The global economic crisis

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DEVELOPMENT & TRANSITION

13 JULY 2009

Albania Armenia Azerbaijan Belarus Bosnia and Herzegovina Bulgaria Croatia Cyprus Czech Republic FYR Macedonia Georgia Hungary Kazakhstan Kosovo (Serbia) Kyrgyzstan Latvia Lithuania Malta Moldova Montenegro Poland Romania Russian Federation Serbia Slovakia Slovenia Tajikistan Turkey Turkmenistan Ukraine Uzbekistan

Published by the United Nations Development Programme and the London School of Economics and Political Science

The Regional Impact of the Global Economic Crisis The socio-economic dimensions of the global economic crisis in Europe and the Commonwealth of Independent States (CIS) are the focus of this issue of Development and Transition. Where does the crisis leave the ‘good governance’ agenda that has been the dominant paradigm for development since the 1990s?

growth, financed by domestic savings. By contrast, the Baltic states’ macroeconomic policies seem to have produced a case of ‘globalization gone astray’. Kattel suggests that the Baltic economies after the crisis will continue to have an unstable character, as small domestic savings pools will combine with fixed exchange rates to create ‘Ponzi scheme’ risks in external finance.

Balázs Horváth calls for policies that address the crisis’s individual components–and their links to such longer-term development challenges as climate change, demographics, and migration. Nick Maddock and Lovita Anders Åslund leads off by arguing Ramguttee point out that, whereas that, while governments and internaremittances globally may decline by tional institutions have managed to 5-8 percent in 2009, the drop in control the contagion effects, the Europe and Central Asia could be eurozone should be expanded to twice this magnitude. Louise Sperl include Estonia, Latvia, Lithuania, and suggests that such shocks could exacBulgaria, as well as Denmark. Marek erbate the gender-specific effects of Dabrowski suggests that, in the the crisis, in such areas as employlonger term, a return to the ‘goverment, social protection, health, and nance’ agenda of economic and instieducation, as well as migration. Aikan tutional reforms, both nationally and Mukanbetova outlines some of these internationally, will increase global threats in the case of low-income growth. Saul Estrin strikes a similar Kyrgyzstan. Andrey Ivanov therefore note in arguing that transition calls for a response to the crisis that processes in the region are not yet would remove incentives for exces© Martin Roemers/Panos Pictures spent, and the crisis is unlikely to funsive consumption and financial leverdamentally alter regional and global economic integration (the age, while emphasizing health, education, and social protection principal drivers of transition). However, these processes seem as per the human development paradigm. likely to be accompanied by greater elements of state direction and regulation going forward. For example, Anja Shortland The global economic crisis has led to predictions of mass mobiargues that bank nationalization can help retain savings, partic- lization and protest in Central and Eastern Europe, as well as ularly when the regulation of private banks is of poor quality. other regions (e.g., Latin America). Previous studies have focused on the persistence of protest in the latter region and The Baltic states–formerly poster children for rapid reform and patience in the former. In comparing recent protests in the two fiscal rectitude–have been among the most severely affected in regions, Olga Onuch concludes that, although economic crises the region. In comparing the Baltic economies’ post-1990 devel- can be triggers, other socio-political factors are critically imporopment patterns to those of the Nordic economies during 1945- tant determinants of mass mobilization.

1970, Rainer Kattel argues that the Nordics’ macroeconomic policies helped pave the way for long-term innovation, and James Hughes and Ben Slay

Implications of the global financial crisis for Eastern Europe / Anders Åslund / . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Responding to crisis: core and periphery / Marek Dabrowski / . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Transition after the crisis / Saul Estrin / . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 A case for nationalizing failing banks / Anja Shortland / . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 The rise and fall of the Baltic states / Rainer Kattel / . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Towards a multifaceted policy response / Balázs Horváth / . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Responding to falling remittances and returning migrants / Nick Maddock and Lovita Ramguttee / . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 The crisis and its consequences for women / Louise Sperl / . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Responding to the economic crisis in Kyrgyzstan / Aikan Mukanbetova / . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 The economic crisis as a human development opportunity / Andrey Ivanov / . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Crisis-related social mobilization in transition states / Olga Onuch / . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Slump and the city: Company towns and the crisis in Russia / Evgeny Levkin / . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

DEVELOPMENT & TRANSITION Implications of the global financial crisis for Eastern Europe Anders Ă…slund The current global financial crisis is the worst the world has seen since the Great Depression, 1929-33. It has hit Central and Eastern Europe harder than any other region of the world. Its forecast drop in GDP this year is about 4 percent, and at least Latvia and Ukraine are likely to face double-digit decline.

Until fall 2008, the East European countries had enjoyed a wonderful decade with an average growth rate of the whole region of 7-8 percent a year thanks to three factors. First, in the 1990s these countries had undergone a successful transition to market economies, with deregulation, privatization, and financial stabilization. Second, they benefited from vast underutilized real and human capital. Third, their exports drove growth through international integration and global boom.

But overheating was apparent since 2006, when my colleague at the Peterson Institute for International Economics, Morris Goldstein, warned that Eastern Europe would be the focal point of the next financial crisis because of large current account

deficits, large foreign debt, currency mismatches, and misaligned exchange rates.

Eastern Europe was making one classical policy mistake. Many countries had fixed exchange rates, notably Estonia, Latvia, Lithuania, Belarus, Russia, Ukraine, and Bulgaria. The illusory safety of the pegged exchange rate attracted large inflows of short-term lending from European banks. The currency inflows boosted the money supply, and inflation surged with money supply growth from 2006. The inflation was worst in Ukraine, peaking at 31 percent in May 2008.

The temptation for international banks was irresistible. They could lend to consumers in Ukraine for 50 percent per annum with minimal financing costs. But this was a dangerous speculative scheme. The foreign exchange inflows accelerated imports and boosted balance-of-payments deficits. High inflation priced countries 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 massively. Real estate prices had spiraled out of control, but even so few premises were available. Salaries of young professionals were outlandish, as skilled labour was desperately scarce. Yet stock markets were already plummeting, indicating that something was seriously wrong.

On 15 September 2008, Lehman Brothers went bankrupt, and financial markets throughout the world froze up. Suddenly,

Lending by the International Monetary Fund in response to the global economic crisis

Country Armenia Belarus Bosnia and Herzegovina Georgia Hungary Iceland Kyrgyzstan Latvia Moldova Poland Romania Serbia Tajikistan Ukraine

Poverty Reduction and Growth Facility1

Type of IMF programme Exogenous Shock Stand-by Facility2 Arrangement3 $540 million $2.46 billion $1.52 billion5 $750 million $15.70 billion $2.10 billion $100 million $2.35 billion

Flexible Credit Line4

$118.20 million $20.58 billion $17.10 billion $4 billion $116 million $16.40 billion

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.

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JULY 2009 | issue 13 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 International Monetary Fund (IMF).

The unprecedented global boom had left the IMF dormant, but it quickly woke up and agreed on new stand-by agreements for Ukraine, Hungary, and Latvia. Other countries with new IMF agreements are Georgia, Belarus, Serbia, and Romania. Poland has concluded a precautionary arrangement, and Turkey and Armenia are about to make new IMF agreements. Presumably, a few more countries will follow.

By and large, the East European financial crisis of 2008-9 resembles the East Asian crisis of 1997-8. The fundamental problem then and now was excessive inflows of short-term bank credits, enticed by pegged exchange rates, leading to large private foreign debt. Public finances, by contrast, were mostly in excellent shape with the exceptions of Hungary and Romania, which had significant budget deficits but only Hungary had a worrisome public debt.

The domestic vulnerabilities were aggravated by the worst financial panic in our lifetime. Capital fled to the perceived safe havens – gold, dollar, euro, yen, and Swiss Franc. Even the British pound and the Swedish krona plummeted. A financial panic is a market failure that needs to be cured by the state, and internationally the IMF is supposed to provide countervailing financial flows.

The IMF acted fast and well. In the East Asian crisis, the IMF was perceived as excessively intrusive, adding many demands for structural reforms to its traditional agenda. This time, the IMF returned to the more elementary Washington Consensus cure of the early 1990s. Essentially, the IMF posed three demands: a budget close to balance, a realistic exchange rate policy, and bank restructuring with recapitalization. In return for the fulfillment of these conditions, the IMF offered far larger loans than previously.

As the crisis erupted, excellent ad hoc cooperation developed between the IMF and the European Commission (EC). The IMF had the staff, rules and procedures for handling a financial crisis, while the EC had neither, so it conceded and assisted instead. The EC has co-financed the IMF programmes for Hungary and Latvia, and several European countries, notably the Scandinavians, contributed with substantial financing to the Latvian programme.

Three other international institutions have played a substantial role, namely the World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank. Their main focus has become bank recapitalization.

One of the greatest worries has been that the West European banks that had bought most East European banks would withdraw from the region. So far, no European bank has done so, and the peak of the crisis has hopefully passed. In Ukraine, 17 European banks with subsidiaries in the country have even com-

Will the European Central Bank decide to expand the eurozone farther east? © European Central Bank

mitted themselves to recapitalize their Ukrainian subsidiaries with $2 billion in 2009.

Exchange rate policy has become the focal bone of contention in the new stabilization programmes. The pegs were clearly causes of the crisis, but that does not necessarily mean that they should be abandoned in the midst of a crisis. If a country devalues, its banks could be squeezed on all sides. The local cost of the loans the banks had taken abroad would sharply rise, and many would default. Their domestic customers that had taken loans in foreign currency would also be unable to repay them, with their revenues in the devalued currency.

Hungary and Romania had floating exchange rates, which plunged along with the floating rates of other currencies not facing a crisis, such as Poland and the Czech Republic. The IMF forced Ukraine to float and Belarus to devalue, but the Baltic states offered a stumbling block. They have long tied their currencies to the euro, in hopes of adopting the euro as early as 2006–hopes that were frustrated by the rising inflation rates that took hold during 2007-2008. As Latvia still aspires to join the euro in 2012, it opposes any devaluation.

For a small open economy that is extremely flexible, devaluation would hardly solve any problem, while the banking system would collapse, causing many bankruptcies and wreaking havoc.

The Latvian government, supported by the Scandinavians and the EC, offered to undertake an ‘internal devaluation’ by cutting salaries and public expenditure as much as was necessary. The IMF accepted with astonishment Latvia’s severe austerity programme as an alternative to devaluation. Although economic results so far have persistently been worse than forecasted, Latvia is 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-

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DEVELOPMENT & TRANSITION ily run out. In London, the G-20 agreed to quadruple IMF’s funds to over $1 trillion, giving it enough money to keep Eastern Europe out of any liquidity trap. As a consequence, East European bond and stock markets rallied in April; the devastated Ukrainian stock market was the best performing stock exchange in the world, reporting a rise of 70 percent in a month. The London summit may mark the end of the acute crisis in Eastern Europe, even if more IMF programmes are to be expected.

Many worried that the crisis would cause social unrest and even regime change, but so far unrest has been very limited.

People appear to understand the severity of the crisis and demand forceful action. Four crisis countries have changed governments in the last half year. Lithuania and Romania had parliamentary elections late last year, and their new governments are more free-marketeering than their predecessors. In Latvia, the most liberal party has joined the center-right coalition government and taken the lead in explaining to the public why wage and expenditure cuts are needed. In Hungary,

Responding to crisis: core and periphery Marek Dabrowski From prosperity to crisis In the new millennium the world economy, especially its emerging-market part, experienced an unprecedented period of prosperity, with most countries growing at high or very high rates regardless of the quality of their economic policies.

This global boom could be partly attributed to policy reforms in a number of important countries and regions in the last two decades, and progress in global trade liberalization (the results of the Uruguay Round). However, it was also stimulated by highly accommodative monetary policies in the United States and elsewhere, which responded to fears of recession and deflation by drastically cutting interest rates in 2001-2002 and then keeping them at record-low levels for too long.

