Financial Times

The December ratings for LEGSI (Lehman Brothers Eurasia Group Stability Index), which measures stability in 10 emerging market countries, reflected modest increases in Croatia, Russia and Turkey; decreases in Poland, Hungary and Ukraine; and remained unchanged in Azerbaijan, Bulgaria, Indonesia and Thailand since November.

As expected, ratings three months after the September 11 attacks do not show dramatically reduced stability in the countries surveyed, but rather the acceleration of existing trends, such as the global economic slowdown and the warming of relations between the US and Russia.

Particularly revealing in December is the number of countries showing declines in social stability, as measured by the society component of the accompanying graphic, which dropped in seven out of 10 countries.

The decline is a result of the interplay between policymakers' actions and resulting social and political tensions. One theme developing in Bulgaria, Croatia, Poland and Ukraine this month is a drop in social stability after attempts to impose fiscal austerity measures were met with objections.

One upcoming test will be the European Union accession process. The process of being admitted to the EU, while expected to benefit countries once they actually join, is likely to be significantly destabilising during the middle and final stages of the process, as tension over reforms puts a stress on fragile political coalitions and mobilises groups, including still powerful successors of communist-era unions.

While both Poland and Hungary are near the finish line on fulfilling the criteria and are expected to complete the EU accession process by 2004, we expect both countries will be contending with increased instability in the near term. This is particularly true in Poland, where the remaining reforms - notably, agriculture - are also the most controversial and potentially destabilising ones.

This tension is likely to be further exacerbated by the presence of the Peasant party in the new government coalition, and may affect the functioning of the government in other areas as well.

The tendency of lawmakers to save the most difficult reforms for last (a pattern that may be repeated in Bulgaria, among others) will result in a process that can become more disruptive as it nears resolution. The author, Tina Nelson, is director, global political risk, at Lehman Brothers' Eurasia Group.

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