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7 April 1994
Doc. 7058
1403-31/3/94-2-E
REPORT
on the progress of economic reform in
central and eastern Europe:
lessons and prospects
(Rapporteurs: Dame Peggy FENNER,
United Kingdom, European Democratic Group,
and Mr LOTZ,
Hungary, Liberal, Democratic and Reformers Group)
Summary
The economic reforms in central and eastern Europe which started a few years ago with such enthusiasm and optimism have not proceeded without problems. The "transformational recession" has worsened beyond expectations, and risks undermining both popular and political support for further change. Economic decline, rising unemployment and high inflation are the unwelcome companions to practically all new democracies.
The Parliamentary Assembly closely follows the economic reconstruction and reform process in the transition economies. The present report raises some of the fundamental questions addressed at the Assembly's Conference "Progress of Economic Reform in Central and Eastern Europe: Lessons and Prospects", held in Helsinki in June 1993, and makes policy recommendations for increased international co-operation in order to arrest and reverse economic decline in the central and eastern European countries, and to integrate the region into the world economy.
I. Draft resolution
1. The Conference "Progress of Economic Reform in Central and Eastern Europe: Lessons and Prospects" (Helsinki 2 to 4 June 1993) brought together parliamentarians, government members and officials from all the countries represented in the Assembly, representatives of international organisations and leading experts. The conference was the second of its kind, following that held in Budapest in May 1990 at the time of the launching of economic reform in central and eastern Europe.
2. The Assembly considers the appended "Helsinki Declaration", approved at the close of the conference, as a timely and fair evaluation of the lessons and prospects for economic reform in central and eastern Europe. The Assembly calls on governments and parliaments to take the findings and suggestions contained in the declaration duly into consideration, and to incorporate them in their decisions and policies.
3. The conference also, however, expressed concern over the political fragmentation occurring in several of the countries concerned, and over the social disruption which has resulted from the transition. This situation has worsened beyond earlier fears, and indeed risks undermining the democratic and economic reform process itself.
4. The Assembly, in the light of the Helsinki Conference, recommends to the countries of central and eastern Europe that the following objectives be pursued:
i. to further enhance the stability and democratic legitimacy of political institutions, including at regional and local level, as well as the responsibility, efficiency and accountability of the public administration. The latter includes a fair, authoritative and comprehensive legal and judicial system, and its adaptation to the needs of a market-oriented economy;
ii. to continue building a market-oriented economy, taking due account of the particular circumstances of each country, which differ considerably among them as far as economic development is concerned. Of particular importance are the privatisation of state-owned enterprises ensuring an equitable access to ownership and the competitiveness of firms, including the improvement of managerial skills; and the creation and promotion of small and medium-sized enterprises in all sectors of economic life;
iii. to initiate restructuring programmes and policies for industry, focusing on those business entities which are of key importance for employment and economic recovery; which have the potential to survive if given proper assistance; and which have demonstrated an ability and will to adapt their activities to the new circumstances;
iv. to establish clear legislation governing business, including foreign investment; and urgently to create a functioning banking and financial infrastructure, fundamental to sustained economic development;
v. to introduce and consolidate, as a matter of urgency, modern tax systems
and to enhance the efficiency of tax administration and collection;
vi. to provide protection for vulnerable groups, such as the aged, the unemployed and the handicapped;
vii. to improve education and retraining of the work force, not least of young people and of women, in order to prepare them for the challenges of a market-oriented economy;
viii. to create a cost-effective social security system, so as to cushion the impact of a rise in unemployment;
ix. to make more efficient use of energy, notably by moving toward market-guided energy prices and through a modernisation of energy-producing and energy-consuming sectors in the economy;
x. to introduce environmentally-friendly technologies, and to consider the repair of already incurred environmental damage as a priority;
xi. to strengthen regional initiatives aiming at increased trade and economic co-operation among the countries of central and eastern Europe, thus realising more fully their common trade and development potential — and seek inspiration in so doing from already existing co-operation in Europe, such as within the Benelux Union, European Free Trade Association (EFTA) and the Nordic Council.
5. The Assembly invites the governments of other Council of Europe member states, and the European Union:
i. to enhance access to their markets for the exports of the new democracies in central and eastern Europe — including their agricultural and other "sensitive" products — and to allow these countries both temporarily to protect their "infant industries" and to profit from comparative advantages such as the low cost of labour. In this regard the Assembly regrets rising protectionist tendencies in certain established market economies, and calls for the speedy establishment of a European multilateral trading framework respectful of the General Agreement on Tariffs and Trade (GATT) principles, eventually leading to a "pan-European common market";
ii. to pursue, and where necessary improve, their material and technical assistance to the countries in transition;
iii. to assist the development of private banking institutions in central and eastern Europe, capable in particular of supplying emerging small- and medium-sized enterprises.
