Transcripts

Transition Report 2003 press conference with Willem Buiter, the Chief Economist, Monday 17 November 2003

MR BUITER:   Welcome.  This is the 10th Transition Report.  As in past years, there are the usual chapters on macroeconomic development and progress in transition and structural reforms, and this year the latter is enhanced by an extended analysis of the political economy nexus between political rights and freedoms and economic transition achievements.  We also have a special theme, as we have each year, which very fortunately turns out to be something that is highly topical at the moment:  regional cooperation and integration in transition countries.  With 13 out of our 27 countries of operations landlocked, it really matters who your neighbours are.  If you are lucky, you are Switzerland; if you are unlucky, you are Kyrgyzstan.   This is a concern at all levels:  projects, policy advice and others.

I am happy to give you a quick outline or I can launch straight into questions, if you can do without the introduction.  Would you prefer to start with questions or do you want a quick précis?

QUESTION (Guardian):   I would like a quick overview, please.

MR BUITER:  Very well.  The press release was in fact meant to be the overview.

On the macro side, the good news, and somewhat surprising news, is that for the third year in a row the region will outperform most of the world economy, with the exception of emerging Asia, where China and India are powering ahead at rates in excess of our region.  The region is certainly growing faster than Western Europe.

Within our region, we see that the lowest overall – but still respectable –  growth rate, at 3.3. per cent, is in central Europe; south-east Europe came next with almost 4 percent; and the CIS is powering ahead at 6.2 per cent.  It looks like a nice catch-up scenario:  the lowest growth rate in the most advanced countries, then come south-east Europe and the CIS countries.  But it is not quite as nice as that.  First, all these numbers could and should be higher.  An average of 3.3 per cent for eastern Europe for the accession countries is all right but nothing to write home about.  It represents a catch-up with the EU only because the current EU performance is so bad and not because the 3.3 per cent figure is particularly good.  Also, the 6.2 per cent achieved by the CIS may look good if you do not know anything about the countries, but it is rather less impressive when you realise that a lot of that is oil and gas driven.  What looks great at $28 per barrel does not look so great at $12 per barrel.  There is vulnerability.

As for the country-specific challenges, we note that a number of CIS countries appear to be uncoupling from normal transition progress, with all the transition indicators, and indeed observation, showing a halting of reform or even in some cases a reverse of reform, for instance, in Moldova and Uzbekistan. There is a risk that, unless this process of stagnating reform in a number of the smaller CIS countries is reversed, these could end up being developing countries, with all the persistent quasi-perennial problems that that term implies, rather than transition countries achieving a fairly swift joining of the ranks of the advanced industrial countries.

In terms of reform, there has been progress across the board.  Serbia and Montenegro, Russia and Bosnia are the leaders if you look at the increment in the transition indexes since last year.  The increments of course have to be related to the level, and Serbia started from a very low level.  In fact, if you look at its level, the increment achieved by Serbia last year was, if anything, disappointing, even though it was the highest in the region.  The other transition countries were making faster progress when they were at Serbia’s stage.  That is clearly something that the supporters of reform in that country have to keep in mind; a lot of work needs to be done.  They do not want to uncouple from the rest of south-eastern Europe as it progresses in the longer run towards full EU membership.

Of course, in the advanced accession countries reform has been driven very powerfully by the prospect of EU membership.  That raises two questions:  one for the countries themselves and one for the countries that have no reasonable prospect of imminent EU membership.  First, now that the eight are in, are the incentives for reform gone and will they have a transition breather, so to speak, because the transition process itself is not completed yet?  They have quite a bit more to do in public administration, reform of the intractable industries that were left on the “to do” menu.  We have seen that kind of behaviour of course within the existing EU when countries made big efforts on the fiscal side to join EMU and, once they were in, they said no “j’y suis, j’y reste” and they left off and let deficits rip.   That is a problem:  how are you going to incentivise the successful accession countries to maintain reform and macroeconomic stability now that they are in, or de facto almost in, on 1 May next year; secondly, how do you incentivise the countries that have no reasonable prospect of EMU membership either ever or in the foreseeable future.  I am not talking here about Bulgaria and Romania.  They clearly have the same incentives facing them now as the eight that will join on 1  May.  I am not even talking about south-eastern Europe because the western Balkans, and Croatia, also are clearly in some sense – not in a legal sense yet but in the process sense – pre-EU; the EU is their destination.  It may take a while.  If you look at some of the countries, they had better take a while because they are not ready.  Once you get outside south-eastern Europe, you are talking about the CIS, and it is hard to see the prospect of imminent EU membership for most and EU membership ever for some.  Central Asian countries are unlikely to join the European Union unless they redefine Europe in a way that would even defy the spirit of De Gaulle.    What do we do for these countries?  

