July 2009 – Impacts of the economic crisis and policy response suggestions for the CIS and Eastern Europe. Considers the socio-economic effects of the downturn and how this will affect ‘good governance’ in the region.
The Regional Impact of theGlobal Economic CrisisThe socio-economic dimensions of the global economic crisis inEurope and the Commonwealth of Independent States (CIS) arethe focus of this issue of Development and Transition. Wheredoes the crisis leave the ‘good governance’ agenda that hasbeen the dominant paradigm for development since the 1990s?
Anders Åslund leads off by arguingthat, while governments and interna-tional institutions have managed tocontrol the contagion effects, theeurozone should be expanded toinclude Estonia, Latvia, Lithuania, andBulgaria, as well as Denmark. MarekDabrowski suggests that, in thelonger term, a return to the ‘gover-nance’ agenda of economic and insti-tutional reforms, both nationally andinternationally, will increase globalgrowth. Saul Estrin strikes a similarnote in arguing that transitionprocesses in the region are not yetspent, and the crisis is unlikely to fun-damentally alter regional and global economic integration (theprincipal drivers of transition). However, these processes seemlikely to be accompanied by greater elements of state directionand regulation going forward. For example, Anja Shortlandargues that bank nationalization can help retain savings, partic-ularly when the regulation of private banks is of poor quality.
The Baltic states–formerly poster children for rapid reform andfiscal rectitude–have been among the most severely affected inthe region. In comparing the Baltic economies’ post-1990 devel-opment patterns to those of the Nordic economies during 1945-1970, Rainer Kattel argues that the Nordics’ macroeconomicpolicies helped pave the way for long-term innovation, and
growth, financed by domestic savings. By contrast, the Balticstates’ macroeconomic policies seem to have produced a caseof ‘globalization gone astray’. Kattel suggests that the Balticeconomies after the crisis will continue to have an unstable char-acter, as small domestic savings pools will combine with fixedexchange rates to create ‘Ponzi scheme’ risks in external finance.
Balázs Horváth calls for policies that address the crisis’s individ-ual components–and their links to such longer-term develop-ment challenges as climate change, demographics, and migra-
tion. Nick Maddock and LovitaRamguttee point out that, whereasremittances globally may decline by5-8 percent in 2009, the drop inEurope and Central Asia could betwice this magnitude. Louise Sperlsuggests that such shocks could exac-erbate the gender-specific effects ofthe crisis, in such areas as employ-ment, social protection, health, andeducation, as well as migration. AikanMukanbetova outlines some of thesethreats in the case of low-incomeKyrgyzstan. Andrey Ivanov thereforecalls for a response to the crisis thatwould remove incentives for exces-sive consumption and financial lever-
age, while emphasizing health, education, and social protectionas per the human development paradigm.
The global economic crisis has led to predictions of mass mobi-lization and protest in Central and Eastern Europe, as well asother regions (e.g., Latin America). Previous studies havefocused on the persistence of protest in the latter region andpatience in the former. In comparing recent protests in the tworegions, Olga Onuch concludes that, although economic crisescan be triggers, other socio-political factors are critically impor-tant determinants of mass mobilization.
James Hughes and Ben Slay
JULY 2009
Published by the United Nations Development Programme and the London School of Economics and Political Science
www.developmentandtransition.net
A l b a n i a A r m e n i a A z e r b a i j a n B e l a r u s B o s n i a a n d H e r z e g o v i n a B u l g a r i a C r o a t i a C y p r u s C z e c h R e p u b l i c F Y R M a c e d o n i a G e o r g i a H u n g a r y K a z a k h s t a n K o s o v o ( S e r b i a ) K y r g y z s t a nL a t v i a L i t h u a n i a M a l t a M o l d o v a M o n t e n e g r o P o l a n d R o m a n i a R u s s i a n F e d e r a t i o n S e r b i a S l o v a k i a S l o v e n i a T a j i k i s t a n T u r k e y T u r k m e n i s t a n U k r a i n e U z b e k i s t a n
Implications of theglobal financial crisisfor Eastern Europe
Anders Åslund
The current global financial crisis is the worst the world hasseen since the Great Depression, 1929-33. It has hit Centraland Eastern Europe harder than any other region of theworld. Its forecast drop in GDP this year is about 4 percent,and at least Latvia and Ukraine are likely to face double-digitdecline.
Until fall 2008, the East European countries had enjoyed a won-derful decade with an average growth rate of the whole regionof 7-8 percent a year thanks to three factors. First, in the 1990sthese countries had undergone a successful transition to marketeconomies, with deregulation, privatization, and financial stabi-lization. Second, they benefited from vast underutilized real andhuman capital. Third, their exports drove growth through inter-national integration and global boom.
But overheating was apparent since 2006, when my colleague atthe Peterson Institute for International Economics, MorrisGoldstein, warned that Eastern Europe would be the focal pointof the next financial crisis because of large current account
deficits, large foreign debt, currency mismatches, and mis-aligned exchange rates.
Eastern Europe was making one classical policy mistake. Manycountries had fixed exchange rates, notably Estonia, Latvia,Lithuania, Belarus, Russia, Ukraine, and Bulgaria. The illusorysafety of the pegged exchange rate attracted large inflows ofshort-term lending from European banks. The currency inflowsboosted the money supply, and inflation surged with moneysupply growth from 2006. The inflation was worst in Ukraine,peaking at 31 percent in May 2008.
The temptation for international banks was irresistible. They couldlend to consumers in Ukraine for 50 percent per annum with min-imal financing costs. But this was a dangerous speculativescheme. The foreign exchange inflows accelerated imports andboosted balance-of-payments deficits. High inflation priced coun-tries with fixed exchange rates out of the market. Sooner or later,they would be forced to cut costs by devaluation or other means.
In the summer of 2008, the whole region was overheating mas-sively. Real estate prices had spiraled out of control, but even sofew premises were available. Salaries of young professionalswere outlandish, as skilled labour was desperately scarce. Yetstock markets were already plummeting, indicating that some-thing was seriously wrong.
On 15 September 2008, Lehman Brothers went bankrupt, andfinancial markets throughout the world froze up. Suddenly,
2
DEVELOPMENT &TRANSITION
Type of IMF programmeCountry Poverty Reduction Exogenous Shock Stand-by Flexible Credit
and Growth Facility1 Facility2 Arrangement3 Line4
Armenia $540 millionBelarus $2.46 billionBosnia and Herzegovina $1.52 billion5
1. The Poverty Reduction and Growth Facility is the IMF's low-interest lending facility for low-income countries.2. The Exogenous Shocks Facility provides policy support and financial assistance to low-income countries facing exogenous shocks.3. The Stand-by Arrangement is designed to help countries address short-term balance of payments problems. 4. The Flexible Credit Line is for countries with very strong fundamentals, policies, and track records of policy implementation and is particularly useful for
crisis prevention purposes.5. Subject to IMF Board approval
Source: International Monetary Fund. For more information please visit www.imf.org.
Lending by the International Monetary Fund in response to the global economic crisis
JULY 2009 | issue 13
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Eastern Europe found itself with little or no international finance.In early October, the first countries, Ukraine and Hungary,applied for fresh financial support from the InternationalMonetary Fund (IMF).
The unprecedented global boom had left the IMF dormant, butit quickly woke up and agreed on new stand-by agreements forUkraine, Hungary, and Latvia. Other countries with new IMFagreements are Georgia, Belarus, Serbia, and Romania. Polandhas concluded a precautionary arrangement, and Turkey andArmenia are about to make new IMF agreements. Presumably, afew more countries will follow.
By and large, the East European financial crisis of 2008-9 resem-bles the East Asian crisis of 1997-8. The fundamental problemthen and now was excessive inflows of short-term bank credits,enticed by pegged exchange rates, leading to large private for-eign debt. Public finances, by contrast, were mostly in excellentshape with the exceptions of Hungary and Romania, which hadsignificant budget deficits but only Hungary had a worrisomepublic debt.
The domestic vulnerabilities were aggravated by the worstfinancial panic in our lifetime. Capital fled to the perceived safehavens – gold, dollar, euro, yen, and Swiss Franc. Even theBritish pound and the Swedish krona plummeted. A financialpanic is a market failure that needs to be cured by the state, andinternationally the IMF is supposed to provide countervailingfinancial flows.
The IMF acted fast and well. In the East Asian crisis, the IMF wasperceived as excessively intrusive, adding many demands forstructural reforms to its traditional agenda. This time, the IMFreturned to the more elementary Washington Consensus cureof the early 1990s. Essentially, the IMF posed three demands: abudget close to balance, a realistic exchange rate policy, andbank restructuring with recapitalization. In return for the fulfill-ment of these conditions, the IMF offered far larger loans thanpreviously.
As the crisis erupted, excellent ad hoc cooperation developedbetween the IMF and the European Commission (EC). The IMFhad the staff, rules and procedures for handling a financial crisis,while the EC had neither, so it conceded and assisted instead. TheEC has co-financed the IMF programmes for Hungary and Latvia,and several European countries, notably the Scandinavians, con-tributed with substantial financing to the Latvian programme.
Three other international institutions have played a substantialrole, namely the World Bank, the European Bank forReconstruction and Development, and the European InvestmentBank. Their main focus has become bank recapitalization.
One of the greatest worries has been that the West Europeanbanks that had bought most East European banks would with-draw from the region. So far, no European bank has done so, andthe peak of the crisis has hopefully passed. In Ukraine, 17European banks with subsidiaries in the country have even com-
mitted themselves to recapitalize their Ukrainian subsidiarieswith $2 billion in 2009.
Exchange rate policy has become the focal bone of contentionin the new stabilization programmes. The pegs were clearlycauses of the crisis, but that does not necessarily mean that theyshould be abandoned in the midst of a crisis. If a country deval-ues, its banks could be squeezed on all sides. The local cost ofthe loans the banks had taken abroad would sharply rise, andmany would default. Their domestic customers that had takenloans in foreign currency would also be unable to repay them,with their revenues in the devalued currency.
Hungary and Romania had floating exchange rates, whichplunged along with the floating rates of other currencies notfacing a crisis, such as Poland and the Czech Republic. The IMFforced Ukraine to float and Belarus to devalue, but the Balticstates offered a stumbling block. They have long tied their cur-rencies to the euro, in hopes of adopting the euro as early as2006–hopes that were frustrated by the rising inflation rates thattook hold during 2007-2008. As Latvia still aspires to join theeuro in 2012, it opposes any devaluation.
For a small open economy that is extremely flexible, devaluationwould hardly solve any problem, while the banking systemwould collapse, causing many bankruptcies and wreaking havoc.The Latvian government, supported by the Scandinavians andthe EC, offered to undertake an ‘internal devaluation’ by cuttingsalaries and public expenditure as much as was necessary. TheIMF accepted with astonishment Latvia’s severe austerity pro-gramme as an alternative to devaluation. Although economicresults so far have persistently been worse than forecasted, Latviais cutting as much as it takes.
For Eastern Europe, the G-20 meeting on 2 April was vital.Hitherto, the IMF only had $250 billion of funds, which could eas-
ily run out. In London, the G-20 agreed to quadruple IMF’s fundsto over $1 trillion, giving it enough money to keep EasternEurope out of any liquidity trap. As a consequence, EastEuropean bond and stock markets rallied in April; the devastatedUkrainian stock market was the best performing stock exchangein the world, reporting a rise of 70 percent in a month. TheLondon summit may mark the end of the acute crisis in EasternEurope, even if more IMF programmes are to be expected.
Many worried that the crisis would cause social unrest andeven regime change, but so far unrest has been very limited.People appear to understand the severity of the crisis anddemand forceful action. Four crisis countries have changedgovernments in the last half year. Lithuania and Romania hadparliamentary elections late last year, and their new govern-ments are more free-marketeering than their predecessors. InLatvia, the most liberal party has joined the center-right coali-tion government and taken the lead in explaining to the pub-lic why wage and expenditure cuts are needed. In Hungary,
admittedly, one socialist prime minister has replaced another.By and large, the East European politics have responded ade-quately to the crisis.
The big question mark is how the EC and the European CentralBank will adapt to the crisis. The EC has sensibly increased its bal-ance of payments fund for member states from €12 billion lastsummer to €50 billion, and it has given large credits to Hungary,Latvia and Romania. Yet the ECB has done very little. It shouldprepare for the expansion of the eurozone to the most faithful –Estonia, Latvia, Lithuania and Bulgaria as well as Denmark. Itshould also develop its own bonds and broaden the range of itsavailable tools. For the eurozone, the current crisis is a greatopportunity which must not be missed.
Anders Åslund is a senior fellow at the Peterson Institute forInternational Economics. Together with Andrew Kuchins, he has co-authored the book The Russia Balance Sheet (Washington D.C.:Peterson Institute for International Economics, 2009).
Responding to crisis:core and periphery
Marek Dabrowski
From prosperity to crisisIn the new millennium the world economy, especially itsemerging-market part, experienced an unprecedented periodof prosperity, with most countries growing at high or veryhigh rates regardless of the quality of their economic policies.This global boom could be partly attributed to policy reformsin a number of important countries and regions in the last twodecades, and progress in global trade liberalization (theresults of the Uruguay Round). However, it was also stimulat-ed by highly accommodative monetary policies in the UnitedStates and elsewhere, which responded to fears of recessionand deflation by drastically cutting interest rates in 2001-2002and then keeping them at record-low levels for too long.Likewise, many emerging market economies pursued neo-mercantilist policies by keeping their currencies undervaluedand building up large precautionary foreign exchangereserves, which they saw as the best insurance against a cur-rency crisis (a view that was shared by the InternationalMonetary Fund (IMF)).
