Upload
idia
View
212
Download
0
Tags:
Embed Size (px)
DESCRIPTION
Director: John Paul Marshall Sustainability in Transition Economies Institute for Domestic & International Affairs, Inc. © 2009 Institute for Domestic & International Affairs, Inc. (IDIA) This document is solely for use in preparation for Philadelphia Model United Nations 2009. Use for other purposes is not permitted without the express written consent of IDIA. For more information, please write us at [email protected]
Citation preview
Institute for Domestic & International Affairs, Inc.
Economic and Financial
Sustainability in Transition Economies
Director: John Paul Marshall
© 2009 Institute for Domestic & International Affairs, Inc. (IDIA)
This document is solely for use in preparation for Philadelphia Model United Nations 2009. Use for other purposes is not
permitted without the express written consent of IDIA. For more information, please write us at [email protected]
Policy Dilemma ______________________________________________________________ 1 Chronology__________________________________________________________________ 2
10 November 1982: The Death of Leonid Brezhnev and the move towards reform in the Soviet Union ___________________________________________________________________________ 2 11 March 1985: The Rise of Gorbachev _______________________________________________ 3 1989: A Series of Revolutions across Eastern Europe____________________________________ 4 1990: The Washington Consensus____________________________________________________ 4 1991: The Breakup of the Soviet Union _______________________________________________ 5 1992: An Ineffective Transition to Market Economies ___________________________________ 6 August 1998: IMF Loan to Russia ___________________________________________________ 7 Moral Hazard in the Ukraine _______________________________________________________ 7 2007: Eastern European Economies Grind to a Halt ____________________________________ 8
Actors and Interests ___________________________________________________________ 8 The States and People of Eastern Europe _____________________________________________ 8 The European Union (EU) _________________________________________________________ 10 Oligarchs _______________________________________________________________________ 12 Non-Governmental Organizations (NGOs) ___________________________________________ 13 International Financing Institutions_________________________________________________ 13
Possible Causes _____________________________________________________________ 14 Corruption______________________________________________________________________ 14 Shock Therapy __________________________________________________________________ 15 Culture_________________________________________________________________________ 16 Comparison of Possible Causes _____________________________________________________ 16
Projections and Implications___________________________________________________ 17
Conclusion _________________________________________________________________ 19 Discussion Questions _________________________________________________________ 20 For Further Reading _________________________________________________________ 21
Works Cited ____________________________________________________________________ 22 Works Referenced _______________________________________________________________ 25
PhilMUN 2009 1
Policy Dilemma
Economic growth was strong in Eastern Europe at the onset of the new
millennium. From 2004 through 2006, gross domestic product (GDP) grew at rates above
5 per cent 1. In 2007, the economies of Eastern Europe began to slow and in 2008, the
situation was worsened by the global credit crisis. The economies of Eastern Europe are
fragile and lack the kind of stability found in more developed states. This has made
economic sustainability throughout the developing world increasingly hard to attain as
the world economy continues in its decline.
Much of the economic growth in Eastern Europe in the past decade has been
caused by the successes of the European Union (EU). The developed states of Western
Europe have encouraged stronger markets by purchasing Eastern European goods
regularly, resulting in higher consumption and rising exports in Eastern Europe. The EU
also relaxed migration standards which allowed labor to flow from poorer to richer states.
Accession into the EU has also provided benefits to Eastern Europe in a number of ways.
States who are members of the EU, or are considering joining the EU have to make
concerted efforts to eradicate corruption, increase GDP, and keep inflation low, all of
which help the economy. While these EU-related externalities have been beneficial to the
economic growth of Eastern Europe they are still external forces and truly sustainable
economic development requires internal forces as well. 2
Association with the European Union has also created many economic problems
for the economies of Eastern Europe. As Eastern Europe has globalized it has become
subject to economic contagions such as the current credit crisis, which spread from the
1 Marcin Sadowski, GDP Growth Rate in CEE will amount to 5%, PMR Publications, http://www.pmrpublications.com/press_room/en_GDP-growth-rate-in-CEE-will-amount-to-5_.shtml, Accessed 4 November, 2008 2 David L. Bartlett, Economic Growth and Financial Development in Europe, RSM International, http://64.233.169.132/search?q=cache:CFOqMpnjRGoJ:www.tmud.org.tr/dokumanlar/14_kasim_sunumlar/1.2.7/bartlett%2520wcoa%2520nov%252006.ppt+EU+and+Eastern+European+GDP+growth&hl=en&ct=clnk&cd=12&gl=us, Accessed 1 December 2008.
PhilMUN 2009 2
United States through Western Europe into Eastern Europe. Entering the Euro zone’s
Exchange Rate Mechanism (ERM) for two years to prove economic stability also
deprives countries of their ability to influence their domestic markets. Two Baltic
countries, Estonia and Lithuania, entered the ERM in 2004 and were denied entry in 2006
due to inflation. Now, in the face of massive trade deficits, they are considering
devaluation to compete in the long term; however, this will reset the clock on their ERM
term so they would not enter the euro zone any earlier than 2010. These strict guidelines
set out by the EU for membership denies Eastern European candidate states the economic
agency needed to deal with domestic problems. 3
Sustainable economic growth must be built internally to be truly sustainable. This
committee needs to find solutions that allow Eastern Europe to develop their economies
on their own terms, addressing domestic resources and needs. EcoFin needs to find a way
to promote real, and comprehensive domestic growth while keeping Eastern Europe open
to the global economy. This means exploring solutions such as development finance,
micro financing, and solutions that address issues such as imbalanced economies.
Solutions should encourage governments and their populaces to work together towards
responsible wealth creation.
Chronology
10 November 1982: The Death of Leonid Brezhnev and the move towards reform in the Soviet Union
The need for economic reform finally gained enough momentum to influence the
choice of a new Soviet head of state who promoted a reform agenda, however moderate.
In November 1982 Leonid Brezhnev died and the next Soviet leader was Yuriy
Andropov. The Brezhnev years (1964-1982) promoted the kind of conservative Stalinist 3 Estonia’s Recession Deepens As Latvian Finances Struggle to find Air, November 14 2008, Eastern Europe Economy Watch, http://easterneuropeeconomy.blogspot.com/2008/11/estonias-recession-deepens-as-latvian.html, Accessed 1 December 2008.
