Marek Dabrowski

Marek Dabrowski

Transition in Central and Eastern Europe and the Former USSR:

The Role of External Institutional Anchors

Center for Social and Economic Research

Presentation at the Symposium of the High School of Economics, Moscow, May 23-25, 2011

www.case-research.eu

Presentation outline

• What was transition about?• Increasing heterogeneity of transition

economies • The role of EU and other international

institutions in modernization process • Challenges ahead


Transition in CEE/FSU

• Macroeconomic stabilization

• Domestic and external liberalization

• Privatization and enterprise restructuring

• Institutional and legal reform

• Building a market-based social safety net

• Political reform


Sources of Macroeconomic Disequilibrium

• Price control market shortages forced savings monetary overhang (hidden [hyper] inflation)

• Price control subsidies to basic goods budget deficit money printing

• Decrease of oil prices (f. USSR)

• Social populism of late communism

• Long public debate about price liberalization


Macroeconomic stabilization

• Fiscal adjustment (reducing subsidies [price liberalization] and government investment spending, market-based tax reform, creating room for SSN)

• Stopping quasi-fiscal activities of central bank• Limiting credit expansion, active role of central

bank, central bank independence, market-based monetary policy instruments

• Temporary wage control in some countries


Liberalization• Price deregulation, removing subsidies• Unification of exchange rate, current account

convertibility, then capital account convertibility• Free private entrepreneurship, business

deregulation• Trade liberalization (unilateral then followed by

AA with the EU and EU/WTO accession)• Dismantling monobank, opening door for private

and foreign banks, abolishing interest rate control


Privatization and enterprise restructuring

• Limited results of enterprise restructuring without privatization

• Corporatization works only as the intermediate stage to privatization

• The role of hard budget constraints and competition• Experience with various privatization schemes (IPO,

sales to strategic investor, voucher privatization, employee/management buy-out, debt-equity swap, joint-ventures)


Institutional and legal reform

• Building of various kind of market-support institutions and adopting market-oriented legislation

• Crucial role of independent, professionally competent and uncorrupted judiciary as well as civil service

• Helpful role of EU AA and EU accession (second-generation reforms)


Social safety net• Moving from subsidies, benefits in-kind, labor

safety and enterprise-based SSN to targeted SSN• Better targeting (political and institutional

constraints)• Unemployment benefits and ALMP• Building a multi-pillar pension system• Demographic challenges (pension system & health

care• Mixed results of SSN (“premature post-communist

welfare state”)


Interrelation between economic and political freedoms in transition countries

RO

MK

RU

UZ

SI

PL LT

MD

KG

KZ

EE

CZ

HR

BG

UABA

AZ

LV

SKHU

GE

AM

AL

BY

TM

TJ

1

2

3

4

5

6

7

8

40.0 45.0 50.0 55.0 60.0 65.0 70.0 75.0 80.0

HF Index of Economic Freedom

FH

In

dex

of

New

Dem

ocr

aci

es

Source: http://www.heritage.org/research/features/index/downloads/2008PastScores.xls; http://www.freedomhouse.hu//images/fdh_galleries/NIT2007/rating%20and%20democracy%20score%20summary3.pdf


End of transition?• Basic transition agenda completed in early 2000s: the largest,

fastest and most complex reform episode in contemporary economic history (ca. 15 years)?