These policies led to the accumulation of excessive liquidity inthe world economy, which in turn caused global overheatingand the growth of the housing bubble in the United States andseveral European countries, stock market bubbles, and com-modity market bubbles. The bursting of these bubbles destabi-lized the financial sector in the United States and in other devel-oped countries. As with the prosperity that preceded them, thefinancial crisis and recession have a truly global character.According to a recent IMF projection, the world gross productmay contract in 2009 for the first time since the 1930s.
The crisis started in summer 2007 at the core of the world econ-omy, in the US financial system. It then moved to WesternEurope and Japan, finally hitting the periphery (i.e., developingand transition countries) at the end of 2008. The September2008 bankruptcy of Lehman Brothers, one of the largest USinvestment banks, was a turning point, which deepened the cri-sis and accelerated its spread to parts of the world that had notyet been affected.
In addition to monetary policy miscalculations, institutional, reg-ulatory, and microeconomic factors contributed to the eruptionand depth of the crisis. The absence of international macroeco-nomic (monetary) policy coordination and the lack of supra-national financial supervision of the world’s highly integratedfinancial markets were perhaps some of the most serious sys-temic inconsistencies. Also, national financial supervision wasoften too lax and did not have sufficient tools to follow newfinancial products. Its traditional sectoral segmentation leftfinancial supervision unable to keep pace with the rapid cross-sectoral integration of financial institutions, as was apparent inthe construction of such large financial conglomerates as AIG.Pro-cyclical prudential regulations (Basel 2 has an even strongerpro-cyclical character than Basel 1), risk assessment methodolo-gies that were unable to follow financial innovations, and wrongincentives schemes (e.g., remuneration of management basedon short-term profit, fees for rating agencies paid by clients) alsocontributed to market distortions, and exacerbated both boomand bust phases of the business cycle.
How have emerging economies been hit by the crisis?The direction of this crisis’s contagion (from ‘core’ to ‘periphery’)stands in contrast to the 1997-1998 emerging market crises,which started in Asia, then spread to Russia, the Commonwealthof Independent States (CIS), and Brazil and finally hit some USfinancial institutions. The present crisis is closer to that of theGreat Depression of the 1930s or the US dollar crisis in the 1970s.Emerging economies were therefore relatively late victims. They
JULY 2009 | issue 13
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continued to grow through most of 2008 thanks in part to highcommodity prices, until their crash in late summer of 2008.Ultimately, they were hit by the contraction in global demandand falling commodity prices, the global liquidity squeeze andthe resulting capital outflows and increasing risk aversion,sometimes by troubles in parent financial institutions in devel-oped countries, increased exchange rate volatility (includingcompetitive depreciation of major trade partners and competi-tors), and decreasing demand for migrant labour. The second-round effects may involve, among others, banking sector trou-bles resulting from clients’ insolvency caused by recession anddepreciating exchange rates.
Policy responses: core andperipheryConcrete responses must reflectnational economic circumstances andavailable resources. However, thereare some general recommendationswhich all countries should try to fol-low. First, they should avoid protec-tionist measures and beggar-thy-neighbour policies, which could deep-en the global recession (as occurred inthe 1930s). Second, they should resisttemptations to nationalize and perma-nently expand the public sector, whichmay lead to decreasing productivity,excessive fiscal burdens, the politiciza-tion of business activity, corruption,and rent-seeking. Nationalizationshould be seen only as a temporarysolution, and only for banks and otherfinancial institutions of systemic importance, and only whenother options for rescue/recapitalization are unavailable. Ineach case a clear exit strategy should be foreseen from thevery beginning.
Many countries must return to structural and institutionalreforms that were forgotten during the time of prosperity, inorder to soften the consequences of the crisis and increasegrowth potential after the crisis ends. Such packages ofreforms must be tailor-made to address the specific condi-tions in each country, but they could involve a greater labour-and product-market flexibility, measures to improve businessclimates, fighting corruption, privatization of remaining state-owned enterprises, and rationalization of social policies.Financial supervision should be overhauled both on nationaland supra-national levels (both inside the EU and globally).The same can be said for the global and regional coordinationof macroeconomic policies, and bringing the Doha trade lib-eralization round to a successful conclusion. The recent G-20decisions to recapitalize the IMF and World Bank, broadentheir mandates, and rebalance voting power in favour ofdeveloping countries are quite hopeful in this respect.
However, countries belonging to the ‘core’ of the world econ-omy have different roles and resources in conducting anti-cri-
sis policies than do countries at the ‘periphery’. These aremost apparent in terms of currencies, only some of which(such as the US dollar, the Euro, and, to lesser extent, theJapanese yen, Swiss frank, and British pound) serve as a glob-al means of exchange, unit of account, and store of value.After the collapse of financial intermediation (and associatedreduction in the money multiplier) following the LehmanBrothers bankruptcy, economic agents increased theirdemand for base money issued by the largest central banks.Despite their previous policy excesses, these banks had tomeet this demand–as is shown in Figure 1 below. The key
questions are how far to go with this monetary expansion,how to withdraw the monetary stimulus when the risk ofdeflation gives way to the risk of inflation or stagflation, andwhat to do with bad assets accumulated by some centralbanks (like the US Federal Reserve) in the course of aggressivequantitative easing.
The economies of the ‘periphery’ face other challenges: declin-ing demands for their currencies both reflect and lead to mas-sive capital outflows and exchange rate depreciation, whichcould trigger bankruptcies of enterprises, consumers andbanks that are indebted in foreign currency. Aggressive mone-tary easing to help the real sector can therefore accelerate theflight from the domestic currency and exacerbate the effectsof the crisis.
Things are even more complicated in the case of fiscal policy.The global fiscal stimulus proposed by the IMF is unrealistic inlight of countries differing borrowing constraints–especiallyin times of market distress. Excessive fiscal easing ineconomies of the ‘periphery’ with limited fiscal space canraise the spectre of default. But even those countries that arein a better starting position (with smaller public and foreigndebts, or larger fiscal reserves, as is the case with oil produc-ers) and better market reputation should think twice before
choosing aggressive fiscal stimulation. First, many of thesewill face a huge fiscal challenge related to aging populationsin the coming decades. Second, while initiating a fiscal stimu-lus is politically easy, stopping or withdrawing it is much moredifficult. Third, fiscal stimulus packages often involve dangersof explicit or implicit trade protectionism. Finally, a large-scalefiscal stimulus could mean crowding out private sector activi-ties or claims on resources that are badly needed by develop-ing countries.
Despite these risks, ‘core’ economies have no alternative to tak-ing fiscal responsibility for repairing the global financial systemand helping ‘peripheral’ economies to resist downward pres-sures on their currencies. Without repair of the global financialsystem, the timely end of the recession is very unlikely.
Looking ahead: the world after crisisThe quality of crisis management will determine its length andseverity, as well as post-crisis economic prospects. While noone can accurately predict the length, depth, and conse-quences of the crisis, the study of business cycles shows that itwill end at some point and the economy will start growing.Let’s hope that major countries will avoid protectionist temp-tations and that global economic governance will be strength-ened. If this optimistic scenario holds, the main achievementsof globalization during the last three decades would remainintact. However, there is little chance that the world economywill grow at the pace experienced earlier in this decade.Macroeconomic policies in major economies will have to beless accommodative, and the financial sector less leveragedand more risk-averse. There are no new major sources of pro-ductivity gains apparent on the horizon. It is also clear thatboth ‘core’ and ‘periphery’ economies will face stronger fiscalconstraints, which will require serious adjustments in publicexpenditure policy. A return to economic and institutionalreforms, both nationally and internationally, may be the bestchance to increase global growth potential.
Marek Dabrowski is President of CASE - Centre for Social andEconomic Research, Warsaw.
0 5 10 15 20 25
Tajikistan
Uzbekistan
Turkmenistan
Kyrgyzstan
Turkey
Azerbaijan
Kazakhstan
Albania
Moldova
Armenia
FYR Macedonia
Russia
Belarus
Serbia
Georgia
Romania
Slovakia
Lithuania
Estonia
Ukraine
BiH
Poland
Latvia
Hungary
Bulgaria
Czech
Croatia
Slovenia
Percentage of population
2000 2025
Transition after the crisis
Saul Estrin
IntroductionTransition, a process that has been followed for almost 20 yearsnow by the former socialist economies of Central and EasternEurope, entails a shift from an economic system characterizedby public ownership and (usually) central planning to one inwhich economic coordination is provided to privately ownedfirms via markets. The socialist systems delivered slow growth,macroeconomic imbalances and political repression; transitionpromised high growth, mass consumption, integration with
the developed economies of the West and political freedom.Most of these promises have been brought into question by thecredit crunch of 2008 and the subsequent economic crisis,which seems likely to have even more savage corollaries in2009 and beyond in many transition economies.
This article considers the ways in which the principal drivers oftransition–for example, EU and global trade integration, or for-eign direct investment–are likely to be affected by the reces-sion. Transition can be viewed as one element in the broaderprocess of globalization, so our analysis also ponders whetherthis will be temporarily or even permanently halted by the eco-nomic downturn. It also considers in more detail some of thelikely implications of the recession for the transition economies,noting that the impact is likely to be more serious in somecountries (i.e., Estonia, Hungary, or Bulgaria) than others (i.e.,
Chart 2. Population cohorts aged 65+ will be much larger by2025, causing long-term fiscal challenges
Source: World Bank staff calculations, based on United Nations 2005.
JULY 2009 | issue 13
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Poland, Czech Republic, and Russia). This is a consequence ofthe particular transition path that they chose, for example withrespect to the speed of privatization, openness to foreign directinvestment, and degree of integration with the EU, as well asbeing significantly affected by initial conditions, notably mar-ket-related reforms pre-transition and natural resource endow-ments. It concludes that the convergence between developedand transition economies will probably resume, although per-formance may become more heterogeneous, for examplebetween EU and non-EU members, and within the CIS betweenresource-rich and resource-poor economies.
Transition, globalization and the credit crunchTransition is usually conceived in an evolutional and uni-dimensional way, with a clear view of the starting and finishingpoints as well as the path. Thus, transition programmes tend-ed to represent the rapid application of Washington consen-sus programmes to economies that were not always lessdeveloped, but which had some of the characteristics ofunderdevelopment: weak market supporting institutions, highlevels of state intervention and price regulation, and very lim-ited integration into global product, service, or capital markets.But radical formal changes in, for example, ownership arrange-ments or property rights laws did not necessarily imply imme-diate substantial changes in practice. In particular, the chang-ing and creation of institutions and the promotion of efficientprivately owned enterprises and of independent financial insti-tutions proved difficult, with achievements measured indecades rather than years, and a variety of political and eco-nomic approaches emerged as a result. As the EBRD Transitionindicators show, success in building a market economy, and innational economic performance, even during the years ofboom, was heterogeneous, being influenced by integrationinto the world trading system (notably EU accession); owner-ship of significant natural resources; or highly favourable pre-conditions (e.g., some liberalization pre-transition and a broadpolitical consensus in favour of the reform process).
Some of the drivers of globalization and success in transitionare rather similar. Because of differences in factor costs,notably labour, profitability can be increased by the transfer ofproduction from developed to developing countries, providedcosts in terms of management and control, transport, tradebarriers etc., are not too high. In fact, these costs have beenfalling for a number of reasons. Developments in informationand communication technologies have reduced the costs oftransacting abroad; while some developing economies havebegun to address those weaknesses in their institutional, legaland policy environment which affect the costs of doing busi-ness in their countries. The global policy environment hasbeen benign, promoting an enormous expansion in worldtrade, foreign direct investment and outsourcing.
These drivers are also associated with the transition process.Many transition economies were not exactly developingcountries (though GDP per capita was well below Westernlevels) but had similarly high barriers to trade and capitalflows, though often with greater levels of human capital.
Moreover, if ‘distance’ represents a way to describe barriers totrade and foreign direct investment, raising both transportcosts and the costs of doing business in unfamiliar surround-ings, then abolishing communism reduced ‘distance’ formany transition economies, especially those bordering theEU. Finally, the liberal policy environment was valuable tomany transition economies in allowing them to reorient theirtrade patterns back to market-based pre-communist norms.
The first two drivers seem unlikely to alter. Technologicalchanges are irreversible and likely to continue despite the cred-it crunch; and while performance has been heterogeneous, thegeneral direction in at least the most advanced transitioneconomies has been for entrenchment of institutional reform.While it is early to evaluate the impact of the credit crunch onthe policy environment, the tone of the international debatesuggests that the lessons of the 1930s have been learned. Inany case, for the transition countries which have acceded to theEU, Brussels is the pivot of the policy environment.
