NATO Economic Colloquium 1997

The Integration of NATO Partner Countries Into Pan-European Economic Structures Jean-Pierre Tuveri Acting Director, OECD Centre for Co-operation with the Economies in Transition Introduction As always, it is a pleasure for me to participate in this NATO Economics Colloquium. This year the Colloquium takes place in the context of an active debate over the enlargement of NATO, the OECD and the European Union. This has naturally increased political interest in questions of both de facto and de jure integration of European transition economies into the more developed market economies of Europe and more generally into the increasingly globalised world market. NATO and the OECD have several institutional features in common; both have a relatively small number of members, and in fact all 16 NATO's member countries are among the 29 OECD members. Both NATO and the OECD have, until recently, largely conducted their respective activities for the benefit of member countries exclusively, and have not tried to grow by accepting new members. Both have had well-defined missions - economics-related for the OECD and mostly defence-related for NATO. These missions are now being reflected on and in significant respects redefined. With the end of the cold war, both NATO and the OECD have had to pay increasing attention to issues of future enlargement. Since 1994, the OECD has reached out to five new members, and is negotiating with Slovakia, bringing total membership to 30. In the case of NATO, the creation of the North Atlantic Cooperation Council in 1991 established a multilateral framework within which, from 1994 onwards, individual Partnership for Peace Agreements could be negotiated. Like OECD, NATO sees enlargement as an "evolutionary" process with the admission of new members governed not only by their willingness and ability to conform with the principles, policies and procedures adopted by existing members, but also by a demonstration of such commitment in practice. Like OECD, NATO relies on a consensual approach and a communality of views. This is reflected in the fact that the NATO Partnership for Peace Agreements, while helping Partners prepare for eventual membership, carries no guarantees to that effect.

The OECD and the Integration of NATO Partner Countries into Pan-European Structures The subject assigned to me is not as easy as it might appear at first sight. Let me, in this context, underscore three broad considerations: First, the OECD is a global, albeit not a universal organisation. Although the EU and all its member states are members of the OECD, the organisation itself also has members in North America, Asia and Oceania. It is therefore committed to free trade and multilateralism on a global scale. Thus, it would not be correct to categorise the OECD as a "pan-European" structure. At the same time, there are many shared values between the OECD and pan-European structures such as the EU with respect to the creation of a competitive market economy and a pluralistic democracy. Close cooperation with the OECD has in fact assisted a number of European transition economies in harmonising their regulatory and institutional frameworks with those of OECD countries, including those within the EU. Second, the degree and the scope of cooperation between the European transition economies and the OECD varies considerably between one country and another. Consequently, the impact of cooperation on the integration of a particular economy with the economies of the OECD varies considerably depending on the precise form of cooperation in place. Third, and more importantly, the term "pan-European economic structures" implies more than formal association or membership of a particular regional or multilateral organisation. The economic integration of partner countries into the European economic space has proceeded rapidly since the beginning of the transition process in 1990, driven partially by the collapse of CMEA markets, but principally by the determination of the reforming countries to adopt the legal and institutional framework of developed market economies. Much of the integration of transition economies into those of developed Western European economies has been achieved by a series of successive steps which have transformed the political, economic and social structures of these countries based on democratic values and market oriented criteria. The very fact that the first three panels of this conference have been devoted to the analysis of this overall transition experience and the development of regional integration among partner countries themselves attests that economic integration has been the combined outcome of market pressures, reformist government programmes and the need to harmonise domestic laws and institutional practices with those of transnational institutions and international organisations. Given the above considerations, I shall concentrate on providing an overview of the nature of OECD cooperation with European partner countries and highlight some instances where this cooperation has enhanced the ability of each partner country to harmonise its economy more effectively with that of the European Union. I will end with some brief comments on some recent thinking inside the OECD regarding the direction of its future relations with non-members in the context of globalisation. Features of OECD Cooperation with European Transition Economies Overview Before the recent wave of new members, beginning