OECD Misrepresentation Of Public Pensions

The recent OECD Report Pensions at a Glance 2009: Retirement-Income Systems in OECD Countries (Paris, June 2009) uses and misuses the concept of “public spending on pensions”. In OECD countries “The public-pension budget has been increasingly rapidly, growing at a rate 17% faster than the national income between 1990 and 2005. Pensions account for 17% of total public spending, on average… Typically, only health and education are more expensive items in the government’s budget”. “OECD countries currently [in 2005] spend an average of 7.2% of national income on public pensions”, but half of the 30 open advanced economies that are OECD members are above this average, with Italy at the top with almost a double share at 14% (30% of the government budget, compared with an OECD average of 16%, and a rise 23% higher than income growth in 1990-2005). Austria, France, Greece, Poland, Germany and Portugal are all above 10%. The United States and the United Kingdom are at 5.7% and 5.4% respectively, Iceland at 2%, Korea at 1.6%, Mexico the lowest at 1.3%. The full picture is given in Figure 1 below.

Figure 1. Public pension expenditure 2005

The implication drawn by the OECD is that the higher the share of “public spending on pensions”, the worse is a country’s performance, for three reasons: 1) affordability and fiscal sustainability; 2) “The risk … that public pension spending crowds out other desirable expenditure, both in social policy (on benefits for children and parents) and elsewhere (on education, for example)” [OECD Report, commenting on Italy]; 3) the desirable “shift towards funding and private sector management within statutory pension systems” that has taken place in recent years – a trend that “has been especially strong in Latin America and Central and Eastern Europe, but it also extends to OECD countries such as Australia, Finland, Iceland, Norway, Switzerland and Sweden”.

Public and private pensions

International differences in “public spending on pensions” are due to many reasons.

First, accounting conventions. For instance, Italian pension expenditure includes items that have nothing whatever to do with pensions, such as lump-sum, golden handshakes on employment termination or retirement (a “deferred wage”, corresponding to 1.3% of GDP), and the cost of persons accompanying invalids. Also, Italian pensions are subject to standard income tax, equivalent to 3.6% of GDP, while in other countries such as Germany they enjoy a particularly favourable treatment, with tax corresponding to only 1.5% of GDP (1.3% in the UK, until the recent tax rise on low incomes Gordon Brown perversely introduced). When differences in tax treatment are taken into consideration, Italy’s position with respect to Germany improves by 2.1% of GDP (See R.F. Pizzuti, Rapporto sullo Stato Sociale 2008, UTET Università, Roma 2008, pp. 70-71). Once these accounting peculiarities are taken into account Italy loses top ranking on public pensions among OECD countries, while retaining a low ranking for social provisions other than pensions (6.8% of GDP against the European average of 7.5%).

Second, international rankings depend on specific features of the public pension systems, such as the pension/earnings replacement ratio, and other circumstances also common to private pension systems, such as: population ageing. contributions relative to earnings, retiring age, the average period spent on retirement (life expectancy minus retirement age).

But there is a third, major explanation of international differences in the share of GDP (or of government budget) earmarked for pensions: namely, the relative weight of Pay As You Go (=public) and funded (=private) pension schemes. A country with 100% PAYG pension schemes will have all pensions classed as a charge solely on public expenditure, whereas a country with a 100% fully funded, private pension system will have a zero incidence of pensions on the public budget regardless of all the other factors mentioned above; all factors will be relevant in intermediate cases. Thus “public spending on pensions“ is not really comparable across countries. A fuller picture is given below, in a table available for 2006 from the OECD Factbook 2009 (Paris, pp. 22-23).

Figure 2. Public and Private Pension Expenditure, 2006
Affordability and Fiscal Sustainability

It is incomprehensible why a compulsory pension contribution compulsorily invested in pension funds should be regarded as private saving, in spite of its undeniable forced saving nature, while an identical pension contribution that gives an entitlement to a public pension should be regarded as a tax, and such a pension treated as a net claim on public expenditure competing with health and education as if it was not financed out of pension contributions that are not normally available for alternative uses. And if the public pension contributions replicate the performance of pension funds (as in the Funded Notional individual Accounts discussed by Nick Barr in a comment to the previous post) there is no reason whatever to treat the two systems any differently.

For the public purse, the true net claim of public pensions on public expenditure is not the total pension expenditure but the difference – if any – between current total pensions and total current pension contributions. If pension payments match current contributions, or exceed them by an amount that the government regards as affordable and sustainable, then the entire public pension system is affordable and sustainable. And – as Paul de Grauwe recently reminded us – the fact that a policy is not sustainable from now to the end of time is no reason for not adopting it for a while, especially at a time of crisis.

There is a cherry on the Italian public pensions cake, a gold coin baked inside it, an Easter Egg surprise that OECD officials should consider and ponder: in 2006, the last year for which final budgetary data are available, Italy’s public pensions exceeded pension contributions by almost €17billion, the smallest deficit in the last 15 years except for 2001. But considering that almost €29billion were returned to the budget as taxes on pensions, the actual budgetary cost was lower than pension contributions by over €11billion. Thus in 2006 the public pension system actually made a positive, significant contribution to Italy’s government budget, by 0.8% (Rapporto sullo Stato Sociale 2008, cited, p.21). For the future, in spite of the serious ageing of the Italian population, doubling by 2050 the ratio between the over-65s and the population aged 16-65, on current trends it is expected that “public spending on pensions” should fall slightly until 2015, rising towards 15.3% around 2038, then falling back to the current values of around 14% in 2050 (ibidem).

Public versus Private Pensions

From the viewpoint of the pensioner the relevant difference between the two isystems (PAYG and fully funded) s the yield obtained on the funded system relatively to the notional yield implicit in the PAYG system. The maximum yield obtainable on a balanced PAYG system corresponds to the growth rate of total wages (for a constant rate of contributions); the actual PAYG yield may will be lower if the system yields a surplus as in Italy, or higher if the government budget devotes net resources to its subsidisation.

At the end of World War II the Italian pension system, that was then fully funded, left pensioners with a hatful of rain. In the current global crisis the assets of pension funds lost a very great deal of their value, according to the OECD between 8% (Mexico) and 38% (Ireland) in 2008, most probably more in 2009. Iceland in 2006 was at the bottom of the OECD “public spending on pensions” league, with under 0.5% of GDP (see Figure 2; reportedly penultimate at 2% in 2005, see Figure 1) and its not terribly generous pension system (with total public and private pensions corresponding only to 4% of GDP, Figure 2) relied massively on private funded pensions. Given the country’s state of near bankruptcy since mid-2008, it is going to be very interesting, though probably distressing, to see how Icelandic pensioners will have fared relatively to their Italian contemporaries in the next couple of years – even allowing for differential contributions. The OECD parrots the World Bank in claiming, in exactly the same words, that “No pension system is immune to the crisis”, in total denial about differential performance (this may be unfair, for it is not clear who parrots whom; maybe there was collusion, which would be even worse).

Ageing, Retiring Age, Life Expectancy

The above reflections are not meant to suggest that all is well in the world of public – or for that matter private – pensions. Population ageing is a secular trend that has been getting all the publicity (see Figure 3; the latest issue of The Economist also has a report on Ageing). But there are two other factors that combine with population ageing to create serious problems for pension systems in general and public pensions in particular. One has been the reduction of retiring age since the 1950s for men and since 1970 for women, amplifying the impact of ageing on the viability of public pensions until 1999, when the trend was reversed (see Figure 4). The other factor is the rise in life expectancy which, in spite of the rise in retirement age postulated to continue until 2050, is expected to be faster than the rise in retirement age and therefore raises the expected retirement duration. It turns out that after the once-and-for-all gradual drop of such duration in the current decade, associated with the reversal in 1999 of the earlier strong reduction in retiring age, the expected retirement duration resumed its inexorable growth (see Figure 5).

These are real problems. The questions arise of how much of public and private pension expenditure deserves a government subsidy. Or whether in anticipation of adverse trends some reserve should be built up in the public pension system. And which of the pension parameters – retiring age, minimum years of service, pension levels, pension contributions – are best adjusted to balance the books or at least to contain their imbalance. And whether the switch from PAYG to a funded system, and the associated surfacing of a the “implicit” pension debt of the PAYG system, is worth the transition to a system less vulnerable to demographic factors but more vulnerable to a systemic crisis like the current one. These issues warrant a serious, profound and extended debate. But the pretence – today spectacularly falsified – of an alleged superiority of funded private pensions over public ones, and the use and misuse of the notion of “public spending on pensions”, are a most unsound foundation for such a debate.

Figure 3. A century of population ageing

Figure 4. Pension Ages in the OECD, 1960-20050

Figure 5. Expected time in retirement 1960-2050

Note: expected retirement duration calculated at normal pension age for each country based on national life expectancy data and projections. Source: OECD, Pensions at a Glance, cit.

The World Bank on Funded Pensions in the Crisis: Feeble, Defensive, Obfuscating

In his “Remarks by the President On 21st Century Financial Regulatory Reform” (17 June 2009), Barak Obama recalls “the terrible pain in the lives of ordinary Americans” inflicted by the “historic economic crisis” and acknowledges that, next to the jobless and the bankrupts, “there are retirees who've lost much of their life savings”.

In my previous post, “First You Pay Then You Go”, I stressed the responsibilities of the World Bank in the current Pension Crisis. Over the last twenty years the Bank continuously, persistently and relentlessly advocated and promoted the transition from a dominant Pay As You Go to a dominant “funded” pension system, in its countries of operation and – through its general influence on government policies – worldwide. Such a move – wrapped up nicely, sealed and delivered as a “multi-pillar” package – transformed part or all of a virtual public debt, implicit in pension rights matured under the old PAYG system but sustainable in a continuing system, into an explicit real public debt that put a heavy strain on the fiscal resources of reforming countries. The move to a funded system also exposed old age pensioners to the risks of fluctuations and trends in the price of pension funds assets (see the previous post on both counts).

