IRU - Speeches: Alain Rathery, Deputy Secretary General, European Conference of Ministers of Transport ECMT

Alain Rathery
Deputy Secretary General, European Conference of Ministers of Transport ECMT

The processes of globalisation and regional integration have taken on a remarkable dimension and speed in Central European countries, the Baltic States and, to a lesser extent, in the countries of South-Eastern Europe and of the CIS.

The change in production structures has been particularly acute. Whereas the initial downturn in production was an extremely severe and, in some cases, a lasting one, the region as a whole recently experienced strong economic recovery. However, although this first appeared as of 1994 in central Europe, it only recently spread to South-East European and CIS countries, as reflected in a greatly varying development from one country to the next.

The transition of East European countries towards market economy has led to many of these countries opening to the outside world, as evidenced by a liberalisation of their foreign trade and their opening to foreign capital. This brought about considerable changes in the volume, structure and trend of their trade, as well as in financial flows. The introduction of competition, with the resulting production shifts and market opening in turn led to an in-depth alteration of transport systems.

However, the impact of globalisation is not restricted to changes in production. It has also strongly increased the freedom and choice of consumers, producers, savers and workers. This phenomenon in turn influenced the expectations expressed in relation to the public authorities with, for instance, producers demanding from their government foreseeable economic policies and institutions providing actual support to the market so that they may be competitive within the global economy.

But most of all, globalisation has revealed a need for effective governance at the regional and international levels, i.e. beyond the national framework. The expansion of trade thus quickly evidenced the need for a regional integration of transport systems and infrastructure so as to facilitate trade flows, since the transport infrastructure of transition countries had been designed for a trading system largely restricted to communist countries only.

The main characteristics of economic development in transition countries since 1989 are the following:

1. A sharp drop in GDP in the initial stage, termed "Transition Recession" by EBRD, followed by a gradual resumption of output. This phenomenon was witnessed in all areas, however with variable intensity and a different profile over time (Figure 1).

The characteristic curve of GDP development in this area is clearly a U curve with a marked change in trend around 1992-1993 and a GDP level which is higher today than it was in 1989.

Here the recession was much sharper than in Eastern Europe, and the lag in relation to the 1989 level remains significant (-25 %).

Following a steep decline in GDP from 1989 to 1995, the L-shaped curve remained relatively flat until 1999. Only since 2000, once the rouble crisis of August 1998 had been digested, has one witnessed a true restart of production with, however, a lag of almost 35 % in 2001 in relation to the 1989 level.

However, if one may dispute the "absolute" wealth level represented by GDP, the development of this indicator over time nevertheless reflects certain major trends which have characterised the transition process. Despite the progress recorded, the standard of living of candidate countries to EU accession - although they are among the most advanced - still remains far below that in the EU. Only 3 countries, Hungary (50 %), the Czech Republic (55 %) and Slovenia (60 %) enjoy a standard of living of over 50 % of the EU average.

Talking about transition in general does not make any sense. Behind this expression are markedly differentiated developments from one region to another, as we have seen earlier, but also according to the country.

a) In Eastern Europe, all those countries which are soon to join the EU saw their GDP in 2001 largely exceed the 1989 level (Figure 2): Poland (128), Slovenia (114), Hungary (108), Slovakia (105), Czech Republic (103).

On the other hand, the countries of South-Eastern Europe still lag behind and are far from having recovered the 1989 level (Figure 3): Romania (84), Croatia (83), Bulgaria (80), FYROM (79) and Serbia-Montenegro (48).

b) The Baltic countries, strongly branded by their former association with the USSR, still display a major lag (75.5 on average), while Estonia is the most advanced in this respect (89).

c) A the level of the CIS, whose GDP level is on average 35 % lower than that of 1989, only Turkmenistan and Uzbekistan seem to have bettered their 1989 performance, while Ukraine lags behind by almost 55 % and Russia by 33 %.

by very different initial situations since the structural and macro-economic distortions were extremely variable at the onset of the transition process, as were the levels of development and the distance in relation to the main markets of Western Europe;

by the timing and extent of the stabilisation policies implemented (e.g. fiscal, monetary or exchange rate policies);

by the extension of structural (market liberalisation and opening) and institutional reforms.

