Download MBA in Strategy and Procurement Management International

MBA in Strategy and Procurement Management
International Business Environment
Sunday, 16th January 2010, 9.30 a.m. – 4.30 p.m.
Political Risk in Transitional Economies:
Russia and Emerging Europe
Dr. Richard Connolly
Centre for Russian and East European Studies
([email protected])
POLITICAL RISK IN TRANSITIONAL ECONOMIES:
RUSSIA AND EMERGING EUROPE
Agenda
9.30 – 9.45
Outline of the day – why is emerging Europe important?
9.45 – 10.30
Planned Economies in Theory and Practice
10.30 – 10.45 Break
10.45 – 12.30 Post-communist Transformation in Theory and Practice
12.30 – 13.30 Lunch
13.30 – 14.45 Emerging Europe today: the global financial-economic crisis,
future challenges and political risks
14.45 – 1500 Break
15.00 – 16.15 Russia today: the global financial-economic crisis, future
challenges and political risks
16.30
Close
POLITICAL RISK IN TRANSITIONAL ECONOMIES:
RUSSIA AND EMERGING EUROPE
Why should we care about emerging Europe?
•
Population: 400 million (5.7% of world population), more than Brazil (194 million, 2.7%) and the
USA (307 million, 4.3%)
•
GDP (current US$): $2.9 trillion (5% of world), compared to Brazil (2.7%), India (2.2%) and China
(8.5%)
•
GDP (PPP): $5.7 trillion (7.8%), compared to Brazil (2.7%), India (5%) and China (12.4%)
•
International trade: share of world exports is 9%, just behind China (9.6%), but ahead of Brazil
(1.3%) and India (2%). For imports, share of world total is 8.6%, ahead of China (8.1%), Brazil (1.3%),
India (2.4%)
•
In general, exceptionally open to international trade, foreign direct investment and capital flows.
•
Taken together, Goldman Sachs have argued that emerging Europe may represent the ‘fifth BRIC’,
i.e., a region that promises to account for a large share of future economic growth and investment
opportunities.
•
In recent years, consumption has grown rapidly, and is forecast to do so in the future as the region
continues to converge with richer countries.
TRANSITIONAL ECONOMIES IN THEORY AND PRACTICE
PART ONE:
THE SOCIALIST PLANNED ECONOMIES
IN THEORY AND PRACTICE
Transitional Economies in Theory and Practice
The Socialist Planned Economies of the USSR and Eastern Europe
Soviet Union – 1917 – end 1991 (Union of Soviet Socialist Republics), including
Baltic States (Estonia, Latvia and Lithuania) incorporated in 1940
Central and Eastern Europe – 1945-89, including German Democratic Republic
(East Germany).
Yugoslavia – less rigidly planned, ‘workers self management’, broke with USSR in
1949
Albania – broke with USSR 1960, became closer to China until c.1978
Plus:
Mongolia
China – 1949 ........
Vietnam, Cambodia, Laos
North Korea
Cuba
Transitional Economies in Theory and Practice
The planned economies of USSR and Eastern Europe - geography
Transitional Economies in Theory and Practice
The Planned Economies – Principal Features
• Ideology (Marxism Leninism), Communist Party rule, nomenklatura
• Predominant state ownership – variation across region
• Hierarchical, bureaucratic coordination
• Non-market resource allocation – the planning system, material balances,
investment
• Employment planning, full employment plus underemployment
• Administered prices
• Financial system – passive money, dual circuits, state budget
• State managed foreign trade, Council of Mutual Economic Assistance
• Extensive growth model – factor mobilisation, not their more efficient use
• Existence of an unofficial ‘second economy’, supplementing planned
official economy
• Use of statistical concepts not comparable with international standards –
output measured in Net Material Product not GDP – bias towards
exaggeration of growth rate and understatement of rate of inflation.
Transitional Economies in Theory and Practice
•
•
•
•
•
•
Resource allocation
A system of five-year and annual plans
Plans drawn up as outcome of bargaining between state planning
committee (in USSR, Gosplan), ministries, and enterprises
Material resources ‘planned’ using ‘material balances’ - for main products
balances drawn up indicating sources of supply and uses. Supplies
allocated to enterprises by a state supply agency.
Prices centrally determined, i.e. not set by market forces; use of average
cost pricing, not marginal. Prices to a large extent arbitrary.
