Colloquium 1996 Panel I : Balance Sheet of Economic Performance and Reforms in Cooperation Partner Countries

A Balance Sheet of Economic Performance and Reforms in Partner Countries Franz-Lothar Altmann Deputy Director, Südost-Institut, Munich, Germany Summary and Introduction Basically, five years of transformation are a short time span, if compared with 45 or even more years of the socialist planned economy. In this respect the achievements of some of the economies in transition are very astonishing. It should also be taken into consideration that these changes did not occur in calm political and safe economic times, but they emerged with a total reorganization of the existing political framework and conditions. The new region of orientation, Western Europe, remained in a deep recession and was not able to offer strong demand impulses through foreign trade. Now, after five years of transformation, the effects of different approaches and consistencies, as well as of the differing speeds and degrees of accomplishment of economic transformation policies, become more and more to be reflected in the different economic performances of the respective Partner Countries. A substantial factor for reform endeavours and economic performance differences must certainly be seen in the principal reorientation of some of the Partner Countries towards the EU: the endeavors of the associated Central and East European (CEE) countries to fulfill the accession conditions presented at the EU summit of Copenhagen in summer 1993 represent a kind of general direction framework with rather clear targets; the reorientation of trade in connection with the Europe Association Agreements, i.e. with the liberalization concessions for most of the Eastern exports, provided the reform countries with the right impulses and with the necessary hard currency earnings for their modernization imports. Furthermore, after initial hesitation, intensified regional cooperation also started to become an issue, at least for the smaller Central European countries in the CEFTA. This was partly because they not only realized that this kind of cooperation in fact brings about benefits for all, but also because the EU-partners expected it as proof of their integrational capability.

Progress in Transformation Most of the basic transformation homework (liberalization of prices, of internal markets, and of foreign trade; new legislation in the relevant sectors; restructuring of the banking sector, privatization of the state economy etc.) has been accomplished in the EU-associated countries. However, even in these countries differing degrees of completion in single areas are still obvious, mainly due to differences in the general political environment/stability (e.g. Bulgaria versus Czech Republic). The fast reforming countries, with more or less radical approaches (Czech Republic, Estonia, Hungary, Poland, Slovakia and Slovenia), succeeded in eliminating major market distortions, in establishing the legal framework for private business, in privatizing large parts of the state owned economy, in dismantling state control, in implementing financial discipline, and in stabilizing their currencies. In contrast, in the CIS-countries, in particular in Russia, Belarus and Ukraine, but also in Bulgaria and to some extent in Romania, inconsistencies in reform concepts and erratic economic policies have led to clear setbacks in the transformation progress and in economic performance. This has caused substantial losses in the trust of the population in reform politics in general, and explains the recent upswing of socialist politicians in elections. This means that the CEE countries in general have achieved such a high level of transformation that now already a second phase of fine-tuning should be started. Problem areas, however, still remain: the privatization of larger state firms (Poland), the banking and credit system, the capital market (stock exchanges), competition (anti-monopoly) policy, and - in some countries - the transformation of agriculture. Let us have a look at some of these issues. (1) Naturally, from country to country decisive differences have to be noticed in certain areas. The degree indicator of achieved privatization seems to be the most unequivocal. In this respect the Czech Republic is "top of the class", because it completed the major part of the denationalization program, at least formally, by means of a consecutive implementation of privatization through restitution, small privatization, auctions, direct sales and large privatization (by means of the so-called "voucher method"). In August 1995 even an accelerated privatization for enterprises from sectors with so-called "strategic significance" was announced, so that soon only really problematic cases will remain whose transformation into private structures will be delayed because of a lack of interest on the buyers side. In the Czech Republic, the current share of the private sector based on value is between 60 % and 80 % depending on the private sectors' modus of classification. The latter is a problem applying to all countries, as it is controversial whether "commercialized" enterprises, i.e. enterprises that are converted from national property into joint-stock companies and whose shares of capital are still kept by national property agencies can be regarded