with Mexico in 1994, the last country to join the OECD was New Zealand in 1973. Until the end of the 80's with a few exceptions, the OECD mission and work focused essentially on issues of interest to its members. Since 1990, however, the Organisation has started to reach out or to engage new countries. At that time, the OECD's Council agreed to create the institutional infrastructure to make OECD Member countries' collective experience available to the transition countries of Central and Eastern Europe. This was done with the creation of the Centre for Co-operation with the Economies in Transition. Programmes developed and implemented by the Centre have been extremely flexible, tailored to the progress made by the partner countries in political and economic transformation and to the degree of cooperation that the Organisation wanted to establish with these countries. To accommodate the transition needs of the European reforming economies, a General Work Programme was established in 1990. This programme was initially open to the Visegrad countries, Bulgaria, Romania and the former Soviet Union. It was subsequently extended to countries like Albania and, following the disintegration of the Soviet Union in 1991, to the Federation of Russia, the Baltic States and the other NIS Republics. This programme, largely made up of thematic and regional activities, aimed essentially at supporting the reform process but did not attempt to establish a special relationship with specific countries. However, in recognition of the progress made by the most advanced reforming countries (i.e. the Visegrad group) a special assistance programme called the "Partners in Transition" (PIT) programme was established in 1991 designed not only to meet the more focused reform needs of these countries but also to help them meet the conditions for possible future membership of the Organisation. After the dissolution of the CSFR, this programme was extended in 1993 to the Czech Republic and the Slovak Republic. In 1994, special country programmes were also developed for Bulgaria, Romania and Slovenia. Designed to provide assistance directed towards their particular needs, these programmes lack the formal structure of the PIT programmes and are not oriented towards meeting the conditions for membership of the OECD. These are instead designed to help the countries concerned draw up and implement policies that will sustain viable market economies. Financial sector reform, privatisation and enterprise restructuring, tax legislation and collection, as well as assistance in the field of statistics are among the areas covered by these programmes. The case of Russia is a somewhat specific one. In 1995, a country programme was established as part of a Declaration of Co-operation between the OECD and the Federation of Russia signed in June 1994. To strengthen cooperation, a Liaison Committee was established in the wake of the last OECD Ministerial Meeting on 27 May and the country programme was reinforced to include activities which play a key role in determining whether a country is in a position to satisfy the terms and conditions of membership in the OECD. In addition to the normal menu of economic and sectoral surveys, tax policy and administration and FDI related activities, the Russia programme now contains activities designed to familiarise the Russian authorities with all aspects of the OECD Codes of Liberalisation and the National Treatment Instruments. Formal accession procedure When it comes to integrating candidate countries fully into the Organisation as new members, the OECD differs from NATO or the Bretton-Woods organisations by virtue of its lack of a structured association mechanism. The Organisation has, however, a great deal of flexibility since the convention establishing the OECD did not specify any particular rules of accession. This flexibility has provided the Organisation with many options to adopt tailored approaches and timetables for different countries according to their individual circumstances. In practice, recent OECD accession has been a three-step process. First, a political decision has been taken by the Council of Ministers to officially open accession negotiations. Then, a note outlining the procedure to be followed has been adopted by OECD ambassadors, a process which involves great flexibility in interpretation with examinations of applicant countries' policies taking place as the applicant country reacts to every single recommendation adopted by the OECD since its founding in 1961. Finally, this note on procedure allows the Secretariat to open accession negotiations with the country, which may take several years to be concluded. While the OECD is not bound to follow the same procedures in the future, major changes are not expected. However, the process has continually been refined as more countries have joined and will continue to do so. Enlarging the OECD has without question been a process of learning by doing. The policies of prospective members are examined by OECD subsidiary bodies which are committees charged with debating policy on capital movements, taxation, labour markets, the environment, and so on. In recent years, the number of committees involved in the examination process has been increasing with each additional country that was examined for membership. The examination process also currently covers a number of topics not directly covered by OECD instruments, such as labour standards or multilateral environmental agreements