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EUROPE BETWEEN EAST AND SOUTH Europe between East and South edited by Siro Lombardini Universita di Torino, Torino, Italy and Pier Carlo Padoan Universita di Roma "La Sapienza", Roma, Italy SPRINGER-SCIENCE+BUSINESS MEDIA, B.Y. A C.I.P. Catalogue record for this book is available from the Library of Congress. ISBN 978-94-010-4431-8 ISBN 978-94-011-0994-9 (eBook) DOI 10.1007/978-94-011-0994-9 Printed on acid-free paper AH Rights Reserved © 1994 Springer Science+Business Media Dordrecht OriginaHy published by Kluwer Academic Publishers in 1994 Softcover reprint of the hardcover 1s t edition 1994 No part ofthe material protected by this copyright notice may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without written permission from the copyright owner. Table of Contents Foreword Domenico Siniscalco 1 Europe Between East and South Introductory Remarks Siro Lombardini 3 EC Enlargement to Eastern Europe: Community and National Incentives and Sectoral Resistances Luca De Benedictis, Pier Carlo Padoan 9 Creation of Financial Markets in (Previously) Centrally Planned Economies Daniele Checchi 37 Problems and Perspectives of East-West- Economic Relations Lutz Hoffmann 73 Exchange Rates, Inflation and Purchasing Power Parity in Eastern Europe Wojciech W. Charemza 89 Clearing, Specialisation and Money: the Finnish Perspective on Trading with the USSR Pekka Sute/a 105 Interdependence Between East, West and South Catrinus J. Jepma 123 International Migratory Movements: The German Experience Wolfgang Franz 157 vi TABLE OF CONTENTS The Interdependence Between Environment and Development: The Mediterranean Sea Case /gnazio Musu 187 The Alps in the Economic and Ecological Systems of Europe Roberto Zoboli 201 Europe Between East and South: New Perspectives and New Problems. Final Remarks Pierre Maillet 255 Foreword At the end of 1991, the Fondazione Eni Enrico Mattei hosted the Integration Symposium of the Confederation of European Associations of Economists on "Europe between East and South". This volume brings together the selected and edited proceedings of the conference. The focus of the book is the transformation of the formerly planned economies in Eastern and Central Europe from an international perspective. The opening up of the Eastern bloc adds a new and extremely challenging dimension to the relationship between the more and the less developed economies. Almost all developing countries implemented liberalisation policies throughout the Eighties, thereby dramatically increasing the market orientation of their economies. The "recipes" used in the South are also being applied virtually unmodified, in Eastern Europe. The symposium was one of the first forays comparing the two sets of experiences, showing that the lessons from the South are of great value for Eastern European reforms. Reforms in Eastern European countries equally affect economic flows between Europe and developing countries, and create new challenges for European countries themselves. Eastern Europe is an enclave of cheap and relatively skilled labour, thus a dramatic competitive threat for other developing countries and poorer EC regions. Furthermore, the strategic relevance of this area for the western world is likely to cause a diversion of public resources previously earmarked for the development of southern economies. All these issues could have tremendous consequences for the environment. The diffusion of market signals changes the nature of the incentives towards the environment. At the same time, the evolving geographic pattern of a economic flows influences vested interests vis vis environmental policies. Consequently, the opening up of Eastern Europe raises new questions for the design of environmental policies and for international policy coordination. These questions are even more striking when the uncertainty of the political and economic context is taken into account. The essays in this volume provide extremely helpful background information to the understanding of the environmental consequences of the S. Lombardini and P. c. Padoan (eds.), Europe between East and South, 1-2. © 1994 Kluwer Academic Publishers. 2 opening up of Eastern Europe. In this respect they are at the centre of the Fondazione Eni Enrico Mattei's research focus. Domenico Siniscalco Director Fondazione Eni Enrico Mattei Europe Between East and South Introductory Remarks SIRO LOMBARDINI Universita di Torino Torino. Italy 1. EUROPE BETWEEN EAST AND SOUTH Economists are all stimulated by the events· of the East: after the general satisfaction for the end of the communist regimes, the fear of an unmanageable crisis of the economies of the countries involved. Less attention is given to the deterioration of the economic conditions of the South. In quite a few countries of Africa and Latin America income per capita has decreased. The two structural crises - of the East and of the South - are interwoven, for two reasons: a) Huge amounts of capital are required to solve both crises. Since the propensity to save has fallen in all countries (especially in the United States), only a general strategy, capable of spurring economic development in all countries, can reduce competition for foreign capital and avoid soaring of interest rates, eventually causing inflationary processes and international disequilibria; b) If the conditions in the East or in the South are not changed, biblical migrations will occur, endangering all prospects of an international economic order. The perception of both crises is made difficult by the structures of economic power that, through the mass media, affect public opinion, and by the lack of scientific tools that could help in identity possible solutions. We shall concentrate our attention on the problems raised by the fall of communist regimes. Some of the remarks we shall make may result in a better understanding of the problems of the South. 