• In most former communist countries market mechanism coordinates most of production and investment decisions

• Private sector contributes between 60% and 80% of GDP (EBRD, 2010). Exceptions: Turkmenistan (25%), Belarus (30%), Uzbekistan (45% of private sector in GDP) + North Korea and Cuba

• Openness to international trade• Various level of market distortions and various quality of

governance• Decade of 2000s: rapid economic growth, low or moderate

inflation, remonetization, high international reserves, improvement of fiscal balances; but part of these achievements reversed in 2008-2010


EBRD indicators, 2010

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50enterprise restructuring

competition policy

banking reform

non-banking

infrastructure


Ranking Country2008 Score

Business Freedom

Trade Freedom

Fiscal Freedom

Gov't SizeMonetary Freedom

Investment Freedom

Financial Freedom

Property Rights

Freedom from

Corruption

Labor Freedom

56 Albania 63,3 55,6 75,8 90,3 76,0 80,4 70 70 30 26 59,328 Armenia 70,3 81,3 85,0 89,0 86,4 84,6 70 70 35 29 73,1

107 Azerbaijan 55,3 61,6 78,4 80,4 82,9 76,5 30 30 30 24 59,2150 Belarus 44,7 58,6 52,2 81,0 55,5 66,2 20 10 20 21 62,0121 Bosnia and Herzegovina 53,7 56,1 79,8 73,7 48,3 76,6 50 60 10 29 53,759 Bulgaria 62,9 67,5 86,0 82,7 56,0 73,7 60 60 30 40 73,2

126 China 52,8 50,0 70,2 66,4 89,7 76,5 30 30 20 33 62,4113 Croatia 54,6 58,1 87,6 68,8 28,0 78,8 50 60 30 34 50,537 Czech Republic 68,5 63,9 86,0 71,3 45,6 80,3 70 80 70 48 70,212 Estonia 77,8 84,5 86,0 86,0 62,0 82,0 90 80 90 67 50,332 Georgia 69,2 85,0 71,0 90,7 81,3 71,4 70 60 35 28 99,943 Hungary 67,2 73,9 86,0 70,0 26,5 77,2 80 70 70 52 66,876 Kazakhstan 60,5 56,5 86,2 80,1 84,7 71,9 30 60 30 26 80,070 Kyrgyz Republic 61,1 60,4 81,4 93,9 76,1 75,6 50 50 30 22 72,038 Latvia 68,3 74,3 86,0 83,4 59,2 73,8 70 70 55 47 64,626 Lithuania 70,8 83,2 86,0 86,3 68,3 78,5 70 80 50 48 57,671 Macedonia 61,1 65,1 83,4 88,1 61,6 85,5 50 60 30 27 60,789 Moldova 58,4 68,5 79,2 83,0 56,9 67,6 30 50 50 32 66,662 Mongolia 62,8 71,1 81,4 85,0 71,7 78,2 60 60 30 28 62,483 Poland 59,5 54,1 86,0 68,6 43,5 82,3 60 60 50 37 53,568 Romania 61,5 74,1 86,0 85,6 70,8 72,5 60 50 30 31 55,3

134 Russia 49,9 52,8 44,2 79,2 69,5 64,4 30 40 30 25 64,235 Slovak Republic 68,7 69,3 86,0 89,4 53,9 76,9 70 80 50 47 64,975 Slovenia 60,6 73,0 86,0 62,4 33,2 79,5 60 50 50 64 47,7

114 Tajikistan 54,5 43,4 77,8 89,3 84,1 65,8 30 40 30 22 62,174 Turkey 60,8 67,9 86,8 77,7 68,3 70,8 50 50 50 38 48,0

152 Turkmenistan 43,4 30,0 79,2 90,6 85,3 66,4 10 10 10 22 30,0133 Ukraine 51,1 44,3 82,2 79,0 43,0 69,9 30 50 30 28 54,3130 Uzbekistan 52,3 67,8 68,4 88,0 68,3 57,5 30 20 30 21 72,1

