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The Different Level of Foreign Assistance as a Consequence of the Different Choices Made at the Beginning of Post-Communist Transition

The necessary assistance for overcoming the transitional economic crisis and conducting post-communist (foremost economic) reform in the countries of the former communist bloc in Eastern Europe was expected to come primarily from Western states and the international organisations which were founded and largely financed by these states: that is from those

GDP growth - annual rates

Cumulative FDI (mil. US $)

Estimated real GDP

(19S9 = 100)

19 S9

1990

1991

1992

1993

1994

1995

19S9-1993

1994-1997

199S

The Czech Republic

1.4

-1.2

-11.6

-0.5

0.1

2.2

5.9

1,546

5,826

95

Hungary

0.7

-3.5

-11.9

-3.1

-0.6

2.9

1.5

5,756

9,527

95

Poland

0.2

-11.6

-7.0

2.6

3.8

5.2

7.0

981

7,458

117

Slovakia

1.4

-2.5

-14.6

-6.5

-3.7

5.2

6.5

374

713

100

Slovenia

-1.8

-4.7

-8.9

-5.5

2.8

5.8

4.9

167

760

104

Estonia

8.1

-6.5

-13.6

-14.2

-8.8

-2.0

4.3

236

652

76

Latvia

6.8

2.9

-10.4

-34.9

-14.9

2.2

-0.9

50

1,418

59

Lithuania

1.5

-5.0

-5.7

-21.3

-16.2

-9.8

3.3

30

583

65

Croatia

-1.6

-7.1

-21.1

-11.7

-8.0

5.9

6.8

115

1,052

78

Macedonia

0.9

-9.9

-7.0

-8.0

-9.1

-1.8

-1.2

-

66

72

Romania

-5.8

-5.6

-12.9

-8.8

1.5

3.9

7.1

179

2,440

76

FR Yugoslavia*

1.3

-7.9

-11.6

-27.9

-30.8

2.5

6.1

-

740

47**

Bulgaria

0.5

-9.1

-11.7

-7.3

-1.5

1.8

2.9

101

848

66

Albania

9.8

-10.0

-28.0

-7.2

9.6

8.3

13.3

65

293

86

Bosnia-Herzegovina

na

-23.2

-12.1

-80.1

-10.0

0.0

20.8

-

-

na

Armenia

14.2

-7.4

-11.7

-41.8

-8.8

5.4

6.9

-

103

41

Azerbaijan

-4.4

-11.7

-0.7

-22.6

-23.1

-19.7

-11.8

-

2,094

44

Belarus

8.0

-3.0

-1.2

-9.6

-7.6

-12.6

-10.4

18

481

78

Georgia

-4.8

-12.4

-20.6

-44.8

-25.4

-11.4

2.4

-

304

33

Moldova

8.5

-2.4

-17.5

-29.1

-1.2

-30.9

-1.4

-

192

32

Russia

na

—4.0

-5.0

-14.8

-8.7

-12.7

-4.0

-

5,205

55

Ukraine

4.0

-3.4

-10.6

-9.7

-14.2

-22.9

-12.2

-

1,505

37

*Serbia and Montenegro; **GDP in 2000 Source: EBRD Transition Report, 1999 and 2001.

whose values and norms served as the basic inspiration for regime change across communist East Central and Eastern Europe during the 1980s (Crampton 1997). Political requirements, including a basic insistence on political democratisation and respect for human and minority rights and freedoms that came along with Western economic advice and financial support (Janos 2001), were less of an additional burden and more of a form of additional assistance and a guide for the recipient countries in securing the long-term consolidation of their newly established institutions of democracy. Although the importance of the bilateral arrangements (particularly those made with leading world economies such as the United States, Japan and Germany) should not be underestimated, the role of international organisations and financial institutions has been crucial in defining both the level ofprovided assistance and the content of additional (or conditional) requirements which came along with this assistance. This becomes particularly relevant when examining the roles of the IMF, the World Bank, the EU, and the European Bank for Reconstruction and Development (EBRD - Lavigne 1999; Stiglitz 2002).

While more coordinated assistance and aid in fighting the challenges of the economic crisis and in economic system reconstruction started to come to the ex-communist countries of Eastern Europe as early as 1989, especially with the foundation of the PHARE programme of economic assistance to Poland and Hungary, the EU’s predecessor, the European Community (EC),3 soon afterwards offered a broader level of economic cooperation through beneficial association agreements, the so-called Europe Agreements (EA) to effectively all the European countries of the former Soviet bloc. By December 1991 it had already signed such agreements with three ECE post-communist states (Poland, Hungary and the still united Czechoslovakia), and by March and February 1993 it had done the same with Romania and Bulgaria, respectively (for more details see Lavigne 1999, pp. 218-228). However, the most valuable assistance for the long-term process of conducting and consolidating economic reforms and democratic institutions in post-communist states came in the form of the EU’s offer for membership, which was accompanied by a set of accession conditions and followed by substantial EU financial support (so-called pre-accession assistance). As discussed and shown in the above-mentioned EU enlargement literature (see page 41), the membership promise that the leaders of the 12 EU member states at the time decided to give at their 1993 Copenhagen meeting to those post-communist European states which had expressed an interest and displayed an ability to meet the conditions for accession defined at that same meeting (see European Council 1993) served as both a very strong motivation for undertaking the process of reforms and as a source of necessary resources for making those reforms in the interested countries.

