Accessibility links

Breaking News

The East: Transition Nations Had A Tough Economic Start

Washington, 30 May 1997 (RFE/RL) - The World Bank's chief economist, Joseph Stiglitz, says the countries in transition from central planning have had a hard time building market financial systems because, unlike even some of the poorest developing nations, they have had to start from scratch in building institutions.

"They faced a very difficult task in creating, in very rapid order, the kinds of institutions that evolved more gradually in other countries," he told reporters in Washington. "They had to create banking systems, they had to create securities markets and in both of these, there were very severe challenges."

Stiglitz made his comments in releasing a new bank report on private capital flows to developing countries.

The report explores the range of challenges facing developing countries in managing what has become a surge in private capital. In 1996, says the bank report, private capital going into developing countries of the world reached a record $244 billion, five times the level of official flows.

The Institute of International Finance (IIF), the global organization of commercial banks, stock funds and insurance firms, estimates that Central and Eastern Europe and the former Soviet Union received about $14.9 billion in private capital flows in 1996. It forecasts that this will rise by at least 75 percent this year to nearly $27 billion.

This shift to private capital flows, says Stiglitz, reflects the accelerating trend toward a globalized capital market, reinforcing the globalization that is taking place through trade.

He says the process is encompassing developing nations at "a dramatic pace," with a promise that it could be a means to include most of the world's population in a "cycle of economic prosperty."

On the positive side, this globalization, driven by advances in communications technology, lower transportation costs and increased global integration of production, is pushing developing nations to undertake fundamental economic reforms.

But it also poses challenges because, according to the report, international capital flows "act like a magnifying glass on the domestic economy, multiplying the benefits of well-structured reform programs, but also increasing the costs of poor economic fundamentals and unsound policies."

Fundamental market rules are essential, and so is a healthy banking system, says the report. In fact, it adds, fixing weak banks is urgent because poor banking systems magnify the problems.

Stiglitz says this has been especially difficult for the nations in transition "because they inherited banks that hadn't really been performing banking functions," were staffed by personnel who didn't know what real banks do and were saddled with a lot of inherited debts that had nothing to do with banking or the new banks.

As difficult, says Stiglitz, was the complete lack of securities markets. There was no experience in financial securities, which require "the kind of rule of law and order (that) is not yet fully realized in many of these countries," he says.

Even a nation as advanced as the Czech Republic has serious problems, says Stiglitz, pointing to closed-end mutual funds selling in Prague for discounts of 40 to 50 percent (off their stated value). That level of discount is "really indicative of underlying problems in the regulatory structure that affects securities markets," he says.

As countries learn to deal with these large flows of private capital, the report cautions that most of it still goes to only a small handful of the most advanced developing nations. Amar Bhattacharya, who headed the bank team that wrote the report, says that while total flows are expected to increase, it won't be in an uninterrupted manner.

"There are likely to be significant year-to-year fluctuations, even in the aggregate," he cautions, as well as "significant variation across countries."