Hungarian National Assembly. I see two central themes to the discussion of economic transformation in the countries of Central and Eastern Europe: NATO was established many decades ago to neutralise the military risk connected with the existence of the USSR. Today, no world superpower - let alone the USSR - exists. The topic of our discussion is to stabilise the economies of Central and Eastern Europe - of those independent countries formerly of the zone dominated by the USSR that are starting a new history after the collapse of the past political system. However the fall of the USSR has brought with it new risk factors and obligations, both for the region's citizens and for NATO countries.

What is the New Risk Factor? Those who have been liberated from the dictatorial reign of the USSR have a strong desire to join in the efficiency of the developing free world of parliamentary democracies and market economies. However recent history has demonstrated that - having already reached a certain level of freedom (which is defined as having a parliamentary democracy and a market economy based on free trade) - the promise of transformation must follow a very painful course even if the region's citizens are willing to bear the burdens of the transition which has proved to be more difficult than expected. Those involved knew that the reconstruction of existing capacities - the development of new economic structure and learning how to adapt a country's production to the new rules of unknown and rapidly-changing market demand - would not be easy. On the contrary, it was assumed that the ability and education of the people in the region, and their recollection of the inconvenience of oppression would accelerate the process and the positive results, and that reconstruction would quickly push aside the unavoidable sacrifices. As discussion at the NATO Economics Colloquium has shown, the practical results of this transformation are too ambiguous. On one hand, there are positive indicators, on the other, there are signs of widespread disappointment and discontent. Individual countries' results and errors concerning the transition are divergent. There is a group of countries that - according to some experts - have already stabilised their economies and are moving toward sustainable growth. Or they are hoping to stabilise their economy and soon begin sustainable growth. During the Colloquium, positive 1995 results for the Czech Republic, Poland, Estonia, Slovenia and Albania were strongly emphasised because of their outstanding statistical indicators for this year. This group could be completed or even amended by adding those countries that have completed the process of installing a parliamentary democracy, and a legal framework for a market economy. In this regard, the remaining countries of the Visegrad agreement and those countries of the Baltic which were not mentioned in the previous group should be considered. Economic Growth (Annual change of GDP, percent) 1990 1991 1992 1993 1994 1995 Albania -10.0 -27.1 -9.7 11.0 8.0 - Bulgaria -9.1 -11.7 -5.6 -4.2 -5.1 0.0 Czech Republic -0.4 -14.2 -7.1 -0.3 3.5 4.0 Poland -11.6 -7.6 1.5 3.8 4.5 4.5 Hungary -3.5 -11.9 -4.3 -2.3 2.0 1.0 Slovakia 0.4 -14.5 -7.0 -4.1 4.0 2.0 Romania -5.0 -12.9 -13.6 1.0 0.0 0.0 Belarus -3.0 -1.2 -9.6 -11.6 -30.0 - Estonia -8.1 -11.0 -25.8 -7.8 5.0 5.0 Kazakhstan -0.4 -12.0 -13.0 -13.0 -11.0 - Kirgizia 3.2 -5.0 -25.0 -16.0 -10.0 - Lithuania -5.0 -13.1 -37.7 -16.2 4.0 - Latvia 2.9 -8.3 -33.8 -11.7 5.0 5.0 Russia - -9.0 19.0 -12.0 -15.0 -7.0 Ukraine -3.4 -12.0 -17.0 14.0 -20.0 -5.0 Slovenia -4.7 -8.1 -5.4 1.3 4.5 5.0

