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Transition Report 2013 Stuck in transition?

CH3 180sq

Facts at a glance

ALMOST
25
years after the start of the transition process, economic institutions in the transition region are, on average, still weaker than in other countries with comparable levels of income.

0.5 The correlation between measures of democracy and regulatory quality in a global sample of countries.

Cover 180sqV2

 

THE
3
-year period prior to accession saw a peak in terms of institutional improvements in EU accession countries.

OVER
33%
of Kyrgyz SMEs say that unofficial payments are required in everyday business.


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Economic institutions

Critical junctures: a comparison

The above analysis confirms the strong (and probably causal) effect of democracy on economic institutions and the likely relevance of several other factors: history, geography, per capita income levels, the presence of natural resources, political, ethnic and economic polarisation, international integration and the design of political institutions.

However, even accounting for all of these factors, at least 20 to 30 per cent of cross‑country variation in the quality of economic institutions remains unexplained. This may relate to factors that are difficult to capture in a regression. For instance, trajectories of economic reform can depend on pivotal moments in history and the way in which they develop. This section examines some of these episodes to see if they confirm the relevance of the factors identified so far, and to see whether they hold lessons for successful institutional reform.

All transition economies went through a critical period at the beginning of the transition process – roughly between 1988 and 1993. Countries emerged from this period with vastly different political systems and at different stages of reform and institution building.1

The following analysis highlights further critical junctures after this period in countries that missed their initial chance to establish full democracies and gain a head start with economic reforms. Within this group, the focus is on reform opportunities triggered by political change in imperfect democracies, which have been far more frequent than transitions from dictatorships to democratic regimes.

From among a dozen or so candidates affecting 10 countries,2 four episodes were chosen because they represented diverse experiences and were viewed as important windows of opportunity at the time they occurred: Romania in 1996, the Slovak Republic in 1998, Georgia in 2004 and Ukraine in 2005.3The first two relate to changes in government triggered by elections, and the last two relate to popular uprisings – the “Rose” and “Orange” Revolutions respectively.

  • After the overthrow of Nicolae Ceauşescu’s regime in December 1989, Romania’s former communist elite, led by President Ion Iliescu, managed to retain political power for the first half of the 1990s. With the exception of price and trade liberalisation, market-oriented reforms proceeded slowly, and Romania also lagged behind in terms of international integration. Parliamentary elections in November 1996 led to the formation of a centre‑right government led by Victor Ciorbea, backed by a 60 per cent majority in the lower house of parliament. Ciorbea announced his intention to break with Romania’s communist past and fight corruption.
  • Following Czechoslovakia’s “velvet divorce” in 1992, the Slovak Republic went through a difficult period under Prime Minister Vladimír Mečiar, which involved non-transparent privatisations and high-level corruption. Of the 10 European countries in the transition region that applied for EU membership in 1994-96, the Slovak Republic was the only one deemed not to comply with the political requirements in the accession criteria. Parliamentary elections in 1998 led to a strong mandate for change from the electorate, which enabled the pro‑reform Slovak Democratic Coalition (SDK) led by Mikuláš Dzurinda to build a broad majority coalition. The timing of the elections – which were held in the immediate aftermath of the Russian financial crisis – may have influenced this outcome.
  • As in Romania, Georgia’s early transition was dominated by elites affiliated with the former communist regime. Rampant corruption and crime, an erratic electricity supply and poorly managed state finances contributed to a popular insurrection following a disputed election in November 2003. This brought Mikheil Saakashvili, a young Western-educated lawyer, to power in January 2004.
  • Ukraine’s first post-Soviet decade was marked by the presidency of Leonid Kuchma, a member of the former communist elite, who was first elected in 1994. Kuchma’s government undertook first-generation economic reforms, but property rights, contract enforcement and competition policy remained weak, and corruption was widespread. A disputed election in November 2004 led to mass protests, which culminated in a second run-off in December 2004 – deemed free and fair by international observers – and the inauguration of Viktor Yushchenko as president.

Charts 3.7, 3.8 and 3.9 show measures of political institutions, economic reform and economic institutions two years before and six years after the critical juncture, which is labelled “t” in the charts. According to the Polity database, three of the four episodes were associated with at least a two-notch improvement on the -10 to 10 democracy scale. Ukraine recorded a one-notch rise one year into the Yushchenko presidency (see Chart 3.7).

Furthermore, all episodes were associated with a pick-up in economic reforms, as reflected in the EBRD transition indicators for privatisation, enterprise restructuring and market liberalisation – a modest pick-up in Georgia, the Slovak Republic and Ukraine, and stronger improvements in Romania, although this probably reflected the country’s less advanced starting point (see Chart 3.8).

Chart 3.7

Source: Polity IV.
Note: This democracy index uses a scale of -10 to 10, where 10 is the most democratic.

Chart 3.8

Source: EBRD.
Note: The chart shows the average of the EBRD’s country-level transition indicators.

