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Transition Report 2013 Stuck in transition?

CH1 180sq

Facts at a glance

2% projected growth of the transition region in 2013, the lowest rate in 15 years (with the exception of the 2009 recession).

IN 15 countries support for markets declined after the crisis.

Cover 180sqV2

 

AROUND
2005
The year by which most transition countries had closed the productivity gap, compared to other countries at similar income levels.

1% estimated average boost to long-run annual growth of GDP per worker in non-EU transition countries resulting from institutional reform.


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Convergence at risk

Conclusion

Economic reform has stagnated across most of the transition region since the mid-2000s, with the marked exception of the Western Balkans (where reform has been supported by the EU approximation process). In less advanced transition economies improvements in economic institutions have been stunted by weak political institutions. In more advanced economies, particularly the new members of the EU, the crisis and austerity have led to a sharp decline in support for market-oriented 
reform, and reform reversals have been observed in a number of countries.

As a consequence – and without the benefit of the initial productivity boost associated with the global integration and liberalisation seen in the 1990s and early 2000s – growth in potential output per worker is projected to be modest in the next 10 years (around 2 to 4 per cent on average) and to decline further in the following decade. At that rate convergence will stall in some countries and slow to a crawl in many others. On the basis of current policies only the CEB countries are projected to reach or exceed 60 per cent of the average per capita income of the EU-15 over the next 20 years, with most transition countries remaining far below this threshold.

How can countries escape from this growth trap? This is not a new question and has been considered in several recent studies.1 These studies have focused on identifying key areas of reform that could help to invigorate growth, such as improving the business environment, fostering competition, reducing non-tariff trade barriers and developing local sources of finance. For the most part, such policy recommendations are not controversial. The question is why transition countries will not necessarily embrace them. What can be done to promote not just growth, but reforms that may lead to growth? That issue is central to this Transition Report. The remaining chapters address it from four angles.

First, analysis suggests that political institutions are a key determinant of economic reform in transition countries. They also appear to influence growth directly – as implied by the long-term forecasting model presented in Box 1.1 and by academic literature.2 Chapter 2 examines political change in the transition region, particularly the question of whether progress towards democracy becomes more likely as a result of economic development.

Second, what determines economic reform and the quality of market-supporting institutions in the transition region? Political institutions are an important factor, but clearly not the only one. Some countries with few constraints on the executive, or with imperfect democracies, have made significant progress with reforming their economies. Others have stunted reform almost entirely. Chapter 3 looks at what, if anything, can be done to encourage the development of better economic institutions in less-than-perfect political environments and why there is significant variation in the quality of economic institutions, even among stable democracies.

Third, Chapter 4 analyses the development of human capital in the transition region and its links to economic institutions. Like political institutions, human capital benefits growth directly (see Box 1.1). It might also interact with economic reform. Better economic environments may influence the returns to education and hence the incentives that determine a country’s human capital stock. Conversely, better education may increase the chances of successful reform. Furthermore, reforms to education are achievable and have been attempted even in environments with weaker political institutions.

Lastly, Chapter 5 considers the extent to which countries in the transition region are inclusive in terms of broad access to economic opportunities. Economic inclusion is a likely reason why some market-based systems have been more successful than others, both in generating growth and in making reforms work. This is correlated with the extent to which countries are democratically organised, and with the quality of economic institutions and education, but merits separate study. This chapter represents the first attempt, to our knowledge, to measure economic inclusion in the transition region using a consistent dataset, assessing the inclusiveness of institutions and education systems in the region.

In short, this Transition Report takes the view that it is not enough to debate which reforms are the most critical in order to revive long-term growth in transition countries. It is also important to understand the political, social and human capital constraints that stand in the way of these reforms. Only then can one hope to find policy levers that might eventually help to relax or circumvent these constraints.

  1. 
See Becker et al. (2010), EBRD (2010) and World Bank (2012), among others. [back]
  2. See Acemoğlu and Robinson (2012), North and Weingast (1989), North (1990) and Olson (2000). [back]

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