The political and economic regression of much of the former Soviet Union casts an ugly shadow over transition’s successes and poses an awkward challenge for the EBRD as it heads east, leading economists have warned.
Willem Buiter, the bank’s former chief economist told Emerging Markets: “My biggest concern about transition is that there is a bifurcation between, on the one hand, central and eastern Europe and the Baltics, which are moving towards democracy and market economy, and on the other hand much of the former Soviet Union that is becoming increasingly autocratic and corrupt.
“This is clan-based crony capitalism. It is tragic.”
His sentiment was echoed by Joseph Stiglitz, a Nobel economics laureate and
former World Bank chief economist, who told Emerging Markets yesterday: “The single most important factor is the failure to establish the rule of law and the institutional infrastructure for a market economy.”
In contrast, “Central and eastern European countries have the incentive to join the EU, and that’s provided a model for legal and institutional infrastructure and facilitated the transition enormously,” added Stiglitz, who arrived in London this morning to deliver the annual Jacques de Larosiere lecture.
Buiter, now a professor of economics at the London School of Economics, said that the investment boom in Russia, Kazakhstan “and even more terrible places” impacts
negatively on the populations.
“The only capital that goes in goes to oil. It has nothing to do with development, with society or with the population.” Countries will have to be “reformed from the inside” and “holdovers from the Soviet Union” dealt with.
As it moves out of central Europe eastwards, the EBRD will confront many no-win situations, Buiter fears. “It’s very hard to work in a whorehouse and to stay a virgin. That’s the problem the bank faces.”
“The EBRD’s great advantage is that it doesn’t have to deal with governments. But in countries like Uzbekistan, it’s very difficult to stay away from the activities of the government and its cronies.” And whatever the EBRD wants, the governments in some countries will not be shy to sever links with it, Buiter believes.
Stiglitz suggested a softer approach for the institution. “What the EBRD can try to do is help continue to explain the importance of [democratic] institutions. In the past it has focused very narrowly on issues like privatization,” he said.
EBRD president Jean Lemierre has vowed to step up the pressure on governments in Turkmenistan, Belarus and Uzbekistan as part of the bank’s new eastern focus.
“In some countries the move towards the east will increase a lot the role we have in policy dialogue. This is very clear and this is what we intend to do,” he told Emerging Markets in an interview.