However, a different and more diverse picture arises from the broader WGI measures of economic institutions. Chart 3.9 shows the average of the same four indicators – government effectiveness, regulatory quality, law and order, and control of corruption – that have formed the basis for most of the previous analysis in this chapter.

Chart 3.9

Source: World Bank.
Note: The chart shows the average of the four WGIs related to economic institutions: government effectiveness, regulatory quality, law and order, and control of corruption.

Of the four episodes, only the Georgian Rose Revolution was followed by sustained improvements in economic institutions according to the World Bank data. Institutions in the Slovak Republic improved only marginally, on average, in the first four years of Dzurinda’s government (although from a much higher level than in the other three countries), and picked up only after Dzurinda’s re-election in 2002. In Romania and Ukraine, however, institutions deteriorated from what were already low levels. In Romania the downward trend continued from 1996 until 2002, while in Ukraine it continued until the end of Yushchenko’s presidency in 2010 and has yet to be reversed.

This remarkable difference in performance reflects the different policy priorities of – and the constraints on – the governments that assumed responsibility at the beginning of each episode.

  • In Romania Victor Ciorbea’s government devised an ambitious IMF-supported stabilisation and reform programme in early 1997. However, after some initial successes – including the creation of a competition authority, the establishment of currency convertibility and acceleration of the privatisation programme – reforms stalled. In critical areas such as restructuring, privatisation of large enterprises and corporate governance, there was little further progress. Having lost support within his own party, Ciorbea resigned in March 1997. Two ineffective centre-right governments followed, bogged down by internal dissent and a confrontation with mineworkers in 1999. Iliescu and the former communists returned to power in November 2000.
  • In the Slovak Republic the broad nature of Dzurinda’s anti-Mečiar coalition – which included former communists, environmentalists, other left-wing parties, liberals and Christian democrats – precluded decisive reforms (with the notable exception of the successful sale of a number of state-owned companies previously deemed “strategic” to foreign investors in 1999 and some other measures to attract foreign direct investment). However, following Dzurinda's re-election at the head of a narrower coalition in 2002, there were further efforts to attract foreign direct investment. Reforms included a comprehensive review of the tax regime, amendments to the commercial and criminal codes and significant improvements to the business environment.
  • In Georgia the new government under Mikheil Saakashvili – which had considerable parliamentary backing – focused on reforms of public revenue management, simpler and lower taxes, large-scale privatisation and an aggressive anti-corruption campaign that included eastern Europe’s first law holding businesses legally liable for bribery. Perceptions of the business environment improved dramatically (see Chart 3.10). The same period, however, also saw increased government control over the media and a number of prosecutions that appeared to be politically motivated. Furthermore, the desire to limit state involvement in the economy led to a weak competition policy and market concentration in a number of industries. Income inequality (and inequality of opportunity; see Chapter 5) also remained high, prompting questions about the sustainability of Saakashvili’s reform model.
  • With the exception of its accession to the World Trade Organization (WTO) in May 2008, Ukraine made no significant progress in terms of economic reforms under Yushchenko’s presidency. Attempts to revitalise privatisation were marred by infighting within the government coalition. After the global financial crisis in late 2008, the government attempted to revive reform in the context of an IMF-supported programme. A number of laws were passed in 2009 to make it easier to set up new businesses, reduce regulatory burdens, improve public procurement and initiate gas sector reform. However, their implementation and follow-up was weak owing to opposition from vested interests and a deteriorating relationship between the president and his prime minister. The 2010 presidential elections handed power to Viktor Yanukovich, whose contested victory in November 2004 had triggered the Orange Revolution.

Chart 3.10

Source: BEEPS.
Note: The chart shows businesses which stated, in each survey year, that corruption or tax administration were a “major” or “moderate” obstacle to business.

To summarise, the governments of Saakashvili in Georgia and (eventually) Dzurinda in the Slovak Republic managed to transform their countries’ economic institutions for the better, while the Romanian and Ukrainian governments that assumed power in 1996 and 2005, respectively, failed. The remainder of this section discusses factors that may have played a role in generating these differences in outcomes.

 

  1. For analysis of these differences, see EBRD (1999), Frye (2007) and Aslund (2013). [back]
  2. These were identified as improvements of at least one notch in the Polity IV democracy measure in countries with initial levels of democracy of between 1 and 7. These included episodes in Albania (2002 and 2005), Estonia (1999 2000), FYR Macedonia (2002), Georgia (1995 and 2004), Kyrgyz Republic (2010), Moldova (2001), Romania (1996), Russia (2000), Slovak Republic (1998) and Ukraine (1994 and 2006). [back]
  3. The case studies that follow are based on past issues of the EBRD's Transition Report and the following additional sources: for Romania, Boia (2007) and Cviić and Sanfey (2010); for Georgia, World Bank (2012b) and Papava (2013); for the Slovak Republic, Eperjesiova (1999); and for Ukraine, Pivovarsky (2013).[back]

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