Convergence or divergence?An economy’s ability to weather the storm depends both onits condition when the turbulence began, policies adopted inresponse, and on how long the turbulence lasts. Communismcollapsed in part because it could not deliver growth in livingstandards comparable to developed economies; and transi-tion will largely be judged by whether it has managed toreverse that divergence in GDP per capita. We consider therecord in Charts 1-4 which show the level of GDP per capita (inpurchasing-power-parity terms) as a percentage of the EU-15average in the relevant year. The data are derived from theIMF. The groups of countries are the 10 EU Accession transitioneconomies (Chart 1), remaining non-EU Central Europeancountries (Albania, Bosnia, Croatia, the Former YugoslavRepublic of Macedonia, and Serbia) in Chart 2, former SovietUnion economies including Russia but excluding the Baltics(Chart 3); and Russia (Chart 4). The bars in each chart are for thefirst year when data are available, 2001 and 2008 respectively.
The process of convergence began at very different levels andhas been heterogeneous. For the new EU members, GDP percapita increased slowly but steadily from 1993 to 2008, reach-ing some 50 percent of the EU-15 average. The other CentralEuropean economies started from a lower base and have
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Chart 1. Eu New 10
Note: The vertical axis denotes the level of GDP per capita (PPP) as a percent-age of the EU-15 average.
1993 2001 2008
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DEVELOPMENT &TRANSITION
closed the gap more slowly. Russia suffered grievously in the1990s with a deep recession, but has restored its position andis now around 40 percent of the EU average, largely becauseof favourable resource price trends. However, transition hasbeen less successful in convergence terms in other CIS coun-tries, where starting from a very low base the situation deteri-orated between 1994 and 2001, though the gap has closed alittle since then. This group’s GDP gap vis-á-vis the EU is thelargest in the region.
In this context, the credit crunch is likely to impact differentiallyto exacerbate the pattern in the charts. Thus, for countries thatare integrated into European production and trade systems, therecession in Western Europe is likely to be amplified in the shortterm because of their relatively greater role in supplying inputsfor European exports, for example in the vehicles sector. Thismay be partially offset by the increased incentives to reduce costby transferring production offshore. Foreign and public sectorindebtedness is also important, as this will restrict policyresponses to the crisis. For example, countries which ran largestructural public sector deficits like Hungary will be constrainedin their policy response; while countries heavily reliant on over-stretched foreign banks, like Latvia, may suffer more sharply inthe global credit crunch. Thus, the Czech Republic and Polandmay fare better than Hungary or Estonia. Interestingly, these dif-ferences are not well correlated with transition preconditions orthe varying speeds or types of reform, but rather with recentmacro-economic policy stances. However, EU membership,international support, and significant institutional moderniza-tion suggest that convergence will resume, in some cases afteran interval. Russian growth is closely correlated with resourceprices, but the high level of reserves gives considerable degreesof policy freedom and, as in most EU transition countries, con-vergence is also unlikely to slow significantly for long. The great-est dangers are for the other European and CIS economies thatdisplayed very slow convergence during the boom. Some ofthem have fragile economic and political environments.
ConclusionsFor most transition economies, the process of transition, likethat of globalization itself, is likely to resume once the currentcrisis in developed economies is past. However, in the interim,some of the transition economies are likely to suffer rathermore than the developed economies, implying that for someyears the convergence process may go into reverse. Thesecountries are likely to be those in the Balkans and formerSoviet Union, rather than the new EU member states orRussia. However, some EU members will suffer more than oth-ers depending on the state of their public finances and inter-national indebtedness. Moreover, whether the threats to con-vergence are short term or long, they may present seriouschallenges for the already relatively fragile political and insti-tutional structures in these countries.
Although it is too early to judge, the fundamental forces drivingglobalization are seen not to have been altered by recentevents. Even so, as the discussions at the April G20 summit inLondon indicate, when growth resumes it seems likely to take amore regulated form. This suggests that the transition processwill then become re-established, certainly in the moreadvanced and stable economies, although perhaps also withgreater emphasis on state direction or regulation than hitherto.
Saul Estrin is Professor of Management and Head of theDepartment of Management at the London School ofEconomics. He would like to thank Angela Lei for research assis-tance and Mario Nuti, Milica Uvalic and the editors for helpfulcomments on an earlier draft.
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Chart 2. Other Central Europe
2000 2001 2008
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Chart 4. Russia
1992 2001 2008
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Chart 3. Former Soviet Union (excluding the Baltics)
1994 2001 2008
Note: In each chart the vertical axis denotes the level of GDP per capita (PPP)as a percentage of the EU-15 average.
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A case for nationalizingfailing banks
Anja Shortland
The partial nationalization of banks in the current crisis hassucceeded in preventing financial meltdowns in both matureand developing financial markets. As the recession destabi-lizes banking systems in the transition economies, govern-ments will have to decide how to react. It currently appearsthat for historical reasons many governments are reluctant toengage in the (re-) nationalization of banks. However, govern-ment ownership of banks can play an important role in retain-ing savings within the financial system when private banksare insufficiently well regulated and supervised to keep exces-sively risky behaviour in check. Moreover, empirical evidenceshows that arguments about the detrimental effects of gov-ernment ownership of banks on economic growth have seri-ous flaws. Governments in transition economies should there-fore seriously consider nationalizing failing banks, and not betoo hasty in privatizing newly acquired or any remaining gov-ernment-owned banks.
In a recent paper published in the Journal of DevelopmentEconomics, we question the well established ‘political view’ ofgovernment banks.1 This states that politicians take overbanks in order to use them for political purposes, such asdirecting credits to ailing state-owned enterprises. Such loandecisions are seen as being economically inefficient and slow-ing economic growth. When the loans are no longer serviced,bank balance sheets are compromised and financial instabili-ty may result. Indeed cross-country correlations showed an
association between government ownership of banks andslower growth as well as financial crises.2 Until recently, gov-ernment ownership of banks was widely criticized in the fieldof economics and privatization was strongly advised or evenmade a condition for loans from international financial institu-tions. Consequently, the transition economies reduced theaverage share of total assets managed by government-owned banks from 100 percent in 1989 to 33.5 percent in1999 then further to just 10.2 percent in 2005.3 In the currentfinancial crisis, the transition economies have largely opted forbalance sheet support, changes in reserve requirements andloan guarantees, and with the exception of Latvia have so faravoided the nationalization of major banks.
Our research challenges the unambiguously negative view ofgovernment-owned banks. We focus on the importance ofgovernment ownership in preventing the withdrawal of fundsfrom the financial system when private banks behave oppor-tunistically and are badly supervised. Deposit insurance, whereit exists, is never perfect. Personal deposits are only guaranteedup to a certain maximum; and if a bank fails, financial compen-sation may take some time. Businesses, local government andcharities might find themselves altogether without access tovital funds. For example in the banking crises of the 1990s‘large’ losses were imposed on Estonian and Latvian depositorsand ‘minor to moderate’ losses on Russian and Lithuaniandepositors.4 Therefore, if bank regulation is perceived as weakand deposit insurance is limited or nonexistent, government-owned banks may be perceived as a ‘safe haven’ by risk-aversedepositors. The government is highly likely to honour savers’local currency deposits in its banks: it is politically preferable torepay depositors rather than default on the deposit contract–the money for such bail-outs can be printed if necessary. Agood example of depositor preferences informed by mistrust
of the private sector is Russia. The state savings bank,Sberbank, still attracts more than half the retail deposits in thecountry, despite its lower deposit rates.
In our paper we develop a theoretical model in which the gov-ernment-owned bank competes with the private sectorbanks. The government bank may not be particularly efficientor provide a good service, but its special status guaranteesthat the bank will not fail, and that it will provide continuousaccess to local currency deposits. Private sector banks on theother hand may be either ‘honest’ or ‘opportunistic’. The lattertype of bank will swindle depositors out of their money,unless they are closely regulated and monitored by the gov-ernment. Demand for deposits in the government-ownedbank therefore depends on whether depositors trust the reg-ulatory institutions that govern the behaviour of privatebanks. If the regulator imposes strict licensing laws, demandshigh disclosure standards and strictly monitors and enforcesprudential standards, all banks behave honestly and there isno need for a government-owned bank. At the other extreme,the presence of unchecked opportunistic behaviour by pri-vate banks results in a complete preference for the govern-ment-owned bank by all depositors.
While our paper was written with developing countries in mind,recent events have shown that the same principles apply to thedeveloped world. During the financial crisis of 2008, revelationsabout private sector banks’ unscrupulous or incompetentbehaviour with regard to investing in opaque, high-risk assetschanged depositors’ perceptions about regulators’ ability tocheck opportunistic behaviour among banks. Following thecollapse of Lehman Brothers, the sudden threat of further large-scale financial sector bankruptcies created huge demand forsavings accounts in nationalized banks such as Northern Rockin the UK, even though these institutions offered lower interestrates than the rest of the banking system. Northern Rock in theend was forced to turn away potential depositors.
Thus, governments in several developed countries wereforced to offer to take large equity stakes in any fragile finan-cial institution to prevent bank runs and hence the wholesalemeltdown of their financial systems. These recent events alsomake it easy to see why the evidence that has been offered tosupport political theories of government ownership is prob-lematic. The positive correlation that arises in a cross-countryrelationship between government ownership of banks andfinancial crises frequently reflects reverse causality: privatebanks that fail end up under government ownership becauseno other investor would buy them, and the political costs togovernments of allowing banks to fail are often too high.Moreover, the financial crises that precede governmenttakeovers of banks are normally followed by a severe reces-sion, or at least slow economic growth. To ascribe the blameto governments is like arguing that hospitals are the causes ofill health because they are associated with illness. To claimthat government banks should be privatized on the basis ofsuch evidence is like arguing that by closing down hospitalsyou can improve the health of the general population.
Our 2008 paper uses data taken from 108 countries in a WorldBank survey of banking practices and regulation. We show thatthe proportion of assets controlled by government-ownedbanks is higher in countries with weaker regulatory institutionsand with a previous history of banking crises, so that financialfragility precedes nationalization. Our research shows that reg-ulatory quality and disclosure are inversely related to govern-ment ownership of banks, while political variables are not sig-nificant. This supports our assertion that government owner-ship is often the symptom of regulatory weaknesses ratherthan the desire of politicians to control banks.
Following this strand of thought we re-examine the empiricalevidence on the effects of government-owned banks on eco-nomic growth.5 Once we control for the quality of governance(regulatory and bureaucratic quality, protection of propertyrights, corruption, etc.) the effect of government ownership ofbanks on economic growth is no longer significant. This is aclassic case of ‘omitted variable bias’. As government owner-ship of banks is correlated with low quality of governance, itwill act as a proxy for the quality of governance in models ofeconomic growth which omit this important variable.Furthermore our results suggest that since 1995, the presenceof government-owned banks has had a positive effect on eco-nomic growth, when we take the quality of governance intoaccount. This suggests that the positive effect of governmentbanks on mobilizing savings in imperfectly regulated financialsectors on average outweighs any adverse effects that mayarise from potentially politicized decisions reflected in theirloan portfolio.
This research has two policy implications. First, nationalizationof failing banks should not be avoided at all costs.Government ownership does restore fragile depositor confi-dence. Equally important, the threat of nationalization sends abetter signal to managers than tacit balance sheet support offailing private-sector banks. Insuring banks against risky loandecisions encourages opportunistic behaviour in the future.Secondly, if government-owned banks are privatized withouta sound institutional infrastructure in place, investors maysimply withdraw their money from the banking system alto-gether. Top priority should therefore be given to rebuildingregulatory institutions to contain opportunistic behaviour bybanks and to regain public confidence. When depositors trustthe private banks again, government-owned banks will slow-ly lose market share as depositors look for attractive offerselsewhere.
Anja Shortland is a Lecturer in the department of Economics andFinance at Brunel University (United Kingdom).
1. Andrianova, S.; Demetriades, P. and Shortland, A. ‘Government Ownership of Banks,Institutions and Financial Development’. Journal of Development Economics, 2008. Vol. 85,Issue 1-2, pp. 218-252.
2. Finance for Growth: Policy Choices in a Volatile World. (Oxford: Oxford University Press, 2001). 3. Beck, T., Caprio, G and Levine, T. World Bank Research Databases: Bank Regulation and
Supervision. http://go.worldbank.org/SNUSW978P0.4. Laeven L and Valencia F. Systemic Banking Crises: A New Database. IMF Working Paper
WP/08/224 (2008). http://imf.org/external/pubs/ft/wp/2008/wp08250.pdf.5. Andrianova, S.; Demetriades, P. and Shortland, A. Is Government Ownership of Banks Really
Harmful to Growth? University of Leicester Discussion Paper 09/11 (2009).
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The rise and fall of theBaltic states
Rainer Kattel
‘Globalization gone astray’The story of the Baltic states’ economic development sinceregaining independence in 1991 seems almost too self-evi-dent to tell. The small open economies were flushed withforeign capital, became overleveraged, and are now pay-ing the price. After exhibiting double-digit growth ratesduring the past decade, the ‘Baltic tigers’ have also becomerecord-setters in the negative direction, being the firstcountries to enter an economic depression in 2009.
The rise and fall of the Baltic countries therefore make anexcellent case study in financial fragility under globalizedproduct and financial markets. This is ironic, in that themacroeconomic policy framework of the Baltic economieswas in many respects created to avoid the financial fragili-ty to which small open (and developing) economies areparticularly vulnerable. This article argues that this policymodel was based on fundamental misunderstandings, andas such was bound to create enormous fragility for theBaltic states, with or without a global financial meltdown.Since the Baltic countries can be seen as case studies in‘globalization gone astray’, they can offer valuable lessonsfor post-crisis reconstruction, for developing countries andthe global rules of finance as well.