PhilMUN 2009 3
policies that slowly destroyed the economy of the Soviet Union. His leadership was
characterized by a return to Stalinist centralization and central planning with an emphasis
on heavy industry, especially defense related, and a notable lack of emphasis on
consumer products. The Soviet public’s demands for more high quality consumer
products went repeatedly unheard. In the agricultural sector, Brezhnev continued to
convert collective farms into state farms, slowing production.4 After Brezhnev’s death the
need to correct the lack of reform under Brezhnev’s leadership became Yuriy Andropov’s
primary political tool when seeking, and eventually gaining leadership of the Soviet
Union. His actual reforms were minimal and Andropov, whose political career began and
ended with national security and foreign policy as a leader of the KGB, had little
economic experience.5
11 March 1985: The Rise of Gorbachev Mikhail Gorbachev assumed control of the Soviet Union with an agenda that
showed a true commitment to liberalization and reform. The key words in his reform
campaign are glastnost (openness) and perestroika (restructuring). Glastnost facilitated
the kind of free speech and freedom of expression that was seen as essential to
liberalization. It allowed the media to be even more radical than Gorbachev, which was a
way for him to promote his own reform agenda. Perestroika was a drastic restructuring of
the central planning-based Soviet economy. It introduced real elections like the Congress
of People’s Deputies which enhanced political participation for the first time in their long
history. Gorbachev promoted decentralization in different ways, such as giving more
power back to the Soviets (the regional worker boards that technically made up the
U.S.S.R). In the economic arena, reforms include liberalizations of price controls,
election (rather than selection) of managers by the labor collectives, legalization of 4 The Brezhnev Era, http://countrystudies.us/russia/14.htm, Accessed 8 December 2008. 5 T. Miko, Soviet Policy Under Andropov, U.S. Library of Congress, Congressional Research Service, Foreign Affairs and National Defense Division, Issue Brief Number IB83120, http://74.125.45.132/search?q=cache:0HJBGtu-WFcJ:digital.library.unt.edu/govdocs/crs/permalink/meta-crs-9189:1+Andropov+Economic+Policy&hl=en&ct=clnk&cd=2&gl=us, Accessed 8 December 2008.
PhilMUN 2009 4
cooperatives, de-monopolization, and an overall move towards private or semi-private
ventures within the Soviet Union. 6
1989: A Series of Revolutions across Eastern Europe The Revolution of 1989 swept across Eastern Europe as Czechoslovakia, Poland,
Hungary, East Germany, Romania, and Bulgaria all converted from communist Soviet
satellite states to free market democracies. In all but one case (Romania) the revolutions
were bloodless and rapid. The unrest began in Poland and Hungary where Gorbachev’s
policies of glasnost and perestroika were mimicked leading to the rise of broad-based
dissent. When people began protesting the Communist government, the governments
quickly negotiated an end to their reigns and political systems. The other states of Eastern
Europe followed similar models except for Romania where Communist despot Ceausescu
refused to abdicate and was violently but quickly overthrown. These revolutions installed
new economic and political philosophies but did not come as the result of widespread
social upheaval. The social structures stayed largely the same; it was simply a matter of
substituting a few of the more communist leaders with other members of the ruling class.7
1990: The Washington Consensus Economist John Williams coined the term Washington Consensus to denote the
paradigm shift in global financial thought that occurred in the early to mid 1980s8. Two
of the most economically important countries in the world, the United States and the
United Kingdom led by Ronald Reagan and Margaret Thatcher respectively, began
vocally promoted liberal, classical economic principles. The International Monetary Fund
and World Bank, influenced by these two leaders also experienced heavy turnover as new 6 Lewis Siegelbaum, Perestroika and Glastnost, Seventeen Moments in Soviet History, http://soviethistory.org/index.php?page=subject&SubjectID=1985perestroika&Year=1985, Accessed 8 December 2008. 7 Colin Barker and Colin Mooers, Theories of Revolution in Light of 1989 in Eastern Europe, http://64.233.169.132/search?q=cache:Ho6uSZMfPCEJ:www.psa.ac.uk/journals/pdf/5/1994/bark2.pdf+1989+Revolutions+economic+transition&hl=en&ct=clnk&cd=4&gl=us, Accessed 8 December 2008. 8 Washington Consensus, Center for International Development at Harvard University, April 2003, http://www.cid.harvard.edu/cidtrade/issues/washington.html, Accessed 8 December 2008.
PhilMUN 2009 5
heads for both institutions executed regime change to bring in fellow free market
enthusiasts and purge the development-styled economists that had typified the previous
forty years of IMF and World Bank policy9. The Washington Consensus pushed agendas
such as fiscal discipline, tax reform, interest rate and capital flow liberalization,
deregulation, and the importance of property rights.10 This was the prevailing school of
economic thought that existed as the breakdown of the Soviet Union occurred and it
dictates many of the policy choices made at this time.
1991: The Breakup of the Soviet Union The breakup of the Soviet Union occurred during the year of 1991. The process
began the previous year with the Soviet Union agreeing to give up its monopoly of power
early in the year and the first free elections taking place early in 1990. The Baltic States
of Lithuania, Latvia, and Estonia, all declared that they would be moving towards
independence. In June 1991, Boris Yeltsin was democratically elected the President of
the Russian Federation, the largest and most influential country in the Soviet Union. Two
months later, there was a coup d’état attempt to return to the old Soviet Union. Boris
Yeltsin rallied the people of Russia and elements of the military to stop the coup and
arrest its leaders, effectively destroying the Soviet old guard.11 The Baltic States were
recognized as independent by the world at large and Yeltsin had the popular support and
lack of political opposition necessary to move forward with the dissolution of the
U.S.S.R., which slowly shut down over the next few months and officially ended on 26
December 1991. The U.S.S.R. was replaced by the Commonwealth of Independent
States. After the collapse of the Communist system, the former states of the U.S.S.R
completed the adoption of free market liberal democracies for their own reasons and due
9 Joseph Stiglitz, Globalization and Its Discontents, New York: WW Norton 2003. 10 Washington Consensus, Center for International Development at Harvard University, April 2003, http://www.cid.harvard.edu/cidtrade/issues/washington.html, Accessed 8 December 2008. 11 Sheilah Kast, Enduring Lessons of the Soviet Breakup, Washington Times, January 1, 2002, http://www.cdi.org/russia/johnson/6002-9.cfm, 12/9/08.
