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The East: World Bank Asks If Economic Transition Has Failed Former USSR

Washington, 27 April 1999 (RFE/RL) -- The World Bank says most of the countries of the former Soviet Union have seen nothing but decline and deterioration since the transition began ten years ago.

World Bank Senior Vice President and Chief Economist, Joseph Stiglitz, says the bank's annual World Development report shows that despite significant gains in development around the world, the gap between rich and poor is widening and in many countries income distributions are worsening, increasing the social pain of economic failure:

Stiglitz said: "Nowhere are these problems more evident than in the states of the former Soviet Union, where the numbers living in poverty increased from 14 million in 1989 to 147 million by the middle of the decade, a ten-fold increase."

Stiglitz told a press conference Monday that it was not just because Russia had a crisis last year:

Stiglitz said: "More broadly, a decade after the beginning of the transition to a market economy, most of the countries of the former Soviet Union have a lower per capita income, worse social conditions, and higher levels of poverty than they did a decade ago."

So does this mean the transition to market economies has failed? The World Bank official admits it's a question they are pondering a lot now:

Stiglitz said: "When most economists said the problem in the former Soviet Union was that they had central planning, no property rights and therefore inefficiencies, distorted prices. You were going to change all that and it was supposed to release a burst of energy of entrepreneurship and output was supposed to increase. Instead output has fallen markedly and poverty has increased markedly and I think the lesson we've learned is that market economies are far more complicated than text book models often describe them. And that issues of governance, issues of legal infrastructures, issues of institutions are absolutely central." The leader of the team that assembled the development report, World Bank senior economist Eric Swanson says one interesting anomaly in Russia is that private personal consumption has actually remained rather strong:

Swanson said: "What's really disappeared is investment and public consumption, government consumption. I guess if you're not collecting taxes, it keeps down your public consumption as well. Essentially we see an economy that's in chaos right now and its very hard to measure what's going on there."

The bank's chief economist Stiglitz says another strange occurrence in Russia has been that there has been both an increase in the degree of inequality of incomes while economic growth has gone down:

Stiglitz said: "In a sense, the economies in transition have repealed a standard law on economics which says there is a trade-off between inequality and growth. What they showed is that you have negative growth and increasing inequality, so they've gotten the worst of both worlds. And that is one of the things we'll have to ponder as we go forward."

The bank's report warns that if present trends persist, there is danger that the poor may become a permanent underclass far less able to respond to opportunities when things do turn around.

The people are obviously feeling the pressure too, says the bank, with the stress showing in declining life expectancy and sharply worsening adult mortality. It says for example that the probability of a 15-year-old Ukrainian male surviving until his 60th birthday is a mere 65 percent, down from 72 percent in 1980.

The bank's report shows that while the former Soviet Countries have been sinking for a decade, another former Communist giant -- China -- is moving strongly ahead in a transition that is working. Joseph Stiglitz:

Stiglitz said: "One of the remarkable contrasts is the success of that (China's) transition as measured by most indicators including increases in GDP, living standards and reductions in poverty. The contrast between that and what has happened in the former Soviet Union are the result of quite different economic policies being pursued."

That seems to be the key, says Stiglitz -- adopting the reforms and policies necessary for a functioning market-based economy, including strong social safety nets to protect the most vulnerable of every society. In the end, he said, it is not the international institutions like the bank and the IMF that will save these countries but their own determination:

Stiglitz said: "One of the things we know is that no matter what we do to these countries, the global marketplace imposes risks. There will be crises in the future not matter what we do. And what we have to is to try to work to make sure that institutions are in place so that when there are crises, the most vulnerable are less effected by that."

On the week-end, the bank's Vice President for Europe and Central Asia, Johannes Linn warned that the crisis in the former Soviet Unions, especially Russia and Ukraine, will only get worse in the next year.