Fortunately, our theme this year was regional integration issues and global integration through regional integration.  We looked specifically at the problems of the new borders of the enlarged EU and the countries covered by the Wider Europe initiative and so on, and also the problems of Central Asia, namely trade and transit.  The failure of reform of a key country at the heart of Central Asia, Uzbekistan, poses very serious economic problems for the more reform-minded countries in the region.

I will leave it at that.  I am happy to let my colleagues answer any question you may have.

SVENJA O’DONNELL (Bloomberg):  You were talking about the countries that are about to join the EU.  Countries such as Poland have been very much criticised recently, particularly in terms of the level of government spending.  How serious is the EBRD warning that these countries should focus on fiscal policy and to what extent should this be at the expense of growth?

MR BUITER:  The concept that tighter fiscal policy is at the expense of growth when the existing fiscal policy is not sustainable does not make any sense.  If fiscal policy is unsustainable, then an attempt to correct it is not at the expense of anything, unless you believe there is a fairy godmother out there who will indefinitely finance deficits.  So these countries have to engage in fiscal corrections.  The only question is of timing and of the methods:  do they do it quickly or slowly?  Do they do it mainly through taxes and, if so, which taxes, or through spending cuts and, if so, which spending cuts?  The countries are sovereign and we can only give general suggestions.  Clearly, if you do it through taxes, then you should do it in ways that are the least distortionary and have least negative incentive effects for investment and other desirable economic activities.  Basically, that means the lowest possible marginal rates, broadest base, getting rid of exemptions, the usual things there.  

In terms of spending, we pointed to the high levels of public spending in Poland – it is actually true across the region with very few exceptions, including one or two in the Baltics.  These countries have general government spending as share of GDP at 40 per cent plus.  These are west European percentages and they are carried by countries that have less than half on average of the per capita income of western Europe.  Those kinds of burdens are excessive, and the only way to finance them is at the expense of growth, and so they have to find ways of cutting spending.  Where can they do that?  The obvious candidates are the many wasted subsidies going to support non-viable industries; there is inefficient, non-targeted support aimed at social protection which in fact fails often to meet that aim but consumes a lot of resources in the process.  There are lots of ways to skin a cat.  This is not our first priority but it is clearly important for us in so far as measures to correct fiscal imbalances may impinge on the business climate and thus on our ability to do business.

There is a need for correction.  It is driven by domestic considerations in these countries.  There is an additional bonus that you get for fiscal tightening:  it sets you up for EMU membership, which I think all these countries are pursuing but cannot achieve until they have met the fiscal test which the four largest countries at this moment fail quite royally.

SVENJA O’DONNELL (Bloomberg):  To follow up on that, you talk about EMU membership; which of these countries joining in May do you think will be the first to join the euro?

MR BUITER:  Clearly countries that will join first are the ones that (a) want to and (b) meet the criteria.  I think that in principle they all want to, so that is not an issue.  As for meeting the criteria, only the small countries at the moment look likely to qualify on the minimal timescale that appears to be implied by the Maastricht criteria, which is two years of ERM 2 membership, and that would put it at the earliest at May 2006.  If you allow a year for slippage, that hits 2007.  The small countries – the Baltics and Slovenia – are the ones that are the obvious candidates if they keep their house in order fiscally, financially and in other ways.  None of the larger countries is, on current performance, likely to meet the fiscal criteria in time for 2006/07 accession but miracles can happen and the Red Sea was parted, so who knows?

SVENJA O’DONNELL (Bloomberg):  When do you think they will be likely to?

