Pirovska Eastern Europe

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Eastern Europe: an analysis of economic transition and the EU enlargement Margarita PIROVSKA Center for Geopolitics of Energy and Raw Materials University Paris Dauphine 24 février 2003

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Outline Margarita Pirovska 24/02/2003 Presentation History: 1945-1989 The crisis The transition period Stakes of the European integration Concluding remarks

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Presentation: map of Europe in 2000

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Presentation: East European candidate countries Source : Eurostat, 2002 Margarita Pirovska 24/02/2003

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Presentation: economic index, 2000 Margarita Pirovska 24/02/2003 Source : Eurostat : PIB régional des pays candidats, A.Behrens, Statistiques en bref, 1-2/2003.

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History: the Soviet bloc Margarita Pirovska 24/02/2003 The socialist regime in the USSR: since 1917. A new political philosophy rises from the writings of Marx The « war economy » system spreads in many countries (Germany, Italy, Spain, Japan…) Consequences of World War II: capitalism falls into discredit. The reconstruction of Europe calls to a new State organization Yalta divides Europe in two parts. Era of the Steel Curtain and the Cold War (1945 – 1989), State socialism and the Warsaw Treaty in Eastern Europe

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History: the economic model of the CMEA Margarita Pirovska 24/02/2003 The division of Europe is also economic Towards the « american invasion » of the Marshall Plan, creation in the Soviet Bloc of the CMEA (Counsil for Mutual Economic Assistance). It is a response to the rising idea of the European Community in the West What are the bases of the socialist economies? Political hierarchy in economic decisions (planification). Nationalisation of all private assets. Primacy and unity of the State, the Communist party and the Bureau of the Plan. Massive industrialization, vertical integration and concentration of industrial structures. Dominance of the USSR and economic specialization in the East in the frame of the « socialist international division of labor ».

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History: why it didn’t work Margarita Pirovska 24/02/2003 Basic conditions: the paradoxes of the socialist system a philosophical utopia: socialism failed to transform into communism Industrial structures: the socialist markets unilateral domination of the USSR, no real integration, over-industrialization Strategies the socialist « kombinats: highly concentrated, political interference, lack of commitment, no real incentives to efficiency Global consequences: the grey economy shortages, price distorsions, drop of production a parallel economic sphere appears

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The crisis of the 1990s Margarita Pirovska 24/02/2003 A global crisis: Economic: systemic inefficiency, drop of the industrial output, decrease in GDP Financial : 3-4 digit inflation, huge public debt, depreciation of the nat. currency Political : loss of faith in the State Social : fall of revenues, shortages, unemployment Institutional disorganization: what solutions?

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The crisis of the 1990s Margarita Pirovska 24/02/2003 Nota : GDP in purchase power parity, USD 1990. Source: Fischer S., Sahay R., Vegh C. (1998). « How far is Eastern Europe from Brussels? ». IMF Working Papers #98/53.

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The crisis of the 1990s Margarita Pirovska 24/02/2003 Source : Eurostat, 2000

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The transition period: the historical events Margarita Pirovska 24/02/2003 1989: fall of the socialist bloc in Eastern Europe (and of the Berlin Wall) From 1990: role of the World Bank and the IMF 1993: Treaty of Maastricht, war in former Yugoslavia, Copenhagen decision 1994-96: declaration of candidacy of East European countries to the EU 1998: Luxemburg council 1999: Helsinki council (second wave) 2000: Nice summit (conditions of the future enlargement) 2001: Laeken council (enlargement agenda: eight among ten to enter in 2004) 2004, May: Estonia, Latvia, Lituania, Hungary, Poland, Czech Republic, Slovakia and Slovenia to enter the EU.

