Geneva, 5 May 1999
ECE/GEN/99/6
ECONOMIC COMMISSION FOR
EUROPE OPENS FIFTY-FOURTH SESSION
Holds informal seminar
on the consequences of the financial crisis
in the ECE region
Speaking as the ECE began its
fifty-fourth session, Miroslav Somol, Czech Ambassador to the
United Nations in Geneva and President of the Commission, said
that the first day of the session would be devoted to a seminar.
Eminent economists and policy makers led the discussions on three
main topics: the impact of the global financial and economic
crisis upon the UN/ECE region, with special emphasis on western
and central Europe; overcoming the crisis of the Russian economy;
the global financial crisis; and the threats to the transition
process in other economies.
The first session of the
seminar, chaired by Miroslav Somol, dealt with the impact of the
global financial and economic crisis on the ECE region, with
special emphasis on western and central Europe. A diagnosis was
offered of the causes of the crisis, its likely effects on
economic growth in the region, and the extent to which these
might be offset by policy responses. Panellists asked whether
such shocks could be avoided or at least mitigated in the future.
The second session, chaired by
Antonio Costa, Secretary-General of the European Bank for
Reconstruction and Development, upon overcoming the crisis of the
Russian economy, started with a discussion on the causes of the
crisis and its implications for future policy. Panellists and
participants in the discussion expressed support for the point of
view of the ECE secretariat that the crisis reflected a more
radical failure to reform the country's economic and political institutions to
restructure the enterprise sector and so to lay the basis for a
sustained economic recovery.
The third session, chaired by
Bernhard Molitor, Chairman, OECD Economic and Development Review Committee,
concentrated on some threats to the transition process in other
economies, especially those stemming from the global financial
crisis. It was argued that some transition economies that had
moved strongly ahead with basic reforms, are less vulnerable to
disturbance. At the same time others that are falling behind and
are often showing signs of increasing economic stress, are also
much more prone to shocks and crisis.
Tomorrow morning at 10 a.m. the
Commission would reconvert into a formal segment for a general
debate which would inter alia draw lessons from the discussions
of the previous two days. The agenda of the 54th session would
also be adopted then.
Panel discussion on the
consequences of the financial crisis in the ECE region
Jorge Braga de Macedo, of the Faculty
of Economics, Nova University at Lisbon, said that the key of
the Eurocentric view was that it enabled governments to change
their economies towards stability. Regional solutions could
divide the world in blocks, while the Eurocentric view was a
broad view, giving a chance to countries to change, based on the
external discipline imposed by the Eurozone. There was still a
need for open partnerships on an open basis, where good policies,
corporate governance and open markets were accepted in larger and
larger numbers.
Christian de Boissieu, Professor,
La Sorbonne, Paris, said that the international financial
crisis was not over. The shock in practice turned out to provoke
important repercussions and divergence in economic performance.
The issue for the future was whether these discrepancies in terms
of performance growth would expand or narrow. A number of
critical gaps had been disclosed by the crisis. Structural reform
was necessary. Exchange rates were often overly rigid, and this
had catalysed the financial crisis. The prudential structure in
banks and financing should be refined and strengthened.
Laszlo Csaba, Budapest
University of Economics and KOPINT-DATORG, spoke of the
causes and the implications of the crisis, and how to ward off
future crises. Possible causes were indulging in weaknesses in
the affected economies, the herd instinct of financial investors,
lack of memory or history, and the small-country syndrome. Issues
at stake were the negative impacts on growth and welfare. An aim
for lower growth would contribute to greater stability and would
be more sustainable. Liberalisation was important, but not
sufficient to ward off a future financial crisis. The European
Union could be a source of stability in the case of a future
financial crisis.
Antonio Costa, Secretary-General,
European Bank for Reconstruction and Development, said that
the recent crises had perturbed investors. The crisis had been
particularly severe in countries that had not lived up to their
transition commitments, such as policy reform and liberalisation.