While valuable, the financial and economic assistance, which the official candidates for EU membership received from the EU in the form of trade concessions, donations and specially created funds for supporting development and transitional reforms (see endnote 3), was far less important than assistance which the candidate countries received from the EU in the form of provided guidelines and expertise throughout the process of accession negotiations for modelling and implementing necessary reforms. The obligation of the applicants to fully comply with the required accession conditions - starting with a general ‘achieved stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities, [and] the existence of a functioning market economy’ (European Council 1993, 7.A. iii) and finishing with the more specific 31 or 35 acquis communautaire4, which were the focus of accession negotiations - was crucially important assistance for applicant countries to successfully accomplish their post-communist transition. As the acquis communautaire factually represent the body of EU laws and regulations and effectively cover the complete legal and institutional framework for the functioning of a country’s economic and socio-political system, the candidates for EU membership from former communist Europe did not have to ‘worry’ about the right design, content and proper introduction of post-communist reforms. They got them all in the form of the 31 or 35 acquis chapters, whose content has steadily increased over the years to reach the current number (for the more recent candidates) of ‘160,000 pages’ (Gateva 2015, p. 21), which have to be negotiated (i.e. adopted and implemented) before a country can become an EU member. Although sometimes criticised for being too detailed, bureaucratic and patronizing (Dimitrova 2002; Raik 2004), the EU’s accession requirement for the fulfilment of the acquis criteria was an enormously important form of assistance. It enabled the candidate for EU membership from postcommunist Europe to secure a relatively swift and effective process of building democratic and market economy institutions, as none of them had any previous experience or the necessary resources for constructing and setting these up on their own.

However, the advantage of the countries who were able to get the status of EU accession states before their less successful post-communist counterparts was not limited in that respect to the much higher amount of technical and financial assistance which they received from the EU alone (as accession states). As discussed above, the much stronger desire for a change and to ‘go West’ was expressed in the countries of ECE and the Baltic states at a very early stage of their post-communist transition, leading them to become the first post-communist countries to apply for EU membership and open accession negotiations with the EU either in March 1998 or in February 2000 (see Table 2.3). This enabled these countries to gain an international reputation as politically stable and economically prosperous societies (both guaranteed by the EU and its member states), which granted them easier access to other types offoreign assistance for reforms. Among these, in addition to the above-mentioned various forms of multilateral and bilateral assistance, including beneficial financial arrangements and the so-called soft loans granted by the IMF, the World Bank or the EBRD, the higher inflow of foreign direct investment (FDI) was particularly important.

Although FDI could have not been considered a ‘poor’ form of foreign assistance in a technical sense, the inflow of FDI, which brought the necessary (private) capital and modern technology as well as a managerial culture and entrepreneurship skills, was an enormous support for the successful privatisation and restructuring of the command-type economies of the former communist states (see, e.g. Lavigne 1999, pp. 254-261; Bevan and Estrin 2004). In this respect, it could be argued that the received amount of FDI was a critical factor for securing the long-term sustainability of the introduced economic reforms and stable economic growth in the post-communist states. Needless to say, the highly positive economic effects of FDI inflow had strong positive impacts on the further acceleration of post-communist reform (both socio-economic and political) and the EU integration of the countries in question.5 Hence, despite the fact that neither the country’s accession negotiations with the EU nor the received amount of FDI can be considered ‘poor’ forms of foreign assistance, even less so a form of aid as such, these were by far the best possible form of assistance that a post-communist country could have received for conducting its transitional reforms.6 This confirms a remarkably strong correlation among the levels of progress in accession into the EU, the received amount of FDI, and success in post-communist political and economic transition, which was clearly established by the time of the completion of the 2004/2007 EU enlargement.

