Development & Aid, Economy & Trade, Europe, Financial Crisis, Headlines

ECONOMY: Meltdown Brings Poverty Back to East Europe

Pavol Stracansky

BRATISLAVA, Dec 11 2009 (IPS) - As former communist states in Eastern Europe transformed their economies from command to capitalist, over the last 20 years, economists praised the adoption of western-style economic models that created middle classes able to enjoy new levels of wealth and comfort.

But the success of those same economic models has, ironically, helped drive millions of people in the region into poverty amid the global financial crisis, reversing the gains made in reducing poverty in the region over the last decade, the World Bank has warned.

Luca Barbone, World Bank Director for Poverty Reduction in the region, told IPS: “Adopting western economic models is not the panacea some people thought it was. It had its obvious benefits – 15 years ago no one could get mortgages in the region to buy a house – but it has its downside as well, as is being seen now’’.

“One of the main reasons why the region was hit so hard by the recession is that it had actually been very successful over the past few years at opening up and integrating. By doing so, though, it exposed itself to financial sector and trade vulnerabilities.”

Parts of Eastern Europe are among the poorest anywhere in the developed world. Some, such as Moldova, Romania, or the Ukraine, have average monthly incomes of as little as 200 euros (295 US dollars).

Unemployment is generally higher than in Western Europe and in some communities, such as Roma settlements in Slovakia, joblessness runs at more than 90 percent.

When communism fell across Eastern Europe in 1989 the centrally-planned economies were far less developed than the capitalist systems in place in the western world.

But governments embarked, to varying degrees of success, on transforming their economies to free-market models and in many states standards of living rose dramatically.

New middle classes were created and wages and purchasing power grew along with the economy, employment picked up and credit became much more widely available.

But in a report released at the start of this month, the World Bank warned that as many as 10 million more people across the region could be forced into poverty by the end of next year and a further 25 million pushed from the ranks of the middle class into living just above the poverty line.

“One of the tragic impacts of the crisis has been that the middle income countries that had turned the corner are the ones hardest hit. Across countries in the region, unemployment levels have risen while economic activities have collapsed. Poverty will rise. Families are being stretched to the limit,” Barbone said.

Even in past economic downturns at home since the fall of communism, people in the region were able to move abroad for work and send money home to less well-off family members. But remittances as a source of welfare for poor in the region have dried up, experts say, as the global nature of the crisis means economies everywhere have suffered.

According to the World Bank the welfare of as many as 160 million people who are poor or living just above the poverty line is “threatened” because of the global recession.

In the Baltic states which have been particularly hard hit by the crisis, some politicians are warning of street riots as the economic and social situation gets worse.

Lithuanian Prime Minister Andrius Kubilius said, last week, that social unrest would be not only bad in itself but would make the economic situation worse and drive investor confidence in the country down.

He told local media the cost of any rioting would be “far more than just the price of broken windows”.

Some countries in the region have been forced to take large loans from institutions like the International Monetary Fund (IMF) to prop up their banking systems and stop economies collapsing.

Strict conditions accompany the credit packages, including slashing public sector expenditures.

At the same time the World Bank has warned governments not to cut social welfare programmes as they try to limit expenditure. “They should not now make dramatic cuts across the board or stop paying pensions. Many countries have good welfare programmes in place and these should be protected,” the World Bank’s Barbone said.

Groups working to fight poverty in the region say the picture is bleak for those already in poverty as well as the 10 million the World Bank predicts are about to enter it.

Last week the United Nations Development Programme (UNDP) said ahead of a conference on the effect of the crisis in Eastern Europe that unemployment had soared in some countries, including Russia where it has risen 43 percent in the first half of this year.

And it warned that “as the recession deepens in Russia and other destination countries for labour migrants, the remittances that cushion household incomes across the region have tumbled, falling by one-third in Moldova, for instance.”

Barbone told IPS he thought it would be years before people start coming out of poverty again and middle classes grow in the way they had been doing over the last decade.

But some economists have said that states in the region can take something from the current crisis, despite the terrible effects it has had socially.

They argue that many East European economies were extremely open to trade, which was a great benefit when trading partners’ economies were booming, but they were vulnerable when it shrank.

They say that relatively large foreign-ownership in the banking sector helped local financial sectors when times were good, but it also brought with it poor banking practices such as mortgages in foreign currency and unsustainable credit booms.

The crisis also exposed the fact that some countries had focused on one single field – car production – an industry that was hit severely by the credit crunch. But they say the exposure of these shortcomings can be used to restructure local economies to help weather future crises better.

Katinka Barysch, deputy director of the Centre for European Reform think tank in London, told IPS the crisis had shown East European states that they needed to diversify their economies.

“Wedged between a high-tech Western Europe and a low-cost Far East, there is only one way to go for the Central and East European Coalition: move up the value chain. To do this, these countries need to improve their education and training systems, make their markets work better and encourage innovation and entrepreneurship,” she said.

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