Lately, questions about the future of capitalism have become
commonplace, almost fashionable, in western capitals. Amid the
rubble of global finance in New York and London, a bout of
soul-searching has taken hold equally among bankers and
policy-makers as among shopkeepers and talk-show hosts.
Yet in the emerging economies at the fringes of global
capitalism, there are surprisingly few calls at least in
the mainstream policy debate for rolling back
In the emerging markets, there has been no such
existential angst about capitalism, no serious questioning of
the role of the market, writes Arvind Subramanian, senior
fellow at the Peterson Institute for International Economics,
in a recent paper.
The question Subramanian poses is why the global financial
crisis spawned a debate on capitalism in the advanced
countries, but not in developing nations; the global financial
crisis may have exposed the claim of a decoupled world
economy, but it seems to have emphasised the decoupling in
policy debate and long-term policy choices.
Most surprising, he claims, is the fact that there has
not even been a pitch to restrict inflows of fickle foreign
capital that were arguably at the centre of this crisis for
many emerging markets.
He argues that the most important reason for the
decoupled debate phenomenon is that the big
development challenge in the developing world is not the
state-market boundary but the more mundane yet fiendishly
difficult question of how to improve the state and its basic
capacity to deliver law and order, security and other essential
services such as health, water, sanitation and education.
That was so before the crisis. That will remain true in
its aftermath, he says.
This is as true of Asia as it is of central and eastern
Europe, says Marek Belka, director of the IMFs European
department and a former Polish prime minister. Belka suggests
that policy-makers across the former eastern bloc remain more
devoted capitalists than their western counterparts.
Our interlocutors in the region have in most cases
displayed deeper allegiance to the market economy than we would
expect, or than people in the west, he tells Emerging
Belkas claim is that the global financial crisis has
so far failed to undermine the impetus in central and eastern
Europe towards market-led reforms. Nobody in this region
at least is seriously talking about dropping market economy,
however imperfect it is.
Although he admits that we do not have full clarity of
what political and social consequences the crisis ultimately
will exert on the world and on this region, Belka says
that the free market, or the market economy to be more
precise, is the only game in town. Nobody is talking socialism
in this region.
Belka suggests that few now seriously dispute that
macroeconomic stability, openness to trade, strong institutions
and liberalised prices are necessary conditions for a
successful shift from planned to market economies. But almost
two decades since the fall of the Berlin Wall gave way to one
of the most important economic revolutions of the past century,
alarm is growing over the extent to which the process for
central and eastern Europe and the former Soviet Union has
fallen short of what backers of the market economy initially
The fear is less about a return to socialism; rather,
its that the biggest casualty of the financial crisis
could be the belief of many common people that the transition
from communism was bound to lead to a secure, happy and
Concerns about well-being are far from frivolous. According
to the World Bank, eastern Europe and the former Soviet Union
are in the grip of a human catastrophe. After a decade of
strong growth and poverty reduction, the bank says the economic
and financial crisis is likely to push almost 35 million people
across the region back into poverty a third of the
people that had escaped from it over the last ten years.
The bank expects that the number of poor and vulnerable
people in the region will rise by 5 million for every 1%
decline in GDP which suggests, according to Bank
economists, that by the end of 2009 almost 25 million more
people will be poor and vulnerable, and by the end of 2010 a
further 10 million.
Of the regions 480 million people, 192 million are
considered poor or vulnerable by the Bank, and nearly 90
million have moved out of poverty and vulnerability since
Shigeo Katsu, World Bank Vice President for the Europe and
Central Asia Region, said last month in Washington:
Within 10 months of the crisis, countries have started to
lose the poverty gains made over the last 10 years. By
end-2010, we may unfortunately see 35 million more people fall
back into the poverty and vulnerability trap.
He added: This is a human crisis that is going largely
unnoticed in the talk of the global financial and
The World Bank notes that the effects of the crisis are
being felt through three key transmission mechanisms:
financial, product, and labour markets.
In the financial sector, large current account debtors face
immense rollover risks and volatility in foreign exchange
markets has also led to uncertainty. At the same time,
industrial output has plummeted, and the bank points out that
some countries are now experiencing double-digit declines
compared to a year ago.
Meanwhile unemployment is sharply up with unprecedented job
losses in some countries and others poised for double-digit
joblessness in the near future. For countries that rely on
remittances in particular Albania, Moldova and Tajikistan
the consequences could be dire: current simulations for
Tajikistan suggest that an anticipated 30% decline in
remittances could result in a 5% rise in the number of people
living in poverty.