What does the World Bank have to say today about its own performance in pension reform, apart from the bland criticisms, mostly on the ground of “overselling” funded systems, voiced in its own “independent” assessment already reported?

The official World Bank position is summarized in a “Note” issued by its Human Development Network and published on 10 October 2008 [prepared by Mark Dorfman, Richard Hinz and David Robalino under the direction of Robert Holzmann]: The Financial Crisis and Mandatory Pension Systems in Developing Countries. “The note discusses the potential impacts of the financial crisis on fully funded and pay-as-you-go retirement-income systems in World Bank client countries, and identifies key short- and medium-term policy responses. The note does not go into depth on the issued identified. Stand-alone technical notes will be prepared subsequently. This note itself will be updated and refined as new issues emerge”. But repeated searches on Internet cannot find any such stand-alone technical notes, or updating, or refinements. Non-quotable papers originated in the Bank circulate informally but do not seem to add much. The valiant officials that drafted that Note did the best of a bad job, but the end result is a feeble, defensive, obfuscating collection of half-truths.

Seven Half Truths: 1. “No pension system is immune”

Half Truth n.1: Both funded and PAYG pension systems are in a crisis: “The international financial crisis has severely affected the value of pension fund assets worldwide. The unfolding global recession will also impose pressures on public pension schemes financed on a pay-as-you-go basis, while limiting the capacity of governments to mitigate both of these effects” (p.1).

The missing, other half, of the truth is that, as a result of the crisis, the additional pressure on funded systems is about ten times larger than on PAYG systems. The pension contributions of a PAYG system fall roughly at the same rate as GDP (a bit more or a bit less according to whether the wage share and/or the pension contribution rate fall or rise, or retirement age rises or falls), i.e. a few percentage points. Whereas the fall in the value of pension funds assets in 2008-2009 has been of the order of magnitude of 30-50 per cent or more. In a presentation to AARP (American Association of Retired Persons) International Section, on 16 December 2008, Robert Holzmann acknowledged that “Over the last 12 months, retirement accounts have lost $2 to $3 trillion in value. Between the 2nd quarters of 2007 and 2008, private pension fund assets declined by over half a billion dollars while state and local pension funds declined at rate of nearly $350 billion”... “rates of return for client countries with funded systems have decreased in value from a low of 8 percent to a high of more than 50 percent.” This was at end-2008; the situation has much worsened in the first half of 2009 and will not improve until 2010.

2. Small Numbers

Half-Truth n.2: “… only a small number of retiring individuals are affected by the crisis”.

How could it be otherwise? “The other missing half of the truth is that this is not thanks to World Bank promoted reforms, but because of lateness, slowness or incompleteness in their implementation.

Many countries still have a dominant PAYG system, which is unaffected by asset[s] values. In the EU, for instance, “In the majority of Member States PAYG provides almost all the pension income for those retiring today and there are only five Member States where funded provision is above 10% (these are Denmark on 16%, Slovenia and UK both on 22%, Ireland on 54%, and the Netherlands on 60%). A further three Member States are at, or slightly below, the 10% level (Germany, Cyprus, Belgium)” (Jerome Vignon [unsigned] “Non Paper – Pensions and the Financial Crisis – Informal Background Briefing Note”, European Commission, Directorate for Economic and Financial Affairs, December 2008).

Moreover, most of the countries that have implemented the transition to a funded system have done it too recently, and gradually enough, to have a significant impact – also due to exempting older workers or even leaving the change voluntary instead of mandatory. See the Table below (Vignon, cited). Even Mexico, that made the change twenty years ago, excluded the over thirty.

3. Multi-pillar diversification

Half-Truth n.3. “The current crisis strengthens the need for diversified multi-pillar system” (from the World Bank “Note” cited above). Next to a first pillar of PAYG or anyway a defined benefits system, a second “fully funded” pillar of defined contributions, a third pillar of voluntary savings, in that “Note” the World Bank now advocates as well even a “zero pillar” (sic), of non-contributory public pensions to take care of poverty among the aged. Which is fine, there is nothing to prevent individuals from saving or governments from making transfers to the poor. Except that diversification of pension systems is only needed to reduce the riskiness of the second and the third “fully funded” pillars, for both the first and the zero pillar do not depend on the price of financial assets.

If anything diversification is needed within the second pillar (and the third, but that is a matter for the individual saver not for public policy other than for tax incentives). So much so that the Bank advocates a “life-cycle” approach reducing the share of equities and raising that of government bonds in individual portfolios with the nearing of retirement age, and “the development of phased transitions to the payout of benefits that limit the impact of short term financial volatility” (Holzman, quoted above). Which is also fine, except that one wonders what has become of the presumed advantages of funded systems in terms of “choice”, reliance on stock markets rather than the state, and the enhancement of financial markets. What difference do pension funds make if they just intermediate between pensioners and the state?

4. Smoothing

Half-Truth n. 4. Governments should reconsider “the valuation rules applicable to pension fund assets in the context of the extreme current volatility in financial markets”, namely relaxing mark-to-market rules and allowing some “smoothing” valuation in order to “more accurately reflect the true underlying values and avoid the possible adverse reactions to large changes that prove to be very short run” (the “Note” cited). This of course would be beneficial to pension funds valuation but at the cost of the associated loss of transparency and disclosure. We know that banks have often abused of the relaxation of accounting rules in the valuation of their toxic assets; why tempt pension funds? It would be a high price to pay for a mostly cosmetic improvement.

5. Black Swans

Half-Truth n.5. “The current financial crisis is a rare “extreme” event” (from the World Bank “Note” cited above). Robert Holzman (in the presentation cited above) sticks his neck out further: “the current financial crisis is an extremely rare event, similar to those that have taken place every 50, 80, or 100 years in the past”. Well, 1929 was eighty years ago; even a single major crisis every eighty years means that everybody will be affected, either directly or through their parents or children. Nassim Nicholas Taleb’s bestseller, The Black Swan – The Impact of the Highly Improbable, (Random House, 2007) should be mandatory reading for the World Bank “Human Development Network” officials.

6. No Shocks

Half-Truth n.6. “Abrupt policy changes in response to the immediate circumstances should be avoided”. Compared with World Bank advocacy of shock therapy in post-socialist economies in the 1990s, this call for gradualism, experimentation and reflection is only to be welcomed. As long as this does not involve a state of denial – which is what the Note suggests – and a failure to learn from current events.

7. No Reversals

Half-Truth n.7. “Governments should avoid short-term reform reversals that have not been properly assessed and that may come at a high price for future retirees” (from the “Note” cited). In the unlikely event that current contributions, instead of accumulating in individual accounts, were simply diverted towards the payment of current pensions, this would be highway robbery, of course. But let us suppose a 100%, 180 degree reversal of the pension reforms implemented in the last twenty years, from fully-funded back to PAYG.

During this reversal, or re-transition, current employees would keep their entitlement the pension they have already matured corresponding to their cumulative investments up to the time of reversal. Their ailing, undervalued if not toxic investments would be transferred to the state, and for the rest of their working life they would mature an entitlement to a full PAYG pension minus what they would have matured in the years before reversal. The reversal would raise over time the virtual, implicit pension debt of the state (negligible in the literal sense that it can be neglected in a continuously operating system, as long as the system is balanced or its possible imbalance is affordable) but would decrease the explicit state debt by the value of pension funds transferred to the state. It would also eliminate completely pensioners’ exposure to financial markets risk.

State bankruptcy and Armageddon would remain uncovered, but the first presumably would affect also financial markets and funded pensions, and its impact would be temporary (see Russia in the 1990s); while the second would not be a problem but a solution.

First You Pay Then You Go

Innocent victims of the current global financial crisis include – next to the gullible millionaires who greedily entrusted their riches to Bernie Madoff; the shareholders of bankrupt companies and the millions of workers made unemployed in the last year – a larger group of less visible, less vocal but undeserving losers: old age pensioners.

The Pension Crisis

On 27 May 2009 the Financial Times ran a major feature (multimedia, interactive) on "The Pension Crisis”, by Cynthia O’Murchu, Helen Warrell, Steve Bernard and Norma Cohen . ”The financial crisis has wreaked havoc on retirement plans of all varieties, inflicting particular damage to employer-based and private retirement savings, which have gradually come to replace state pension provision [emphasis added]. Meanwhile workers themselves, who have built up a lifetime of savings in pension funds, are being forced to rethink their pension plans and even defer their retirement.” VIDEO See also Sharlene Goff, “Pensions warning over bet on shares”, FT 20 May 2009.

A leading independent pensions adviser, Dr Ros Altman, last May published a report Planning for Retirement: You're On Your Own, warning that the credit crisis had "hugely damaged" the UK's pensions system and destroyed the widespread belief that long-term stock market investment would produce generous pensions. "Essentially the entire UK pensions system has been based on a bet that equities would always do well enough over the long term to deliver reliably good pensions," she says in her report, "The old idea that stock markets can always be relied on to deliver strong returns has left millions facing an impoverished old age." (Goff, cited). In fact, over the past 10 years, equity returns have averaged just 1.2 per cent, compared with 16.1 per cent in the previous 10 years. The UK is a good illustration of what today is a universal problem.

The replacement of “state pension provision” with “private retirement savings” was pioneered in Pinochet’s Chile, championed by the World Bank in its countries of operation (especially in the economies of post-socialist transition), and became fashionable throughout the world over the last twenty years. The current pension “time-bomb” (O’Murchu et al., cited) is a pre-announced crisis, rooted in the hyper-liberal ideology of the Reagan-Thatcher years, and based on faulty economic theory. Nobody has the right to be surprised.

Pay As You Go …

There are two main alternative approaches to the provision of pensions. The first, traditional system is unfunded: pensions are paid, at a level of pre-defined benefits, out of the current pension contributions made by current employees. It is also called a re-distributive, or PAYG-Pay As You Go system. It is typical of the old socialist model.