6. The Assembly also reiterates its proposal for the Council of Europe to become a political forum for pan-European co-operation on economic issues, along the lines suggested by the Assembly in its Resolution 995 (1993) on economic renaissance of the Baltic Sea region, involving the European Union and other European organisations concerned.
7. Finally, the Assembly invites the international organisations concerned to improve substantially the co-ordination of their conceptual and material assistance to the countries of central and eastern Europe — both amongst themselves and with the national bodies in charge of bilateral assistance, thus enabling on-the-spot initiatives to take advantage of experience gained.
Appendix: The Helsinki Declaration1
The Parliamentary Conference "Progress of Economic Reform in Central and Eastern Europe: Lessons and Prospects" was held by the Parliamentary Assembly of the Council of Europe in Helsinki from 2 to 4 June 1993 at the invitation of the Finnish Parliament. It brought together: parliamentarians from the twenty-nine member states of the Council of Europe as well as the eleven European countries whose parliaments enjoy special guest status with the Parliamentary Assembly; government members and officials; representatives of international organisations; and leading experts. The conference was the second of its kind, following that held in Budapest in May 1990 at the time of the launching of economic reform in central and eastern Europe.
The participants:
—we lcomed the courageous and significant progress made by the countries in central and eastern Europe in strengthening pluralist democracy — including at regional and local level — in ensuring human rights and the rule of law, and in adopting a market-oriented economy. These fundamental principles are prerequisites for any sustainable, socially fair and environmentally-sound economic development. The Council of Europe has an essential role in promoting and safeguarding them;—
—ex pressed concern at the political fragmentation, crime and corruption in some countries, and at the social disruption caused by the transformational recession in the countries of central and eastern Europe which has worsened beyond previous expectations and risks undermining the democratic and economic reform process. Therefore reforms should aim at balanced development, based on the principles of equity and social justice, enshrined in the European Social Charter of the Council of Europe;—
—en couraged the countries concerned to seek further to enhance the stability of their political institutions, as well as the responsibility, efficiency and accountability of their public administration. This includes a comprehensive legal and judicial system, and its adaptation to the needs of the new market economies.—
—no ted that the first encouraging results of economic reform are being observed in certain transition economies, in the form of a halt of economic decline or indeed modest economic growth. They called on all countries in the region to pursue efforts towards a more market-oriented economy, taking into account the particular situation prevailing in each country. Of particular importance are the privatisation of state-owned enterprises ensuring an equitable access to ownership; the creation of private enterprises in all sectors of economic life; a clear recognition of the right to property; efficient tax collection; stable prices reflecting the true market situation for goods and services, not least through a central bank free from political pressure and determined to fight inflation; and a functioning financial infrastructure;—
—st ressed the importance of providing targeted protection for vulnerable groups in society, such as the aged, the unemployed, the handicapped and minorities. Particular attention will have to be paid to education and retraining of the work force, not least young people and women, in order to prepare it for the challenges of modern society;—
—em phasised the need to protect the environment, or to repair environmental damage already incurred, which takes on particular significance in central and eastern Europe. The participants especially welcomed the Environmental Action Programme (EAP) agreed upon in Lucerne in April 1993 and called for its speedy implementation;—
—ur ged OECD member countries to fulfil their commitments to enhance access to their markets for the exports of the new democracies in central and eastern Europe, as well as those from the developing countries in the south. They recalled the enormous potential for trade and economic development that would result from a "pan-European common market", and deplored existing protectionism in established market economies;—
—as ked central and eastern European countries not to overlook the prospects for increased trade and economic co-operation among them, and called for the strengthening of regional initiatives towards this end;—
—ca lled on the established market economies to pursue and where necessary improve their assistance to the countries in transition. The participants invite the international organisations to co-ordinate their assistance, whether conceptual or material, in favour of the countries of central and eastern Europe with the national bodies in charge of bilateral assistance, so as to enable the on-the-spot mechanisms and staff to take advantage of the experience gained;—
—ex pressed the belief that the fate of democracy, peace and prosperity in all European countries depends vitally on the achievement of greater unity among them, and called on governments and parliaments to make the fullest use of, and strengthen, the Council of Europe and other institutions to this end.II
II. Explanatory memorandum
by Dame Peggy FENNER and Mr LOTZ
Contents
Page
A. Introduction 8
B. A stable democracy and efficient institutions:
pre-conditions for economic progress 9
C. What is changing? An analysis of the reforms 9
D. Social and environmental protection 12
E. The international economic environment:
the vital importance of an open international trade system 13
F. Concluding remarks 17
A. Introduction
1. The aim of the present report is to draw conclusions from the Parliamentary Assembly's Conference entitled "Progress of Economic Reform in Central and Eastern Europe: Lessons and Prospects", held in Helsinki from 2 to 4 June 1993 at the kind invitation of the Finnish Parliament.
