[Index]
UNECE Spring Seminar identifies
challenges and opportunities for resource-rich
transition economies
Geneva, 1 March 2005
- Rich endowments in oil and gas present
tremendous opportunities but also significant
challenges to sustainable economic development.
This was one of the key findings of the eighth
Spring Seminar of the United Nations Economic
Commission for Europe (UNECE), which focused
on Financing for Development in low-income
transition economies. Abundant oil and gas
endowments are a source of significant government
and foreign exchange revenues for countries
such as Russia, Kazakhstan, Azerbaijan and
Turkmenistan. These revenues can be an invaluable
source of financing for economic development.
At the same time, these revenues tend to fluctuate
greatly in line with volatile world market
prices and risk pushing up real exchange rates
and undermining the competitiveness of local
manufacturing. In order to cope with these
challenges, seminar participants argued, resource-rich
transition economies should stash away part
of their oil and gas revenues in rainy day
funds and should prepare the ground for economic
diversification by improving public and corporate
governance as well as reforming financial
sectors and upgrading human capital.
*************
Brigita Schmögnerová,
Executive Secretary of the UNECE, opened the
Seminar, which was held in Geneva on 21 February,
by pointing out that the gains from globalization
have been shared unequally and that some countries
have been left behind because they have been
unable to mobilize sufficient domestic financial
resources or to attract sufficient foreign
capital to invest in economic development.
In his keynote speech, José Antonio
Ocampo, the UN Under-Secretary General for
Economic and Social Affairs, emphasized that
despite a recent upward trend in official
development assistance (ODA), there remained
a significant gap between the actual amounts
and the global needs as identified in a recent
UN report on the Millennium Development Goals.
He also pointed out that there remains significant
scope for improving the effectiveness of ODA,
and said that multilateral development banks
can play a crucial catalytic role in mobilizing
private financing. Ocampo stressed the need
for further debt restructurings and write-downs
for highly indebted poor countries, but also
called for multilateral and international
cooperation to guarantee stable access to
international financial markets for developing
and transition economies in times of trouble.
José Luis Machinea,
Executive Secretary of the UN Economic Commission
for Latin America and the Caribbean (ECLAC),
examined the record in Latin America with
economic growth, volatility and private capital
flows. He argued that Latin America economic
growth has been very volatile in comparison
with other regions, and that financial flows
have been the main source of this volatility.
To make economic growth less volatile, he
called for counter-cyclical fiscal and monetary
policies, the prudent management of more flexible
exchange rates, policies to encourage domestic
savings, the development of deeper local and
regional financial systems and controls on
short-term capital flows.
The following session on
“Strategies for development
and growth” focused on political
aspects of financing for development in the
emerging market economies in the ECE region.
Steven Fries, Deputy Chief Economist, European
Bank for Reconstruction and Development (EBRD),
discussed the political economy of reforming
domestic financial sectors. He argued that
political support for banking reform could
be strengthened by industrial restructuring
and trade liberalization because these policies
encourage the entry of new firms, and banking
reform in turn benefits new entrants at the
expense of incumbent firms. As for the economic
effects of banking reform, Fries argued that
institutional reforms and the privatization
of the banking industry improve the efficiency
of financial intermediation, whereas the entry
of foreign banks had no such effects. In the
subsequent discussion, Lucio Vinhas de Souza,
of the Kiel Institute of World Economics,
pointed out that the impact of foreign bank
entry on the efficiency of financial intermediation
was a controversial issue and wondered whether
the lack of impact found by Fries might be
due to measurement problems. He also wondered
whether institutional reforms, EU accession
or the work of multilateral organizations
might contribute to raising the effectiveness
of foreign entry into domestic banking sectors
in improving financial intermediation.
Taner Yigit, Bilkent University,
Ankara analyzed how political instability
affects the ability of countries to attract
foreign direct investment (FDI). His findings
indicated that transition economies had in
fact been able to attract a lot of FDI due
to the pent-up demand for technology and market
access caused by their relative isolation
under central planning. At the same time,
the political instability of most CIS countries
when compared to the more stable new EU members
caused a significant shortfall in their FDI
inflows. The discussant, Gabor Hunya of the
Vienna Institute for Comparative Economic
Studies, cautioned that Yigit and his co-authors
were not measuring political instability directly,
but instead were interpreting as the effect
of political instability anything that could
not be captured by their measures of economic
determinants of FDI inflows. He also pointed
out that while there was a clear positive
correlation between FDI inflows and economic
performance, it was not so clear whether FDI
inflows were responsible for improving economic
performance, or whether to the contrary, FDI
was attracted primarily to economically successful
countries. Nevertheless, Hunya did agree that
political stability was important for attracting
FDI, as were economic stability and an appropriate
legal and institutional framework.