MR BUITER:  I do not know.  It is up to them.  It is simply a question of generating domestic political consensus to run a budget deficit compatible with membership.  I am no political pundit.  My colleagues can tell you all about that.

QUESTION (Guardian):  You have put Russia among the reform-minded countries. Are you as confident about them being reform-minded as you presumably were when the report was being drawn up?

MR BUITER:  As you point out, the report, and in particular the data for Russia refer to the level achieved in September this year and the change in the level since September 2002.  We see there that Russia is indeed among the best performers.  Evidence of that can be found in table 2.1.  We see that they have improved in two dimensions: there was further liberalisation in trade and foreign exchange systems, and securities markets and financial institutions.  In terms of level, of course, they remain very much at the intermediate stage.  

These improvements are real. They are part of a pattern of improvement in economic governance which started following the 1998 crisis, and accelerated with the change of regime when Putin took over in 2000.  It is a slow process.  It is a non-uniform process.  Many of the improvements are in legislation and in the drawing up, approval and formal introduction of the new regulations.  Progress in implementing reforms and in the implementation of changes aimed at enhancing the effectiveness of public administration in general, and of the judiciary in particular, is much, much slower.  Implementation has always been the Achilles’ heel of reform everywhere, and it is no exception here.   Recent developments – I assume you are referring to the Yukos case – are one element in this very broad picture of overall progress, but progress which is non-uniform and much more on the side of the letter of the law and regulations than of their implementation.  But I see no reason at this stage to change the overall assessment that I have given you or the prospects for growth in Russia over the next year.

QUESTION:  So you are not worried by questions that many people have raised about the implications of the Yukos case in terms of reviving the worst aspects of the old bureaucracy, to name just one, and also equality before the law?

MR BUITER:  There are important issues raised by the Yukos case, and it is therefore very important that the case is handled properly going forward, and that the world at large and the Russian public especially can see the rule of law applied in an open, fair and transparent manner.  The case is clearly being monitored very closely by existing and potential investors, both Western and Russian.  

The impact of the decision itself, if we look at indicators for the financial markets, has been there, but it is small.  The rouble has not come under massive downward pressure – there has been no stampede for the door –  although there probably will be some increase in capital outflows.  There has been some weakening of the stock market, but again, rather muted, and it has recovered most of the lost ground.  I think it is important, as with everything in Russia, to keep things in perspective.  This is one development – potentially important, but just one.  Just as our Bank did not go along with the euphoria created by Moody’s upgrade to investment ratings a few months ago, when everybody was writing bright stories about Russia, so we take a more balanced and long-term view of what is currently happening around Yukos.  Wait and see; this is important, but it is only one part of an extremely complex and difficult picture.

QUESTION:  Does that mean that you remain confident about the independence of the Russian judiciary and their willingness to pursue this case? More confident than the EBRD has been in the past about the independence of the Russian judiciary?

MR BUIITER:  No.  The independence of the judiciary, just like the independence of the media, is a defining characteristic of the rule of law, and both have been weak in Russia, but I see no reason to change that assessment, with all the other things that are going on, on the basis of this one case thus far.  We have seen that the rule of law is imperfect, flawed.  It has been improving slowly since 1998 and we will have to see how it goes from here.  There is no large-scale reassessment of the quality or the independence or the impartiality of the Russian judiciary as a result of what has happened so far.  

QUESTION:  Is it your view that this is an indication of existing weaknesses?  Do you view this as a politically motivated action?

MR BUITER:  I do not know.  I cannot read the coffee grounds of what goes on in the Kremlin.  What I know is how we look at it.  We monitor it very closely.  We will see whether, going forward, the law, both the letter and the spirit, is applied even handedly in this case.  The outcome of this case will be important for Russia, because it will affect the attitudes of investors across the world – not just foreign investors but especially domestic Russian investors.  I think the Russian authorities are aware of this.  Statements have been made by both President Putin and Prime Minister Kasyanov to that effect, and we really have to see whether the good noises that have come out from the top are actually going to be implemented on the ground and in the regions.  It is clearly important that we should not over-interpret.