PhilMUN 2009 6
to the pressure of groups involved in the Washington Consensus. The method for
capitalist integration in Eastern Europe was shock therapy.12
1992: An Ineffective Transition to Market Economies As the transition to market economies became more common, land privatization
also occurred more frequently, with governments practically giving away valuable assets
deals across Eastern Europe. The shock therapy model pressured these transition
economies to sell assets before the really knew what they had and while the bureaucrats
of the former regime still had an unprecedented influence. The result of these
privatization programs was the concentration of property rights in the hands of those who
had connections, exacerbating the income and equality gap. These people had no
incentives and no capital to do the things needed to create sustainable economic growth.
This was compounded by inconsistent and flawed regulations and poor economic
incentives led to wealth stripping and hoarding, not wealth creation. The capital flight
that ensued ensured that much of that money would not be spent bettering the economies
of Eastern Europe. The economies of Eastern Europe had another problem in that there
was no enforced change away from the Soviet model. The workers and managers wanted
to continue to work and produce based on the model that characterized their previous
economies. Eastern Europe was over-industrialized, especially in heavy industry, which
is not only inefficient but has only been supported by the military-industrial complex
brought about by the Cold War. Public administration also stayed largely the same and a
notorious lack of transparency and regulation irregularities were problems throughout
Eastern Europe. These distortions only led to a higher concentration of wealth, which
gave rise to the oligarchies that dominated the economic sectors of these transition
economies. As the oligarchs gained increasingly large proportions of the wealth, they
further distorted the lawmaking process with economic pressures and corruption. Many
12 Ibid
PhilMUN 2009 7
of the factors created by the rapid changeover to free market ideals lead to the
unsustainable development apparent in these transition economies today.13
August 1998: IMF Loan to Russia There was a financial crisis in Russia due to unsustainable economic policy during
their transition to a market economy. Russia, with its oligarchies and stripped wealth, was
driving economic growth almost solely through oil. When the East Asian Financial Crisis
brought down the global demand for oil, Russia went from a current account surplus to a
current account deficit of 1.5 to 2 per cent between 1997 and 1998. This put pressure on
the ruble forcing the Russians to tighten their money flow to try to defend an already
overvalued ruble. As speculative attacks began on the ruble the Russian Federation
looked to the international currency regulator, the IMF, for help in June. They received
help but the IMF’s insistence against devaluing the Russian currency was costing four
billion U.S. dollars monthly14, money that was supposed to be providing liquidity to a
tight market. By August the Russians had decided to devalue and they defaulted on many
of their loans, essentially wasting the IMF’s money and plunging Russia deeper into debt.
Russian banks are estimated to have lost about 40 per cent of their assets in this financial
collapse. 15
Moral Hazard in the Ukraine Another impediment to sustainable development is the propensity for international
institutions to rely on the use of money to solve problems rather than adapting
comprehensive solutions. In 1998 the IMF and Ukraine continued their tumultuous
relationship, with the IMF approving a USD $2.2 billion loan over three years to allow
them to avoid default. The IMF had removed its support for Ukraine multiple times
before because Ukraine was not making progress on reforms. Each time, the IMF ended
13 The Russian Crisis of 1998, The Third World Network, http://www.twnside.org.sg/title/1998-cn.htm, Accessed 9 December 2008. 14 Ibid 15 Ibid
PhilMUN 2009 8
up relenting as the country neared imminent default. As a result necessary reforms are
never made. This case is an example of moral hazard. Ukraine, knew it would be bailed
out, which provided no incentive to reform or to pursue responsible economic policy. In
addition, lenders had no incentive against making irresponsible loans. Such a heavy
reliance of outside help is an indicator of an unsustainable economy. 16
2007: Eastern European Economies Grind to a Halt After almost a decade of strong economic growth throughout Eastern Europe, past
trends reemerged and exposed the lack of sustainable development in the region. External
imbalances now plague the overheated economies of the Baltic States and Ukraine. The
rapid growth of the previous decade compensated for a lot of mistakes and distorted
views on acceptable risks in these burgeoning economies. These states, while they are in
the process of developing their financial infrastructures, are not capable of internally
escaping the effects of reduced access to credit from the major developed powers. Access
to credit is crucial to sustainable development, both in creating new businesses and
maintaining them during tight times. Eastern Europe is still too reliant on foreign capital
to have truly sustainable development.17
Actors and Interests
The States and People of Eastern Europe Eastern Europe has never enjoyed the kind of stability found in Western Europe.
In the 20th Century many of the major political and state changes worldwide have been in
Eastern Europe. After World War I the rise of Communism, the creation of Poland, and
the breakup of the Austro-Hungarian Empire were all significantly destabilizing events.
After World War II, more specifically the fight between the Russians and the Germans, 16 Ukraine, Easy Money, The Economist, August 8,1998, http://www.imfsite.org/recentfin/ukraine.html. Accessed 9 December 2009. 17 Eastern European Outlook: Resilience is eroding - lengthy recession in Estonia and Latvia, Euro Investor, 08/10/2008, http://www.euroinvestor.co.uk/News/ShowNewsStory.aspx?StoryID=9990056, Accessed 9 December 2008.
PhilMUN 2009 9
the Russians never left, instilling Communism in satellite states and claiming new
territories for the U.S.S.R. Finally, from 1989 to 1991 the Soviet sphere of influence
slowly disintegrated, instantly creating new countries, new borders, and a new way of
running the economy.18 Since that point there has been little stability in Eastern Europe.
Ethnic tensions in the Balkans led to the creation of several new states. In Eastern Europe
almost every national economy has fundamentally changed or been created within the
past twenty years. Although developed countries also had to deal with the aftermath of
the two World Wars, their states and political systems remained intact.19 Eastern Europe
has experienced constant change, conflict, and struggle, which has made both political
and cultural turmoil nearly constant. This kind of environment lacks the stability
necessary for sustainable development.