Likewise, many emerging market economies pursued neomercantilist policies by keeping their currencies undervalued and building up large precautionary foreign exchange reserves, which they saw as the best insurance against a currency crisis (a view that was shared by the International Monetary Fund (IMF)).

These policies led to the accumulation of excessive liquidity in the world economy, which in turn caused global overheating and the growth of the housing bubble in the United States and several European countries, stock market bubbles, and commodity market bubbles. The bursting of these bubbles destabilized the financial sector in the United States and in other developed countries. As with the prosperity that preceded them, the financial crisis and recession have a truly global character.

According to a recent IMF projection, the world gross product may contract in 2009 for the first time since the 1930s.

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admittedly, one socialist prime minister has replaced another.

By and large, the East European politics have responded adequately to the crisis.

The big question mark is how the EC and the European Central Bank will adapt to the crisis. The EC has sensibly increased its balance of payments fund for member states from €12 billion last summer to €50 billion, and it has given large credits to Hungary, Latvia and Romania. Yet the ECB has done very little. It should prepare for the expansion of the eurozone to the most faithful – Estonia, Latvia, Lithuania and Bulgaria as well as Denmark. It should also develop its own bonds and broaden the range of its available tools. For the eurozone, the current crisis is a great opportunity which must not be missed.

Anders Åslund is a senior fellow at the Peterson Institute for International Economics. Together with Andrew Kuchins, he has coauthored the book The Russia Balance Sheet (Washington D.C.: Peterson Institute for International Economics, 2009).

The crisis started in summer 2007 at the core of the world economy, in the US financial system. It then moved to Western Europe and Japan, finally hitting the periphery (i.e., developing and transition countries) at the end of 2008. The September 2008 bankruptcy of Lehman Brothers, one of the largest US investment banks, was a turning point, which deepened the crisis and accelerated its spread to parts of the world that had not yet been affected.

In addition to monetary policy miscalculations, institutional, regulatory, and microeconomic factors contributed to the eruption and depth of the crisis. The absence of international macroeconomic (monetary) policy coordination and the lack of supranational financial supervision of the world’s highly integrated financial markets were perhaps some of the most serious systemic inconsistencies. Also, national financial supervision was often too lax and did not have sufficient tools to follow new financial products. Its traditional sectoral segmentation left financial supervision unable to keep pace with the rapid crosssectoral integration of financial institutions, as was apparent in the construction of such large financial conglomerates as AIG. Pro-cyclical prudential regulations (Basel 2 has an even stronger pro-cyclical character than Basel 1), risk assessment methodologies that were unable to follow financial innovations, and wrong incentives schemes (e.g., remuneration of management based on short-term profit, fees for rating agencies paid by clients) also contributed to market distortions, and exacerbated both boom and 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 Commonwealth of Independent States (CIS), and Brazil and finally hit some US financial institutions. The present crisis is closer to that of the Great Depression of the 1930s or the US dollar crisis in the 1970s.

Emerging economies were therefore relatively late victims. They

JULY 2009 | issue 13 continued to grow through most of 2008 thanks in part to high commodity prices, until their crash in late summer of 2008.

Ultimately, they were hit by the contraction in global demand and falling commodity prices, the global liquidity squeeze and the resulting capital outflows and increasing risk aversion, sometimes by troubles in parent financial institutions in developed countries, increased exchange rate volatility (including competitive depreciation of major trade partners and competitors), and decreasing demand for migrant labour. The secondround effects may involve, among others, banking sector troubles resulting from clients’ insolvency caused by recession and depreciating exchange rates.

Policy responses: core and periphery

sis policies than do countries at the ‘periphery’. These are most apparent in terms of currencies, only some of which (such as the US dollar, the Euro, and, to lesser extent, the Japanese yen, Swiss frank, and British pound) serve as a global means of exchange, unit of account, and store of value.

After the collapse of financial intermediation (and associated reduction in the money multiplier) following the Lehman Brothers bankruptcy, economic agents increased their demand for base money issued by the largest central banks.

Despite their previous policy excesses, these banks had to meet this demand–as is shown in Figure 1 below. The key

Figure 1. Federal Reserve money in US $ million 1900000

Concrete responses must reflect national economic circumstances and 1700000 available resources. However, there are some general recommendations 1500000 which all countries should try to follow. First, they should avoid protectionist measures and beggar-thy- 1300000 neighbour policies, which could deepen the global recession (as occurred in 1100000 the 1930s). Second, they should resist temptations to nationalize and perma900000 nently expand the public sector, which may lead to decreasing productivity, 700000 excessive fiscal burdens, the politiciza2007 2007 2008 2008 2009 tion of business activity, corruption, Jan. June Jan. June Jan. and rent-seeking. Nationalization should be seen only as a temporary Source: http://www.federalreserve.gov/datadownload/. solution, and only for banks and other financial institutions of systemic importance, and only when questions are how far to go with this monetary expansion, other options for rescue/recapitalization are unavailable. In how to withdraw the monetary stimulus when the risk of each case a clear exit strategy should be foreseen from the deflation gives way to the risk of inflation or stagflation, and very beginning. what to do with bad assets accumulated by some central banks (like the US Federal Reserve) in the course of aggressive Many countries must return to structural and institutional quantitative easing. reforms that were forgotten during the time of prosperity, in order to soften the consequences of the crisis and increase The economies of the ‘periphery’ face other challenges: declingrowth potential after the crisis ends. Such packages of ing demands for their currencies both reflect and lead to masreforms must be tailor-made to address the specific condi- sive capital outflows and exchange rate depreciation, which tions in each country, but they could involve a greater labour- could trigger bankruptcies of enterprises, consumers and and product-market flexibility, measures to improve business banks that are indebted in foreign currency. Aggressive moneclimates, fighting corruption, privatization of remaining state- tary easing to help the real sector can therefore accelerate the owned enterprises, and rationalization of social policies. flight from the domestic currency and exacerbate the effects Financial supervision should be overhauled both on national of the crisis. and supra-national levels (both inside the EU and globally).

The same can be said for the global and regional coordination Things are even more complicated in the case of fiscal policy. of macroeconomic policies, and bringing the Doha trade lib- The global fiscal stimulus proposed by the IMF is unrealistic in eralization round to a successful conclusion. The recent G-20 light of countries differing borrowing constraints–especially decisions to recapitalize the IMF and World Bank, broaden in times of market distress. Excessive fiscal easing in their mandates, and rebalance voting power in favour of economies of the ‘periphery’ with limited fiscal space can developing countries are quite hopeful in this respect. raise the spectre of default. But even those countries that are in a better starting position (with smaller public and foreign However, countries belonging to the ‘core’ of the world econ- debts, or larger fiscal reserves, as is the case with oil producomy have different roles and resources in conducting anti-cri- ers) and better market reputation should think twice before

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DEVELOPMENT & TRANSITION Chart 2. Population cohorts aged 65+ will be much larger by 2025, causing long-term fiscal challenges 0

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Percentage of population 10 15

20

25

Tajikistan Uzbekistan Turkmenistan

2000

2025

Kyrgyzstan Turkey

choosing aggressive fiscal stimulation. First, many of these will face a huge fiscal challenge related to aging populations in the coming decades. Second, while initiating a fiscal stimulus is politically easy, stopping or withdrawing it is much more difficult. Third, fiscal stimulus packages often involve dangers of explicit or implicit trade protectionism. Finally, a large-scale fiscal stimulus could mean crowding out private sector activities or claims on resources that are badly needed by developing countries.

Despite these risks, ‘core’ economies have no alternative to taking fiscal responsibility for repairing the global financial system and helping ‘peripheral’ economies to resist downward pressures on their currencies. Without repair of the global financial system, the timely end of the recession is very unlikely.

Azerbaijan Kazakhstan Albania Moldova Armenia

Looking ahead: the world after crisis The quality of crisis management will determine its length and severity, as well as post-crisis economic prospects. While no one can accurately predict the length, depth, and consequences of the crisis, the study of business cycles shows that it will end at some point and the economy will start growing.

Let’s hope that major countries will avoid protectionist temptations and that global economic governance will be strengthened. If this optimistic scenario holds, the main achievements of globalization during the last three decades would remain intact. However, there is little chance that the world economy will grow at the pace experienced earlier in this decade.

Macroeconomic policies in major economies will have to be less accommodative, and the financial sector less leveraged and more risk-averse. There are no new major sources of productivity gains apparent on the horizon. It is also clear that both ‘core’ and ‘periphery’ economies will face stronger fiscal constraints, which will require serious adjustments in public expenditure policy. A return to economic and institutional reforms, both nationally and internationally, may be the best chance to increase global growth potential.

FYR Macedonia Russia Belarus Serbia Georgia Romania Slovakia Lithuania Estonia Ukraine BiH Poland Latvia Hungary Bulgaria Czech Croatia Slovenia Source: World Bank staff calculations, based on United Nations 2005.

Transition after the crisis Saul Estrin Introduction Transition, a process that has been followed for almost 20 years now by the former socialist economies of Central and Eastern Europe, entails a shift from an economic system characterized by public ownership and (usually) central planning to one in which economic coordination is provided to privately owned firms via markets. The socialist systems delivered slow growth, macroeconomic imbalances and political repression; transition promised high growth, mass consumption, integration with

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Marek Dabrowski is President of CASE - Centre for Social and Economic Research, Warsaw.

the developed economies of the West and political freedom.

Most of these promises have been brought into question by the credit crunch of 2008 and the subsequent economic crisis, which seems likely to have even more savage corollaries in 2009 and beyond in many transition economies.

This article considers the ways in which the principal drivers of transition–for example, EU and global trade integration, or foreign direct investment–are likely to be affected by the recession. Transition can be viewed as one element in the broader process of globalization, so our analysis also ponders whether this will be temporarily or even permanently halted by the economic downturn. It also considers in more detail some of the likely implications of the recession for the transition economies, noting that the impact is likely to be more serious in some countries (i.e., Estonia, Hungary, or Bulgaria) than others (i.e.,

JULY 2009 | issue 13 Poland, Czech Republic, and Russia). This is a consequence of the particular transition path that they chose, for example with respect to the speed of privatization, openness to foreign direct investment, and degree of integration with the EU, as well as being significantly affected by initial conditions, notably market-related reforms pre-transition and natural resource endowments. It concludes that the convergence between developed and transition economies will probably resume, although performance may become more heterogeneous, for example between EU and non-EU members, and within the CIS between resource-rich and resource-poor economies.

Transition, globalization and the credit crunch Transition is usually conceived in an evolutional and unidimensional way, with a clear view of the starting and finishing points as well as the path. Thus, transition programmes tended to represent the rapid application of Washington consensus programmes to economies that were not always less developed, but which had some of the characteristics of underdevelopment: weak market supporting institutions, high levels of state intervention and price regulation, and very limited integration into global product, service, or capital markets.

But radical formal changes in, for example, ownership arrangements or property rights laws did not necessarily imply immediate substantial changes in practice. In particular, the changing and creation of institutions and the promotion of efficient privately owned enterprises and of independent financial institutions proved difficult, with achievements measured in decades rather than years, and a variety of political and economic approaches emerged as a result. As the EBRD Transition indicators show, success in building a market economy, and in national economic performance, even during the years of boom, was heterogeneous, being influenced by integration into the world trading system (notably EU accession); ownership of significant natural resources; or highly favourable preconditions (e.g., some liberalization pre-transition and a broad political consensus in favour of the reform process).

Some of the drivers of globalization and success in transition are rather similar. Because of differences in factor costs, notably labour, profitability can be increased by the transfer of production from developed to developing countries, provided costs in terms of management and control, transport, trade barriers etc., are not too high. In fact, these costs have been falling for a number of reasons. Developments in information and communication technologies have reduced the costs of transacting abroad; while some developing economies have begun to address those weaknesses in their institutional, legal and policy environment which affect the costs of doing business in their countries. The global policy environment has been benign, promoting an enormous expansion in world trade, foreign direct investment and outsourcing.