QUESTION (Guardian):  Looking at those countries where you say there is little or no prospect of them ever joining the EU, what is your long-term scenario for them?  What is the Bank going to try to achieve with them?  How do you see their future in the long term if they cannot be integrated into a larger block?

MR BUITER:  They have to integrate into the world.  Globalisation is their future, as it is for the EU for that matter.  The practical way to do that is to move on a number of fronts.  The first necessity for global integration in this part of the world is regional integration.  As I said, you cannot have trade or transit with the world at large unless you can get goods and services across the border.

As you will see when you read the report, the anomaly in Central Asia is not that these countries trade too little with each other, they just trade too little.  They are often more important as obstacles to the transit of goods than they are as markets.  Kyrgyzstan’s natural market for many of their agricultural products is Siberia in Russia, but the transit has to be through Kazakhstan.  If the Kazakhs close the border or make it difficult to get there, Kyrgyzstan’s WTO membership does not mean a thing.  It is a WTO member, but its neighbours are not, so it still does not gain.

Uzbekistan has long since mined the border with Tajikistan, and they have recently also begun to mine the border with Kyrgyzstan.  These are what economists call man-made obstacles to international trade.  It is a tragic reflection, in extreme form, of what these countries can do to each other if they do not see the obvious mutual interest in an open transit and access policy for goods, services and, for that matter, people.  Russia used to be a major source of remittances for Tajikistan: 200,000 Tajiks a year, more or less, used to spend time in Russia.  That labour flow has been undermined, interrupted and much reduced as a result of both Russian and Kazakh reluctance to let the Tajiks through.

Some of the arguments for these restrictions are in principle perfectly legitimate: for example, concern about terrorism and drug-trafficking.  But a lot of it is just the unacceptable face of nationalism and xenophobia, and we should not mince words when we see these things.  Trade restrictions are really just that; it is protectionism, it is mutually destructive, and we as an International Financial institution and other International Financial institutions need to speak up and say that changes need to be made.

In terms of integrating in the wider world economy, it is, of course, nice to know that your immediate neighbours are willing to let the goods through, but they still have to get to the ultimate markets.   I think the industrial countries – and for most of the accession countries the EU is the key market, but the same applies in principle to the US, Japan and other industrial countries – have to open up their markets to the products of the accession countries, especially the countries on the border of the enlarged European Union.

We are talking about sensitive goods here: agricultural goods, especially temperate zone agricultural goods, which, of course, encounter the most discrimination through trade barriers and direct or indirect subsidies of agricultural production in the EU; we are talking about textiles, footwear, light manufacturing, and steel.  If the EU, the US and Japan were to stop their blatant protectionist policies in these areas and give accession countries unrestricted access to their markets, that would be the most development-friendly, transition-positive action that they could encounter.  It is thus very important that the EU, but also the other industrial countries, be outward looking and open their markets.  Without that, there is really not much hope for some countries.  If Moldova cannot export to the EU – and it is basically at the moment not exporting anything agricultural – where can it export to?  

There is a real obligation here, a moral obligation, but it is also a matter of enlightened self-interest.  You do not want a collection of small, failing states on your new borders, and unless the economic prospects of the poorest of these countries – Georgia, Armenia, Moldova – improve significantly, the direct adverse consequences of what could become near-failing states in the immediate vicinity could be very hard for the west European countries.  So it is enlightened self-interest as well as the morally right thing to do.

PAUL HANNON (Dow Jones):  I was just wondering if you had any thoughts on how the region will perform during what is expected to be an upturn next year in the global economy.  Are there any particular strengths that they can capitalise on or any particular problems that might emerge as growth picks up?

MR BUITER:  They will be at risk of too much of a good thing.  Basically, the recovery of the world economy, the ongoing recovery that you are likely to see next year, is going to put a very firm floor under oil prices.  That is good news in an accountancy sense for an oil exporter.

However, it may also reduce the incentive to engage in the kinds of economic reform and economic diversification that Russia, Kazakhstan, Azerbaijan and Turkmenistan badly need.  One of the most telling statistics over the last three years for Russia, Kazakhstan and Azerbaijan is that their dependence on the extractive industries has increased, if you look at oil and gas exports as a percentage of exports, or as a percentage of total government revenues, or at oil and gas production as a share of GDP.  There has been decreasing diversification.