that have nevertheless been taken into account by OECD members in internal policy debates and recommendations. Contribution of OECD Cooperation Programmes to Integration in Pan-European Structures Accession related programmes To get a flavour of the role of the OECD in the integration of transition economies into the European economic space it is worth examining the implementation of the Partners in Transition Programme initiated in 1991. This was modified in light of the 1994 Ministerial decision to incorporate a number of accession related activities, although no time was fixed for the completion of these negotiations. As was usual in the case of previous new members, the statutory requirement of acceptance of the legally binding obligations of the OECD Codes of Liberalisation and the commitments of the 1976 Declaration and Decisions on International Investment and Multinational Enterprises, including the National Treatment Instrument (NTI), remained the essential condition for accession. At the beginning of the accession process, the PIT countries' legislation on foreign direct investment appeared to be relatively liberal with no restrictions for the repatriation of capital. There remained, however, sectoral and real-estate restrictions, and a concern on the part of the OECD that rules be implemented in a consistent and transparent manner and that the National Treatment Principle be applied also in practice. A further concern was that, in spite of active privatisation programmes, state-owed enterprises still accounted for a significant share of economic activity thus limiting the scope for foreign equity participation in domestic enterprises and, consequently, for substantial improvements in competitiveness. The OECD has also played a significant role through its general economic reports in assisting these countries to formulate and implement their economic policies. While due concern was paid to the peculiarities of the transition process, the benchmark for the assessment of progress in macro-stabilisation, liberalisation and restructuring, and therefore policy recommendations in such areas, was that of advanced market economies. The aim was to stimulate candidates for membership to adopt higher standards in all fields of transformation. This concern marks deeply the "second stage" OECD support for transition economies which have graduated to OECD membership and is particularly evident in the area of monetary policy and price stability which are not yet direct concerns of the EU. However, monetary matters will need to be considered in the preparation of the European Commission's assessment on the membership requests of the countries in transition concerned in the Association Agreements. The European Association Agreements do not contain any provision on monetary policy cooperation, nor have the macroeconomic surveillance procedures proposed by the European Commission in July 1994 been implemented as yet. On more general grounds, a problem which matters not only for the countries in transition but also for the EU in the process of integration is the still high rate of inflation in all partner countries, despite significant progress achieved by some countries in bringing prices down to two-digit levels, such as in Poland (where the inflation rate could go down to 15% this year), or to one-digit, such as in the Czech Republic and Slovakia (with estimated rates of inflation in 1997 of 8% and 7% respectively). While the 1990-1996 average rate of inflation (GDP deflators) in the EU is down to 3.6%, Hungary was still struggling with about 21% inflation in 1996. Even the projected 17% inflation rate in 1997 remains substantially above the comparative indicators for the EU. The OECD assessment that a reduction of three or four percentage points in inflation is not sufficient at this stage has strongly emerged in the last economic reports on Hungary and Poland. In the case of Hungary, the recommendations that further efforts need to be made in order to prevent high inflation from distorting saving and investment decisions by households, enterprises and banks have been linked to the need for a firmer commitment to the independence of the Central Bank and to credible disinflationary policies through monetary targets, and the pursuit of a wage restraint policy. In the case of Poland, a tighter fiscal stance has been recommended on the grounds that due to the low monetisation of the economy, a given increase in base money (as a percent of GDP) will be more inflationary in Poland than in Western Europe. This recommendation was also geared, indirectly, to bring the effective fiscal deficit (purged of privatisation revenues) down to the Maastricht convergence criteria of 3%. Another welcome development is that OECD pressure to increase transparency in financial markets and make room for efficient corporate governance has prompted first Hungary and lately the Czech Republic to upgrade rules and monitoring requirements needed for the functioning of markets. It is more difficult to adapt the pension schemes to the constraints of ageing societies - a feature which transition economies share with OECD member countries and with most EU members - because of implications in the social and political field. While these adjustments will require continuous peer pressure (indeed, also on senior OECD and EU member countries), some results have already been achieved. In Hungary and the Czech Republic, some progress has been made with the institution in 