These drivers are also associated with the transition process.

Many transition economies were not exactly developing countries (though GDP per capita was well below Western levels) but had similarly high barriers to trade and capital flows, though often with greater levels of human capital.

Moreover, if ‘distance’ represents a way to describe barriers to trade and foreign direct investment, raising both transport costs and the costs of doing business in unfamiliar surroundings, then abolishing communism reduced ‘distance’ for many transition economies, especially those bordering the EU. Finally, the liberal policy environment was valuable to many transition economies in allowing them to reorient their trade patterns back to market-based pre-communist norms.

The first two drivers seem unlikely to alter. Technological changes are irreversible and likely to continue despite the credit crunch; and while performance has been heterogeneous, the general direction in at least the most advanced transition economies has been for entrenchment of institutional reform.

While it is early to evaluate the impact of the credit crunch on the policy environment, the tone of the international debate suggests that the lessons of the 1930s have been learned. In any case, for the transition countries which have acceded to the EU, Brussels is the pivot of the policy environment.

Convergence or divergence?

An economy’s ability to weather the storm depends both on its condition when the turbulence began, policies adopted in response, and on how long the turbulence lasts. Communism collapsed in part because it could not deliver growth in living standards comparable to developed economies; and transition will largely be judged by whether it has managed to reverse that divergence in GDP per capita. We consider the record in Charts 1-4 which show the level of GDP per capita (in purchasing-power-parity terms) as a percentage of the EU-15 average in the relevant year. The data are derived from the IMF. The groups of countries are the 10 EU Accession transition economies (Chart 1), remaining non-EU Central European countries (Albania, Bosnia, Croatia, the Former Yugoslav Republic of Macedonia, and Serbia) in Chart 2, former Soviet Union economies including Russia but excluding the Baltics (Chart 3); and Russia (Chart 4). The bars in each chart are for the first year when data are available, 2001 and 2008 respectively.

The process of convergence began at very different levels and has been heterogeneous. For the new EU members, GDP per capita increased slowly but steadily from 1993 to 2008, reaching some 50 percent of the EU-15 average. The other Central European economies started from a lower base and have Chart 1.

Eu New 10

60 50 40 30 20 10 0 1993

2001

2008

Note: The vertical axis denotes the level of GDP per capita (PPP) as a percentage of the EU-15 average.

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DEVELOPMENT & TRANSITION Chart 2.

Other Central Europe

27 26 25 24 23 22 21 20 19 2000

Chart 3.

2001

2008

Former Soviet Union (excluding the Baltics)

20 18 16 14 12 10 8 6 4

In this context, the credit crunch is likely to impact differentially to exacerbate the pattern in the charts. Thus, for countries that are integrated into European production and trade systems, the recession in Western Europe is likely to be amplified in the short term because of their relatively greater role in supplying inputs for European exports, for example in the vehicles sector. This may be partially offset by the increased incentives to reduce cost by transferring production offshore. Foreign and public sector indebtedness is also important, as this will restrict policy responses to the crisis. For example, countries which ran large structural public sector deficits like Hungary will be constrained in their policy response; while countries heavily reliant on overstretched foreign banks, like Latvia, may suffer more sharply in the global credit crunch. Thus, the Czech Republic and Poland may fare better than Hungary or Estonia. Interestingly, these differences are not well correlated with transition preconditions or the varying speeds or types of reform, but rather with recent macro-economic policy stances. However, EU membership, international support, and significant institutional modernization suggest that convergence will resume, in some cases after an interval. Russian growth is closely correlated with resource prices, but the high level of reserves gives considerable degrees of policy freedom and, as in most EU transition countries, convergence is also unlikely to slow significantly for long. The greatest dangers are for the other European and CIS economies that displayed very slow convergence during the boom. Some of them have fragile economic and political environments.

2 0 1994

2001

Chart 4.

2008

Russia

45 40 35 30 25 20 15 10 5 0 1992

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.

closed the gap more slowly. Russia suffered grievously in the 1990s with a deep recession, but has restored its position and is now around 40 percent of the EU average, largely because of favourable resource price trends. However, transition has been less successful in convergence terms in other CIS countries, where starting from a very low base the situation deteriorated between 1994 and 2001, though the gap has closed a little since then. This group’s GDP gap vis-å-vis the EU is the largest in the region.

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Conclusions For most transition economies, the process of transition, like that of globalization itself, is likely to resume once the current crisis in developed economies is past. However, in the interim, some of the transition economies are likely to suffer rather more than the developed economies, implying that for some years the convergence process may go into reverse. These countries are likely to be those in the Balkans and former Soviet Union, rather than the new EU member states or Russia. However, some EU members will suffer more than others depending on the state of their public finances and international indebtedness. Moreover, whether the threats to convergence are short term or long, they may present serious challenges for the already relatively fragile political and institutional structures in these countries.

Although it is too early to judge, the fundamental forces driving globalization are seen not to have been altered by recent events. Even so, as the discussions at the April G20 summit in London indicate, when growth resumes it seems likely to take a more regulated form. This suggests that the transition process will then become re-established, certainly in the more advanced and stable economies, although perhaps also with greater emphasis on state direction or regulation than hitherto.

Saul Estrin is Professor of Management and Head of the Department of Management at the London School of Economics. He would like to thank Angela Lei for research assistance and Mario Nuti, Milica Uvalic and the editors for helpful comments on an earlier draft.

JULY 2009 | issue 13

A case for nationalizing failing banks Anja Shortland The partial nationalization of banks in the current crisis has succeeded in preventing financial meltdowns in both mature and developing financial markets. As the recession destabilizes banking systems in the transition economies, governments will have to decide how to react. It currently appears that for historical reasons many governments are reluctant to engage in the (re-) nationalization of banks. However, government ownership of banks can play an important role in retaining savings within the financial system when private banks are insufficiently well regulated and supervised to keep excessively risky behaviour in check. Moreover, empirical evidence shows that arguments about the detrimental effects of government ownership of banks on economic growth have serious flaws. Governments in transition economies should therefore seriously consider nationalizing failing banks, and not be too hasty in privatizing newly acquired or any remaining government-owned banks.

In a recent paper published in the Journal of Development Economics, we question the well established ‘political view’ of government banks.1 This states that politicians take over banks in order to use them for political purposes, such as directing credits to ailing state-owned enterprises. Such loan decisions are seen as being economically inefficient and slowing economic growth. When the loans are no longer serviced, bank balance sheets are compromised and financial instability may result. Indeed cross-country correlations showed an

association between government ownership of banks and slower growth as well as financial crises.2 Until recently, government ownership of banks was widely criticized in the field of economics and privatization was strongly advised or even made a condition for loans from international financial institutions. Consequently, the transition economies reduced the average share of total assets managed by governmentowned banks from 100 percent in 1989 to 33.5 percent in 1999 then further to just 10.2 percent in 2005.3 In the current financial crisis, the transition economies have largely opted for balance sheet support, changes in reserve requirements and loan guarantees, and with the exception of Latvia have so far avoided the nationalization of major banks.

Our research challenges the unambiguously negative view of government-owned banks. We focus on the importance of government ownership in preventing the withdrawal of funds from the financial system when private banks behave opportunistically and are badly supervised. Deposit insurance, where it exists, is never perfect. Personal deposits are only guaranteed up to a certain maximum; and if a bank fails, financial compensation may take some time. Businesses, local government and charities might find themselves altogether without access to vital funds. For example in the banking crises of the 1990s ‘large’ losses were imposed on Estonian and Latvian depositors and ‘minor to moderate’ losses on Russian and Lithuanian depositors.4 Therefore, if bank regulation is perceived as weak and deposit insurance is limited or nonexistent, governmentowned banks may be perceived as a ‘safe haven’ by risk-averse depositors. The government is highly likely to honour savers’ local currency deposits in its banks: it is politically preferable to repay depositors rather than default on the deposit contract –the money for such bail-outs can be printed if necessary. A good example of depositor preferences informed by mistrust

The state savings bank, Sberbank, still attracts more than half the retail deposits in Russia, despite its lower deposit rates.

© Justin Jin/Panos Pictures

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DEVELOPMENT & TRANSITION of the private sector is Russia. The state savings bank, Sberbank, still attracts more than half the retail deposits in the country, despite its lower deposit rates.

In our paper we develop a theoretical model in which the government-owned bank competes with the private sector banks. The government bank may not be particularly efficient or provide a good service, but its special status guarantees that the bank will not fail, and that it will provide continuous access to local currency deposits. Private sector banks on the other hand may be either ‘honest’ or ‘opportunistic’. The latter type of bank will swindle depositors out of their money, unless they are closely regulated and monitored by the government. Demand for deposits in the government-owned bank therefore depends on whether depositors trust the regulatory institutions that govern the behaviour of private banks. If the regulator imposes strict licensing laws, demands high disclosure standards and strictly monitors and enforces prudential standards, all banks behave honestly and there is no need for a government-owned bank. At the other extreme, the presence of unchecked opportunistic behaviour by private banks results in a complete preference for the government-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 the developed world. During the financial crisis of 2008, revelations about private sector banks’ unscrupulous or incompetent behaviour with regard to investing in opaque, high-risk assets changed depositors’ perceptions about regulators’ ability to check opportunistic behaviour among banks. Following the collapse of Lehman Brothers, the sudden threat of further largescale financial sector bankruptcies created huge demand for savings accounts in nationalized banks such as Northern Rock in the UK, even though these institutions offered lower interest rates than the rest of the banking system. Northern Rock in the end was forced to turn away potential depositors.

Thus, governments in several developed countries were forced to offer to take large equity stakes in any fragile financial institution to prevent bank runs and hence the wholesale meltdown of their financial systems. These recent events also make it easy to see why the evidence that has been offered to support political theories of government ownership is problematic. The positive correlation that arises in a cross-country relationship between government ownership of banks and financial crises frequently reflects reverse causality: private banks that fail end up under government ownership because no other investor would buy them, and the political costs to governments of allowing banks to fail are often too high.

Moreover, the financial crises that precede government takeovers of banks are normally followed by a severe recession, or at least slow economic growth. To ascribe the blame to governments is like arguing that hospitals are the causes of ill health because they are associated with illness. To claim that government banks should be privatized on the basis of such evidence is like arguing that by closing down hospitals you can improve the health of the general population.

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Our 2008 paper uses data taken from 108 countries in a World Bank survey of banking practices and regulation. We show that the proportion of assets controlled by government-owned banks is higher in countries with weaker regulatory institutions and with a previous history of banking crises, so that financial fragility precedes nationalization. Our research shows that regulatory quality and disclosure are inversely related to government ownership of banks, while political variables are not significant. This supports our assertion that government ownership is often the symptom of regulatory weaknesses rather than the desire of politicians to control banks.

Following this strand of thought we re-examine the empirical evidence on the effects of government-owned banks on economic growth.5 Once we control for the quality of governance (regulatory and bureaucratic quality, protection of property rights, corruption, etc.) the effect of government ownership of banks on economic growth is no longer significant. This is a classic case of ‘omitted variable bias’. As government ownership of banks is correlated with low quality of governance, it will act as a proxy for the quality of governance in models of economic growth which omit this important variable.

Furthermore our results suggest that since 1995, the presence of government-owned banks has had a positive effect on economic growth, when we take the quality of governance into account. This suggests that the positive effect of government banks on mobilizing savings in imperfectly regulated financial sectors on average outweighs any adverse effects that may arise from potentially politicized decisions reflected in their loan portfolio.

This research has two policy implications. First, nationalization of failing banks should not be avoided at all costs.

Government ownership does restore fragile depositor confidence. Equally important, the threat of nationalization sends a better signal to managers than tacit balance sheet support of failing private-sector banks. Insuring banks against risky loan decisions encourages opportunistic behaviour in the future.