This article compares these countries to the Nordiceconomies in the postwar era–economies that oftenseemed unstable but on the whole have been spectacularlysuccessful–while linking technological change and innova-tion to the question of financial fragility. Whereas the Nordiceconomies have been extremely good at hedging or social-izing risks for long-term research and development (R&D),innovation and industrial modernization, the Balticeconomies of the 1990s and 2000s hedged or socialized risksfor short-term consumption and asset booms. The formerlearned to manage financial fragility and long-term growth;the latter have no options left to manage enormous fragilitybrought into the system by short-term rapid growth.
Financial fragility and technological changeThe concept of financial fragility or instability in the inter-national economy originates from Keynesian economictheory and has been further developed in the works ofHyman Minsky1 and Jan Kregel.2 The basic idea is relativelystraightforward: a free-market economy is inherentlyunstable because stability itself leads to the relaxation offinancial due diligence (lower margins of safety) that inturn engender excessive risk taking. As a growing numberof businesses are unable to meet their financial commit-ments, financial instability or fragility, and possibly finan-cial crises, arise.
Minsky argues that there are three distinct financing posi-tions for business units in a free-market system: hedge,speculative, and Ponzi finance. These positions are definedaccording to a business unit’s ability to meet its financialcommitments. In a hedge position, cash flow from operat-ing activities is enough to cover all outstanding debts andother financial commitments (i.e., these are successfullyhedged). In a speculative position, cash flow does notcover all commitments, so the business unit must sell someassets, cut costs or borrow, in order to meet the commit-ments. In a Ponzi position, a business unit’s commitmentsare larger than assets owned; in essence, the unit is insol-vent because ‘financing costs are greater than income’.3
In order to compare the postwar Nordic economies withthe post-1991 Baltic economies, it is important to under-stand that these economies operated in very differenttechno-economic paradigms.4 The postwar era was charac-terized by the mass-production paradigm, based on hugehierarchical organizations and long-term planning thatwere directed both at creating stability in production andreaping economies of scale and scope. Growing real wagesand living standards that guaranteed stable consumptionpatterns became part of this paradigm, which was perfect-ed by the small Nordic welfare states during the 1960s andthe 1970s.
The new information-and-communication-based techno-economic paradigm that came into full force in the 1990sengendered key changes in production processes inalmost all industries, in the form of outsourcing and theresulting geographical dispersion of production functions.These changes enabled very fast growth in foreign directinvestment (FDI) inflows and industrialization (e.g., interms of growth rates of manufactured and high-techexports) in many developing countries. However, in manycases the outsourced activities do not exhibit the samedynamics that were seen in the originating countries, suchas fast and sustained productivity growth, growing realwages, forward and backward linkages–but rather theopposite.5 Thus, growth in high technology exports indeveloping countries does not necessarily imply industrial
Source: International Monetary Fund. The asterisk denotes a forecast.
Boom and bust in the Baltics
15
10
5
0
-5
-10
-15
Average annual GDP growth rates for the Baltic states
2003 2004 2005 2006 2007 2008 2009*
Perc
ent
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DEVELOPMENT &TRANSITION
dynamism with significant increasing returns and forwardand backward linkages.6 The failure to fully understandthese technological changes was a key fallacy in the eco-nomic policy model chosen in the Baltic states.
Nordic vs. Baltic modelsDuring the post-war Bretton Woods international financialsystem (which lasted until the early 1970s), most Nordiceconomies operated under policy regimes that featuredwage agreements, closed capital markets, strong relianceon commodity exports (wood, iron, fish), rapid industrial-ization financed by domestic bank loans, and productivitygrowth.7 This resulted in strong growth both in wages andprofits, but also in inflation, and thus in periodic losses ofexport competitiveness due to high wages. Such a situa-tion corresponds to a highly speculative position, as theloss of export competitiveness reduces abilities to meetfinancial commitments (by both private and sovereign bor-rowers). The typical response was to return to a hedgeposition by increasing export competitiveness via devalu-ing the national currency. As devaluation hit both profitsand wages, such a managed boom-bust cycle was alsosocially accepted. This approach avoided prolonged finan-cial fragility via the adoption of Ponzi positions.
Such a policy framework created strong incentives for(high-risk) innovation at the company level as it socializedthe risk of sliding into Ponzi positions via mechanisms toabsorb internal and external shocks. In addition, undercontinuous wage growth and welfare state regulations,domestic markets kept expanding, creating opportunitiesto further diversify the economy (inter alia into high-techproducts like mobile phones, beginning in the 1980s). Thiscorporatist model also created high policy and administra-tive capacity for industrial modernization, education, R&D,and other policy areas.
The Washington Consensus policy framework pursued bythe Baltic economies after 1991 emphasized avoidingmacroeconomic instability and boom-bust cycles from thevery beginning. They sought to create stability and inter-national trust through currency pegs, very open traderegimes, balanced budgets, low tax and administrativeburdens, and generally the weakening of labour power tonegotiate wages. This allowed for fast economic restruc-turing via FDI.8 However, such an environment created fer-tile grounds for short-term asset booms, so that largeamounts of foreign investment and private lending wentinto financing consumption and real estate, particularly inthe past decade. This drove wage growth into double-digit territory and placed the Baltic economies in the samekind of speculative position as the postwar Nordiceconomies faced, where rapid wage growth threatenedexport competitiveness and endangered their ability tomeet all liabilities.
However, a key difference between the postwar Nordiceconomies and the Baltic economies in the past decade is the
large amounts of private borrowing in the Baltic economiesthat is done in euros, not in local currencies–mostly via for-eign banks operating in these countries. The most drasticcase is Estonia, where by 2008 nearly 100 percent of thebanking sector was foreign owned. Essentially, the Balticeconomies used global financial markets–via Nordic banksoperating in the Baltics–to fund short-term production andasset booms. Moreover, low value-added outsourcing activi-ties devoid of significant returns to scale and scope, play alarge role in the composition of Baltic exports–limiting possi-bilities for local diversification through forward and back-ward industrial linkages. In addition, many export industries,being part of international value chains, pay for their inputsin euros as well.
These features essentially preclude devaluation, whichwould hit wages, input prices and consumption in theBaltic states. Rather than leading the Baltic economies backto a hedge position, a devaluation would reinforce thespeculative position: new financing (investments, borrow-ing) would be needed in order to meet current commit-ments and finance future investments. New foreign fundswould have to be attracted through lower taxes, weakerlabour regulations, and the like–thus further reducing thescope for investments into such productivity-enhancingactivities as engineering education and R&D.
The enormous current account deficits and external debtburdens (reaching up to 400 percent of foreign exchangereserves in Latvia in 2008) meant that the Baltic economieswere rapidly becoming Ponzi schemes. Even without theglobal recession, the Baltic economies needed new borrow-ing and foreign investments to avoid default. The financialmeltdown starting in 2008 almost overnight revealed thePonzi dimensions of the Baltic economic model: invest-ment, borrowing, exports, consumption all dropped withastonishing speed, and continue to drop still. While theadoption of the euro would reduce the foreign exchangerisks facing Baltic companies and households, it would notrepair their balance sheets; nor would it produce the realwage reductions or industrial modernization that couldrestore competitiveness. Euro adoption would insteadtransform exchange rate risk into sovereign default risk. Itwould not change the essentially Ponzi financing positionin which the Baltic economies now find themselves.
ConclusionComparing the experience of the postwar Nordiceconomies with the Baltic economies yields counterintu-itive results. While the former faced episodes of uncertaintyand fragility characterized by devaluations, labour unrest,and the like, the latter were dead-set from the beginning onhaving a highly stable macroeconomic environment. Yet,the Nordic economies’ apparently uncertain environmentserved as a buffer to stave off financial fragility and pave theway for long-term R&D and innovation. By contrast, theBaltic states’ search for highly stable macroeconomic policyenvironments ironically produced FDI-led restructuring,
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generating lower-end production, construction, and con-sumption booms. The Baltic states lack instruments toaddress the fragility that has been introduced into the sys-tem, other than through increased foreign investment andborrowing which in turn reinforce the longer-term Ponzischeme risks. Moreover, underlying these developments isa weak national innovation system (expressed, e.g., in smallnumbers of patents, and low levels of business R&D spend-ing) that in turn darkens future prospects for exports andsustainable growth. While the much anticipated entranceinto the euro zone would alleviate the immediate danger ofcurrency collapse, financial fragility would continue, via lowproductivity growth, higher sovereign default risk, and alack of policy options for restoring price competitiveness.These countries now face a vicious cycle of asset destruc-tion and debt deflation that could easily take years tounwind.
Rainer Kattel is Professor and Chair of Public Administrationand European Studies, Tallinn Technical University (Estonia).
1. Key works in this context are gathered into two volumes, Minsky H., Can ‘It’ HappenAgain? Essays on Instability and Finance (New York: Sharp, 1982), and Minsky H.,Stabilizing an Unstable Economy (London: Yale University Press, 2008).
2. See in particular ‘Yes, ‘It’ Did Happen Again. A Minsky Crisis Happened in Asia’, TheLevy Economics Institute of Bard College Working Paper, No 234, 1998, available athttp://www.levy.org/pubs/wp234.pdf; ‘External Financing for Development andInternational Financial Instability’, G-24 Discussion Paper Series, United Nations,2004, available at http://www.unctad.org/en/docs/gdsmdpbg2420048_en.pdf;and ‘Financial Flows and International Imbalances: The Role of Catching Up byLate-industrializing Developing Countries’, The Levy Economics Institute of BardCollege Working Paper, No 528, 2008, available at http://www.levy.org/pubs/wp_528.pdf.
3. Minsky, H., Stabilizing an Unstable Economy, p. 231.4. Carlota Perez, ‘Respecialization and the deployment of the ICT paradigm: An essay on
the present challenges of globalization’, in Compañó et al. (eds.), The Future of theInformation Society in Europe: Contributions to the debate (Seville: Institute forProspective Technological Studies, 2006); see also her main work, TechnologicalRevolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages(Cheltenham, UK: Edward Elgar Publishing, 2002).
5. For a detailed discussion and data, see Cimoli, M., Ferraz, J., and Primi, A., Science andTechnology Policies in Open Economies: The case of Latin America and the Caribbean(Santiago, Chile: Economic Commission for Latin America and the Caribbean, 2005);Palma, J., ‘The seven main ‘stylized facts’ of the Mexican economy since trade liberal-ization and NAFTA’, Industrial and Corporate Change, 14 (6), pp. 941-991; and Tiits, M.,Kattel, R., Kalvet T., and Tamm, D., ‘Catching up, forging ahead or falling behind?Central and Eastern European development in 1990-2005’, Innovation. The EuropeanJournal of Social Science Research, 21 (1), pp. 65-85.
6. A somewhat similar conclusion is drawn by Paul Krugman, ‘Trade and Wages,Reconsidered’, 2008, available at http://www.princeton.edu/~pkrugman/pk-bpea-draft.pdf.
7. An excellent overview of post-war Nordic economic policy regimes is Lars Mjoset, ‘TheNordic Economies 1945–1980’, ARENA Working Paper Series, No 6, 2000, available athttp://www.arena.uio.no/publications/wp00_6.htm.
8. See especially Tiits et al, ‘Catching up, forging ahead or falling behind? Central andEastern European development in 1990-2005’.
Towards a multifacetedpolicy response
Balázs Horváth
The global crisis has several inter-related components,and has reached practically all regions and sectors. In aglobalized, interdependent world, countries face a conflu-ence of shocks, both immediate and longer term.Immediate issues to deal with include a strong cyclicaldownturn triggered by massive global imbalances, a deepfinancial crisis with the associated liquidity and creditcrunch, and an unprecedented commodity price roller-coaster. The crisis-induced recession–which will causeworld output to fall this year for the first time in 50years–is being rapidly transmitted to the mostly small,open economies that comprise the Europe and CIS region,calling for immediate policy action. Meanwhile, the worldfaces crucial long-term challenges as well, notablyextreme income inequality, seismic demographic shifts,and global climate change. These challenges also requirea prompt response, in order to avoid rapidly escalatingsocial and economic costs. The social impact of the crisisseems likely to be large, lasting, and unequal.
Falling incomes, disappearing capital inflows, and bindingbudgetary constraints are set to reverse a decade ofprogress towards meeting the Millennium DevelopmentGoals. Past experience shows that it takes considerabletime for employment and real wages to recover after largemacroeconomic shocks, especially if several come hand in
hand. The crisis also hits the poor the hardest, since theyhave limited abilities to adjust and cope. They tend to haveno accumulated savings or assets, and are the first to loseaccess to credit. Moreover, poor households predominant-ly supply unskilled labour, often in the informal sectorwhere job losses are most immediate and severe given thelack of employment protection. The downturns can alsopush poor households into a vicious cycle. Coping by eat-ing less, postponing spending on health and education, orwithdrawing children from school reinforces poverty byundermining future income-earning potential. Such con-ditions may also lead to rising crime rates.