The governments in Eastern Europe have also provided obstacles to sustainable
development in the region. They are rife with corruption20, which is a major force
preventing sustainable development. When corruption plays such a large role in public
life, the market does not have control over the economies. Even though Eastern European
states have transitioned to free market economies, the states have not yet privatized many
of their resources21, and were responsible for all of the previous asset sales, giving
government a significant role in the sustainable development of the economy. Instead of
privatization sales going to those who make the best offers and considering the impact
sales will have on the economies, most of the sales either went to corrupt politicians or
whoever could offer the largest kickback to the bureaucrat in charge of the sale of the
given property.
18 Internet Modern History Sourcebook, Fordham University, http://www.fordham.edu/halsall/mod/modsbook.html, Accessed 10 December 2008. 19 Stiglitz. 20 Transparency International, http://www.transparency.org/policy_research/surveys_indices/cpi/2008, Accessed 9 December 2008. 21 Milic Milanovic, Property Rights, Liberty, and Corruption in Serbia, Independent Review; Fall2007, Vol. 12 Issue 2, p213-234, 22p, Academic Search Premier
PhilMUN 2009 10
The people of Eastern Europe are interested in creating sustainable growth but are
limited by a number of factors. In the older generations, there is a lack of adaptability due
to Soviet culture. Although the older generations of workers are highly skilled in
technical areas, they were victims of central planning. They were told which jobs to learn
and never deviated from their task. The younger generation proved more adaptable but
the economic collapse they grew up during leaves little room for education.22 The people
of Eastern Europe are ready and capable to move forward with sustainable development
but their poverty, instability, conflict, and horribly corrupt governmental system is
preventing their progress.
The European Union (EU) The European Union is important to Eastern Europe in a variety of ways. The
primary trading partners of Eastern European states are mostly members of the EU and
many Eastern European states are either members or candidate members of the EU
(Croatia, FYR Macedonia), though none of them have been able to adopt the Euro. A few
other Eastern European states such as Ukraine are currently debating whether they want
to apply to join. 23 Association with the European Union is seen as one of the major
factors in the strong economic growth of Eastern Europe during the 2000s. There are two
major reasons for this. The EU’s rise as a true economic power has increased its buying
power to benefit Eastern Europe and as a result, has been looking for new untapped
markets for its own goods. The EU found these markets in Eastern European states.
The EU has been a major agent for reform and change in Eastern Europe, most of
which led to more sustainable development. To join the EU a country must adhere to the
Copenhagen Criteria, and the EU has an effective candidacy program for assisting
countries in reaching said criteria. The criteria include a stable democracy with rule of 22 Growing Older in Eastern Europe and Central Asia, Help Age International, http://www.helpage.org/Worldwide/EasternEuropeandCentralAsia/GrowingoldinEasternEuropeandCentralAsia, Accessed 10 December 2008. 23 European Countries, Europa, http://europa.eu/abc/european_countries/index_en.htm, Accessed 10 December 2008.
PhilMUN 2009 11
law, human rights, and a respect for the protection of minorities, a functioning market
economy, and a perceived ability to assume the duties of membership. Another provision
was added during the 1995 Madrid conference, requiring the presence of certain
administrative and judicial structures that allow EU-wide reforms to be carried out by
individual countries quickly, evenly, and completely.24 These requirements are applied
actively during the candidacy process and help improve many aspects of a given state’s
economic abilities. They promote sound governance with the kind of human rights and
minority protections that prevent unrest and destabilization. This criterion is also used to
encourage domestic anti-corruption campaigns in candidate and pre-candidate countries.
The provision for a functioning market economy is also effective; the EU provides
technical and financial assistance to assist Eastern European states in improving their
market systems. The last two requirements are more circumstantial and can be used to
promote a variety of reforms or misused to attempt to block a candidate state’s entry.
The interest of the EU in Eastern Europe is contested. The EU maintains that all of
its actions are in the best interests of the EU as well as the people and governments of
Eastern Europe. The actions of the Western European powers that are engaging Eastern
European states on behalf of the EU have been conscientious, thorough, helpful, and
sincere but decidedly cautious. Most of the criticism of the EU has not been as a result of
their action but of their mechanisms.25 The mechanisms they have for inclusion in the EU
and more specifically the Eurozone are extremely conservative and not necessarily
conducive to sustainability in transition economies. The Eurozone requirements include
maintaining a low budget deficit, stable exchange rate, and low interest and inflation
24 Acession Criteria, European Commision, http://ec.europa.eu/enlargement/enlargement_process/accession_process/criteria/index_en.htm, Accessed 10 December 2008. 25 John O’Brennan, The EU in the Western Balkans: Enlargement as Empire? A Response to David Chandler, Global society : journal of interdisciplinary international relations 10/1/2008. Academic Search Premier. Accessed Accessed 10 December 2008.
PhilMUN 2009 12
rates.26 Critics have identified three major problems with this. The first is that very few of
the countries already in the Eurozone even attempt or achieve these goals themselves.
The second problem is that some in Eastern Europe see this as an attempt for Western
Europe to homogenize them despite their distinct cultural differences and their histories.
The final criticism is mainly economic in nature. These requirements deprive Eastern
European candidate states of domestic economic policy autonomy by determining the
policy choices for them. Countries have no ability to manipulate interest rates, spend
during a deficit, or devalue (especially important in this current economic decline). If
development is to be truly sustainable the government and the people have to work
together to create wealth. By lessening the degree of government agency, some say the
EU could be creating rifts between the people of Eastern Europe and their own
governments. Some critics have even gone so far as to label the EU’s treatment of the
Balkan states as neo-colonialism.27
Oligarchs Oligarchs are the small group of business magnates who now control much of the
commerce in Eastern Europe, especially in Russia, due to their advantageous positions in
the breakup of the Soviet Union. They accumulated as much as they could in the mass
privatizations of the early 90s and have since only expanded their influence over the
economic and political sectors, using oppressive economic advantages to eliminate
competition. They are also a reason that the economies of Eastern Europe are
unsustainable. Any development they achieve is largely for personal gain as they look to
gain as much profit out of the resources they have and are not interested in diversifying.