2. The conference brought together parliamentarians from the (at the time) twenty-nine member states of the Council of Europe as well as from the numerous European countries whose parliaments enjoy special guest status with the Parliamentary Assembly; leading government members and officials; representatives of international organisations specially competent in the subject area; prominent experts; and many media representatives.
3. The event constituted a follow-up to the Assembly's pioneering 1990 Conference "Economic Reform in Central and Eastern Europe: A Challenge for All Europe", held in Budapest, and was held in conformity with the pledge made in the Assembly's subsequent Resolution 955 (1991) to hold a follow-up conference a few years into the reform process so as to "take stock of the economic changes achieved, and to compare setbacks and successes in order to offer help in correcting the direction of reform".
4. The Budapest Conference in 1990 ended on an upbeat note: economic reform in central and eastern Europe was not only necessary, but feasible. It would take place in one country after another — different in each, but with certain common characteristics — and the industrialised market economies (especially OECD countries) would help out in word ("conceptual" assistance) and deed (material aid) on a scale never seen since the Marshall Plan in the wake of the second world war.
5. However, the economic reforms in central and eastern Europe which started in 1989 with such popular enthusiasm and optimism have not been without their problems. The "transformational recession" has worsened beyond expectations — not least in reaction to the economic difficulties which have in the meantime hit the OECD area — and risks undermining both popular and political support for change. Economic decline, unemployment and high inflation are the unwelcome companions to practically all new democracies in Europe and central Asia. Moreover, the changes of 1989 appear to be posing a much greater challenge to the traditional economic and foreign policy concepts of western countries than previously assumed.
6. The purpose of this report is, then, to raise some of the fundamental questions addressed at Helsinki, and to formulate policy recommendations for increased international co-operation in order to arrest and reverse economic decline in the transition economies or, on a more upbeat note, to accelerate economic growth.
B. A stable democracy and efficient institutions:
pre-conditions for economic progress
7. Under Theme I of the conference the interplay of politics and economics in the transition economies was examined from different aspects, notably: what are the challenges to a newly established parliamentary democracy; what is the role of regions and of local government in the modernisation process; what type of legal and institutional framework is needed for economic development.
8. The strong belief of our Assembly, it will be remembered, is that pluralist democracy is a prerequisite for lasting economic and social development. Indeed, the future of democratic institutions and economic development are closely intertwined in the formerly communist countries. In this respect, several speakers at the conference expressed concern at the political fragmentation (crime and corruption in some countries) and the social disruption occurring partly as a result of the transformational recession in the new democracies of central and eastern Europe.
9. There is a growing discrepancy between the prevailing economic situation and the high expectations of the peoples of central and eastern Europe. It has become clear that the transformation process will need a much longer period of development than was anticipated at the time. Similarly, it will require great determination by governments to hold on to the central pillars of the modernisation programme until tangible positive results become felt also by the broader population. As one speaker put it: "These countries have to pay a very high price for forty years of communist rule".
10. Let no one get the impression that the Rapporteurs in any way despair about the situation. Quite to the contrary, they believe it is altogether possible for the countries concerned to steer a clear course for the future to ensure that the market economy and democracy will survive. This does, however, mean that we must address this problem on a more systematic basis, as time is running short. A framework must be put in place to stop the very real threat of a "new tribalism" — ethnic, social and political — which could even harm economic reform and recovery.
11. In this regard, several speakers of the conference stressed the need to establish institutions and structures capable of ensuring the creation and development of a smoothly functioning market economy. It is becoming increasingly clear that neither privatisation nor the sheer injection of capital will help unless the right "framework conditions" for reform have been established. These include laws governing business, property and the like; well-written constitutions ensuring stable government and protection of citizens; a responsible, accountable and efficient public administration working according to clear rules and capable of ensuring some form of social security; and an authoritative juridical system.