In formulating policy responses, the urgent must not beallowed to squeeze out the important. Horizons typicallyshorten dramatically in a crisis, but policymakers do nothave the luxury of delaying decisions on longer-termchallenges, because any action with a reasonable chanceof success typically has a long time lag. The crisis is alsoan opportunity for getting things right. Vested intereststhat have blocked much-needed reforms have beenweakened. Minds are concentrated, and society’s desirefor decisive action grows, opening the door for policychange.
The best policy response to the crisis combines elementsaddressing its individual components. The fiscal stimulusto support sagging demand, for example, should aim toraise employment, strengthen the financial system, andalso support the introduction and expansion of low-car-bon technologies. Improved targeting of social transfers isneeded to ensure that inequality can be held in checkwithin the available budgetary envelope. Pension, health,
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and immigration reforms are needed to address theexpected consequences of demographic challenges (suchas a rising dependency ratio, and growing health expendi-tures). Action is also needed outside of the budget. Betterregulation of monopolies and financial institutions,improved governance and public-sector transparency,together with avoidance of self-defeating beggar-thy-neighbor trade policies would provide a very useful impe-tus to improved functioning of the market. Legal empow-erment of the poor can help improve lives and alleviateextreme inequality.
Policy inaction would imply higher socio-economic costs.These would accrue over a longer period, and would affectother countries as well. If domestic demand plummetsowing to surging unemployment, other countries see theirexport markets melt away. The permanent and substantialloss in human capital associated with reemerging povertywould lower the entire path of future incomes. Crime mayrise, adding to the list of factors with cross-border repercus-sions, including a greater likelihood of conflicts. But as men-tioned, other factors are also at work. Global climate changethreatens not only the livelihoods, but even the continuedpresence of millions of people in their current homes.Without effective policy responses to strengthen socialsafety nets and address global warming, a tidal wave of eco-nomic migration may occur from poorer countries. Thisstrengthens the already compelling humanitarian case for
international donor support forthe hardest-hit countries.
Two leading examples of requi-site comprehensive policy actionare efforts to widen the tax base,and coordinated action to allevi-ate climate change.
• In many European and CIScountries, the very rich largelyavoid paying taxes. But the crisismakes greater equity in burdensharing essential, and is erodingsocial tolerance for tax evasion.A key governance test in theweeks and months ahead will bewhether countries manage towiden the tax base, or see vitalpublic services go unfunded.
• Global warming necessitatescoordinated increases in taxes ongreenhouse gas emissions, toend the mispricing of carbon thatcontributes to global warming.Without appropriate pricing toforce final users to internalize thecosts of their energy use, privateincentives and the public good
will remain misaligned, and the likelihood of sufficientprogress towards alleviating global warming will remainlow. Governments should therefore be willing to use the fis-cal space created by newly imposed greenhouse taxes toreduce or eliminate the most distortive taxes, thus helpingto create employment and strengthen social safety nets.This requires cooperation and coordination across coun-tries–which is itself a direct consequence of the globaliza-tion that has created a world where domestic policies haveimmediate and considerable international repercussions.
Multilateral and bilateral donors need to coordinate moreclosely, each focusing on areas of comparative advantage.Enhanced coordination promises not only more efficientuse of scarce development resources, but also welcomereductions in the strain on thinly stretched governmentsthat deal with many different donors. UNDP, in particular,has a natural role to play in coordinating the actions of UNagencies. It also has a comparative advantage in providingpolicy advice at the central and local government levels, inadvocacy work, in project implementation in remoteregions, and in working with disadvantaged groups. In thisway, UNDP can help ensure micro-level traction of otherinternational organizations that focus more on central gov-ernment and macroeconomic assistance.
Balázs Horváth is Poverty Reduction Practice Leader at theUNDP Bratislava Regional Centre.
Responding to fallingremittances and returning migrants
Nick Maddock and Lovita Ramguttee
Current estimates suggest that whereas, worldwide,remittances will decline by between 5 percent and 8 per-cent in 2009, Europe and Central Asia will be the mostseverely affected region with a fall of between 10 percentand nearly 13 percent.1 For countries with heavy depend-ence on remittances and migration, the effects of the cri-sis will thus be magnified. Economic migration and remit-tances are important to many transitional countries and,indeed, in 2006, Tajikistan and Moldova received the high-est levels of remittances in the world (as a percentage ofGDP), with Kyrgyzstan in fourth place.2 In addition toexamining some of the recent data on migration andremittances in the region, this article proposes some pos-sible responses to the socio-economic problems that
could result from falling remittance incomes and largenumbers of returning migrants.
Migration and remittances in MoldovaMoldova’s economy has been strongly driven by remit-tances. The number of Moldovans working abroadincreased from some 56,000 in 1999 to 340,000 in 2007(from a population which, in 2007, was 3.8 million).3 Totalremittances were US$ 1.5 billion in 2007 (36 percent ofMoldova’s GDP) and were growing in the first half of 2008prior to the economic crisis.
Migration has mainly been from rural areas. Of themigrants who, in 2006, were abroad, had recently beenabroad, or who planned at that time to migrate, 38 percentwere from Chisinau (the capital city) and other urban areas,while 62 percent were from rural areas or small towns offewer than 10,000 people.4 Some 67 percent of those whowere abroad at that time were from rural areas.5 Manymigrants are young, with an average age of 35 in 2006 andover 37 percent aged below 30. Further, of those who in2006 were planning to migrate, over 44 percent werebelow 30 years.6
Nearly 52 percent of the Moldovans abroad in 2006worked in Moscow, with 59 percent in Russia as a whole.Italy received the second largest group of migrants (17percent). The number of migrants from Moldova in CIScountries (principally Russia) has increased sharply inrecent years, especially in the construction industry.
Effects of returning migrant and remittance shocksFalls in remittances and the large-scale return ofmigrants could add pressures which, even in the contextof the severe downturn, are not felt, or felt to a lesserextent, in the region as a whole. In practice, the trend inremittances may take time to become clear. And whilethere are likely to be downward pressures, there is alsoevidence that, worldwide, remittances tend to beresilient and to fall less sharply than might be expectedin a downturn. This is partly because sums sent home areoften small (typically around 5 percent of income) withthe result that payments can often be sustained evenwhen incomes fall.7 Further, remittance flows are domi-nated by payments from long-standing migrants who,because they are often well established in their place ofmigration, may be better placed to find alternativesources of income if they lose their job.
In addition, female migrants working in the caring pro-fessions will probably be less affected by the downturnthan male construction workers. The effects of demo-graphic change in Western Europe and North America
and high domestic costs of care of the elderly mean thatdemand for female migrants in the caring professions islikely to be sustained even in a downturn and may thuscontribute to the resilience of remittances.
Remittances will nonetheless shrink if people, havinglost their job, then return home (although there may bea short-term increase as those returning repatriate sav-ings). The return of migrants, may, however be laggedand so turn out to be gradual rather than a major wave.This is partly because of migrants’ adherence to theplace of migration, usually because the bureaucratic andstart-up costs associated with migrating are substantial.Migrants’ commitment to stay may be further strength-ened by new immigration controls with, for example,Australia, the United States, Spain, Italy and Malaysia allrecently imposing new regulations.8
The effects of falling remittances are likely to be feltnationwide but, where (as in Moldova) migration hasbeen principally from rural areas, it seems probable thatthey will be felt disproportionately there. If so, there isthe prospect of increases in rural poverty. This wasalready a concern in Moldova, despite good growth per-formance between 1999 and 2004 which moved 40 per-cent of the population out of poverty, representing thelargest reduction in poverty (in percentage terms) in theEurope and Central Asia region over this period.9
Nonetheless, about 26 percent of the Moldovan popula-tion in 2007 remained poor, with about two-thirds of the
poor living in rural areas.10 A similarly rural concentrationof impacts from returning migrants is likely if there is dis-proportionate return to rural areas. This conclusion must,however, be tempered by evidence that migrants haveused remittances to buy urban residential property11
and/or if migrants return to urban areas because of bet-ter job prospects.
Disproportionate deterioration in youth unemploymentis also possible. While youth unemployment is compara-tively low in some, although not all, countries with highmigrant populations,12 this has been achieved partlythrough exporting labour in the form of migrants. Withopportunities for migration diminished, young peoplewill be forced to rely on domestic labour markets at atime of falling labour demand. There they will have tocompete with returning migrants, who may have betterskill sets (by virtue of having worked overseas) and moreextensive experience. In other words, a generation of‘frustrated migrants’ is likely to be created amongst theyoung, at the same time as competition is increasing indomestic labour markets. The resulting possibilities forsocial unrest are evident.
Rural poverty effects may also be exacerbated by transi-tion in agriculture, which in many transitional countrieshas served as a safety net,13 providing subsistence andcash income from fresh sales or lightly processed prod-ucts. Labour inflow to rural areas now threatens to clashwith agricultural commercialization that is making agri-culture more of a business than a safety net or a way-of-life.14 Indeed, in Moldova, the combination of labour out-flow from agriculture in recent years (with linked growthin labour productivity), low rates of agricultural growth,and rising rural poverty all argue against the capacity ofagriculture now to re-absorb unskilled labour.15
Possible responsesThe likelihood of disproportionate effects on rural areassuggests geographical targeting of responses, which arelikely to be both short- and medium-term. The formerwill principally seek to mitigate the immediate shocks,while actions in the medium- and longer term will beaimed at avoiding further deterioration in rural povertyand achieving improved labour market outcomes. Inaddition, however, labour supply actions will also berequired in addressing youth unemployment.16
In the short run, providing temporary safety netsthrough public works would help cushion both thereturn of migrants and those newly unemployed domes-tically. Finding suitable public works which are consis-tent with participants’ skills has often been a problemwith such measures in the past, but this may be lessenedwhere a significant proportion of returning migrantshave building skills (as seems probable given the declinein construction in the region).17 The speed of responsemay also be increased by building on existing donor-
funded and managed programmes which already haveimplementation structures in place.18
In the medium term, increasing employment in the non-farm rural economy is likely to be essential. Indeed, the cur-rent underdevelopment of this sector in transitioneconomies offers opportunities for growth and labourabsorption. Ironically, limited access to finance in ruralareas before the crisis may have had the advantage of mak-ing growth in the rural non-farm economy less dependenton bank lending than in other sectors, since there is little orno experience of reliance on cheap credit.
Growth is likely to come from two sources: small enter-prises in the service sector in the form of small-scale,low-barrier-to-entry enterprises; and food processing.But while there has been growth in rural service indus-tries in many countries, de novo agroprocessing has beenslow to emerge. Further support to the development offood processing may therefore be required. Poor invest-ment climates are a major contributor to underperfor-mance but, in addition, agroprocessors are generallysmall and, like most small firms in transitional countries,face constraints in finance, management, marketing,logistics and corruption. Importantly, they also faceproblems of technology and, although small-scaleaffordable technology exists (principally from Chineseand Indian suppliers), small processors in the regionrarely have the opportunity to buy from these sources.Partly as a result, use of second-hand machinery, withattendant problems of reliability and quality, is wide-spread.
Combating rural poverty may also require labour supplyinterventions, particularly if the effects of the crisis aredisproportionately felt by young people. The youngalready face the usual labour market disadvantages oflack of experience and employers’ distrust. Many coun-tries have programmes aimed at youth entrepreneur-ship, with the aim of allowing young people to pursuealternative careers. Complementing this with internshipand retraining programmes may be necessary if sharpincreases in youth unemployment rates are to be pre-vented.
Nick Maddock is Rural Development Policy Specialist for theUNDP Bratislava Regional Centre. Lovita Ramguttee isAssistant Resident Representative for UNDP Moldova.
1. Migration and Development Brief (Washington, D.C.: World Bank, 2009). No.9 (23 March 2009).2. Ratha D., and Xu, Z. Migration and Remittances Factbook (Washington, DC.: World Bank,
2008). www.worldbank.org/prospects/migrationandremittances.3. Estimates of the number of migrants vary and the National Development Strategy
2008-2011 shows that, in 2005, there were 295,000 migrants and 310,000 in 2006. 4. Remittances in the Republic of Moldova: Patterns, Trends and Effects. (Chisinau:
International Organization for Migration, 2007). http://www.un.md/key_doc_pub/IOM/Remittances_eng.pdf.
5. There were nonetheless signs that, prior to the crisis, this trend was changing and thatthere was a shift to migration from urban areas, with a greater proportion fromChisinau and provincial towns planning to work abroad. This suggests that the skillsmigrants needed was changing and/or that the supply of migrants from rural areaswas being exhausted.
18
DEVELOPMENT &TRANSITION
The crisis and its consequences forwomen
Louise Sperl
As pointed out by many experts and organizations,1 theeconomic crisis will have serious consequences for women.More significantly, the crisis will hamper progress made sofar in achieving gender equality.2 Even though the globalfinancial crisis is still unfolding, and it is too early to antici-pate its full social implications,3 the crisis seems likely toaffect women in such areas as employment and social safe-ty networks, unpaid care work, health, education, migra-tion, and also in terms of gender violence. Lessons from the1997 crisis in Asia, when many low-income households fellswiftly and deeply into poverty,4 should be taken intoaccount when formulating responses to the current crisis.In Russia, for example, women are often in low-paying,low-level public-sector jobs. They have experienced signif-icant discrimination in the private sector, with low sharesof the high-paying jobs in that sector. Women have alsomade up the bulk of the long-term unemployed.5 Such vul-nerability could easily deepen as the crisis unfolds. In addi-tion to formulating macro-level policies, responding tothese challenges requires reaching out to the most vulner-able and marginalized, including women.
