P09-EcoFin-SustainabilityandTransitionEconomies by IDIA

Institute for Domestic & International Affairs, Inc.

Economic and Financial Sustainability in Transition Economies Director: John Paul Marshall

ÂŠ 2009 Institute for Domestic & International Affairs, Inc. (IDIA) This document is solely for use in preparation for Philadelphia Model United Nations 2009. Use for other purposes is not permitted without the express written consent of IDIA. For more information, please write us at idiainfo@idia.net

Policy Dilemma ______________________________________________________________ 1 Chronology __________________________________________________________________ 2 10 November 1982: The Death of Leonid Brezhnev and the move towards reform in the Soviet Union ___________________________________________________________________________ 2 11 March 1985: The Rise of Gorbachev _______________________________________________ 3 1989: A Series of Revolutions across Eastern Europe____________________________________ 4 1990: The Washington Consensus____________________________________________________ 4 1991: The Breakup of the Soviet Union _______________________________________________ 5 1992: An Ineffective Transition to Market Economies ___________________________________ 6 August 1998: IMF Loan to Russia ___________________________________________________ 7 Moral Hazard in the Ukraine _______________________________________________________ 7 2007: Eastern European Economies Grind to a Halt ____________________________________ 8

Actors and Interests ___________________________________________________________ 8 The States and People of Eastern Europe _____________________________________________ 8 The European Union (EU) _________________________________________________________ 10 Oligarchs _______________________________________________________________________ 12 Non-Governmental Organizations (NGOs) ___________________________________________ 13 International Financing Institutions _________________________________________________ 13

Possible Causes _____________________________________________________________ 14 Corruption______________________________________________________________________ 14 Shock Therapy __________________________________________________________________ 15 Culture_________________________________________________________________________ 16 Comparison of Possible Causes _____________________________________________________ 16

Projections and Implications___________________________________________________ 17 Conclusion _________________________________________________________________ 19 Discussion Questions _________________________________________________________ 20 For Further Reading _________________________________________________________ 21 Works Cited ____________________________________________________________________ 22 Works Referenced _______________________________________________________________ 25

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Policy Dilemma Economic growth was strong in Eastern Europe at the onset of the new millennium. From 2004 through 2006, gross domestic product (GDP) grew at rates above 5 per cent 1. In 2007, the economies of Eastern Europe began to slow and in 2008, the situation was worsened by the global credit crisis. The economies of Eastern Europe are fragile and lack the kind of stability found in more developed states. This has made economic sustainability throughout the developing world increasingly hard to attain as the world economy continues in its decline. Much of the economic growth in Eastern Europe in the past decade has been caused by the successes of the European Union (EU). The developed states of Western Europe have encouraged stronger markets by purchasing Eastern European goods regularly, resulting in higher consumption and rising exports in Eastern Europe. The EU also relaxed migration standards which allowed labor to flow from poorer to richer states. Accession into the EU has also provided benefits to Eastern Europe in a number of ways. States who are members of the EU, or are considering joining the EU have to make concerted efforts to eradicate corruption, increase GDP, and keep inflation low, all of which help the economy. While these EU-related externalities have been beneficial to the economic growth of Eastern Europe they are still external forces and truly sustainable economic development requires internal forces as well. 2 Association with the European Union has also created many economic problems for the economies of Eastern Europe. As Eastern Europe has globalized it has become subject to economic contagions such as the current credit crisis, which spread from the 1

Marcin Sadowski, GDP Growth Rate in CEE will amount to 5%, PMR Publications, http://www.pmrpublications.com/press_room/en_GDP-growth-rate-in-CEE-will-amount-to-5_.shtml, Accessed 4 November, 2008 2

David L. Bartlett, Economic Growth and Financial Development in Europe, RSM International, http://64.233.169.132/search?q=cache:CFOqMpnjRGoJ:www.tmud.org.tr/dokumanlar/14_kasim_sunumlar/1.2.7/ba rtlett%2520wcoa%2520nov%252006.ppt+EU+and+Eastern+European+GDP+growth&hl=en&ct=clnk&cd=12&gl= us, Accessed 1 December 2008.

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United States through Western Europe into Eastern Europe. Entering the Euro zoneâ&#x20AC;&#x2122;s Exchange Rate Mechanism (ERM) for two years to prove economic stability also deprives countries of their ability to influence their domestic markets.

Two Baltic

countries, Estonia and Lithuania, entered the ERM in 2004 and were denied entry in 2006 due to inflation. Now, in the face of massive trade deficits, they are considering devaluation to compete in the long term; however, this will reset the clock on their ERM term so they would not enter the euro zone any earlier than 2010. These strict guidelines set out by the EU for membership denies Eastern European candidate states the economic agency needed to deal with domestic problems. 3 Sustainable economic growth must be built internally to be truly sustainable. This committee needs to find solutions that allow Eastern Europe to develop their economies on their own terms, addressing domestic resources and needs. EcoFin needs to find a way to promote real, and comprehensive domestic growth while keeping Eastern Europe open to the global economy. This means exploring solutions such as development finance, micro financing, and solutions that address issues such as imbalanced economies. Solutions should encourage governments and their populaces to work together towards responsible wealth creation.

Chronology 10 November 1982: The Death of Leonid Brezhnev and the move towards reform in the Soviet Union The need for economic reform finally gained enough momentum to influence the choice of a new Soviet head of state who promoted a reform agenda, however moderate. In November 1982 Leonid Brezhnev died and the next Soviet leader was Yuriy Andropov. The Brezhnev years (1964-1982) promoted the kind of conservative Stalinist 3

Estoniaâ&#x20AC;&#x2122;s Recession Deepens As Latvian Finances Struggle to find Air, November 14 2008, Eastern Europe Economy Watch, http://easterneuropeeconomy.blogspot.com/2008/11/estonias-recession-deepens-as-latvian.html, Accessed 1 December 2008.