C. What is changing? An analysis of the reforms
12. As regards Theme II, the Helsinki Conference saw an extremely rich and stimulating exchange of views on themes such as property rights and privatisation, restructuring of state enterprises, monetary and fiscal policies, and the role of small- and medium- sized enterprises and foreign investment in fostering economic development.
13. One conclusion was that transition has meant moving to a totally new political and economic system. Decision-makers in reforming countries have to deal not only with the "technicalities" of, for example, privatisation, but also with popular perceptions. Changes in the economy so fundamental as the ones in central and eastern Europe tend to bring with them also a destabilising social revolution, and they produce friction on a daily basis. In this respect, the single most difficult issue often becomes how to ensure lasting popular, and hence political, support for painful economic transition — or, put differently — how to keep economic policy on track in the face of growing social tension.
14. As Mr Lewandowski, then Minister for Privatisation of Poland formulated it, the countries of central and eastern Europe used to be not so much underdeveloped as part of a wrongly developed economic bloc, producing unsuitable goods in the wrong kind of market. Therefore, he implied, the essential task must be the conversion of the outdated industrial stock inherited from the communist past, and the adaptation to a new market reality. Ownership change is a decisive tool in this adjustment process. However, because of its scope and intensity, privatisation in the transition economies represents a challenge without precedent in economic history and will require much creativity and perseverance.
15. As was stressed at the conference, so-called "voucher privatisation" — meaning the distribution of shares in state companies to the whole population — can be an effective tool. The crucial question remains, however, whether it will be possible to transform the thus privatised enterprises into viable entities. Most firms are heavily in debt, and the recent entry into force of new bankruptcy legislation in several countries could result in a wave of further closures. Moreover, it is uncertain how mass privatisation will affect corporate ethics, the ability to raise equity finance, and the development of capital markets.
16. Privatisation in the transition economies has also suffered from a lack of capital available within the countries concerned, and from uncertainty in some countries and on the part of certain donors whether money lent, given as grants or invested is put to the best possible use. While capital in the world is not exactly in abundant supply, several speakers warned that the success of the economic transition risked failure unless accompanied by a much greater inflow of foreign direct investment.
17. Fiscal and monetary policies have important roles to play in the transition economies. In this respect, the main objectives can be described as follows: to avert hyper-inflation, and to wring out inflationary expectations at the least cost to production and social protection; to eradicate the extreme misallocation of resources which had characterised central planning, and thus pave the way for sustainable economic growth.
18. However, as was pointed out by Mr Kopits, Chief of Fiscal Operations Division of the International Monetary Fund, there are major impediments to using fiscal and monetary tools effectively in the economies of transition — given their past subordination to central planning. For instance, central banks operated much more as employment and subsidising agencies than as warrantors of price stability. Enterprises were not operating under well-defined objectives, such as profit-maximisation, and the social security system was used as a covert form of unemployment compensation.
19. In these fields, further structural reforms were seen by many participants as indispensable. Specifically, governments should: accelerate privatisation of state-owned companies by providing attractive credits to investors; ensure early settlement of property rights, including those pertaining to agricultural land and state-owned real estate; develop state-owned credit guarantee institutions, thereby encouraging commercial banks to assume greater risks while providing long-term investment credit to entrepreneurs. All these issues relate to the wider problem of creating effective financial institutions in these countries.
20. After decades of high but misdirected capital accumulation, investment is now quite inadequate for the restructuring of existing plant and equipment, for the development of the public sector infrastructure and for the promotion of growth. Domestic savings are substantial, at least in some countries, but they are largely used to cover budget deficits, while domestic financial institutions can not satisfy remaining needs. Therefore, governments should make the creation of appropriate institutions and incentives a priority, so as to enable domestic (and foreign) financial markets to channel investments effectively.
21. Moreover, the transition economies face a serious fiscal crisis, since taxes on the profits of state enterprises — previously a major source of government revenue — fell sharply along with the latters' output and profitability, while the black economy which developed in the central planning era left a legacy of weak tax morality. A comprehensive tax reform should aim at "broadening the base and lowering the rate" — contrary to what has often been the case in these countries. Modern tax systems, based primarily on value added and personal income taxes, should be introduced and consolidated as quickly as possible. The modernisation of tax administration should form an integral part of the reform.
22. Sky-rocketing budget deficits are particularly worrying in the case of the countries of the former Soviet Union, where the republics have not been able to agree with central monetary authorities on principles for spending and creating money. However fiscal and monetary responsibilities are eventually divided, a mechanism must be found soon to restore budgetary constraint and effective control over the money supply. Already Keynes warned that "there is no subtler, no surer means of overturning the existing basis of society than to debauch the currency".
