I. Introduction
In general, the situation can be characterised as follows: the stagnation and high inflation period of the post-1989 developments in Central and East Europe is gradually turning into slow growth, which is expected to accelerate in 1997-98. This does not include the former Yugoslavia and the Baltic States. The Baltic States are developing in roughly the same way as the CEE states. Russia and Ukraine, on the other hand, continue to lag behind the CEE countries, both in terms of transforming the economic and political institutional framework as well as restoring macro-economic stability and GDP growth. Taking 1989=100 as the base year, however, none of the countries of the Central and East European region has managed to reach the level of GDP of 1989. It is extremely interesting to look at the calculations of the Wiener Institute for Comparative Economic Studies (No. 28, July 1996) where Leon Padkominer, the author of the report, gives the following summary (see table in hardcopy of Bulletin).
Perhaps the 1996-97 forecasts are rather on the optimistic side. Each of the countries has the potential for unexpected disturbances. If we look at the Hungarian picture, Hungarian sources provide a different picture; minimal growth of GDP in 1996, i.e. 100.5% or 0.5% compared to the previous year based on actual data (1996 I-IX). In spite of the fact that Hungary is one of the "success stories" in the region, some kind of unexpected macro-economic instability might set in because it is so heavily dependent on the economic export performance. The fragile macro-economic situation in all of the CEE countries indicates a kind of fragile transformation process. Unfinished structural changes may take any direction.
It is obvious from the table that whilst the Central European countries are slowly approaching their 1989 GDP level, Russia and particularly Ukraine are still deep in recession and their macro-economic instability continues. This situation points towards further potential political problems, both in Russia and Ukraine. The situation will be more complicated by the fact that Poland, the Czech Republic and Hungary will soon be admitted to NATO. The Baltic States and all the other CEE countries also intend to join NATO. The most important danger signal, however, is that Ukraine has also let it be known that it would like to join NATO.
Obviously the prospect of such developments will make Russia uneasy. It may also have undesirable spill-over effects on the internal political development of Russia towards militaristic-hardline extremist developments. It certainly does not help macro-economic stabilisation, partly because the absolute institutional structure, no clear property rights, and very slow reforms do not attract foreign capital investment. The political uncertainty makes further reforms extremely difficult. As a consequence, inter-regional trade, which would benefit all of the countries in the region, will most likely decline below the present low levels. All kinds of economic uncertainties may adversely affect the macro-economic stabilisation of the CEE countries. Spill-over effects from Russia and Ukraine as well as the high level of Western European unemployment may reduce growth potentials in Western Europe and therefore dampen the rate of recovery in the CEE countries in general, making their transformation processes sluggish and contradictory in particular. The main political problem is the sharp contrast between the expectations of 1989-90 and the actual achievements of 1996-97. This is politically explosive everywhere.
II. Hungarian Developments.
One of the most interesting features of the socio-economic transformation of the CEE countries is their contradictory development path since 1989. Hungary, which in 1989 was perhaps in the best position to transform the socio-economic structures relatively quickly, could not utilise its favourable position. Whilst privatisation advanced quite rapidly, the macro-structure of the economy did not change enough to provide the necessary dynamics for the expansion of the economy. The state remained an East European-type "welfare state", with over-extended and obsolete welfare systems; (medical, health, pension, schooling, public utilities subsidised etc.) without an appropriate income (tax) base to finance expenditure. A high budget deficit led to the further increase of external debt. As a result the increasing exports were not able to earn enough foreign exchange to invest. Therefore the macro-structure changed relatively slowly. Inflation remained high (it actually accelerated somewhat in 1995) and production growth remained sluggish with rather high unemployment (properly measured around 14-15%).
Perhaps this was the price to be paid for the relative political stability, such that the majority of the population became disillusioned with the results of the establishment of a private enterprise-based capitalist economy (real incomes and real wages still declining, although at a reducing rate) but remained calm with some improvement in the situation expected in the near future. In particular, the coming membership in NATO, followed by joining the EU (faster, perhaps, because of NATO membership) increased popular expectations for the better, despite high inflation, low growth, unemployment and high foreign debt. The large capital inflow also helped to increase expectations. Hungary received the highest foreign capital inflow amongst the CEE countries (current level at US$10 billion altogether).
The overall situation is well-illustrated by Table 2 (see hard copy of Bulletin).
Most of the Hungarian analysts agree on the following main points:
1) The inflation rate is still high, 23-25% per annum, but is slowly declining;
2) The budget deficit is declining dramatically from 6.5% of the GDP in 1995 (due to very strict restrictive fiscal and monetary policies introduced since 1995) but is still 4.5% of the GDP;
3) Real incomes will decline during 1996-97 but expected decline in 1996 is only 5% compared to 9-10% in 1995.
Looking at the most important indicators in Table 3 we get the following results:
The data reinforce what was suggested at the beginning of this paper. The transformation processes, the reforms and the macro-economic instability make the whole CEE area very fragile, both from the point of view of economic transformation and political stability. In such fragile circumstances a relatively unimportant failure of the system to control borrowings for investment, such as in Albania, may lead to consequences totally out of proportion. This is not to suggest that the five CEE countries are comparable to Albania. Still, unexpected setbacks may cause imbalance far beyond the triggering event, particularly in Russia and Ukraine.
Laszlo Csapo
Research Associate
Centre for Russian and Euro-Asian Studies
University of Melbourne
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