The third session on “Economic
integration and trade” analysed
the prospects of the initiatives to revitalize
economic relations and their contribution
to promoting growth and employment in the
western Balkan region and the Commonwealth
of Independent States (CIS). As for the Balkans,
the paper by Milica Uvalic of the University
of Perugia argued that the transition process
and the political upheavals in the region
led to a disintegration of trade relations
and to a re-orientation of trade towards the
European Union. However, she argued that intra-regional
trade remained much more important for the
successor States of former Yugoslavia, and
that the potential for intra-regional trade
might be underestimated. She also stressed
the importance of path dependencies, history
and EU trade policies for intra-regional trade
patterns. In his comments, Vladimir Gligorov
of the Vienna Institute for Comparative Economic
Studies argued that trade patterns between
the successor States of former Yugoslavia
continued to be heavily distorted, and that
intra-regional trade was in fact low with
the exception of Bosnia-Hercegovina, which
however was a highly special case due to its
high aid-financed current account deficits
and due to the close ties between its Serb
and Croat-Muslim parts with Serbia-Montenegro
and Croatia, respectively. Within the CIS,
Ruslan Grinberg (Russian Academy of Sciences)
examined the implications of the development
of a Common Economic Space for economic integration.
He documented the evolution of intra-CIS trade
and showed the increased role Russia is playing
as an investor in some other CIS countries.
He then discussed the various existing integration
initiatives and argued that on the one hand,
elusive hopes for joining the EU dampened
the enthusiasm of some CIS economies for intra-CIS
integration initiatives, and on the other
hand, the absence of solid prospects for EU
membership weakened the reform resolve in
some countries. In his comments, Robert Shelburne,
of the Economic Analysis Division of UNECE,
argued that in light of the huge border effects
normally found in studies of international
versus inter-regional trade, the large drop
in trade between the successor States of the
Soviet Union after the break-up were something
that had to be expected. He suggested that
it would be unrealistic to expect intra-CIS
trade to return to Soviet levels. Moreover,
he pointed out that the costs of intra-CIS
integration initiatives such as a customs
union could conceivably be very high because
of high external tariffs which would result
in trade diversion effects possibly dominating
trade creation effects. On balance, Shelburne
advocated WTO accession as the best way forward
for the CIS economies.
The final session on “Financial
management and sustainable growth in resource-rich
economies” addressed some important
issues arising in economies that are richly
endowed with natural resources. On the one
hand, rich natural resource endowments can
be a blessing generating large export revenues
and hence potential funds available for financing
economic development. On the other hand, rich
natural resource endowments can also become
a curse, causing Dutch Disease and rent-seeking
behaviour and making both the economy in general
and government finances in particular highly
vulnerable to swings in world market prices.
Focusing primarily on the case of Russia,
Rüdiger Ahrend, Organisation for Economic
Co-operation and Development (OECD), argued
that institutional reforms can prevent the
resource curse and that economic diversification
should be a long-term goal, but that in the
short term, the comparative advantage of Russia
was probably in resource extraction. He criticized
recent slippages in macroeconomic management,
structural reforms, the fight against corruption
and the management of the country’s
oil stabilization fund. He questioned the
rationale in a transition economy of building
up such a fund with the aim of sharing resource
rents with future generations in view of the
fact that the economic well-being of current
generations had suffered under central planning
and that future generations would likely enjoy
higher living standards as a result of (successful)
economic transition. The discussant, Jose
Palacin of the Economic Analysis Division
of UNECE, agreed with the emphasis on institutional
reforms and on improvements in public and
corporate governance. He stressed that both
the state and the private sector have important
roles to play in supporting diversification
and an appropriate management of natural resources.
In the final paper of the seminar, Yelena
Kalyushnova, of the University of Reading,
and Michael Kaser, Oxford and Birmingham Universities,
discussed policy choices for using the revenues
derived from resource extraction to foster
sustainable economic development in three
Caspian Sea countries. They stressed the challenges
posed by volatile world market prices, particularly
in view of the fact that state budgets in
these countries were highly dependent on revenues
from resource extraction, a fact which potentially
introduces a pro-cyclical bias into fiscal
policies. They also argued that there is a
tendency for resource-rich low-income economies
to overinvest in projects with low social
returns. To foster sustainable development,
the authors advocated oil fund revenues to
be invested abroad rather than at home, to
welcome FDI and the attendant inflow of technology,
to create efficient domestic financial sectors
to improve the efficiency of investment in
the non-resource sectors, and to promote labor
productivity growth by investing into the
development of local human capital. The discussant,
Jan Svejnar of the University of Michigan,
pointed out that some countries, including
the United Kingdom, had chosen not to create
an oil fund, and so he wondered under which
circumstances the creation of such a fund
was really advisable.
For further information please contact:
UNECE Economic Analysis
Division
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Phone: +41(0)22 917 2445 or 917 1269
Fax: +41(0)22 917 03 09
E-mail: [email protected]
Web site: http://www.unece.org/ead/ead_sprin_sem_new.htm
Ref: ECE/GEN/05/N02