PAYG is a kind of pyramid banking scheme, where pensions are paid out of current employee contributions just like Bernie Madoff paid interest out of new deposits. Except that the standard banking pyramid goes bust when deposits unavoidably at some point stop growing at least as fast as the rate of interest paid out; and before it happens Mr Ponzi runs away with the loot. Whereas the pension pyramid can be perfectly sustainable, since there are always new depositors (current employees making pension contributions) and there are gradual and orderly withdrawals (pensions paid only after reaching retirement age, and gradually, month after month).

The unfunded system is sustainable as long as the number of old age pensioners multiplied by their individual average pension is no greater than the number of current employees multiplied by their individual average pension contribution. Otherwise the uncovered difference is a claim on current government expenditure, and the present value of such uncovered differences is an explicit “pension debt” which should be counted as part of the government debt; its sustainability depends not on the specific characteristics of the pension system but on whether that overall government debt is sustainable.

Suppose the two sides – pension outlays and pension contributions revenues – balance. All future pensions are currently unfunded, and formally there is an implicit pension debt today equal to today's pensioners' pensions for the rest of their lives (plus the future pensions matured so far by current employees). But the day of reckoning never comes; that debt is buried and – as long as the balance between pensions and contributions is kept – it never surfaces nor need ever to surface. The government ability to run such a pension system is a kind of seigniorage, as long as the unfunded system is universal. Only if the two sides are not in equilibrium and pensions amount to more than current contributions, can that shortfall, cumulated and discounted over the residual lifetime of current pensioners, be regarded as today's "true", explicit component of public debt on account of pensions.

If current contributions are higher than current pensions you can set aside the difference as a reserve for the possible aging of the population, or for later pension rises. If the population does age and such reserve is not there or is exhausted, then pensions must be reduced, or contributions raised, or retirement age delayed, or some combination of all three, until balance is restored. Or the imbalance can be financed by the state budget, if the burden is bearable and sustainable.

… or Fully Funded?

The second kind of pension system is funded, with defined contributions but with benefits depending on the yield earned on the accumulation of individual contributions over time. In this case there is no problem with ageing, or with retiring age, since what you get always depends on what you put in, and on the success of the investment to which your cumulative contributions were put, by you or by a pension fund of your choice. Choice is reputed to be one of the advantages of the system. The other advantage claimed for it is the development of financial markets, which is regarded as a good thing in itself.

Does this funded system ensure a zero explicit and implicit pension debt? Yes, normally – until such a time as 2008-9 when insurance companies and banks go bust and stock exchange values fall by over a half. Then funded schemes end up with vanishing yields and capital values, i.e. pensions literally tend to vanish. “First You Pay and Then You Go”, they used to say in the pension crisis in Russia in the 1990s. Ultimately the government will have to look after the pensioners no longer covered by their nominally "funded" but shrinking pension schemes. The pension burden will ultimately fall on the public budget – inexorably and regardless of whether pensions are funded or unfunded.

Steady States and Transition

The funded system may or may not be superior to the PAYG system when both are compared in a steady state, but even if it were that would not necessarily mean that the transition from PAYG to funded is a good thing. For if and when you move to a funded system you make the buried, hidden, implicit pension debt behind the PAYG (today's pensioners' pensions for the rest of their lives), surface unnecessarily as an explicit real claim on current government resources. Whereas, as long as the balance is kept between pension outlays and pension contributions revenues, the unfunded system implicit debt remains buried and is of no consequence whatever. So much so that, if you wished to privatise a balanced funded pension system, there should be no shortage of takers without having to pay them the value of the implicit, buried, pension debt.

Therefore the best option is to keep PAYG but adjust pensions/contributions/retiring age so as to make the system – if not balanced – at least maintain the imbalance at levels that can be a reasonable and sustainable burden on the state budget. If you still want to change from PAYG to a fully funded system, you should consider the unnecessary cost surfacing into public accounts, and not necessarily expect the eternal boom needed to validate its alleged superiority, which depends on the yield on pension investments being consistently higher than the growth rate of the wage bill.

Alternatively, instead of moving from PAYG to a fully funded system, it is preferable to mimic the functioning of a funded system, with the state continuing to cash in the pension contributions of the currently employed, crediting them to contributors in personalised accounts yielding a rate of return equal to that of a chosen investment fund or even basket of securities, eventually determining future pension benefits. In this way the explicit burden on the government budget is not the total contributions of the currently employed otherwise lost in the transition to a funded system, but only the difference between pensions mimicking a funded system and what pension payments would have been under the standard PAYG.

The World Bank: No Pillars of Wisdom and Little Support for the Three They Claim

The World Bank advocates a Three Pillars pension system, composed of a PAYG (Pay As You Go) publicly managed, tax-financed minimum pension for all; a privately managed funded scheme; and additional voluntary retirement savings. The third, voluntary, pillar is neither here nor there, or rather is always possibly there regardless: voluntary savings can be encouraged by tax incentives but otherwise are nobody’s business other than the saver's. The other two are the real alternative; and it is clearly a question of relative proportions between the two pillars, rather than strictly an alternative between the two.

The World Bank’s favour of funded pension schemes is enshrined in two classic documents: Averting the old age crisis – Policies to protect the old and promote growth, 1994, and Social Protection Sector Strategy: from Safety to Springboard, 2001. A great deal of favour, well bias, is hidden behind the three pillars, but the insistence with which the World Bank urged the downsizing the PAYG pillar already in existence, and urged the introduction of a totally new funded system alongside an already existing rudimentary voluntary pillar should not fool anyone: “multi-pillar” is a cosmetic euphemism for the emphatic introduction of a funded pillar, and on a large scale.

But now the wind has changed. In 2006 the World Bank conducted an “Independent Evaluation” of the its own assistance to pension design: "Pension reform and the development of pension systems", see also “Pension Reform: How to Strengthen World Bank assistance”, in IEG Reach, 2 February 2006. The assessment finds that “… in a number of instances the Bank supported multi-pillar reform [read: funded systems] even though there were clearly weaknesses in the country’s underlying economic and financial structure. Moreover the Bank did not always fully consider non-contributory options to expand the social safety net to the populace outside the formal system”. “… despite expectations, in many countries with multi-pillar system, funded pensions remain poorly diversified and pension coverage has not been increased. In addition, the secondary objective of funded pillars – to increase savings, develop capital markets and improve labor flexibility – remains largely unrealised.” The Bank comes under bland but firm criticism for “overselling” the benefits of funded pensions in its countries of operation.

Nicholas Barr of LSE and Peter Diamond of MIT have now finally destroyed the theoretical foundations of the World Bank penchant for funded pensions and other aspects of its policies towards poverty and the aged, in their Reforming Pensions: Principles and Policy Choices, Oxford UP, 2008, and Pension Reform: A short Guide, Oxford UP (forthcoming June 2009).

But the writing had been on the wall for sometime. See for instance John Eatwell, Michael Ellman, Mats Karlsson, D. Mario Nuti and Judith Shapiro, Soft Budget, Hard Choices: the Future of the Welfare State in Central Eastern Europe, IPPR, London 2000, Ch. 8 on pensions. Or Nicholas Barr, "Reforming pensions: myths, truths, and policy choices", IMF Working Paper 00/139, August 2000. Or P. Orszag e Joseph E. Stiglitz, "Rethinking Pension Reform: Ten Myths About Social Security Systems", in: R. Holman e J. Stiglitz (Eds), New Ideas About Old Age Security, Washington: World Bank, 2001, pp. 17-56.

In most countries, mis-selling pension plans is a prosecutable offence. In the UK “several pension companies are expected to be investigated and fined for advising customers to switch into a personal pension or self-invested personal pension (Sipp) against their best interests” (The Times, 5 December 2008). Why should the World Bank get away with mis-selling entire pension systems? It has become fashionable for all kind of institutions and governments to apologise for their past or recent misdeeds. They include Pope Benedict XVI, apologising for pedophile priests; the Anglican Church apologising to Darwin; the Canadian government to Inuit Indians; the Australian to Aborigines. Former Royal Bank of Scotland chief executive Sir Fred Goodwin told MPs on the Treasury Committee he "could not be more sorry" for what had happened (BBC, 10 February 2009).

It’s time for the World Bank President Robert B. Zoellick to at least say “Sorry” to the old-age pensioners for their loss of protection at such a difficult time.

The EBRD and Foreign Banks in Transition Economies

La lingua batte dove il dente duole. The tongue always finds the aching tooth. No-one can help thinking and talking about worries and fears, hoping to chase them away, almost to exorcise them. Clearly the EBRD is very worried about the possible withdrawal of funds by foreign banks from transition economies. Its officials keep talking about this, ambivalently both envisioning the dangers and denying them in the same breath. Economics can be controversial: if it is quite common for an economist to disagree with herself, it is even more common for an international financial institution, like the EBRD. But for an outsider this insistence is a very worrying signal indeed.

On 7 May 2009, inaugurating the newly founded EBRD blog, the Bank’s Chief Economist Erik Berglof strikes a pre-emptive attack: “Eastern European governments can … damage the international bank groups by preventing them from transferring profits or adjusting their exposures. The public pressures to interfere are great.” And in the EBRD Press Release on the same day, Berglof notes that “Over the past six months important bank bailout programmes in Western Europe have helped stabilise the international banks operating in Eastern Europe” and assumes “continued external engagement, particularly from the western parents of banks in the region”.

I pointed out, in a Comment, that in turn “international bank groups can damage Eastern European governments by the abrupt withdrawal of funds in a crisis.” And that the EC Spring forecasts 2009 tell a different story: “The repatriation of capital by foreign banks has been particularly abrupt in some cases. …the presence of EU banks in the region creates further potential negative spill-overs via the financial channel” (p.22). And “If a foreign bank with big exposure to the region—Swedish, Austrian or Italian—needs to raise more capital but finds that outsiders think its loan book is too risky, what happens? The price of rescue may be that it sheds a troubled foreign subsidiary. Signs of shareholder twitchiness are growing“ (The Economist, 26 February 2009). Not unnaturally, when capital becomes scarcer in the country of origin, foreign capital tends to go back home.

