number of small commercial banks. However, many of these banks were created to serve particular interest groups for licit and illicit activities and could not and would not be interested in serving the public for savings and credit purposes. The fragility of the systems quickly emerged with the first bankruptcies and governments responded by strengthening banking regulations which resulted in a reduction in the number of banks and in an increase of the average size. In the late 1990s, the typical banking system in these countries included a few tens of banks with two-three banks owning over half of the consolidated capital in the system. To date, financial systems remain very weak and vulnerable, lending rates are high with large interest spreads between credit and lending rates and very low access for small businesses and farms. Sources of capital are also almost exclusively enterprises which are obliged to operate with banks by law while only a very small percentage of households holds bank deposits (Pomfret 2003).

The 1998 Russian financial crisis, while it had some positive externalities on exports, delayed reforms further. Comparing the pre and post crisis period, the EBRD transition indicators deteriorated in most countries<sup>7</sup> with the result that, at the outset of the new millennium, transitional reforms were still largely incomplete and markets were not supported by the necessary institutional infrastructure.

# **Growth and the labor market**

The scale of the general _output_ decline has been faster and deeper in the CIS-7 than elsewhere in transitional economies (figure 1.1). By the end of the recession in 1995, the average GDP stood at 55% below the 1989 level with Armenian and Georgian output having fell by a staggering 70% between 1989 and 1993. As elsewhere in the CIS, the deep recession has been followed by a macroeconomic stabilisation period between 1994 and 1995 that halted the output decline and brought down inflation to manageable levels. Since 1996 and despite the 1998 crisis, the CIS-7 have been able to re-establish growth with an estimated cumulated and cross-country average for the period 1996-2001 of 27.1%. This is an encouraging achievement although the pre-transition level of output target remains some years away as - on average - the CIS-7 are still almost 36 percentage points below the 1989 output level. Among the CIS, the only outlier is Uzbekistan, a country that had a relatively minor recession during the early years of transition followed by moderate growth that allowed this country to bring the output level above its pre-transition level.<sup>8</sup> _Population_ trends also show remarkable changes during the recession years and later. Birth rates plummeted as elsewhere in the CIS and the rates of natural population growth decreased making the population on average older. Net external migration rates have been very significant with a net outflow of people in all countries and in every year between 1992 and 2002 with peaks of emigration in Kyrgyzstan and Tajikistan between 1992 and 1994 (a net emigration of between 1% and 2% of the population every year). The number of internally displaced persons and refugees has also been very large due to conflict inside these countries and conflicts in neighboring regions coupled with very poor economic conditions.

> 7 Vandycke, N. (2003) _"Economic Development and Private Sector Growth in the Low-Income CIS-7 Countries: Challenges and Policy Implications"_ , background paper to the Lucerne CIS-7 conference, January 2003, www.cis7.org 8 The diversity of Uzbekistan vis-à-vis other countries treated in this paper will emerge in several occasions and deserves a word of warning. Uzbekistan never had a population census since the last census conducted by the Soviet Union in 1989 which implies that any figure drawn from sample surveys should be treated with caution. Moreover, macroeconomic official statistical figures have been questions by the ADB, EBRD, IMF and World Bank in several occasions, including GDP figures and particularly during the period 1998-2002. There are several indications that GDP has been overestimated due to a consistent underestimation of inflation and the deflators used to deflate GDP.

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