as already privatized. In most cases one can argue that such enterprises should already behave like private joint-stock companies, and therefore, they clearly could be classified as "privatized". If that is the case, one has to keep in mind that one gets a larger "private sector" than in official statistics where only "really privatized" enterprises are taken into account, i.e. in those whose shares or whole property (if they are not predominantly joint-stock companies) are in private hands. The classification of cooperatives, too, is not compatible if observed in the country to country and sector to sector perspective. One consequence is that comparisons always have to be made with caution. The Czech Republic, Poland (although here the actual privatization of larger enterprises started quite slowly), Hungary and Estonia can be seen as "top" regarding the respective shares of the private sector. Here, more than 50 % of the gross national product (GNP) is achieved by private enterprises, whereas Bulgaria and Romania, according to their low private sector/GNP share of 27 % and 35 % respectively (at the end of 1994) are tailing behind. Regarding the compatibility of statistical data, problems still exist, even though all analyzed countries made considerable efforts to adjust the procedures of data gathering and data presentation to the standard of Western market economies. In most cases this happened with strong support by European institutions (EUROSTAT) and national statistical offices of EU member states within the framework of the PHARE program. Some country reports clearly demonstrate that correct data gathering has still not turned out well in some sectors of economic activities (shadow economy and also small enterprises). This may cause quite justified doubts, on the one hand, vis--vis the officially reported extreme decrease of production during the last five years, and, on the other hand, concerning the official figures on commencing economic growth. In the former case, the decrease might have been smaller, in the latter, actual economic growth may even be higher than officially stated! Data gathering problems in terms of real economic activities also have negative impacts on fiscal revenues because they create additional revenue gaps on top of those which already exist due to general deficiencies in the financial administration and they burden the public sector as well. The banking and credit system is also troubled with evident starting difficulties. In all analyzed countries, a transformation into a two-tier banking system with a more or less independent central (or national) bank and independent commercial banks, whose capital shares in the most part are still kept in state hands, has been completed. As far as the analyzed countries are concerned, the undercapitalisation of the banking sector seems to be a common problem. One consequence of this is the limitation of credit potential. In several countries, for example in Bulgaria, some of the commercial banks, which in fact are today's successors of former state banks, suffer very much from old debts of those former state enterprises that had been restructured according to the now existing rights of ownership. In Bulgaria, one speaks about the fact that in some banks so-called "bad debts" (probably non-repayable debts) amount to 50 % of all credits. This fact of course complicates recovery and reconstruction of the banking sector and clearly handicaps the domestic banks' competitiveness vis--vis foreign banks. In some countries, for example in Estonia and Latvia, a consolidation of the banking sector happened only in 1995 after times of insecurity and in spite of bank insolvencies. But even countries like Slovenia present an underdeveloped banking system or insufficient decentralization, and private banks in Romania only show a share of 15 % of the business volume. Stock exchanges, too, could be described as nascent. Besides the commodity exchanges which were created first, there exists functioning stock exchanges in Poland, the Czech Republic, Slovakia, Hungary and Slovenia, some of which have been in existence for several years. The turnover, however, is understandably low and quotations have been subjected to enormous fluctuations (Czech Republic). Buying and selling take place outside of the official stock exchanges, for example, between investment funds (Czech Republic) directly, a situation that is not beneficial to transparency in the securities market. But one must observe that the population has not been able to accumulate sufficient savings that could be invested in stocks or obligations. On the other hand, no adequate and diversified supply in securities exists which would offer good yields and therefore would be attractive to buy. And, of course, many of the newly structured joint-stock companies have first to produce profits in order to improve the stock exchanges' attractiveness. In most of the analyzed countries considerable effort was made in the sphere of competition policy. This includes the scaling down and splitting up of former large state enterprises and the liberalization of foreign trade. The countries implemented such measures very early, but first of all and in particular they have to attach great importance to a specific competition legislation. This legislation, too, partly only