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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

Natural resource endowments

As shown in Chapter 2, an abundance of natural resources – reflected in high natural resource rents (revenues net of extraction costs) as a share of GDP, or a large share of commodities in total exports – can lead to a weakening of democratic institutions.1 One interpretation for this is that stronger political institutions impose checks and balances on the ruling elites and make it more difficult to appropriate natural resource rents. These elites will therefore be particularly opposed to democratisation and political reform.

For the same reasons, an abundance of natural resources would make improvements in economic institutions, such as the rule of law or control of corruption, less likely.2 Chart 3.4 shows that resource-rich and resource-poor countries in the transition region (excluding the future EU members) had similar average scores for control of corruption in the mid-1990s. However, these levels have been steadily diverging, particularly during the period of high commodity prices from 2003 onwards.

Chart 3.4

Source: World Bank.
Note: Countries are classified as “resource-rich” if natural resource rents amount to 10 per cent of GDP or more, based on World Bank data. In this chart the EU countries in the transition region are: Bulgaria, Croatia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic and Slovenia.

Tables 3.1 and 3.2 confirm that an abundance of resources has a negative effect on economic institutions over and above its effect through weaker political institutions (which itself constrains economic reform). This effect is statistically significant regardless of which measure of economic institutions is used, in both the world and transition samples.

At the same time, there are important differences between the experiences of individual countries. Some Gulf countries, for example, have much stronger economic institutions than their political institutions would predict (see Chart 3.5). In the transition region this also seems to be true for Azerbaijan and Kazakhstan for some measures, such as the distance to the frontier measures in the World Bank Doing Business reports. Government effectiveness has also been improving in Kazakhstan (see Chart 3.6).

These improvements could reflect the use of natural resource wealth to strengthen the implementation capacity of governments, pursue basic business environment reforms and reduce petty corruption by raising the pay of officials, regulators and inspectors. In addition, countries with natural resource wealth may have an incentive to engage in such policies in order to attract the foreign investment and expertise needed for the exploitation of natural resources.3 Similarly, the presence of multinational oil or mining companies can facilitate the transfer of skills and the adoption of international business practices – which may, over time, lead to improvements in some economic institutions.

Chart 3.5
Chart-3.5

Source: World Bank and Polity IV.
Note: The chart plots the average of the four Worldwide Governance Indicators (WGIs) (rule of law, regulatory quality, control of corruption and government effectiveness) for 2011 against 2011 Polity2 scores.

Chart 3.6

Source: World Bank.
Note: The WGI government effectiveness indicator is shown on the left-hand axis; the Doing Business measure of the distance to the frontier is shown on the right-hand axis.

Table 3.1 (last column) shows that, in a subset of countries with low Polity scores (less than -5), an abundance of natural resources is positively and significantly associated with the distance to the frontier.4 However, for broader measures of economic institutions – such as control of corruption or the rule of law, which are reflected in the average WGI score – the effect of natural resources generally remains negative, even for countries with low Polity2 scores. This is also true for regressions involving the transition indicators (see last column of Table 3.2).

 

  1. See also EBRD (2009) and Boix (2003). [back]
  2. See Karl (1997). [back]
  3. See Nikolova (2012) [back]
  4. The total effect for these countries is the sum of the coefficient for the commodity share of exports and the interaction term between the commodity share of exports and a dummy variable for countries with low Polity scores (that is to say, scores below -5). [back]

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