23. The participants also noted that the first encouraging results of economic reform are being observed in certain transition economies. Especially in the Visegrad countries — the Czech Republic, Hungary, Poland and the Slovak Republic — stabilisation has been, generally speaking, successful. Significant inflation has persisted only in Poland, and even there has fallen rather than develop into hyperinflation. Liberalisation has also made progress, at least in the market for goods. Prices have been freed, "administrative allocation" has largely disappeared. And a dramatic opening up to, and reorientation of, foreign trade has taken place. Monolithic financial institutions have given way to multi-level central and commercial banking throughout the region, and financial markets are emerging.
24. Many observers have attributed the very large and persistent fall in output in central and eastern European countries to various combinations of "creative destruction", statistical errors and external shocks. However, Professor Portes, Director of the Centre for Economic Policy Research in London, instead maintained that the stabilisation programmes themselves bore part of the blame.
25. These stabilisation programmes, he implied, not only caused the intended negative demand shocks, but were also accompanied by strong, unanticipated, negative supply-side effects. Many large state-owned enterprises effectively forced banks and suppliers to "roll over" past loans and capitalise arrears indefinitely, so that a greater-than-intended credit squeeze hit the small, emerging private sector disproportionately. The recapitalisation of banks was therefore seen by Professor Portes as an urgent task.
26. Furthermore, "state desertion" — leaving state-owned enterprises adrift in true laissez-faire style — should in certain cases be reconsidered, he maintained. Privatisation has moved relatively slowly in most of these countries, and political resistance may increase as unemployment rises. Meanwhile, the enterprises concerned operate with weak and often market-foreign incentives under little central guidance, and the growth of new firms can not substitute for their restructuring in the short term. Conscious industrial policies are therefore required, Professor Portes maintained, in order to transform state enterprises into joint-stock companies, provide managers with appropriate incentives to stop decapitalisation, reorganise and seek new markets, determine in which areas state ownership would continue, and promote privatisation elsewhere.
27. The Rapporteurs, one of whom comes from Hungary where this problem is very much a reality, see a certain merit in this approach, but also wish to caution against artificially prolonging the life of dinosaur-type, government-budget-draining state companies for too long. A middle way must be sought, combining swiftness of action with pragmatism.
D. Social and environmental protection
28. The Helsinki Conference laid considerable emphasis on the need to ensure adequate standards of social protection, especially for vulnerable groups and in connection with rising unemployment. It was recognised that in some countries the situation has recently worsened due to large lay-offs and the growing impoverishment of important strata of the population.
29. According to Mr Standing, Director of the ILO Central and Eastern European Team, the labour market and the institutional and social processes underpinning it have so far received insufficient attention in the transition. Unemployment is a new phenomenon in central and eastern Europe and there has, in Mr Standing's view, been inadequate concern for what might be termed the "distributive justice and social empowerment of ordinary people". The Rapporteurs agree that labour market problems are now more acute than at any time during the past three years, and they show every sign of worsening. Chronic poverty, growing inequality and mass unemployment will likely continue to co-exist together with an increasingly affluent elite able to take advantage of the reforms.
30. Labour market insecurity has grown considerably in recent years, with some countries facing a prolonged period of mass unemployment. In Bulgaria, for instance, currently over 15% of the workforce is registered as unemployed. Yet one of the biggest challenges to the region and to the international community in the next two years will be mass unemployment in Russia and in the rest of the CIS. The scale and character of that problem are unprecedented, especially if one bears in mind that for nearly seventy years an individual's not having gainful employment was banished in the Soviet Union as "parasitic", indeed punishable, behaviour. The labour market problems in the CIS area might thus come to dwarf those in the other transition economies, and can seriously compromise the stability of the whole region.
31. Thus it would be imperative to enact a broad framework of labour legislation, and to provide targeted protection for vulnerable groups in society. Particular attention will have to be paid to education and retraining of the work force, not least young people and women, in order to prepare them for the challenges of a modern society.
32. The conference understandably enough devoted considerable time to the problem of environmental protection and restoration in central and eastern Europe. Obviously, the resources available for this purpose will be limited over the next decade. It is essential that means be freed for the most urgent problems, to be identified through a careful weighing together of needs, costs and benefits. Participants also emphasised the need to repair the important environmental damage already incurred. They especially welcomed the Environmental Action Programme (EAP) agreed upon in Lucerne in April 1993 and called for its speedy implementation.