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policies that slowly destroyed the economy of the Soviet Union. His leadership was characterized by a return to Stalinist centralization and central planning with an emphasis on heavy industry, especially defense related, and a notable lack of emphasis on consumer products. The Soviet public’s demands for more high quality consumer products went repeatedly unheard. In the agricultural sector, Brezhnev continued to convert collective farms into state farms, slowing production.4 After Brezhnev’s death the need to correct the lack of reform under Brezhnev’s leadership became Yuriy Andropov’s primary political tool when seeking, and eventually gaining leadership of the Soviet Union. His actual reforms were minimal and Andropov, whose political career began and ended with national security and foreign policy as a leader of the KGB, had little economic experience.5

11 March 1985: The Rise of Gorbachev Mikhail Gorbachev assumed control of the Soviet Union with an agenda that showed a true commitment to liberalization and reform. The key words in his reform campaign are glastnost (openness) and perestroika (restructuring). Glastnost facilitated the kind of free speech and freedom of expression that was seen as essential to liberalization. It allowed the media to be even more radical than Gorbachev, which was a way for him to promote his own reform agenda. Perestroika was a drastic restructuring of the central planning-based Soviet economy. It introduced real elections like the Congress of People’s Deputies which enhanced political participation for the first time in their long history. Gorbachev promoted decentralization in different ways, such as giving more power back to the Soviets (the regional worker boards that technically made up the U.S.S.R). In the economic arena, reforms include liberalizations of price controls, election (rather than selection) of managers by the labor collectives, legalization of 4

The Brezhnev Era, http://countrystudies.us/russia/14.htm, Accessed 8 December 2008. T. Miko, Soviet Policy Under Andropov, U.S. Library of Congress, Congressional Research Service, Foreign Affairs and National Defense Division, Issue Brief Number IB83120, http://74.125.45.132/search?q=cache:0HJBGtu-WFcJ:digital.library.unt.edu/govdocs/crs/permalink/meta-crs9189:1+Andropov+Economic+Policy&hl=en&ct=clnk&cd=2&gl=us, Accessed 8 December 2008. 5

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cooperatives, de-monopolization, and an overall move towards private or semi-private ventures within the Soviet Union. 6

1989: A Series of Revolutions across Eastern Europe The Revolution of 1989 swept across Eastern Europe as Czechoslovakia, Poland, Hungary, East Germany, Romania, and Bulgaria all converted from communist Soviet satellite states to free market democracies. In all but one case (Romania) the revolutions were bloodless and rapid. The unrest began in Poland and Hungary where Gorbachevâ&#x20AC;&#x2122;s policies of glasnost and perestroika were mimicked leading to the rise of broad-based dissent. When people began protesting the Communist government, the governments quickly negotiated an end to their reigns and political systems. The other states of Eastern Europe followed similar models except for Romania where Communist despot Ceausescu refused to abdicate and was violently but quickly overthrown. These revolutions installed new economic and political philosophies but did not come as the result of widespread social upheaval. The social structures stayed largely the same; it was simply a matter of substituting a few of the more communist leaders with other members of the ruling class.7

1990: The Washington Consensus Economist John Williams coined the term Washington Consensus to denote the paradigm shift in global financial thought that occurred in the early to mid 1980s8. Two of the most economically important countries in the world, the United States and the United Kingdom led by Ronald Reagan and Margaret Thatcher respectively, began vocally promoted liberal, classical economic principles. The International Monetary Fund and World Bank, influenced by these two leaders also experienced heavy turnover as new 6

Lewis Siegelbaum, Perestroika and Glastnost, Seventeen Moments in Soviet History, http://soviethistory.org/index.php?page=subject&SubjectID=1985perestroika&Year=1985, Accessed 8 December 2008. 7 Colin Barker and Colin Mooers, Theories of Revolution in Light of 1989 in Eastern Europe, http://64.233.169.132/search?q=cache:Ho6uSZMfPCEJ:www.psa.ac.uk/journals/pdf/5/1994/bark2.pdf+1989+Revol utions+economic+transition&hl=en&ct=clnk&cd=4&gl=us, Accessed 8 December 2008. 8 Washington Consensus, Center for International Development at Harvard University, April 2003, http://www.cid.harvard.edu/cidtrade/issues/washington.html, Accessed 8 December 2008.

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heads for both institutions executed regime change to bring in fellow free market enthusiasts and purge the development-styled economists that had typified the previous forty years of IMF and World Bank policy9. The Washington Consensus pushed agendas such as fiscal discipline, tax reform, interest rate and capital flow liberalization, deregulation, and the importance of property rights.10 This was the prevailing school of economic thought that existed as the breakdown of the Soviet Union occurred and it dictates many of the policy choices made at this time.

1991: The Breakup of the Soviet Union The breakup of the Soviet Union occurred during the year of 1991. The process began the previous year with the Soviet Union agreeing to give up its monopoly of power early in the year and the first free elections taking place early in 1990. The Baltic States of Lithuania, Latvia, and Estonia, all declared that they would be moving towards independence. In June 1991, Boris Yeltsin was democratically elected the President of the Russian Federation, the largest and most influential country in the Soviet Union. Two months later, there was a coup dâ&#x20AC;&#x2122;ĂŠtat attempt to return to the old Soviet Union. Boris Yeltsin rallied the people of Russia and elements of the military to stop the coup and arrest its leaders, effectively destroying the Soviet old guard.11 The Baltic States were recognized as independent by the world at large and Yeltsin had the popular support and lack of political opposition necessary to move forward with the dissolution of the U.S.S.R., which slowly shut down over the next few months and officially ended on 26 December 1991. The U.S.S.R. was replaced by the Commonwealth of Independent States. After the collapse of the Communist system, the former states of the U.S.S.R completed the adoption of free market liberal democracies for their own reasons and due

Joseph Stiglitz, Globalization and Its Discontents, New York: WW Norton 2003. Washington Consensus, Center for International Development at Harvard University, April 2003, http://www.cid.harvard.edu/cidtrade/issues/washington.html, Accessed 8 December 2008. 11 Sheilah Kast, Enduring Lessons of the Soviet Breakup, Washington Times, January 1, 2002, http://www.cdi.org/russia/johnson/6002-9.cfm, 12/9/08. 10

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to the pressure of groups involved in the Washington Consensus. The method for capitalist integration in Eastern Europe was shock therapy.12

1992: An Ineffective Transition to Market Economies As the transition to market economies became more common, land privatization also occurred more frequently, with governments practically giving away valuable assets deals across Eastern Europe.

