Eastern Europe and the Commonwealth of Independent States: UNDP's Perspective of Development and Integration Challenges

On April 23, 2003, Harvard’s Caspian Studies Program, Center for International Development, and Kokkalis Program on Southeastern and East-Central Europe co-sponsored an address at Harvard’s Kennedy School of Government by Dr. Kalman Mizsei, Assistant Administrator and Director of the Regional Bureau for Europe and the Commonwealth of Independent States of the UN Development Program (UNDP), and Assistant Secretary-General of the UN.

Mizsei spoke on the topic of “Eastern Europe and the Commonwealth of Independent States: UNDP’s Perspective of Development and Integration Challenges.”

Ambassador Richard Morningstar, former U.S. Ambassador to the EU and currently a lecturer at Harvard’s Kennedy School of Government, served as the moderator for the event. Morningstar began the event by posing a question to Mizsei: Why has economic reform in post-communist Eastern Central Europe (Poland, Hungary, and the Czech Republic) gone more smoothly than in the Commonwealth of Independent States over the last twelve years?

Mizsei began his remarks by offering a description of the main economic issues facing Eastern Europe and the Commonwealth of Independent States (CIS). According to Mizsei, the goal of economic reformers from Eastern Europe such as himself has been nothing less than changing the perspectives of the people in the region, placing these countries on a “modernizing path of no return” and attempting to create a social fabric similar to that which exists in European Union countries. He indicated that while East European countries have focused a great deal of energy on instituting domestic market economic reforms, they have also acknowledged that integration into the larger European economic common market is a necessary aspect of that reform process.

Mizsei noted that his colleague Jeffrey Sachs often talks about the importance of geography in determining the course of economic development and indicated that Eastern Central Europe is certainly an example of where geography has made a big difference. These countries have benefited from their proximity to the economic engine of Western Europe in a way that CIS countries (particularly in Central Asia) and the Balkan countries have not.

Mizsei explained that his work at UNDP requires him to deal with three overlapping groups of countries: (1) The ten East European countries that have begun the European Union accession process; (2) The Balkan countries; and (3) The Commonwealth of Independent States. Each of these groups faces a different set of challenges and circumstances.

The conventional argument about the post-communist economic transitions in Eastern Europe and the CIS, Mizsei acknowledged, has been that the countries of Eastern Central Europe have had the best track record. They have had higher rates of growth and broader social equality than the countries of the CIS. Mizsei said that he believes that this analysis is essentially correct but was also mindful to draw attention to the alternative hypothesis of economists such as Anders Aslund, who has suggested that certain CIS countries (most notably, Russia, Kazakhstan, and Ukraine) have actually grown faster than leading EU accession countries (such as Poland and Hungary) as a result of more vigorous reforms since the Russian financial crises in 1998. Aslund has warned that the East European countries’ adoption of higher taxes and social spending as part of their attempt to gain accession into the European Union is actually detrimental to their economies during this nascent state of development. According to Aslund, the radical tax reform and lower social spending in countries of the CIS have actually led to more dynamic economic growth.

Mizsei said Aslund’s argument is worth considering, but he ultimately believes that the European Union remains an extremely important “anchor” in promoting the development of East Central European countries’ economies. Integration into the EU has many benefits, including financial transfers from other EU countries and enhanced trade opportunities within the European Common Market. Mizsei suggested that if Eastern Central Europe’s accession into the EU follows a similar path to that of certain South European countries (Greece, Spain, and Portugal) in the past few decades, EU membership will benefit these East European countries considerably. It is also likely to help them attract foreign direct investment, which would be crucial to their economies during this transitional phase of development.

As for the Balkan countries, Mizsei acknowledged that it still an open question of whether or not the EU will be ready to absorb countries like Romania and Bulgaria by 2007. On the other hand, Mizsei argued, European policymakers realize that the EU often evolves through crises and negotiations and, therefore, does not see the integration of the Balkan countries as a lost cause. In fact, Mizsei argued, Croatia and Serbia and Montenegro actually have a relatively mature institutional framework in place, so this could facilitate the EU’s attempts to expand the European Common Market. So, there is a distinct likelihood that in a few years’ time, a new round of expansion will lead to the absorption of Romania, Bulgaria, Croatia, and, potentially, Serbia and Montenegro into the Union. Turkey’s full integration is a wholly separate and complex enterprise in itself.

