NATO Economic Colloquium 1997

Summary by the Economics Directorate During this 26th annual NATO Economics Colloquium, over 100 participants examined economic developments and reforms in partner countries with an emphasis on external economic relations and regional cooperation. In his Welcoming Address, NATO's Secretary General, Javier Solana, noted that NATO has been in the forefront of creating a new cooperative approach to security across the whole of the Euro-Atlantic area. He stressed that NATO is helping to create the strategic confidence which is essential for sustained economic growth and the prospect of joining NATO is providing a strong incentive for reform in Central and Eastern Europe. The Keynote Speaker, Dr. Marijan Senjur, Minister of Economic Relations and Development of Slovenia, referred to the comments by Lester Thurow that "tectonic" change in Central and Eastern Europe since 1989 would inevitably impact on the West. Dr. Senjur's speech provided a broad framework for the subsequent exchanges, highlighting critical yardsticks of economic transition in partner countries illustrated by practical (and successful) experience in his native Slovenia. PANEL I : undertook a short overview of reform in transition economies, concluding that progress with reform is broadly (and positively) reflected in economic performance. Progress with financial stabilisation and privatisation were cause for particular optimism, although the latter has not led everywhere, especially in Russia, to the kind of industrial restructuring and associated investment expected. The Panel then examined trade and capital flow developments including foreign direct investment (FDI), foreign trade patterns, the link to reforms at large, and methodological questions. In part through globalisation, the World economy has become multipolar. It is marked by an information revolution and a worldwide market for investment, production, and distribution. A global value system (McWorld) is spreading rapidly. Whether the economies in transition can integrate into this World economic system is still an open question. Preferential security treatment does not mean preferential economic treatment and free trade within Europe remains an elusive goal. Many rich countries fear that globalisation threatens their "social contracts", forgetting that both rich and poor countries stand to gain enormously from increased trade. On this basis, transition economies might perhaps look for further synergies beyond Europe. In particular, they should not pay too much attention to West European concerns over differences in social norms for that would run the risk of perpetuating them. Panel II discussed the status and perspectives/potentials of regional economic cooperation schemes. The Central European Free Trade Area (CEFTA) is seen as a "waiting room" for the EU in that no institutional structures or coordinated economic policies exist or are planned. Nevertheless, comparative advantages are becoming apparent and CEFTA has helped to increase trade within the group and promote economic liberalisation. The Council of Baltic Sea States (CBSS) has seen trade within the region increase by 20% per annum in recent years but it is unlikely that much of this growth can be attributed to the CBSS. The eleven states that comprise the CBSS are of diverse size and wealth, indeed, one of the longer-term goals of the group is to reduce income differentials between states such as Estonia and Finland. Cooperation is on small scale yet important projects such as nuclear safety, environmental protection and improving transportation infrastructures. The focus of the Black Sea Economic Cooperation (BSEC) group is on social and practical issues such as transport, communications, energy, environment, tourism, culture and agriculture. Its membership is not in any way homogenous (Greece and Azerbaijan are both members; Austria and Egypt have observer status) yet the group does promote market and democratic values and brings a degree of social and political stability to an historically volatile and fractious region. The Commonwealth of Independent States (CIS) has proved to be ineffectual as an instrument of re-integration. The share of inter-regional exports as a percentage of GDP fell from 14.9% in 1990 to 4.8% in 1995. Notwithstanding the 6% growth in Russian trade with CIS countries last year, without faster growth in the near future, Russia risks losing its status as a "gravitation centre" for CIS members thus making the disintegration of the post Soviet economic space irreversible. Integration between Russia and Belarus reflects more their bilateral agenda than a multilateral one. Overall, the lessons from this Panel were that regional cooperation groups need to be homogenous if any kind of economic integration is envisaged. Diverse groupings can however succeed on a limited scale (by concentrating on specific and micro-level projects) although economic and political goals must be shared for any higher level of cooperation to work. The global impetus is towards democracy and economic liberalisation - any regional group that bucks this trend is not likely to succeed or survive. PANEL III was primarily devoted to an analysis of the energy sector in C&EE which is in the process of radical change. This involves privatisation (with significant Western participation everywhere except Russia where legal, fiscal and transportation uncertainties have restricted the development of joint-ventures, relative to progress in Kazakhstan and Azerbaijan), consumption decline, dramatic new resource developments in the Caspian Sea region, a greater emphasis on natural gas and oil at the expense of coal, and a reduction in energy dependence on Russia. The reorganization of the Russian energy sector will concentrate on maintaining Western markets while attracting Western capital necessary to modernise. The recently part-privatised Gazprom provides half of all energy in Russia and its huge reserves give it