exists on paper (or is in process of preparation, as the example of Romania shows), and requires a strong political will and a functioning administration. An effective antimonopoly policy becomes difficult, if an economy is relatively small as is the case with Slovenia, Slovakia and Bulgaria, where a sufficient number of producing and thus competing suppliers cannot be expected. A total and immediate opening of the domestic economy with respect to foreign business, which as additional supply may optimize the competition, is opposed by political resistance. Taking into account the difficult economic situation in general as well as the embarrassing job situation with unemployment rates that range between 10 % and 16 % (the Czech Republic being an exception), this reaction is understandable. The transformation of agriculture is a special case, because there a totally different starting point for the reorganization of property and production structures existed and also former Eastern European markets (mainly the former Soviet Union) vanished almost completely. The orientation towards the new Western markets is accompanied by particularly difficult competitive conditions (EU agricultural market). On the contrary, even on their domestic markets, Eastern sellers are having diffi-culties coping with the very strong competition from imports. Strong decreases in agricultural production and employment were the unavoidable consequences: for example in Bulgaria, the share of the agricultural production in the GNP decreased from 18.1 % in 1991 to 8.5 % in 1994. In some countries a particular problem developed through restitution, as the return of land led to an extreme parceling out of land due to pre-socialist farming structures with small units and dispersed fields (polonisation). Due to lack of capital, these small producers were not able to implement steps of modernization. Here, too, differences between the countries are interesting: whereas in the Czech Republic many city dwellers are now the new owners of agricultural land, leasing their plots to cooperatives, people in Bulgaria have returned to the countryside as a consequence of lack of industrial employment thus actualizing the land dismemberment. In addition, still remaining or new distortions - also those resulting from the recent rapid economic growth - of either structural and/or social kind (new riches) must be fought against. Problems also still exist with regard to budgetary imbalances, monetary oversupply (causing reaccelerating inflationary tendencies) and high unemployment rates. The CIS-states and some East European countries (FR of Yugoslavia, Albania, FYROM) are still lagging behind with larger tasks before them, e.g. the further completion of mass privatization (Ukraine, FRY, Belarus), the stabilization of the banking sector, the implementation of strict financial and monetary policy (in contrast to the erratic attempts of anti-inflation policy of Russia in the last years), the further opening of the economy, the transformation of agriculture, and the completion of the legal framework, in particular in those areas like business law, competition law etc. Economic Performance The ECE-secretariat in Geneva distinguished in its recent `Survey 1995-96 four country-groups: (2) East-Central Europe (including Slovenia) the Baltic countries CIS-countries crisis-countries at the brink of the CIS and in former Yugoslavia Concerning the reform process and economic performance, a partitioning into two groups might be even more appropriate: the East-Central European countries and the rest. In the East-Central European countries the first important phase of stabilization of the economy (and of the currency) seems more or less to have been completed. Basically, internal and external equilibrium - though on differing levels - has been achieved. High inflation rates were brought down to manageable dimensions, economic growth had gained an upward trend in most of these countries already in 1994 (in Poland, Romania and Slovenia in 1993); in the Baltics the economic descent took longer due to their extremely deep former dependence on the Soviet economys division of labor (e.g. 95% of Estonian exports went in former times to Soviet partner countries!) It must be remembered that the decline of GNP during the transition vis-à-vis 1989 was distinctly smaller in East-Central Europe (20-30%) than in the rest of the countries (40-60%, the Baltics included). Economic growth in East-Central Europe has become surprisingly strong with an average of 5.3% for 1995 (after 4.0% in 1994) and an estimated 6.0% for 1996. Exports and imports increased by some 10-12% and 9% respectively, and also investment activity for the first time accelerated in 1995, remarkably in machinery and equipment. Net capital inflows have tripled against 1994 reaching a total of US-$ 31.0 bn, of which, however, 90% went into the Czech Republic, Hungary and Poland. Foreign indebtedness of East-Central Europe decreased to a net value of US-$ 69.4 bn (1994: 83.5 bn). According to the ECE-Survey, in 1995 the respective countries reached the following percentage levels of their 1989 performances (measured in GNP): Poland 98.5, Slovenia 89.3, Hungary 85.8, Czech Republic 84.8, Romania 84.5, Slovakia 83.0, Bulgaria 76.5, Albania 74.2. In the CIS-countries, the Baltics and the rest the