3 S. Lombardini and P. C. Padoan (eds.), Europe between East and South, 3-8. @ 1994 Kluwer Academic Publishers. 4 SIRO LOMBARDINI A challenge for economics: the transition from a command to a market economy History is offering economists and politicians a unique opportunity: to construct a market economy out of the failure of the command economy. Unfortunately, most economists are underestimating the enormity of the task and are convinced that the political changes resulting from the fall of the old regime will automatically open the way to market economy. Such an expectation is grounded on arguments essentially based on the neoclassical economic theory. In fact, economic theory has been devised to explain how a market economy works after its establishment. Market economies have emerged from different historical processes; these processes can aid in the understanding of their differences (the Japanese market economy works differently from that of the United States). The neoclassical paradigm may be of some use to visualize the reactions of a market economy to small changes. For instance, one could see what would happen if the price of a good or service, that for some time has been fixed by the State, were freed. However it cannot help us in understanding what could happen if in a command economy all (or almost all) prices, that never reflected the conditions of demand and supply, were freed. Similarly, privatisation of a firm in a capitalistic economy is a completely different matter from privatisation of state firms after the collapse of the command economy; in the latter case, there are no parameters for the required valuations, nor a financial market where equities can be sold. The emergence of a market economy requires some structural conditions that are of a technical, cultural and political nature. Such conditions depend on the stage of the country's economic development at which market economy takes off and on the features of the previous political and economic system. I shall concentrate my remarks on the case of the USSR. For a market economy to arise, some structural conditions had to be changed. Price liberalization can disrupt the economy through accelerated inflation if the growth of demand is not paralleled by an adequate increase in supply. Such a possibility was lacking for two reasons. First, demand could rapidly expand thanks the huge liquidity of the economy (in the past a large part of the purchasing power was not utilized since the desired goods were not EUROPE BETWEEN EAST AND SOUTH 5 available); second, the rigidities of the productive system hampered adjustments of supply. A monetary reform could help in controlling inflation by freezing the excessive liquidity. Large firms can be successfully privatised only if they are properly restructured. They must become capable of reacting to market stimuli in a time shorter than that required for their transfer to the private sector (the transfer being necessarily partial). The monetary reform has not been carried out for fear of people's reaction. No industrial restructuring policy has been adopted because of unrealistic optimistic expectations for privatisation. The privatisation of agriculture was urgently required to increase the food production in order to meet the foreseeable increase in demand. An efficient commercial network could make all regions in condition to benefit from the increase availability of agriCUlture foodstuff. Such a need has not yet been seriously perceived. The ideological views of the old nomenclature converge with the ideological illusions of reformers in disregarding these preliminary steps of the process of conversion from a command to a market economy. Most economists expected a restrained inflationary process; a 25% inflation rate was considered a reasonable expectation. My own was much more pessimistic. Inflation can help restructuring and development if it induces forced savings. But that is not likely to occur in the ex communist countries. It is more likely that an abrupt rise in prices will induce a substantial rise in wages contributing to the inflation spiral. The rise of wages will sharply accelerate as soon as the bank deposits are depleted. 2. PRIVATISATION AND PRICE LmERALIZATION Undervaluation of the problems of transition becomes even more apparent when we consider the privatisation issue that is linked with that of price liberalization. Land privatisation raises legal questions that can and must be faced and solved. Privatisation of small firms, especially in the service sectors (eventually after the creation of cooperatives), may be easily implemented. A completely different matter is the privatisation of large firms. Actually, what has to be done is the creation of new firms. For that foreign capital is required, as well as joint ventures with foreign companies in order to convert the state fa,ctories - in fact, merely administrative organizations -into real firms.
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