The shock therapy model pressured these transition

economies to sell assets before the really knew what they had and while the bureaucrats of the former regime still had an unprecedented influence. The result of these privatization programs was the concentration of property rights in the hands of those who had connections, exacerbating the income and equality gap. These people had no incentives and no capital to do the things needed to create sustainable economic growth. This was compounded by inconsistent and flawed regulations and poor economic incentives led to wealth stripping and hoarding, not wealth creation. The capital flight that ensued ensured that much of that money would not be spent bettering the economies of Eastern Europe. The economies of Eastern Europe had another problem in that there was no enforced change away from the Soviet model. The workers and managers wanted to continue to work and produce based on the model that characterized their previous economies. Eastern Europe was over-industrialized, especially in heavy industry, which is not only inefficient but has only been supported by the military-industrial complex brought about by the Cold War. Public administration also stayed largely the same and a notorious lack of transparency and regulation irregularities were problems throughout Eastern Europe. These distortions only led to a higher concentration of wealth, which gave rise to the oligarchies that dominated the economic sectors of these transition economies. As the oligarchs gained increasingly large proportions of the wealth, they further distorted the lawmaking process with economic pressures and corruption. Many

Ibid

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of the factors created by the rapid changeover to free market ideals lead to the unsustainable development apparent in these transition economies today.13

August 1998: IMF Loan to Russia There was a financial crisis in Russia due to unsustainable economic policy during their transition to a market economy. Russia, with its oligarchies and stripped wealth, was driving economic growth almost solely through oil. When the East Asian Financial Crisis brought down the global demand for oil, Russia went from a current account surplus to a current account deficit of 1.5 to 2 per cent between 1997 and 1998. This put pressure on the ruble forcing the Russians to tighten their money flow to try to defend an already overvalued ruble. As speculative attacks began on the ruble the Russian Federation looked to the international currency regulator, the IMF, for help in June. They received help but the IMFâ&#x20AC;&#x2122;s insistence against devaluing the Russian currency was costing four billion U.S. dollars monthly14, money that was supposed to be providing liquidity to a tight market. By August the Russians had decided to devalue and they defaulted on many of their loans, essentially wasting the IMFâ&#x20AC;&#x2122;s money and plunging Russia deeper into debt. Russian banks are estimated to have lost about 40 per cent of their assets in this financial collapse. 15

Moral Hazard in the Ukraine Another impediment to sustainable development is the propensity for international institutions to rely on the use of money to solve problems rather than adapting comprehensive solutions. In 1998 the IMF and Ukraine continued their tumultuous relationship, with the IMF approving a USD $2.2 billion loan over three years to allow them to avoid default. The IMF had removed its support for Ukraine multiple times before because Ukraine was not making progress on reforms. Each time, the IMF ended 13

The Russian Crisis of 1998, The Third World Network, http://www.twnside.org.sg/title/1998-cn.htm, Accessed 9 December 2008. 14 Ibid 15 Ibid

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up relenting as the country neared imminent default. As a result necessary reforms are never made. This case is an example of moral hazard. Ukraine, knew it would be bailed out, which provided no incentive to reform or to pursue responsible economic policy. In addition, lenders had no incentive against making irresponsible loans. Such a heavy reliance of outside help is an indicator of an unsustainable economy. 16

2007: Eastern European Economies Grind to a Halt After almost a decade of strong economic growth throughout Eastern Europe, past trends reemerged and exposed the lack of sustainable development in the region. External imbalances now plague the overheated economies of the Baltic States and Ukraine. The rapid growth of the previous decade compensated for a lot of mistakes and distorted views on acceptable risks in these burgeoning economies. These states, while they are in the process of developing their financial infrastructures, are not capable of internally escaping the effects of reduced access to credit from the major developed powers. Access to credit is crucial to sustainable development, both in creating new businesses and maintaining them during tight times. Eastern Europe is still too reliant on foreign capital to have truly sustainable development.17

Actors and Interests The States and People of Eastern Europe Eastern Europe has never enjoyed the kind of stability found in Western Europe. In the 20th Century many of the major political and state changes worldwide have been in Eastern Europe. After World War I the rise of Communism, the creation of Poland, and the breakup of the Austro-Hungarian Empire were all significantly destabilizing events. After World War II, more specifically the fight between the Russians and the Germans, 16

Ukraine, Easy Money, The Economist, August 8,1998, http://www.imfsite.org/recentfin/ukraine.html. Accessed 9 December 2009. 17 Eastern European Outlook: Resilience is eroding - lengthy recession in Estonia and Latvia, Euro Investor, 08/10/2008, http://www.euroinvestor.co.uk/News/ShowNewsStory.aspx?StoryID=9990056, Accessed 9 December 2008.