respective figures oscillate between only 40 and 50%! Slightly more positive is the picture for Croatia (62.5), Russia (60.4) and Belarus (59.3), whereas Lithuania is last with 35.7! However, the speed of GNP decline has also slowed down in the CIS-states, in particular in Russia; in the Baltic states stagnation rather than real new growth is continuing. Investment activity has not yet recovered either in Russia or in the Baltics. In some of the non-Asian CIS-countries output has increased in a number of industries for the first time since transformation began, mainly in ferrous and non-ferrous metallurgy, chemicals and oil-refining - in other words, in the classical old industries rather than in light industries, because domestic demand is still very low. In the Central-Asian CIS-republics the recession seems to continue at higher rates than in the western parts of the former Soviet Union with Uzbekistan being the only possible exception. Differences also exist among the Transcaucasian republics where Armenia exhibits a strong recovery - although from a very deep low. Stabilization appears also in Georgia after the implementation of a stabilization program and a new currency, whereas in Azerbaijan the recession is still going on. Reorientation of Foreign Economic Relations and Integrational Processes Differences in consistency and speed of transformation as well as the Europe agreements with their prospective future EU-membership option have prompted further differences: The market openings of the East-Central European countries have become much greater than those of the CIS-countries and the Baltic countries. Trade has therefore experienced a more rapid growth in the former countries. The EU-associated countries have reoriented their trade substantially performing now between 50 and 65% of their trade with the EU-countries (except Bulgaria). These countries have in general integrated rather well into the world trade system becoming members of WTO. Furthermore, the East-Central European countries have even started to trade more intensively among themselves (CEFTA) which some of the CIS-countries are promoting also but still are not able to bring into momentum. Table I Economic Performances in the Transition Countries in Europe and Central Asia (Percentage changes over same period of preceding year) Country GDP or NMP (a) 1992 1993 1994 1995 1996 Forecast Albania - 9.7 10.9 7.4 13.4 .. Bosnia and Herzegovina .. .. .. .. .. Bulgaria -7.3 -1.5 1.8 2.5 3 Croatia - 9.7 -3.7 0.8 - 1.5 6-8 Czech Republic - 6.4 - 0.9 2.6 5.2 4.8 Hungary - 3.0 - 0.8 2.9 2.0 2 Poland 2.6 3.8 5.2 7.0 5-6 Romania - 8.8 1.5 3.9 6.9 4.5 Slovakia - 7.0 - 4.1 4.8 6.5b 5-6 Slovenia - 5.4 1.3 5.3 4.8 5.0 The FYR of Macedonia c - 13.4 - 14.1 - 8.2 - 3.0 e 2 FR of Yugoslavia c - 26.2 - 27.7 6.5 6.0 12.5 Eastern Europe - 5.7 - 1.6 4.0 5.3 6.0 CETE-4 - 0.9 1.5 4.3 5.8 .. SETE-8 - 12.2 - 5.8 3.6 4.8 .. Armenia - 52.3 - 14.6 5.5 5.2 b .. Azerbaidjan - 22.6 - 23.1 - 21.9 - 17.2 .. Belarus - 9.6 - 10.6 - 15.8 -10.0 .. Georgia - 40.3 - 39.4 - 30.0 2.4 e .. Kazakstan - 13.0 - 12.9 - 25.5 - 8.9 .. Kyrgyztan - 13.9 - 15.5 - 20.1 - 6.2 .. Republic of Moldova - 29.1 - 1.2 - 31.2 - 3.0 7.7 Russian Federation - 14.5 - 8.7 - 12.6 - 4.0 - 3 Tajikistan - 31.0 d - 17.3 - 12.7 - 12.4 .. Turkmenistan d 35.7 10.0 - 18.0 - 7.5b .. Ukraine - 13.7 - 14.1 - 23.0 - 12.0 - 0.5 Uzbekistan - 11.1 - 2.4 - 3.5 - 1.0 e .. CIS - 14.8 - 10.1 - 14.9 - 5.0 .. Estonia - 14.1 - 8.6 - 2.7 2.5 e .. Latvia - 34.9 - 14.9 0.6 - 2.7 b 0-3 Lithuania - 39.3 - 30.4 1.0 2-2.5 e 4.2 Baltic States - 32.5 - 20.6 0.1 0.6 e .. Total transition economies - 12.6 - 7.9 - 9.2 - 2.3 .. Ex-GDR Länder 7.8 7.2 8.5 6.3 5.0 Source: UN/ECE-: Economic Survey of Europe in 1995-1996, p.54. The ECE secretariat has primarily made use of national statistics and direct communications with national statistical offices, but also of non-governmental forecasts. Aggregates for eastern Europe, the Baltic states and total transition countries are UN/ECE secretariat computations based on 1992 weights and some estimates for missing components. Forecasts for 1996 are of national conjunctural institutes or, if these were not available, government forecasts associated with the budget formulation. Notes: Eastern Europe are the 12 countries listed in Table I, with sub-aggregates CETE-4 (Central European transition countries: Czech Republic, Hungary, Poland, Slovakia) and SETE-8 (South(east) European transition countries. Gross domestic product unless otherwise noted. January-September. Gross material product (value added of the material sphere including depreciation). Net material product. Estimates by the secretariat of the ECE. Footnotes The author is grateful to "Documentation Française" Eastern Europe and to Prof. Dr. Judith Bolas for providing statistics and useful discussion. He is also grateful to Lt. Colonel (Retd.) Michael Schilcot for linguistic assistance. The research on which this paper is based has been financially sponsored by Euroest (the Centre on the Evolution in Eastern Europe at the University of Trento). The author is grateful to Silvio Goglio (University of Trento) and participants at the 1996 NATO Economics Colloquium for helpful comments on an earlier version of this paper. However, any responsibility for errors and weakness of analysis remains solely with the author.