Secondly, if government-owned banks are privatized without a sound institutional infrastructure in place, investors may simply withdraw their money from the banking system altogether. Top priority should therefore be given to rebuilding regulatory institutions to contain opportunistic behaviour by banks and to regain public confidence. When depositors trust the private banks again, government-owned banks will slowly lose market share as depositors look for attractive offers elsewhere.

Anja Shortland is a Lecturer in the department of Economics and Finance 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).

JULY 2009 | issue 13

Rainer Kattel ‘Globalization gone astray’ The story of the Baltic states’ economic development since regaining independence in 1991 seems almost too self-evident to tell. The small open economies were flushed with foreign capital, became overleveraged, and are now paying the price. After exhibiting double-digit growth rates during the past decade, the ‘Baltic tigers’ have also become record-setters in the negative direction, being the first countries to enter an economic depression in 2009.

The rise and fall of the Baltic countries therefore make an excellent case study in financial fragility under globalized product and financial markets. This is ironic, in that the macroeconomic policy framework of the Baltic economies was in many respects created to avoid the financial fragility to which small open (and developing) economies are particularly vulnerable. This article argues that this policy model was based on fundamental misunderstandings, and as such was bound to create enormous fragility for the Baltic 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 lessons for post-crisis reconstruction, for developing countries and the global rules of finance as well.

This article compares these countries to the Nordic economies in the postwar era–economies that often seemed unstable but on the whole have been spectacularly successful–while linking technological change and innovation to the question of financial fragility. Whereas the Nordic economies have been extremely good at hedging or socializing risks for long-term research and development (R&D), innovation and industrial modernization, the Baltic economies of the 1990s and 2000s hedged or socialized risks for short-term consumption and asset booms. The former learned to manage financial fragility and long-term growth; the latter have no options left to manage enormous fragility brought into the system by short-term rapid growth.

Financial fragility and technological change The concept of financial fragility or instability in the international economy originates from Keynesian economic theory and has been further developed in the works of Hyman Minsky1 and Jan Kregel.2 The basic idea is relatively straightforward: a free-market economy is inherently unstable because stability itself leads to the relaxation of financial due diligence (lower margins of safety) that in turn engender excessive risk taking. As a growing number of businesses are unable to meet their financial commitments, financial instability or fragility, and possibly financial crises, arise.

Minsky argues that there are three distinct financing positions for business units in a free-market system: hedge, speculative, and Ponzi finance. These positions are defined according to a business unit’s ability to meet its financial commitments. In a hedge position, cash flow from operating activities is enough to cover all outstanding debts and other financial commitments (i.e., these are successfully hedged). In a speculative position, cash flow does not cover all commitments, so the business unit must sell some assets, cut costs or borrow, in order to meet the commitments. In a Ponzi position, a business unit’s commitments are larger than assets owned; in essence, the unit is insolvent because ‘financing costs are greater than income’.3 In order to compare the postwar Nordic economies with the post-1991 Baltic economies, it is important to understand that these economies operated in very different techno-economic paradigms.4 The postwar era was characterized by the mass-production paradigm, based on huge hierarchical organizations and long-term planning that were directed both at creating stability in production and reaping economies of scale and scope. Growing real wages and living standards that guaranteed stable consumption patterns became part of this paradigm, which was perfected by the small Nordic welfare states during the 1960s and the 1970s.

The new information-and-communication-based technoeconomic paradigm that came into full force in the 1990s engendered key changes in production processes in almost all industries, in the form of outsourcing and the resulting geographical dispersion of production functions.

These changes enabled very fast growth in foreign direct investment (FDI) inflows and industrialization (e.g., in terms of growth rates of manufactured and high-tech exports) in many developing countries. However, in many cases the outsourced activities do not exhibit the same dynamics that were seen in the originating countries, such as fast and sustained productivity growth, growing real wages, forward and backward linkages–but rather the opposite.5 Thus, growth in high technology exports in developing countries does not necessarily imply industrial Boom and bust in the Baltics Average annual GDP growth rates for the Baltic states 15 10 Percent

The rise and fall of the Baltic states

5 0 -5 -10 -15 2003

2004

2005

2006

2007

2008

2009*

Source: International Monetary Fund. The asterisk denotes a forecast.

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DEVELOPMENT & TRANSITION dynamism with significant increasing returns and forward and backward linkages.6 The failure to fully understand these technological changes was a key fallacy in the economic policy model chosen in the Baltic states.

Nordic vs. Baltic models During the post-war Bretton Woods international financial system (which lasted until the early 1970s), most Nordic economies operated under policy regimes that featured wage agreements, closed capital markets, strong reliance on commodity exports (wood, iron, fish), rapid industrialization financed by domestic bank loans, and productivity growth.7 This resulted in strong growth both in wages and profits, but also in inflation, and thus in periodic losses of export competitiveness due to high wages. Such a situation corresponds to a highly speculative position, as the loss of export competitiveness reduces abilities to meet financial commitments (by both private and sovereign borrowers). The typical response was to return to a hedge position by increasing export competitiveness via devaluing the national currency. As devaluation hit both profits and wages, such a managed boom-bust cycle was also socially accepted. This approach avoided prolonged financial fragility via the adoption of Ponzi positions.

Such a policy framework created strong incentives for (high-risk) innovation at the company level as it socialized the risk of sliding into Ponzi positions via mechanisms to absorb internal and external shocks. In addition, under continuous wage growth and welfare state regulations, domestic markets kept expanding, creating opportunities to further diversify the economy (inter alia into high-tech products like mobile phones, beginning in the 1980s). This corporatist model also created high policy and administrative capacity for industrial modernization, education, R&D, and other policy areas.

The Washington Consensus policy framework pursued by the Baltic economies after 1991 emphasized avoiding macroeconomic instability and boom-bust cycles from the very beginning. They sought to create stability and international trust through currency pegs, very open trade regimes, balanced budgets, low tax and administrative burdens, and generally the weakening of labour power to negotiate wages. This allowed for fast economic restructuring via FDI.8 However, such an environment created fertile grounds for short-term asset booms, so that large amounts of foreign investment and private lending went into financing consumption and real estate, particularly in the past decade. This drove wage growth into doubledigit territory and placed the Baltic economies in the same kind of speculative position as the postwar Nordic economies faced, where rapid wage growth threatened export competitiveness and endangered their ability to meet all liabilities.

However, a key difference between the postwar Nordic economies and the Baltic economies in the past decade is the

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large amounts of private borrowing in the Baltic economies that is done in euros, not in local currencies–mostly via foreign banks operating in these countries. The most drastic case is Estonia, where by 2008 nearly 100 percent of the banking sector was foreign owned. Essentially, the Baltic economies used global financial markets–via Nordic banks operating in the Baltics–to fund short-term production and asset booms. Moreover, low value-added outsourcing activities devoid of significant returns to scale and scope, play a large role in the composition of Baltic exports–limiting possibilities for local diversification through forward and backward industrial linkages. In addition, many export industries, being part of international value chains, pay for their inputs in euros as well.

These features essentially preclude devaluation, which would hit wages, input prices and consumption in the Baltic states. Rather than leading the Baltic economies back to a hedge position, a devaluation would reinforce the speculative position: new financing (investments, borrowing) would be needed in order to meet current commitments and finance future investments. New foreign funds would have to be attracted through lower taxes, weaker labour regulations, and the like–thus further reducing the scope for investments into such productivity-enhancing activities as engineering education and R&D. The enormous current account deficits and external debt burdens (reaching up to 400 percent of foreign exchange reserves in Latvia in 2008) meant that the Baltic economies were rapidly becoming Ponzi schemes. Even without the global recession, the Baltic economies needed new borrowing and foreign investments to avoid default. The financial meltdown starting in 2008 almost overnight revealed the Ponzi dimensions of the Baltic economic model: investment, borrowing, exports, consumption all dropped with astonishing speed, and continue to drop still. While the adoption of the euro would reduce the foreign exchange risks facing Baltic companies and households, it would not repair their balance sheets; nor would it produce the real wage reductions or industrial modernization that could restore competitiveness. Euro adoption would instead transform exchange rate risk into sovereign default risk. It would not change the essentially Ponzi financing position in which the Baltic economies now find themselves.

Conclusion Comparing the experience of the postwar Nordic economies with the Baltic economies yields counterintuitive results. While the former faced episodes of uncertainty and fragility characterized by devaluations, labour unrest, and the like, the latter were dead-set from the beginning on having a highly stable macroeconomic environment. Yet, the Nordic economies’ apparently uncertain environment served as a buffer to stave off financial fragility and pave the way for long-term R&D and innovation. By contrast, the Baltic states’ search for highly stable macroeconomic policy environments ironically produced FDI-led restructuring,

JULY 2009 | issue 13 generating lower-end production, construction, and consumption booms. The Baltic states lack instruments to address the fragility that has been introduced into the system, other than through increased foreign investment and borrowing which in turn reinforce the longer-term Ponzi scheme risks. Moreover, underlying these developments is a weak national innovation system (expressed, e.g., in small numbers of patents, and low levels of business R&D spending) that in turn darkens future prospects for exports and sustainable growth. While the much anticipated entrance into the euro zone would alleviate the immediate danger of currency collapse, financial fragility would continue, via low productivity growth, higher sovereign default risk, and a lack of policy options for restoring price competitiveness.

These countries now face a vicious cycle of asset destruction and debt deflation that could easily take years to unwind.

Rainer Kattel is Professor and Chair of Public Administration and European Studies, Tallinn Technical University (Estonia).

1. Key works in this context are gathered into two volumes, Minsky H., Can ‘It’ Happen Again? Essays on Instability and Finance (New York: Sharp, 1982), and Minsky H., Stabilizing an Unstable Economy (London: Yale University Press, 2008).

Towards a multifaceted policy response Balázs Horváth The global crisis has several inter-related components, and has reached practically all regions and sectors. In a globalized, interdependent world, countries face a confluence of shocks, both immediate and longer term.

Immediate issues to deal with include a strong cyclical downturn triggered by massive global imbalances, a deep financial crisis with the associated liquidity and credit crunch, and an unprecedented commodity price rollercoaster. The crisis-induced recession–which will cause world output to fall this year for the first time in 50 years–is being rapidly transmitted to the mostly small, open economies that comprise the Europe and CIS region, calling for immediate policy action. Meanwhile, the world faces crucial long-term challenges as well, notably extreme income inequality, seismic demographic shifts, and global climate change. These challenges also require a prompt response, in order to avoid rapidly escalating social and economic costs. The social impact of the crisis seems likely to be large, lasting, and unequal.

Falling incomes, disappearing capital inflows, and binding budgetary constraints are set to reverse a decade of progress towards meeting the Millennium Development Goals. Past experience shows that it takes considerable time for employment and real wages to recover after large macroeconomic shocks, especially if several come hand in

2. See in particular ‘Yes, ‘It’ Did Happen Again. A Minsky Crisis Happened in Asia’, The Levy Economics Institute of Bard College Working Paper, No 234, 1998, available at http://www.levy.org/pubs/wp234.pdf; ‘External Financing for Development and International 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 by Late-industrializing Developing Countries’, The Levy Economics Institute of Bard College 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 the Information Society in Europe: Contributions to the debate (Seville: Institute for Prospective Technological Studies, 2006); see also her main work, Technological Revolutions 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 and Technology 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 liberalization 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 European Journal 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-bpeadraft.pdf.

7. An excellent overview of post-war Nordic economic policy regimes is Lars Mjoset, ‘The Nordic Economies 1945–1980’, ARENA Working Paper Series, No 6, 2000, available at http://www.arena.uio.no/publications/wp00_6.htm.

8. See especially Tiits et al, ‘Catching up, forging ahead or falling behind? Central and Eastern European development in 1990-2005’.

hand. The crisis also hits the poor the hardest, since they have limited abilities to adjust and cope. They tend to have no accumulated savings or assets, and are the first to lose access to credit. Moreover, poor households predominantly supply unskilled labour, often in the informal sector where job losses are most immediate and severe given the lack of employment protection. The downturns can also push poor households into a vicious cycle. Coping by eating less, postponing spending on health and education, or withdrawing children from school reinforces poverty by undermining future income-earning potential. Such conditions may also lead to rising crime rates.