E. The international economic environment: the vital importance
of an open international trade system
33. The Helsinki Conference also tried to identify ways in which the international community may assist the transition economies in their reform, including the role of international organisations. It reviewed the different programmes of co-operation in existence — such as the Phare programme of the G24 group of countries, or the OECD's Partners in Transition project — as well as the efforts at regional co-operation among the transition economies.
34. It was generally agreed, however, that the most important contribution to success would be an open international trading system, especially as regards access by transition economies to western markets. In the last forty years, the prosperity of the west — which contrasted so starkly with the absence of prosperity in the command economies — depended vitally on a liberal regime for international trade.
35. The international trading system now finds itself at an important juncture. North America and western Europe are engaged in ambitious ventures of regional trade liberalisation. Similarly, the recently concluded Uruguay Round negotiations will have profound effects for the kind of world which the countries of central and eastern Europe are seeking to join.
36. Moreover, while public and private sector financial transfers from west to east have an important part to play in rebuilding post-communist Europe, they risk proving relatively futile unless accompanied by functioning trade. Only through trade can hard currency be earned to service debts, and prosperous economies have a chance of emerging in central and eastern Europe.
37. The potential for a reorientation of trade towards western Europe is there. A number of central and eastern European countries have seen the share of their exports to the European Union rise from 20% to 25% in 1989 to over 50% today. Indeed, despite the unprecedented burden of political and economic transformation — and notwithstanding the critical situation in several key areas such as production, employment, the welfare system and declining real wages — foreign trade is among the bright spots in the transformation process.
38. As stressed by several speakers, the reforming countries have liberalised their external trade with considerable speed — and this at a time of a dramatic shrinking of the domestic economy and internal demand, and of a collapse in their main export markets of previous times.
39. In fact, growth, production and trade patterns of all the central and eastern European economies depended heavily (if to different degrees) on intra-regional trade within the Council for Mutual Economic Assistance (CMEA or "Comecon"). Their total exports accounted for 20% to 40% of their GDP. Considering that from half to two-thirds of these exports were sold within the region, the disappearance of 10% to 30% of their GDP can be attributed exclusively to the collapse of Comecon. An upheaval on this scale would have created huge problems even for far more developed economies. (One can only guess at the kind of economic measures that, say, Austria or the Netherlands would have had to consider if they had lost their German market overnight.)
40. Following the collapse of Comecon, some of the central and eastern European economies carried out a fundamental realignment of their trade from east to west. Whereas total OECD imports from all sources grew by 16% from 1989 to 1991, Poland's exports to the area went up by 63%, Czechoslovakia's by 59% and Hungary's by 48%. At the same time, imports to central and eastern Europe from the European Union increased even faster. The main destination for the exports was the European Union, especially Germany but also Italy. These two countries now account for some 70% of east-central Europe's trade with the European Union.
41. Improved, although far from complete, market access and relatively strong import demand on the part of the European Union and EFTA countries have made the trade reorientation of the transition economies easier. In this context, the EFTA free trade agreements, together with the Association Agreements which six countries (Bulgaria, the Czech Republic, Hungary, Poland, Romania and the Slovak Republic) have with the European Union (the "Europe Agreements") could play an important role in integrating them into the world economy.
42. It is, however, increasingly believed that these treaties do not take sufficiently into account the dramatically changed and still fluid situation in post-communist Europe. They are considered to be more a reward for political and economic changes already undertaken in central and eastern Europe, rather than sufficient to help further continued economic and social modernisation. For instance, agriculture is a vital sector in all the transition economies and one with considerable export potential, but the coverage in the trade agreements of this field hardly meets the expectations of the countries concerned (a fact which will not surprise us, considering the agricultural overproduction in western Europe).
43. Moreover, new types of protectionism are emerging in the European Union to restrict imports from the east. Anti-dumping procedures and special safeguards are replacing the so-called "ex-ante" obstacles (tariffs and traditional quotas). Hence the urgent need to arrive at solutions within a global trading framework also in this domain.
44. Another aspect repeatedly addressed by participants as regards the "Europe Agreements" of the European Union was the absence therein of any clear commitment by the Union to granting eventual full membership to the transition economies, at least certain among them. This, however, would be extremely important, for economic, political as well as psychological reasons. It is generally recognised that the successful economic transformation of southern Europe largely resulted from the clear vision provided through the European Union. The new democracies of central and eastern Europe are, however, in a far more difficult situation, and their plight would require similar vision today.