As shown in Table 2.2, eight countries of ECE and the Baltics (EU-8), which opened accession negotiations with the EU already in March 1998 or (Latvia, Lithuania and Slovakia) in February 2000, had the best average scores in both success in post-communist political and economic transition (as measured by Freedom House’s Nations in Transit (NIT) Democracy Score, the Transparency International Corruption Perception Index (TICPI) and EBRD indicators of economic transition)7 and the highest received amount of FDI of all four groups of countries presented in Table 2.2. The second best results regarding both criteria were achieved by Bulgaria and Romania, which also opened accession negotiations with the EU in February 2000, but which as late starters with reforms (for reasons explained in the first section) were not able to complete accession negotiations together with the first group of states; they did so 2 years later and became EU members on 1 January 2007, only 2 years and 8 months after the first group, despite their serious problems with corruption and organised crime (see European Commission 2006, Phinnemore 2010; L. Holmes, Chap. 4 in this volume). The Western Balkan states, which started with reforms after Bulgaria and Romania but which were included in the EU’s Stabilization and Association Process (SAP) from 1999 to 2000 and got the status of ‘potential candidates’ for EU membership a few years later (see the third section of this chapter), significantly improved their transition indicators and increased the amount of FDI received during the first half of the 2000s. However, the fourth group of countries in the table are seven European post-Soviet states which have never been considered as potential EU members and have never received any official offer or promise in this respect.8 They had the lowest scores among all four groups of states in both political and economic transition indicators and started to have significantly worse democratisation scores after the late 1990s. Although the combined population of these seven post-Soviet states is over 200 million people, the total cumulative inflow of FDI in all seven of them from 1989 to 2006 was only slightly above the total FDI received by the small Western Balkan states and about the same as the combined amount of FDI received in the same period by the two late reformers Bulgaria and Romania (whose total population at present does not exceed 27 million).

As developments in this group of post-Soviet states, and generally in all non-Baltic post-Soviet states, is not within the scope of this chapter - but rather of Chaps. 3 and 4 of this volume as well as the chapters presented in Part III - the discussion in the following section

Table 2.2 Indicators of post-communist democratisation and marketisation and foreign direct investment inflow in East European states, 1999-20143

Democracy score*

Economic transition * *

TICPI***

Cumulative EDI (mil. US $)

1999

2006

2014

1999

2006

2014

2006

2014

1989-2006

2007-2012

EU-8 (2004)

2.12

2.03

2.32

3.4

3.7

3.9x

51

57

224,585 T

97,462 Tx

Hungary

1.88

2.14

3.18

3.7

3.9

4.0

52

54

45,738

8,844

Poland

1.58

2.36

2.21

3.5

3.7

4.0

37

61

81,665

60,415

Romania

3.54

3.29

3.46

2.8

3.3

3.7

31

43

35,550

35,255

Bulgaria

3.58

2.89

3.29

2.8

3.5

3.7

40

43

19,225

27,812

Croatia

4.46

3.75

3.68

3.0

3.5

3.8

34

48

13,623

14,635

Maced FYR

3.83

3.82

4.07

2.7

3.1

3.6

27

45

1,628

2,402

Albania

4.75

3.82

4.14

2.6

2.9

3.5

26

33

2,098

5,364

Bosnia-

5.42

4.04

4.46

2.0

2.6

3.0

29

39

2,680

4,193

Herzegovina

Montenegro

5.50

3.93

3.89

1.6

2.5

3.3

na

42

1,326

4,755

Serbia

5.50

3.68

3.68

1.4

2.7

3.2

30

41

9,837

11,441

Ex-USSR 7

4.92

5.46

5.64

2.3

2.6

3.0

27

34

55,723 T

65,164 Ту

T- total; x - seven countries only (from 2008 the EBRD no longer provides data for the Czech Republic); у - six countries only (excluding Russia). Ex-USSR7: Armenia, Azerbaijan, Belarus, Georgia, Moldova, Russia and Ukraine.

  • *Freedom House NIT “democracy score” (I being the highest: full democracy; 7 being the lowest: complete dictatorship) are published annually in June and show the state of play in the respective countries during the previous year. The scores given in this table for particular years (e.g. 2014) are actually published in the NIT publication for the following year (2015 in this case).
  • **EBRD economic transition indicators (4.33 = standards of advanced industrial [market] economies; 1 = standards of a centrally planned economy) are published annually in October in the Transition Report and refer to the state of play in the previous 12 months.
  • ***Transparency International’s Corruption Perception Index (TICPI) is published annually in December and gives information about the corruption level for that particular year. Since 2012, the TICPI has ranged from 100 (very clean) to 0 (highly corrupt), while in the period until 2011 it ranged from 10 (very clean) to 0 (highly corrupt). For simplicity’s sake, it has been converted to a 100-0 scale for all years shown in the table.

aData for Kososvo are not included as they are not available for most years before its declaration of independence in 2008. EU member states are given in italics; EU members from 2004: EU-8 (2004) are given in bold and italics.

Sources: Freedom House Nations in Transit, various years; EBRD Transition Report, various years.

focuses on explaining the reasons which prevented the Western Balkan states from continuing to improve all three indicators presented in Table 2.2 at the same rapid pace as they did during the first half of the previous decade.

 
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