Enterprise performance assessed by fulfilment of a set of plan indicators
Bonuses for managers if principal success indicators fulfilled, or over
fulfilled, in relation to the plan
This hierarchical, bureaucratic, economic management system rife with
‘principal-agent’ problems, with substantial scope for opportunistic
behaviour, including bargaining for soft plan targets, exaggerating plan
fulfilment , ‘informal’ trading activities between enterprises, etc.
Outcome – inefficiency, waste and, for centre, high ‘agency costs’
Transitional Economies in Theory and Practice
The Socialist Economic System – according to Janos Kornai
Hungarian economist, born 1928
Now retired, but in 1986-2002 spent half his time at Harvard University
First major work: Overcentralisation in Economic Administration, 1957 (1959 in
English); later, Anti Equilibrium, 1971
Transitional Economies in Theory and Practice
Major work of Kornai – Economics of Shortage, 1980
Summary work of 1988 – The Socialist System
Transitional Economies in Theory and Practice
Janos Kornai
Soft Budget Constraints
Budget constraints subject to bargaining:
•
•
•
•
Soft subsidies
Soft taxation
Soft administered prices
Soft credit terms
Budget constraints most soft in priority sectors of the economy.
Households experienced hard budget constraints.
Transitional Economies in Theory and Practice
Janos Kornai
With SBCs, the socialist economic system exhibited a number of
characteristic phenomena:
•
•
•
•
•
•
•
•
•
•
•
Forced growth
Chronic, pervasive, shortage (and slack)
Labour shortage and full employment, coexisting with underemployment
Low labour discipline
‘Investment hunger’
No enterprise bankruptcy
Sellers’ market, no concern for quality except in military industry (cf US)
Repressed inflation
Queues, low quality, forced substitution, forced savings
Weak incentives for innovation
Low efficiency and productivity
Transitional Economies in Theory and Practice
Janos Kornai
The Socialist Economic System provides a comprehensive analysis of the
classic socialist system – a ‘resource-constrained’ economy, and
comparisons with the ‘demand-constrained’ capitalist system.
Market regime
Capitalism
Buyers’ market
Dominant deviation
from market equilibrium
State of labour
allocation
Surplus
Labour surplus
Classical socialism
Sellers’ market
Shortage
Labour shortage
Transitional Economies in Theory and Practice
Janos Kornai
In Kornai’s view the socialist economic system had
considerable systemic coherence and was highly resistant to
any reforms that threatened it.
In his view the ideological commitment to Marxism-Leninism
was crucial, above all because of the central belief in the
superiority of state ownership over private property.
Although in practice, was it not a case of excessively
powerful bureaucratic and industrial interests.
Transitional Economies in Theory and Practice
Structural characteristics of planned economies
•
•
•
•
•
•
very high participation rates (but underemployment)
‘over-industrialised’, with much heavy industry
underdeveloped service sector
often backward, socialised agriculture and relatively large agricultural
employment
trade-averse, especially USSR, although less so in CEE
in the case of USSR, a militarised economy
Performance
•
•
•
•
•
•
Growth – rapid in early years, then declined
Efficiency - low
Energy/material intensive – CEE dependent on subsidies from USSR
Innovation – poor, except in priority sectors, and in Czechoslovakia, GDR
Standards of living – low cf. West European market economies
Environment – a wasteful system, with much environmental degradation
Transitional Economies in Theory and Practice
The planned economies – failed reforms and collapse
Many attempts to reform the socialist economic system, but very limited success
• USSR – reforms in 1965, 1979, and finally in 1985-91, under Mikhail Gorbachev
• Most far reaching reforms in Hungary and Poland; limited reforms in
Czechoslovakia, Bulgaria, GDR, and Romania
• Directions of reform: partial market reforms: decentralisation, enterprise rights
raised cf. ministries, reduced number of plan/success indicators, more indirect
influence of state, limited price reforms, limited changes in property rights, partial
external liberalisation.
• However, as argued by Kornai and others, the socialist planning system had a high
degree of systemic coherence and any reform threatening it tended to be rejected or
diluted.
•Far reaching reforms also threatened to challenge the political legitimacy of
communist rule.
Transitional Economies in Theory and Practice
The planned economies – collapse
While region had performed badly in 1980s, change is initiated by Gorbachev
• USSR – uskorenie, glasnost, perestroika: all initiated to stimulate CPSU into undertaking
reform so that socialism could become more efficient and competitive.
