Democracy or development? Eastern Europe may have to choose

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When the Berlin Wall fell in 1989, industrialized countries, including Canada, scrambled to help nations in Eastern Europe introduce democratic and economic reforms. Now, 24 years later, the organization set up to drive those changes says the reform process has been stalled for years and many of these countries may never catch up to the developed world.

In bleak assessment of the political and economic situation across much of Eastern Europe, including Russia, the European Bank for Reconstruction and Development, EBRD, said the transition toward democracy and capitalism has gone nowhere for nearly a decade.

The transition "has essentially been flat-lining since the mid 2000's and has been worsened by the financial crisis," EBRD President Sir Suma Chakrabarti said at a press conference on Wednesday at the bank's head office in London. "If these economies become stuck their living standards will not begin to approach those in advanced economies for the next half century." He added that in some countries "reform has not just stalled but has in fact gone into reverse."

The EBRD was created in the early 1990s by 40 countries, including Canada, the United States and most of Western Europe. There are now 64 member nations and the mandate of the EBRD is to provide financing to businesses and public institutions in Eastern Europe and elsewhere in order to promote democracy and open markets. The organization currently has projects in more than 30 countries in Europe, Central Asia, the Middle East and North Africa.

The bank's annual survey of the political and economic situation in the areas where it operates is called "Stuck in Transition?"

"After all of the remarkable achievements in the 1990s, very little has happened in terms of economic reforms in most of the countries we are operating," said Erik Berglof, the bank's chief economist. "Much of our region is stuck in transition, in a vicious circle of weak political institutions and lack of economic reform." Only a handful of countries in southeastern Europe, notably Albania, have shown much progress recently, he added.

One problem has been a lack of incentive from the European Union. For years, these countries were told that if they reformed they could gain entry into the EU. However, the financial crisis and ongoing recession has made that less attractive.

The "EU is not exactly what we had in mind when we started to fight for it," Albania's Prime Minister Edi Rama told the press conference. "The more we approach it, the more we have to deal with a different thing than what we dreamed of."

Roza Otunbayeva, former president of the Kyrgyz Republic, said her country has introduced a host of democratic reforms, but seen little economic progress. She highlighted the continuing controversy in the country involving a gold mine operated by Canada's Centerra Gold. The mine is the country's biggest employer, and the government and Centerra have been involved in a dispute over control of the project. The country's parliament has been divided and the controversy has led to riots and hunger strikes.

"Democracy helps for openness," Ms. Otunbayeva told the press conference. "But at the same time, democracy stops, sometimes, development. This is the problem which we are facing."

Ms. Otunbayeva and Mr. Rama said China has stepped into the void left by the EU and is offering badly needed cash for infrastructure and investments. Mr. Rama said he and 15 other leaders from countries in his region will meet China's Prime Minister next week to sign a series of agreements. "China is showing it is very willing to have a role," he said.

Economist Tarik Yousef, who is a member of the board of directors of the Libyan central bank, said many of the ERBD's conclusions apply to Libya and North Africa. He said countries that went through the Arab spring in 2011 have been stuck in transition as well, unable to move beyond the initial revolution. And many are now facing deep divisions along religious and ethnic lines.

Unless these countries can come up with a way to move forward "these revolutions could be reversed and you would have the restoration of the old regimes with new faces," he told the press conference. He added that the West has not provided much help. "It is my firm conviction that we are today stuck in the first stage of our transition because the outside world looked the other way, did not engage, and allowed us to become victims of an immense level of polarization."

Businessman and philanthropist George Soros also lamented the weakened role of the EU. "The main source of trouble is in the European Union itself because one way or another, [post 1989 there was] clearly a move to try to join the West and the West is in deep trouble, particularly in the European Union," said during the press briefing. "And this is the region that desperately needs the European Union."

Nonetheless, Mr. Soros said he remain optimistic that Eastern European countries will develop and reform. "I'm rather hopeful because the situation is so bad that it's liable to improve," he said.