October 22, 2002 | WebMemo on Russia
On October 10, 2002 Ariel Cohen, Ph.D., Research Fellow in Russian and Eurasian Studies, hosted Michael Bleyzer and Edilberto Segura, authors of the new Bleyzer Foundation book Completing the Economic Transition in FSU Countries,at the Heritage Foundation's Kathryn and Shelby Cullom Davis Institute for International Studies.
The Bleyzer Foundation is a non-government organization established to support successful transition of the former Soviet Union countries into democratic market-based economies. The Foundation provides assistance to developing countries in creating favorable market conditions, improving investment climates and ensuring sustainable economic growth.
Michael Bleyzer (left) and Edilberto Segura (right), along with
Heritage's Dr. Ariel Cohen (center), discuss their book at a
luncheon on October 10, 2002.
During the last ten years, the countries of the former Soviet Union (FSU) have been undergoing very difficult transitions from planned economies to free market economies. Although there have been different degrees of success, by and large this transition has been harder and more cumbersome than originally expected. In fact, most FSU countries are still struggling to implement the economic reforms that would either revive or maintain economic growth.
Given the current international scenery, including the threat of international terrorism, there is now a sense of urgency to complete the transition to market economies. Without clear economic recoveries, the decline in the standards of living experienced by these countries in the last ten years is bound to generate discontent and resentment against free market principles. This can generate economic and political instability, leaving their citizens to become easy targets for corruption and terrorism. Therefore, the international community should give the highest priority to helping these countries regain stability and improve the quality of life of their citizens.
However, this is not an easy task. The completion of the transition to market economies by the FSU countries will be expensive. For example, studies indicate that the investment needed to recapitalize and modernize the FSU countries' productive capabilities over the next ten years may be as high as $800 billion.
Given low levels of domestic savings of the population and the limited capacity of domestic enterprises to internally generate funds, the most viable alternative for FSU countries to complete their transition to market economies is to accelerate their inflows of international private equity capital, and in particular, foreign direct investments (FDI).
FSU countries are receiving only a small fraction of their potential flow of FDI. All 15 FSU countries got only $50 billion in the ten years since independence. By comparison, only in 2000, other countries attracted large net FDI: China $38 billion; Brazil $33 billion; South Korea $9 billion; Mexico $13 billion, Poland $9 billion, Czech Republic $5 billion, Chile $4 billion.
Benchmarking and statistical analyses indicate that FSU countries could increase their level of foreign direct investments, from the current level of less than $7.5 billion per year, to about $28 billion per year by year 2005, with the implementation of economic policies identified by the International Private Capital Task Force (IPCTF) study. The cumulative inflow of FDI by year 2010 could reach $300 billion, enabling these countries to successfully complete their transitions. This level of foreign investments would have an important incremental effect on GDP growth and on the quality of life of their citizens. With continuation of current policies, foreign direct investment flows will increase only slightly from its current levels, reaching $11 billion for all FSU countries in 2005.
Most of the economic reform programs proposed for the FSU recognize that there is a low correlation between FDI flows and "natural characteristics" of a country (e.g., location, size, resources, etc.), whereas there is a high correlation between some key government policies and the flows of FDI. Therefore, the emphasis should be on the implementation of those economic reform policies that have the greatest impact on attracting FDI, or "investment drivers".
The IPCTF methodology quantifies (statistically) the relative importance of individual economic policies (investment drivers) on FDIs and economic growth. The objective of the IPCTF framework is to provide econometric model of a transition economy predicting FDI flows based on government policies.
The IPCTF study identified three key policy actions that have the strongest impact on foreign direct investments:
· Liberalize and deregulate business activities
· Provide a stable and predictable legal environment
· Improve corporate and public governance
The IPCTF study also shows that an additional six policy areas are essential to securing a significant and sustainable flow of investments:
· Remove international capital and foreign trade restrictions
· Facilitate financing of businesses by the financial sector
· Reduce corruption levels
· Minimize political risks
· Expand country promotion and improve image
· Rationalize investment incentives
The experience of many other countries shows that only a comprehensive program addressing all nine of these policy areas can lead to significant and sustainable capital investments, both foreign and domestic.
IPCTF framework provides a comprehensive tool for building consensus and developing an Action Plan for any transition economy. Its ratings include reviews of the Heritage Foundation Index of Economic Freedom, World Bank ratings, Euromoney indexes, UNDP index, Transparency International Index on Corruption, International Country Risk Guide and EBRD indexes.
Bleyzer Initiative calls to replicate the developed countries Wealth Creation Capacity in developing countries, beginning with FSU countries; to refocus multilateral and bilateral assistance to FSU countries on the creation of market economies and stronger private sector, to use IPCTF framework to create capital-friendly environment in the FSU countries and attract private equity capital; to focus most financial assistance on creating private businesses - SMEs and conditions for large multinationals operations in the FSU countries; to leverage private capital with donor's money; to implement comprehensive coordinated assistance program to the FSU countries.
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