• In 1985, Gorbachev described the USSR as in a ‘pre-crisis’ situation; same could be said for
much of CEE.
• ‘New thinking’ designed to create more favourable external conditions so that reform could be
undertaken more comfortably.
•‘Sinatra doctrine’ an attempt to relax imperial burden on USSR, but had unintended
consequences.
•Some countries exhibited appetite for reform (e.g., Poland, Hungary), but others staunchly
resist change (Czechoslovakia, Romania, Bulgaria)
• However, as argued by Kornai and others, the socialist planning system had a high
degree of systemic coherence and any reform threatening it tended to be rejected or
diluted.
•Far reaching reforms also threatened to challenge the political legitimacy of
communist rule.
Transitional Economies in Theory and Practice
Unravelling and collapse, 1989-91
In 1989 – end of socialist system in Central and Eastern Europe
In USSR - Gorbachev reforms – perestroika – mounting crisis, eventual
collapse end 1991 – outcome, 15 independent countries.
Features at end of the system
•Economic decline
•Inflation – open and repressed
•Budgetary crises
•Macroeconomic disequilibrium
•Balance of payments crises
•Substantial external debts
•Severely reduced living standards
•Negative demographic trends
•Growth of crime and corruption
•ALL TO SHAPE TRAJECTORY OF
TRANSITION
Socialism: concluding thoughts
• The performance of the socialist economies declined after the
1970s.
• There were clear systemic limitations inherent within the
system, as described by Kornai. These prevented a move from
extensive to intensive economic development.
• Technological revolution of 1970s (and rising oil prices)
exposed these flaws (Berend, 2008)
• Nature of collapse varied across the region: some elite-led,
some popular based, ‘from below’.
• However, legacies of socialism would shape future economic
and political developments.
• While nearly all countries expressed desire to adopt
democratic political institutions and create market economies,
not all were able to do so, often because of structural
impediments.
TRANSITIONAL ECONOMIES IN THEORY AND PRACTICE
PART TWO:
POST-COMMUNIST TRANSFORMATION
– THEORY AND PRACTICE
Transitional Economies in Theory and Practice
The task of transformation – in theory
The ultimate goal: convergence with the West
In early years – 1989 – c.mid-1990s, predominance of so-called
‘Washington consensus’ (a term coined by John Williamson, Institute of
International Economics, Washington) in 1989):
• Liberalisation and stabilisation according to standard methods of IMF (in
particular, as adopted in Latin American countries)
• Privatisation seen as essential for functioning markets and economic
efficiency
• Priority for deregulation, open trade, fiscal balance, low inflation
• Belief that institutions arise as generated by market forces.
Became known as ‘shock therapy’, ‘big bang’ approach, etc
Influential advocates include Leszek Balcerowicz (Poland), Anders Aslund
First adopted in Poland in 1990; influential in Russia, early 1992
(Gaidar government)
Transitional Economies in Theory and Practice
At this time task posed was ‘transition’ – from the planned economy to a
liberal, free-market, economy – seen as relatively unproblematic process.
Standard agenda for transition:
• Stabilisation: securing macroeconomic balance as quickly as possible
(removing inflationary pressure from economy) – monetary policy, fiscal policy
– new taxes, budget spending cuts, etc
• Liberalisation: domestic and external – removing administrative constraints
to permit markets to function (including freeing most prices); foreign trade
liberalisation, customs duties, moves towards currency convertibility
• Privatisation: changing property relations, ending dominance of state
• Institution building: especially adoption of new laws appropriate to a market
economy – civil and commercial codes, company laws, labour codes, etc
• Social support for those adversely affected by transition, including
unemployment benefit
Politics – hopefully, the development of a pluralistic, democratic, political order
with a vibrant civil society and the rule of law.
Transitional Economies in Theory and Practice
However, from the outset alternative approaches were advocated
to secure a more gradual transition, hopefully leading to less
severe social costs:
•Notably, work of Peter Murrell, University of Maryland: a gradualist view
based on an evolutionary, Austrian School (von Mises, Hayek, Schumpeter),
understanding of economic change.
•Also, impact of alternative path of China – communist rule maintained, gradual
development of market sector and non-state businesses
•‘Heterodox’ economists (e.g., Reinert, Chang, Stiglitz) had criticised the
application of the WC in practice (Latin America in 1980s and 1990s) for
resulting in macroeconomic instability (due to openness to capital flows) and
deindustrialization (as state withdrew from economy)
•This view gained ground during the 1990s and the focus of discussion turned
increasingly to institutions, without attention to which, some saw successful
transition as unlikely.