3) A change in GDP structure with a significant decline in industrial output and a development of the tertiary sector.

a) Globally, in Eastern Europe in 2001 industrial output barely reached an index of 88 (1989 basis = 100) (Figure 4), whereas this output only truly restarted in very recent years following an in-depth reorganisation of the industrial structure and major direct foreign investment.

Among all the countries of Eastern Europe (Figure 5), only Hungary (140) and Poland (130) exceeded their 1989 level, whereas industrial output still lags behind by 9 % in Slovakia, 13 % in the Czech Republic and 17 % in Slovenia. In South-Eastern Europe, the decline is even steeper (Figure 6), reaching 40 % in Croatia, 45 % in Romania and 57 % in Bulgaria.

b) The decline in industrial output is extremely marked in the Baltic countries (-50 %) as well as in the CIS (â€‘37 %), with the output in Russia lagging behind its 1989 level by almost 40 %.

Further to this decline in industrial output, the latter's share in GDP has sharply dropped in Central European countries. With the exception of the Czech Republic (36 %), today industrial output only represents about a quarter of GDP in Hungary, Poland, Slovakia or Slovenia, whereas this was around 40 % in the 1990s. In contrast, in Russia the share of industrial output has only decreased very little, from 34 % in 1991 to 32 % in 2000, which is undoubtedly a sign of a delay in the restructuring process. Simultaneously, the relative share of agriculture also dropped to less that 10 % in all countries except Bulgaria and Romania, where this is still around 15 %.

This decline in industrial output reflects upon the employment market. Whereas since 1989 employment has globally dropped by 15 % in Eastern Europe [with the notable exception of Romania (â€‘2 %) due to the lengthy restructuring process in this country], by 25 % in Baltic countries and by 15 % in Russia, for the industrial sector only this decline reaches respectively 38 % in Eastern Europe, 50 % in the Baltic countries and 35 % in Russia.

4) A strong development of foreign trade, accompanied by a geographical shift in trade flows and changes in the nature of goods traded.

This phenomenon relates both to exports and to imports but, there again, to varying extents according to the area:

This contrasted development of imports and exports has led to a major increase of the trade balance deficit of Eastern European and Baltic countries, applying strong economic and financial pressure on these countries, compensated to date to a great extent by foreign capital flows, and in particular by direct international investment. In contrast, the CIS has witnessed a significant increase in its trading surplus, mainly due to petroleum product exports and to the recent favourable performance of oil prices.

Globally, the share thus performed by foreign trade as the main support to the growth of Eastern European countries has led to an acute sensitivity of these countries' economies to the international economic situation, as evidenced by the crisis which arose in the early 1990s in the wake of a slackening of global trade.

The disappearance of the virtually autarchic economy within the COMECON, together with strong regional specialisation and a meticulous division of labour, which made very little of relations with the rest of the world, has led to an in-depth shift in the international trade of transition countries, there again with major differences according to the region:

i) This geographical change in international trade was especially marked in Eastern European countries:

The geographical shift in the foreign trade of Eastern European countries witnessed since 1989 explains why these countries were particularly hard hit by the slow-down in the global economy which arose in the first years of the 1990s, whereas they were finally only marginally affected by the events which followed the collapse of the rouble in 1998.

ii) If one turns to the case of Russia, some change in the structure of the country's foreign trade also came about, however to a far lesser extent than in Eastern European countries.

The EU's share is only 37 %, both for exports and imports, whereas trade with the CIS still amounts to almost 20 % of Russia's foreign trade, and less than 11 % for Eastern European countries.