Berglof readily admitted the problem: “I do indeed think that there is a serious risk that some banks could decide to withdraw or be forced to withdraw from the region. We should not kid ourselves, the forces on the banks to retrench are extraordinary - some deleveraging and adjustment to lower credit demand is unavoidable and essentially healthy.” He actually strengthened the point adding that “The current situation has elements of a prisoners’ dilemma where the banks as a collective want to stay involved, but in the short-term an individual bank has incentives to be the first to withdraw.” But he relied on the “Vienna Initiative” (illustrated in his post) and other forms of concerted and conditional support by international financial institutions.

On 14 May 2009, at the Bank's Economic Policy Forum, EBRD President Thomas Mirow took comfort from the fact that, in the “spectacular slump which now seems to suggest that the only way is down” – and which he regards as exaggerated as “the earlier spectacular success when the only way seemed to be up” – “we did not see the withdrawal of any of the leading western banking groups who own most of the financial sector in eastern Europe.” This he attributes to “the fact that financial integration generally went along with long term commitments, particularly on the part of international banking groups”. “A measure of the progress achieved so far is the fact that the danger of large-scale retrenchment or withdrawal of western parent banks from eastern Europe has been averted and seems more unlikely now than only a few months ago”(my Italics throughout).

The trouble is that on 11 May two other EBRD officials, Piroska Nagy and Stephan Knobloch, in an excellent post on the EBRD Blog, on “BIS data on cross-border flows” produced substantial and disquieting evidence of the seriousness of cross border outflows. In the last quarter of 2008 BIS-reporting banks significantly reduced their asset holding across major world regions ($1.8 trillion or 5.4% of their stock). In absolute terms advanced countries were hit harder ($1.3 trillion), but in relative terms emerging markets did worse. So far the EBRD region was the least affected, but the decline ($57 billion) was “still very significant”.

Moreover, within Emerging Europe: 1) the decline was concentrated on a few countries: Russia, Turkey, Ukraine, as well as Poland, the Czech Republic, and Slovenia; 2) the decline happened in the most financially integrated countries, not necessarily in countries with weaker fundamentals, “with large outflows both from countries that have already been hard hit by the crisis (Ukraine) and countries that have been resilient so far (Poland)”. “This is in line with earlier crisis experiences which showed that investors withdraw liquidity not only from countries with weaker fundamentals but also from markets in the same region that are deeper and more liquid” (Nagy and Knobloch, Ibidem). Thus asset outflows in the last quarter of 2008 were 15.5% of the stock in Russia, 9.4% in Ukraine, 8.2% in Poland, 7.5% in Turkey (which is also a country of operation for the EBRD), 7.2% in the Czech Republic, 4.1% in Moldova. In absolute terms, the outflow was $33bn in Russia, $12bn in Turkey, $11bn in Poland, $4bn in the Czech Republic and in Ukraine.

Data refers to all cross-border loans, deposits, and securities held by bank offices located in one of the 41 BIS-reporting countries. This includes assets held vis-a-vis all economic sectors, i.e. private and public, or bank and non-bank. BIS uses the category "developing" countries; this note uses "emerging" countries instead.

“Looking forward, – Nagy and Knobloch conclude – similar trends are expected to have continued – if not deepened - in Q1 of 2009. De-leveraging is an inevitable part of banks’ balance sheet adjustment in the context of the global financial crisis.” While the average picture is reassuring, for the individual countries where the phenomenon is concentrated it is intensely worrying.

But this is not the end of the story. If the post by Nagy and Knobloch pulls the rug from under their President and the Chief Economist, Piroska Nagy adjusts her aim with another post, on “The ‘invisible hand’ of advanced country central banks in emerging markets”, while EBRD senior economist Ralph De Haas writes another post “In defense of foreign banks”.

Piroska Nagy notes that “most emerging market economies have limited policy room to deliver massive counter-cyclical crisis response”, but “there is an invisible channel through which advanced country quantitative easing can benefit emerging markets”, trickling down to subsidiaries of international banking groups. She regards the “invisible hand” of the European Central Bank as particularly important.

I would argue that the ECB hand is, indeed, invisible, because it is not there. The ECB is notorious for not having the function of Lender of Last Resort, which rests with the national Central Banks for their national banks, leaving open the thorny and often unanswerable question of bank nationality. True, the ECB is often said to have functions of ELA - “Emergency Liquidity Assistance”, understood as lesser responsibilities than those of Lender of Last Resort – except that the IMF uses the two expressions interchangeably. Willem Buiter worries about who would re-capitalise the ECB if it went bankrupt; I worry about the impossibility of the ECB ever going anywhere near bankruptcy as a result of its non-existant operations as Lender of Last Resort, with Eurozone banks going bust instead.

And anyway, quantitative easing does not seem to work in the Eurozone, as banks are still reluctant to lend; why should liquidity trickle down into Emerging Europe. Furthermore I have heard other promises, for instance of prosperity trickling down, but I have also come across trickling up. Quantitative easing by the ECB and national Central Banks in Europe is much more likely to spill-over into a commodity price boom than into Emerging Europe.

Finally, in his post In defense of foreign banks, Ralph De Haas distinguishes between cross-border foreign bank lending, which he recognises does shrink during the crisis, and local lending which he regards as generally more stable. He refers to a 2004 study which he co-authored to argue that in central eastern Europe “reductions in cross-border credit were generally met by increases in lending by foreign bank subsidiaries”. But that was then and this is now, and much worse than then; and in any case foreign and local funds are not perfect substitutes, for local funds do not help the stability of the currency.

So, now we know. The EBRD President, its Chief Economist, the Senior Adviser to the Chief Economist and her co-author, and at least another Senior Economist, go to considerable lengths to tell us that there might be trouble ahead, but to reassure us that all is under control, and that foreign banks will behave selflessly, readily and adequately to support and stabilise credit in Emerging Europe. Excusatio non petita accusatio manifesta, as it were.

Clearly they are all worried stiff, and so they should be. I wonder if there is an agreed plan for providing Emergency Liquidity Assistance to one of the Currency Boards of Emerging Europe if it went bust; there should be one. Or two.

How Normal Is Russia Now?

This is a Guest Post contributed by Professor Vladimir V. Popov, of the New Economic School, Moscow.

From 1989 to 1998 Russia experienced the transformational recession – GDP fell to 55% of the pre-recession 1989 level. In 1999-2008 the Russian economy was recovering at a rate of about 7% a year and nearly reached the pre-recession peak of 1989. But in 2009 due to the collapse of oil prices and the outflow of capital caused by world recession Russian GDP is expected to fall by 5-10%. Now, with some luck, the pre-recession level of GDP is to be surpassed only in 2010-12. For two decades there was no improvement in living standards for most of the Russians.

In 2004-05 Andrew Schleifer and Daniel Treisman published various articles claiming that Russia was A Normal Country (for instance, in Foreign Affairs, March-April 2004). They compared Russia with Brazil, China, India, Turkey and other developing countries and argued that in terms of crime, income inequalities, corruption, macroeconomic instability, and other typical curses of the third world Russia is by far not the worst – somewhere in the middle of the list, better than Nigeria, worse than China. In short – a normal developing country.

The USSR was an abnormal developing country. The Soviet Union put the first man into space, had about 20 Nobel Prize winners in science and literature, with universal free health care and education – the best among developing countries – low income inequalities and relatively low crime and corruption. By 1965 Soviet life expectancy increased to 70 years – only 2 years less that in the US even though per capita income was only 20-25% of the US level.

The transition to the market economy in the 1990s brought about the dismantling of the state – the provision of all public goods from health care to law and order fell dramatically. The shadow economy, which the most generous estimates place at 10-15% of the GDP under Brezhnev, grew to 50% of GDP by the mid 1990s. In 1980-85, the Soviet Union was placed in the middle of a list of 54 countries rated according to their level of corruption, with a bureaucracy cleaner than that of Italy, Greece, Portugal, South Korea and practically all the developing countries. In 1996, after the establishment of a market economy and the victory of democracy, Russia came in 48th in the same 54-country list, between India and Venezuela.

Income inequalities increased greatly – the Gini coefficient (ranging from 0 to 100%, the higher, the higher are inequalities) increased from 26% in 1986 to 40% in 2000 and 42% in 2007. The decile coefficient – ratio of incomes of the wealthiest 10% of the population to incomes of the poorest 10% – increased from 8 in 1992 to 14 in 2000 to 17 in 2007. But the inequalities at the very top increased much faster: in 1995 there was no person in Russia worth over $1 billion, in 2007, according to Forbes, Russia had 53 billionaires, which propelled the country to the second/third place in the world after US (415) and Germany (55) - Russia had 2 billionaires fewer than Germany, but they were worth $282 billion ($37 billion more than Germany's richest). In 2008 the number of billionaires in Russia increased to 86 with a total worth of over $500 billion – 1/3 of GDP.

Worse of all, the criminalization of the Russian society grew dramatically in the 1990s. Crime was rising gradually in the Soviet Union from the mid 1960s, but after the collapse of the USSR there was an unprecedented surge – in just several years in the early 1990s crime and murder rates doubled and reached one of the highest levels in the world. By the mid 1990s the murder rate stood at over 30 people per 100,000 of inhabitants against 1-2 persons in Western and Eastern Europe, Canada, China, Japan, Mauritius and Israel. Only two countries in the world (not counting some war-torn collapsed states in developing countries, where there are no reliable statistics anyway) had higher murder rates – South Africa and Colombia, whereas in countries like Brazil or Mexico this rate is two times lower. Even the US murder rate, the highest in developed world – 6-7 people per 100,000 inhabitants – pales in comparison with the Russian one.

The Russian death rate from external causes (accidents, murders and suicides) by the beginning of the twenty-first century had skyrocketed to 245 per 100,000 inhabitants. This was higher than in any of the 187 countries covered by WHO estimates in 2002. It was equivalent to 2.45 deaths per 1,000 a year, or 159 per 1,000 over 65 years, which was the average life expectancy in Russia in 2002. Put differently, if these rates continue to hold, 1 out of 6 Russians born in 2002 will have an ‘unnatural’ death. To be sure, in the 1980s murder, suicide and accidental death rates were quite high in Russia, Ukraine, Belarus, Latvia, Estonia, Moldova and Kazakhstan—several times higher than in other former Soviet republics and in East European countries. However, they were roughly comparable to those of other countries with the same level of development. In the 1990s these rates rapidly increased, far outstripping those in the rest of the world.