Transitional Economies in Theory and Practice
Neo-institutionalism
An influential trend of analysis arising from dissatisfaction with the
orthodoxies of the ‘Washington consensus’ , even from within the international
financial institutions themselves, e.g. Joseph Stiglitz, when chief economist of
World Bank, 1997-2000.
With rise of institutionalism, term ‘transition’ increasingly replaced by
‘transformation’. Growth of understanding that for markets to function effectively
appropriate institutional arrangements are required, arrangements that may
not emerge spontaneously from the impact of market forces alone.
‘Founding father’ of new institutionalism, Douglass C North (b.1920), Nobel
Prize for Economics, 1993
Major works:
•Structure and Change in Economic History, 1981
•Institutions, Institutional Change and Economic Performance, 1990
•Understanding the Process of Economic Change,2005
Transitional Economies in Theory and Practice
North’s definition of institutions
”Institutions are the rules of the game in a society or, more formally, are the
humanly devised constraints that shape human interaction. In consequence
they structure incentives in human exchange, whether political social or
economic”.
Institutions can be formal (e.g. law) or informal (custom and habit).
They can be created from above or evolve. Organisations arise within a
given institutional framework and structure human action in the
achievement of certain goals.
So, organizations (state, firms, other groups) operate within framework
of rules or institutions (formal or informal).
North stressed the importance of ‘fit’ between formal and informal rules
– if formal rules were dissonant with interests of organizations and
prevailing informal rules, how could transition be successful?
Transitional Economies in Theory and Practice
Neo-institutionalism and post communist transformation
Institutionalist critique of Washington Consensus –
Peter Murrell, Joseph Stiglitz, Martin Raiser, Gerard Roland (‘evolutionaryinstitutional’ alternative).
An early work; O Blanchard and M Kremer, ‘Disorganization’, Quarterly Journal
of Economics, 1997 (output decline and lack of effective governance).
In words of Peter Boettke, evolution of thinking , from ‘getting the prices right’ to
‘getting the institutions right’, then to ‘getting the culture right’ (cultural factors
influence institutions). In a sense, back to a Weberian understanding (or Pareto
and other 19thc thinkers): interaction of political, social, legal, economic, and
cultural variables to explain performance and behaviour of a social systems.
Institutional approaches tended to emphasize ‘case specificity’
while WC associated with ‘one-size fits all approach’
Methodological problems with the latter?
(i.e. use of averages, unrealistic and over simplistic assumptions)
Transitional Economies in Theory and Practice
Issues of institutional convergence and diversity
•The historical evolution of institutions, path dependency
•Can institutions be transplanted? If not, why not?
•What causes institutional change? – market forces, government action,
external pressure (e.g. with FDI), social conflict….?
•How quickly can institutions be changed? An optimal pace?
Counterproductive if too fast?
•An influential normative approach – seeking to transfer best practice
(especially international agencies during the 1990s and since)
•But, a reaction: e.g., Dani Rodrik (Harvard) for ‘second-best’ institutions –’if
you think best practice is the way to go in institutional reform, think again’.
•How to measure institutional performance, best practice?
•Debate continues, but ‘one-size fits all’ approaches increasingly discredited
outside basic arguments (e.g., relative macroeconomic stability, and….?)
Transitional Economies in Theory and Practice
A new consensus?
Today: a new consensus? Washington Consensus widely acknowledged as too
limited; institutions do matter, but do not explain everything; now a more
sceptical, less doctrinaire, approach to policy has become influential,
e.g. work of Dani Rodrik, Harvard (One Economics, Many Recipes:
Globalisation, Institutions and Economic Growth, 2007)
William Easterly, New York University (White Man’s Burden: Why the West’s
Efforts to Aid the Rest have Done so Much Ill and so Little Good, 2007)
In part, the encounter of economists with the ex-communist economies,
including the notable case of China, has helped to promote this new
understanding.
Transitional Economies in Theory and Practice
Privatisation
A particularly contentious topic at the time because it dealt with
‘who got what’. As such, a highly politicized process.
Why privatise?
Ronald Coase: Most important is to assign property rights clearly and
unambiguously – someone has property rights better than no-one.
