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East: EBRD Overview On Ten Years In Transition

The European Bank for Reconstruction and Development (EBRD) publishes its annual report today. A decade after the fall of the Berlin Wall, it assesses the economic progress of the East and Central European countries, the Baltic states and CIS nations.

London, 8 November 1999 (RFE/RL) -- Transition Report 1999 delivers a mixed verdict on the economic health of 26 former communist countries. It says there was a growing divergence this year between relatively well-off and poorer countries.

The report says progress in market-oriented reform has been more rapid in the countries adjacent to the EU, including central Europe and the Baltic states, than countries further south and east.

Aside from recent weakness in the Czech Republic, most states of Central and Eastern Europe and Baltic states continued to register moderately strong growth. The report says that Hungary and Poland -- both 'early reformers' hopeful of early accession to the EU -- have shown 'impressive resilience.'

But in southeastern Europe, and the CIS, the report says slower and more uneven reforms, combined with the knock-on effects of the Russian financial crisis and the Kosovo conflict, created greater uncertainty. In Bulgaria and Romania, growth contracted in 1999, partly reflecting the effects of the Kosovo conflict. An exodus of 700,000 refugees put a heavy strain on neighboring Balkans countries which also suffered disruptions to trade because of the NATO bombing of Danube bridges and closure of Serbia's roads and railways.

The report notes that the conflict closed key export routes -- for fruit, vegetables and other perishable goods -- from southeastern Europe to western Europe. Bulgaria's export transport costs rose by up to 50 percent.

The EBRD report notes that the Kosovo conflict prompted the launch by the international community of a major new initiative, the Stability Pact for south eastern Europe, which aims to promote regional prosperity. This is expected to most benefit Albania, Bosnia, Croatia, and Macedonia.

The report notes that the Kosovo crisis came when the region was already facing worsening external conditions including global financial turmoil, the Russian crisis, and the collapse of commodity prices. It says foreign investment in the region fell in late 1998, but it has now picked up.

The report cites economic forecasts predicting that the economy in Russia -- where 35 percent of the population is estimated as living below the poverty line -- would shrink by 1 percent this year before returning to growth next year.

The economy of Russia -- whose health is crucial to its trading partners -- has declined in every year except 1997, with its nascent growth then smothered by the collapse of the ruble in August, 1998. Some countries have seen their exports to Russia fall by up to 70 percent.

The EBRD report says gross domestic product also contracted in Ukraine in 1999 but grew significantly in Belarus. Strong growth was recorded the Caucasus -- Armenia, Azerbaijan and Georgia -- and in Kyrgyzstan. Elsewhere in Central Asia, Uzbekistan recorded growth of just over two percent per year, while gdp remained unchanged in Kazakhstan.

The report says that the variation in reforms across countries is mirrored in their economic performance over the first decade of transition. Those countries which moved quickly to liberalize their economies, and embark on privatization, have recorded the strongest growth rates.

The report classifies countries into early reformers, late reformers and non-reformers. The first group comprises those that achieved price, foreign trade and exchange liberalization and small-scale privatization by 1993. These countries -- including the Czech and Slovak republics, Estonia, Hungary, Poland, and Slovenia -- have on average achieved positive growth rates since 1993.

The report says late reformers include Albania, Armenia, Bulgaria, Croatia, Macedonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Romania, and Russia. It says the non-reformers include Uzbekistan, Belarus, Turkmenistan and Ukraine.

The report says the central lesson of transition is that market economies will not function well without strong institutions, a state that carries out its basic responsibilities, and a healthy civil society.

The report says that those countries lacking these elements have seen the sharpest decline in living standards, causing hardship and great stress -- including rising mortality rates -- and loss of confidence in reforms.

The report says transition in many countries has been stunted by partial reforms, weaknesses in market-supporting institutions, arbitrary bureaucratic interference and weaknesses in the rule of law. It says that one of the most serious restraints is widespread corruption. It says these problems are particularly acute in the CIS countries which need to break out of a cycle of political instability and poor governance that has delayed their recoveries. The state and enterprises in many CIS and other countries are still "entangled in a complex web of state interventions, subsidies and bribes."

A survey of over 3,000 businesses in 20 transition countries found that 40 percent of small enterprises say they frequently pay bribes compared with 16 percent of large enterprises.

The report says the quality of governance across the region is linked with the extent to which states have been subject to undue influence by narrow vested interests in the economy.

The report says that in Azerbaijan, Bulgaria, Georgia, Russia and Ukraine, more than a third of enterprises report being affected by "sale" of parliamentary legislation and presidential decrees. In Armenia, Belarus, Hungary, Slovenia and Uzbekistan, the figure was below 15 percent.

The report says the extent to which the nomenklatura retained its power -- including its control of ministries, enterprises and natural resources -- has differed widely across the CIS region.

The report notes that in the Central Asian nations, the new leaders were the communist bosses prior to independence from the Soviet Union. The report says this has not encouraged trust by the population in government or the rule of law or belief in a new beginning.

The report argues that the way to improve governance and the investment climate is to strengthen both the capacity and the accountability of the state. Reform-minded entrepreneurs and the employees of new private firms should be encouraged to break the grip of vested interests in many transitional countries.

The report says small medium-sized enterprises and open competition on international markets are the key elements of a strategy "to sustain reforms in the next decade of transition."

But the report says that disappointed hopes of some should not overshadow what it calls the "remarkable achievements" over the past 10 years. Most people have gained political and economic freedom. Most goods and services are produced by the private sector and exchanged in markets. Free and fair elections have been held in most countries.

The report concludes: "There is little likelihood of a return to the old political structures. These achievements are fundamental landmarks of the 20th century."