Employment and social safety networksMen and women may be affected differently because ofgender-specific inequalities in labour markets and prevail-ing norms about men and women’s role in the economyand society. The notion that men are the ‘breadwinners’ ofa family may lead to unequal treatment of men and
women in terms of dismissal, social security entitlementsand rehiring.6 Women may therefore bear the brunt of eco-nomic hardship–being the first to lose their jobs, or beingforced to take on more work, or work longer hours whenmale breadwinners lose their jobs. Furthermore, womenoften constitute the majority of temporary, casual, season-al and contract labourers, and low-skilled workers, unlikelyto be covered by formal unemployment insurance or socialprotection schemes. For example, in Kazakhstan, limitedaccess to the financial resources necessary for formal busi-ness activities pushes women into self-employment andsmall-scale commercial activities in the informal sector.7
Female-headed households are more likely to be at great-est risk, with few if any savings to weather the crisis, andlimited ownership of wealth and other assets. In developedand middle-income countries, men are better positionedto weather the crisis. They have higher paying jobs, moreassets and wealth. Their jobs are more likely to offer unem-ployment insurance and other benefits. Women’s jobs paylower wages, in part because women are more likely tohave part-time employment.
Men and women migrant workers are likewise affected bythe crisis (as well as their families back home),8 in terms ofreductions in household incomes and inadequate socialprotection. However, the scale of female migration is oftenunder-reported, and with it the impact on families depend-ent on their wages for survival. On the other hand, womenmay find themselves in an even more vulnerable positionwhen they return home, rejected by their communitiesand families and perceived as prostitutes. 9
Other challenges related to women’s economic and social statusThe quality and access of health services may deterioratesignificantly as a consequence of the crisis. During difficulttimes, families often rely on women for care for the sick,
6. See International Organization for Migration (2007), op.cit.7. See The Economist. 21-27 February 2009, p.74.8. Migration and Development Brief. (Washington D.C.: World Bank.) 23 March 2009.9. Ibid. p. 5.10. Moldova: Poverty Update. (Washington D.C.: World Bank, 2006). Report No. 35618-MD.
11. See International Organization for Migration (2007), op.cit.12. Recent years have seen improvements in employment prospects for the young in
Moldova. Youth unemployment (in the 15-24 age group) has been declining and, at14 percent in 2007, is low by European standards. (See Black Sea Labour MarketReviews: Moldova Country Report. (Brussels: European Training Foundation, January2009.)) This rate is comparable to youth unemployment in Britain (14.5 percent in2006) and better than the levels in France (22 percent in 2006) and Romania (nearly20 percent in 2005). Long-term youth unemployment (i.e., for 6 months or more) hasalso been decreasing (from 46 percent of the young unemployed in 2006 to 35 per-cent in 2007). Youth unemployment is also low in Kazakhstan (14 percent in 2004)and Albania (nearly 13 percent in 2005), with both countries having high migrantpopulations. This is not, however, the case in Bosnia and Herzegovina and the FormerYugoslav Republic of Macedonia, both of which have high youth unemploymentrates (58 percent and 60 percent, respectively) despite their high migrant popula-tions. See http://www.indexmundi.com/romania/youth-unemployment-rate.html.
13. Davis, J. ‘Rural non-farm livelihoods in transition countries: emerging issues and poli-cies’. eJade electronic Journal of Agricultural and Development Economics (2006), vol. 3,no. 2, pp 180-224. www.nri.org/projects/rnfe/index.html. See also Csaki, C. andLerman, Z. Agriculture transition revisited: issues of land reform and farm restructuringin East Central Europe and the former USSR. Washington D.C.: World Bank, 2000).
14. Davis (2006), op.cit. p.186 and table 1 (p.187).
15. This is particularly marked in Moldova, given the concentration of production inlarge-scale farming agglomerates and the consequent limited individualization ofagriculture. Such farms are more highly mechanized than family farms and so requireless labour. Further, the business ethic of farming agglomerates argues againstlabour absorption at low rates of labour productivity, particularly given that workersare paid employees. In contrast, because of farm size, family farms are lightly orunmechanized and workers are predominantly unpaid family members. But theirminority share of agricultural production and cultivated area means that the capaci-ty of family farms to absorb significant amounts of the newly unemployed is likely tobe low.
16. In contrast, in addressing rural poverty, it is not proposed that UNDP support shouldbe provided to vocational training or agricultural production. Donor-funded supportin these areas is already considerable and argues against UNDP involvement. Thisnotwithstanding, many of the development partners are in the process of reviewingtheir programmes in the context of, and in response to, the crisis. As a result, thescope and focus of development assistance to Moldova could change significantly inthe coming months. Policy notes currently being compiled by the World Bank mayinfluence this.
17. A new dimension of public works, the opportunity to tailor public works to envi-ronmental concerns through ‘greening’ has appeared. In this context, they couldaddress the challenges of unemployment whilst at the same time working toincrease public buildings’ energy efficiency and to reduce natural disaster risks,through construction activities associated with flood and drought mitigationprojects.
18. For example, in Moldova, there are UNDP interventions in active labour markets thatsupport the establishment of social integration centres and vocation formation andinformation services, which may now be upscaled to include youth internship pro-grammes.
JULY 2009 | issue 13
19
elderly, and extended family. This means longer workhours and heavier work loads for women–many of whomare already employed outside the home.10 This ‘socialreproduction’ work, which is not realized through themarket and is therefore not counted in GDP, is more likelyto present women with difficult choices about reconcilingintra- and extra-household labour.11 Girls in poor countrieswith low education attainment rates are also more likelyto be pulled out of school as households cope with declin-ing incomes.12 School attendance during times of crisistypically declines; some children may never return toschool. Another concern relates to recent evidence sug-gesting that incidences of abuse and violence againstwomen increase during periods of socio-economic crisis.13
Indebtedness, labour migration, or changes in breadwin-ners’ roles create additional stress in families, which canlead to abuse of drugs and alcohol, domestic violence, andin extreme cases, suicide. While often being the perpetra-tors of this abuse, men may also be more likely to experi-ence personal difficulties in such periods, partly becausetheir abilities to perform traditional roles within the familyare challenged.14
Responding to the crisisWith its human development approach, UNDP is well posi-tioned to take a lead in addressing the human conse-quences of the economic and financial crisis. It can advocate
for policies that create economic and social support mecha-nisms that safeguard the poor and marginalized against thenegative consequences for human development. Such anapproach will also reduce the vulnerability of the poor andmarginalized–including women–against future crises.
Thus, support for social protection is required, along withappropriate macroeconomic policies.15 Investments insocial infrastructure (inter alia to improve care for children,the elderly, sick and disabled), and in jobs that improvesafety, social cohesion, and quality of life are extremelyimportant in this context. Economic stimulus packagescould reduce unpaid care work through focusing on localservice delivery. Examples of women-friendly employmentschemes include public employment projects that areclose to home and provide for child care, flexible workinghours, home-based production, paid care work, and sharedemployment (i.e., reducing working hours rather thaneliminating jobs). Microcredit schemes have become aproven method for supporting women entrepreneursengaged in small-scale production. However, empower-ment cannot be assumed to be an automatic outcome ofmicrofinance programmes.16
Strengthened global partnerships will be needed to avoidany reversal of progress made thus far. In the realm of gen-der equality, it is even more important in these difficult
economic times not to cut budgets for aid and social safe-ty nets, but to promote job creation, which is important forsocial inclusion and stability.
Louise Sperl is Programme Specialist for the Gender Team atthe UNDP Bratislava Regional Centre.
1. See for example the 53rd Session of UN Commission on the Status of Women, March2009; World Bank, The Global Financial Crisis. Assessing Vulnerability for Women andChildren, 2009b; Sylvia Walby, Gender and the Financial Crisis. Paper for UNESCO Projecton Gender and the Financial Crisis, April 2009.
2. The progress is apparent when one compares the 2006 and 20008 Global Gender GapIndexes for Eastern Europe and the CIS. According to such a comparison, 77 percent ofthe countries have improved their ranking. Extracted and compiled fromhttp://www.weforum.org/pdf/gendergap/report2008.pdf.
3. Written statement submitted by Shamika Sirimanne to the Interactive Expert Panelof the Commission on the Status of Women, 53rd session on the Emerging Issue: TheGender Perspectives of the Financial Crisis, 2-13 March 2009, p.2. http://www.un.org/womenwatch/daw/csw/csw53/panels/financial_crisis/Sirimanne.format-ted.pdf.
4. Ibid., p 7.5. UN Committee for the Elimination of Discrimination Against Women (CEDAW),
Concluding Observations of the Russian Federation, CEDAW/C/2002/I/CRP.3/Add.3.The reporting period also covered the period of the financial crisis in Russia in 1998.See http://www2.ohchr.org/english/bodies/cedaw/docs/co/RussiaCO26.pdf.
6. Ibid., p.5.
7. MDG Report Kazakhstan 2007. http://www.undg.org/docs/9238/MDGR_eng.pdf.8. See Mihail Peleah, ‘The Impact of Migration on Gender Roles in Moldova’, Development
and Transition (8), December 2007, pp.14-17.9. Tutnjevic, T. Working Paper 9: Gender and Financial/Economic Downturn. International
Labour Office, 2002, p8. http://www-ilo-mirror.cornell.edu/public/english/employ-ment/recon/crisis/download/wp9.pdf.
10. Sirimanne, p.5.11. Sakiko Fukuda-Parr, The Human Impact of the Financial Crisis on Poor and
Disempowered People and Countries, 2008, p5.http://www.un.org/ga/president/63/interactive/gfc/sakiko_p.pdf.
12. Buvinic, M. Written Statement submitted to the Interactive Expert Panel of theCommission on the Status of Women, 53rd session on the Emerging Issue: The GenderPerspectives of the Financial Crisis, 2-13 March 2009, p3. (Washington D.C.: WorldBank).
13. Heyzer, N., and Khor, M. ‘Globalization and the way forward’, Development Outreach‘Speaker’s Corner’ (Washington D.C.: World Bank, 2009).
14. For more on this, see Ashwin, S., ‘Adapting to Russia’s Transition: Men and WomenCompared’, Development and Transition (8), December 2007, pp. 19-21. See also ILO,Working Paper 9: Gender and Financial/Economic Downturn, 2002. p.8.
15. Fukuda-Parr, p.6.16. For further details see ILO, Micro-finance and the empowerment of women. A review of
the key issues. http://www.ilo.org/public/english/employment/finance/download/wpap23.pdf. While microcredit schemes can secure a certain livelihood for womenand their families, increasing their sustainability and effectiveness requires combin-ing such schemes with business skills development for women entrepreneurs as wellas policy measures to facilitate the involvement of central and commercial banks toscale up women’s enterprises.
Responding to the economic crisis in Kyrgyzstan
Aikan Mukanbetova
Crisis impactKyrgyzstan is one of the three members of theCommonwealth of Independent States (CIS) to be classi-fied by the World Bank as a ‘low income country’. AlthoughKyrgyzstan has reported economic growth virtually everyyear since 1996, the large declines in output during the firstyears of independence combined with population growthhave left per-capita GDP in Kyrgyzstan well below levelsreported at the end of the Soviet period. Although therehave been remarkable successes in reducing poverty (fromabout 63 percent in 2000 to 35 percent in 2007), thisprocess has not been simple. The main engine for povertyreduction was the growth of private consumption (remit-tances from emigrants). The average rate of growth in pri-vate consumption from 2003 to 2007 was 17 percent.1
Figure 1. Poverty trends in Kyrgyzstan2
However, Kyrgyzstan’s consumption boom may now becoming to an end. GDP growth, which was measured at8.5 percent in 2007 and 7.6 percent in 2008, is forecast bythe IMF to drop to under 1 percent in 2009. Combinedwith the sharp increases in food and energy pricesreported during these years (see Table 1), growing short-ages of electricity,3 and the significant reductions inremittances anticipated in 2009, this slowdown couldmean significant increases in poverty, and real hardship,for thousands of vulnerable households, particularly inrural areas.4 The negative impact of the global financialcrisis now threatens the progress in poverty reductionthat has been achieved.
0% 10% 20% 30% 40% 50% 60% 70%
2000
2001
2002
2003
2004
2005
2006
2007
Poverty level Extreme poverty level
Table 1. Inflation trends in Kyrgyzstan, 2007-2009
Growth in: 2007* 2008* 2009**
- Consumer price index 10% 25% 16%
- Food prices 15% 33% 15%
- Electricity, gas, heat tariffs 8% 30% 28%
* Annual average** First quarter of 2009 compared to first quarter of 2008.
Source: National Statistical Committee (http://www.stat.kg/ stat.files/express/prise/10801.xls); UNDP calculations.