45. As stressed during the conference, institutionalised regional economic (and political) co-operation among the transition economies would have a strong symbolic impact. In December 1992 the four so-called Visegrad countries — that is the Czech Republic, Hungary, Poland, and the Slovak Republic — took an important step in liberalising trade among them by concluding an Agreement on a Central and East European Free Trade Area (CEFTA).
46. However, the contacts and accords among central and eastern European countries should not be considered as a substitute for their integration into larger settings. Intra-regional trade, for instance among the Visegrad countries, was never very important, and has in recent years fallen by at least 50% in current-price terms, and probably by 70% in volume terms. At present the share of the other Visegrad countries in Hungary's trade is less than 5%.
47. Information about the total amount of financial assistance to central and eastern Europe varies. According to OECD estimates, resources committed by the G24 to the countries of central and eastern Europe (including the CIS countries) in 1991-92 amounted to $ 43 thousand million. Among the major donor countries were Germany ($ 27,5 thousand million), the United States ($ 3,3 thousand million), France ($ 1,7 thousand million), the Netherlands ($ 1,6 thousand million), Canada ($ 1,4 thousand million), Spain ($ 1,4 thousand million), Italy ($ 1,1 thousand million) and Austria ($ 1,1 thousand million). It should be added, however, that more than four-fifths of these gross financial flows has been debt-creating. Portfolio and foreign direct investment to the region was negligible, as were official aid and grants. In fact, in 1991-92 there was a net outflow from most central and eastern European countries because of their large servicing obligations on the foreign debts of the previous regimes and, in some cases, due to capital flight.
48. As stressed during the Helsinki Conference, there is growing criticism at the lack of international co-ordination of assistance to the transition economies. In an exchange of views with the Committee on Economic Affairs and Development in September 1993 Mr Gerald Hinteregger, the then Executive Secretary of the United Nations Economic Commission for Europe, stressed firstly that it was virtually impossible to obtain a clear-cut statistical picture of current assistance efforts. There is also, he said, an element of competition among donors to be the first to support the most prestigious projects, or to use assistance as a tool of penetration by certain favoured economic interests. Donor credibility also, he added, risks being undermined by donors' increasing tendency to term as "assistance" virtually all financial flows to the transition countries — from grants to loans at market conditions. An accurate monitoring of the levels and composition of financial flows to the transition economies is therefore, he concluded, urgently needed in order to improve co-ordination among donors.
49. Mr Hinteregger went on to say that in the field of technical assistance it was crucial to choose the right experts. Although there is considerable agreement on the general need for technical assistance, recipient countries have often questioned the concrete results obtained by western consultancy firms and experts. The latter sometimes give advice without caring to learn about the real problems and needs of the economy studied. Technical assistance is at its most efficient when part of coherent programmes of adjustment drawn up by the recipients themselves.
50. Since domestic demand is sluggish and the prospects for strong and imminent recovery poor, exports will remain the driving force for economic development in central and eastern Europe during most of the decade. The sustainability of exports is therefore a key policy goal of the countries in the region, but there is growing concern whether it can be realised.
51. Even in the most successful central and eastern European countries, figures on the export performance (in relation with western markets) in 1993 are deeply disturbing, with substantial falls in Bulgaria, Hungary and Poland. On the domestic side, concerns about the international environment are compounded by exchange-rate problems, depleted reserves and growing social problems (pressure for higher wages, strikes, social unrest, etc.).
52. To avoid a growing trade deficit that could threaten stability, better access to foreign markets becomes vital. Priority therefore has to be given to the continued opening up of markets for the exports of the new democracies — including for agricultural and other "sensitive products" — by ensuring favourable trade access for them through such bodies as the European Union, EFTA and GATT.
53. Indeed, new sources of economic growth should be sought to keep the reform process on track. Your Rapporteurs deem it a misfortune of historic proportions that the fundamental reforms in central and eastern Europe coincided with a world-wide, and more particularly European, economic recession of the most severe kind. The latter has very much hampered the possibilities of export-based growth and economic restructuring in the transition economies, and of their successful reintegration (that is, after the long hiatus caused by communism) into the world economy.
54. Moreover, the prolonged recession in the established market economies has not only made western governments more cautious about increasing financial assistance to the central and east European countries, but has left them politically less capable of resisting protectionist pressure from sectorial interests at home. This is a particularly threatening development for the central and eastern European countries, where the few signs of recovery in output have largely been in the export sector. Western trade restrictions have not only put that recovery at risk, but threaten to undermine the reform process itself. It should be recognised that restructuring of economic activity, though sometimes painful, is inevitable also in the market economies.