The income gap widens further because wealth is concentrated in the hands of a few. In
the 1998 IMF bailout, Russian oligarchs were largely responsible for the currency attacks
26 Euro aspirants fall short of requirements, Wednesday 6 December 2006, EurActiv, http://www.euractiv.com/en/enlargement/euro-aspirants-fall-short-requirements/article-160307, Accessed 10 December 2008. 27 O’Brennan.
PhilMUN 2009 13
and subsequent capital flight that severely impacted the Russian tax payer and subsequent
economic growth. The Oligarchs also have a distortion effect on economic policy. Due
to their status as an unnaturally large part of Eastern European business, they influence
the political process as well. The interest of the oligarchs is almost exclusively to make
money in the short term.28
Non-Governmental Organizations (NGOs) There are many NGOs who aid in supporting sustainable development in Eastern
Europe. Often it is far easier to directly access the effected populations through non-
governmental organizations and engage them in development projects that build the
economy from the bottom up, creating truly sustainable development. NGOs are
involved in a variety of projects including microfinancing for small businesses, small
scope infrastructure investment, and regional banking that can assess the needs of a
region rather than trying to cater to diverse areas. Significant NGOs include the European
Bank for Reconstruction and Development (EBRD)29 and the Northern Alliance for
Sustainability.30 The interest of the NGOs is to better the world, reduce poverty, and
provide employment through responsible, long-term development projects.
International Financing Institutions The World Bank and the IMF have played a significant role in the economies of
Eastern Europe since the break-up of the Soviet Union. The World Bank has executed
numerous development projects in the region and the IMF has been involved with loans
to many countries, including two significant bailouts to Russia in 1995 and 1998. The
IMF and World Bank also had a significant role in the process of deciding how to
liberalize the former communist states. During the transition, these two organizations
28 Roger Schoenman, Captains or Pirates? State-Business Relations in Post-Socialist Poland, East European politics and societies, 1/1/2005. Academic Search Premier. Accessed 8 December 2008. 29About the EBRD, http://www.ebrd.com/about/index.htm, Accessed 8 December 2008. 30 About Us, http://www.anped.org/index.php?part=411, Accessed 8 December 2008.
PhilMUN 2009 14
adhered to the Washington Consensus and helped influence the choice of shock therapy
instead of gradual reintegration of Eastern European markets. The action ended up being
a failure. It is important to remember that the interest of the IMF and the World Bank is
and always will be promoting sound economic policy and sustainable development, even
if their methods can be questioned.31
Possible Causes
Corruption Corruption is still one of the biggest obstacles to economic growth in Eastern
Europe. When corruption is present, all of the negative aspects of government impact the
economic arena. These impacts include inefficient allocation of resources due to bribes or
cronyism, weakened administrative institutions, and poor regulation. Poor regulation due
to corruption can be particularly damaging because other countries will use it as an
excuse to reject a state’s imports, inciting further economic damage. Corruption hurts
sustainability in both direct and indirect ways. Corruption directly diverts resources away
from the populace, who are the driving force behind sustainable development. It
concentrates resources in the hands of the rich and the well-connected, which perpetuates
income disparity as an impediment to sustainable development. Lastly corruption wears
on a populace until they have an adversarial relationship with the government. In order to
create sustainable development, the government has to be working with, rather than
against the people.32
Corruption also has a destabilizing effect in the world credit market. Risk
premiums for international loans to countries with high perceived levels of corruption are
more likely to account for the possible diversion of money, such as in the 1998 IMF
31 Joseph Stiglitz, Globalization and Its Discontents, New York: WW Norton 2003. 32 Rasma Karklins, The System Made Me Do It: Corruption in Post-Communist Societies, New York, M.E. Sharp, 2005.
PhilMUN 2009 15
Bailout of Russia. Generally, development cannot occur without secure, fair, and safe
access to credit and corruption negatively influences these aspects.33
Shock Therapy The lack of sustainable development in Eastern Europe can be attributed to the
rapid liberalization states experienced during the early 1990s after the breakup of the
Soviet Union. The states of Eastern Europe, under pressure from international finance
institutions and states like the United States, all opted for rapid liberalization programs.
The Washington Consensus institutions had faith that the market would rapidly adjust to
address new issues and they made almost no attempts to reform the economies that had
emphasized heavy industry for the past 50 years. The rapid liberalization also included
rapid privatization which concentrated the worthwhile resources in the hands of a few
political insiders. This privatization led to the rise of the oligarchs and the Russian
Mafia.34 Throughout the transition, those who could take things by force did, and soon
their protection was necessary for anyone looking to conduct business. Their time of
power was short-lived but nearly complete, as the Russian Mafia filled the power vacuum
created by the abrupt shift.
The Western World did not attempt to identify or fix structural problems in
Eastern European states. The political changeover did not represent real change; many of
the political institutions remained the same or similar to their previous manifestations and
many of the bureaucrats were the same people in power in the new systems. The endemic
lack of responsiveness of the government to the people that existed under the Soviet
Union was continued, but this time in new ostensibly democratic governments35. True
democracy and market economies have to be developed, not suddenly made. The process
can be accelerated but the transition period has to be lengthy and thorough. 33 Transparency International, http://www.transparency.org/policy_research/surveys_indices/cpi/2008, Accessed 9 December 2008. 34 Anders Aslund, How Capitalism Was Built: The Tranformation of Central and Eastern Europe, Russia, and Central Asia, New York: Cambridge University Press, 2007. 35 Stiglitz.
PhilMUN 2009 16
Culture In Eastern Europe there are many cultural factors that have prevented sustainable
development. There has been and still is a deep sentiment of self-sufficiency, to the point
where there is an almost inherent mistrust of other people and their own governments.
This mistrust was exacerbated as it led to communications breakdowns and conflict
which bred further distrust. The institutional mistrust of government manifests itself in
many negative ways. Government development programs and other initiatives common
in market economies are ignored or under-utilized.36 Petty corruption is not reported, as
citizens believe it is a fixture in everyday life. People who grow up in the system later
wonder where their cut is and perpetuate the same system of corruption.