A good process of market reform was fundamental. The impact of
the crises on Central European markets was diminished regional
growth and had set a trend to differentiation. Fall-out from
Russia was substantially limited to close trading partners. The
outlook for the Central European Markets was for further
differentiation, but these could expect a better performance than
other emerging markets.
Daniel Gottlieb, Senior
Adviser to the Governor of the Bank of Israel, said that a
country could ward off crisis, by correcting the difference
between planned and actual budget deficit. This could improve the
current account deficit, which was important in an open economy.
Continuing liberalisation was vital. Letting the economy face the
true turmoil was probably the best way to get the economy and its
agents used to the issue.
A discussion then took place on
the issues of the effects of the Russian crisis on central and
western Europe, investment rates, whether further liberalisation
was an effective or acceptable solution, structural reform,
potential reactions to future crisis, the sky-rocketing interest
spreads for emerging markets, the divergence and rigidity of the
world economy, the lack of resource allocation to cover the
outflow of capital, the link between progress in reforms and
geographic location, speculative capital flows, and the attitude
of international investors.
It was noted that there are no
instruments to predict such crises. However, institutional
stability is important to prevent a crisis. Banking supervision
needed to be global as well as national, and was vital for all
countries in transition. Liberalisation without proper rules,
institution building or confidence building does not enhance
stability. The systemic implication of the crisis needed to be
contained. Refining and tightening of banking regulations was
important, but there was a danger that financial protectionism
could be the beginning of trade protectionism.
The Chairman of the session said
that the speakers had contributed extensively to the
understanding of the subject in hand, most especially during the
interactive debate with the floor.
Panel discussion on
overcoming the crisis of the Russian Economy
Grzegorz Kolodko, Professor
at Warsaw School of Economics, Deputy Premier and Minister of
Finance of Poland 1994-1997, said that the nature of the
crisis was different from any previous crisis. It was due to
ill-advised economic policies being implemented to transform the
economy, without structural reforms and institution building, and
without addressing the structural and institutional implications
of the post-Communist events. The systemic vacuum was filled by
informal institutions, which had a negative impact on the
economy. Russia should start by addressing the issues over the
long-term.
Andrei Swinarenko, Deputy
Minister of Economics of the Russian Federation, said that
structural and institutional reform of the Russian economy was
vital. Fiscal policy and the banking payment system needed to be
improved. The normalisation of the payment situation would
improve the federal budget and lower the deficit, lowering
inflation. Strengthening the national currency, improving fiscal
policy and ensuring an appropriate fiscal climate would be
required on a macro-economic level. Measures to stabilise the
recovery of the economy, and creating an appropriate environment
for growth would be possible by the year 2000.
Rumen Dobrinsky, Economic
Affairs Officer of the UN/ECE, said the Russian crisis was
deeply rooted in the underlying economic structure and the
political structure. The institutional arrangement was
insufficient, causing a discrepancy between expectations and
outcomes. Institutional reform was repeatedly set back. The
crisis reflected major failures in the transformation model
undertaken in Russia. The reform of State and Public
Administration was necessary, as was a long-term programme of
reform and institution building.
A discussion then took place
upon such issues as whether it were possible to predict crises in
the context of an early-warning system, and how to deal with
political blocking of institution reform. The early-warning
system was important mainly in the context of detecting
vulnerability. Due to the evolution of the global economic
system, the nature of potential crises was constantly mutating.
There was need for credible long-term policies to reassure
consumers and investors. In the case of transition economies,
short-term solutions did not work. Reform should be undertaken
only in the context of structural and institutional reform.
Yves Berthelot, Executive
Secretary of the ECE, commented that the sequencing of reform
and institution building was important, but this was not
sufficient to ensure successful reform. Three factors were
indispensable for development, but not sufficient on their own:
there was need for leadership; consensus on how to put the
economy on a competitive edge; and dialogue between policy makers
and the public. Addressing the issue of post-communist reform
ought to take place by combining all the different issues.