In formulating policy responses, the urgent must not be allowed to squeeze out the important. Horizons typically shorten dramatically in a crisis, but policymakers do not have the luxury of delaying decisions on longer-term challenges, because any action with a reasonable chance of success typically has a long time lag. The crisis is also an opportunity for getting things right. Vested interests that have blocked much-needed reforms have been weakened. Minds are concentrated, and society’s desire for decisive action grows, opening the door for policy change.

The best policy response to the crisis combines elements addressing its individual components. The fiscal stimulus to support sagging demand, for example, should aim to raise employment, strengthen the financial system, and also support the introduction and expansion of low-carbon technologies. Improved targeting of social transfers is needed to ensure that inequality can be held in check within the available budgetary envelope. Pension, health,

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DEVELOPMENT & TRANSITION international donor support for the hardest-hit countries.

Two leading examples of requisite comprehensive policy action are efforts to widen the tax base, and coordinated action to alleviate climate change.

• In many European and CIS countries, the very rich largely avoid paying taxes. But the crisis makes greater equity in burden sharing essential, and is eroding social tolerance for tax evasion.

A key governance test in the weeks and months ahead will be whether countries manage to widen the tax base, or see vital public services go unfunded.

• Global warming necessitates coordinated increases in taxes on greenhouse gas emissions, to end the mispricing of carbon that contributes to global warming.

Without appropriate pricing to This unemployed man in Georgia is but one example of how the economic crisis is swelling the ranks of the poor in force final users to internalize the the region. ©Yuri Mechitov/World Bank costs of their energy use, private incentives and the public good and immigration reforms are needed to address the will remain misaligned, and the likelihood of sufficient expected consequences of demographic challenges (such progress towards alleviating global warming will remain as a rising dependency ratio, and growing health expendi- low. Governments should therefore be willing to use the fistures). Action is also needed outside of the budget. Better cal space created by newly imposed greenhouse taxes to regulation of monopolies and financial institutions, reduce or eliminate the most distortive taxes, thus helping improved governance and public-sector transparency, to create employment and strengthen social safety nets. together with avoidance of self-defeating beggar-thy- This requires cooperation and coordination across counneighbor trade policies would provide a very useful impe- tries–which is itself a direct consequence of the globalizatus to improved functioning of the market. Legal empow- tion that has created a world where domestic policies have erment of the poor can help improve lives and alleviate immediate and considerable international repercussions. extreme inequality.

Multilateral and bilateral donors need to coordinate more Policy inaction would imply higher socio-economic costs. closely, each focusing on areas of comparative advantage.

These would accrue over a longer period, and would affect Enhanced coordination promises not only more efficient other countries as well. If domestic demand plummets use of scarce development resources, but also welcome owing to surging unemployment, other countries see their reductions in the strain on thinly stretched governments export markets melt away. The permanent and substantial that deal with many different donors. UNDP, in particular, loss in human capital associated with reemerging poverty has a natural role to play in coordinating the actions of UN would lower the entire path of future incomes. Crime may agencies. It also has a comparative advantage in providing rise, adding to the list of factors with cross-border repercus- policy advice at the central and local government levels, in sions, including a greater likelihood of conflicts. But as men- advocacy work, in project implementation in remote tioned, other factors are also at work. Global climate change regions, and in working with disadvantaged groups. In this threatens not only the livelihoods, but even the continued way, UNDP can help ensure micro-level traction of other presence of millions of people in their current homes. international organizations that focus more on central govWithout effective policy responses to strengthen social ernment and macroeconomic assistance. safety nets and address global warming, a tidal wave of economic migration may occur from poorer countries. This Balázs Horváth is Poverty Reduction Practice Leader at the strengthens the already compelling humanitarian case for UNDP Bratislava Regional Centre.

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JULY 2009 | issue 13

Responding to falling remittances and returning migrants Nick Maddock and Lovita Ramguttee Current estimates suggest that whereas, worldwide, remittances will decline by between 5 percent and 8 percent in 2009, Europe and Central Asia will be the most severely affected region with a fall of between 10 percent and nearly 13 percent.1 For countries with heavy dependence on remittances and migration, the effects of the crisis will thus be magnified. Economic migration and remittances are important to many transitional countries and, indeed, in 2006, Tajikistan and Moldova received the highest levels of remittances in the world (as a percentage of GDP), with Kyrgyzstan in fourth place.2 In addition to examining some of the recent data on migration and remittances in the region, this article proposes some possible responses to the socio-economic problems that

could result from falling remittance incomes and large numbers of returning migrants.

Migration and remittances in Moldova Moldova’s economy has been strongly driven by remittances. The number of Moldovans working abroad increased from some 56,000 in 1999 to 340,000 in 2007 (from a population which, in 2007, was 3.8 million).3 Total remittances were US$ 1.5 billion in 2007 (36 percent of Moldova’s GDP) and were growing in the first half of 2008 prior to the economic crisis.

Migration has mainly been from rural areas. Of the migrants who, in 2006, were abroad, had recently been abroad, or who planned at that time to migrate, 38 percent were from Chisinau (the capital city) and other urban areas, while 62 percent were from rural areas or small towns of fewer than 10,000 people.4 Some 67 percent of those who were abroad at that time were from rural areas.5 Many migrants are young, with an average age of 35 in 2006 and over 37 percent aged below 30. Further, of those who in 2006 were planning to migrate, over 44 percent were below 30 years.6

Agriculture has traditionally served as a safety net in Moldova, providing subsistence and cash income from sales of fresh and lightly processed products. Š Julie Pudlowski/UNDP Moldova

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DEVELOPMENT & TRANSITION

Female migrants working in the caring professions will probably be less affected by the downturn than male construction workers.

Nearly 52 percent of the Moldovans abroad in 2006 worked in Moscow, with 59 percent in Russia as a whole.

Italy received the second largest group of migrants (17 percent). The number of migrants from Moldova in CIS countries (principally Russia) has increased sharply in recent years, especially in the construction industry.

Effects of returning migrant and remittance shocks Falls in remittances and the large-scale return of migrants could add pressures which, even in the context of the severe downturn, are not felt, or felt to a lesser extent, in the region as a whole. In practice, the trend in remittances may take time to become clear. And while there are likely to be downward pressures, there is also evidence that, worldwide, remittances tend to be resilient and to fall less sharply than might be expected in a downturn. This is partly because sums sent home are often small (typically around 5 percent of income) with the result that payments can often be sustained even when incomes fall.7 Further, remittance flows are dominated by payments from long-standing migrants who, because they are often well established in their place of migration, may be better placed to find alternative sources of income if they lose their job.

In addition, female migrants working in the caring professions will probably be less affected by the downturn than male construction workers. The effects of demographic change in Western Europe and North America

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Š UNDP Moldova

and high domestic costs of care of the elderly mean that demand for female migrants in the caring professions is likely to be sustained even in a downturn and may thus contribute to the resilience of remittances.

Remittances will nonetheless shrink if people, having lost their job, then return home (although there may be a short-term increase as those returning repatriate savings). The return of migrants, may, however be lagged and so turn out to be gradual rather than a major wave.

This is partly because of migrants’ adherence to the place of migration, usually because the bureaucratic and start-up costs associated with migrating are substantial.

Migrants’ commitment to stay may be further strengthened by new immigration controls with, for example, Australia, the United States, Spain, Italy and Malaysia all recently imposing new regulations.8 The effects of falling remittances are likely to be felt nationwide but, where (as in Moldova) migration has been principally from rural areas, it seems probable that they will be felt disproportionately there. If so, there is the prospect of increases in rural poverty. This was already a concern in Moldova, despite good growth performance between 1999 and 2004 which moved 40 percent of the population out of poverty, representing the largest reduction in poverty (in percentage terms) in the Europe and Central Asia region over this period. 9 Nonetheless, about 26 percent of the Moldovan population in 2007 remained poor, with about two-thirds of the

JULY 2009 | issue 13 poor living in rural areas.10 A similarly rural concentration of impacts from returning migrants is likely if there is disproportionate return to rural areas. This conclusion must, however, be tempered by evidence that migrants have used remittances to buy urban residential property11 and/or if migrants return to urban areas because of better job prospects.

Disproportionate deterioration in youth unemployment is also possible. While youth unemployment is comparatively low in some, although not all, countries with high migrant populations,12 this has been achieved partly through exporting labour in the form of migrants. With opportunities for migration diminished, young people will be forced to rely on domestic labour markets at a time of falling labour demand. There they will have to compete with returning migrants, who may have better skill sets (by virtue of having worked overseas) and more extensive experience. In other words, a generation of ‘frustrated migrants’ is likely to be created amongst the young, at the same time as competition is increasing in domestic labour markets. The resulting possibilities for social unrest are evident.

Rural poverty effects may also be exacerbated by transition in agriculture, which in many transitional countries has served as a safety net,13 providing subsistence and cash income from fresh sales or lightly processed products. Labour inflow to rural areas now threatens to clash with agricultural commercialization that is making agriculture more of a business than a safety net or a way-oflife.14 Indeed, in Moldova, the combination of labour outflow from agriculture in recent years (with linked growth in labour productivity), low rates of agricultural growth, and rising rural poverty all argue against the capacity of agriculture now to re-absorb unskilled labour.15

Possible responses The likelihood of disproportionate effects on rural areas suggests geographical targeting of responses, which are likely to be both short- and medium-term. The former will principally seek to mitigate the immediate shocks, while actions in the medium- and longer term will be aimed at avoiding further deterioration in rural poverty and achieving improved labour market outcomes. In addition, however, labour supply actions will also be required in addressing youth unemployment.16 In the short run, providing temporary safety nets through public works would help cushion both the return of migrants and those newly unemployed domestically. Finding suitable public works which are consistent with participants’ skills has often been a problem with such measures in the past, but this may be lessened where a significant proportion of returning migrants have building skills (as seems probable given the decline in construction in the region).17 The speed of response may also be increased by building on existing donor-

funded and managed programmes which already have implementation structures in place.18 In the medium term, increasing employment in the nonfarm rural economy is likely to be essential. Indeed, the current underdevelopment of this sector in transition economies offers opportunities for growth and labour absorption. Ironically, limited access to finance in rural areas before the crisis may have had the advantage of making growth in the rural non-farm economy less dependent on bank lending than in other sectors, since there is little or no experience of reliance on cheap credit.

Growth is likely to come from two sources: small enterprises 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 industries in many countries, de novo agroprocessing has been slow to emerge. Further support to the development of food processing may therefore be required. Poor investment climates are a major contributor to underperformance but, in addition, agroprocessors are generally small and, like most small firms in transitional countries, face constraints in finance, management, marketing, logistics and corruption. Importantly, they also face problems of technology and, although small-scale affordable technology exists (principally from Chinese and Indian suppliers), small processors in the region rarely have the opportunity to buy from these sources.

Partly as a result, use of second-hand machinery, with attendant problems of reliability and quality, is widespread.

Combating rural poverty may also require labour supply interventions, particularly if the effects of the crisis are disproportionately felt by young people. The young already face the usual labour market disadvantages of lack of experience and employers’ distrust. Many countries have programmes aimed at youth entrepreneurship, with the aim of allowing young people to pursue alternative careers. Complementing this with internship and retraining programmes may be necessary if sharp increases in youth unemployment rates are to be prevented.

Nick Maddock is Rural Development Policy Specialist for the UNDP Bratislava Regional Centre. Lovita Ramguttee is Assistant 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 that there was a shift to migration from urban areas, with a greater proportion from Chisinau and provincial towns planning to work abroad. This suggests that the skills migrants needed was changing and/or that the supply of migrants from rural areas was being exhausted.