Eastern European culture has another significant impact on sustainability. Ethnic
nationalism manifests itself in prejudice, which distorts the market, and warfare which
destabilizes entire economies, setting back years of economic progress. The Balkans
conflicts of the 90s were numerous and destroyed the region’s fragile economies which
need to be rebuilt before they can work towards sustainability. The vicious conflict
between various seceding Yugoslavian states and ethnic Serbs left over 200,000 dead and
displaced millions.37 Mistrust, whether of other ethnicities or of government as a whole,
is not conducive to sustainable economic development and any solution would have to
eradicate this culture of mistrust.
Comparison of Possible Causes The lack of sustainability in Eastern Europe is a serious problem; the states of the
region continue to lag behind the rest of Europe in almost every economic factor. The
potential is there, as seen by the stellar growth rates of the early to mid 2000s. However,
Eastern European states need to be capable of sustaining their growth in more than four
to five year bursts. Three possible causes for the lack of sustainable development are 36 Rasma Karklins. 37 The War in Bosnia, USA Today, 2/14/96, http://www.usatoday.com/news/index/bosnia/nbos002.htm, Accessed 10 December 2008.
PhilMUN 2009 17
corruption, shock therapy, and culture. Corruption destabilizes states domestically and in
the eyes of the international lenders, a significant hurdle to development. The adverse
effects of an ineffective application of shock therapy to the markets is still impacting
Eastern Europe, as people have to deal with poor infrastructure, stripped assets, and an
imbalanced allocation of resources based on non-market factors. The culture of Eastern
Europe needs to be shifted to achieve lasting economic success. People need to work
closely with other people, and with their governments to make sustainable development
truly attainable.38 If trust is not built and fostered, these states will revert to isolationism,
and closed-off markets.
The issue is complex because all of these causes are linked. The lack of trust in
institutions can be explained by the corruption evident in Eastern European states for
centuries. The propensity to strip wealth, and take it abroad in capital flight was the result
of Eastern European culture undergoing shock therapy. Shock therapy was thought to be
necessary, partially because those who proposed it thought the corruption could be
eliminated by a quick transition, preventing the creation of intractable political blocs. In
addition, gradual change could have slowed down the liberalization process
immeasurably. These factors are the causes for a lack of sustainable economic
development in the transition economies of Eastern Europe.
Projections and Implications
If this issue is not addressed it could have dire consequences for Eastern Europe.
Despite the growth in the 2000s of some of the Eastern European state’s economies, they
are all still distinctly developing states, and this latest global economic crisis is hitting the
Eastern European region harder than most. The trends of poverty, declining life
expectancy, higher infant mortality rates, and real wage reduction in Eastern Europe
could continue if action is not taken. Russia’s incidence of poverty is above twenty per
38 Giovanni Cornia an d Vladimir Popov, Transition and Institutions, New York: Oxford University Press, 2001
PhilMUN 2009 18
cent and Armenian real wages are 11 percent of what they were in 1989 as of 2001.39
Throughout Eastern Europe over 60 million people live on less than two USD a day. 40
Less than 30% of people in rural areas have easy access to water.41 These numbers do not
represent sustained economic development, nor do they represent the kind of
infrastructure that can support sustained economic development in the future.
If economic sustainability cannot be achieved, the Eastern European region is
prone to destabilize again. The mistrust inherent in Eastern European culture could begin
to form new conflicts, further stunting economic progress. Due to the significant variety
of resources such as oil, natural gas, manpower, coal, fertile land, metals, and forests, it is
clear that Eastern European states will be making a profit. However, if sustainable
economic development for all cannot be established the gaps between the impoverished
and the wealthy will continue to grow with possibly disastrous consequences.
39 Mihaly Simai, Poverty and Inequality in Eastern Europe and the CIS Transition Economies, http://www.un.org/esa/desa/papers/2006/wp17_2006.pdf, Accessed 12 December 2008. 40 Growth, Poverty, and Inequality: Eastern Europe and Former Soviet Union, World Bank, http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/0,,contentMDK:20627214~pagePK:146736~piPK:146830~theSitePK:258599,00.html, Accessed 8 December 2008. 41 Millions Living in Poverty in Eastern Europe, SOS Childrens Foundation, 4/30/2007, http://www.soschildrensvillages.org.uk/charity-news/millions-living-in-poverty-in-eastern-europe.htm, Accessed 8 December 2008.
PhilMUN 2009 19
Conclusion
Eastern Europe is an impoverished area and it is EcoFin’s responsibility to think
of creative solutions that better the welfare of the populace and create economic growth.
In order to do this it is important to keep in mind the history of Communist states and
their current status as modernizing but still underdeveloped societies. One also must
consider the steps that put Eastern Europe in this position, such as the use of market
fundamentalism, and the corruption and mistrust of their own states and societies. The
status of Eastern Europe as emerging members of the European Union and
simultaneously members of the oligarchic economies from which they come represents
an interesting dichotomy that requires a unique set of solutions to achieve the goal of
sustainable development.
PhilMUN 2009 20
Discussion Questions
• What are the ways we as a committee can promote sustainable development in the transition economies of Eastern Europe?
• What effects will curtailing corruption have on sustainability? • What about this issue is specific to Eastern Europe? What about this issue can we
apply to other countries and regions? • How does Eastern Europe relate to the European Union? Should this be a part of
our discussion? • How can this committee create solutions that will make a positive culture change
in Eastern Europe? • Which of the possible causes do you think is the most relevant in this issue?
Which is most important to your state? • Do you think the global financial institutions such as the IMF and World Bank
handled this situation well? • What unique policy problems do the oligarchs create? • What can NGOs do to help solve this issue? • What historical events are the most important to understanding the present
problems presented by sustainable development?
PhilMUN 2009 21
For Further Reading
Cornia, Giovanni and Popov, Vladimir. Transition and Institutions. New York: Oxford University Press, 2001
This book covers the processes of economic transition from around the world in all kinds of market styles. A thorough and informative look at transition economies and the solutions that have worked and failed in the past.