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the Russians never left, instilling Communism in satellite states and claiming new territories for the U.S.S.R. Finally, from 1989 to 1991 the Soviet sphere of influence slowly disintegrated, instantly creating new countries, new borders, and a new way of running the economy.18 Since that point there has been little stability in Eastern Europe. Ethnic tensions in the Balkans led to the creation of several new states. In Eastern Europe almost every national economy has fundamentally changed or been created within the past twenty years. Although developed countries also had to deal with the aftermath of the two World Wars, their states and political systems remained intact.19 Eastern Europe has experienced constant change, conflict, and struggle, which has made both political and cultural turmoil nearly constant. This kind of environment lacks the stability necessary for sustainable development. The governments in Eastern Europe have also provided obstacles to sustainable development in the region. They are rife with corruption20, which is a major force preventing sustainable development. When corruption plays such a large role in public life, the market does not have control over the economies. Even though Eastern European states have transitioned to free market economies, the states have not yet privatized many of their resources21, and were responsible for all of the previous asset sales, giving government a significant role in the sustainable development of the economy. Instead of privatization sales going to those who make the best offers and considering the impact sales will have on the economies, most of the sales either went to corrupt politicians or whoever could offer the largest kickback to the bureaucrat in charge of the sale of the given property.

Internet Modern History Sourcebook, Fordham University, http://www.fordham.edu/halsall/mod/modsbook.html, Accessed 10 December 2008. 19 Stiglitz. 20 Transparency International, http://www.transparency.org/policy_research/surveys_indices/cpi/2008, Accessed 9 December 2008. 21 Milic Milanovic, Property Rights, Liberty, and Corruption in Serbia, Independent Review; Fall2007, Vol. 12 Issue 2, p213-234, 22p, Academic Search Premier

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The people of Eastern Europe are interested in creating sustainable growth but are limited by a number of factors. In the older generations, there is a lack of adaptability due to Soviet culture. Although the older generations of workers are highly skilled in technical areas, they were victims of central planning. They were told which jobs to learn and never deviated from their task. The younger generation proved more adaptable but the economic collapse they grew up during leaves little room for education.22 The people of Eastern Europe are ready and capable to move forward with sustainable development but their poverty, instability, conflict, and horribly corrupt governmental system is preventing their progress.

The European Union (EU) The European Union is important to Eastern Europe in a variety of ways. The primary trading partners of Eastern European states are mostly members of the EU and many Eastern European states are either members or candidate members of the EU (Croatia, FYR Macedonia), though none of them have been able to adopt the Euro. A few other Eastern European states such as Ukraine are currently debating whether they want to apply to join.

Association with the European Union is seen as one of the major

factors in the strong economic growth of Eastern Europe during the 2000s. There are two major reasons for this. The EUâ&#x20AC;&#x2122;s rise as a true economic power has increased its buying power to benefit Eastern Europe and as a result, has been looking for new untapped markets for its own goods. The EU found these markets in Eastern European states. The EU has been a major agent for reform and change in Eastern Europe, most of which led to more sustainable development. To join the EU a country must adhere to the Copenhagen Criteria, and the EU has an effective candidacy program for assisting countries in reaching said criteria. The criteria include a stable democracy with rule of 22

Growing Older in Eastern Europe and Central Asia, Help Age International, http://www.helpage.org/Worldwide/EasternEuropeandCentralAsia/GrowingoldinEasternEuropeandCentralAsia, Accessed 10 December 2008. 23 European Countries, Europa, http://europa.eu/abc/european_countries/index_en.htm, Accessed 10 December 2008.

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law, human rights, and a respect for the protection of minorities, a functioning market economy, and a perceived ability to assume the duties of membership. Another provision was added during the 1995 Madrid conference, requiring the presence of certain administrative and judicial structures that allow EU-wide reforms to be carried out by individual countries quickly, evenly, and completely.24 These requirements are applied actively during the candidacy process and help improve many aspects of a given stateâ&#x20AC;&#x2122;s economic abilities. They promote sound governance with the kind of human rights and minority protections that prevent unrest and destabilization. This criterion is also used to encourage domestic anti-corruption campaigns in candidate and pre-candidate countries. The provision for a functioning market economy is also effective; the EU provides technical and financial assistance to assist Eastern European states in improving their market systems. The last two requirements are more circumstantial and can be used to promote a variety of reforms or misused to attempt to block a candidate stateâ&#x20AC;&#x2122;s entry. The interest of the EU in Eastern Europe is contested. The EU maintains that all of its actions are in the best interests of the EU as well as the people and governments of Eastern Europe. The actions of the Western European powers that are engaging Eastern European states on behalf of the EU have been conscientious, thorough, helpful, and sincere but decidedly cautious. Most of the criticism of the EU has not been as a result of their action but of their mechanisms.25 The mechanisms they have for inclusion in the EU and more specifically the Eurozone are extremely conservative and not necessarily conducive to sustainability in transition economies. The Eurozone requirements include maintaining a low budget deficit, stable exchange rate, and low interest and inflation

Acession Criteria, European Commision, http://ec.europa.eu/enlargement/enlargement_process/accession_process/criteria/index_en.htm, Accessed 10 December 2008. 25 John Oâ&#x20AC;&#x2122;Brennan, The EU in the Western Balkans: Enlargement as Empire? A Response to David Chandler, Global society : journal of interdisciplinary international relations 10/1/2008. Academic Search Premier. Accessed Accessed 10 December 2008.

