Download stuck in transition?

TRANSITION
REPORT
2013
www.tr.ebrd.com
STUCK IN TRANSITION?
Presentation at the
Stuck
in
Higher School of Economics
Transition?
12 December 2013
Jeromin Zettelmeyer
Jeromin Zettelmeyer
Deputy Chief Economist
Deputy Chief Economist
Alan Rousso
Managing Director, External Action and Political Affairs
Produced by the Office for the Chief Economist, EBRD.
© European Bank for Reconstruction and Development
20.11.13
1
Motivation: will convergence resume?
Growth
Real GDP growth y-o-y, per cent:
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
2
This Transition Report in a nutshell
I.
Jeromin Zettelmeyer
Worries about permanently lower growth in the future compared to
1997-2005 are justified. Reinvigorating growth requires additional
reform and better economic institutions.
II. Two sets of factors shape the quality of economic institutions:
1. Broad political institutions: democratisation
2. International integration, human capital and local political reform
III. Fortunately, democratisation itself becomes more likely as a result
of economic development and market reform
 Transition to market can spur (or at least stabilise) democratic
transition, which in turn spurs more reform.
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Alan Rousso
3
Why convergence may slow
Everyone focuses on slower capital flows. But this a cyclical
phenomenon which will lose importance in the medium term.
Better reasons to worry about convergence are:
1. The end of productivity catch-up related to early transition
2. Stalled reforms, even in less advanced transition countries
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
4
Convergence driven by growth of total factor productivity
Growth 1993-2010
Total growth of real GDP (PPP) from 1993 to 2010:
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: Penn World Tables 8.0
5
Total factor productivity (log)
… but this productivity catch-up may now be complete
Income per capita (log)
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: Penn World Tables 8.0
6
Reforms have stagnated since mid-2000s
Economic Transition
Average of 6 country-level transition indicators:
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: EBRD
7
With current policies, convergence will slow…
Income as a share of EU15 income
GDP per worker as a share of EU15 average, actual and projected:
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: EBRD calculations
8
…unless reform efforts can be reinvigorated
Income as a share of EU15 income
GDP per worker as a share of EU15 average, actual and projected:
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: EBRD calculations
9
This Transition Report in a nutshell
I.
Worries about permanently lower growth in the future compared to
1997-2005 are justified. Reinvigorating growth requires additional
reform and better economic institutions.
II. Two sets of factors shape the quality of economic institutions:
1. Broad political institutions: democratisation
2. International integration, human capital and local political reform
III. Fortunately, democratisation itself becomes more likely as a result
of economic development and market reform
 Transition to market can spur (or at least stabilise) democratic
transition, which in turn spurs more reform.
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Democracy is strongly correlated with reform
Economic Transition
2012 Polity2 score (x-axis) and average country-level transition indicator (y-axis):
Level of democracy
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: Polity IV database and EBRD
11
Democratic reversal impedes reform
Economic Transition
Average of 6 country-level transition indicators:
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: EBRD
12
Democratisation has propelled reform – but not always
Economic Transition
Average of 6 country-level transition indicators:
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: EBRD
13
Improving economic institutions for a given political
system
i.
International integration and external anchors
•
Both trade and financial integration; EU effect
ii. “Feasible political reform”:
•
Particularly at the local/regional level
iii. Exploiting political windows of opportunity
•
Relatively small political improvements (1-2 points on Polity
scale) can open a window of opportunity for reform
iv. Improving human capital
• Improves institutional capacity in normal times; ability to
exploit critical junctures; spreads fruits of reform
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
14
Economic Institutions
What we mean by “economic institutions”
• Worldwide Governance Indicators (survey based)
• Doing Business “distance to the frontier” (laws and regulations)
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
• EBRD transition indicators (cumulative market reform)
20.11.13
15
International integration comes with good institutions
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Trade
Explanatory power
Financial
Factors explaining institutional quality difference between top and
bottom transition countries, using WGIs as measure of institutions :
Source: EBRD calculations
16
Large variation in business environment at regional level
• e.g. corruption as a business obstacle in Russian regions.
