Colloquium Reiner Weichhardt Editor Deputy Director NATO Economics Directorate 28-30 June, 1995 Brussels 28-30 juin, 1995 Bruxelles

Colloquium Status of Economic Reforms in Cooperation Partner Countries in the mid-1990s: Opportunities, Constraints, Security Implications Colloque Etat des réformes économiques dans les pays partenaires de la coopération au milieu des années 90: chances, contraintes, implications en matière de sécurité

Contents Preface Reiner Weichhardt, Deputy Director NATO Economics Directorate Welcoming Remarks Ambassador Sergio Balanzino, Deputy Secretary General, NATO Keynote Speech: Economic Reforms in Ukraine: Possibilities, Problems, Security Implications Victor Petrov Ukraine had great potential, even within the USSR, but it was held back by its dependence on the former central planning system. Those days are gone forever, says Minister Petrov. The kind of economic reforms that will realise Ukraine's new potential are now past the point of no return. Tough monetary policy has reduced inflation to nearly a quarter of its 1994 level. Price controls have been cut and government subsidies slashed. Unemployment has inevitably grown, and the government has tried to create a strong safety net to protect the most vulnerable. Ukraine needs international help, especially with decommissioning the Chernobyl nuclear power station and converting its arms industry, but it can offer a large market to trading partners, and promises to be an enthusiastic member of the 'New Europe'. Victor Petrov, Minister of Engineering, Military Industrial Complex and Conversion of Ukraine.

Panel I Chair: Daniel George, Director, NATO Economics Directorate Panelists: László Csaba Vladimir Gimpelson Vladimir Kuznyetsov Gérard Wild

Panel I Balance Sheet of Economic Reforms in Cooperation Partner Countries Economic Reforms in Cooperation Partner Countries: a Balance Sheet László Csaba It is now clear that there is no quick fix to the problems of Central and Eastern Europe. But Hungarian economist László Csaba shows that the race is definitely to the swift. Countries that have held back on reform are suffering, while those which opted for the 'short sharp shock' method are forging ahead. Other trends are also emerging: the need for more foreign direct investment is paramount; as is the development of investment-friendly banking and taxation systems. Conventional wisdom has been proved wrong: it is not necessarily the big resource-rich countries that are taking the lead. Professor Csaba points out that smaller countries like the Baltic states have created economies flexible enough to stand the sort of external shocks that might break their bigger competitors. His conclusion is that their flexible, 'try-it-and-see' approach is more likely to succeed than any grand scheme. Professor Csaba is a senior Economist, Kopint-Datorg and Professor of International Economics, College of Foreign Trade, Budapest. Economic Reforms in Russia Vladimir Gimpelson Vladimir Gimpelson asks whether Russia will survive as a united country, or fall apart like the former USSR. The collapse of central planning has revealed the vast differences between Russia's regions. The gap between regional priorities and federal interest may provide just the opening that separatists can exploit. But Dr. Gimpelson concludes that the hard-line proponents of regional autonomy are too weak, and too closely identified with the old order. In the regions, support for economic reform outweighs the support for separatism. His verdict is that separatists have too much to lose from the break-up of Russia - and they know it. Dr. Gimpelson is Head of Department, Institute of World Economy and International Relations, Russian Academy of Sciences, Moscow. Balance Sheet of Economic Reforms in Cooperation Partner Countries: The Case of Ukraine Vladimir Kuznyetsov Ukraine is moving as quickly as it can to reform its economy. Vladimir Kuznyetsov outlines the main aims of the reform package: these are to cut the budget deficit, reduce governement spending, and put an end to government interference in the economy. There have been successes: taxation has been reformed; prices have been freed; inflation has fallen (though it is still much too high); and the energy debt to Russia has been cut. Despite this progress, there is still resistance to be overcome. Privatisation, for example, had to be helped along by government decree. In mitigation, Vladimir Kuznyetsov points out that although reform policies may be second nature to the West, his country has lived under central planning for 70 years, and the old ways are not undone in three or four years. Dr. Kuznyetsov is the Head, Department of the Economy, Administration of the President, Ukraine. Etat des réformes économiques à l'Est au milieu des années quatre-vingt-dix: Bilans de la transition Gérard Wild Il y a de multiples façons de rendre compte des transformations intervenues en Europe centrale et orientale et dans l'ex-Union soviétique. Trois d'entre elles sont ici présentées, qui éclairent chacune à sa manière le processus de transition vers le marché qui se déroule depuis le début des années quatre-vingt-dix dans l'ex-bloc soviétique. Gérard Wild est Chef de Département au CEPII (Paris)