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DEVELOPMENT & TRANSITION 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. http://siteresources.worldbank.org/INTMOLDOVA/Resources/MDPoverty UpdateEng.pdf.

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, at 14 percent in 2007, is low by European standards. (See Black Sea Labour Market Reviews: Moldova Country Report. (Brussels: European Training Foundation, January 2009.)) This rate is comparable to youth unemployment in Britain (14.5 percent in 2006) and better than the levels in France (22 percent in 2006) and Romania (nearly 20 percent in 2005). Long-term youth unemployment (i.e., for 6 months or more) has also been decreasing (from 46 percent of the young unemployed in 2006 to 35 percent 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 migrant populations. This is not, however, the case in Bosnia and Herzegovina and the Former Yugoslav Republic of Macedonia, both of which have high youth unemployment rates (58 percent and 60 percent, respectively) despite their high migrant populations. See http://www.indexmundi.com/romania/youth-unemployment-rate.html.

13. Davis, J. ‘Rural non-farm livelihoods in transition countries: emerging issues and policies’. 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. and Lerman, Z. Agriculture transition revisited: issues of land reform and farm restructuring in 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 in large-scale farming agglomerates and the consequent limited individualization of agriculture. Such farms are more highly mechanized than family farms and so require less labour. Further, the business ethic of farming agglomerates argues against labour absorption at low rates of labour productivity, particularly given that workers are paid employees. In contrast, because of farm size, family farms are lightly or unmechanized and workers are predominantly unpaid family members. But their minority share of agricultural production and cultivated area means that the capacity of family farms to absorb significant amounts of the newly unemployed is likely to be low.

16. In contrast, in addressing rural poverty, it is not proposed that UNDP support should be provided to vocational training or agricultural production. Donor-funded support in these areas is already considerable and argues against UNDP involvement. This notwithstanding, many of the development partners are in the process of reviewing their programmes in the context of, and in response to, the crisis. As a result, the scope and focus of development assistance to Moldova could change significantly in the coming months. Policy notes currently being compiled by the World Bank may influence this.

17. A new dimension of public works, the opportunity to tailor public works to environmental concerns through ‘greening’ has appeared. In this context, they could address the challenges of unemployment whilst at the same time working to increase public buildings’ energy efficiency and to reduce natural disaster risks, through construction activities associated with flood and drought mitigation projects.

18. For example, in Moldova, there are UNDP interventions in active labour markets that support the establishment of social integration centres and vocation formation and information services, which may now be upscaled to include youth internship programmes.

The crisis and its consequences for women

women in terms of dismissal, social security entitlements and rehiring.6 Women may therefore bear the brunt of economic hardship–being the first to lose their jobs, or being forced to take on more work, or work longer hours when male breadwinners lose their jobs. Furthermore, women often constitute the majority of temporary, casual, seasonal and contract labourers, and low-skilled workers, unlikely to be covered by formal unemployment insurance or social protection schemes. For example, in Kazakhstan, limited access to the financial resources necessary for formal business activities pushes women into self-employment and small-scale commercial activities in the informal sector.7 Female-headed households are more likely to be at greatest risk, with few if any savings to weather the crisis, and limited ownership of wealth and other assets. In developed and middle-income countries, men are better positioned to weather the crisis. They have higher paying jobs, more assets and wealth. Their jobs are more likely to offer unemployment insurance and other benefits. Women’s jobs pay lower wages, in part because women are more likely to have part-time employment.

Louise Sperl As pointed out by many experts and organizations,1 the economic crisis will have serious consequences for women.

More significantly, the crisis will hamper progress made so far in achieving gender equality.2 Even though the global financial crisis is still unfolding, and it is too early to anticipate its full social implications,3 the crisis seems likely to affect women in such areas as employment and social safety networks, unpaid care work, health, education, migration, and also in terms of gender violence. Lessons from the 1997 crisis in Asia, when many low-income households fell swiftly and deeply into poverty,4 should be taken into account 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 significant discrimination in the private sector, with low shares of the high-paying jobs in that sector. Women have also made up the bulk of the long-term unemployed.5 Such vulnerability could easily deepen as the crisis unfolds. In addition to formulating macro-level policies, responding to these challenges requires reaching out to the most vulnerable and marginalized, including women.

Employment and social safety networks Men and women may be affected differently because of gender-specific inequalities in labour markets and prevailing norms about men and women’s role in the economy and society. The notion that men are the ‘breadwinners’ of a family may lead to unequal treatment of men and

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Men and women migrant workers are likewise affected by the crisis (as well as their families back home),8 in terms of reductions in household incomes and inadequate social protection. However, the scale of female migration is often under-reported, and with it the impact on families dependent on their wages for survival. On the other hand, women may find themselves in an even more vulnerable position when they return home, rejected by their communities and families and perceived as prostitutes. 9

Other challenges related to women’s economic and social status The quality and access of health services may deteriorate significantly as a consequence of the crisis. During difficult times, families often rely on women for care for the sick,

JULY 2009 | issue 13 elderly, and extended family. This means longer work hours and heavier work loads for women–many of whom are already employed outside the home.10 This ‘social reproduction’ work, which is not realized through the market and is therefore not counted in GDP, is more likely to present women with difficult choices about reconciling intra- and extra-household labour.11 Girls in poor countries with low education attainment rates are also more likely to be pulled out of school as households cope with declining incomes.12 School attendance during times of crisis typically declines; some children may never return to school. Another concern relates to recent evidence suggesting that incidences of abuse and violence against women increase during periods of socio-economic crisis.13 Indebtedness, labour migration, or changes in breadwinners’ roles create additional stress in families, which can lead to abuse of drugs and alcohol, domestic violence, and in extreme cases, suicide. While often being the perpetrators of this abuse, men may also be more likely to experience personal difficulties in such periods, partly because their abilities to perform traditional roles within the family are challenged.14

Responding to the crisis With its human development approach, UNDP is well positioned to take a lead in addressing the human consequences of the economic and financial crisis. It can advocate

for policies that create economic and social support mechanisms that safeguard the poor and marginalized against the negative consequences for human development. Such an approach will also reduce the vulnerability of the poor and marginalized–including women–against future crises.

Thus, support for social protection is required, along with appropriate macroeconomic policies.15 Investments in social infrastructure (inter alia to improve care for children, the elderly, sick and disabled), and in jobs that improve safety, social cohesion, and quality of life are extremely important in this context. Economic stimulus packages could reduce unpaid care work through focusing on local service delivery. Examples of women-friendly employment schemes include public employment projects that are close to home and provide for child care, flexible working hours, home-based production, paid care work, and shared employment (i.e., reducing working hours rather than eliminating jobs). Microcredit schemes have become a proven method for supporting women entrepreneurs engaged in small-scale production. However, empowerment cannot be assumed to be an automatic outcome of microfinance programmes.16 Strengthened global partnerships will be needed to avoid any reversal of progress made thus far. In the realm of gender equality, it is even more important in these difficult

Limited access to finance pushes women into self-employment and small-scale commercial activities in the informal sector.

© OSCE/Eric Gourlan

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DEVELOPMENT & TRANSITION economic times not to cut budgets for aid and social safety nets, but to promote job creation, which is important for social inclusion and stability.

Louise Sperl is Programme Specialist for the Gender Team at the UNDP Bratislava Regional Centre.

1. See for example the 53rd Session of UN Commission on the Status of Women, March 2009; World Bank, The Global Financial Crisis. Assessing Vulnerability for Women and Children, 2009b; Sylvia Walby, Gender and the Financial Crisis. Paper for UNESCO Project on Gender and the Financial Crisis, April 2009.

2. The progress is apparent when one compares the 2006 and 20008 Global Gender Gap Indexes for Eastern Europe and the CIS. According to such a comparison, 77 percent of the countries have improved their ranking. Extracted and compiled from http://www.weforum.org/pdf/gendergap/report2008.pdf.

3. Written statement submitted by Shamika Sirimanne to the Interactive Expert Panel of the Commission on the Status of Women, 53rd session on the Emerging Issue: The Gender Perspectives of the Financial Crisis, 2-13 March 2009, p.2. http://www. un.org/womenwatch/daw/csw/csw53/panels/financial_crisis/Sirimanne.formatted.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.

Figure 1. Poverty trends in Kyrgyzstan2

Responding to the economic crisis in Kyrgyzstan

0%

Crisis impact Kyrgyzstan is one of the three members of the Commonwealth of Independent States (CIS) to be classified by the World Bank as a ‘low income country’. Although Kyrgyzstan has reported economic growth virtually every year since 1996, the large declines in output during the first years of independence combined with population growth have left per-capita GDP in Kyrgyzstan well below levels reported at the end of the Soviet period. Although there have been remarkable successes in reducing poverty (from about 63 percent in 2000 to 35 percent in 2007), this process has not been simple. The main engine for poverty reduction was the growth of private consumption (remittances from emigrants). The average rate of growth in private consumption from 2003 to 2007 was 17 percent.1 Table 1. Inflation trends in Kyrgyzstan, 2007-2009 2007* 10% 15% 8%

2008* 25% 33% 30%

2009** 16% 15% 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.

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10%

20%

30%

40%

50%

60%

70%

2000

Aikan Mukanbetova

Growth in: - Consumer price index - Food prices - Electricity, gas, heat tariffs

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/employment/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 the Commission on the Status of Women, 53rd session on the Emerging Issue: The Gender Perspectives of the Financial Crisis, 2-13 March 2009, p3. (Washington D.C.: World Bank).

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 Women Compared’, 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 women and their families, increasing their sustainability and effectiveness requires combining such schemes with business skills development for women entrepreneurs as well as policy measures to facilitate the involvement of central and commercial banks to scale up women’s enterprises.

2001 2002 2003 2004 2005 2006 2007

Poverty level

Extreme poverty level

However, Kyrgyzstan’s consumption boom may now be coming to an end. GDP growth, which was measured at 8.5 percent in 2007 and 7.6 percent in 2008, is forecast by the IMF to drop to under 1 percent in 2009. Combined with the sharp increases in food and energy prices reported during these years (see Table 1), growing shortages of electricity,3 and the significant reductions in remittances anticipated in 2009, this slowdown could mean significant increases in poverty, and real hardship, for thousands of vulnerable households, particularly in rural areas.4 The negative impact of the global financial crisis now threatens the progress in poverty reduction that has been achieved.

JULY 2009 | issue 13 Table 2. Remittance inflows in Kyrgyzstan

In millions of US$ As a share of GDP

2004 $329 15%

2005 $521 21%

2006 $754 27%

2007 $1041 27%

2008* $1462 29%

* Preliminary data Sources: National Bank of Kyrgyzstan, Economist Intelligence Unit; UNDP calculations.

Crisis response measures The government and Central Bank have sought in a number of ways to minimize the socio-economic impact of the crisis. Thanks in part to reductions in capital inflows, the Central Bank has succeeded in reducing inflation rates which, while remaining high, in the first quarter of 2009 were well below year-earlier levels. This is despite a 25 percent nominal depreciation in the national currency, the som,5 which has helped to support Kyrgyzstan’s export competitiveness. Measures to protect vulnerable population groups include increases in pensions and public sector salaries (of 29 percent and 30 percent,

respectively) in 2008, as well as in the universal monthly benefit and monthly social benefits (financed by the World Bank and the European Commission). In light of Kyrgyzstan’s continuing double-digit inflation rates, however, these increases may not be enough to allow poor households to keep abreast of the costs of the minimum consumption basket.

UNDP’s response: Area-based development for poverty reduction UNDP has sought to assist government efforts to protect vulnerable communities (especially those living in rural areas) via area-based development programming in the Batken region (which borders with Tajikistan and Uzbekistan) and the Naryn region (which borders with China). Batken and Naryn are among the regions of high unemployment and poverty, with decapitalized socioeconomic infrastructure. UNDP’s area-based development programming in these regions has focused on employment- and income-generating activities, particularly in agriculture, and particularly in poor villages. Services provided include access to business training and vocational education, microfinance and leasing, and infrastructure

UNDP programmes have helped to expand livestock herds and agricultural production, giving returning migrants the skills and opportunities needed to invest in their communities. © UNDP Kyrgyzstan

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DEVELOPMENT & TRANSITION construction and repair, with a special emphasis on improving access to water, schools, and transportation services.