•Concern for value (present and future) of assets
•Creation of a market for control
•Existence of capital markets – shares, takeovers, mergers etc
•Market evaluation of assets
•More open market for managerial skills (cf nomenklatura)
•May be less conducive to rent seeking
•More credible hard budget constraints?
•Privatisation increases the transaction costs of lobbying government for
support (Stiglitz)
•Political goals: build a constituency for further reform.
Transitional Economies in Theory and Practice
Some political arguments in favour of privatisation – in theory
•Generation of social support for post-communist transformation
•Creation of obstacle to communist restoration
•De-politicisation of economy – rolling back the state (still a politicisation,
surely?)
•Decentralisation of economic power and property conducive to democracy
Who owns the assets prior to privatisation?
•‘Public’ ownership – all owned but in reality no-one
•Contested property rights, especially in late communist period – state,
ministries, managers, workers, population at large?
•Spontaneous privatisation
•Restitution issues (especially in CEE and Baltics)
•For clarity of rights prior to privatisation transfer assets to a State Property
Fund
Transitional Economies in Theory and Practice
How to privatise?
Small scale businesses - sell, auction, transfer to employees
Large-scale businesses - ‘retail’ model (as in UK under Thatcher) – one off
IPOs – problems of valuation, finding buyers with money, restructuring? But,
in most cases considered too slow.
‘Wholesale’ model
– give them away to employees, free
- give entitlements to own shares (vouchers) – free, for a charge? Who to –
employees only, whole population?
Potential dangers – may lead to predominance of ‘insider’ ownership,
possibilities for corruption, future legal battles....
-Problems if process drags out
-Problems if rushed
Which enterprises to be left in state hands? – public utilities, defence
companies, other ‘strategic’ enterprises?
Land privatisation?
Transitional Economies in Theory and Practice
After privatisation?
•Insider or outsider ownership?
•Restructuring?
•Development of effective corporate governance
•Market for shares – redistribution of property
•Post-privatisation consolidation of ownership
•Emergence of ‘oligarchs’
•Competition policy
•Bankruptcy legislation
New business creation
Small and Medium Sized Enterprises (SMEs)
•
•
•
•
Ease of registration
Tax regime
Access to capital
Problem of state interference – national and local – opportunities for bribery
Transitional Economies in Theory and Practice
Post-communist economic
transformation - practice
Transitional Economies in Theory and Practice
Outline:
1.
2.
3.
How transition unfolded in practice: output, privatization, social
consequences, political developments.
What explains patterns of economic performance?
What explains patterns of institutional development?
Transitional Economies in Theory and Practice
Leading figures in post-communist economic transformation
Leszek Balcerowicz
(Poland)
Yegor Gaidar
(Russia)
Anatolii Chubais
(Russia)
Jeffrey Sachs
Anders Alsund
Marek Dabrowski
Peter Murrell
(Harvard)
(Sweden)
(Poland)
(USA)
Václav Klaus
(Czech Republic)
Transitional Economies in Theory and Practice
Reform measures
•
•
•
•
•
•
With varying speed and sequencing, most countries undertook a common set of
measures:
Liberalisation – domestic: freeing most prices, allowing market forces to develop,
freedom of trade and business
Liberalisation – external: reducing state control of foreign trade, adoption of
tariff regimes, moves towards convertible currencies
Stabilisation: measures to bring economy into balance and reduce inflation – new
monetary policy – moves toward positive real interest rates, new fiscal policy
(including new taxes – VAT, profits tax, etc), new approach to budget and its role
in the economy; spending cuts/changes
Privatisation: changing property relations – large and medium enterprises, SMEs,
land, housing, etc
Institution building: new institutions for market economy
Social support: creation of at least basic social safety net, unemployment benefit
system (as allowed by state of budget).
Transitional Economies in Theory and Practice
Impact of measures in early years of transformation
Output decline:
•Chaos and uncertainty of transformation
•Break down of supply links
•Reduction of value subtracting output
But, problems of measurement – growth of new businesses and informal,
unregistered economic activity.