The mortality rate grew from 10 per mille in 1990 to 16 in 1994, and stayed at a level of 14 to 16 per mille thereafter. This was a true mortality crisis, a unique case in history, when mortality rates increased by 60% in just 5 years without wars, epidemics or volcanic eruptions. Never in the postwar period had Russia such high mortality rate as in the 1990s. Even in 1950-53, during the last years of the Stalin’s regime with high death rate in the labor camps and consequences of the war time malnutrition and wounds, the mortality rate was only 9-10 per mille as compared to 14-16 in 1994-2008.

Russia became a typical “petrostate”. Few specialists would call the USSR a resource-based economy, but Russian industrial structure changed a lot after the transition to the market. Basically, the 1990s were the period of rapid deindustrialization and “resource-lization” of the Russian economy, and the growth of world fuel prices since 1999 seems to have reinforced this trend. The share of output of major resource industries (fuel, energy, metals) in total industrial output increased from about 25% to over 50% by the mid 1990s and stayed at this high level thereafter. Partly this was the result of changing price ratios (greater price increases in resource industries), but also the real growth rates of output were lower in the non-resource sector. The share of mineral products, metals and diamonds in Russian exports increased from 52% in 1990 (USSR) to 67% in 1995 and to 81% in 2007, whereas the share of machinery and equipment in exports fell from 18% in 1990 (USSR) to 10% in 1995 and to below 6% in 2007. The share of R&D spending in GDP was 3.5% in the late 1980s in the USSR, but fell to 1.3% in Russia today (China – 1.3%, US, Korea, Japan – 2-3%, Finland – 4%, Israel – 5%). So today Russia really looks like a “normal resource abundant developing country”.

To understand Russia now one has evaluate the record of the last 20 years. In the late 1980s, during Gorbachev’s perestroika, the Soviet Union was aspiring to join the club of rich democratic nations, but instead degraded in the next decade to the position of a normal developing country that is not considered either democratic or capable of engineering a growth miracle. For some outsiders a “normal developing country” may look better than that of an ominous superpower posing a threat to Western values. Those on the inside however feel differently. Most Russians want to find a way to modernize the country so as to make it prosperous and democratic. But they also feel that something went very wrong during the transition; the policies and political leaders of the 1990s are totally discredited. And so we find ourselves with Putin-Medvedev’s policy getting 50% plus approval rate even in the midst of economic recession.

Immigration Is Economically Intractable

Last year over 191 million migrants were on the move worldwide (Transatlantic Trends: Immigration 2008). In 2009 “…immigration issues will again be atop the political agenda. The United States will look to a new president to pass much-needed immigration reform, and in Europe, the [former] French EU Presidency has made it clear that a common EU immigration policy is a priority. All this comes at a time when the United Kingdom is adjusting to its new points-based immigration system. Germany has put its new citizenship test into use, Poland is transitioning from a country of emigration to one of immigration, and Italy is adopting more restrictionist [sic] policies than ever before” (from the report cited above).

Intra-Europe migrations

European Union enlargement from 15 member states to 25 (2004) and then 27 (2007), and the EU emphasis on “free movement” of labour – as well as goods, services and capital – raised fears of invasion by job-seekers and “welfare-scroungers”. Only the UK, Sweden and Ireland did not take advantage of the possibility of suspending full access for a transitional period of up to 7 years.

The UK saw the largest inflow of foreign labour ever recorded, hugely exceeding all predictions; Ireland followed suit. In Poland between 2004 and 2007 the number of citizen “temporarily residing” in another EU country more than doubled, reaching almost 2 million; the Poles’ preferred destination switched from Germany to the UK (where 27% of Polish immigrants in 2007 had a University degree, up from 22% in 2003). This was reflected in Polish remittances in 2007 being 60% higher than in 2003; while in Latvia remittances were nearly three times the level of 2003. (see B. Galgòczi, J. Leshke and A. Watt, Intra-EU labour migration – Flows, effects and policy responses, ETUI-European Trade Union Institute, Working Paper 2009.03, March 2009).

Other ‘sending’ (Hungary) and ‘receiving’ (Sweden) countries experienced much less dramatic flows. Clearly the pattern of migration was distorted by transitional restrictions, with the three more open countries raising their share of Polish immigrants from 12.1% to 42.4%; only Hungarian immigrants stuck to their favourite destinations of Germany and Austria. Some of the sending countries also experienced inward migration, notably Hungary from Romania and Slovakia (Ibidem).

The key macroeconomic drivers of immigration were the wage gap and relative unemployment (especially youth unemployment). Prior to enlargement the wage gap between the EU-15 and accession countries was very large. In 2003 Latvia had an average wage, at Purchasing Power Parity exchange rates, equal to 12.9% of the EU-15 average, Poland 21.5%, Hungary 29.0%; gaps were much higher at actual exchange rates, due to relative undervaluation of eastern currencies. By 2007 the gap had shrunk but was still substantial: 18.2% for Latvia, 25.4% for Poland and 31.1% in Hungary. Unemployment rates in 2003 were 17.9% in Poland, 10.5% in Latvia, 5.9% in Hungary. By 2007 unemployment had risen to 7.4% in Hungary but fallen respectively to 9.6% and 6.0% in Poland and Latvia – against a EU unemployment rate of 7.9 in 2003 and 7.0% in 2007. Relative employment opportunities in the destination country were a very important driver. (Ibidem, pp. 14-25).

In the receiving countries the rise in labour supply due to immigration was accompanied by higher aggregate output and labour demand. Even lacking a counterfactual alternative for a comparison, the ETUI study concludes that in Austria, Germany and Sweden “the overall unemployment trend … is inconsistent with the idea of post-accession pushing up unemployment: it rose slowly until 2005; and subsequently fell. However, the unemployment trend in the UK, the country with the largest relative influx, does appear at first sight consistent with the idea of unemployment-creating immigration: the jobless rate bottomed out in 2004 and has been slowly but inexorably rising ever since”. The evidence on sectoral wage trends in the presence of high or low incidence of immigration is mixed. (Ibidem p. 25-27). The ETUI underlines the importance of welfare provisions trends in the sending countries as a determining factor of emigration, but is silent on the vexed question of the attraction of relative welfare provisions with respect to and among the countries of destination.

Economic and non-economic obstacles

Immigration raises deep emotional issues of race, ethnicity, religion, culture, language, customs – generating barriers and conflicts. Apparently 50% of Americans and 47% of Europeans in the public opinion poll conducted by Transatlantic Trends (cited) “perceived immigration to be more of a problem than an opportunity, but majorities in France and the Netherlands, as well as sizable minorities in other countries considered it to be more of an opportunity”. Interestingly, on average 7% of those respondents who were asked this question twice during the interview, at the beginning and at the end, consistently switched their view of immigration from problem to opportunity – presumably on reflection or out of concern for their image.

But even if all these controversial issues did not arise, even if immigrant assimilation was costless and instantaneous, immigration would still be economically intractable. Because even in this ideal world:

1) the redistribution of gains and losses from immigration, so that its net benefits should affect everybody positively, is either impossible or undesirable or both; and

2) immigration, like any population increase, involves the appropriation by the newcomers of some social capital. Losers in the host country are usually happy to bear this cost for the future generations of the nation’s children (and not just of their own prospective children), but resist social capital dilution for the benefit of outsiders.

Free movement of labour was remarkably trouble-free and successful in the re-unification of Germany, but only thanks to exceptional factors. The non-economic obstacles mentioned above – race, ethnicity, religion, culture, language, customs – were totally absent; they were all tall, blond, blue-eyed, and one as good or bad as the other. Massive re-distribution of gains and losses from (internal) migrations were funded by the federal government within a single state; social capital was left in the hands of the entire nation; and the economic disruption involved by internal migrations was compensated for by the joys of re-unification, national independence and the return of democracy. These are all non-repeatable factors – except for the prospective reunification of Korea.

Impossible or undesirable redistribution of gains and losses

There is no doubt that immigration is efficient, for it involves a potential net increase in universal economic welfare. But this potential benefit is the net result of gains and losses accruing to different groups of individuals, and even accruing to the same individuals in different proportions in different capacities. A potential net benefit is not enough to assert the superiority of any economic change, including the opening of borders to immigration. The losers must actually be over-compensated by winners, potential over-compensation not being sufficient to assert an improvement. When it comes to immigration – as is often the case with opening international trade and factor movements – redistribution of winners’ gains to losers is almost invariably impossible, or undesirable or both.

Imagine two countries, North and South, both – for simplicity but without loss of generality – with full employment of labour at a Northern wage higher than in the South and closed borders. Suppose borders are opened so as to allow migration from South to North. With unrestricted migration, after the time necessary to reach a new equilibrium, and neglecting travel and resettlement costs, a uniform wage level (within bounds) should prevail. Southern winners are the non-migrant workers whose wage will increase due to the fall in labour supply. Southern losers are firms that now pay higher wages and –starting from full employment – also have to reduce employment and production. Northern winners are firms that, thanks to the increase in labour supply due to migrants, now pay lower wages than they would have had to pay otherwise, and thanks to immigration can raise employment and production. Northern losers are the national workers, who get a lower wage (not necessarily lower than before, but lower than it would have been without immigration). Immigrants gain directly from being employed at higher wages.

Some of the gains and losses are national internal transfers and cancel out; all of the gain for remaining Southern workers is a loss for Southern firms; all of the loss of Northern workers is a gain for Northern firms. There is an additional loss for Southern firms, which is the surplus that they used to obtain from employing, at the lower pre-migration wage, those who now have migrated; that loss is equivalent to some (half, with linear demand and supply curves for labour) of the net gain that migrants obtain from the higher wages in the North. Finally, there is an additional gain by Northern firms, which is the surplus produced by migrants over and above their wages (except for the marginal migrant who will yield no surplus in equilibrium).

