20 Years After: Have We Learnt the Lessons?

 The EBRD 2009 annual flagship publication “Transition Report” was published exactly 20 years after the Berlin Wall fell. Its presentation by Chief Economist Erik Berglof was accompanied by a Panel Discussion with former Presidents Kwasniewski (Poland) and Carnogursky (Czechoslovakia), Thomas Mirow (EBRD) and the historian Timothy Garton Ash, an expert on transition.

The Transition Report focuses mainly on the present crisis and states – the well-known fact – that the “EBRD region” (stretching from Slovakia to Mongolia, from the Baltics to Montenegro, from Slovenia to Kazakhstan and Russia) has been hardest hit by the crisis and will recover from it (once it is “over”), more slowly than other regions of the world.

The specifics of this region are – among all other, as Kwasniewski pointed out – the “velvet revolutions” which might have set a new global standard of non-violent revolutions throughout the world and its strong reliance on the EU anchor (for the countries farther to the West) which resulted in high financial flows from abroad (mainly through wholesale funding of West-owned banks) and strong value-chain integration into Western consumer and investment goods production. This integration model enabled the countries to grow very fast until the onset of the crisis – which did not originate in the region, but in the West.

While the panel described the last 20 years as “unmitigated success”, some questions might be in order:

  1. Did the fact that all ex-communist countries (if at varying intensity and speed) adopted “shock therapy”, instead of a more gradual approach which would have allowed to respect the socio-economic context of market-building and the necessity to first build up its necessary institutions maybe contribute to the extra vulnerability of these countries in the present crisis?
    The more recent recognition, also in the EBRD, of how much institutions matter for the success of the transition process, might be part of an affirmative answer. This is not just a “hindsight” observation. In 1991 I participated in a project (An AGENDA for the Economic and Social Reconstruction of Central and Eastern Europe) initiated by the late Egon Matzner which specifically criticized the then prevailing Shock Therapy propounded, among others, by Jeffrey Sachs and applied in all countries. There the sequencing of the liberalization process, the importance of building market institutions before liberalizing, the role of the state in the transformation process – all these “unorthodox” ideas were discussed between “Eastern” and “Western “ economists. These efforts resulted in a book “The Market Shock” University of Michigan Press, Ann Arbor 1992.
  2. Could a more gradual process have prevented the pain that the shock therapy caused? Let us remember that during the early 1990s, many of these countries lost 50% of their output, unemployment (previously unknown) shot up, social systems were destroyed, inflation reached Zimbabwean heights, poverty levels increased and life expectancy fell.
    We have to compare this experience with the 2007 results of the EBRD “Life in Transition” survey which show surprisingly low values of assessments of betterment of the populations between before and after transition. Only around 40% of those surveyed say that their economic situation had improved, even fewer are satisfied with the political situation – alarming numbers.
    Could it not be that the great transition project was more of an elite-driven, macro-socio/political project and left many of the people – for whom transition should bring improvement – behind? Was not the transition project the counterpart of the “Washington Consensus” for less developed countries which brought the mainstream ‘”neo-liberal” paradigm into development assistance?
    It is not just the griping of the losers of the transition process, it is not just that the older generation nostalgically hankers after the old times: We need to take these messages seriously. Also the EBRD must make sure that transition really benefits “the people” – and not only satisfies abstract principles of market economy – with very real negative influence on income distribution. More attention on job creation, more provision of SME financing, even higher standards for social and environmental safeguards: these are the lessons which the EBRD has learned and is putting more and more into practice.
  3. While integration into the EU value chains was and remains an important principle, which sets the Western part of the EBRD region in a positive way apart from other emerging regions, this principle must be complemented by more attention to domestic demand, to upgrading of production, to move closer to the end-user of the products, to regional trade. The – nearly exclusive – reliance on exports into the EU need another support leg in regional, neighbourhood trade (despite political difficulties and animosities).
    Since after the crisis foreign financial flows will not return to the region anywhere near the previous volumes for a long time to come, more attention must be given to mobilizing domestic savings, to prevent capital flight, to raising domestic taxes for building a reliable social safety net and invest in education and R&D.
    The transition process has dismantled to huge research centers of the old Academies of Sciences, without replacing them by other science and technology research centers. Many of the best scientists have emigrated to the West. The few high-value goods production lines need to be supplemented by clusters of medium-to-high-tech production, training and research facilities, if the countries want to close the income gap to Western countries. There are huge tasks ahead.

The present crisis has revealed the growth model established during the course of the last 20 years to be not sustainable. Much has been achieved in these countries, also with the help of international institutions. It is certain that the EU accession anchor has been one of the strongest drivers of the transition process which the region has used to its (and the EU’s) advantage.

The task for the next 20 years is to establish a “social market” economy, to give adequate attention to job creation, to upgrade domestic production, to loosen in some cases the very strong dependence on the EU, both in terms of financial markets and of the real economy.

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Filed under Crisis Response, European Union, Financial Market Regulation, Socio-Economic Development

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