Panel II Chair: Daniel George, Director, NATO Economics Directorate Panelists: Michael Ellman Lubomir Filipov Yuri Khromov Fikret Pashayaev Domenico Mario Nuti

Panel II Living Standards and Social Welfare Living Standards and Social Welfare Michael Ellman Depending on which international institution's statistics you choose to chart the economic and social evolution in Eastern Europe and the former Soviet Union, the same country can be presented as 'progressing nicely toward full recovery' or 'in serious decline'. The truth, believes Professor Michael Ellman, lies somewhere in between. While most of the international statistics available are produced by professionals using sound methods, they often do not take into account the unreliability and fast-changing nature of the markets they are measuring. Two examples of this are the tendency of producers to conceal part or all of their output to escape taxation and the fact that - in Russia, for example - the networks which provide trade and economic statistics are not in place and do not cover all regions and sectors of activity. Michael Ellman is Professor at the Department of Microeconomics, University of Amsterdam. The Transition of the Bulgarian Economy: is the Social Price too High? Lubomir Filipov The people of Bulgaria are paying a high price for economic reform. Three quarters of the population earns less than a living wage; unemployment is high; and social security funds are down. Lubomir Filipov notes that things might get worse before they get better. The high inflation rate (121 percent in 1994) means that the current tight monetary policy cannot be relaxed. The country's only hope is that the private sector will come to the rescue of the economy - but to do so, it will have to get a lot bigger. Lubomir Filipov is the Deputy Governor of the Bulgarian National Bank, Sofia. Current Food Situation in Russia and Prospects of Agrarian Reform Yuri Khromov Once the post-Soviet Agricultural sector went into a free-fall, the government rapidly recognised that this reform process required special attention - due to its delicate 'food-security' implications. But the government's new role is not to provide food, says Yuri Khromov, but to create the conditions in which private enterprise can satisfy the population's appetite. In the meantime, several million private plots located across the country are filling the gap left by the decline in state production. Yuri Khromov is the Head of the Economics Department of Russia's Institute for Strategic Studies. Living Standards and Social Welfare in Azerbaijan Fikret Pashayev Azerbaijan is rich in natural resources, but it is still finding the road to a market economy heavy going. Wages are trailing prices, with the result that three-quarters of the population are living below subsistence level. Fikret Pashayev says economic reforms create an economic transformation in the long term - but at the moment, it's a question of 'all shock and no therapy'. He also points out that in managing its reform programme, the government has done its best to protect the most vulnerable - and to help the one million refugees from the conflict in Karabakh. Fikret Pashayev is First Secretary at the Department of International Economic Relations, Ministry of Foreign Affairs of Azerbaijan Republic, Baku. Living Standards and Social Welfare in Central and Eastern Europe Domenico Mario Nuti Official statistics don't tell the whole truth about improvements in the quality of life in Central and Eastern Europe, says Professor Domenico Mario Nuti. They record the fact that the queues have vanished, and that the shops always have well-stocked shelves. But even so, the truth must be faced. Unemployment is high and set to remain high, and an increasing number of people are falling below the poverty line. In the short term, active labour market policies will help even out the benefits of the reform policies. But the only viable long term solution, he says, is a massive boost in economic growth. Dr. Nuti is Professor at the University of Rome "La Sapienza" and visiting Professor at the London Business School.

Special Lecture

Special Lecture A Two-edged Sword: the Impact of Ecological Threats on Economic Reforms and the Impact of Economic Reforms on Ecological Issues Murray Feshbach There is a direct link between ecology and economy, says Murray Feshbach. The ecological problems left after the break-up of the Soviet Union have today reached acute proportions - bordering in some areas on the ecological destruction of the population. From the view of the governments of the former Soviet Union, virtually everything needs fixing - so the population's problem is where to start. The West's dilemma is where to start funding - as the cost of cleaning up only part of the region's environment will run into tens of billions of dollars. Dr. Feshbach is Research Professor at the Department of Demography, Georgetown University, Washington DC.

Panel III Chair: Reiner Weichhardt, Deputy Director, NATO Economics Directorate Panelists: Michael Kaser Niko Glozheni Leonid Kosals Anna Zatkalíková Peter Rutland