It is true that in Russia and in Kazakhstan there is investment outside the oil sector, but there is more investment in the oil sector so that the dependence in a proportional sense has increased.  For the rest, I think it can only help countries of operations.  In eastern Europe, especially in the four Visegrad, larger accession countries, the stimulus to demand provided up to now by the expansionary fiscal policy can be taken up by export demand.  The timing would be wonderful because they have to tighten fiscally, and so that particular demand stimulus would go into reverse.  That would not necessarily be a huge negative if it is associated with lower interest rates and possibly also a weaker real exchange rate; there could be some element of crowding in when you cut back fiscally, though probably not  one for one. The [recovery in the] world economy may in fact be arriving just in time for Poland, Hungary, the Czech Republic and Slovakia from the point of view of changing the driver of demand from domestic consumption and government spending to exports and hopefully, and this is key for the sustainability of growth, ultimately private investment.  We have seen private investment that is adequate but not spectacular, not the kind of investment-driven growth that promises catch up in the next 25 years.  It is going to take longer at current rates of investment.  Anything that can boost domestic saving and foreign investment into these regions would be welcome.

SVENJA O’DONNELL (Bloomberg):  You mentioned Romania and Bulgaria.  Given the fact that Romania has not been recognised as a functioning market economy and given the problems that are bound to be caused by the accession of the 2004 joiners, do you really see either of these countries joining the EU by 2007?

MR BUITER:  There is a very clear agenda and a timetable.  The countries know the hoops they have to jump through in order to make that timetable.  It is a challenging timetable for both of them.  For Romania, it is very challenging because they have failed to make progress in these last two years in most of the reform areas I have mentioned, although macroeconomically they are not doing badly at all.  All I am saying is that it is not impossible, but it will be difficult for both and it will be impossible for Romania unless it significantly speeds up its domestic reform process.  At current rates, it will not happen.

SVENJA O’DONNELL (Bloomberg):  Realistically, do you see them joining this decade then?

MR BUITER: It is certainly possible, yes.  Again, there is no determinism in this.  Countries can really be the masters of their own destiny if they do the reforms, the awkward privatisations and restructurings, continue reforming their utilities and tackle the problem of public administration reform, which is key in all these countries, including in fact the eight accession countries where there is continued weakness in public administration, especially at a sub-national level where most of the EU funds are going to be administered and spent.  Throughout the region they have to change that if they are going, in the case of Bulgaria and Romania, to make the deadline and in the case of the eight that are already in, if they are going to take advantage of the opportunities that these funds would give them.  Without considerable strengthening of implementation capacity at the local, provincial level, much of the money from Brussels could be wasted or disappear through corruption.  They really have to pull up their socks to take advantage of this potentially very important source of financial support.

SYLVIE LANTEAUME (AFP):  This year the Annual Meeting was in Uzbekistan and it was intended to be an incentive for reform but apparently it failed since you have just said that they are closing down the borders even more.  What kinds of incentives do you have after that?  What can you do to convince those kinds of country reform?

MR BUITER:  As an institution we are of course only one player in this whole orchestra.  What we said is clear.  At the Annual Meeting we set out seven tests – two more than Gordon Brown –  four economic and three political, that we expected the Uzbek Government to meet.  In March, a Board mission will go there to make an assessment.  We continuously monitor progress, or the lack of it, both political and economic.  We use the information provided by allies like the OSCE, United Nations (van Boven) on the political side; and we use the information that our fellow IFIs provide on the economic side:  IMF, World Bank, Asian Development Bank.  I was there last week and this week our Secretary General is there.  We are keeping our finger on the pulse but we cannot prejudge the outcome of what is a serious Board review process until it happens in March.  We are following developments very closely.  We have set these benchmarks.  We will make a judgment when it comes to dealing with this.

STEFAN WAGSTYL (FT):  What is your assessment of their announcement on the current account liberalisation?

MR BUITER:  It is like the rule of law, the letter of the law and the spirit of the law [can differ].  Article 8 compliance is in fact a very legalistic concept.  It means that you desist from certain kinds of prohibitions and hindrances on certain kinds of international financial transaction for current account transactions.  