European Bank for Reconstruction and Development Website http://www.ebrd.com/
The EBRD’s website is full of excellent information, research, background, and programs and almost all relating to sustainability in transition economies. Highly recommended both for committee members and anyone interested in economic development policy.
Stiglitz, Joseph. Globalization and it’s Discontents. New York: WW Norton, 2003.
This book is not specifically about sustainability but it has many interesting insights about economics of globalization. An interesting read with many valuable pieces of information and an excellent description of the 1998 IMF bailout of Russia.
PhilMUN 2009 22
Works Cited About the EBRD. http://www.ebrd.com/about/index.htm. 12/8/08. About Us. http://www.anped.org/index.php?part=411. 12/8/08. Acession Criteria. European Commision.
http://ec.europa.eu/enlargement/enlargement_process/accession_process/criteria/index_en.htm. 12/10/08.
Aslund, Anders. How Capitalism Was Built: The Tranformation of Central and Eastern Europe. Russia. and Central Asia. New York: Cambridge University Press. 2007. Barker, Colin and Mooers, Colin. Theories of Revolution in Light of 1989 in Eastern
Europe. http://64.233.169.132/search?q=cache:Ho6uSZMfPCEJ:www.psa.ac.uk/journals/pdf/5/1994/bark2.pdf+1989+Revolutions+economic+transition&hl=en&ct=clnk&cd=4&gl=us. 12/8/08.
Bartlett, David L.. Economic Growth and Financial Development in Europe. RSM International.
http://64.233.169.132/search?q=cache:CFOqMpnjRGoJ:www.tmud.org.tr/dokumanlar/14_kasim_sunumlar/1.2.7/bartlett%2520wcoa%2520nov%252006.ppt+EU+and+Eastern+European+GDP+growth&hl=en&ct=clnk&cd=12&gl=us. 12/1/08.
Cornia, Giovanni and Popov, Vladimir. Transition and Institutions. New York: Oxford
University Press. 2001
Eastern European Outlook: Resilience is eroding - lengthy recession in Estonia and Latvia. Euro Investor. 08/10/2008. http://www.euroinvestor.co.uk/News/ShowNewsStory.aspx?StoryID=9990056. 12/9/08.
Estonia’s Recession Deepens As Latvian Finances Struggle to find Air. November 14
2008. Eastern Europe Economy Watch. http://easterneuropeeconomy.blogspot.com/2008/11/estonias-recession-deepens-as-latvian.html. 12/1/08.
European Countries. Europa. http://europa.eu/abc/european_countries/index_en.htm. 12/10/08
PhilMUN 2009 23
Euro aspirants fall short of requirements. Wednesday 6 December 2006. EurActiv http://www.euractiv.com/en/enlargement/euro-aspirants-fall-short-requirements/article-160307 12/10/08e
Growing Older in Eastern Europe and Central Asia. Help Age International. http://www.helpage.org/Worldwide/EasternEuropeandCentralAsia/GrowingoldinEasternEuropeandCentralAsia. 12/10/08.
Growth. Poverty and Inequality: Eastern Europe and Former Soviet Union. World
Bank. http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/0..contentMDK:20627214~pagePK:146736~piPK:146830~theSitePK:258599.00.html. 12/8/08.
Internet Modern History Sourcebook. Fordham University. http://www.fordham.edu/halsall/mod/modsbook.html. 12/10/08. Karklins, Rasma. The System Made Me Do It: Corruption in Post-Communist Societies.
New York. M.E. Sharp. 2005.
Kast, Sheilah. Enduring Lessons of the Soviet Breakup. Washington Times. January 1. 2002. http://www.cdi.org/russia/johnson/6002-9.cfm. 12/9/08. Miko, T. Soviet Policy Under Andropov. U.S. Library of Congress. Congressional
Research Service. Foreign Affairs and National Defense Division. Issue Brief Number IB83120. 1/20/84. http://74.125.45.132/search?q=cache:0HJBGtu-WFcJ:digital.library.unt.edu/govdocs/crs/permalink/meta-crs-9189:1+Andropov+Economic+Policy&hl=en&ct=clnk&cd=2&gl=us. 12/8/08.
Milanovic, Milic. Property Rights. Liberty. and Corruption in Serbia. Independent Review; Fall2007. Vol. 12 Issue 2. p213-234. 22p. Academic Search Premier Millions Living in Poverty in Eastern Europe. SOS Childrens Foundation. 4/30/2007.
http://www.soschildrensvillages.org.uk/charity-news/millions-living-in-poverty-in-eastern-europe.htm. 12/8/08.
O’Brennan, John. The EU in the Western Balkans: Enlargement as Empire? A Response
to David Chandler. Global society : journal of interdisciplinary international relations 10/1/2008. Academic Search Premier. Accessed 12/10/08
PhilMUN 2009 24
Sadowski, Marcin. GDP Growth Rate in CEE will amount to 5%. PMR Publications. http://www.pmrpublications.com/press_room/en_GDP-growth-rate-in-CEE-will- amount-to-5_.shtml. 11/4/08. Schoenman, Roger. Captains or Pirates? State-Business Relations in Post-Socialist Poland. East European politics and societies. 1/1/2005. Academic Search Premier 12/8/08. Siegelbaum, Lewis. Perestroika and Glastnost. Seventeen Moments in Soviet History.
http://soviethistory.org/index.php?page=subject&SubjectID=1985perestroika&Year=1985. 12/8/08.
Simai, Mihaly. Poverty and Inequality in Eastern Europe and the CIS Transition Economies. http://www.un.org/esa/desa/papers/2006/wp17_2006.pdf. 10/12/08. Stiglitz, Joseph. Globalization and Its Discontents. New York: WW Norton 2003. The Brezhnev Era. http://countrystudies.us/russia/14.htm. 12/8/08. The Russian Crisis of 1998. The Third World Network. http://www.twnside.org.sg/title/1998-cn.htm. 12/8/08. The War in Bosnia. USA Today. 2/14/96. http://www.usatoday.com/news/index/bosnia/nbos002.htm. 12/10/08. Transparency International. http://www.transparency.org/policy_research/surveys_indices/cpi/2008. 10/19/08 Ukraine. Easy Money. The Economist. August 8.1998. http://www.imfsite.org/recentfin/ukraine.html. 12/9/08
Washington Consensus. Center for International Development at Harvard University. April 2003. http://www.cid.harvard.edu/cidtrade/issues/washington.html. 12/8/08.