Panel discussions on
threats to the transition process in other economies
Daniel Daianu, Former
Minister of Finance of Romania and President of the Romanian
Institute for Free Enterprise, said that most transition
economies fared poorly in the respect of proper institutions.
There were increasing gaps and differences among the transition
economies. Financial markets should be developed, but only in the
context of the speed of restructuring of the rest of the economy,
otherwise disaster loomed. The notion of convergence was not
validated by globalization. There were looming gaps between the
transitional economies, with some becoming more and more
vulnerable. There was a need for dramatic policy changes.
Lutz Hoffman, President, DIW,
Berlin, said that today's problems were not just of economic nature, but
of a political nature. Domestic policies were unsatisfactory:
governments did not understand what needed to be done to remedy
the situation; there was a lack of co-ordination of policies to
form a consistent strategy package; and there was a lack of
political clout to carry through those policies that were
absolutely necessary. If these three political points were
resolved, then there would be a lesser threat to the transition
economies.
Igor Mitiukov, Minister of
Finance of Ukraine, said that the Ukraine suffered from the
financial crisis in a number of different ways and for a number
of different reasons. The Ukraine had applied certain measures to
combat the crisis, such as continuing to work with other trade
partners, to avoid trade protectionism and to keep trade at the
highest possible level. More emphasis was placed upon
privatisation and de-monopolisation. The budget was used to
realistically reflect expectations of revenue. Due to these
efforts, the Ukraine managed to avoid the negative effects of the
Russian crisis.
Brigita Schmögnerová, Minister
of Finance, Slovak Republic, said that the financial crisis
had had negative impacts on the ability of the Central European
countries to attract foreign investment. The role of
international financial institutions should increase in a
globalized world, and start to emphasise not only stabilisation
policy, but reform policy. There was a need for an appropriate
set of indicators to pick up on growing vulnerability. The
Governments of the Central European Economies should respond by
prudent fiscal policy, and sustainable stabilising policy by
restructuring the economy.
Timo Summa, Director,
Directorate-General IA, European Commission, Brussels, said
that transition was a difficult and painful process.
Macro-economic stabilisation could be reached in a short period
of time, but was not sufficient on its own. All economies in
transition had a potential for good economic growth, and there
was a need to fulfil this potential by sound economic policies
and a renewed commitment to transition. The creation of a more
efficient social security net and the reform of the pension
system were necessary for wide support of reforms.
There was discussion of the
impediments to the transition process, of the difficulty to find
the correct balance between restrictive monetary policies without
hindering economic growth, the importance of the capacity to
transform B politically, socially and economically
for countries under crisis, and the usefulness of the learning
process entailed by reforms. Not enough attention had been paid
to the political economy dimension in the context of transition.
Choices between re-structurisation and stability were important
in the context of sequencing of the reforms.
The Chairman, Mr. Molitor, in
his concluding remarks, said that the discussion had been most
enriching. The base of the whole discussion was that transition
was not an easy process, since it meant fundamental changes and
took time. The principle was learning by doing, and the trial and
error method. Crises were different from one country to another,
but could be the catalyst for improvement and learning. A
solution to the problems of transition was very often a matter of
political rationality, rather than one of economic rationality.
Solutions were thus individual to countries.
The crisis in transition
countries was not due to the Asian crisis: the nature of the
individual crises were quite different. What is necessary was
transparency, continuity and reliability of the reform process.
Domestic problems need to be resolved before external problems
could be addressed. A legal framework, including transparency and
rules for accountability is necessary, as was global
re-structurisation. International financial organizations should
concentrate on their role as solution-finders, not stability
enforcers.
For further information,
please contact:
Information Unit
United Nations Economic Commission
for Europe (UN/ECE)
Palais des Nations, Room 356
CH - 1211 Geneva 10, Switzerland
Tel: +41 (22) 917 44 44
Fax: +41 (22) 917 05 05
E-mail: [email protected]
Website: http://www.unece.org