The movement from a planned economy - where trade was based on a strict division of labour and high specialisation without any consideration of the rules of market economy - to a system open to competition has not only disrupted the geographical structure of trade flows, but also the nature of goods traded. This phenomenon was all the more acute since direct international investment was channelled to certain countries whose output now comes within the strategy of multinational companies which have relocated part of their production to Eastern Europe in order to benefit from lower labour costs. These low costs also explain the development of certain industries such as clothing or shoe-making, which are highly labour-intensive.

Thus, gradually, Eastern European countries which mainly exported raw materials and basic industrial products before transition have become highly specialised in exporting goods in specific market niches:

clothing represents almost 30 % of exports from the countries of South-Eastern Europe (Albania, Bosnia-Herzegovina, FYROM, Romania, Croatia), to which one should add the shoe-making industry (20 % in Albania and Bosnia-Herzegovina, 10 % in Croatia);

the automotive industry accounts for almost 12 % of exports from Central European countries, thanks to the establishment of assembly plants in the Czech Republic, Poland, Slovakia and Slovenia;

electrical equipment accounts for over 10 % of exports from the Czech Republic, Hungary and Slovenia.

On the other hand, in Eastern Europe the iron and steel industry only still plays a significant role in Slovakia (13 %), FYROM (20 %) and Romania (10 %).

In contrast to the changes brought about in the export structure of Central European countries, one observes that the CIS still largely depends on raw materials for its exports: oil in Russia (32 %), Azerbaijan (21 %) and Georgia (23 %) as well as ferrous and non-ferrous metals (20 % in Russia, 15 % in Ukraine) and steel and metallurgy (20 % in Moldova and Georgia, 27 % in Ukraine).

The development of production and trade structures, the application of the rules of market economy to the transport sector as well as the freedom of choice given to carriers and users have led to an upheaval in the transport systems of transition countries which is far from over.

This disruption has affected both goods transport - with a sustained growth of road transport to the detriment of the railways and inland waterways - and passenger transport, where the development of private motoring has weakened the virtual monopoly of collective transport by rail and bus.

Here again, the development is strongly differentiated between Central Europe and the CIS, reflecting varying progress in the transition and economic reform process.

a) In Central and East European and Baltic countries, in 2001 the market share of road haulage (t-km) exceeded 56 % while that of the railways settled at 41 %. In 1980, the railways performed almost 72 % of goods transport in these same countries. This modal shift reflects a very different development of the various modes as a result of the change in these countries' economic structure, of the geographical shift in their trade as well as of the introduction of market rules into the transport sector. Road transport has increased its services by 3.5 times since 1970, with a strong acceleration in the process as from 1995; on the other hand, since 1990 the railways have lost almost half their freight transport (Figure 7).

A similar development applies to passenger transport. Under pressure from growing private motoring, the railways' performance in passenger-kilometres has dropped by over 60 % since 1990, while bus and coach transport declined by approximately 50 %. On the other hand, in the few countries where relevant statistics are available, private motoring increased 2.3 times over the same period (Figure 8).

b) The differences observed in the level of economic transformation and restructuring are also found in the transport sector if one compares its development in the CIS to that experienced in Central European countries.

Within the CIS, freight transport still relies strongly on the railways, whose market share in t-km still exceeded 86 % in 2001, whereas that of road transport has peaked around 10 % for several years. This situation is largely explained by the size of the countries concerned, but it also reveals delays in introducing market economy rules. Although the railways remain the predominant mode by far, they have nevertheless lost about 50 % of their freight transport since 1990, reflecting an enduringly difficult economic situation and a collapse in international trade further to the dissolution of COMECON, which generated much traffic due to the enforced international division of labour and specialisation (Figure 9).

As in Central European countries, for passenger transport one observes a collapse in public transport in the CIS, whereby the passenger transport output of the railways has dropped by 50 % since 1990 and that of buses and coaches by 55 %. For want of available statistics, the shift towards private motoring cannot be quantified, however this was undoubtedly major due to the development of the latter mode (Figure 10).