In conclusion, there is a net gain from immigration, and it accrues entirely in the North (if immigrants are considered part of the North): it consists of half the extra wage of migrants (the other half is matched by Northern firms losses) and the additional surplus obtained by Northern firms on migrants’ employment.

In principle, gains and losses could be redistributed from winners to losers and make everybody better off. But this is 1) impossible and/or 2) undesirable. If this were done nationally, in the South a transfer would have to be made from the poor non-migrants to the richer owners of Southern firms. In the North, the relatively rich owners of Northern firms could compensate Northern workers for their losses. But profit is seen as the reward of entrepreneurship and risk-taking, and the extra-profit on emigration is difficult to tap; the extra tax (if any) levied on that extra-profit is indistinguishable from other government revenues in the budgetary melting pot. Therefore the Northern extra-profit is not available for compensating Northern workers – let alone to compensate the owners of Southern firms who are also losers. And it would be undesirable to tax migrants, less poor than before but still relatively poor, in order to compensate the losses of Northern workers, let alone those of the owners of Southern firms.

International transfers are anyway unthinkable; they would require taxation and expenditure by a non-existent supranational agency, or bilateral agreements very hard to negotiate and agree between the two governments.

Therefore: no transfers internationally; no transfers from the poor to the rich which would be unfair and unjust; no transfers involving firms' profits other than through ordinary taxation. Moreover, any transfers to compensate losers who started from a monopolistic position broken by immigration is also undesirable, for it perpetuates an unfair and inefficient monopoly advantage – of capital in the South, of labour in the North.

No over-compensation of losers means stern, economically rational, opposition to immigration by national workers.

There are small oversimplifications in this picture: suppose workers have two degrees of skill, higher and lower. If the skilled migrate the unskilled wage will not rise but fall in the South, and viceversa in the North. The presence of unemployment in the South and/or the North alters the pattern of re-distribution necessary to make everybody better off in both North and South, but without making it any easier, for now Northern workers are likely to lose employment opportunities as well as wage levels if employed. Re-distribution from migrations will include remittances. As a result of immigration prices might rise in the South and fall in the North relatively to what they would have been otherwise, with people gaining or losing as consumers as well as producers. The general problem of impossible and/or undesirable re-distribution does not change.

Social capital appropriation

Every country is endowed with a certain amount of what we could loosely call “social capital”: a physical infrastructure of transport routes, schools, hospitals; public facilities like social housing, swimming pools, libraries, museums; and all the other provisions that a society makes for the future of its children. When the children arrive, they dilute that social capital, they appropriate it, but this is what it was provided for, society takes pride in providing it. Newcomers from outside have the same effect of diluting and appropriating social capital, but are regarded as intruding usurpers. Unless – as in the new worlds of the 19-th century – immigrants are needed to build up that social capital and to exploit economies of scale in under-populated territories, which is not the case today in the advanced countries that are on the receiving end of large-scale migration.

This is another source of resistance to immigration: the refusal to allow current and future generations of outsiders to take part of the social capital that has been provided and paid for by society for the benefit of future generations of national children.

Economically Intractable

These are the purely economic reasons why immigration is intractable. These reasons should be addressed as such and not mixed with less rational reasons, although all of them lead to the recommendation and adoption of unpleasant illiberal means to discourage or stop immigration.

The double-pronged resistance to immigration can be overcome either by the economic benefits of immigration being or becoming so overwhelming that opposition comes only from a silent minority, or by widespread sentiments of human solidarity prevailing over self-interest.

Immigration pressure can be reduced by a less unequal worldwide distribution of income and wealth, but this is the opposite of what has been happening in the last twenty years. Otherwise unpleasant illiberal means of dubious legality might be used to discourage it or stop it, like the “respingimento” (rejection, forced repatriation) policies of the current Italian Minister of the Interior.

Eastern Europe: from Slowdown to Nosedive

On 15-16 May next the EBRD – European Bank for Reconstruction and Development, founded in 1991 to assist the post-socialist transition of Central-Eastern Europe – will hold its Annual Meeting in London. The Bank “could be set for a big increase of its €20bn capital to help deal with the economic crisis” (Stefan Wagstyl, EBRD considers big rise in capital, FT, 7 May 2009 http://www.ft.com/cms/s/0/5c560d04-3b35-11de-ba91-00144feabdc0.html). The case for capital increase is greatly strengthened by the publication, on 7 May just before the Meeting (http://www.ebrd.com/new/pressrel/2009/090507gdp.pdf), of the latest EBRD forecasts for 2009-2010 for all the 28 transition countries where it operates plus Turkey which was added in October 2008.

On average, in these 29 countries the EBRD forecasts a 5 per cent contraction in real GNP. Such nosedive comes after the growth slowdown from 6.9 per cent in 2007 to 4.2 per cent in 2008, and is followed by a modest recovery of 1.4 per cent, anticipated for the second half of 2010. The peak of unemployment is yet to come. These forecasts are much more pessimistic than the EBRD own forecast of January 2009, of imperceptible but positive growth at 0.1 per cent, itself a significant deterioration with respect to the November 2008 forecasts of 3.0 per cent growth, which in turn had been slashed from 5.7 in May 2008.

The latest EBRD figures are also – on average but not for Central Europe – worse than the most recent growth forecasts by the IMF, in the World Economic Outlook of April 2009, on Crisis and Recovery (http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf). The European Commission Spring Forecasts 2009 (European Economy 3/2009, 4 May 2009, https://webmail.london.edu/exchweb/bin/redir.asp?URL=http://ec.europa.eu/economy_finance/publications/publication15048_en.pdf) are much more optimistic about Russia (only -3.8 per cent in 2009) but more pessimistic about Hungary and Poland, and otherwise only marginally different. The forecasts of UN/DESA Monthly Briefing on the World Economic Situation and Prospects (http://www.un.org/esa/policy/publications/wespmbn/sgnote_8.pdf), published on 7 May 2009, the same day as the EBRD forecasts, are consistently slightly more optimistic (The next set of forecasts, by the UN World Economic Situation and Prospects Update as of mid-2009, is to be released on 26 May 2009).

The EBRD is an institution suffering from three existential problems. It is supposed to lend to the private sector in transition economies, at commercial rates, but if it does this its existence does not make any difference. It is a public financial institution whose raison d’être is the inefficiency of public financial institutions. And we will know that it has fulfilled its mission only if and when it is liquidated.

In fact, before the crisis, the EBRD government-shareholders (about 60) were considering reducing the scale of its activity – perhaps also because of the EBRD own over-generous assessment of transition progress in its yearly Transition Reports. Now an expansion is being considered instead because of both the envisaged large scale of the recession in its countries of operation, and the need to fill the gap abruptly left by the drop in current capital inflows into the area.

There is no reason to believe that the pessimism of the latest EBRD forecasts has been exaggerated in order to strengthen the case for the Bank’s capital increase. EBRD Chief Economist Erik Berglof says that "There are downside risks to these predictions. But now there is also upside potential. Our underlying outlook assumes continued external engagement, particularly from the western parents of banks in the region." (http://www.ebrd.com/new/pressrel/2009/090507k.htm) Such an engagement on the part of foreign parent banks in the area is an over-optimistic assumption (see below). If anything, the withdrawal of foreign parent banks from transition economies is precisely what strengthens the case for an EBRD major capital increase in the near future, already before the review of the EBRD capital is due in 2012.

Within the aggregate forecasts given above, the heterogeneous group of 29 countries naturally exhibits a highly diversified economic performance. In Central Europe and the Baltics in 2009 Poland fares best, with zero growth. At the other end of the range, all three Baltics are contracting by more than 10 per cent: Estonia (already in recession at -3 per cent in 2008) at -10.5, Lithuania -11.8, Latvia -13.2. Hungary is doing rather poorly: after stagnation at 1.1 per cent in 2007 and 0.5 per cent in 2008, its GNP is poised to fall by 5.0 per cent, with zero growth next year. On average this area’s GDP is expected by the EBRD to decline in 2009 at 2.9 per cent, and to resume growth at only 0.2 per cent in 2010. In the April 2009 World Economic Outlook the IMF was even more pessimistic, with a 3.7 per cent GNP decline, but more optimistic for Russia and the rest of the Commonwealth of Independent States.

EBRD forecasts for South-eastern Europe show a slightly better performance: on average growth rates in 2007-2010 follow the pattern (in per cent): 6.3, 6.6, -2.2, 0.4; in 2009 Romania is worst with -4.0. Eastern Europe and the Caucasus (meaning the non Asian members of the Commonwealth of Independent States, not counting Russia) in the same years exhibit actual and predicted growth of: 9.9, 5.0, -6.2, 1.3; Ukraine is expected to contract by 10.0 per cent this year and grow at a zero rate next year. Central Asia is the least affected area, with GNP growth rates of 9.2, 5.0, 0.4, 3.0 in 2007-2010. Finally, Russia is seriously affected: 8.1 and 5.6 in 2007, 2008; - 7.5 in 2009, the result of an even deeper fall in the first quarter and an expected improvement in the rest of the year; the green shoots of recovery are forecast by the EBRD at 1.0 per cent in 2010.

All these countries have either completed their transition to the market economy and their re-integration into the world economy and especially Europe (the ten new member states of 2004 and 2007, with Slovenia and Slovakia already members of the Eurozone), or have made steady and very substantial progress in that direction. What makes them so vulnerable to the pandemic financial and real crisis?

Initially, when the global crisis involved only the financial sector, transition countries – regardless of EU membership – seemed to be fairly resilient. Then, as the crisis impacted the corporate sector, they began to slowdown, and by the end of 2008 and the first quarter of 2009, when domestic consumption began to be affected, they went from slowdown to nosedive.
In general the current financial crisis confronted all emerging and developing countries – including transition economies – with two shocks: “a ‘sudden stop’ of capital inflows driven by global deleveraging, and a collapse in export demand associated with the global slump” (Atish R. Ghosh et al., IMF 2009)[1]. But there are different aspects and intensities, specific to country groups, discussed both in the IMF Staff Position Note just quoted and in other papers[2].