The transition from communism to capitalism across the
region has had devastating human consequences since the
collapse of the Soviet Union effects which still persist
today. UNICEF attributes more than 3 million premature deaths
to transition; the UN Development Programme estimates over 10
million missing men; and almost two decades since
the start of the transition, only slightly over half of the
ex-communist countries have regained their pre-transition life
In January the Lancet, a medical journal, published the
first ever study that empirically assesses the role of
transition policies on increased mortality rates in
post-communist countries. It finds a correlation between mass
privatisations and higher death rates in transition
The researchers showed that four or five of the worst
countries in terms of life expectancy had implemented mass
privatisation while only one of the five best performers had
done so. They concluded that the mass privatisation and the
shock therapy policies that encouraged it, ranked
alongside the other causes of extra deaths such as acute
psychosocial stress, reduced access to good medical care,
rising social inequalities, social disorganisation and
And the region still faces overwhelming demographic
challenges. The UNDP published a report this month claiming
that Russias population may shrink by an additional 11
million people in the next 15 years, threatening its economic
Columbia University economist and Nobel laureate Joseph
Stiglitz has long maintained that flawed policies and poor
management are to blame for the regions ills even
before the global financial crisis took its toll. We
didnt manage the transition very well, he tells
Emerging Markets in an interview.
But he says that the assumptions underlying financial
globalization must now be reassessed, in light of the
devastating blow to the global financial system. Some
rethinking now is surely a good thing. We pushed certain things
like capital market liberalisation too far. The kind of
financial market integration we had brought risk without reward
and in the balance of risk and reward many people would say we
got it wrong.
Weve now let loose a lot of bubbles around the
region, he says. The hope will be that they learn
the lesson and theyll move towards a more balanced market
economy after the extremes.
But former EBRD chief economist and LSE professor Willem
Buiter argues that todays financial crisis does not
represent a transition issue at least not
for central and eastern Europe. For the more developed parts of
the region, he believes todays economic and financial
turmoil represent mature country problems.
It is not a legacy of central planning that is causing
them pain. It is the result of their being small countries with
big crises who have experienced a classic boom and bust cycle
which combined with a global economic recession that is the
biggest since the 1930s.
[Central and eastern Europe] suffered from inadequate
regulation and supervision. But so did the US and the UK.
He notes, however, that transition has gone horribly askew
further east, most acutely in the Commonwealth of Independent
States (CIS). The region has seen the spread of corrupt, crony
and clan capitalism and authoritarianism to various degrees, he
says. And the trouble is that the countries most in need of
deeper reforms, more growth and better public services tend
also to have weakest institutions and so are most susceptible
to corruption, Buiter adds.
The challenge posed by increasing corruption, lawlessness
and mounting state control across the CIS is perhaps most
profound for the EBRD, especially since the bank is
specifically charged with promoting democracy, thereby placing
it in direct conflict with some of its countries of
The multilateral bank in recent years had stated to shift
its focus eastwards as its operations, particularly in western
Europe, appeared to be winding down; the eight countries which
joined the EU in 2004 Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Poland, Slovakia and Slovenia were
due to stop receiving EBRD funds in 2010, while the Czech
Republic graduated early.
But the current crisis could change everything. EBRD
president Thomas Mirow said recently that countries of central
Europe now have other concerns than the one of when they
will graduate. Lets cope with the crisis, lets look
at what the crisis has done to these countries and how the
recovery looks and then we will discuss when and how [they will
No cause for alarm?
Herbert Stepic, chief executive of Raiffeisen International
acknowledges that the recent economic crisis had heightened
fears of social and political upheaval not only among
the regions fragile governments but also within the
There was a worry that the process of transformation
was suddenly interrupted and that would have meant social
uproar in these countries: huge unemployment, crumbling growth
and so on, says Stepic.
In particular, he says that concerns over western
Europes support for its eastern neighbours was a central
component of the bigger fear that transition could be thrown
The political consequences of letting eastern Europe go
would have been profound, he says. One of Europes
greatest achievements in the past two decades was peacefully to
reunify the continent after the end of the Soviet empire. But
if the people of eastern Europe felt they had been cut loose by
the west, they could easily fall prey to populists or
nationalists in a manner not unknown in European history.
That would have meant strong social pressure on these
young democracies. So we would have created again more or less
visibly again a Europe of two dimensions or a Europe of two
classes. That was an enormous risk, Stepic says.
But that worry, he says, has largely receded, in part to
what he believes are renewed commitments from western European
authorities to stabilize their eastern neighbours
economies. That was very much at risk, but now things
changed, Stepic says.
Stiglitz agrees that the fundamental drivers of transition
have not been destroyed by todays crisis. The
market economy is clearly better than what [the region] had
before. I wouldnt say that were really at risk of
[economic globalization] unwinding, he says.
But he warns that the process of transition may nevertheless
have stalled. Theres a risk a very strong
risk of progress going forward being very limited, with
some degree of pullback. Thats very very