Along with a significant change in the modal split, the change in the geographical trends of foreign trade has generated growing problems with the infrastructure linking Western and Eastern Europe, while other infrastructure - in particular in the railways - which was previously used for such links has become largely underutilised, with whole transfer stations virtually deserted due to the difference in track gauges.

Over the past couple of years (2001 and 2002), several developments have somewhat strengthened the transition process initiated in 1990, lending the economies of Eastern European countries a more mature disposition.

a) Firstly, over the past two years all transition countries have recorded a much higher growth than the world average, although this growth gradually abated. Thus, after an increase of 5.7 % in 2000, the total growth for transition countries exceeded 4.3 % in 2001 (+2.5 % in Central and Eastern Europe, +4.6 % in South-Eastern Europe, +5.0 % in Russia). In 2002, this figure was +3.7 %, compared to 1.7 % for the world and +0.9 % for the EU.

b) In transition countries, economic growth became widespread, extending to all countries, whereas the CIS had lagged behind until then. Better still, it was in those countries most resistant to growth that the latter was the strongest. The CIS, least exposed to the turbulences in Western economies, recorded a GDP growth of 5.9 % in 2001 in the wake of a development in the Russian economy (+9.0 % in 2000, +5 % in 2001), while Ukraine finally - and brutally - found its way back to growth (+9.1 % in 2001).

As for the Baltic countries (+6.3 %) and especially the South-Eastern countries (+5.3 % in Romania, +4.0 % in Bulgaria, +3.8 % in Croatia), they also largely contributed in 2001 to the positive performance of transition economies.

c) Given the increasing opening of transition economies (especially in Central Europe) and the considerable slackening in world trade, this performance came as a surprise as transition economies succeeded in resisting the adverse effects of this slow-down. This was made possible by the achievement of reforms which increased the trust of consumers and investors alike: domestic demand in transition economies has strongly developed in recent years, enabling these countries to offset the consequences of the deterioration in the external environment, as world trade declined by 0.1 % in 2001 (the first drop in two decades) and only increased little in 2002 (+2.5 %). Contrary to what had happened in the early 1990s, when transition countries had suffered much from the adverse international economic situation, since 2002 these countries have found growth relays in the domestic market. This major change, reflecting a greater economic maturity, was made possible in particular by sustained domestic demand, boosted by an increase in real salaries, by somewhat more flexible fiscal policies (notably due to impending elections) and by major budget deficits (which, however, are not sustainable in the long term). In a number of countries (Croatia, Hungary, Slovakia as well as Russia and the CIS), the major driving force was private consumption, reflecting an improvement of consumers' trust following several years of strong growth, a phenomenon which was further strengthened by progress in the fight against inflation. In other countries such as Bulgaria, Romania and the Baltic States, both private consumption and fixed investment contributed positively to growth. Moreover, it should be noted that the sustained development of direct foreign investment - a sign of trust in itself -further boosted domestic final demand.

d) Despite a global slackening of foreign trade, in 2001 net exports also actively contributed to growth in countries like the Czech Republic, Slovakia and Slovenia. Indeed, the volume of exports further increased by 10.2 % in Eastern European countries in 2001 (+19.3 % in 2000). Thanks to recent productivity gains, most transition economies in Eastern Europe succeeded in improving their competitiveness. This helped the exporters of these countries to perform better than some of their competitors on Western European markets. The slackening of the demand in Western Europe had a less than proportionate effect on the exports of Eastern European countries. Whereas the global volume of Western European imports increased by just over 1 % in 2001, the global volume of exports from Central European and Baltic countries increased by some 11 % (while the share of non-Community imports of the EU grew from 9.9 % in 2000 to 11.1 % in 2001).

Exporters in many transition countries further succeeded in steering their output towards new markets, not only in Europe, but also in Asia and other parts of the world. Moreover, thanks to strong domestic demand, these exporters also managed to shift some of their output towards the domestic market.

