Colloquium 1995 Summary of Discussions

Panel II Living Standards and Social Welfare Central Bank Monetary Policies People's Expectations GDP Growth Consumption and Demand Savings Unemployment Shadow Economy The discussion mainly focused on the interdependencies of monetary and economic policies, therefore of financial and economic indicators, and social welfare and living standards. Many arguments were about the different interpretation of certain indicators, such as money supply, consumption, unemployment or inflation. The debate was generally very difficult and based on assumptions because of the uncertainty of almost all numbers and statistics. Being now in a position to gain from experience of the first years of reform, it was made clear that the collapse of the administrative command economy had to result in declining output (20-50 percent) and increasing inflation (1000 percent) in most transition countries. The question is how quickly those countries will succeed in recovering. It was argued that the collapse and its consequences would have happened anyway, even when keeping the old system. Commenting on a rating proposed by one of the panelists, other speakers pointed out the differences in political systems and attitudes, in tradition and cultures and in the starting situation as well as the time lag since the beginning of reform activities of the five "top group" countries. Albania, for example, only just started reform, whereas Poland started in 1991. Central Bank Monetary Policies Some participants agreed upon the responsibility of central bankers for socially bearable policies. Tight policies could lead to enormous decline of the economy. Most central banks, though, are more interested in controlling real inflation than looking at figures of money supply growth. IMF policies are very tough in that respect and therefore some problems are also political issues. People's Expectations Doubts were expressed whether the population of transition countries will believe that, by applying the right policies and accepting the consequent decline in social welfare, living standards and the overall economic situation, the situation will improve within a certain time frame. This argument was countered by reference to the actual experience of some countries applying those strict policies. Those that have not followed orthodox policies yet, can therefore expect to experience the same. GDP Growth Participants highlighted the importance of investment for substantial growth, especially where sustained over a number of years. Despite a lack of this investment, some countries on the fringe of the EU (Czech Republic, Slovakia, Slovenia... ) might experience what other less wealthy European states, such as Spain, Portugal or Greece have experienced. They benefited from the increasing demand from other EU countries resulting in rising exports and capital flows towards low cost countries. Disagreement also became obvious when sustainability of high growth rates, such as the proposed 5 percent annual growth, was discussed. Whereas this was considered too high by some, others emphasised that this was indispensable for potential accession to the EU.

Consumption and Demand Consumption was seen as an important indicator for social welfare and living standards. Where, as in Russia, no real welfare programmes exist, the problem of poverty and poor consumption, especially in the food sector, is all the bigger. Poor demand is closely connected to this problem, therefore the key question to the solution of the agriculture crisis will be how to push the demand side. Savings A considerable rise in Russian savings was noted, up from 5-8 percent in 1980 to about 30 percent in 1994, maybe thus showing first signs of improving real income. For other participants this only proved the high inequality in income and illustrated the problem of capital flight, as much of the savings are in hard currency. Unemployment Agreement was expressed on the issue of unemployment, where expectations a couple of years ago largely surpassed real figures. Social crisis and unrest have been avoided, so far. In countries, though, where reform is lagging, such as Belarus, one can also note a complete absence of strategy on social welfare and unemployment. This might in the medium and long term lead to social problems and confrontation. It also became obvious that any interpretation of unemployment figures is highly speculative, as nobody really has correct and reliable data. Shadow Economy As mentioned before, agreement was also reached on the unreliability of statistics. When talking about living standards, one has to include grey economy activities, sometimes amounting to one third of economic activity. In the case of Poland, consumption is growing disproportionally faster than income, suggesting that living standards might be significantly higher than shown in official statistics. Other paradoxes, carrying on the example of Poland, include foreign trade statistics, not accounting for about $3-4 billion unregistered border trade. This, argued one speaker, was partly due to under-reporting of private companies or individuals for tax reasons.