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rates.26 Critics have identified three major problems with this. The first is that very few of the countries already in the Eurozone even attempt or achieve these goals themselves. The second problem is that some in Eastern Europe see this as an attempt for Western Europe to homogenize them despite their distinct cultural differences and their histories. The final criticism is mainly economic in nature. These requirements deprive Eastern European candidate states of domestic economic policy autonomy by determining the policy choices for them. Countries have no ability to manipulate interest rates, spend during a deficit, or devalue (especially important in this current economic decline). If development is to be truly sustainable the government and the people have to work together to create wealth. By lessening the degree of government agency, some say the EU could be creating rifts between the people of Eastern Europe and their own governments. Some critics have even gone so far as to label the EUâ&#x20AC;&#x2122;s treatment of the Balkan states as neo-colonialism.27

Oligarchs Oligarchs are the small group of business magnates who now control much of the commerce in Eastern Europe, especially in Russia, due to their advantageous positions in the breakup of the Soviet Union. They accumulated as much as they could in the mass privatizations of the early 90s and have since only expanded their influence over the economic and political sectors, using oppressive economic advantages to eliminate competition. They are also a reason that the economies of Eastern Europe are unsustainable. Any development they achieve is largely for personal gain as they look to gain as much profit out of the resources they have and are not interested in diversifying. The income gap widens further because wealth is concentrated in the hands of a few. In the 1998 IMF bailout, Russian oligarchs were largely responsible for the currency attacks 26

Euro aspirants fall short of requirements, Wednesday 6 December 2006, EurActiv, http://www.euractiv.com/en/enlargement/euro-aspirants-fall-short-requirements/article-160307, Accessed 10 December 2008. 27 Oâ&#x20AC;&#x2122;Brennan.

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and subsequent capital flight that severely impacted the Russian tax payer and subsequent economic growth. The Oligarchs also have a distortion effect on economic policy. Due to their status as an unnaturally large part of Eastern European business, they influence the political process as well. The interest of the oligarchs is almost exclusively to make money in the short term.28

Non-Governmental Organizations (NGOs) There are many NGOs who aid in supporting sustainable development in Eastern Europe. Often it is far easier to directly access the effected populations through nongovernmental organizations and engage them in development projects that build the economy from the bottom up, creating truly sustainable development.

NGOs are

involved in a variety of projects including microfinancing for small businesses, small scope infrastructure investment, and regional banking that can assess the needs of a region rather than trying to cater to diverse areas. Significant NGOs include the European Bank for Reconstruction and Development (EBRD)29 and the Northern Alliance for Sustainability.30 The interest of the NGOs is to better the world, reduce poverty, and provide employment through responsible, long-term development projects.

International Financing Institutions The World Bank and the IMF have played a significant role in the economies of Eastern Europe since the break-up of the Soviet Union. The World Bank has executed numerous development projects in the region and the IMF has been involved with loans to many countries, including two significant bailouts to Russia in 1995 and 1998. The IMF and World Bank also had a significant role in the process of deciding how to liberalize the former communist states. During the transition, these two organizations 28

Roger Schoenman, Captains or Pirates? State-Business Relations in Post-Socialist Poland, East European politics and societies, 1/1/2005. Academic Search Premier. Accessed 8 December 2008. 29

About the EBRD, http://www.ebrd.com/about/index.htm, Accessed 8 December 2008. About Us, http://www.anped.org/index.php?part=411, Accessed 8 December 2008.

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adhered to the Washington Consensus and helped influence the choice of shock therapy instead of gradual reintegration of Eastern European markets. The action ended up being a failure. It is important to remember that the interest of the IMF and the World Bank is and always will be promoting sound economic policy and sustainable development, even if their methods can be questioned.31

Possible Causes Corruption Corruption is still one of the biggest obstacles to economic growth in Eastern Europe. When corruption is present, all of the negative aspects of government impact the economic arena. These impacts include inefficient allocation of resources due to bribes or cronyism, weakened administrative institutions, and poor regulation. Poor regulation due to corruption can be particularly damaging because other countries will use it as an excuse to reject a stateâ&#x20AC;&#x2122;s imports, inciting further economic damage. Corruption hurts sustainability in both direct and indirect ways. Corruption directly diverts resources away from the populace, who are the driving force behind sustainable development. It concentrates resources in the hands of the rich and the well-connected, which perpetuates income disparity as an impediment to sustainable development. Lastly corruption wears on a populace until they have an adversarial relationship with the government. In order to create sustainable development, the government has to be working with, rather than against the people.32 Corruption also has a destabilizing effect in the world credit market. Risk premiums for international loans to countries with high perceived levels of corruption are more likely to account for the possible diversion of money, such as in the 1998 IMF

Joseph Stiglitz, Globalization and Its Discontents, New York: WW Norton 2003. Rasma Karklins, The System Made Me Do It: Corruption in Post-Communist Societies, New York, M.E. Sharp, 2005. 32

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Bailout of Russia. Generally, development cannot occur without secure, fair, and safe access to credit and corruption negatively influences these aspects.33

Shock Therapy The lack of sustainable development in Eastern Europe can be attributed to the rapid liberalization states experienced during the early 1990s after the breakup of the Soviet Union. The states of Eastern Europe, under pressure from international finance institutions and states like the United States, all opted for rapid liberalization programs. The Washington Consensus institutions had faith that the market would rapidly adjust to address new issues and they made almost no attempts to reform the economies that had emphasized heavy industry for the past 50 years. The rapid liberalization also included rapid privatization which concentrated the worthwhile resources in the hands of a few political insiders. This privatization led to the rise of the oligarchs and the Russian Mafia.34 Throughout the transition, those who could take things by force did, and soon their protection was necessary for anyone looking to conduct business. Their time of power was short-lived but nearly complete, as the Russian Mafia filled the power vacuum created by the abrupt shift. The Western World did not attempt to identify or fix structural problems in Eastern European states. The political changeover did not represent real change; many of the political institutions remained the same or similar to their previous manifestations and many of the bureaucrats were the same people in power in the new systems. The endemic lack of responsiveness of the government to the people that existed under the Soviet Union was continued, but this time in new ostensibly democratic governments35. True democracy and market economies have to be developed, not suddenly made. The process can be accelerated but the transition period has to be lengthy and thorough. 33

Transparency International, http://www.transparency.org/policy_research/surveys_indices/cpi/2008, Accessed 9 December 2008. 34 Anders Aslund, How Capitalism Was Built: The Tranformation of Central and Eastern Europe, Russia, and Central Asia, New York: Cambridge University Press, 2007. 35 Stiglitz.

