I. Interregional co-operation

A main feature of the ECE region is its heterogeneity in terms of incomes per capita. The region comprises not only the richest countries of the world but also some very poor countries which occupy a low rank on the global income scale. In addition to the intra-regional development gap there exists at the same time a large inter-regional development gap, if the average income per capita in the ECE region is compared with the corresponding level in other major regions of the world economy.

The advanced ECE economies have been a major source of finance and other resources for developing countries, both directly and indirectly, through the intermediaries of multilateral regional and global institutions. This includes the provision of ODA, although the actual support has remained significantly below the target of 0.7 per cent of GNP in the developed countries. The ECE secretariat welcomes the statement in the Monterrey Draft Outcome, which urges developed countries that have not done so to make concrete efforts toward the target of 0.7 percent of GRIP.

However, although the ODA is important it will not have the expected impact unless it is complemented by effective institutions of a market economy. This is a lesson from the experience in the ECE region from the past and the present. This points to the important role which international organizations, including the regional commissions, can play in promoting capacity building, including the creation of a legal and institutional framework. Another important aspect is the support of policy dialogue among countries at the regional level.

The work of the ECE on norms and standards contributed to capacity building and promoted at the same time the integration of the transition economies into the wider division of labour in the region and the world economy at large. ECE's work in the field of electronic data interchange (EDI) has led to the adoption of a common standard, Centre for Trade Facilitation and Electronic Business (CEFACT), which is an important trade facilitation technique that has considerably reduced the cost of transmitting and processing commercial documents.

Another major area of ECE's work has been the setting of environmental norms for transboundary air and water pollution. The major objective is to protect the environment and improve the quality of life, and more broadly to contribute to the goal of sustainable development.

The UNECE has been developing soft regulations, best practices, etc., which are important for good governance and a necessary condition for enhancing the efficiency of ODA. The UNECE has also promoted partnerships between governments and businesses that allow for the joint use of public and private resources.

Many of these standards, norms and conventions would create larger benefits if they were adopted beyond the ECE region, and one of the activities of the organization has been to increase their global visibility. This body of work represents a considerable investment by ECE member governments and other participants and it would be only fitting that the social and economic benefits were more widely spread to other regions of the world. However, this process would require resources and the standards might have to be adapted to local circumstances.

The advanced economies in the ECE region should consider ways and means in which to enhance the transfer of this expertise and knowledge to help close the development gap. Developing countries should also be encouraged to follow the regional integration mechanisms that have been successful in the ECE region. These comprise not only measures to reduce barriers to trade but also to foster policy dialogue which could be supported by ECE.

II. Intra-regional co-operation

Since 1990, Europe has witnessed dramatic political and economic changes with the collapse of the Communist regimes in central and eastern Europe and the former Soviet Union. There has been considerable progress toward the goal to create functioning market economies, and in most countries of central and eastern Europe this transition process is now nearly complete.

Embarking upon transition led initially to a deep economic and social crisis as the established trade links collapsed and the creation of an adequate legal and institutional framework took more time than expected by many.

In recent years, most transition economies have experienced relatively strong economic growth, but there remains still a considerable gap in real incomes per capita compared with western Europe. Many of the transition economies still have to reach the levels of real output attained before 1990. This gap in development levels compared with western Europe remains one of the most important challenges of the European continent because it risks to be a source of economic and political instability.

ECE has always insisted on the importance of institutions (including private property rights, law enforcement, fighting corruption) and other socio-political variables in determining economic performance. These factors play also a crucial role in the transition process in Eastern Europe and the CIS. The evidence of research into the effect of political variables on growth and development strongly suggests that growth and productivity are to a large degree explained by politics, policy and institutions, rather than by endogenous processes of capital formation.

The record of the former planned economies of the former Soviet Union and Eastern Europe illustrate the point. They had high rates of employment, high levels of education, and high (albeit forced) rates of savings and investment, and apparently large stocks of physical capital. Yet these resources were inefficiently employed and living standards stagnated. The institutional arrangements, which embody the incentive structures of an economy, were unable to produce efficient outcomes or respond to changes in the economic environment.

The ECE contributes to policy discussion in the region through the Economic Survey of Europe, the key publication of the organization, and by means of other, more specialized publications. In addition, seminars and round tables present an opportunity for a free and open discussion between government officials. policy makers, academics and civil society on important issues facing the region.

A key objective is to promote policy dialogue within the region by choosing topics of general interest to the membership, but also ones from which lower income countries in the region can draw lessons for their own development and transition polices. In addition, ECE also hosts a variety of conferences and workshops on technical issues intended to inform and promote discussion of technical matters of interest to its member states.

During the past decade the transition economies have faced the huge challenge of establishing a market-based economic system for mobilizing the internal and foreign financial resources required for industrial restructuring and upgrading of physical infrastructure. In general, the countries of eastern Europe and the Baltic states have made the most progress mobilizing financial resources, while most of the CIS have lagged in this regard. Most east European and Baltic countries have been able to attract foreign private capital in the form of FDI, international bond issues and bank loans and some portfolio investment in local securities. Nine of these countries have received investment grade ratings and another six countries have been rated as sub-investment grade risks by the international credit rating agencies. By contrast only Hungary was rated prior to the transition. As a result of improving economic fundamentals, most of these countries have been upgraded in the past two years and they have been able to borrow on better terms.