One extremely positive message arising from recent developments is the fact that local producers have displayed increasing reactivity to market opportunities, even though this trend developed in a framework of growing market competition due to an increasing liberalisation on the part of transition countries. These producers also managed to capitalise on emerging market niches, including in the West - often due to their integration into multinational production networks - and to draw full benefits from their competitiveness in terms of labour costs.

According to EBRD and IMF forecasts, growth should accelerate in 2003 in all transition countries - to a relatively modest extent however - to reach approximately 4 % (against 3.7 % in 2002).

a) In the most advanced countries of Central Europe as well as the 3 Baltic countries, domestic demand should endure, as in the less advanced countries of South-Eastern Europe (Table 1).

Table 1. Growth Forecasts for 2003
	as a % of GDP
	EBRD Figures	IMF figures
Bulgaria Croatia Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia Czech Republic	4 4 5 3.7 5 5.5 3 4.5 3.8 3.3 3	5 4.2 4.9 3.6 5.5 5.3 2.6 4.9 4 3.2 1.9

b) On the contrary, in the CIS domestic consumption is expected to slow down, while exchange rates and an increase in social costs will reduce companies' profits, in particular in Russia. Therefore, growth should decline in the CIS in 2003 as the recovery observed to date - which was mainly based on an increase in production capacity - may well run out of steam. Indeed, it must be noted that until now, Russia has done very little to meet the challenges of economic diversification and remains overly dependent on the energy sector. In particular, the announced drop in oil prices is likely to have an adverse effect on demand in this country, as well as in Azerbaijan and Kazakhstan (Table 2).

Table 2. Growth Forecasts for 2003
	as a % of GDP
	EBRD Figures	IMF Figures
Kazakhstan Russia Ukraine	7.5 4.3 4	8.5 4 4.5

s in the results, one also observes major differences between countries and regions in terms of the risks affecting their economic situation and which may impact on their future.

a) In the most advanced countries of Central Europe (in particular Hungary, Poland, Slovakia and the Czech Republic), tax losses have often reached a worrying peak and public spending related to EU accession will further increase in coming years to meet the requirements of the Union (for instance in the field of the environment). Sooner or later, budget stringency is clearly desirable, if not inevitable in those countries, in order to purge government finance and meet the EU's requirements in this field.

Moreover, despite indisputable positive aspects as mentioned above, a shift from a growth mainly based on exports to a growth linked more to internal factors is placing the transition economies of Central European countries in a somewhat vulnerable position. Although it acted as a relay to fight the adverse external shock, domestic demand only has limited potential as a major growth factor in many transition countries, for these labour under a major and permanent deficit in their balance of payments. In these countries, placing too much trust in the domestic absorptive capacity might lead to an increase in these deficits and severely jeopardise macro-economic stability. In general, basing growth mainly on domestic elements cannot be considered as a sustainable medium-term strategy in a majority of countries (except Russia). Furthermore, as for the recent trade performance of these countries, one does not yet clearly know whether the consequences of the slackening global demand, and in particular of Western European demand (particularly if this endures), might not have a delayed adverse impact on transition countries.

b) Despite recent positive developments in the Russian economy, some doubts remain. Despite some progress towards a market economy, it is not certain that this country's institutional framework will succeed in effectively implementing the indispensable laws and regulations adopted recently.

Moreover, the Russian economy's strong reliance on oil exports entails some risks for this country's global macro-economic performance due to the persisting volatility of oil prices. The combination of a major depreciation of the rouble, high oil prices and an initial collapse of the economy enabled Russia to increase production without a real growth in production capacity. But the positive impulse of these factors is coming to an end. Sustainable growth in Russia calls for investment levels much higher than those observed to date, in particular in order to diversify production. In particular, this would imply major direct foreign investment. Now the net volume of such investment remains extremely low in Russia and in the CIS, particularly if compared to that in those countries soon to join the EU. In order to remedy this situation, sustained efforts should be made in the medium turn to establish a climate conducive to investments.

As the economy in the CIS has been strongly supported by a development in trade within the CIS itself, any incident affecting the Russian economy would undoubtedly have an extremely adverse impact on the region as a whole.