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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

Box 3.1. The legacy of former empires

For better or worse, empires and colonial powers may leave a long-lasting legacy in terms of economic and political institutions.

Ottoman rule, in particular, has had persistent negative effects on financial development and social norms relating to trust in south-eastern Europe.1 Habsburg rule, in contrast, has had a positive legacy in terms of a lack of corruption.2 Those areas of Poland that used to be under Prussian or Austrian rule tend to vote for more liberal parties today compared with areas that were once part of the Russian empire.3 Such persistence could reflect the influence of long-lasting historical episodes on social norms, which have subsequently been transmitted from generation to generation.

Chart 3.1.1 shows how the EBRD transition indicators differ according to old imperial boundaries. The level of transition is markedly higher in countries that formed part of the Habsburg and Prussian empires compared with those that were under Ottoman and Russian control. However, a country’s history does not tell the whole story. Within the boundaries of former empires there is considerable diversity across countries, as shown in Chart 3.1.2.

As discussed elsewhere in this chapter, this diversity may reflect other elements, such as initial factor endowments and their distribution in society.4 But even then, inherited institutions or social norms might have continued to make their effects felt by modifying the way in which conditions at the beginning of the transition process shaped reform outcomes. For example, the failure of early privatisations is often attributed to control of the political process being seized by special interest groups which opposed reforms that would erode their rents. Yet their propensity, and ability, to oppose such reforms may have depended on the quality of contemporary economic institutions, whose foundations go back centuries.

A regression analysis was used to investigate this possibility with regard to natural resources. It transpires that the concentration of economic activity in the natural resource sector at the start of the transition process is not significantly associated with transition scores today for the transition region as a whole.5 However, in the former Ottoman and Russian empires, this association is negative, significant and sizeable. On average, the effect of going from zero concentration in natural resources in 1989 to the average concentration for the sample, combined with Ottoman heritage, is associated with a reduction in the quality of economic institutions that is equivalent to the difference between the transition scores of Bulgaria and Estonia today. The combined effect of natural resource wealth and the legacy of the Russian empire is even larger.

On a more optimistic note, the same regressions suggest that although institutions are deeply rooted in history, they do change over time. This can be shown by repeating the analysis for different vintages of the EBRD transition indicators and plotting the effects of natural resource concentration over time for each empire. The gap between the average quality of institutions in the various former empires appears to be narrowing (see Chart 3.1.3).

Chart 3.1.1

Source: EBRD and authors’ calculations.
Note: The chart shows the sum of standardised individual scores for large-scale privatisation, small-scale privatisation, enterprise restructuring, price liberalisation, reform of the trade and foreign exchange system, competition policy and overall infrastructure reform. Standardised scores are obtained by subtracting the mean and dividing by the standard deviation.

Chart 3.1.2a

Chart 3.1.2b

Chart 3.1.2c

Chart 3.1.2d

Source: LiTS (2006) and authors’ calculations.
Note: See note on Chart 3.1.1.

Chart 3.1.3

Source: LiTS (2006) and authors' calculations.
Note: The chart plots the estimated combined impact of the share of the population employed in mining in 1989 and the imperial legacy on the standardised transition indicators, based on coefficients from regressions estimated separately for every year between 1990 and 2006.

 

  1. See Grosjean (2011a and 2011b). [back]
  2. See Becker et al. (2011). [back]
  3. See Grosfeld and Zhuravskaya (2013). [back]
  4. See Engerman and Sokoloff (2000) for evidence for the Americas. [back]
  5. The chart plots the estimated combined impact of the share of the population employed in mining in 1989 and the imperial legacy on the standardised transition indicators, based on coefficients from regressions estimated separately for every year between 1990 and 2006. [back]

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