1. Home made sub-primes. The USA sub-primes crisis of August 2007 touched only marginally the transition economies. But a large amount of domestic loans, mostly for house-purchase finance but also in the enterprise sector – and in the government sector – were originally denominated in foreign currency because the national currency a) involved much higher interest rates and b) had been stable or (with the exception of countries with a successful Currency Board: Bulgaria, Estonia and Lithuania) appreciating. All these loans, amounting to $250 billion in Central Eastern Europe (Auer and Wehrmuller 2009)[3] promptly became sub-prime, as soon as the domestic currency began to depreciate for the reasons indicated below. Thus Polish borrowers in Swiss Francs in the last quarter of 2008 and the first quarter of 2009 have seen their zloty liabilities rise by 31 per cent due to the revaluation of the SF with respect to the Polish zloty.

Auer and Wehrmuller estimate that in the 10 EU member states from Central Europe total losses from private and public debt re-valuation amount to about $60bn, under 5 per cent of GDP in most countries but as much as 18 per cent and 8 per cent in Hungary and Poland respectively. The expectation that the state will ultimately bear the cost of bailing out the debtors, plus the cost born by the state on its own debt, has dramatically raised the spread on Credit Default Swaps for the eight countries for which data are available out of the ten new Member States (Auer and Wehrmuller, cit.).

The problem is serious: in 2007 in eight countries the foreign currency-denominated debt in the non-financial private sector exceeded 50% of total non-financial sector debt: Ukraine, Romania, Bulgaria, Lithuania, Hungary, Georgia, Estonia, Latvia; over 60% in the last four of these, almost 90% in Latvia (Connelly, 2009, p.23).

2. External imbalances. Connelly (2009, cit.) considers twenty countries which he labels “Emerging Europe” (the EBRD 29 minus Turkey, Albania; Bosnia & Herzegovina, Macedonia, Montenegro, Serbia; Tajikistan and Turkmenistan; Mongolia). He notes that “Emerging Europe is the only emerging market region to collectively run a current account deficit”: apart from Azerbaijan, Kazakhstan and Russia in 2008 all the other countries in this group have current account deficits, of which seven over 10 per cent of GDP: Bulgaria at -21.2 per cent, Georgia -20.6, Moldova -15.3 Lithuania -13.9, Romania -13.3, Latvia -12.1, Estonia -11.2.

Sustained current account deficits lead naturally to higher external debt. But it cannot be argued that the current account deficits were the result of fiscal profligacy. Between 2000 and 2008 the number of countries running a government surplus increased from one (Russia) to five (with the addition of Azerbaijan, Belarus, Bulgaria, Kazakhstan), while the deficits of another 13 countries out of the twenty reviewed by Connelly fell below 3 per cent. Thus the growth of external debt is clearly due, on average, primarily to the private sector. Yet the expected emergence of contingent liabilities and costly bail-outs reduces governments’ credibility anyway. Darvas and Pisani-Ferry (2009)[4] establish a significant correlation between the cost of credit default swaps (CDS), the insurance against default on government debt, and current account deficits. Moreover, non-Eurozone members pay a higher insurance cost, rising very much faster over time: “the crisis management in the euro area has had the unintended consequence of putting non euro-area new member states at disadvantage”. Probably, without the credibility bestowed by the euro, floating rates lead to overshooting devaluation, while fixed rates lose competitiveness to the country that maintains them and provide adverse shocks when the peg sooner or later must be altered.

3. Primary product exporters – primarily Russia, Azerbaijan and Kazakhstan – until mid-2008 were in a position to run current account surpluses and accumulate foreign reserves. But in 2008 oil, gas, cotton and metals fell in price. Foreign reserves were used – wasted, we could say to some extent – to support overvalued exchange rates and to bail out financial institutions and productive enterprises. The Central Bank of Russia foreign reserves (including gold) fell from $476.4bn in 2007 to $427.1bn in 2008 and $383.9 at the end of April 2009, plus another $32bn lost by the Stabilisation Fund in the first quarter of 2009 (https://webmail.london.edu/exchweb/bin/redir.asp?URL=http://www.bof.fi/bofit_en/seuranta/venajatilastot/index.htm , though other sources report larger losses). The EC Spring Forecasts 2009 (cited) are more optimistic than the EBRD yet expect a Russian budget swinging sharply from a hefty surplus to large deficits, of respectively 6.5% and 2.7% of GDP in 2009, due to the reduction in commodity prices and in economic activity, plus the large fiscal stimulus packages. Russia is also forecast to see major falls in both its trade and current account surpluses, respectively to 5.1% and 6.3% of GDP in 2009, and 1.4% and 2.7% in 2010.

4. Fall or reversal of FDI and portfolio investment inflows. “With net private capital flows to emerging market (and developing) countries projected to decline from an inflow of US$600 billion in 2007 to an outflow of US$180 billion in 2009, EMEs [Emerging Market Economies] are facing a severe credit crunch. Particularly affected are the countries with large current account deficits – many of which had asset price and credit booms” (Ghosh et al., 2009, p.6). Transition economies had been able to attract large and growing capital inflows thanks to privatisations at attractive prices, high interest rates net of devaluation cover or even plus revaluations, and production de-localisation thanks to low wages. These attractions have weakened, and the recession has made inflows even less attractive.

“The region [i.e. Donnelly’s Emerging Europe defined above] faces an aggregated adjusted gross external financing requirement of approximately $460bn, or around $930bn if short-term is added… The deterioration in the outlook for private capital flows to emerging markets makes ‘roll-over’ of these loans extremely unlikely, with the Institute of International Finance (IIF) projecting a fall in private capital flows to the region from around $254bn in 2008 to only $30bn in 2009” (Connelly 2009, p.4).

In these circumstances devaluations are unavoidable but steering a course between floating and pegging is hard, as we have seen above. Higher interest rates are unlikely to bring back capital in a recession. Controls on capital flows will at best stop capital flight but not bring it back, and can be counterproductive. Official financing is therefore badly needed, by the IMF in the first instance with doubling access limits, Flexible Credit Lines, and Stand-By arrangements. With additional resources, support for debt re-structuring can come from national governments, for instance converting foreign currency loans to domestic currency and compensating banks for losses, maybe only partly.

5. Foreign Banks withdrawing funds. At the inception of the transition an under-capitalised and largely insolvent state banking system was partly cleansed of what today are labelled toxic assets, re-capitalised, privatised mostly to foreign banks, and new banks were promoted, also mostly foreign. By 2006, foreign ownership in the ten New Member States, excluding Slovenia (at 22 per cent), ranges from 74 per cent in Latvia to 98 per cent in Estonia (EBRD, Transition Report 2006). Foreign banks were to provide capital and know how, and through access to foreign parent banks provide foreign exchange and in practice access to lending of last resort in the country of origin.

Today the EBRD Chief Economist still relies on “the continued external engagement, particularly from the western parents of banks in the region” (cited above). And Darvas and Pisani-Ferry (2009, cited) still argue that “Several factors have mitigated the impact of the crisis on non euro area NMS [New Member States]: … [among other things] western European ownership of NMS banks (by indirectly stabilizing their NMS subsidiaries)…” (emphasis added).

Yet the EC Spring forecasts 2009 tell a different story: “The repatriation of capital by foreign banks has been particularly abrupt in some cases. For instance, in Ukraine real GDP growth is projected to decline by 9½% in 2009, due to a severely curtailed access to external financing, which has triggered the conclusion of a stand-by arrangement (SBA) with the IMF…”. “The significant and broad-based slowdown in the CIS could have direct growth effects in Central and Eastern Europe, and the presence of EU banks in the region creates further potential negative spill-overs via the financial channel” (p.22, emphasis added). “Paradoxically, it is precisely this characteristic – strong foreign banking presence – that renders EE countries (except for the CIS) region, much more vulnerable to the present financial turmoil” (Uvalic 2009, p.4)[5]. In turn, foreign parent banks risk downgrading as a result of the declining profitability and the losses on their operations in Eastern Europe; conversely, EE countries depend on their continued financial health.

Recently the EBRD made one of its larger investments, worth a total of €432.4 million, in UniCredit subsidiaries across eight eastern European countries, to provide medium and long-term debt and equity financing through UniCredit subsidiaries in support of SMEs, lease finance and energy efficiency projects. [6] This is precisely the kind of contribution that the EBRD can make to the region’s recovery, especially if its relatively modest resources of €20bn were to be raised by 50-100 per cent.

6. Reduction in external demand. Current projections for 2009 indicate for the first time since the last War a decline in world output (-2 per cent according to the IMF) and a much larger decline in world trade, by as much as 13% (WTO), thus reducing for the first time since the War the most common measure of globalisation, the ratio between world exports and world GNP. A sizeable de-globalisation episode is taking place. Output contraction and trade are larger in the EU, with which transition economies have grown to be increasingly integrated, with EU trade shares of the order of 60-90 per cent for the New Member States and South-Eastern Europe, all characterised by high foreign trade openness, higher than that of most old members of the EU (see the table below, penultimate column). Such openness makes the transition economies opportunities of “de-coupling” from downturns in the EU rather limited (Connelly, cit., p.5). Lower trade shares involve a slowdown in manufacturing and extractive industries, and in internal demand especially in construction and financial services.

7. Differences in initial positions and policy response. “Some [countries] were ripe for a homegrown crisis associated with the end of unsustainable credit booms or fiscal policies; others were just bystanders caught in the storm” (Ghosh et al., 2009, cit., p.3; “… the majority were just innocent bystanders”, p.2).