three times the value of Shell. A panellist quoted a Russian commentator who said that NATO enlargement to the east would be more than offset by Gazprom enlargement to the west. Over the next 15 years, Russian energy exports to Europe are expected to increase, especially natural gas, but the rate of growth will depend on external demand, investment in production and transportation sectors, and the economic situation in Russia. Higher internal prices would help investment and reduce consumption but would also add to non-payment problems. Caspian projects are adding to competitive pressures but control over the pipeline network is a key asset for some Russian firms. This is an important sector for Russia's integration into the World economy, indeed, the growing interdependence between buyers and suppliers is in itself a kind of security guarantee which drives Europe towards greater stability. Ukraine has the most serious energy deficits in Europe. Despite the recession which has seen a 50% reduction in energy consumption since 1988, Ukraine still imports 80% of its oil and gas requirements, over 90% from Russia. Gas production has fallen by 50% and coal production has fallen by two-thirds. A fuels revolution is needed if the energy import bill is not to crush the new currency. New gas-powered stations and the proposed oil terminal at Odessa miss the point for there is no money to pay for the fuel imports involved. Instead, Ukraine desperately needs investment to complete 3 VVER nuclear reactors which would enable it both to reduce costly imports and close down the Chernobyl RBMK. Over time, Ukraine could play a major role in oil and gas supplies from CIS and Middle East sources to Central and Western Europe, similar to that of Turkey. Integration prospects in Central Asia will depend upon the development of economic complimentarities, meaning that economies that at present compete against one another as raw materials suppliers (of oil, natural gas, minerals and cotton) will need to become more diverse (thus boosting trade between them) by adding value to this existing and rich resource base. Only in this way will economic growth be sufficient to provide jobs for the 11 million more people expected to join the workforce by 2010. Kazakhstan has received the most capital inflows followed by Uzbekistan, Turkmenistan and Kyrgyzstan. Water shortages and environmental disasters add to tension in the region, despite the growth in cooperative projects both between Central Asian states themselves and between some of them and Russia on a bi- rather than multi-lateral basis. PANEL IV examined the integration or planned integration of partner countries into transnational economic organisations and institutions such as the EU, NATO, the EBRD, the WTO and the OECD. Many countries have cleared the first hurdle of transition (macroeconomic stabilisation) but the second stage of structural reform, institution-building and financial sector reform will be much more difficult. Institution building is of key importance. The quality and probity of public administrations, the legal system and the financial sector need to be further developed. Many transition economies now reveal themselves as being much poorer than historically thought, but this is because they are mis-developed, not under-developed. Significant human capital exists which has been mis-directed. The role of international institutions is to point people in the right direction. A summing-up of the proceedings was provided by the Rapporteur, John Hardt of the US Congressional Research Service. Dr. Hardt suggested that transition countries take on faith that in following the democratic market model, a process leading to an economic miracle will inevitably follow (after a short period of painful adjustment). Some of the regional associations reviewed by delegates may be productive way-stations on the transition road and a useful means of breaking free from the old system. But the holy grail remains full acceptance within and membership of the institutions making up the Bretton Woods global hegemonic structure, to which can be added (for a majority of transition countries) NATO, the OECD, the EBRD and the EU. The core reform requirements (stabilisation, liberalisation, privatisation) are necessary but not sufficient pre-conditions to reach the threshold of sustainable growth needed to be accepted as a normal participant in the global market place. This would require the creation of a truly plural society and the disempowerment of those resisting change, both within the surviving old political elites and within the new economic elites whose wealth is often more the result of arbitrary good fortune than of enterprise or graft. Nevertheless, some transition countries have achieved the core conditions and are beginning to make the grade. In conclusion it can be stated that the successes in transition economies are well known. But the transition record is uneven and that is what concerns us the most. The costs in terms of human suffering have been high, as noted in the 1996 Colloquium. As a result, in some countries, there has been backtracking on reform. Indeed, some of the security challenges Alliance members have faced recently had financial and economic roots. Credible economic policies and security are two sides of the same coin: without effective economic policies, security will suffer; without a sound security environment, investment and economic growth will suffer. The external sector is a key element in the transition toward a market-based economy. Foreign trade, investment, technology and know-how can make strong contributions to higher living standards. Regional economic relationships have proven to be an important impetus to the external sector of many economies, in Central Europe and in the Black Sea region for example. They also promote good neighbourly relations, thereby strengthening peace and security. Daniel George Director, NATO Economics Directorate Colloquium Chairman