Mizsei pointed out that the EU has had significant difficulty in its negotiations with Turkey, that, upon accession, would become the largest EU country and could end up changing the dynamics of the EU considerably. Russia and the CIS provide an even greater set of challenges than Turkey, Mizsei explained, so it is unrealistic to expect that the EU will be able to incorporate CIS countries in the near future.

Mizsei discussed the possibility that the CIS could develop into a EU-style common market but said that the first twelve years since the disintegration of the Soviet Union have not offered a promising track record on this front. Mizsei argued that CIS countries are becoming closer to each other—on the basis of security and political issues rather than of economic ones. In fact, Russia still uses a great deal of its economic leverage to put pressure on other CIS countries—most notably by using its control over Gazprom to manipulate the price of gas exports primarily to extract political gains from these countries.

Mizsei then turned his attention to the positive effects of the privatization that have occurred in Russia over the past decade. Despite criticisms from prominent economists such as Joseph Stiglitz, Mizsei argued that Russian privatization has led to a greater development and opportunity in many sectors of the Russian economy. He cited the recent merger between Yukos and Sibneft—which will create the world’s fourth largest oil company—as an example of how privatization has actually led to a strong revival in the asset values that had plummeted in Russia in the immediate aftermath of the Soviet Union’s collapse. Mizsei acknowledged, however, that most business successes in Russia have taken place only at the very top level. While Yukos Sibneft will likely become an internationally important company, establishing a small business in Russia’s regions is extraordinarily difficult due to lack of access to capital, bureaucratic inefficiency, and corruption.

Mizsei concluded his remarks by saying that the picture in Russia is somewhat mixed at the moment. While it is possible that President Vladimir Putin will institute another series of economic reforms if he wins a second presidential term, Russia is also struggling with the problems of an overinflated currency and a stagnant manufacturing sector. What is more, most economists argue about whether or not high oil prices will benefit the Russian economy over the long term. Much of the Russian economy depends on oil exports, but the possibility exists that if Russia becomes too dependent on its oil industry, it will not take the incentive to modernize other aspects of its economy that would lead to a greater stabilization of the country’s growth.

Q & A

Q: Is it possible that Russia could become something of an economic anchor for the smaller countries in the CIS the way that the European Union has become an anchor for the countries of Eastern Central Europe?

A: Actually, the European Union and CIS have worked according to very different principles of integration. The European Union utilizes an economics-first approach, where countries implement reform in an attempt to gain access to the common market before they can make political connections. In the CIS, the reverse has been true, in as much as Russia has tried to make political and military arrangements with CIS countries and then parlay these agreements into greater economic integration.

Q: Is Russia is trying to “take back what is lost” vis-à-vis the CIS, whereas with the European Union accession is more of an act of free will?

A: Russia, as a single country, is certainly a more centralized entity than the EU, and its impact on the other countries of the CIS will be different. However, it still remains an open question of how effective Russia will be in implementing reforms, although there have been some encouraging trends recently. The major Russian private oil companies (e.g., Yukos Sibneft and Lukoil) have been winning the battle against Transneft, the state oil pipeline monopoly, in their attempt to build a new pipeline to Murmansk. The example of Yukos and Sibneft’s merger—and even more significantly, of joint Western-Russian company mergers, as was the case with BP’s acquisition of TNK—show that there are significant gains in the private sector in Russia. And these private companies may effectively pressure the Russian government to pursue more progressive economic reforms.

Q: In addition to the EU’s interaction with Eastern Central Europe and Russia’s relationship with CIS states, are there opportunities for smaller countries to develop networks of regional economic cooperation? Could these smaller organizations create more economic “anchors” in Eastern Europe and the CIS?