Panel III Privatisation and Industrial Restructuring The Privatisation Phase of Industrial Restructuring Michael Kaser Privatisation in the West took place within a detailed legislative framework and a free-market culture. Professor Michael Kaser confirms that Central and Eastern Europe's transition is quite the opposite. The direct costs are measurable - paying for restructuring, recapitalising banks, and absorbing old debts. The indirect costs are harder to quantify, but they reflect the chaotic environment in which the reformers have to operate. Their aim, according to one economist, is 'a normal Western market economy'. The problem is that they must create one in a world where literally everything is for sale. Professor Kaser is working at the Institute of German Studies, University of Birmingham, UK. Economic Reform, Privatisation And Industrial Restructuring In Albania Niko Glozheni Albania is a small country with big problems, says Niko Glozheni. It emerged from fifty years of isolation under the harshest of Europe's communist dictatorships with its economy in ruin and its people on the brink of starvation. Despite this, the reform programme is working - inflation though still high, is falling, and price controls have all but vanished. The currency is strong, and privatisation is steaming ahead, with the full backing of all political parties. Economic reform will be difficult and painful - but, judging from the progress so far, the worst may be over. Dr. Glozheni is Executive Director, Albanian National Agency for Privatisation, Tirana. Russia's Military-Industrial Complex: Privatisation and the Emerging New Owners Leonid Kosals A free-market culture is slowly emerging in Russia's military-industrial complex (MIC). To date the government has been careful to keep overall control: three-quarters of the MIC are still in state hands despite the privatisation programme. But a new managerial attitude is emerging, reports Dr. Leonid Kosals. And this new breed of managers comes not a minute too soon, as this industry is in desperate need of a firm hand to help its companies develop and innovate. Today's big question is whether the governments will actually allow the MIC companies to follow this path to restructuring and conversion. Dr. Kosals is a Senior Researcher at the Institute for Population Studies, Russian Academy of Sciences, Moscow. Privatising the Slovak Economy: Legislative Framework and Development Anna Zatkalíková There was a lack of theoretical preparedness for the huge privatisation effort in post-socialist countries and Slovakia is no exception. In the beginning these processes were in many case implemented "campaign-style" as in the old days, says Anna Zatkalíková, from the Slovak Republic's National Council. Privatisation is seen as the key to helping the economy, and to cementing political reform in place. There is a spirited debate about how to privatise. The voucher method was popular at first, but the people, and successive governments, are ambivalent about it now. This approach spreads share ownership, but it also hinders the growth of strategic owners who can invest in their enterprise and bring about expansion. Other methods, such as management buy-outs, or selling shares to employees, are under consideration. The debate continues... Mrs. Zatkalíková is working at the Department of Information and Analysis of the National Council of the Slovak Republic, Bratislava. Successes and Failures: Privatisation in the Transition Economies Peter Rutland The solution to Eastern Europe's transition problems lies in implementing the Western economic policy 'trinity' of liberalisation, stabilisation, and privatisation. The first two were relatively easy because governments simply had to stop doing things - controlling prices, and spending money. The third was more difficult, yet it had become an important criterion for measuring the success of economic reform. The key to its success, says Peter Rutland, is strong leadership, good administration, and a clear timetable. They have been a qualified success, he thinks. But the benefits could take years to come through. Dr. Rutland is Assistant Director (Research) of the Open Media Research Institute, Prague.

Panel IV Chair: Graham Sharp, Assistant Director, NATO Economics Directorate Panelists: Andreas Gummich Leonid Fituni Katarzyna Zukrowska Lazar Comanescu Zdenek Drábek

Panel IV External Economic Relations and Integration into the World Economy The External Relations of the Eastern European Countries: a Comparative Assessment Andreas Gummich The ability of the economies in transition to succeed in their external economic relations can be judged according to some very practical guidelines, according to Dr. Andreas Gummich. Most countries know what they have to do to interact with outside markets. The question is, are they taking action? Those countries that put their policies where their mouth is will be able to create export-led growth, and be able to attract foreign investment - and in the long run increase their nation's wealth, he says. Dr. Gummich is Vice President, Deutsche Bank Research, Frankfurt am Main. Russia: External Economic Relations and Future Development Leonid Fituni Russia's participation in international trade and the world economy in general has declined during the current reform period. At the same time, the country has become much more dependent on external economic factors. Private consumption in particular now relies heavily on foreign goods. The positive side of this, says Leonid Fituni, is that the country will eventually become much more closely integrated into the world economy. But he warns that the poorer majority of the population may feel squeezed out of today's new economic order. There is a danger that they will give vent to their feelings of alienation by turning to isolationist politicians - a situation that would be worrying for both Russia and the West. Professor Fituni is Director, Centre for Strategic and Global Studies, Moscow. Participation of International Institutions in the Reforming Process of Economies in Transition Katarzyna Zukrowska Economic reform of a post-communist economy is not a question of shock therapy, but of direct foreign investement. To create a favourable climate for investors, the groundwork must be laid at the political level, says Katarzyna °Zukrowska. Then it is up to the economy to do its work. Professor Zukrowska is working at the Institute of Development and Strategic Studies, Warsaw External Economic Relations and Integration into the World Economy: The case of Romania Lazar Comanescu As the global economy develops, it is becoming increasingly clear that no country can progress in economic isolation, says Lazar Comanescu. Romania is having a more difficult transition than most of Europe's economies in transition, precisely because its previous regime - besides being a hypercentralised one - also promoted a highly inward oriented economic policy which resulted in a real isolation from the world. Today, Romania has realised that economic prosperity can only come from active membership in the world economy. One of its first steps in this direction has been to build up a system that will inspire enough confidence for foreign investment. Lazar Comanescu is Director at the Ministry of Foreign Affairs, Bucharest Integrating Central and East European Countries into the European Monetary Union: The Macroeconomic Aspects Zdenek Drábek The Association Agreements that most of the East European countries have signed with the European Union have created a formal level of regular institutional contact and preferential trade conditions for the Eastern partners. While a basic level of reform is required for Associate EU membership, the hard part is yet to come, says Zdenek Drábek. This is the preparation for Monetary Union. In the East, part of the problem could be a lack of consensus as to what form monetary and financial requirements should take. The other side of this coin is the absence of clear requirements from the European Union, on how it sees true monetary union. Dr. Drábek is Senior Advisor, World Trade Organisation, Geneva.

