Transition Report 2013 Stuck in transition?

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Facts at a glance

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.

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

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

Economic institutions

Political systems in multi-party democracies

Chart 3.5 shows that the quality of economic institutions varies widely among countries with Polity2 scores of between 8 and 10. In addition to the reasons considered so far, another possible explanation might be differences in the design of democratic political systems.

One relevant factor is the electoral system, which determines how votes translate into seats in parliament. This affects both the distribution of power within a government and the extent to which politicians are accountable to voters. In the absence of clear evidence, it is impossible to say which electoral system is most conducive to sustained economic reform. While majoritarian democracies usually lead to the emergence of single-party governments, proportional representation is more often associated with coalition cabinets, as it gives more weight to minority parties and independent candidates. Multi-party cabinets may be more representative, but they may also be more unstable, owing to internal ideological divisions. Similarly, countries with proportional systems may have higher spending and budget deficits.1

Another factor is the distribution of power across branches of government. Parliamentary democracies lack the strong leadership of a president, which may be crucial for pushing through essential but unpopular reform agendas. At the same time, they constrain the scope for abusing presidential power. Presidential systems may be particularly prone to corruption and clientelistic spending in the transition region, which had extensive experience of concentration of political power during communism.

Table 3.3 explores the link between a country’s political system and its economic institutions by adding political variables to the first regression model in Table 3.1 and the first and third regression models in Table 3.2 (see first four columns). It uses data on (i) the degree of proportionality of the electoral system (where 0 indicates a proportional system, 1 indicates a mixed proportional-majoritarian system, and 2 indicates a majoritarian system) and (ii) the distribution of power between the president and parliament (where 0 indicates a parliamentary system, 1 indicates a semi-presidential system dominated by parliament, 2 indicates a semi-presidential system dominated by the president, and 3 indicates a presidential system) from Comparative Political Dataset II.

The regression results show that countries with more proportional systems tend to have better economic institutions. The effect is slightly stronger for the transition region than for the worldwide sample. Perhaps surprisingly, the link between proportionality and economic institutions does not seem to be modified by the quality of the political regime, suggesting that broad political representation has a positive impact on economic institutions even in imperfect democracies. Presidential systems also appear to be associated with better economic institutions, but the effect is typically statistically insignificant.

The ideologies and relative strength of the main political parties may also affect the quality of economic institutions. Strong differences between the parties in parliament may slow down economic reform, not only because divided parliaments may find it difficult to agree on the design of economic institutions, but also because of the threat of policy reversals should the opposition gain power.

One way of expressing these divisions that has been proposed for the transition region is the use of an index of political polarisation. This measures the representation in parliament of the largest former communist faction when an anti‑communist party controls the executive, and vice versa.2 For example, in Bulgaria in 1994 the anti-communist Union of Democratic Forces won 29 per cent of the seats in parliament and was the largest party in opposition, with the government being formed by the former communist Bulgarian Socialist Party. Bulgaria’s polarisation score in that year was therefore 29. 

The last two columns of Table 3.3 show that political polarisation is indeed associated with lower-quality economic institutions in the transition region. The interaction term with the Polity variable indicates that the effect can only be felt in relatively democratic regimes, as one would expect. The next section explores some examples of how polarisation can undermine reform.

Table 3.3

Exploring the influence of the political system on economic institutions

  World sample Transition region sample
Dependent variable WGI average WGI average WGI average Transition indicator average WGI average Transition indicator average WGI average Transition indicator average
Polity2 0.032** 0.083*** 0.036* -0.003 0.080** 0.054 0.058*** 0.079***
(0.015) (0.027) (0.020) (0.023) (0.029) (0.046) (0.017) (0.026)
Majoritarian system -0.201**   -0.229** -0.407**        
(0.084)   (0.085) (0.159)        
Polity2*Majoritarian system -0.002   -0.002 0.021        
(0.010)   (0.011) (0.018)        
Presidential system   0.156     0.158* 0.075    
  (0.094)     (0.090) (0.126)    
Polity2*Presidential system   -0.016     -0.018 -0.009    
  (0.011)     (0.011) (0.016)    
Polarisation index             -0.006 0.010
            (0.006) (0.008)
Polity2*Polarisation index             -0.002* -0.003**
            (0.001) (0.001)
Natural resources 0.000 -0.001 0.002 -0.002 -0.003 -0.005 -0.001 -0.001
(0.002) (0.002) (0.002) (0.003) (0.003) (0.005) (0.003) (0.004)
Trade openness 0.374*** 0.345*** 0.511*** 0.216 0.453*** 0.184 0.418** 0.120
(0.110) (0.111) (0.110) (0.179) (0.148) (0.215) (0.151) (0.169)
Financial openness 0.139*** 0.114*** 0.153*** 0.110*** 0.131*** 0.086** 0.088*** 0.056
(0.031) (0.038) (0.029) (0.031) (0.036) (0.040) (0.031) (0.037)
Income 0.338*** 0.359*** 0.371*** 0.081 0.354*** 0.044 0.309*** -0.027
(0.068) (0.069) (0.068) (0.079) (0.080) (0.111) (0.058) (0.083)
Observations 184 184 96 96 96 96 92 92
R-squared 0.941 0.935 0.923 0.886 0.907 0.834 0.925 0.889
Adjusted R-squared 0.934 0.928 0.907 0.863 0.888 0.801 0.909 0.865
F-value 180.771 145.444 363.096 23.075 101.457 10.810 67.188 16.479

Source: See Annex 3.2.
Note: The table shows coefficient estimates from panel regressions, based on three-year averages. Standard errors are clustered by country and shown in parentheses. All regressions include the same controls as in Tables 3.1 and 3.2: ethnic fractionalisation, state antiquity, landlocked, ruggedness, EU membership (for transition region regressions), and time fixed effects (not reported). Polity2, trade openness, financial openness, income, electoral systems, political systems, polarisation and the interaction terms are lagged by one period. Standard errors are clustered by country. *p<=0.10; **p<=0.05; *** p<=0.01.


  1. See Persson and Tabellini (2005) for a review of the literature on the economic effects of constitutions, as well as EBRD (1999). [back]
  2. See Frye (2010). [back]