55. The difficulty in achieving this should not be underestimated, for it may put pressure on traditional western European production patterns and attitudes. Yet, the choice of how to shape a new Europe should not be based on old-fashioned concepts, attractive though they may appear to some, but on what kind of Europe is likely to be able better to weather the economic and other challenges of the next century. A western Europe with an unstable central and eastern Europe in its backyard can hardly become competitive on global markets, and will be a weak player also in the political domain.
56. Under a pessimistic — let us hope unrealistic — scenario western Europe might try to rebuild some kind of dividing border across the continent. This would, however, hardly prevent instability from spreading over into it. In addition, it would have disastrous effects on the transition economies, and unknown consequences for Europe as a whole. The need for rapid modernisation of post-communist central and eastern Europe should therefore be addressed as soon as possible.
F. Concluding remarks
57. The first four years of the central and eastern European transformation, the prevailing western approach can almost be termed "defensive". This prudence has been heightened recently by growing uncertainties of the transforming region and the costs of the transformation, and perhaps also by increasing concerns about the sustainability of the western welfare system and the post-war socio-economic status quo. In this report, your Rapporteurs have tried to argue differently, for they are convinced that efficient, clear-cut, predictable and reliable assistance to the modernisation of central and eastern Europe will produce greater benefits also for the developed market economies.
58. Never in history have two adjacent regions — western and central/east Europe — which have such different levels of wealth and which have been closed to one another ideologically, politically and economically for such a long time, been opened to one another so suddenly. However, at the end of the difficult road ahead of us, let us imagine, in the words of the Helsinki Declaration approved at the end of the conference, "the enormous potential for trade and economic development that would result from a "pan-European common market" of some 600 million people", linked by an efficient transport and communication system. This is the direction the Helsinki Conference pointed us in, and this is what we parliamentarians, in the Parliamentary Assembly and in our national parliaments, have to work for.
59. However, the situation is paradoxical in the sense that Europe can offer little in certain areas of the greatest concern to the reforming countries of central and eastern Europe — such as an institutional framework for general economic co-operation, infrastructure development, communications, and transport matters not dealt with within the ECMT (the European Conference of Ministers of Transport, for which the Parliamentary Assembly serves as a parliamentary forum).
60. The Council of Europe would be an ideal forum for general political consultations in such areas, since it is likely soon to embrace all democratic European nations and has a strong, established parliamentary dimension. The idea was raised by several speakers at the Helsinki Conference. Similarly, President Mitterrand's speech at the Council of Europe's Vienna Summit in October 1993 — in which he encouraged the Council of Europe to embrace a more active pan-European role in the economic and related fields — certainly gave support to this thought. The Assembly should in the Rapporteurs' opinion reflect seriously on this idea, especially since it traditionally deals with such matters as economic co-operation, agriculture and transport.
Reporting committee: Committee on Economic Affairs and Development.
Budgetary implications for the Assembly: none.
Reference to committee: Resolution 955 (1991), paragraph 10.
Draft resolution unanimously adopted by the committee on 16 March 1994.
Members of the committee: Mr Holtz (Chairman), Dame Peggy Fenner, Mr Lotz (Vice-Chairmen), MM. Andreoli, Gudmundur Bjarnason, Mrs Blattmann, MM. Bloetzer, Bonnici, Borderas, Mrs Burbiené, MM. Buzatu, Colombo, Davis, Demiralp, Draguiev, Mrs Durrieu, MM. Fabra, Figel, Flückiger, Gjellerod, Goerens, Goop, Gregory, Hagård, Hellström, Kempinaire, Kilic, Kittelmann, Kolár, Konecny, Leers, Le Grand, Malinowski, Mändmets, Mautner-Markhof, Mesoraca (Alternate: Covi), Novak, Pahor, Paire (Alternate: Liberatori), Pavlides, Pinto, Pirinski, Radulescu Botica, Rehn, Rodrigues, Mrs von Teichman, MM. Townend, Uczkiewicz, Valleix, Mrs Verspaget, MM. Vrettos, Wintgens.
N.B. The names of those members present at the meeting are printed in italics.
Secretaries to the committee: MM. Torbiörn and Mezei.
1 1 1. Approved by participants at the close of the Conference "Progress of Economic Reform in Central and Eastern Europe: Lessons and Prospects", held from 2 to 4 June 1993 in Helsinki.