Heritage Foundation Index of Economic Freedom, 2008


Doing Business 2008

Economy Doing

Business Starting a Business

Licenses Employing Workers

Registering Property

Getting Credit

Protecting Investors

Paying Taxes

Int. Trade

Enforcing Contracts

Closing a Business

Estonia 17 20 14 156 21 48 33 31 7 29 50 Georgia 18 10 11 4 11 48 33 102 64 42 105 Latvia 22 30 82 96 85 13 51 20 19 3 64 Lithuania 26 57 57 124 4 36 83 71 23 18 31 Slovakia 32 72 50 75 5 7 98 122 90 50 36 Armenia 39 47 73 48 2 36 83 143 118 64 42 Hungary 45 67 87 81 96 26 107 127 45 12 53 Bulgaria 46 100 103 57 62 13 33 88 89 90 72 Romania 48 26 90 145 123 13 33 134 38 37 81 Slovenia 55 120 62 166 99 68 19 63 69 79 34 Czech Rep. 56 91 83 55 54 26 83 113 30 97 108 Kazakhstan 71 57 173 22 72 48 51 44 178 28 100 Poland 74 129 156 78 81 68 33 125 40 68 88 Macedonia 75 21 76 128 91 48 83 99 72 84 127 Montenegro 81 98 113 98 103 84 19 129 113 131 41 Serbia 86 90 149 110 115 13 64 121 58 101 103 Moldova 92 81 153 93 46 97 98 111 122 17 82 Kyrgyzstan 94 49 152 74 16 68 33 152 177 32 128 Azerbaijan 96 64 159 80 56 26 107 141 173 30 75 Croatia 97 93 162 139 99 48 122 43 96 45 78 Bosnia&Herz 105 150 150 114 144 13 83 142 53 126 61 Russia 106 50 177 101 45 84 83 130 155 19 80 Belarus 110 119 94 43 94 115 98 178 137 16 69 Albania 136 123 168 109 82 48 165 118 70 74 178 Uzbekistan 138 54 145 67 119 170 107 159 165 48 119 Ukraine 139 109 174 102 138 68 141 177 120 46 140 Tajikistan 153 161 166 125 43 135 176 155 176 23 99


Corruption Perception Index – A Map


Factors determining transition progress

• Initial conditions

• Internal factors (mostly ability to build durable political consensus around key elements of reform program)

• External factors (EU and NATO integration prospects, support of Bretton Woods institutions, WTO, regional conflicts)


External vs. internal anchoring of reforms

• Problems with domestic anchors• Ex ante and ex post political constraints of reform

• Time inconsistency

• Multiple equilibria (coordination failures)

• External influence• Incentives

• Guidance

• Monitoring


Magnetism of EU integration

• Political (‘club’) membership• Geopolitics and security• Four basic freedoms (goods,

services, capital, labor)• Prospects of prosperity• Structural funds


Historical and actual role of EU anchor

• Mediterranean Enlargement of 1980s (Greece, Portugal and Spain);

• Eastern Enlargement 2004 and 2007 (Bulgaria, Czech Rep., Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia);

• Candidates and potential candidates (Croatia, Turkey, other Western Balkans)

• ENP and EaP for European part of CIS• Central Asia left behind even this pretty weak policy

frameworks


Examples of empirical studies

• Dabrowski and Radziwill (2007)‘Regional vs. Global Public Goods: The Case of Post-communist Transition’, CASE Studies and Analyzes, No. 336

• Schweickert et al., Institutional Convergence of CIS towards European Benchmarks, CASE Network Reports No. 82/2008)


Reform progress: Index of democratization

Composite index: civil liberties and political rights. Source: Freedom House

0

1

2

3

4

5

6

Luxemburg group

Helsinki group

Western Balkans

European CIS

Other CIS


Reform progress: Index of structural reforms

Composite index: competition policy, enterprise reform, banking and non-

banking financial sector reform. Source: World Bank

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

Luxemburg group

Helsinki group

Western Balkans

European CIS

Other CIS


Challenges and problems ahead

• Post-crisis environment: slower and more fragile growth, higher debts, volatile commodity markets, inflation pressures

• How to improve business climate and governance (CIS and Western Balkans)?

• How to avoid economic marginalization (CIS, Central Asia)

• Unsustainable welfare state (NMS, Western Balkans, Western CIS)

Marek Dabrowski

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