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Culture In Eastern Europe there are many cultural factors that have prevented sustainable development. There has been and still is a deep sentiment of self-sufficiency, to the point where there is an almost inherent mistrust of other people and their own governments. This mistrust was exacerbated as it led to communications breakdowns and conflict which bred further distrust. The institutional mistrust of government manifests itself in many negative ways. Government development programs and other initiatives common in market economies are ignored or under-utilized.36 Petty corruption is not reported, as citizens believe it is a fixture in everyday life. People who grow up in the system later wonder where their cut is and perpetuate the same system of corruption. Eastern European culture has another significant impact on sustainability. Ethnic nationalism manifests itself in prejudice, which distorts the market, and warfare which destabilizes entire economies, setting back years of economic progress. The Balkans conflicts of the 90s were numerous and destroyed the regionâ&#x20AC;&#x2122;s fragile economies which need to be rebuilt before they can work towards sustainability. The vicious conflict between various seceding Yugoslavian states and ethnic Serbs left over 200,000 dead and displaced millions.37 Mistrust, whether of other ethnicities or of government as a whole, is not conducive to sustainable economic development and any solution would have to eradicate this culture of mistrust.

Comparison of Possible Causes The lack of sustainability in Eastern Europe is a serious problem; the states of the region continue to lag behind the rest of Europe in almost every economic factor. The potential is there, as seen by the stellar growth rates of the early to mid 2000s. However, Eastern European states need to be capable of sustaining their growth in more than four to five year bursts. Three possible causes for the lack of sustainable development are 36

Rasma Karklins. The War in Bosnia, USA Today, 2/14/96, http://www.usatoday.com/news/index/bosnia/nbos002.htm, Accessed 10 December 2008. 37

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corruption, shock therapy, and culture. Corruption destabilizes states domestically and in the eyes of the international lenders, a significant hurdle to development. The adverse effects of an ineffective application of shock therapy to the markets is still impacting Eastern Europe, as people have to deal with poor infrastructure, stripped assets, and an imbalanced allocation of resources based on non-market factors. The culture of Eastern Europe needs to be shifted to achieve lasting economic success. People need to work closely with other people, and with their governments to make sustainable development truly attainable.38 If trust is not built and fostered, these states will revert to isolationism, and closed-off markets. The issue is complex because all of these causes are linked. The lack of trust in institutions can be explained by the corruption evident in Eastern European states for centuries. The propensity to strip wealth, and take it abroad in capital flight was the result of Eastern European culture undergoing shock therapy. Shock therapy was thought to be necessary, partially because those who proposed it thought the corruption could be eliminated by a quick transition, preventing the creation of intractable political blocs. In addition, gradual change could have slowed down the liberalization process immeasurably. These factors are the causes for a lack of sustainable economic development in the transition economies of Eastern Europe.

Projections and Implications If this issue is not addressed it could have dire consequences for Eastern Europe. Despite the growth in the 2000s of some of the Eastern European stateâ&#x20AC;&#x2122;s economies, they are all still distinctly developing states, and this latest global economic crisis is hitting the Eastern European region harder than most. The trends of poverty, declining life expectancy, higher infant mortality rates, and real wage reduction in Eastern Europe could continue if action is not taken. Russiaâ&#x20AC;&#x2122;s incidence of poverty is above twenty per 38

Giovanni Cornia an d Vladimir Popov, Transition and Institutions, New York: Oxford University Press, 2001

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cent and Armenian real wages are 11 percent of what they were in 1989 as of 2001.39 Throughout Eastern Europe over 60 million people live on less than two USD a day.

Less than 30% of people in rural areas have easy access to water.41 These numbers do not represent sustained economic development, nor do they represent the kind of infrastructure that can support sustained economic development in the future. If economic sustainability cannot be achieved, the Eastern European region is prone to destabilize again. The mistrust inherent in Eastern European culture could begin to form new conflicts, further stunting economic progress. Due to the significant variety of resources such as oil, natural gas, manpower, coal, fertile land, metals, and forests, it is clear that Eastern European states will be making a profit. However, if sustainable economic development for all cannot be established the gaps between the impoverished and the wealthy will continue to grow with possibly disastrous consequences.

Mihaly Simai, Poverty and Inequality in Eastern Europe and the CIS Transition Economies, http://www.un.org/esa/desa/papers/2006/wp17_2006.pdf, Accessed 12 December 2008. 40 Growth, Poverty, and Inequality: Eastern Europe and Former Soviet Union, World Bank, http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/0,,contentMDK:20627214~pagePK:1467 36~piPK:146830~theSitePK:258599,00.html, Accessed 8 December 2008. 41 Millions Living in Poverty in Eastern Europe, SOS Childrens Foundation, 4/30/2007, http://www.soschildrensvillages.org.uk/charity-news/millions-living-in-poverty-in-eastern-europe.htm, Accessed 8 December 2008.

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Conclusion Eastern Europe is an impoverished area and it is EcoFinâ&#x20AC;&#x2122;s responsibility to think of creative solutions that better the welfare of the populace and create economic growth. In order to do this it is important to keep in mind the history of Communist states and their current status as modernizing but still underdeveloped societies. One also must consider the steps that put Eastern Europe in this position, such as the use of market fundamentalism, and the corruption and mistrust of their own states and societies. The status of Eastern Europe as emerging members of the European Union and simultaneously members of the oligarchic economies from which they come represents an interesting dichotomy that requires a unique set of solutions to achieve the goal of sustainable development.