Apparently, and I take the word of the IMF for this, as regards technical compliance, they have achieved with that.  However, this is meant to be part of a package that facilitates international exchange, at least for current goods and services.  This compliance with Article 8 was bundled together with a package of other measures that included the further suppression of small traders, further harassment of small independent businessmen generally, and further interventions in the domestic financial system that undermine the internal convertibility of the currency.  In other words, cash – som is the local currency – is not freely convertible into som chequeing accounts in the banking system.  There is a premium for cash over banking deposits which occasionally gets up to 20 or 30 per cent.  If you ask what the effect of the whole package of measures that was taken on 15 October has been on the ability of the Uzbeks to trade freely with foreign counterparties, and the other way round, I think on balance it is probably negative, and so the reality has been no progress there, as far as I can tell.  I am not prejudging the Board on this particular dimension.  I am simply making a statement that, as an economist, the substance of greater trade liberalisation and facilitating international exchange has not been achieved so far.  They have more work to do.

SVENJA O’DONNELL (Bloomberg):  As one last question, you mentioned earlier that the Baltic States might be among the first to join the euro.  Obviously we are talking about different economies, but, given the fact that a country like Sweden has refused to join the euro, do you not think this throws some kind of doubt over a traditionally much more euro-sceptic country like Estonia, for example?

MR BUITER:  It is possible, but what are the Estonians gaining from having their own currency except the ability to put their own pictures on a bit of paper?  A national currency for a country like Estonia is all pain and no gain.  They will always have at most limited room to pursue active macroeconomic management and an independent monetary policy.  The interest rate in Estonia is set in Frankfurt, and so they might as well get the advantages of euro membership, deepening financial markets and removing the last remaining risk of a possible speculative attack against the currency and the currency board underpinning it.  

Sweden is a bit larger than Estonia, but even though for them too the  economic case for EMU membership is overwhelming, it is slightly less ludicrous for them to run their own currency.

QUESTION:  Mr Balcerowicz was talking in London this morning about how disappointed he was that consideration was being given to the easing of the Stability Pact.  Do you share his concern and that he wants the accession countries to join a very strict club?

MR BUITER:  I think he recognises that the reality in the transition countries is that the larger transition countries have taken a bit of a macroeconomic stability holiday after achieving effective entry into the European Union, which becomes final on 1 May.  He would like to see the domestic forces making for tighter fiscal policy reinforced in any possible way.  If the United Nations could re-enforce fiscal responsibility, he would probably welcome that as well.  The EU is clearly one way of doing that and it has done so in the past for countries aiming at EMU membership.  He is looking, I think appropriately, for ways of strengthening Polish fiscal discipline and this could be a big help.

The second point is more general: he is worried about what happens to respect for and enforcement of any kind of Treaty rules or clauses if countries blatantly violate these rules with impunity.  If you do not abide by the Stability and Growth Pact, never mind the rationally for the Pact, and if you then do not face the consequences, why should you bother with the rest of the Treaty requirements –  the Single Act, agricultural production quotas, rules on State Aid  Really, it is respect for the rule of law that Balcerowicz is ultimately worried about.

The problem, of course, is that a number of people ask:  “what do you do when the law ain’t that great?”  That is a separate issue.  The accession countries, at the moment, for cyclical and quasi-structural reasons, happen to be in the position where they need tighter fiscal policy, and so at this moment for them the Pact would have pointed in the right direction.

It is, of course, dangerous to adopt a rule if it does not necessarily always point in the right direction.  A clock that has stopped gives the right time twice a day.  But they are definitely at the point where they can do with this discipline.  It is too bad for them that some of the larger EMU members have decided that they do not have to abide by the rules of the fiscal game.

QUESTION:  Hungary seems to be back in the situation of the pre-Bokros plan, where they undertook this massive adjustment.  It was not completed, clearly, and there were still aspects of social spending, medical spending and all the other things that you are familiar with, and now they are back to where they were before Bokros got his hands on the economy, and there does not seem to be any willingness to do that.  Is the fact that it has happened in Hungary of great concern?