At the other extreme, there are countries in which civil war has broken out and continues today. In some countries, governments are not able to stop triple-digit inflation and neutralise the consequences of widespread economic uncertainty. It is worth mentioning that such extreme experiences were not addressed during the Colloquium. It is my impression that after five years of transformation we are still not able to see the final outcome. Are the changes in some countries real indications that the end of the transformation tunnel is in sight? Moreover, can we really be certain - as was mentioned on many occasions by participants in this meeting - that the partial success of some countries fully justifies the conservative and drastic policies recommended by the international financial institutions (IMF, World Bank, etc.). I base my doubts in this regard on two factors: Firstly, the story of many Latin American countries has shown that long-lasting periods of economic slump and stagnation can be interrupted by shorter growth periods. I wonder whether the growth of some Central and East European countries in 1994-95 is not a similar process. Secondly, it certainly is not clear to me whether the temporary success of some countries are merely the consequence of postponed market-oriented changes, the delay of central wage control, subsidisation of enterprises, delay of the introduction of bankruptcy laws, delayed restructuring of large firms or the consequence of the well-set conditions for market prosperity. I hope that time will refute my doubts, and that my early statements will instead become a reality. Nevertheless it is clear to me that conflicts will continue to take place in this region, even as political freedom and consumer sovereignty develop, and even if the freedom of job selection and business activity have been achieved. The question remains: after decades of job security, comparatively equal living standards and a relatively well-functioning welfare system - under what conditions do the citizens of the region consider that these achievements are full compensation for the high level of unemployment, a decrease in living standards and increased income differences? My general conclusion is that citizens of the region will continue to pay a high price for the transition. We must realise that the current and future situation is leading to one that will continue to have long-lasting and painful consequences. On the one hand, positive consequences require changes in the production structure; but on the other, transformation measures also have ambiguous results. Profit produced under conditions of market insulation no longer appears, with the result that the state budget is much less able to finance the health care system, schools and universities than it was under the "real socialist" system. The second negative consequence is that the collateral on which banking credits were based in the previous period have shrunk substantially. Because of this, the reorganised banking system remains in a deep crisis. Under these conditions, several open questions remain: how can the region or any individual country overcome this transitional crisis? Are the citizens of the region ready to consciously accept a low consumption level and strongly-reduced social expenditures for a long period of time? What is required to overcome this crisis of transformation? The Colloquium has shown that the long-lasting and unsatisfactory performance levels of the economies in transition have brought with them not only dangerous ethnic conflicts in some regions, but other worrying phenomena such as increasing ecological risks and a rising death rate and health situation - which are a danger to the entire world.

What do we Know About the Therapy? It is clear to everyone, including the citizens of the region, that the final end to this crisis of transition will only come with sustainable growth. The citizens of the region are also keenly aware that only sustainable growth will decrease and finally close the gap between the developed world and the "former socialist" countries. This is everyone's basic hope. What Details do we Know about the Therapy for a Transformation Crisis? Based on the economic success of West Germany, Japan and some Far Eastern countries, we are aware that the transition should be primarily achieved through the individual efforts of each country involved. Economic assistance and debt reform reduction from Western companies might only be of secondary importance in the development of a country's economy. Additionally, these countries may even ask a price for the assistance - in the form of health and economic development, to minimise the risk of this development. Moreover, it is also clear that a country which displays the following characteristics can produce such an economic miracle: One where domestic consumption is lower then the revenue produced. In other words, a high savings rate is needed. One where the domestic currency is undervalued. In other words, where strong export and import substitution drives are built in. One where state budget expenditures are in harmony with the performance level of the country and where the tax system is transparent and stable. One where the Central Bank is independent and therefore able to keep the value of domestic currency under control. One where private interests dominate the economy, and where strong practical programme "agent" relationships are set. But these five leading requirements are not enough to design a practical programme. Quite a few questions still remain open, such as: What are the right requirements for monetary policy, and how can restriction measures be combined with the right credit launching to produce profitable firms? What is the right way to manage inherited debt? How can fiscal expenditure be cut and a transparent and stable economy be created that is acceptable to the citizens and business agents? How can state-owned assets be privatised while constraining corruption, and setting good conditions for profitable structural change? It is clear that there are no ready-made solutions to these questions and that there is no standard recipe available from any of the world's international institutions. Nor is there a conservative, liberal or social democratic solution that can be offered. Country-specific programmes should be a trial and error procedure in which the politicians should consider two important constraining factors: Firstly, there is no possible way for any country to keep its creditworthiness unless it has strong, secure and reliable connections with the world capital markets. And finally, no country will be able to secure economic growth and success without strong cooperation from its citizens to fulfil the programme.