A: To some extent, the World Trade Organization (WTO) plays the role of an economic “anchor.” The reform processes that precede WTO accession and the access to markets that comes with WTO membership are serving as something of anchor for development in this region. As for smaller regional economic networks, such as the Black Sea Economic Cooperation Organization, these smaller organizations often have difficulty thriving in the shadow of larger economic entities, such as the EU and the CIS. However, these regional economic networks can do a great deal to promote regional free trade and foreign direct investment. If a foreign company wants to sell its product in the Balkans, it will be interested not just in Bosnia and Herzegovina but also in capturing markets throughout the Balkans. These smaller economic associations can help to advance that process.

Q: Will these networks work if there is no economic rationale and driving force behind their existence?

A: No. But there is significant popular pressure in these countries for an improved standard of living—which provides a strong political and economic rationale for integration into larger economic networks. Hungary wants to look like Austria immediately. Moldova wants to look like Hungary immediately. And the main way this will happen is if these countries are successful in attracting foreign direct investment. [One of the reasons that Hungary has been successful in navigating the road to economic reform is that 80 percent of its exports are made by multinational corporations, and 80 percent of its exports go to the European Union.] This has promoted the kind of foreign direct investment that leads to better standards of corporate governance.

Q: What are the UNDP’s main goals in Eastern Europe and the CIS?

A: We want to help coordinate bilateral donor relationships in this region. Bilateral donors often have self-serving interests, and the UNDP can engage in discussions with donor countries to ensure that their investment is serving the interests of recipient countries as well as their own. Also, UNDP seeks to replicate the successes that have occurred in Eastern Central Europe, in order that these economic reforms expand further east and south in the coming years.

Q: Can East European and CIS expatriates who have become entrepreneurs in the West help serve as something of a bridge between the West and developing countries in Eastern Europe and the CIS?

A: Yes. The UNDP has worked with diaspora communities, but this is not always easy because these communities often have their own vested interests. But in the case of Armenia, for example, there are opportunities to work with the Armenian diaspora community to attempt to promote lasting institutional economic reform.

Q: What role can UNDP play in promoting reform in oil-producing countries of the CIS, such as Russia, Kazakhstan, and Azerbaijan?

A: In Russia, UNDP is rather small, and it is a challenge to really make a difference. But we work with the authorities on two fronts: decentralization of public administration, including pilot projects that facilitate this, and improving the situation of the socially excluded, stretching from the treatment of prisoners through the approach to HIV/AIDS to the situation of minorities.

Q: What is your perspective on Belarus?

A: Belarus is probably the most industrialized country in the CIS, but it faces serious socio-economic and political challenges. These difficulties are predominantly self-imposed by the political elite, but we should also not forget the deep impact that Chernobyl has had on Belarus. Chernobyl has played a similar role in Belarus that communism once did— in this information-poor society, people feel as though they are always fighting some sort of invisible enemy, and the disparity between propaganda and reality has a detrimental effect. But the situation is not hopeless. Perhaps closer economic and political cooperation with Russia will help Belarus in implementation of necessary reforms.

Q: And what about Ukraine?

A: It is unfortunate that the United States’ relationship has gone from one of complete engagement in the early 1990s to lack of interest on the part of Washington toward Ukraine today. The United States’ deteriorating relationship with President Leonid Kutchma has distorted the proportions of the picture between the president and the crucial importance of the way Ukraine develops for the whole of Europe. It is still a country with an emerging entrepreneurial sector and would benefit from more engagement with the United States as well as with other western democracies in developing stronger civil society programs and business development.

Q: There is talk that Russia, Ukraine, Belarus, and Kazakhstan—who recently signed a customs agreement—may make a collective effort to join the WTO. What is your assessment?

A: Russia will not wait until these other countries are ready to join the WTO. In fact, they may try to reach a deal on accession sometime this year. In Central Asian countries like Kazakhstan, UNDP has provided technical expertise to help them on their WTO accession process. In Kyrgyzstan and Uzbekistan, UNDP is also actively supporting their governments’ efforts to make these countries’ legal framework more conducive to attracting foreign direct investment.

Please note that this is a summary of the event and not a transcript.

Summary by John Grennan, Caspian Studies Program

Photograph by Jeanie Barnett

Kalman Mizsei and Richard Morningstar