PhilMUN 2009 25
Works Referenced About the EBRD. http://www.ebrd.com/about/index.htm. 12/8/08. About Us. http://www.anped.org/index.php?part=411. 12/8/08. Acession Criteria. European Commision.
http://ec.europa.eu/enlargement/enlargement_process/accession_process/criteria/index_en.htm. 12/10/08.
Aslund, Anders. How Capitalism Was Built: The Tranformation of Central and Eastern Europe. Russia. and Central Asia. New York: Cambridge University Press. 2007. Barker, Colin and Mooers, Colin. Theories of Revolution in Light of 1989 in Eastern
Europe. http://64.233.169.132/search?q=cache:Ho6uSZMfPCEJ:www.psa.ac.uk/journals/pdf/5/1994/bark2.pdf+1989+Revolutions+economic+transition&hl=en&ct=clnk&cd=4&gl=us. 12/8/08.
Bartlett, David L.. Economic Growth and Financial Development in Europe. RSM International.
http://64.233.169.132/search?q=cache:CFOqMpnjRGoJ:www.tmud.org.tr/dokumanlar/14_kasim_sunumlar/1.2.7/bartlett%2520wcoa%2520nov%252006.ppt+EU+and+Eastern+European+GDP+growth&hl=en&ct=clnk&cd=12&gl=us. 12/1/08.
Cornia, Giovanni and Popov, Vladimir. Transition and Institutions. New York: Oxford
University Press. 2001
Estonia’s Recession Deepens As Latvian Finances Struggle to find Air. November 14 2008. Eastern Europe Economy Watch. http://easterneuropeeconomy.blogspot.com/2008/11/estonias-recession-deepens-as-latvian.html. 12/1/08.
Eastern European Outlook: Resilience is eroding - lengthy recession in Estonia and
Latvia. Euro Investor. 08/10/2008. http://www.euroinvestor.co.uk/News/ShowNewsStory.aspx?StoryID=9990056. 12/9/08.
European Countries. Europa. http://europa.eu/abc/european_countries/index_en.htm. 12/10/08
PhilMUN 2009 26
Euro aspirants fall short of requirements. Wednesday 6 December 2006. EurActiv http://www.euractiv.com/en/enlargement/euro-aspirants-fallshortrequirements/article-160307 12/10/08e
Growing Older in Eastern Europe and Central Asia. Help Age International.
http://www.helpage.org/Worldwide/EasternEuropeandCentralAsia/GrowingoldinEasternEuropeandCentralAsia. 12/10/08.
Growth. Poverty and Inequality: Eastern Europe and Former Soviet Union. World
Bank. http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/0..contentMDK:20627214~pagePK:146736~piPK:146830~theSitePK:258599.00.html. 12/8/08.
Internet Modern History Sourcebook. Fordham University. http://www.fordham.edu/halsall/mod/modsbook.html. 12/10/08. Karklins, Rasma. The System Made Me Do It: Corruption in Post-Communist Societies.
New York. M.E. Sharp. 2005.
Kast, Sheilah. Enduring Lessons of the Soviet Breakup. Washington Times. January 1. 2002. http://www.cdi.org/russia/johnson/6002-9.cfm. 12/9/08. Miko, T. Soviet Policy Under Andropov. U.S. Library of Congress. Congressional
Research Service. Foreign Affairs and National Defense Division. Issue Brief Number IB83120. 1/20/84. http://74.125.45.132/search?q=cache:0HJBGtu-WFcJ:digital.library.unt.edu/govdocs/crs/permalink/meta-crs-9189:1+Andropov+Economic+Policy&hl=en&ct=clnk&cd=2&gl=us. 12/8/08.
Milanovic, Milic. Property Rights. Liberty. and Corruption in Serbia. Independent Review; Fall2007. Vol. 12 Issue 2. p213-234. 22p. Academic Search Premier Millions Living in Poverty in Eastern Europe. SOS Childrens Foundation. 4/30/2007.
http://www.soschildrensvillages.org.uk/charity-news/millions-living-in-poverty-in-eastern-europe.htm. 12/8/08.
O’Brennan, John. The EU in the Western Balkans: Enlargement as Empire? A Response
to David Chandler. Global society : journal of interdisciplinary international relations 10/1/2008. Academic Search Premier. Accessed 12/10/08
PhilMUN 2009 27
Sadowski, Marcin. GDP Growth Rate in CEE will amount to 5%. PMR Publications. http://www.pmrpublications.com/press_room/en_GDP-growth-rate-in-CEE-will- amount-to-5_.shtml. 11/4/08. Schoenman, Roger. Captains or Pirates? State-Business Relations in Post-Socialist Poland. East European politics and societies. 1/1/2005. Academic Search Premier 12/8/08. Siegelbaum, Lewis. Perestroika and Glastnost. Seventeen Moments in Soviet History.
http://soviethistory.org/index.php?page=subject&SubjectID=1985perestroika&Year=1985. 12/8/08.
Simai, Mihaly. Poverty and Inequality in Eastern Europe and the CIS Transition Economies. http://www.un.org/esa/desa/papers/2006/wp17_2006.pdf. 10/12/08. Stiglitz, Joseph. Globalization and Its Discontents. New York: WW Norton 2003. The Brezhnev Era. http://countrystudies.us/russia/14.htm. 12/8/08. The Russian Crisis of 1998. The Third World Network. http://www.twnside.org.sg/title/1998-cn.htm. 12/8/08. The War in Bosnia. USA Today. 2/14/96. http://www.usatoday.com/news/index/bosnia/nbos002.htm. 12/10/08. Transparency International. http://www.transparency.org/policy_research/surveys_indices/cpi/2008. 10/19/08 Ukraine. Easy Money. The Economist. August 8.1998. http://www.imfsite.org/recentfin/ukraine.html. 12/9/08
Washington Consensus. Center for International Development at Harvard University. April 2003. http://www.cid.harvard.edu/cidtrade/issues/washington.html. 12/8/08.