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The transition period: towards a reunification of the continent Margarita Pirovska 24/02/2003

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The transition period: towards a reunification of the continent Margarita Pirovska 24/02/2003

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The transition period: the context Margarita Pirovska 24/02/2003 The transition process is an unprecedented phenomenon in the modern economic history There is a major difficulty of standard economic theory to build a pattern and to explain the evolution of centraly planned economies in transformation Political shocks are at the basis of the creation of the Soviet bloc in Eastern Europe. In 1989, again, a socio-political upheaval is the origin of the process of returning back to market economies

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The transition period: theoretical approaches Margarita Pirovska 24/02/2003 Two major theories on economic transition: The Washington consensus, based on neoclassical theory and standard micro-economic approach of stabilization, defends the « tabula rasa » technique, or shock therapy. Assumption: markets will develop spontaneously. Method: trio « liberalization – stabilization – privatization ». Precondition: to create an appropriated legal framework. Gradualism is based on recent developments of microeconomy, on evolutionary and on institutional economics. It warns against shock therapy: nothing guarantees the spontaneous replacement of old institutions by new ones, sovereign and operational. These two approaches have in the end the same aim: the creation of a market economy based on private property and « libre échange »

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The transition period: the political choice Margarita Pirovska 24/02/2003 Massive choice of the Washington consensus approach. But results are mitigated. The shock therapy has become an end itself. The « market fanatism » has more sustained corruption than ghrowth Liberal orientation in Eastern Europe  Aim: European integration (economic criteria of Copenhagen: achieve a functionning market economy, able to face the competitive pressure of the EU single market) Overall, transition appears as a dilemma. Liberalization is necessary, but there is a risk of market power capturing by interest groups, and the incapacity of a competitive framework to take place. Fundamental difficulty in the transition process: the institutional reform which supports a real market economy.

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European integration: what stakes? Margarita Pirovska 24/02/2003 Official breaking of the CMEA: 1991. Political identity crisis in the region Political stability may be achieved by the European integration (foundations of the EU) A considerable transformation was needed in emergency to resolve the deep crisis The enlargement is a positive sum game: perspective of more growth in the frame of market opening and globalization of the economy. What weight for the new Europe on the world diplomatic scene ?

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European integration: some problems Margarita Pirovska 24/02/2003 Fundamental question: what governance for a European Union with 27 member countries? EU authorities have limited power => debate of enlargement Vs. Deepening; role of the Convention and the future European constitution All Eastern countries weren’t in the same situation in 1990, some of them have been more implied in the Soviet bloc. In some cases, former political elite has perpetuated under a modern capitalist form, allowing money laundring and capital drain – reforms are thus deviated in a more or less visible way.

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European integration: main consequences Margarita Pirovska 24/02/2003 On economic level: upsizing the internal market, perspective of extended growth and propsperity in the region. But: what costs of the integration, and who will pay? On political level: the core of the Union goes East: Mitteleuropa and role of Germany. New balance towards Russia and Central Asia On social and cultural level: high educational level of the new member states, great diversity of cultures. But: European unity in question.

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Concluding remarks Margarita Pirovska 24/02/2003 Gaps in the transition process: Appropriate institutional framework still lacks Privatization and liberalization sometimes worsened the economic situation (capital drain and money laundring) A new balance of power between States and the market Will the liberalization process and the introduction of competition be sufficient to create this institutional background? The role of the State seems to be still very important in the case of Eastern Europe, to law enforcement on national level and to political unification in the frame of the enlarged Union.

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Bibliography Margarita Pirovska 24/02/2003 Andreff W., La crise des économies socialistes – la rupture d’un système. PUG, 1993. Blanchard O., The economics of Post-communist transition. Oxford, Clarendon Press, 1997. Dembinski P., The logic of the planned economies: the seeds of the collapse. Oxford University Press, 1990. Guttman R.J., (eds) Europe in the new century. Lynne Riener Publishers, London, 2001. Kornai J., Economics of shortage. North Holland, New York, 1980. Von Hirschhausen C., Modernizing infrastructure in Transformation economies. Edward Elgar, Cheltenham, 2001. http://europa.eu.int

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Thank you for your attention! Centre de Géopolitique de l’Energie et des Matières Premières Université Paris Dauphine www.dauphine.fr/cgemp Margarita Pirovska 24/02/2003