SIGNS OF ECONOMIC RECOVERY FOR COUNTRIES IN TRANSITION NOW APPARENT, ACCORDING TO NEW UN PUBLICATION

9 February 1996

Press Release
ECE/462

SIGNS OF ECONOMIC RECOVERY FOR COUNTRIES IN TRANSITION NOW APPARENT, ACCORDING TO NEW UN PUBLICATION

19960209 Economic Slump Deeper Than Expected; Will Take Until End of Century to Regain 1989 Output Levels

GENEVA, 9 February (UN Information Service) -- Although the first signs of an economic recovery have become apparent, it will take until the end of the century for the countries in transition from centrally planned to market economies to regain the output levels of 1989, according to a recent study published by the Economic Commission for Europe (ECE).

Following the radical political changes which began in 1989, it had been widely believed that the transition process would lead to a marked decrease in output in the countries concerned, but that the resulting recession would be short and not very profound. However, contrary to expectations, there has been a considerable economic slump among the countries concerned.

In an effort to elucidate the situation, the review of Industrial Restructuring in Selected Countries in Transition provides a country-by-country analysis of aspects of industrial restructuring in the countries in transition. It also analyses the situation in the three Baltic States and eight members of the Commonwealth of Independent States (CIS).

The study indicates that the situation is probably influenced by factors beyond the transition process. It cites the collapse of the market within the former Soviet trading bloc and the imbalances inherited by the countries in transition and the newly independent States, taking particular note of imbalances between the structures of industrial production and consumption.

Despite the disintegration of old economic systems and traditional trade links, industry in most of the countries in transition continues to rely heavily on the markets of other transition countries and the newly independent States, according to the ECE.

Industrial Policy -- Role of State

A special feature of the transition economies after 1989 was that the central planning system collapsed before new mechanisms needed for the operation of a market economy could be put in place. The infrastructure of a market economy results from a long process of learning by doing and of adapting to changes in the economic and social environment. In the countries in transition, the rates of change from country to country are bound to affect both the pace of restructuring and the effectiveness of stabilization policies.

The speed with which market forces could manage the necessary restructuring was overestimated. As a result, the governments of countries in transition must adopt specific industrial policies to exploit the full potential of the economy for sustained growth. The role of the State in transitional economies must be redefined, not eliminated. It's industrial policy must aim at improving the overall quality of life of the population, ensuring economic security, raising living standards and improving the environment.

Industrial Restructuring

To a large extent, successful restructuring the economies in transition depends on industrial restructuring, transformation and privatization. The issue facing governments and entrepreneurs is how to restructure their industrial sectors so that they may become viable within an integrated regional and global economy, while contributing to national wealth and welfare through such vehicles as value added, tax revenues, employment and foreign currency.

The restructuring of industries in the countries in transition requires modernizing and reorienting production, to improve the availability of quality consumer goods and reduce imports. It also entails increasing exports, developing the private sector and increasing investment. A further objective in some countries aims at the conversion of military establishments, which include communications, engineering, electronics and aircraft plants. Such establishments would be reoriented towards the manufacture of consumer goods for domestic and export markets. There must be a change in management principles and methods at all levels.

Changing Ownership and Privatization

A principal way in which governments of the countries in transition hope to achieve the restructuring of their industries and economies is through the privatization of State property. This requires transformation of the legal,

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economic, technical and social framework within which these enterprises operate.

A change in ownership structure does not automatically result in profitability. Efficiency cannot be gained as a result of a simple transfer of ownership rights. Privatization in itself is not a panacea for attracting capital and automatically eliminating all the shortcomings of State-owned firms. The success of privatization depends on the existence of an appropriate economic and social infrastructure to enable privatized enterprises to operate effectively.

Small and Medium-Sized Enterprises

Small and medium-sized enterprises make a significant contribution to the prosperity of national economies and are considered to be one of the principal driving forces in economic development. They stimulate private ownership and entrepreneurial skills; they are flexible and can adapt quickly to changing market demand and supply situations; they generate employment, help diversify economic activity, and make a significant contribution to exports and trade.

In central and eastern Europe, such enterprises are the healthy embryos of the market economy that transition aims to create, and their is intrinsically linked with the process of privatization. A major task facing governments is to create a positive political and economic environment for such enterprises. Together with enterprise and industrial restructuring, the creation of such an environment forms an integral part of economic, investment and financial reform.

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Note: Industrial Restructuring in Selected Countries in Transition (ECE/IND/1) was published in January 1996. It is available in English and Russian through the United Nations Economic Commission for Europe, Industry and Technology Division, Palais des Nations, CH 1211 Geneva 10, Switzerland. Fax: 41-22-917-01-78.