8:01 AM Apr 21, 1997

EUROPE: TRANSITION NEEDS GENEROUS, SUSTAINED ASSISTANCE

Geneva, 21 Apr (Chakravarthi Raghavan) -- While the crises in Bulgaria and Albania have their particularities, and may thus be seen as exceptional, the basic causes including institutional hiatus are present in all transition economies, and overcoming such problems require concerted actions and long-term commitment, according to the UN's Economic Commission for Europe.

In its annual economic survey, the UN regional body notes that in south-eastern Europe, there has been a "marked worsening" in the economic health of the transition economies. In Bulgaria, the deep crisis provoked by erratic economic and financial policies resulted in a 10% drop of GDP and year-on-year inflation exceeding 300%. In Romania while there was relatively strong growth in 1996, this was the result of loose macro-economic policies which by year-end had forced powerful corrective measures. As a result a fall in GDP is expected for 1997.

The two major crises that broke out in 1996 - in Bulgaria and in Albania - and which are still unresolved though progress has been made in Bulgaria -- underlined in a dramatic fashion the fragility of the transition process and how misleading and dangerous it can be to focus on changes in a few macroeconomic variables as indicators of progress, says the ECE.

The growth rate in Albania of 9% and more between 1993 and 1995, and reduction in inflation from more than 200% in 1992 to six percent in 1995 were seen as impressive. And in Bulgaria while inflation remained high, still it had fallen from 300% in 1991 to 33% in 1995, while GDP was rising modestly at 2%.

The immediate events triggering the crises in both countries, and the more general context in which they occurred, differed substantially in each country. Both crises originated in "institutional hiatus" that arose between speedy destruction of the former system of economic organization and the much longer time needed to build new institutions to support a market-based system of coordination.

Developing the new system takes time, and this explains not only why the transitional recession was so deep and long in most transitional economies, but also why rent-seeking, corruption and criminal activities have flourished in the vacuum.

The under-development of the financial sector is a particularly important example of this general problem: without a effective institutional and regulatory framework for banking and financial activities, credit risks will not be undertaken on the basis of commercial evaluation and this lack of financial discipline leads to the financial sector becoming an obstacle rather than a support to sustained economic growth.

This also means effects of stabilization tend to be short-lived and, for the majority of the people, costs of adjustment are prolonged and promised benefits are postponed - except for the minority which is enabled to enrich itself through non-market activity, the ECE economists (who were among the few who from inception had cautioned against the big bang approach to a market system in former centrally planned economies).

Because of the extreme nature of the crises in Bulgaria and Albania, and especially the latter in its consequences, the ECE notes that there is a natural temptation to set them aside as special cases.

"But most of the basic elements of these crises are present in one form or another in all the transition economies, and especially in some of the other economies of south-eastern Europe (the successor states to former Yugoslavia (except Slovenia) and Romania, and most of the CIS. In Central Europe, there are still problems with certain missing or ineffective or underdeveloped institutions, but their general institutional and economic development have advanced to a degree where risks of serious breakdown is now fairly low, considerably less than in south-east Europe.

Very little special allowance was made for the historical legacy (of these countries) when the international community first responded with assistance for the transition economies.

The transition process in south-eastern economies is now in a very vulnerable position, the ECE cautions. A significant degree of liberalization of trade and prices, including interest rate and credit allocation, has been achieved in several of them, but the institutional structures needed for these newly-released market forces to operate in a socially optimal manner is highly deficient.

And one of the most crucial institutional weaknesses lies in the banking and financial systems. The "pyramid" schemes in Albania were only exceptional in the scale on which the population invested in them, and with dramatic economic, social and political consequences of their collapse.

But essentially these are a symptom of "institutional hiatus" -- lack of sound financial institutions and instruments for placing savings, and lack of effectively regulation to proscribe certain types of financial practices and limit systemic effects of financial failure.

"The naive and credulous willing to gamble their savings on promises of gain which exceed all reasonable degrees of probability are not concentrated in south-east Europe; they are to be found not only in all the transition economies but in all the western economies as well," the ECE comments.

Reform of the financial system is thus at the top of most programmes for reform and the financial and technical assistance programmes of IFIs. But the fragility of the financial sector is closely bound up with the slow development of the private sector and lack of other institutions to support the market economy. In addition urgent measures are needed to restore macroeconomic stability.

Recent developments have highlighted not only lack of mechanisms and institutional safeguards, but also the danger that setbacks in the economy can rapidly degenerate into a broader social and political crisis which is extremely difficult to control.

The two open crises (in Bulgaria and Albania) raise important issues not only for policy makers in all the transition economies, but also for countries and institutions in a position to provide assistance. They also bring to the forefront of public debate a number of questions relating to goals and methods of providing assistance to countries which still face considerable problems not only in escaping from the transition trap but also in nurturing democratic institutions and forms of government.

Overcoming these problems require concerted action and long-term commitment both on the part of policy markets in the transition economies and of the international community, as well as a more generous, better focused and much speedier delivery of assistance - technical and financial.

Without such assistance, the results of further crises may be even more chaos and destruction, with severe spill-over effects on neighbouring countries in the first instance, and eventually on the rest of Europe.