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Discussion Questions • What are the ways we as a committee can promote sustainable development in the transition economies of Eastern Europe? • What effects will curtailing corruption have on sustainability? • What about this issue is specific to Eastern Europe? What about this issue can we apply to other countries and regions? • How does Eastern Europe relate to the European Union? Should this be a part of our discussion? • How can this committee create solutions that will make a positive culture change in Eastern Europe? • Which of the possible causes do you think is the most relevant in this issue? Which is most important to your state? • Do you think the global financial institutions such as the IMF and World Bank handled this situation well? • What unique policy problems do the oligarchs create? • What can NGOs do to help solve this issue? • What historical events are the most important to understanding the present problems presented by sustainable development?

PhilMUN 2009 For Further Reading Cornia, Giovanni and Popov, Vladimir. Transition and Institutions. New York: Oxford University Press, 2001 This book covers the processes of economic transition from around the world in all kinds of market styles. A thorough and informative look at transition economies and the solutions that have worked and failed in the past. European Bank for Reconstruction and Development Website http://www.ebrd.com/ The EBRDâ&#x20AC;&#x2122;s website is full of excellent information, research, background, and programs and almost all relating to sustainability in transition economies. Highly recommended both for committee members and anyone interested in economic development policy. Stiglitz, Joseph. Globalization and itâ&#x20AC;&#x2122;s Discontents. New York: WW Norton, 2003. This book is not specifically about sustainability but it has many interesting insights about economics of globalization. An interesting read with many valuable pieces of information and an excellent description of the 1998 IMF bailout of Russia.

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Works Cited About the EBRD. http://www.ebrd.com/about/index.htm. 12/8/08. About Us. http://www.anped.org/index.php?part=411. 12/8/08. Acession Criteria. European Commision. http://ec.europa.eu/enlargement/enlargement_process/accession_process/criteria/in dex_en.htm. 12/10/08. Aslund, Anders. How Capitalism Was Built: The Tranformation of Central and Eastern Europe. Russia. and Central Asia. New York: Cambridge University Press. 2007. Barker, Colin and Mooers, Colin. Theories of Revolution in Light of 1989 in Eastern Europe. http://64.233.169.132/search?q=cache:Ho6uSZMfPCEJ:www.psa.ac.uk/journals/p df/5/1994/bark2.pdf+1989+Revolutions+economic+transition&hl=en&ct=clnk&c d=4&gl=us. 12/8/08. Bartlett, David L.. Economic Growth and Financial Development in Europe. RSM International. http://64.233.169.132/search?q=cache:CFOqMpnjRGoJ:www.tmud.org.tr/dokuma nlar/14_kasim_sunumlar/1.2.7/bartlett%2520wcoa%2520nov%252006.ppt+EU+a nd+Eastern+European+GDP+growth&hl=en&ct=clnk&cd=12&gl=us. 12/1/08. Cornia, Giovanni and Popov, Vladimir. Transition and Institutions. New York: Oxford University Press. 2001 Eastern European Outlook: Resilience is eroding - lengthy recession in Estonia and Latvia. Euro Investor. 08/10/2008. http://www.euroinvestor.co.uk/News/ShowNewsStory.aspx?StoryID=9990056. 12/9/08. Estoniaâ&#x20AC;&#x2122;s Recession Deepens As Latvian Finances Struggle to find Air. November 14 2008. Eastern Europe Economy Watch. http://easterneuropeeconomy.blogspot.com/2008/11/estonias-recession-deepensas-latvian.html. 12/1/08. European Countries. Europa. http://europa.eu/abc/european_countries/index_en.htm. 12/10/08

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Euro aspirants fall short of requirements. Wednesday 6 December 2006. EurActiv http://www.euractiv.com/en/enlargement/euro-aspirants-fall-shortrequirements/article-160307 12/10/08e Growing Older in Eastern Europe and Central Asia. Help Age International. http://www.helpage.org/Worldwide/EasternEuropeandCentralAsia/GrowingoldinE asternEuropeandCentralAsia. 12/10/08. Growth. Poverty and Inequality: Eastern Europe and Former Soviet Union. World Bank. http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/0..cont entMDK:20627214~pagePK:146736~piPK:146830~theSitePK:258599.00.html. 12/8/08. Internet Modern History Sourcebook. Fordham University. http://www.fordham.edu/halsall/mod/modsbook.html. 12/10/08. Karklins, Rasma. The System Made Me Do It: Corruption in Post-Communist Societies. New York. M.E. Sharp. 2005. Kast, Sheilah. Enduring Lessons of the Soviet Breakup. Washington Times. January 1. 2002. http://www.cdi.org/russia/johnson/6002-9.cfm. 12/9/08. Miko, T. Soviet Policy Under Andropov. U.S. Library of Congress. Congressional Research Service. Foreign Affairs and National Defense Division. Issue Brief Number IB83120. 1/20/84. http://74.125.45.132/search?q=cache:0HJBGtuWFcJ:digital.library.unt.edu/govdocs/crs/permalink/meta-crs9189:1+Andropov+Economic+Policy&hl=en&ct=clnk&cd=2&gl=us. 12/8/08. Milanovic, Milic. Property Rights. Liberty. and Corruption in Serbia. Independent Review; Fall2007. Vol. 12 Issue 2. p213-234. 22p. Academic Search Premier Millions Living in Poverty in Eastern Europe. SOS Childrens Foundation. 4/30/2007. http://www.soschildrensvillages.org.uk/charity-news/millions-living-in-povertyin-eastern-europe.htm. 12/8/08. Oâ&#x20AC;&#x2122;Brennan, John. The EU in the Western Balkans: Enlargement as Empire? A Response to David Chandler. Global society : journal of interdisciplinary international relations 10/1/2008. Academic Search Premier. Accessed 12/10/08