Crisis response measuresThe government and Central Bank have sought in a num-ber of ways to minimize the socio-economic impact ofthe crisis. Thanks in part to reductions in capital inflows,the Central Bank has succeeded in reducing inflationrates which, while remaining high, in the first quarter of2009 were well below year-earlier levels. This is despite a25 percent nominal depreciation in the national curren-cy, the som,5 which has helped to support Kyrgyzstan’sexport competitiveness. Measures to protect vulnerablepopulation groups include increases in pensions andpublic sector salaries (of 29 percent and 30 percent,
respectively) in 2008, as well as in the universal monthlybenefit and monthly social benefits (financed by theWorld Bank and the European Commission). In light ofKyrgyzstan’s continuing double-digit inflation rates,however, these increases may not be enough to allowpoor households to keep abreast of the costs of the min-imum consumption basket.
UNDP’s response: Area-based development forpoverty reductionUNDP has sought to assist government efforts to protectvulnerable communities (especially those living in ruralareas) via area-based development programming in theBatken region (which borders with Tajikistan andUzbekistan) and the Naryn region (which borders withChina). Batken and Naryn are among the regions of highunemployment and poverty, with decapitalized socio-economic infrastructure. UNDP’s area-based developmentprogramming in these regions has focused on employ-ment- and income-generating activities, particularly inagriculture, and particularly in poor villages. Services pro-vided include access to business training and vocationaleducation, microfinance and leasing, and infrastructure
Table 2. Remittance inflows in Kyrgyzstan
2004 2005 2006 2007 2008*
In millions of US$ $329 $521 $754 $1041 $1462
As a share of GDP 15% 21% 27% 27% 29%
* Preliminary data
Sources: National Bank of Kyrgyzstan, Economist Intelligence Unit; UNDP calcula-tions.
22
DEVELOPMENT &TRANSITION
The economic crisis as a human development opportunity
Andrey Ivanov
The economic crisis has obvious human developmentimplications. They reach beyond the immediate outcomes(contraction of effective demand dragging down output),to include decreasing employment and income opportuni-ties with negative mid- and long-term implications for edu-cation, health status, housing security, and other humandevelopment indicators. But apart from describing theconsequences, the human development approach couldbe useful for understanding the crisis’s fundamentals andthus designing adequate responses.
The crisis is not something unique. It bears the typical char-acteristics of overproduction fuelled by expansion of ‘fidu-ciary money’ and resulting in excessive supply. At the coreof the current crisis is the ‘explosive combination’ of cheapcredit, globalized trade and effective financial systems. Indeveloped countries (like the United States) that reportedperpetual current account deficits, these three elementsbrought about a huge temporal shift in consumption:goods and services were being consumed now againstincomes that were to be earned tomorrow (if earned at all).
This temporal shift made possible the rapid expansion ofoutput, employment and incomes in emerging markets,which supplied the imports purchased by American con-sumers. Today’s recession is largely the price the world ispaying for the decade-plus of growth in production andemployment in China and other developing economiesthat produced more than they consumed, with part of theexcessive supply absorbed on credit by developedeconomies. It also suggests a certain inevitable decline inhuman development opportunities, at least in the short
run.1 Paradoxically, the global economy has replicated oneof the features of central planning that led it to its collapse:debt-financed consumption and shifting the burden tonext generations.
For years, the set of incentives driving world economicgrowth has been drifting away from the logic underpin-ning the human development paradigm. The focus onpeople and their well-being as the ultimate objective ofeconomic growth is what makes the concept of humandevelopment intuitive and appealing. Prospects for theenhancement of people’s potential to be and do areplaced at the core of the human development paradigm. Inthe human development context, to have is a means,rather than the end of human progress.2
The existing economic system has effectively reversed therelationship between output and human development,detaching commodity from functionality and capability.Each consecutive increase of commodities contributesless to human capabilities. The consumer is being increas-ingly flooded with cheap ‘disposable’ goods that maymeet demand, but only less so (if at all) meet real needs.Consumption (economic output) has turned from a meansfor achieving functional-ities and expanding op -portunities into an endin itself.
The moment a commodi-ty acquires a value that isindependent of the needs(functionalities) it is sup-posed to fulfil, we are fac-ing the phenomenon of‘commodity fetishism’,which starts underpin-ning the structure of eco-nomic incentives. Thegrowth in production andoutput in the last decadeincreasingly became anobjective in its own right,
construction and repair, with a special emphasis onimproving access to water, schools, and transportationservices.
Some 50,000 people in 102 villages (in Batken, Naryn, andelsewhere) are now benefiting from these activities.During the last six months, access to improved watersources has been provided to 8,000 people; another10,000 have received access to electricity. In addition tofinancing the expansion of livestock herds and agricultur-al production (including value chains), these programmesare giving returning migrants the skills and opportunitiesneeded to invest in their communities and businesses.
Aikan Mukanbetova is Head of the Socio-Economic Unitand Programme Analyst for UNDP Kyrgyzstan.
1. The Second Periodic Progress Report on the Millennium Development Goals in theKyrgyz Republic. http://www.undp.kg/.
2. Ibid.3. For more on this, see UNDP’s Central Asia Regional Risk Assessment. http://europe-
andcis.undp.org/home/show/60B55B69-F203-1EE9-B99CA6F9ED93A5B8. 4. The absolute income poverty level in Kyrgyzstan is defined according to data on
household incomes, expenditures, and consumption generated by householdbudget surveys. The level of poverty is assessed in terms of the absolute povertyline, which is calculated on the basis of actual consumption of goods and servicesby households. Poverty is largely a rural phenomenon: almost three out of fourpoor people live in rural areas.
5. The nominal exchange rate dropped from US$1 = 34.6 som in September 2008 toUS$1 = 43.2 as of mid-May. (Source: www.oanda.com.)
subordinating consumption needs and thus turning people’scapabilities into a macroeconomic residual. An increase inconsumer spending – regardless of its type (does it expandpeople’s capabilities or not?) and sustainability (is it credit orsavings-based?) is still seen as the way out of the crisis. Thefact that consumers in most of the world are now reducingspending in order to reduce personal debt (the paradox ofthrift) is seen as a disaster from a macroeconomic perspec-tive. In fact, consumers are behaving rationally from a humandevelopment perspective–unlike governments, which areattempting to restore pre-crisis consumption patterns, thusreinforcing the very system that brought about the crisis.Shopping for things you never even thought you might needcould turn into a patriotic duty and personal input into therescue of the global economy.
A radical paradigm shift–not the restoration of the sys-tem–is what is needed. The global economy needs to ‘rein-vent’ the human development logic, putting human capa-bilities at the centre of its incentives systems. Seen fromthis perspective, the crisis could be a unique opportunityto reconsider some basic development paradigms and puteconomies back on sustainable paths.
A first step in this direction could be answering the ques-tion: ‘what kind of growth is indeed beneficial from ahuman development perspective?’ In 1996 the GlobalHuman Development Report reminded us that growth isnot always conducive to human development, that growthcan be also jobless, ruthless, voiceless, rootless, and future-less and thus not contributing to people’s capabilities.3 The
quality of growth and most importantly, the link betweengrowth and capabilities is of paramount significance todaywhen the global economy is slowing down and ‘resuminggrowth’ is at the top of policy makers’ agenda. Unless the‘commodity functionality capability’ linkage andordering are restored, growth will continue to fuel the‘commodity fetishism’ cycle, which could be devastatingfrom a human development perspective.4
While putting economic systems back on a human develop-ment track may be easier said than done, it could begin byasking whether policy measures to address the crisis wouldbring the economy closer to human development princi-ples. A human development audit of ‘stimulus’ or ‘rescue’packages from the perspective of their fundamental incen-tives could be a revealing and meaningful exercise. A sec-ond step could be acknowledging that the global econom-ic system needs to be redesigned rather than rescued.‘Saving industries’ cannot save jobs; changing industriesand fine-tuning market mechanisms to make them moreconducive to principles of sustainable human developmentcan. The global car industry is an example. The highly skilledjobs in the sector can be saved in various ways. One optionis to promote state-sponsored programmes for shreddingold cars and to boost consumer spending replicating exist-ing demand patterns. Another option is to downscale thesector’s capacity and invest the resources in environmental-ly sustainable technologies that would require similar skillsets and technological sophistication. The latter may bemore difficult and less profitable – but would the former stillbe profitable without government spending?
Governments are often bound by constituencies’ expecta-tions and the intuitive reaction often is saving the statusquo. But when it can’t be saved, such efforts only increasethe overall costs in the long run. Clearly communicatingthe message that the ‘good old times are over’ and radicalchange is necessary is not easy, particularly prior to elec-tions. However any policy response to the ‘saving jobs’challenge constitutes such a message.
On the other hand, restoring pre-crisis levels of growthcould be unnecessary as well as impossible. It could beunnecessary because of the broken commodity capa-bility linkage; it could be impossible because of the envi-ronmental implications. The latter is a major differencebetween the current crisis and previous downturns and acritical mass of awareness of the impossibility to followeconomic ‘business as usual’ exists today (unlike in 1972when the Club of Rome raised the ‘limits to growth’issue). Matching this awareness with clear market incen-tives and disincentives so that the individual choices ofeconomic actors are aligned with principles of sustain-able human development is a major responsibility ofgovernments and international organizations. Adequatecosting of ‘externalities’ and factoring them into com-modity prices is one way to discharge these responsibili-ties and communicate the second crucial message–thatincreasing demand is the key to recovery but not anydemand, and thus not any way of boosting it is accept-able and desirable from the human development per-spective. Currently commodity prices reflect just the costof immediate inputs – and we are relatively close to ade-quate pricing of CO2 emissions. But unless it factors inthe entire scale of a commodity’s environmental impact(the costs associated with depleted ‘zero price’ naturalresources, the impact on biodiversity, waste dischargedetc.) the ‘market economy formula’ – and thus the out-come of the individual consumer/producer choices –would be inevitably wrong. The argument that there isno convincing evidence of the existence and scale ofsuch externalities is widely being used as an excuse forinaction.
Such an exercise would be expensive and painful; many‘staple commodities’ would turn into unaffordable luxu-ries. But at least future generations would not be robbed of
their chance to make their own choices and enjoy oppor-tunities we are (still) enjoying–as today’s young generationin the region was largely robbed by their parents’ debt-driven consumption in the 1980s.
To summarize: we are facing a unique set of developmentchallenges, requiring responses going beyond orthodoxmacroeconomic solutions. The crisis is human develop-ment in nature; it demands responses consistent with thehuman development paradigm. A major challenge is notrestoring pre-crisis levels of output but assessing howmuch (what rates of) growth mankind actually needs, canafford and what could be its sustainable drivers. Unless werespond to these basic questions, the immediate respons-es to the ongoing challenges may be only reinforcing theirfundamental causes.
Andrey Ivanov is Human Development Policy Adviser at theUNDP Bratislava Regional Centre.
1. The borrowed nature of the prosperity in recent decade is largely behind the sharpincrease in poverty incidence in Eastern Europe and other ‘emerging markets’ with 35million people back into poverty and vulnerability according to World Bank estimates(or one third of those who escaped poverty in the last decade). See World Bank regu-lar regional economic briefing at the World Bank/IMF Spring Meetings, Press ReleaseNo: 2009/323/ECA.
2. Although the human development paradigm is associated largely with the works ofAmartya Sen, winner of the Nobel Prize in Economic Sciences in 1998, it emerged froma number of debates on welfare economics, employment, human capital and povertyin the 1970s involving prominent economists such as Frances Stewart, Mahbub ul Haq,Paul Streeten and others.
3. United Nations Development Programme, 1996. Human Development Report 1996.Oxford, UK: Oxford University Press. pp. 56-64.
4. Functionality here shouldn’t be confused with functionings in Sen’s definition as‘achievement of a person: what he and she manages to do or to be’ (Sen: 1989, p. 41).In this text functionality is understood as the set of a commodity’s characteristics deter-mining the latter’s value as a contribution to an individual’s capabilities.
ReferencesMeadows, Donella et al. 2004. Limits to Growth: The 30-yearupdate. White River Junction, Vermont: Chelsea GreenPublishing.Sen, Amartya K. 1985. Commodities and Capabilities.Oxford: Oxford University Press. Sen, Amartya K. 1999. Development as Freedom. New York:Knopf Press.Sen, Amartya K. 1989. Development as CapabilityExpansion. Journal of Development Planning, No. 19, pp.41-58.
DEVELOPMENT &TRANSITION
Crisis-related socialmobilization in transi-tion states
Olga Onuch
The global economic crisis has produced many predictionsof mass mobilization in both Latin America and Central and
Eastern Europe. Yet, sustained mass mobilization has notmaterialized. Simply put, there are other political opportu-nity issues at stake when predicting mass-mobilization.Previous studies of transition and post-transition periods inthe two regions have focused on the persistence of protestin the former and the perseverance of patience in the latter.Yet, over time, it has become obvious that the motivationsand patterns of mobilization in both regions have con-verged. When crises are understood to be propelled bypolitical mismanagement, sporadic mass-protests occur inLatin America. Such protests have been replicated more
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recently in Central and Eastern Europe. Although there is anabsence of sustained mass-protest, we have seen the emer-gence of localized grassroots engagement in both regions,especially during the recent economic crisis. A comparisonof the recent crisis-related protests in Latvia, Moldova,Georgia, and Ukraine, with similar episodes in Mexico, Chile,and Argentina, shows that although economic crises canfacilitate or trigger social mobilization ultimately it is socio-political factors (referred to as political opportunity struc-tures) that are the most important determinants.