1993 of complementary privately funded pension schemes, and in 1995, with reforms including the gradual increase of retirement ages to 62 years. In Poland, a package of laws reforming the pension system is now being discussed in parliament including the institutionalisation of private pension funds. But much still needs to be done in this field under the threat of increasing dependency ratios. This is an area in which the OECD has a strong comparative analytical and policy advantage based on OECD members' experience and past actions, which range from changing the retirement age, raising contribution periods, changing indexing rules or moving towards greater targeting of benefits. Finally, the EU is preparing for the redirection of structural funds towards the new members, whose GDP per capita is comparatively much lower. A natural starting point for such redirection is an assessment of each country's capacity of absorption. The experience built by each country in absorbing capital inflows (attracted by still high interest rate differentials) through appropriate instruments of sterilisation, improvements to the financial markets and adjustment in their exchange rate policies, are all areas which are closely monitored by the OECD. This will, no doubt, represent an important contribution to structural fund assessments. In summary, the assistance provided by the OECD in the formulation and implementation of reform policies and the establishment of the legal and institutional framework of a market economy have contributed to making the policies followed as well as the structures of these economies more compatible with that of OECD Member countries. They have therefore facilitated the integration of the partner countries in pan-European economic structures. This has been reinforced by the discipline imposed by compliance with the decisions, recommendations and other substantive instruments of the Organisation as part of the accession procedure. Continued "peer" pressure is also contributing to this process following accession. To a large extent, these considerations are also relevant for the Russian Federation. Programmes not related to accession As regards other programmes not closely related to OECD membership, their influence on the integration of European transition countries in pan-European economic structures is more diffuse and related to providing support for a successful completion of the transition process. In particular, most of these countries, not being key players and not satisfying the criteria of mutual interest, do not qualify for observership in OECD Committee meetings. Concluding Remarks : The Future Direction of OECD Cooperation with Non- Members The success of the transition process in several European economies, the increased reliance on private capital flows and the rapprochement with the European Union has naturally prompted the question of the future of OECD cooperation with transition economies. While this cooperation is likely to continue in the near future, it has to be assessed against the background of recent debates within the OECD over the implications of globalisation for the member countries and the need for a clearer definition of the strategic objectives that should govern relations with non-member economies at large. There is a lively on-going debate over the future enlargement of the OECD. Although the recent Ministerial ended with a consensus that the Organisation must remain open to states sharing the common values of OECD Members, it was also agreed that this process should be selective to preserve the tradition of high standards for membership. Behind this consensus, some members favour the "major players" approach, according to which attention should be focused on large economies with a potential to exert a significant influence in the world economy, or, which constitute major markets for OECD products in the future. The recenty completed OECD study on Globalisation and Linkages identifies five such economies: Russia, China, India, Indonesia and Brazil; and argues for a redirection of outreach towards greater policy dialogue with these economies. The other spectrum of the argument is composed of those who argue that the OECD should reflect not economic power per se but "like mindedness", a concept embracing pluralistic democracy, respect of human rights and the market economy. According to this view, countries which share the goals and objectives of the Organisation, that are willing to access, and that are able to meet the requirements of membership should be invited to become members. While the end of the debate is still not in sight, the OECD has begun to rationalise its own institutional mechanisms for dialogue with non-members to take account of the demands for a less European orientation in its outreach activities. New country specific programmes for China, India, and possibly Brazil, as well as continued priority on Russia, implies that within a shrinking budgetary envelope, emphasis on European economies in transition will be reduced. Given the recent political changes in Bulgaria and Romania and their greater commitment to reform, and the rapid pace of economic reform in Slovenia and the Baltics, the need for OECD programmes towards assisting these countries should also diminish in coming years, all the more since their links with the EU are becoming closer. We shall be pleased when these countries join the European Union and proud to have contributed in our modest way to this outcome.