Inflation:
•In some cases at very high rates (Ukraine, 1992-3, Russia, 1992-3, etc)
•Persisted when stabilisation policies not pursued rigorously or consistently
Budget deficits:
•Problems of reducing spending, especially social
•Ineffective tax reforms and inadequate measures to collect taxes
•Deliberate tax avoidance
Unemployment:
•In some cases grew rapidly to rates of 15% or more (e.g. Poland) and
proved to be persistent
Transitional Economies in Theory and Practice
Privatisation in practice
Basic methods of privatisation (medium and large enterprises)
• sale to outside owners (‘retail’ privatisation) (primary method in Estonia,
Bulgaria, Hungary)
• mass privatisation – vouchers (free, or for payment; named, or anonymous)
(primary method in Czech Republic, Russia, Latvia, Lithuania, Armenia, Georgia,
Moldova, Kazakhstan, Kyrgyzstan)
• management or employee buy outs (primary method in Poland, Slovakia,
Romania, Ukraine, Tajikistan and Uzbekistan)
• restitution (restoration to pre-communist owners) (in some Central, Eastern
European and Baltic countries)
In Russia, 1995, ‘loans for shares’ as a process chosen more for political expediency,
i.e., ‘Eltsin’s 1996 presidential campaign against the then potent CPRF.
In some countries very limited and slow privatisation, e.g. Belarus
Transitional Economies in Theory and Practice
Private sector share of GDP, %
1992
25
30
40
45
25
30
1997
50
75
75
65
60
75
2002
70
80
80
75
65
80
2007
75
80
80
75
70
80
2009
75
80
80
75
70
80
Estonia
Latvia
Lithuania
25
25
20
70
60
70
80
70
75
80
70
75
80
70
75
Armenia
Azerbaijan
Belarus
Georgia
Kazakhstan
Kyrgyzstan
Moldova
Russia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
35
10
10
15
10
20
10
25
10
10
10
10
55
40
20
55
55
50
45
70
20
25
55
45
70
60
25
65
65
65
55
70
50
25
65
45
75
75
25
80
70
75
65
65
55
25
65
45
Bulgaria
Czech Republic
Hungary
Poland
Romania
Slovakia
75
75
25
80
70
75
65
65
55
25
60
Source:
EBRD
45
Transitional Economies in Theory and Practice
Social consequences of transformation
To varying degrees in different countries with changes over time:
• Unemployment
• Widening of income and wealth differentials (new poor, ‘oligarchs’)
• Development of social and health problems – homelessness, alcoholism, drug
abuse, HIV-AIDS
• Demographic consequences – reduced birth rates, increased death rates
(although continuation of pre-existing trends)
• Growth of crime and corruption
But
• New freedoms – consumption, travel, occupation, expression
• New career opportunities
Winners and losers of transformation
• Winners – tend to be those with good education, young, urban, well
connected(?)
• Losers – tend to be those with poor education, older, rural
Transitional Economies in Theory and Practice
Recovery and growth
Level real GDP in 2007 cf 1989 (1989 =100)
Czech Republic
Hungary
Poland
Slovakia
Bulgaria
Romania
139
135
169
154
107
120
Estonia
Latvia
Lithuania
150
124
116
Armenia
Azerbaijan
Belarus
Georgia
Kazakhstan
Kyrgyzstan
Moldova
Russia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
143
160
146
60
136
95
51
102
56
204
68
150
Source: EBRD
Transitional Economies in Theory and Practice
GDP in CIS economies, 1991 - 2004
120
Russia
110
Azerbaijan
100
Armenia
90
Belarus
80
Georgia
Kazakhstan
70
Kyrgyzstan
60
Moldova
50
Tajikistan
40
Uzbekistan
30
Ukraine
1991 1992 1995 1999 2000 2001 2002 2003 2004
Transitional Economies in Theory and Practice
Transition indicator scores – EBRD
Average score, 2008
Average of scores for:
•Large-scale privatisation
•Small privatisation
•Enterprise restructuring
•Price liberalisation
•Trade and foreign
exchange system
•Competition policy
•Banking reform
Czech Republic
Hungary
Poland
Slovakia
Bulgaria
Romania
3.86
4.00
3.86
3.95
3.71
3.52
Estonia
Latvia
Lithuania
4.00
3.67
3.86
Armenia
Azerbaijan
Belarus
Georgia
Kazakhstan
Kyrgyzstan
Moldova
Russia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
3.38
2.86
2.10
3.38
3.10
3.24
3.24
3.09
2.71
1.57
3.24
2.24
Transitional Economies in Theory and Practice
Relationship between economic growth and EBRD transition scores
4.5
Average EBRD transition score (1992-2007)
4
Bul
3.5
Mol
3
Geo
Ukr
Kyr
Lit
Hun
Cz
Lat
Rom
EstSlo
Pol
Arm
Kaz
Rus
Aze
Taj
2.5
Uzb
Bel
2
1.5
R² = 0.0169
1
0.5
0
0
20
40
60
80
100
120
140
160
180
GDP, 2007 (1989 = 100)
Is there any relationship? If not, what does this mean?