Even a severe economic downturn in a country withaverage levels of trust, government support, and nointernal political crises will not automatically triggermass-mobilization of ‘ordinary people’. However, severeeconomic downturns can compound existing crises andthus, the deeper the crisis on both political and socio-economic terms, the higher the probability that mobi-lization will go beyond activists and opposition andacquire a mass character.
Several Central and Eastern Europe countries share charac-teristics associated with a perceived vulnerability to mass-mobilization, such as newer/less stable political institu-tions, high instances of political conflict, recent histories of
mass-mobilization (excepting Russia and Belarus), andhigher rates of distrust in individual politicians and politicalinstitutions. Thus, in the face of economic hardship, it isassumed that Central and Eastern European countrieswould be ideal candidates for mass-mobilization. But, as inLatin America, only particular countries, such as Latvia,Moldova, Georgia, and Ukraine–where the economic crisishas exacerbated ongoing socio-political crises and generalanti-elite sentiment–appear vulnerable.
Latvia has seen several protests in late 2008 and early2009. On 13 January 2009, peaceful protests turned intoriots. The protesters called for the government to resign,as it was perceived to have mismanaged the economic cri-sis. The initial protesters were students and youth, andeven at their peak only a small share of the general popu-lation joined in the protests. Perceptions of political mis-management and arrogance, rather than the economiccrisis per se, have been the main issue for the protestors.The protests forced the government to resign. Althoughthe immediate outcome of the protests seems to punishthe political elite in power, in the longer term the newgovernment’s policies are not likely to stray far from itspredecessors and the effects of the economic mismanage-ment are likely to persist. Interestingly the government’s
resignation appeased protesters and pre-empted thespread of protests, muting their severity and making fur-ther mass protests unlikely.
Moldova, which has also been hit badly by the economiccrisis and gas shortages, witnessed the eruption of vio-lent protests against the government following therecent parliamentary elections in which the MoldovanCommunist Party triumphed. The protests turned violentafter outgoing President Vladimir Voronin stated that,although he intends to step down in accordance with theconstitution’s term limit, he will remain the key politicalplayer akin to, as he put it, a ‘Moldovan Deng Xiaoping’.These were not mass-protests. The protesters were most-ly young activists and students not previously connectedto opposition groups, who organized themselves usingtwitter and other social-networking sites. The fact thatMoldova’s economic crisis coincides with an election yearhas exacerbated the political crisis in the country. It wasthe perception of increased political elitism and the cen-tralization of power that was challenged by the protes-tors, not the social consequences of the economic crisis.The government reacted with a severe and violent crack-down, leading to injury and imprisonment of activists. Forsocial mobilization theorists this would be a signal thatpolitical opportunity structures are weak in Moldova andthus sustained mass-mobilization is unlikely. By boy-cotting the election of a new president in parliament, theopposition parties have forced new parliamentary elec-tions. If they remain aloof from the protests, it is possiblethat they too will become victims of the growing anti-elite sentiment.
Since its 2003 ‘Rose Revolution’, Georgia has witnessedtwo episodes of mass mobilization; most recently, protestswere organized on 9 April 2009 by opposition parties hop-ing to topple President Mihail Saakashvili. In contrast toprevious mobilizations, Saakashvili now faces lowerapproval ratings following the war with Russia and his pre-vious use of force against the opposition. The protests todate have not been of a mass character and, unlike inMoldova, all protestors are supporters of, and organizedby, the opposition. Georgia is a case where socio-politicalcrises have already destabilized the government; and withthe onset of a recession Saakashvili’s leadership is beingseriously challenged. For protests to take on a mass charac-ter two things would have to occur: (a) the oppositionwould have to divide the ruling elite by finding politicalallies within Saakashvili’s inner circle; and (b) oppositionmovements would have to find a way to reach out to ‘ordi-nary’ Georgians who have been affected by the variouscrises and who have until now maintained support for thegovernment despite their growing frustration about themilitary and political weakness of the current regime.
Ukraine’s severe economic crisis is being intensified bypolitical crisis in the run-up to the presidential elections.Ukraine could have been the example par excellence of
crisis mobilization, but while local protests have beenreported by the media, no mass-mobilization has yettaken hold. There is a lack of coordination as most inde-pendent protests are not linked to the youth networksthat emerged during the ‘Orange Revolution’ of 2004-2005. There have been several instances of sporadicprotests, e.g. recently laid-off workers ‘taking over’ smallfactories and running them in the style of‘cooperative/recovered factories’, as has occurred in post-2001 Argentina. In early March, more than 200 truck driv-ers threatened to block roads if the government did notpay their debts. These are new repertoires in Ukraine andpoint to the increased political agency of a portion of thepopulation previously excluded from collective action.While the opposition has attempted to exploit the sus-tained economic and political crisis to mobilize ‘ordinary’Ukrainians, their success has been mixed. On 3 April 2009,some 15,000 protesters gathered on IndependenceSquare under opposition party flags and banners.Opposition leader Viktor Yanukovich continued todemand the resignation of the government of PrimeMinister Yulia Tymoshenko and President ViktorYushchenko, blaming the severity of the economic crisison their political conflict. Yet it is Yanukovich’sterritory–Ukraine’s eastern industrial belt–where the cri-sis has hit the hardest, and where small instances of localprotest have also been observed. It is therefore no sur-prise that recent protesters have used slogans akin tothose used in Argentina in 2001–‘get rid of them all’. Inpost-‘Orange Revolution’ Ukraine the repertoire of publicprotest in main city squares has been co-opted by all themain party blocs as campaign ‘technology’. Ukrainiansare very well aware that these events are bought and paidfor and that they are not rooted in authentic activism orpopular agency, but are controlled by the political elite.This ‘knowledge’ may in fact delegitimize mass protest.
The most interesting and ‘new’ instances of protests inUkraine, and more broadly in the Central and EasternEuropean region, are those that are local and organizednot by rank- and-file activists as in 2001 and 2004, but by‘ordinary people’. Dissatisfaction with politics in general ison the rise; and in a climate of uncertainty over regularpresidential and early parliamentary elections, the ques-tion is whether protests will take on a grassroots/local ormass/national character; and whether certain politicalgroupings, including existing activist networks, provemore successful than others in capitalizing on this dissatis-faction.
In contrast to Central and Eastern Europe, protest is alwaysexpected in Latin America, where economic and politicalcrises seem to occur in tandem. Low levels of trust in politi-cians and political institutions, weak governments withhigh levels of political factionalism and falling approval rat-ings, strong activist networks with previous mass-mobiliza-tion experience, are considered opportunity structuresthat make mass-mobilization more likely. Economic crisis
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Slump and the city: Company towns and thecrisis in Russia
Evgeny Levkin
The economic crisis poses special threats to the ‘company towns’ that continue to play a large role in Russia’s eco-nomic landscape. Many Russian cities during the Soviet period relied on a small number of large companies thatprovided social services as well as production and employment. While some cities have since managed to diversifytheir economic bases, others have not. Local incomes, employment, social services, and the tax revenues needed tofund the city administration continue to be provided by companies that are ‘too big to fail’ for the local economy.In addition to declining incomes and employment, the crisis therefore means abrupt reductions in social servicesthat have been provided to local residents by the mainstay enterprise. As a result, the local authorities face a severerevenue crisis.
On 10 April 2009 a meeting in Moscow of the UN Global Compact network in Russia focused on these issues.Representatives of the Russian business and think-tank communities that were present at the meeting concludedthat the main ways to overcome the social consequences of the economic crisis in Russian regions and municipal-ities could be:
• Closer coordination of government and business anti-crisis responses and long-term development strategies;• Stronger federal support for the reorganization of company towns that are based on non-competitive enter-
prises, in the form of additional social payments, public works projects, and possibly the resettlement of localresidents;
• Greater support for employment restructuring and vocational training for cities with more competitive compa-nies;
• Salary support for public sector workers in small towns and rural areas from the federal budget;• Reductions in tax and administrative burdens on small businesses; and• Stronger assistance to local authorities in strategic planning, rationalizing social protection costs, and public par-
ticipation in local decision-making.
Evgeny Levkin is Head of Official Development Assistance and Private Sector Engagement for UNDP Russia.
management policies and budget cuts have sparkedrecent protests in Latin America, most notably in Mexico,Chile, and Argentina. Much like the above cases in theCentral and Eastern European region, these have beenmainly sporadic protests by activists or experienced pro-testers.
The experience of Latin America and Central and EasternEurope suggests that while socio-economic crises can trig-ger and facilitate social mobilization, it is only when theycoincide with serious political instability and uncertaintythat we see major protests. Socio-economic crises seem tolead to localized and grassroots mobilization while thelarger, more systemic political conflicts have taken on amass character. It is thus important to differentiatebetween the different triggers of protest, and understandlocal thresholds of collective patience and protest. Whilethresholds are country-and era-specific, we know that theyare associated with levels of political trust and support forindividual politicians and political institutions. This under-
scores the importance of analyzing recent declines in pub-lic trust in politicians and institutions in Latvia, Moldova,Georgia, Ukraine, and elsewhere. Furthermore, previousepisodes of mass mobilization suggest that thresholds oftolerance are most often breached when perceived rightsand freedoms (for example, employment) are seen asunder threat and ‘ordinary people’ who were not previous-ly engaged in protests join in. The effects of the crisis man-agement tactics adopted by the political elite on localthresholds of patience and protest are also important inthis respect. All governments–particularly those attempt-ing to manage economic crisis during an election year ortime of heightened political competition–should under-stand the need to engage in a three-way dialogue withopposition parties, activist groups, and ordinary citizens, inorder to better understand local patience and protestthresholds.
Olga Onuch is a Doctoral Candidate at Nuffield College,University of Oxford.
UNDP’s Bratislava Regional Centre is organizing a RegionalWorkshop on Programming in Support of Anti-corrup-tion Agencies. The event will take place in Bratislava,Slovakia from 30 June to 2 July 2009. The event will bringtogether UNDP Country Office staff with partners, expertsand practitioners from anti-corruption agencies and interna-tional organizations. Participants will discuss the role and fea-tures of anti-corruption institutions, with a focus on corrup-tion prevention agencies, as called for in Article 6 of the UNConvention Against Corruption. Lessons learned from pro-grammatic interventions in support of anti-corruption agen-cies will be discussed with the aid of case studies. The UNDPBratislava Regional Centre will introduce a toolkit designedto provide practical guidance for country offices on develop-ing programming. For more information, please contactFrancesco Checchi at [email protected].
The fourth annual summer course, ‘Sustainable HumanDevelopment: From International Frameworks toRegional Policies’ will be conducted at Central EuropeanUniversity (CEU) on 6-17 July 2009. CEU and UNDP will con-duct the course jointly in cooperation with the RegionalEnvironmental Centre (REC). The course will have a policyfocus, bringing together practitioners, mid- and high-levelpolicy makers, members of academia, and civil societyactivists from Europe and the CIS, as well as experts on humandevelopment and the Millennium Development Goals(MDGs). The aim of the summer course is to address knowl-edge deficits and apply the concept of sustainable humandevelopment to regional challenges. For more informationplease visit http://www.sun.ceu.hu/02-courses/course-sites/
sustainable/index-sustain.php. Or contact Mihail Peleah,Human Development Programme and Research Officer, [email protected].
UNDP will hold a Case Study Work Stream Workshop on13-14 July 2009 at the Bratislava Regional Centre. This eventis part of the Growing Inclusive Markets (GIM) Initiative,which seeks to create understanding and awareness abouthow doing business with the poor can be good not only forthe poor but also for private sector enterprises. The work-shop is a joint event of the Global, East European and CISregional GIM initiatives. The initiative has studied some 50business solutions that create value both for business andthe poor. For more information, please, contact Brigitte Duerrat [email protected].
The ‘Understanding Children’s Work’ project and theUniversity of Galatasaray (Istanbul, Turkey) are organizing atwo-day seminar on child labour, education and youthemployment to present recent research on child labour and itslinkages with education and employment outcomes. The sem-inar will be held on 15 – 16 October 2009 at University ofGalatasaray, and will aim to identify the key information gaps,thereby helping to guide future research efforts. For moreinformation please visit http://www.ucw-project.org/.
The III Eastern Europe and Central Asia AIDS Conferencewill be held on 28 – 30 October 2009 at the World TradeCentre, Moscow. The purpose of the conference is tostrengthen regional cooperation, bolster efforts to fightHIV/AIDS, and achieve the goal of universal access to HIV pre-vention, treatment, and care. The conference recognizes thatthe concept of universal access includes not only essentialmedical care, but also social justice and human rights consid-erations that are necessary for overcoming stigma and dis-crimination and reach most-at-risk target groups, includingyoung people and drug users. For more information, please,visit http://www.eecaac.org/en/index.phtml?PHPSESSID=7dff5e17e2caaff703da802ced18a4d7.
The next issue of Development and Transitionwill focus on:
Social inclusion (December 2009)
The editors welcome contributions. If you wish to submitan article, please follow the guidelines at www.develop-mentandtransition.net.
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Note to our readersIn the previous issue of Development and Transition, thearticle entitled ‘Attracting and retaining civil servants inthe Western Balkans’ should have stated that ProfessorIvan Koprić (University of Zagreb) was in charge of allaspects of the research project upon which the articlewas based. The editors apologize for the omission.
