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#16 - JRL 7167
The Times (UK)
May 5, 2003, Monday
Post-communist nations offered a helping hand
EBRD investment is an incentive to deal with life in a new world
By Robin Shepherd

THE contrast could not have been more stark as the European Bank for Reconstruction and Development (EBRD) kicked off its 12th annual conference in Uzbekistan yesterday. For eight of the 27 former communist nations assembled it was something of a goodbye party.

This time next year the Czechs, Slovaks, Hungarians, Poles, Slovenians and the peoples of the three Baltic republics should all be members of the European Union.

While Romania and Bulgaria may join them in 2007, at the other end of the spectrum Ukraine and Belarus are virtual pariahs. Ukraines economy is less than half the size it was a decade ago. In Belarus, President Lukashenkos scorn for human rights has earned him the title of the last dictator in Europe.

Observers of the post-communist world note sardonically that the two countries have indeed made a successful transition from the Second World to the Third.

Oil-rich Russia may have hit the headlines after BPs $6.75 billion (4 billion) investment earlier this year but the overall economy is only two thirds of its size in 1991. Last week the countrys statistical office reported that about a quarter of the population was living in absolute poverty on less than 42 a month.

As for the Central Asian states, one need look no further than the controversy surrounding the EBRDs decision to hold its conference in Tashkent (see below). On the economic front, average wages in Uzbekistan have almost halved in the past five years to just 18 a month.

The leader of neighbouring Turkmenistan, for his part, has declared himself a prophet. Saparmurat Niyazov, as part of a bizarre North Korea-style personality cult that he has fostered, now goes by the name of Turkmenbashi the Great, or Father of all Turkmen.

He has even renamed the months of the year, calling January after himself and April after his mother. Part and parcel with this aggrandisement is a crackdown on all opposition and widespread abuse of human rights. The economy of Turkmenistan, a nation with a population of just over five million, has lost about a tenth of its value since the fall of the Berlin Wall.

Since the EBRDs mission was to help to build market economies and democracies in the 27 countries of the former communist world, the transition has clearly had mixed results. Analysts say the banks stated aims, although laudable, were in many cases ambitious to say the least.

Transition has been a remarkable success for the eight countries about to join the EU, although it is not over yet, said Paul Lewis, an analyst of post-communism at the Economist Intelligence Unit in London. But the prospects are much less clear for parts of the Balkans and the former Soviet Union.

In many cases they have to build democracy, the basic institutions of a market economy and also come to terms with a relatively recent and therefore precarious national identity. It is a multiple transition.

The very different historical baggage carried into the transition lies at the root of the variations now so evident across the post-communist world. The Czech Republic, at the most westerly point, succumbed to a communist coup in 1948. Its 41-year experience of totalitarian rule was preceded in the interwar years by a functional liberal democracy.

In per capita terms, the then Czechoslovakia was the sixth or seventh richest country in the world. The Czechs lost a lot of ground under communism but when it came to an end they retained memories, fondness and respect for a heritage which had already endorsed private property, the market economy and democracy. There was still a leap to be made but the wind of history was behind them.

Thousands of miles to the east, the Kyrgyz republic on the Chinese border lies at the outer fringe of the EBRDs empire. The once nomadic peoples of this mountainous Central Asian state were gobbled up by the Russian empire and subsequently the Soviet Union. The country had no tradition of democracy, industrial market economy or modern banking.

Despite widely praised efforts to reform the economy and meet International Monetary Fund targets, the precarious nature of the transition was shown for all to see last year when the economy slipped into recession after an accident at the Kumtor goldmine, which alone accounts for 10 per cent of GDP. Gold and agriculture together make up more than half of the overall economy.

There is little, of course, that such countries can do to alter the bequest of history. Neither could they, or the EBRD, influence their geography, an equally significant factor affecting their chances of successful transition. Countries bordering the EU Poland, the Czech Republic, Slovakia, Hungary and Slovenia were clearly in a more advantageous position to bid for membership than their counterparts further east.

To the carrot of easy accession was added the stick of strict compliance with membership criteria, involving the transplanting of thousands of EU laws on to the statute books of the accession hopefuls. Deviate from democratic norms or fail to privatise your economy, the EU said, and you simply do not get in.

In most cases the injunction was irresistible.

They opened themselves up to the process of international integration. It is a case where globalisation has paid real dividends, said Stephen Fries, deputy chief economist at the EBRD.

For the Central Asian states, accident of geography even in recent years may have provided a negative influence in the transition. In return for co- operation in the war in Afghanistan, the United States has offered aid and, its critics say, legitimacy to corrupt dictatorships harbouring no real intention of reform.

While the EU has helped the transition countries of the West, the United States may unwittingly have set reform back in the East.

Mr Fries, however, refuses to countenance the conclusion that genuine transition was a non-starter for countries which lacked the advantages of history and benign geography from the start. Communism was just as unsustainable, he said, in Central Asia as it was in Eastern Europe.

These countries had to go somewhere after communism. It was only sensible to point them in the right direction. The lack of a real history of statehood for many of the countries of Central Asia meant building the institutions of a market economy. And building a nation state would make things more difficult. But I dont think that made it not worth trying, he said.

Success is certainly not pre-determined but equally you would be unwise to rule it out as a potential outcome.

The EBRDs own role in the transition process is seen, 12 years on, as a success. After early controversy over the cost of its palatial, Carrara marble-fitted headquarters in London, the bank has gone on to finance billions of dollars worth of projects. Now seen as a model for development banks worldwide, it has mobilised investments of about $67 billion, including $22 billion of its own money.

We are a significant international investor in this part of the world, said Mr Fries. That role has allowed us to bring in real capital, real jobs and it does afford some influence.

Whatever influence the bank can muster, it will now need to work twice as hard to produce results. As the EU scoops up the pick of the bunch, the really hard work for the EBRD is just about to start.

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