Uncharacteristically, the IMF has recommended, to advanced economies experiencing the global recession, easing monetary policy and lower interest rates. It has also “called for a timely, large, lasting, diversified fiscal stimulus that is coordinated across countries with a commitment to do more if the crisis deepens” (Ghosh et al., 2009, p.19-20). Naturally the IMF now is forced to recommend the same policies to transition economies in crisis, though with stronger warnings about the possible side effects: “Much of the spending and revenue policy advice for advanced economies remains relevant for EMEs [Emerging Market Economies], once scaled down for their small fiscal space” (Ibidem, emphasis added).

Thus transition economies and other EMEs are reminded that looser monetary policies involve dangers of exchange rate devaluation and consequent adverse effects on balance sheets. That it is dangerous to exceed the “policy space” and especially the “fiscal space” of a country, jeopardizing policy credibility and sustainability. Changes should be gradual (however strange this now may sound coming from the IMF) and sustainable; abrupt and non sustainable changes can be particularly costly and disruptive (see Ghosh et al., 2009).

Clearly an expansionary fiscal policy “ is likely to be more effective in stimulating aggregate demand if the economy is relatively closed to trade flows, uses monetary policy to prevent or limit the appreciation of the currency, has substantial spare capacity, has a high proportion of credit-constrained households or firms, and has a sustainable public debt position” (Ibidem, p.21). Which is fair enough, except that transition economies and other EMEs are most unlikely to satisfy these ideal preconditions.

A short digression on the euro. The question here is whether early membership of the Euroarea might assist recovery in the New Member States, of which only Slovenia and Slovakia are already members. The IMF now recommends it, speaking out of turn because it is not for the IMF to recommend anything to Europe other than possibly an application to join the Euroarea on the part of those new members that meet the Maastricht conditions for membership.

Small open economies would probably gain from being part of a large currency area in times of crisis, although Slovakia (not yet a member until 1 January 2009) and the Czech Republic have done rather well being outside it. Unilateral adoption of the euro is ruled out by the EU for both members and candidates; Currency Boards reduce the probability of a crisis at the cost of making the crisis catastrophic if and when it happens (as in Argentina); European Currency Boards are not yet out of the danger zone. The European Central Bank role as Lender of Last Resort is remarkably undetermined and left to informal arrangements with Eurozone members; non-members with hyper-fixed links to the euro (unilateral euroisation or Currency Boards) might be left high and dry in times of crisis.

The EU could have well admitted at least a few other New Member States to the Euroarea, by somewhat loosening the Maastricht criteria for fiscal and monetary convergence, and the two-year membership of the Exchange Rate Mechanism II. The Maastricht criteria for fiscal convergence are in theory looser than those of the so-called Growth and Stability Pact (GSP, which involves not only a 3% ceiling to government deficit but a stricter zero per cent over the cycle) applying to all EU members regardless of Euroarea membership. In practice however the GSP strictures and the associated penalties were considerably relaxed in March 2005, and further loosened during the current crisis, whereas Maastricht criteria for joining the euro have been very strictly enforced. It is unreasonable to subject countries that grow much faster than the Eurozone members and have relatively low ratios between public debt and GNP to the same fiscal stringency of stagnant and highly indebted Euroarea members (like Italy), moreover rigidly and inflexibly applied only to prospective members.

Lithuania was left out of the euro only because its inflation exceeded the average inflation of the three least inflationary EU members by 1.6% instead of the 1.5% prescribed by the Maastricht Treaty – not exactly an enlightened or rational behaviour, especially considering that two of those three least inflationary countries were not Euroarea members.

“The EU can certainly be criticised for clinging to criteria ill-suited to catching-up countries and the case for reforming them is strong” (Darvas and Pisani-Ferry, 2009, cited). See also Nuti 2006. [7] Be that as it may, the middle of a recession is not the best time to change or, worse, bend the rules as drastically as it would be required by early admission of all or most New Members to the Euroarea. End of digression.

The heterogeneity of country experiences is pithily and efficiently synthesised by one-liners from two sources. The first is a table on Fourteen ways to slowdown from The Economist, 26 February 2009 (http://www.economist.com/world/europe/displaystory.cfm?story_id=1318459).

Fourteen ways to slowdown (italics=pegged to euro; underlined=in euro area)
....................GDP......S&P..........financing
.....................per.....credit...requirements
Country...person*..rating#..% of GDP°..Exports§............In a nutshell
Belarus...12,344.... B+...........7.3...........62.1.Autocratic, isolated, gained surprise IMF bailout
Bulgaria..12,372.....A...........29.4...........61.0 Strong finances back currency peg; sleaze rampant
Czech R...25,757....AA.......... 9.4...........80.1 Thrifty and solid but hit by export slowdown
Estonia...20,754....AA.........20.0 ..........72.0 Star reformer squeezes spending to stay afloat
Hungary.19,830.....A ..........29.9..........80.2 Currency crush could topple debt-heavy economy
Latvia.....17,801....BBB........24.3..........46.6 Clinging to currency peg amid turmoil & downturn
Lithuania.18,855....A+ ........27.1...........59.0 Painful spending squeeze to avoid worse
Poland....17,560.....A+.........13.2..........42.3 Regional heavyweight speeds up euro bid
Romania.12,698...BBB+.......20.2.........36.4 Spendthrift policies meet solid reality
Russia....16,161....BBB..........2.2...........31.7 Energy-based kleptocracy in denial about crisis
Serbia... 10,911......BB-........23.5..........22.2 Seeking more IMF help
Slovakia.22,242....AAA......12.5...........90.5 Smugly in euro-area, hit by car-factory slowdown
Slovenia.28,894...AAA..........-.............70.5 Self-satisfied, rich and still growing
Ukraine....7,634...CCC+......16.1..........45.0 No end in sight to political and economic chaos

* PPP$, 2008 estimate. # Standard & Poor’s, latest. ° Current account balance, principal due on public and private debts plus IMF debits, 2008 estimate. § Goods and services, % of GDP, 2008 estimate. Sources: IMF; Moody’s; Economist Intelligence Unit; The Economist.
From: Sarah Hanson, The whiff of contagion, The Economist, 26 February 2009. (Corrected in the 5 March 2009 issue).

The second source is the EC Spring Forecasts 2009 (cited), whose country chapters for transition economies (EU member states, candidate states and Russia) have the enlightening subtitles listed below:

Bulgaria: Vanishing budgetary surplus, external deficit remains large.
The Czech Republic: Output falls sharply driven by collapse in external demand.
Estonia: Adjusting to face gloomier years.
Latvia: Domestic demand and trade implode.
Lithuania: Deepening recession leads to wider fiscal deficits.
Hungary: Domestic financial crisis magnifies recession.
Poland: Mild recession knocking at the door.Romania: Growth contracts sharply.
Slovenia: Sharp falls in exports and investment point to competitiveness challenges.
Slovakia: Global downturn weighs on exports.
Croatia: a declining economy creates important fiscal challenges.
The Former Yugoslav Republic of Macedonia: Joining the general trend … albeit with a delay.
Turkey: Manufacturing faltering as exports decline.
Russian Federation: The first recession in a decade.

In the 1990s an unexpected, deep and protracted recession characterised the post-socialist transition of Central-Eastern Europe and the Former Soviet Union, with GNP decline ranging from 18 per cent in Poland over three years, to 65 per cent in Moldova over ten years. The decline may be slightly exaggerated especially at the top of the range, for well known reasons, but a reliable and unbiassed observer such as Bob Mundell reckons that the transition recession was not just deeper than the 1929 crisis, it was deeper than the recession that accompanied the Black Death in the 14th century, because then income fall was matched by population fall and living standards were preserved.

By comparison the current recession must be barely perceptible to the populations of transition countries. And at least this time they are benefiting not only from more generous assistance from the international community, but from more enlightened policies of monetary easing and low interest rates, fiscal subsidies and expansion, large scale state intervention – all policies diametrically opposite to the draconian hyper-liberal policies that contributed so much to aggravate the transition recession and the other costs of transition in the 1990s. Only two things have really changed since then: today the hyper-liberalism that inspired the course of transition in the 1990s has been thoroughly discredited by the global crisis associated with it, and the predicament of transition economies is vastly improved simply because they happen to share it with the advanced countries that control international financial organisations.

[1] Atish R. Ghosh, Marcos Chamon, Christopher Crowe, Jun. I. Kim, and Johnathan D. Ostry, “Coping with the Crisis: Policy Options for Emerging Market Countries”, IMF Staff Position Note, SPN/09/08, 23 April 2009, http://www.imf.org/external/pubs/ft/spn/2009/spn0908.pdf.
[2] . See for instance Richard Connolly, “Financial vulnerabilities in Emerging Europe: An overview”, Bank of Finland Institute of Transition-BOFIT Online No. 3, 4 May 2009, http://www.bof.fi/NR/rdonlyres/BA4C9028-D69D-45CB-ABF1-140ECB129E4C/0/bon0309.pdf.
[3] Raphael Auer and Simon Wehrmuller, $60 billion and counting: Carry trade-related losses and their effect on CDS spreads in Central and Eastern Europe, 29 April 2009 http://www.voxeu.org/index.php?q=node/3467 http://www.vox.eu/.
[4] Zsolt Darvas and Jean Pisani-Ferry, The looming divide within Europe, Breugel, 18 January 2009, http://www.eurointelligence.com/article.581+M5852b1b851d.0.html
[5] Milica Uvalic, “The impact of the global financial crisis on Eastern Europe”, Conference Paper, Bol (Croatia), 21-23 May 2009.
[6] “UniCredit is the largest banking group in the central and eastern European region, with over 4,000 branches in 19 countries. The group has invested around €10 billion of equity in central and eastern Europe and has around €85 billion of total customers loans in the region. Beside its own funding programs to its subsidiaries, it cooperates with international institutions including the EBRD in order to ensure continuing support to the local economies during these challenging times.” (from the EBRD website, http://www.ebrd.com/new/pressrel/2009/090507g.htm).
[7] D. Mario Nuti, "Alternative fiscal rules for the new EU Member States", TIGER-WSPiS Discussion Papers n. 84, Warsaw, 2006, http://www.tiger.edu.pl/publikacje/TWPNo84.pdf .