Well, the top-left quadrant is empty, so reform certainly doesn’t do any harm
Transitional Economies in Theory and Practice
Patterns of performance
•
As a rule, Central and East European countries have undertaken more farreaching reforms and have shown strong economic growth. The southern
countries –Bulgaria and Romania, which joined the EU later, have not performed
as well, nor did they undertake reform as quickly.
•
Of the ex-USSR countries, the three Baltic economies have achieved the highest
transition scores; overall, their performance has been similar to that of the CEE
countries
•
Of the CIS countries, the most impressive growth has been shown by economies
undertaking modest reforms – Turkmenistan (oil and gas), Azerbaijan (oil and
gas), Belarus (subsidised by Russia). As a rule, the CIS countries have not
undertaken reforms as far-reaching as those in the CEE/Baltic countries and rates
of growth (with the exceptions indicated) have been lower.
Transitional Economies in Theory and Practice
Patterns of performance – why?
•
•
•
•
•
The CEE countries and the Baltic states lived under communism for a shorter
period than Russia and the other ex-Soviet countries. The planned economy was
not so deeply institutionalised and attitudes were not so moulded by the
experience of life under socialism.
The CEE and Baltic countries have also had more democratic political systems
and stronger civil societies than Russia and other CIS states and this appears to
have favoured successful market reforms. They are also less dependent on
resource-based development than some CIS economies.
The CEE and Baltic countries from the outset had a realistic prospect of joining
the EU and this focused the post-communist transformation process, providing
an external ‘anchor’.
This prospect was not open to Russia/CIS countries, although ‘neighbourhood’
status has had some impact in Ukraine, Moldova and the Caucasus (Armenia,
Azerbaijan, Georgia).
In Russia, the protracted accession process for WTO membership has played
some role in focusing reforms, but this has diminished over time as accession has
become increasingly illusive. Without WTO membership Russia cannot join the
OECD, which also has potential as an external anchor. Russia is being considered
for membership but prospects are now not good.
Transitional Economies in Theory and Practice
Summary: patterns of performance – why?
•
Institutional reform most important, although not always decisive.
•
Other factors include:
•
Political stability - Frozen states (Belarus, some in Central Asia) performed well.
•
Initial conditions – the richer you were in 1989, the more likely you are to be rich
in 2007.
•
Natural resource endowments – mineral rich countries have higher per capita
income levels, especially 2000-2008. But negatively associated with institutional
reform.
Transitional Economies in Theory and Practice
Explaining institutional change in transition economies
What is important:
•
Structural change (initial conditions, proximity to EU, FDI) – countries with more
diverse economic structures have greater political competition.
•
Initial economic conditions – more sophisticated production structures in 1980s
lead to greater sophistication later on.
•
Initial choice of institutions – countries that adopted parliamentary systems in
early post-socialist period made greater reforms. But what ‘caused the cause’?
Structure of economy?
•
All suggest path dependency is of paramount importance, lending weight to
institutional explanations. This applies to cases of positive change, as well as
negative – institutional ‘lock in’ occurs after early 1990s with few exceptions.
Transitional Economies in Theory and Practice
SUMMARY:
1. Widespread desire – in early stages, at least – to create markets and
democracies
2. Initial consensus was on Washington Consensus prescriptions.
3. As reforms stalled, recognition that reforms should be tailored to institutional
environment.
4. Privatization, in particular, was a highly contentious and politicized process
that was often subverted because of unfavourable institutional environment.
5. But to say that ‘good’ institutions in sense of WC caused growth is not entirely
accurate; rather, formal institutions that match informal institutions is more
important in explaining economic performance – so, appropriateness.
6. This is illustrated by patterns of performance.
7. Notwithstanding the above, positive WC institutional reform didn’t tend to
cause any harm prior to 2008.
8. Drivers of institutional change appear to be structural-economic in nature –
more structural change, more institutional change, and vice versa.
9. Politics – and any assessment of political risk – needs to appreciate close links
with economic structure in emerging Europe.