Given these signs of success and buoyant GDP growth, it might be easy to overlook some of the financing constraints faced by the transition economies and the important shortcomings in their systems of financial intermediation. The domestic financial markets of the transition economies are generally underdeveloped and the sources of long-term enterprise finance are very limited. It was the opinion of the joint ECE/EBRD expert meeting in December 2001 that much remains to be done to mobilize internal sources of funds in these countries, both from the side of improving
the creditworthiness of potential borrowers and increasing the supply of funds from local banks and other financial institutions.

Attracting foreign direct investment has been one of the priorities of the transition economies. Multinational corporations (MNCs) are expected to contribute to output and employment by restructuring acquired enterprises, investing in new capacity/and or improving the efficiency of existing operations. The ECE/EBRD expert meeting, while recognizing the important direct impact of MNCs, focused on a related issue: how can countries promote the development of technological spillovers (externalities) from FDI and thus enhance its indirect benefits for their economies.

The ECE has followed up on some of these conclusions within the Working Party on Industry and Enterprise Development. At its forthcoming meeting, it will discuss how local firms can become suppliers to MNCs and large domestic enterprises and whether it is desirable for countries to establish national linkage programmes.

A major theme of the regional consultative meeting held by the ECE in December 2000 was the heterogeneity of the transition economies and their continuing need for official assistance. Large differences between the countries are reflected, inter alia in their levels of income, progress toward stabilization, the stage of economic reform and the ability to attract foreign financing. Within the ECE region, eight low-income countries are eligible for the IMF Poverty Reduction and Growth Arrangement. In the recent London seminar on seven low-income countries of the CIS - Armenia, Azerbaijan, Georgia, Kyrgyzstan, Republic of Moldova, Tajikistan, and Uzbekistan (CIS7) - it was observed that about 20 million people, about half of the total population, live in extreme poverty. Most of these countries are highly indebted and rely almost exclusively on official sources of finance. Although many of the low-income countries in the ECE region have made considerable progress, further policy and institutional reforms are essential if they are to achieve sustained growth. Adequate support from the international community in the form of market access, generous financing, debt relief where appropriate, and continuing policy advice will be indispensable.

Although the need for assistance has diminished in the ECE region, especially among the middle-income countries, it still has a role to play during the transition:

• Continuing assistance is required to foster systemic reforms, finance infrastructure and help, inter alia with environmental cleanup and training. It was also noted that international capital markets do not currently guarantee maturities of the duration required for projects of long duration.
• Assistance has to be tailored to recipients' changing needs and sectoral developments.
• Public funds should be additional to private funds and should not replace private funds.
• Some recipient governments have noted the potential benefits associated with conditionality: international institutions (IFIs) help with policy design. provide technical assistance, monitor compliance with programme parameters etc., and these services may be sometimes more important than the availability of funds. However, the effectiveness of conditionality can often be increased if it is customized to country-specific circumstances and is the result of policy dialogue between donor and recipient
• IFIs should leverage their resources to maximize its "transition impact", by fostering long-lasting market reforms and setting the stage for sustainable economic growth. Appropriate mechanisms or policies include providing help in strengthening market supporting institutions, closer interaction between IFIs and the private sector and the judicious application of conditionality.

The Inter-regional Conference on Financing for Development in Mexico City in January 2002 was jointly organized by the regional commissions. Among other things, the ECE shared conclusions from the policy discussions that occurred at the regional consultative and expert meeting in Geneva. The conference also concluded that experiences with national FDI linkage programmes (see below) might be a particularly fruitful area for an exchange of information between regional commissions.

The regional meetings held within the context of the Financing for Development process have contributed to policy dialogue in several areas among which are: ¹ the mobilization of financial resources. enhancing the benefits of FDI and the need for a continuation of official financial assistance.

Several conclusions relating to official assistance were drawn by participants at the ECE regional meeting:

• Although the external financing needs of developing and transition countries must be met increasingly by private finance, official resources will remain indispensable for low-income countries. To this end it was proposed that the developed countries fulfil their commitment to provide ODA equivalent to 0.7 , percent of their GDP.
• Further progress needs to be made in the coordination of assistance between donors. Coordination is often difficult because of the differing objectives of multiple donors, differing assessments of country needs and the lack of common aid preferences. The lack of experience in the administration of assistance in some transition economies may also hinder its efficient use.
• More effective regional cooperation could bring benefits in certain areas because trade patterns and physical infrastructure under the former economic system were shaped by governments and may not be suitable for cross-border transactions emerging as a result of market forces.
• A proposal was made to provide debt relief to several low-income transition economies that appear to have unsustainable debt burdens.
• It has been a long-standing ECE view that once the urgency of assistance needs is established and donors make financial commitments, funds should be disbursed quickly - but in a coherent framework of assistance. This may help to avoid undermining any popular support for reform and may well enhance it.