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Sadowski, Marcin. GDP Growth Rate in CEE will amount to 5%. PMR Publications. http://www.pmrpublications.com/press_room/en_GDP-growth-rate-in-CEE-willamount-to-5_.shtml. 11/4/08. Schoenman, Roger. Captains or Pirates? State-Business Relations in Post-Socialist Poland. East European politics and societies. 1/1/2005. Academic Search Premier 12/8/08. Siegelbaum, Lewis. Perestroika and Glastnost. Seventeen Moments in Soviet History. http://soviethistory.org/index.php?page=subject&SubjectID=1985perestroika&Ye ar=1985. 12/8/08. Simai, Mihaly. Poverty and Inequality in Eastern Europe and the CIS Transition Economies. http://www.un.org/esa/desa/papers/2006/wp17_2006.pdf. 10/12/08. Stiglitz, Joseph. Globalization and Its Discontents. New York: WW Norton 2003. The Brezhnev Era. http://countrystudies.us/russia/14.htm. 12/8/08. The Russian Crisis of 1998. The Third World Network. http://www.twnside.org.sg/title/1998-cn.htm. 12/8/08. The War in Bosnia. USA Today. 2/14/96. http://www.usatoday.com/news/index/bosnia/nbos002.htm. 12/10/08. Transparency International. http://www.transparency.org/policy_research/surveys_indices/cpi/2008. 10/19/08 Ukraine. Easy Money. The Economist. August 8.1998. http://www.imfsite.org/recentfin/ukraine.html. 12/9/08 Washington Consensus. Center for International Development at Harvard University. April 2003. http://www.cid.harvard.edu/cidtrade/issues/washington.html. 12/8/08.

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Works Referenced About the EBRD. http://www.ebrd.com/about/index.htm. 12/8/08. About Us. http://www.anped.org/index.php?part=411. 12/8/08. Acession Criteria. European Commision. http://ec.europa.eu/enlargement/enlargement_process/accession_process/criteria/in dex_en.htm. 12/10/08. Aslund, Anders. How Capitalism Was Built: The Tranformation of Central and Eastern Europe. Russia. and Central Asia. New York: Cambridge University Press. 2007. Barker, Colin and Mooers, Colin. Theories of Revolution in Light of 1989 in Eastern Europe. http://64.233.169.132/search?q=cache:Ho6uSZMfPCEJ:www.psa.ac.uk/journals/p df/5/1994/bark2.pdf+1989+Revolutions+economic+transition&hl=en&ct=clnk&c d=4&gl=us. 12/8/08. Bartlett, David L.. Economic Growth and Financial Development in Europe. RSM International. http://64.233.169.132/search?q=cache:CFOqMpnjRGoJ:www.tmud.org.tr/dokuma nlar/14_kasim_sunumlar/1.2.7/bartlett%2520wcoa%2520nov%252006.ppt+EU+a nd+Eastern+European+GDP+growth&hl=en&ct=clnk&cd=12&gl=us. 12/1/08. Cornia, Giovanni and Popov, Vladimir. Transition and Institutions. New York: Oxford University Press. 2001 Estoniaâ&#x20AC;&#x2122;s Recession Deepens As Latvian Finances Struggle to find Air. November 14 2008. Eastern Europe Economy Watch. http://easterneuropeeconomy.blogspot.com/2008/11/estonias-recession-deepensas-latvian.html. 12/1/08. Eastern European Outlook: Resilience is eroding - lengthy recession in Estonia and Latvia. Euro Investor. 08/10/2008. http://www.euroinvestor.co.uk/News/ShowNewsStory.aspx?StoryID=9990056. 12/9/08. European Countries. Europa. http://europa.eu/abc/european_countries/index_en.htm. 12/10/08

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Euro aspirants fall short of requirements. Wednesday 6 December 2006. EurActiv http://www.euractiv.com/en/enlargement/euro-aspirantsfallshortrequirements/article-160307 12/10/08e Growing Older in Eastern Europe and Central Asia. Help Age International. http://www.helpage.org/Worldwide/EasternEuropeandCentralAsia/GrowingoldinE asternEuropeandCentralAsia. 12/10/08. Growth. Poverty and Inequality: Eastern Europe and Former Soviet Union. World Bank. http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/0..cont entMDK:20627214~pagePK:146736~piPK:146830~theSitePK:258599.00.html. 12/8/08. Internet Modern History Sourcebook. Fordham University. http://www.fordham.edu/halsall/mod/modsbook.html. 12/10/08. Karklins, Rasma. The System Made Me Do It: Corruption in Post-Communist Societies. New York. M.E. Sharp. 2005. Kast, Sheilah. Enduring Lessons of the Soviet Breakup. Washington Times. January 1. 2002. http://www.cdi.org/russia/johnson/6002-9.cfm. 12/9/08. Miko, T. Soviet Policy Under Andropov. U.S. Library of Congress. Congressional Research Service. Foreign Affairs and National Defense Division. Issue Brief Number IB83120. 1/20/84. http://74.125.45.132/search?q=cache:0HJBGtuWFcJ:digital.library.unt.edu/govdocs/crs/permalink/meta-crs9189:1+Andropov+Economic+Policy&hl=en&ct=clnk&cd=2&gl=us. 12/8/08. Milanovic, Milic. Property Rights. Liberty. and Corruption in Serbia. Independent Review; Fall2007. Vol. 12 Issue 2. p213-234. 22p. Academic Search Premier Millions Living in Poverty in Eastern Europe. SOS Childrens Foundation. 4/30/2007. http://www.soschildrensvillages.org.uk/charity-news/millions-living-in-povertyin-eastern-europe.htm. 12/8/08. Oâ&#x20AC;&#x2122;Brennan, John. The EU in the Western Balkans: Enlargement as Empire? A Response to David Chandler. Global society : journal of interdisciplinary international relations 10/1/2008. Academic Search Premier. Accessed 12/10/08

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