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

Box 3.2. Ethnic divisions in the Kyrgyz Republic

The Kyrgyz Republic was the first Central Asian country to adopt market-oriented reforms, proceeding faster and further than neighbouring countries with privatisation and the liberalisation of prices and foreign exchange. It joined the WTO in 1997, ahead of all of its neighbours – including China, which joined in 2001. As a result, the country scored higher than its Central Asian peers in terms of its average transition indicator score.

The Kyrgyz Republic has also generally been more democratic than all other Central Asian countries except Mongolia. In 2010 it adopted a new constitution introducing a parliamentary form of government. It is currently rated 7 on the Polity 2 scale – at the same level as Georgia, and almost as high as the Czech Republic and Latvia.

However, neither early reform efforts nor democracy have so far translated into good economic institutions. With respect to governance, in particular, Kyrgyz economic institutions have generally performed significantly worse than its political institutions scores would have predicted. Petty corruption is considered pervasive. In fact, according to the BEEPS conducted in 2008-09, Kyrgyz businesses complained about this more than those of any other country covered by the survey (see Chart 3.2.1). This places a large burden on economic activity, particularly in a country where cross-border trade and SMEs dominate the economy.

Chart 3.2.1

Source: BEEPS (2009).
Note: This chart shows the percentage of SMEs responding to the BEEPS survey who reported that unofficial payments were expected in everyday business situations.

Ethnic fractionalisation is greater in the Kyrgyz Republic than in any other country in the transition region for which data are available. This may have been a factor in both the Kyrgyz Republic’s high level of democracy and its comparatively weak economic institutions. Ethnic divisions may have encouraged the development of democratic institutions that are able to mediate between different interests, find compromises and build coalitions. At the same time, economic reform efforts have been frustrated by the divisions within Kyrgyz society.

Successive governments have lacked an economic reform and modernisation agenda that commands broad support. They have had to operate in an environment of political instability, exacerbated by ethnic tensions and regional divisions – primarily between the more industrialised north of the country and the more agrarian south. For example, reform of the business environment has taken a back seat to a row over an investment agreement governing the operations of Kumtor, a large foreign-owned gold mine. This issue has been much politicised by competing political parties amid rising nationalist sentiment over control of the country’s resources.