Panel V Chair: Daniel George, Director, NATO Economics Directorate Panelists: Andrei Zagorski John P. Hardt Eduardas Vilkas Janusz Kostecki, Leon Turczynski Hans-Hermann Höhmann Márton Tardos

Panel V Conclusions, Perspectives and Security Implications Strategic Failures and Assets of Russian Reform Policies. Andrei Zagorski Vast differences have emerged between Russia's approach to reform and that of her former satellites, says Andrei Zagorski. Russia seems to lack their commitment to transition. The government devotes its energy to placating interest groups, rather than embarking on a full-bodied reform programme. Defence conversion has all but halted because the grip of the military-industrial complex has not been broken. And the old-style industries are using protectionism not to gain time to adjust, but to keep things as they are. The reform process cannot be stopped, but it can be slowed down. Dr. Zagorski is Vice-Rector of the Moscow State Institute of International Relations (MGIMO-University). A Report Card for Economies in Transition. John P. Hardt How will we know when Eastern Europe and the former Soviet Union have completed their transition to a market economy? When economic performance begins to improve sharply in a stable political and economic environment, says John Hardt. What these regions need to achieve a successful transition, he says, is nothing short of an economic miracle. But it is a dream that can be realised. Exactly the same thing happened in Europe and the Far East after World War II - and in parts of southeast Asia over the past 15 years. Dr. Hardt is Senior Specialist in Post-Soviet Economics of the Congressional Research Service of the Library of Congress, Washington, DC. Chances for Achieving Stable Economic Growth in Lithuania. Eduardas Vilkas Lithuania, like the other Baltic states, is too small to dream of splendid isolation. She must always look to her neighbours, especially Russia. According to Eduardas Vilkas, the Lithuanian economy is still dependent on Russia to a large extent. All the country's energy, and a substantial amount of her raw materials, come from Russia, who also swallows up most of her exports. Helping democracy and economic reform in Lithuania therefore means doing the same for Russia. The Lithuanian economy, though not in great shape, is on the right track. Double-digit growth is forecast for 1995, and there is great popular enthusiasm for reform. The country's ultimate aim is full membership of the European Union. This, Lithuanians are convinced, is the only way to guarantee economic and political security. Professor Vilkas is Director of the Institute of Economics, Lithuanian Academy of Sciences, Vilnius. Systemic Change in Cooperation Partner Countries: Yardsticks for Assessment, Results, Conclusions and Perspectives. Hans-Hermann Höhmann Russia and the countries in Central and Eastern Europe are engaged in more than economic reform. They are redefining their statehood, and seeking a new place in the international community. The whole process is fraught with danger, says Hans-Hermann Höhmann. The first requirement is economic stability. Central and Eastern Europe are making good progress, but Russia is lagging behind. All this demands tough monetary policies and a shock therapy approach that threatens the social consensus needed to keep the reform moving forward. The circle can be broken, but the West must invest a lot of political and financial capital, especially in Russia - after all, Western security is also at stake. Professor Höhmann is Director of Research and Head of the Economic Department of the Bundesinstitut für ostwissenschaftliche und internationale Studien, Köln. 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. Summary of discussions Panel I - Balance Sheet of Economic Reforms in Cooperation Partner Countries Panel II - Living Standards and Social Welfare Panel III - Privatisation and Industrial Restructuring Panel IV - External Economic Relations and Integration into the World Economy Special Lecture: Ecological Challenges to Economic Reforms in CIS Countries Closing Remarks: Observations finales du president Daniel George, Directeur des Affaires économiques de l'OTAN