MR BUITER:  No.  Cumulatively, it will be.  With unsustainable deficits, there is never a clear cliff where you can say if you go over this, be it a 3 per cent deficit or a 60 per cent [debt to GDP ratio], then you die.  It just means the more of a deficit you have, the higher the debt burden, and the longer it lasts and the less likely it is that there will be an early correction, the greater the odds of a run on debt.  It is cumulative.  You do not know when markets will take fright.

In Argentina the currency board lasted for ten years, and even though the underlying fiscal position was deteriorating quite a bit before the collapse, it took the market several years to realise that the Government was not going to be able to put its fiscal house in order without (a) a default and (b) a devaluation.  The timing could have been three years earlier.

It is clear that the fiscal position in the larger accession countries is unsustainable, and therefore, given that it is unsustainable, early correction is better economically than later correction.  Corrections are painful and politically unpopular.  In democracies, there is always the next election to worry about, but you can postpone adjustment too long.  I just hope that the countries of Central and Eastern Europe will be serious and take the necessary painful steps.

YAMATO SATO (Nikkei):  You have pointed out the strong relationship between political liberalism and transition.  How do you explain the situation in China?

MR BUITER:  China is not a country of operations.

YAMATO SATO:  There is no kind of media freedom whatsoever.  Do you see any double standards there?

MR BUITER:  Double standards?  The analysis could be wrong but it is not a case of double standards.

I should leave this question for our political counsellor, Alan Rousso.  The argument is not a simplistic, year by year one.  Certainly there is a strong association if you look at a large sample of countries, and long periods of time, between – not in the first instance the electoral dimension of political liberalism – but the rule of law, freedom of the press, freedom of expression, all the civil liberties.  If you think about it, can you expect people to be efficient, competitive, independent entrepreneurs in economic affairs and then come home and be politically gagged?  The answer is: you can for a while, yes.  Pinochet showed that.  But then liberalism returned to Chile.

China at the moment has an economy which is growing very rapidly in parts, but it is a very repressive political regime.  To me, it is clear that one of the two will give at some point, and I hope it is the political regime.  If you get further political liberalisation, that will make continued economic growth possible.  But it is a question of the domestic political choices of the leadership there.  Bringing them into equilibrium could happen the other way round; I do not think that, in the long run, we are going to see countries that are bastions of economic growth and efficiency with a population that is politically gagged.  It does not make any sense.

MR ROUSSO:  I would just draw out two things you have mentioned.  We are talking about a broad relationship among variables that applies not just to the transition countries but to the world as a whole.  If you look at that relationship across the entire universe of countries we can study over time, you will find it holds up in most cases.  There will always be an occasional case where it does not fit, but it is important to keep in mind that it might not fit for a fragment of time, not in the entire history of that country’s experience with both democracy or authoritarianism and markets.  The China example is a good corrective in some respects, in terms of thinking about when this relationship may not apply for particular periods of time, but you also need to identify some of the seeds for change even in China.  Willem has already pointed to some of those that eventually may cause a conflict between these two developments.  Certainly the scale of corruption in China is one indication of the fact that they have not got everything right.

MR BUITER:  The equation that has economic performance on the left-hand side does not just have political democracy on the right-hand side; it has several thousand other things as well.  It is just one important factor in the long run.  We will see what China looks like in ten years!

SYLVIA LANTEAUME (AFP):  Could you tell us how you see the situation in Georgia right now.

MR BUITER:  As you know, Georgia is a country that has had a very troubled post independence history: territorial secessions, problems with a large northern neighbour.  It had great problems in achieving the domestic political equilibrium that permitted the institution-building phase of transition to follow the liberalising phase of transition, which went quite quickly.  The most recent electoral flop is clearly not good news.  It is a further source of instability, it raises doubts about political stability and about the ability to implement the economic reforms that are already on the books.

I think the authorities there, the opposition and the surrounding countries must be aware of the fact that this is not a broth they want to stir; this is a broth that they want to see calmed down.  That is in everybody’s interests.  We have hopes that common sense will prevail, that some resolution of the conflict following the elections will take place, and that the country will continue on its troubled journey, but it is clearly one of the countries where it is most difficult to work and do business.