Aikan Mukanbetova is Head of the Socio-Economic Unit and Programme Analyst for UNDP Kyrgyzstan.

Some 50,000 people in 102 villages (in Batken, Naryn, and elsewhere) are now benefiting from these activities.

During the last six months, access to improved water sources has been provided to 8,000 people; another 10,000 have received access to electricity. In addition to financing the expansion of livestock herds and agricultural production (including value chains), these programmes are giving returning migrants the skills and opportunities needed to invest in their communities and businesses.

1. The Second Periodic Progress Report on the Millennium Development Goals in the Kyrgyz Republic. http://www.undp.kg/.

2. Ibid.

3. For more on this, see UNDP’s Central Asia Regional Risk Assessment. http://europeandcis.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 household budget surveys. The level of poverty is assessed in terms of the absolute poverty line, which is calculated on the basis of actual consumption of goods and services by households. Poverty is largely a rural phenomenon: almost three out of four poor people live in rural areas.

5. The nominal exchange rate dropped from US$1 = 34.6 som in September 2008 to US$1 = 43.2 as of mid-May. (Source: www.oanda.com.)

The economic crisis as a human development opportunity

run.1 Paradoxically, the global economy has replicated one of the features of central planning that led it to its collapse: debt-financed consumption and shifting the burden to next generations.

Andrey Ivanov The economic crisis has obvious human development implications. They reach beyond the immediate outcomes (contraction of effective demand dragging down output), to include decreasing employment and income opportunities with negative mid- and long-term implications for education, health status, housing security, and other human development indicators. But apart from describing the consequences, the human development approach could be useful for understanding the crisis’s fundamentals and thus designing adequate responses.

The crisis is not something unique. It bears the typical characteristics of overproduction fuelled by expansion of ‘fiduciary money’ and resulting in excessive supply. At the core of the current crisis is the ‘explosive combination’ of cheap credit, globalized trade and effective financial systems. In developed countries (like the United States) that reported perpetual current account deficits, these three elements brought about a huge temporal shift in consumption: goods and services were being consumed now against incomes that were to be earned tomorrow (if earned at all).

This temporal shift made possible the rapid expansion of output, employment and incomes in emerging markets, which supplied the imports purchased by American consumers. Today’s recession is largely the price the world is paying for the decade-plus of growth in production and employment in China and other developing economies that produced more than they consumed, with part of the excessive supply absorbed on credit by developed economies. It also suggests a certain inevitable decline in human development opportunities, at least in the short

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For years, the set of incentives driving world economic growth has been drifting away from the logic underpinning the human development paradigm. The focus on people and their well-being as the ultimate objective of economic growth is what makes the concept of human development intuitive and appealing. Prospects for the enhancement of people’s potential to be and do are placed at the core of the human development paradigm. In the human development context, to have is a means, rather than the end of human progress.2 The existing economic system has effectively reversed the relationship between output and human development, detaching commodity from functionality and capability.

Each consecutive increase of commodities contributes less to human capabilities. The consumer is being increasingly flooded with cheap ‘disposable’ goods that may meet demand, but only less so (if at all) meet real needs.

Consumption (economic output) has turned from a means for achieving functionalities and expanding opportunities into an end in itself.

The moment a commodity acquires a value that is independent of the needs (functionalities) it is supposed to fulfil, we are facing the phenomenon of ‘commodity fetishism’, which starts underpinning the structure of economic incentives. The growth in production and output in the last decade increasingly became an objective in its own right,

The human development paradigm is most often associated with Amartya Sen, the Nobel prize-winning economist at Harvard University. © The Hindu: Chennai, India

JULY 2009 | issue 13

A Roma woman stands with her children in a Sofia slum. Growth is not always conducive to human development; it can be also jobless, ruthless, voiceless, rootless and futureless. © Scott Wallace/World Bank

subordinating consumption needs and thus turning people’s capabilities into a macroeconomic residual. An increase in consumer spending – regardless of its type (does it expand people’s capabilities or not?) and sustainability (is it credit or savings-based?) is still seen as the way out of the crisis. The fact that consumers in most of the world are now reducing spending in order to reduce personal debt (the paradox of thrift) is seen as a disaster from a macroeconomic perspective. In fact, consumers are behaving rationally from a human development perspective–unlike governments, which are attempting to restore pre-crisis consumption patterns, thus reinforcing the very system that brought about the crisis.

Shopping for things you never even thought you might need could turn into a patriotic duty and personal input into the rescue of the global economy.

A radical paradigm shift–not the restoration of the system–is what is needed. The global economy needs to ‘reinvent’ the human development logic, putting human capabilities at the centre of its incentives systems. Seen from this perspective, the crisis could be a unique opportunity to reconsider some basic development paradigms and put economies back on sustainable paths.

A first step in this direction could be answering the question: ‘what kind of growth is indeed beneficial from a human development perspective?’ In 1996 the Global Human Development Report reminded us that growth is not always conducive to human development, that growth can be also jobless, ruthless, voiceless, rootless, and futureless and thus not contributing to people’s capabilities.3 The

quality of growth and most importantly, the link between growth and capabilities is of paramount significance today when the global economy is slowing down and ‘resuming growth’ is at the top of policy makers’ agenda. Unless the ‘commodity functionality capability’ linkage and ordering are restored, growth will continue to fuel the ‘commodity fetishism’ cycle, which could be devastating from a human development perspective.4 While putting economic systems back on a human development track may be easier said than done, it could begin by asking whether policy measures to address the crisis would bring the economy closer to human development principles. A human development audit of ‘stimulus’ or ‘rescue’ packages from the perspective of their fundamental incentives could be a revealing and meaningful exercise. A second step could be acknowledging that the global economic system needs to be redesigned rather than rescued.

‘Saving industries’ cannot save jobs; changing industries and fine-tuning market mechanisms to make them more conducive to principles of sustainable human development can. The global car industry is an example. The highly skilled jobs in the sector can be saved in various ways. One option is to promote state-sponsored programmes for shredding old cars and to boost consumer spending replicating existing demand patterns. Another option is to downscale the sector’s capacity and invest the resources in environmentally sustainable technologies that would require similar skill sets and technological sophistication. The latter may be more difficult and less profitable – but would the former still be profitable without government spending?

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DEVELOPMENT & TRANSITION Governments are often bound by constituencies’ expectations and the intuitive reaction often is saving the status quo. But when it can’t be saved, such efforts only increase the overall costs in the long run. Clearly communicating the message that the ‘good old times are over’ and radical change is necessary is not easy, particularly prior to elections. However any policy response to the ‘saving jobs’ challenge constitutes such a message.

On the other hand, restoring pre-crisis levels of growth could be unnecessary as well as impossible. It could be unnecessary because of the broken commodity capability linkage; it could be impossible because of the environmental implications. The latter is a major difference between the current crisis and previous downturns and a critical mass of awareness of the impossibility to follow economic ‘business as usual’ exists today (unlike in 1972 when the Club of Rome raised the ‘limits to growth’ issue). Matching this awareness with clear market incentives and disincentives so that the individual choices of economic actors are aligned with principles of sustainable human development is a major responsibility of governments and international organizations. Adequate costing of ‘externalities’ and factoring them into commodity prices is one way to discharge these responsibilities and communicate the second crucial message–that increasing demand is the key to recovery but not any demand, and thus not any way of boosting it is acceptable and desirable from the human development perspective. Currently commodity prices reflect just the cost of immediate inputs – and we are relatively close to adequate pricing of CO2 emissions. But unless it factors in the entire scale of a commodity’s environmental impact (the costs associated with depleted ‘zero price’ natural resources, the impact on biodiversity, waste discharged etc.) the ‘market economy formula’ – and thus the outcome of the individual consumer/producer choices – would be inevitably wrong. The argument that there is no convincing evidence of the existence and scale of such externalities is widely being used as an excuse for inaction.

Such an exercise would be expensive and painful; many ‘staple commodities’ would turn into unaffordable luxuries. But at least future generations would not be robbed of

Crisis-related social mobilization in transition states Olga Onuch The global economic crisis has produced many predictions of mass mobilization in both Latin America and Central and

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their chance to make their own choices and enjoy opportunities we are (still) enjoying–as today’s young generation in the region was largely robbed by their parents’ debtdriven consumption in the 1980s.

To summarize: we are facing a unique set of development challenges, requiring responses going beyond orthodox macroeconomic solutions. The crisis is human development in nature; it demands responses consistent with the human development paradigm. A major challenge is not restoring pre-crisis levels of output but assessing how much (what rates of) growth mankind actually needs, can afford and what could be its sustainable drivers. Unless we respond to these basic questions, the immediate responses to the ongoing challenges may be only reinforcing their fundamental causes.

Andrey Ivanov is Human Development Policy Adviser at the UNDP Bratislava Regional Centre.

1. The borrowed nature of the prosperity in recent decade is largely behind the sharp increase in poverty incidence in Eastern Europe and other ‘emerging markets’ with 35 million 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 regular regional economic briefing at the World Bank/IMF Spring Meetings, Press Release No: 2009/323/ECA. 2. Although the human development paradigm is associated largely with the works of Amartya Sen, winner of the Nobel Prize in Economic Sciences in 1998, it emerged from a number of debates on welfare economics, employment, human capital and poverty in 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 determining the latter’s value as a contribution to an individual’s capabilities.

References Meadows, Donella et al. 2004. Limits to Growth: The 30-year update. White River Junction, Vermont: Chelsea Green Publishing.

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 Capability Expansion. Journal of Development Planning, No. 19, pp.

41-58.

Eastern Europe. Yet, sustained mass mobilization has not materialized. Simply put, there are other political opportunity issues at stake when predicting mass-mobilization.

Previous studies of transition and post-transition periods in the two regions have focused on the persistence of protest in the former and the perseverance of patience in the latter.

Yet, over time, it has become obvious that the motivations and patterns of mobilization in both regions have converged. When crises are understood to be propelled by political mismanagement, sporadic mass-protests occur in Latin America. Such protests have been replicated more

JULY 2009 | issue 13 recently in Central and Eastern Europe. Although there is an absence of sustained mass-protest, we have seen the emergence of localized grassroots engagement in both regions, especially during the recent economic crisis. A comparison of the recent crisis-related protests in Latvia, Moldova, Georgia, and Ukraine, with similar episodes in Mexico, Chile, and Argentina, shows that although economic crises can facilitate or trigger social mobilization ultimately it is sociopolitical factors (referred to as political opportunity structures) that are the most important determinants.

Even a severe economic downturn in a country with average levels of trust, government support, and no internal political crises will not automatically trigger mass-mobilization of ‘ordinary people’. However, severe economic downturns can compound existing crises and thus, the deeper the crisis on both political and socioeconomic terms, the higher the probability that mobilization will go beyond activists and opposition and acquire a mass character.

Several Central and Eastern Europe countries share characteristics associated with a perceived vulnerability to massmobilization, such as newer/less stable political institutions, high instances of political conflict, recent histories of

mass-mobilization (excepting Russia and Belarus), and higher rates of distrust in individual politicians and political institutions. Thus, in the face of economic hardship, it is assumed that Central and Eastern European countries would be ideal candidates for mass-mobilization. But, as in Latin America, only particular countries, such as Latvia, Moldova, Georgia, and Ukraine–where the economic crisis has exacerbated ongoing socio-political crises and general anti-elite sentiment–appear vulnerable.

Latvia has seen several protests in late 2008 and early 2009. On 13 January 2009, peaceful protests turned into riots. The protesters called for the government to resign, as it was perceived to have mismanaged the economic crisis. The initial protesters were students and youth, and even at their peak only a small share of the general population joined in the protests. Perceptions of political mismanagement and arrogance, rather than the economic crisis per se, have been the main issue for the protestors.

