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1996 In Review: Eastern Economies End A Year Of Continuing Struggle

Prague, 30 December 1996 (RFE/RL) -- The world remained economically a tough place in 1996, and no part of the globe felt the stresses and strains more than the emerging democracies.

Across Eastern and Central Europe and the former Soviet Union, millions of ordinary people struggled to survive amid continuing economic hardship, spreading crime, omnipresent corruption, inefficiency and decay.

But there were many signs in 1996 that a basis was being laid for economic betterment, that the region was moving at least in part from darkness towards the light.


Russia became more clearly identified as a lure of almost irresistible proportions for foreign investors and businessmen, but as yet it has been unable to create a framework for foreign capital to play a full part in its economic rejuvenation.

To all outside appearances Russia spent 1996 as a monumental mess. The economy continued to shrink, millions of workers went unpaid for months, the tax collection system collapsed, the International Monetary Fund suspended loan installments, capital flight abroad reached an estimated $20 billion. Corruption continued to spread its tentacles over the land, murder for economic reasons became more widespread, and money became concentrated in the hands of a close-knit elite.

But despite those realities, the world's big institutional investors in November stormed Russia's first global bond offering. The full $1 billion issue was snapped up immediately with eagerness which market analysts called phenomenal. The bond issue was reportedly three times oversubscribed, indicating an underlying acceptance that Russia is stabilizing and making progress with reforms. It also shows, crucially, an acceptance of the risk of investing in Russia. More bond issues from Russian cities, regions and conglomerates appear likely to be as heavily supported.

This new mood of international confidence grew in the latter part of 1996 following the re-election of President Boris Yeltsin, his ongoing recovery from heart surgery and his re-assertion of authority over the Kremlin.

There were other positive indicators during the period. Inflation was low, foreign trade, headed by oil and gas, continued to rise impressively to an expected $75 billion in 1996. Spurred on by the IMF, tax collection improved remarkably and a budget for the new year was in the process of being adopted.

"We can say the world believes in the future of Russia," Finance Minister Alexander Livshits said. "All that is left is that we have to believe in ourselves."


Another troubled giant is Ukraine, where living standards have fallen so far that most Ukrainians struggle to survive. And Ukraine, with its weakly developed national personality and pervading Soviet mentality, was initially slow to reform.

But in 1996 President Leonid Kuchma's reform program gained momentum. The year saw the introduction of the permanent national currency, the hryvna, and privatization proceeded well, at least with smaller enterprises. An estimated 100,000 small enterprises were in private hands by year's end, 65 percent of arable land was controlled by private or cooperative farming ventures, and as of November, more than 80 percent of Ukrainians eligible to claim mass privatization vouchers had done so.

Underlying these indices of progress is the belief among analysts that Ukraine has hit bottom and could see an overall improvement. In the course of the year, inflation was cut, foreign trade was up, unemployment, either on official or unofficial figures, remained low, and the decline in production slowed. Moreover, some Western financial experts believe the hryvna is up to 60 percent undervalued against the dollar, meaning that when measured at purchasing power parity exchange rates, the country's dollar gross domestic product is about three times higher than at market exchange rates.


The post-communist state which has emerged from 1996 most successful in transition, and which is now sailing in a fair breeze, is Slovenia. The old Yugoslav economy was always freer than others in the region, but Slovenia in the past year achieved an enviable average monthly wage of $620 and per capita GDP of $9,350. Compare that to Moldova's breakaway Dniester region, where the minimum monthly wage was set at the equivalent of $1.25. Slovenia is the only post communist country to have achieved A-grade credit rating with major risk-assessment agencies. Despite slow-moving privatization and sluggish foreign trade, Slovenia spent a comfortable year and is poised to do better.

Czech Republic

On another bright note, the Czech Republic, which endured one of the most suffocating communist regimes for years, is now counted as one of Europe's freest economies. The fruits of that can be seen daily around the republic, where despite predictions of ups and downs, there is a dynamism in the air and an increasing prosperity.

The Baltic States

The three Baltic states remained stable during the year, achieving further consolidation and making some modest gains. Lithuania and Latvia weathered turbulence caused by earlier collapses in the banking sector. Estonia, where the banking system was not shaken, actually saw a strengthening of that sector. Smaller banks merged, the Hansa Bank -- the country's biggest -- moved into the Latvian market, and Estonian banking equities were accepted by the Finnish, Swedish and London capital markets.

The three states recorded modest economic expansion within a steady environment. Estonia was once again at the top of the league with an estimated 4 percent growth to show for the year.

On foreign trade, the picture was not so encouraging, Latvia recorded a record trade deficit of $500 million in the first eight months of the year, and Lithuania's trade deficit also rose sharply. Estonia once again fared better, its trade deficit being less threatening than that of the other two.


Not all the region could report success stories for the year, however, Bulgaria being the most tragic example of what can go wrong in a badly-managed transition economy.

In a nightmare year, the lev currency was ending the period at one-seventh of the value against the dollar that it had at the start of the year, unemployment rose to 12 percent, inflation at year's end was an estimated 260 percent. GDP, incomes, imports and exports all fell and the banking sector was in disarray.

The IMF provided a conditional standby loan in summer, but later suspended financing when Sofia failed to make sufficient progress on reform.

By end of year it looked very like the Socialist-led government of Prime Minister Zhan Videnov would accept the IMF proposal to create a currency board to help guarantee strict budgetary discipline and restore trust in the lev.

However, even in Bulgaria there was some forward movement. The mass privatization scheme was launched in the spring, and the country was still running a trade surplus. Also, a renewed default on debts appears to have been avoided.


Albania also continued in a state of poverty. During the year about a third of the population was reportedly making a living from investment companies offering extraordinary interest rates -- up to 50 percent -- on small investments. Outside observers believe such companies are in great danger of collapse as soon as the flow of new investors dries up. Or, that if they don't collapse that other, more sinister factors are involved -- namely that the investment companies are actually fronts for major money laundering in the arms and drugs trades. In any event, their activity is distorting the economic and fiscal life of Albania, and could cause economic collapse.


Beyond the region, the world economy in 1996 stood like a train at a station waiting for a green signal that never came. The United States saw continued revival and unemployment held at reasonable levels, but most advanced nations struggled with lack of demand, declining revenues, high to very high unemployment and big budget deficits.

The increasing trend to globalization of the economy contributed heavily to this, with companies moving production out of expensive areas like the United States and Western Europe, to cheaper areas such as Southeast Asia.

This in turn highlighted the impact on social organization of economic rationalism. Companies moved to cheap-labor areas in Asia, providing jobs for Asians, while the high-quality social-protection systems of the European Union countries threatened to collapse as too expensive to maintain.

A further complicating factor was the continuing downsizing of workforces around the globe. Through new technologies and improved production procedures, companies big and small were able to slash personnel and improve their competitive situation.

The economic theory is that workers will no longer be able to rely on one job or one industry during their lifetime, but must re-train for completely new jobs perhaps as often as every two years, as growth moves to different sectors of the economy.

The reality is that the overall effect of frequent job-swapping and reduced security has been to depress demand, as consumers find themselves unable to make long-term financial commitments as they once could.