In Central And Eastern Europe - Microfinance Centre

CHAPTER 2
THE CEE AND NIS REGIONAL CONTEXT FOR MICROFINANCE
This chapter describes the origin, development, and broader role of microfinance in Central and Eastern Europe and the New
Independent States—all in the context of the larger macroeconomic environment. Specifically, it explains how a rise in unemployment
and poverty, in the transition from socialist-run economies, has triggered the growth of micro and small enterprises. It is their
needs for financing that have, in turn, spurred the development of microfinance in the region.
The Rise of Unemployment and Poverty in the Region
The countries of Central and Eastern Europe and the New Independent States are diverse in their traditions,
cultures, and histories. Yet, they share two important historical elements. First, at some point after 1917, each
was ruled by a communist regime—whether the soviet, state-bureaucracy variety or Yugoslavia’s self-management
variety. Second, for more than a decade now, each has been in transition toward democratic rule and a
market economy.
Different countries in the study are at different stages in this transition. The 10 EU accession countries (Bulgaria,
Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia) are the most
advanced. They have successfully developed more democratic governments and active private sectors. In many
of the other countries, particularly those in the Caucasus and NIS, democracy is less established, and the private
sector remains underdeveloped.
Despite finding themselves at different stages of transition, all of the countries in the region share certain fundamental
macroeconomic characteristics. Most important is that poverty has increased significantly in each over
the last 10 years. While the transition toward a market economy has brought new opportunities to many people,
it has brought material hardship and the loss of economic security to others.
The development of poverty in these countries differs from its development elsewhere by the speed and magnitude
of its onset. Here, unlike in developing but nontransitional countries, poverty has been a new and sudden
condition. It emerged instantly in the 1990s, as a decline in the well-being of much of the population, and created
an enormous class of “new poor.” Between 1988 and 1998, absolute poverty rates increased from 2% of the
region’s population to 21%. 1
Today, the percentage of people living below the poverty line is as high as 68% of the population of Tajikistan,
50% of Kyrgyzstan, and 40% of Armenia. By contrast, such poverty is virtually nonexistent in most of the countries
of Central Europe. The main cause of the region’s poverty is unemployment. In many of these countries,
unemployment has become a persistent problem due to ongoing privatization and low levels of growth. The
1 World Bank, Making Transition Work for Everyone: Poverty and Inequality in Europe and Central Asia (Washington, D.C.: World Bank, 2000).
The CEE and NIS Regional Context for Microfinance