In the former Eastern bloc,
a hazardous transition
Omar Noman, Senior Project Manager, UNDP
| In 1960, the 20% of world population living in the richest countries had 30 times the income of the poorest 20%—by 1995 their income was 82 times as much. |
Excessive liberalization leads to private monopolies, capital flight, unpalatable levels of inequality and lack of trust in the market due to financial fraud
• For a comprehensive analysis of development in this region, see the UNDP Report Poverty in Transition?
1998 (224pp.,
ISBN: 92-1-126100-7) www.undp.org/undp/rbec
In the former Eastern bloc, strong central
government virtually wiped out poverty through wealth redistribution mechanisms.
But as the region undergoes political transition, the state is no longer up to the
task, and poverty is making a horrific comeback. Even the former middle classes now
rank among the impoverished.In the vast, ethnically diverse Former Soviet Union (FSU) and Eastern Europe, the breakdown of central planning and in many cases, the absence of effective state institutions to cushion the jolt, have led to the most acute poverty and welfare reversals in the world.
Based on a daily four dollar benchmark—considered the minimum required to survive—the number of poor increased by over 150 million in seven years, a figure greater than the total combined population of France, the United Kingdom, the Netherlands and Scandinavia. Since the 1998 financial crisis in Russia, the ranks of the poor are estimated to have swelled by a further 20 million. What’s more, in this decade dollar-a-day poverty has made a comeback: in Romania and Bulgaria, five per cent of the population lives below that level.
Eastern bloc transition countries were the only ones in the world to have recorded a decline in national incomes from the start of the current decade up to the present. The declines have been as great as 60 per cent in some cases. A region that had virtually no inflation under the previous system suddenly experienced the most acute price instability in the world, with prices rising in excess of 500 per cent per year between 1990 and 1995.
It is also the only region in the world to have witnessed a decline in men’s life expectancy, which in the Russian Federation fell from 64.2 to 57.6 years from 1989 to 1994, lower than in Egypt, India and Bolivia. Morbidity from syphilis, tuberculosis and AIDS has increased dramatically. And a system that once prided itself on having achieved near-universal literacy has suffered serious reversals. In Central Asian countries, the poverty of families has become a major impediment to school attendance, and research in several countries suggests that there is a continued threat of illiteracy emerging amongst certain groups.
There have been many losers in the transition process.
Wavering between gradualism and shock therapy
Children for one, with a massive erosion of child allowances. In the Russian Federation, poverty rates among the under-15 group stood at 46 per cent, compared to 35 per cent for adults between 31 and 60 and 22 per cent for pensioners. With the decreasing number of child-care facilities, many women have been forced to abandon work.
But what gives poverty in this region a qualitatively different profile from that of most developing nations is the slide into precarity of those who once made up the professional middle class under socialism. Large numbers of once prestigious scientists, engineers and other highly educated specialists employed by public institutions have joined the ranks of the poor, with little apparent chance of transferring their skills to the market system and becoming part of the entrepreneurial class. Once supporters of a democratic opening, this frustrated, marginalized class is now more likely to be the first to stand behind an authoritarian regime.
This general picture merits tempering. Central European countries (Czech Republic, Hungary and Poland), which were independent at the time of the breakup of the Former Soviet Union but had extensive trade links with it—moved swiftly toward a market-based, private-sector dominated economy, with reasonably competent state institutions. These countries still have the lowest levels of inequality in the world. Social transfers in the form of pensions, unemployment benefits and child allowances increased relative to gross domestic product (GDP) or remained constant. The economies of the Baltic States, initially disrupted by the loss of energy subsidies from the USSR, regained momentum after a relatively short period of hyperinflation and declining output. Again, partly because they came into the Soviet fold at a later date, their state institutions remained competent and credible.
This has not been the case in the former Soviet Republics. Most of these were unable to reach consensus on the course of transition and wavered between gradualism and shock therapy. In the Russian Federation and Ukraine, reform has been paralyzed over such issues as property rights in agriculture. Public institutions, namely the law and order machinery and the tax revenue services, have collapsed, virtually destroying the government’s ability to redistribute resources.
The pendulum has swung too far
In Russia, taking advantage of a political vacuum, the executive rushed through with a series of reforms that further undermined credibility in state institutions, by providing generous underhand deals in the privatization process and creating the conditions for the mafia’s growth, not unlike the situation in Italy in the 19th century. In 1996, the richest 5 per cent of the population controlled a share of income equal to that of the bottom 60 per cent—and in many countries, inequality has surpassed the troubling levels found in Latin America.
From the all-intrusive state, the pendulum has swung too far in the opposite direction. Often, the ideological inheritance dictated a rush to dismantle the state. And yet, as countries of Central Europe go to show, the state has a key role to play in the transition process. Excessive liberalization leads to private monopolies, capital flight, unpalatable levels of inequality and lack of trust in the market due to financial fraud. Strong public institutions are required that regulate financial markets and transfer resources effectively to vulnerable groups. Last but not least, reviving growth is the critical issue.
Many countries of the FSU were poised for a turnaround when the 1998 Russian crisis set them back. Still, the outlook is not comprehensively bleak. Many countries have defined their economic course, have well-educated populations, are investing in retraining manpower and moving ahead with welfare reforms and institution-building. Not including countries of Central Europe and the Baltic Republics, there are some exceptional cases.
Azerbaijan will be an important test: thanks to an easily exportable oil surplus, the country is likely to benefit from a boost in revenue (even with world oil prices as low as they are). But will it share the wealth? Many fear that wealth will stay concentrated in the hands of a small oligarchy, a nightmarish scenario.
A second group of countries (Uzbekistan, Kazakhstan, Turkmenistan, Bulgaria and Romania) is beginning to post growth and take a more pro-active stance towards the future. Many are making strenuous efforts to form trade and technology links other than with Russia. But for a third group of countries—Tajikstan, Georgia (embroiled in an endless conflict), Armenia, the Kyrgyz Republic and Russia—the most highly populated country of the FSU—the prospects seem bleak. In Russia, it is conceivable that a fairly coherent former Communist party grouping acting like a reformist state in China could shore up public institutions without losing the momentum of reform. In the worst case scenario, the country will simply print money, return to hyperinflation, fuel social discontent and heighten political conflict.
Clearly the Russians are aware of the leverage they hold on the international stage. They have essentially defaulted on debt. Chaos in the region is too great a threat to global security to be taken mildly, making it highly unlikely that Western powers will pull back. On the contrary: the situation is likely to engage the United States in the region more than it had ever expected to be.
International agencies have an important role to play in strengthening public institutions in many new areas and some traditional ones, such as health, education and the financial sector. Recognizing that the transition process is a much more painful and systemic process than initially conceived, the Nordic countries are reviewing their aid policies towards the FSU, while the European Union is set to increase its commitment in the months ahead.