The protests forced the government to resign. Although the immediate outcome of the protests seems to punish the political elite in power, in the longer term the new government’s policies are not likely to stray far from its predecessors and the effects of the economic mismanagement are likely to persist. Interestingly the government’s

Moldova witnessed the eruption of violent protests following the recent parliamentary elections in which the Moldovan Communist Party triumphed. © Tomas van Houtryve/Panos Pictures

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DEVELOPMENT & TRANSITION resignation appeased protesters and pre-empted the spread of protests, muting their severity and making further mass protests unlikely.

Moldova, which has also been hit badly by the economic crisis and gas shortages, witnessed the eruption of violent protests against the government following the recent parliamentary elections in which the Moldovan Communist Party triumphed. The protests turned violent after outgoing President Vladimir Voronin stated that, although he intends to step down in accordance with the constitution’s term limit, he will remain the key political player akin to, as he put it, a ‘Moldovan Deng Xiaoping’.

These were not mass-protests. The protesters were mostly young activists and students not previously connected to opposition groups, who organized themselves using twitter and other social-networking sites. The fact that Moldova’s economic crisis coincides with an election year has exacerbated the political crisis in the country. It was the perception of increased political elitism and the centralization of power that was challenged by the protestors, not the social consequences of the economic crisis.

The government reacted with a severe and violent crackdown, leading to injury and imprisonment of activists. For social mobilization theorists this would be a signal that political opportunity structures are weak in Moldova and thus sustained mass-mobilization is unlikely. By boycotting the election of a new president in parliament, the opposition parties have forced new parliamentary elections. If they remain aloof from the protests, it is possible that they too will become victims of the growing antielite sentiment.

Since its 2003 ‘Rose Revolution’, Georgia has witnessed two episodes of mass mobilization; most recently, protests were organized on 9 April 2009 by opposition parties hoping to topple President Mihail Saakashvili. In contrast to previous mobilizations, Saakashvili now faces lower approval ratings following the war with Russia and his previous use of force against the opposition. The protests to date have not been of a mass character and, unlike in Moldova, all protestors are supporters of, and organized by, the opposition. Georgia is a case where socio-political crises have already destabilized the government; and with the onset of a recession Saakashvili’s leadership is being seriously challenged. For protests to take on a mass character two things would have to occur: (a) the opposition would have to divide the ruling elite by finding political allies within Saakashvili’s inner circle; and (b) opposition movements would have to find a way to reach out to ‘ordinary’ Georgians who have been affected by the various crises and who have until now maintained support for the government despite their growing frustration about the military and political weakness of the current regime.

Ukraine’s severe economic crisis is being intensified by political crisis in the run-up to the presidential elections.

Ukraine could have been the example par excellence of

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crisis mobilization, but while local protests have been reported by the media, no mass-mobilization has yet taken hold. There is a lack of coordination as most independent protests are not linked to the youth networks that emerged during the ‘Orange Revolution’ of 20042005. There have been several instances of sporadic protests, e.g. recently laid-off workers ‘taking over’ small factories and running them in the style of ‘cooperative/recovered factories’, as has occurred in post2001 Argentina. In early March, more than 200 truck drivers threatened to block roads if the government did not pay their debts. These are new repertoires in Ukraine and point to the increased political agency of a portion of the population previously excluded from collective action.

While the opposition has attempted to exploit the sustained economic and political crisis to mobilize ‘ordinary’ Ukrainians, their success has been mixed. On 3 April 2009, some 15,000 protesters gathered on Independence Square under opposition party flags and banners.

Opposition leader Viktor Yanukovich continued to demand the resignation of the government of Prime Minister Yulia Tymoshenko and President Viktor Yushchenko, blaming the severity of the economic crisis on their political conflict. Yet it is Yanukovich’s territory–Ukraine’s eastern industrial belt–where the crisis has hit the hardest, and where small instances of local protest have also been observed. It is therefore no surprise that recent protesters have used slogans akin to those used in Argentina in 2001–‘get rid of them all’. In post-‘Orange Revolution’ Ukraine the repertoire of public protest in main city squares has been co-opted by all the main party blocs as campaign ‘technology’. Ukrainians are very well aware that these events are bought and paid for and that they are not rooted in authentic activism or popular agency, but are controlled by the political elite.

This ‘knowledge’ may in fact delegitimize mass protest.

The most interesting and ‘new’ instances of protests in Ukraine, and more broadly in the Central and Eastern European region, are those that are local and organized not by rank- and-file activists as in 2001 and 2004, but by ‘ordinary people’. Dissatisfaction with politics in general is on the rise; and in a climate of uncertainty over regular presidential and early parliamentary elections, the question is whether protests will take on a grassroots/local or mass/national character; and whether certain political groupings, including existing activist networks, prove more successful than others in capitalizing on this dissatisfaction.

In contrast to Central and Eastern Europe, protest is always expected in Latin America, where economic and political crises seem to occur in tandem. Low levels of trust in politicians and political institutions, weak governments with high levels of political factionalism and falling approval ratings, strong activist networks with previous mass-mobilization experience, are considered opportunity structures that make mass-mobilization more likely. Economic crisis

JULY 2009 | issue 13 management policies and budget cuts have sparked recent protests in Latin America, most notably in Mexico, Chile, and Argentina. Much like the above cases in the Central and Eastern European region, these have been mainly sporadic protests by activists or experienced protesters.

The experience of Latin America and Central and Eastern Europe suggests that while socio-economic crises can trigger and facilitate social mobilization, it is only when they coincide with serious political instability and uncertainty that we see major protests. Socio-economic crises seem to lead to localized and grassroots mobilization while the larger, more systemic political conflicts have taken on a mass character. It is thus important to differentiate between the different triggers of protest, and understand local thresholds of collective patience and protest. While thresholds are country-and era-specific, we know that they are associated with levels of political trust and support for individual politicians and political institutions. This under-

scores the importance of analyzing recent declines in public trust in politicians and institutions in Latvia, Moldova, Georgia, Ukraine, and elsewhere. Furthermore, previous episodes of mass mobilization suggest that thresholds of tolerance are most often breached when perceived rights and freedoms (for example, employment) are seen as under threat and ‘ordinary people’ who were not previously engaged in protests join in. The effects of the crisis management tactics adopted by the political elite on local thresholds of patience and protest are also important in this respect. All governments–particularly those attempting to manage economic crisis during an election year or time of heightened political competition–should understand the need to engage in a three-way dialogue with opposition parties, activist groups, and ordinary citizens, in order to better understand local patience and protest thresholds.

Olga Onuch is a Doctoral Candidate at Nuffield College, University of Oxford.

Slump and the city: Company towns and the crisis in Russia Evgeny Levkin The economic crisis poses special threats to the ‘company towns’ that continue to play a large role in Russia’s economic landscape. Many Russian cities during the Soviet period relied on a small number of large companies that provided social services as well as production and employment. While some cities have since managed to diversify their economic bases, others have not. Local incomes, employment, social services, and the tax revenues needed to fund 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 services that have been provided to local residents by the mainstay enterprise. As a result, the local authorities face a severe revenue 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 concluded that the main ways to overcome the social consequences of the economic crisis in Russian regions and municipalities 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 enterprises, in the form of additional social payments, public works projects, and possibly the resettlement of local residents; • Greater support for employment restructuring and vocational training for cities with more competitive companies; • 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 participation in local decision-making.

Evgeny Levkin is Head of Official Development Assistance and Private Sector Engagement for UNDP Russia.

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JULY 2009 | issue 13

sustainable/index-sustain.php. Or contact Mihail Peleah, Human Development Programme and Research Officer, at mihail.peleah@undp.org.

FORTHCOMING EVENTS UNDP’s Bratislava Regional Centre is organizing a Regional Workshop on Programming in Support of Anti-corruption Agencies. The event will take place in Bratislava, Slovakia from 30 June to 2 July 2009. The event will bring together UNDP Country Office staff with partners, experts and practitioners from anti-corruption agencies and international organizations. Participants will discuss the role and features of anti-corruption institutions, with a focus on corruption prevention agencies, as called for in Article 6 of the UN Convention Against Corruption. Lessons learned from programmatic interventions in support of anti-corruption agencies will be discussed with the aid of case studies. The UNDP Bratislava Regional Centre will introduce a toolkit designed to provide practical guidance for country offices on developing programming. For more information, please contact Francesco Checchi at Francesco.checchi@undp.org.

The fourth annual summer course, ‘Sustainable Human Development: From International Frameworks to Regional Policies’ will be conducted at Central European University (CEU) on 6-17 July 2009. CEU and UNDP will conduct the course jointly in cooperation with the Regional Environmental Centre (REC). The course will have a policy focus, bringing together practitioners, mid- and high-level policy makers, members of academia, and civil society activists from Europe and the CIS, as well as experts on human development and the Millennium Development Goals (MDGs). The aim of the summer course is to address knowledge deficits and apply the concept of sustainable human development to regional challenges. For more information please visit http://www.sun.ceu.hu/02-courses/course-sites/ Note to our readers In the previous issue of Development and Transition, the article entitled ‘Attracting and retaining civil servants in the Western Balkans’ should have stated that Professor Ivan Koprić (University of Zagreb) was in charge of all aspects of the research project upon which the article was based. The editors apologize for the omission.

Development & Transition is published by the United Nations Development Programme and the London School of Economics and Political Science. The ideas expressed here do not necessarily reflect the views or policies of either organization. www.developmentandtransition.net

UNDP will hold a Case Study Work Stream Workshop on 13-14 July 2009 at the Bratislava Regional Centre. This event is part of the Growing Inclusive Markets (GIM) Initiative, which seeks to create understanding and awareness about how doing business with the poor can be good not only for the poor but also for private sector enterprises. The workshop is a joint event of the Global, East European and CIS regional GIM initiatives. The initiative has studied some 50 business solutions that create value both for business and the poor. For more information, please, contact Brigitte Duerr at brigitte.duerr@undp.org.

The ‘Understanding Children’s Work’ project and the University of Galatasaray (Istanbul, Turkey) are organizing a two-day seminar on child labour, education and youth employment to present recent research on child labour and its linkages with education and employment outcomes. The seminar will be held on 15 – 16 October 2009 at University of Galatasaray, and will aim to identify the key information gaps, thereby helping to guide future research efforts. For more information please visit http://www.ucw-project.org/.

The III Eastern Europe and Central Asia AIDS Conference will be held on 28 – 30 October 2009 at the World Trade Centre, Moscow. The purpose of the conference is to strengthen regional cooperation, bolster efforts to fight HIV/AIDS, and achieve the goal of universal access to HIV prevention, treatment, and care. The conference recognizes that the concept of universal access includes not only essential medical care, but also social justice and human rights considerations that are necessary for overcoming stigma and discrimination and reach most-at-risk target groups, including young people and drug users. For more information, please, visit http://www.eecaac.org/en/index.phtml?PHPSESSID =7dff5e17e2caaff703da802ced18a4d7.

The next issue of Development and Transition will focus on: Social inclusion (December 2009) The editors welcome contributions. If you wish to submit an article, please follow the guidelines at www.developmentandtransition.net.

Editor: James Hughes: j.hughes@lse.ac.uk Executive Editor: Ben Slay Deputy Editor: Gwendolyn Sasse Managing Editor: Peter Serenyi Marketing and Production Coordinator: Dasa Rehakova Advisory Board: Nicholas Barr, Willem Buiter, Mary Kaldor, Margot Light, Waltraud Schelkle

UNDP Bratislava Regional Centre Grosslingova 35 Bratislava 81109 Slovakia Tel: +421 2 59337 111 Fax: +421 2 59337 450 http://europeandcis.undp.org

Houghton Street, London WC2A 2AE, UK www.lse.ac.uk

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