Ranking of corruption relative to other obstacles to business
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
1st
3rd
5th
2nd
4th
6th
10th
Source: Banking Environment and
Enterprise Survey 2012
17
Windows of opportunity leading to better economic
institutions: Slovak Republic and Georgia
Level of democracy
Quality of institutions
Polity2 (left axis) and average worldwide governance indicator (right axis):
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: Polity IV database and World Bank
18
Missed opportunities: Romania (1995), Ukraine (2004)
Level of democracy
Quality of institutions
Polity2 (left axis) and average worldwide governance indicator (right axis):
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: Polity IV database and World Bank
19
Factors shaping the success of windows of opportunity
1. Early transition histories – where powerful vested interests
arose after the collapse of central planning, they impeded
reform.
2. Political Polarisation – restricted reformers’ ability to initiate
and sustain change.
3. Leaders’ priorities – in some countries foreign-educated
leaders backed reformist agendas and tackled corruption.
4. External anchors and support – the prospect of EU
membership spurred reform, as did foreign financial and
technical assistance
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
20
Political polarisation was an obstacle in Romania and
Ukraine
Political Polarisation
Index of political polarisation. Average score 1990-2004.
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: Frye 2010
21
In transition region, tertiary education is the issue…
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Number of
Quality of education
Comparison of human capital in Advanced and Transition countries:
Source: EBRD calculations, National
Science Foundation, WIPO
22
…. but returns to education are also critical
Brain drain*
• Better institutions improve returns to tertiary education
• Key to people acquiring education and to retaining them
*Stock of high-skilled immigrants minus the stock of high-skilled emigrants abroad, as a percentage of high-skilled workers, 2000:
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: EBRD calculations based on Artuc
et al. (2013)
23
This Transition Report in a nutshell
I.
Worries about permanently lower growth in the future compared to
1997-2005 are justified. Reinvigorating growth requires additional
reform and better economic institutions.
II. Two sets of factors shape the quality of economic institutions:
1. Broad political institutions: democratisation
2. International integration, human capital and local political reform
III. Fortunately, democratisation itself becomes more likely as a result
of economic development and market reform
 Transition to market can spur (or at least stabilise) democratic
transition, which in turn spurs more reform.
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Average polity score
Proportion of democracies
Since the end of the Cold War, democracy has resumed
a secular upward trend
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: Polity IV dataset
25
What drives democracy?
• Modernisation (Lipset, 1959)
• Democratic beliefs and culture (Almond and Verba, 1965)
• Convergence of interests and equality (Dahl, 1971)
• Critical junctures (Acemoglu and Robinson, 2006)
• Immobility of assets and the creation of a ‘rentier state’ can impede
progress towards democracy (Mahdavy, 1970)
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
26
Economic development and reforms help democracy
• Economic development – measured in terms of growth in per capita
GDP, expansion of the middle class, industrialisation, urbanisation –
has led to advances in democracy both globally and in the transition
region (with diminishing returns).
• Reform can help democracy:
1. By making societies richer and building constituencies for
democratic reform
2. By creating competition and weakening special interests
opposed to democracy
3. By fostering growth of the private sector and small business
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
27
Early reforms help to predict democracy …
Democracy in 2012
Average country-level transition indicator 1992 (x-axis) and Polity2 score 2012 (y-axis) :
Economic reform levels in 1992
Note: relationship holds controlling for initial levels of democracy.
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: Polity IV database and EBRD
28
…but natural resources may hold it back.
Log per capita income 1992 (x-axis) and Polity 2 score 2012 (y-axis):
Oil-producing
Level of democracy in 2012
Not oil producing
Income in 1992
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Income in 1992
Source: Polity IV database and IFS
29
Demand for democracy
• Evidence from the EBRD/World Bank Life in Transition Survey (LiTS)
shows that support for democracy may be affected by:
 Employment – employees of government agencies or state-owned
entities are less likely than private sector workers to support
democracy
 Education – better educated people are more likely to support
democracy (even if they work in the state sector)
 Upward mobility – people who believe themselves to be better off
than four years ago are more likely to support democracy.
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
30
Democracy, 2012
Less democratic countries tend to have higher levels
of state employment
State-sector employment, 2010, per cent
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Source: LiTS (2010) and Polity IV
31
The case of Russia
• Big Bang in 1991/92 (following years of gradual reform under
Gorbachev).
• Experience in the 1990s (distorted reforms, corruption and state
capture, inequality) eroded public support for democracy.
• Yet, Russia has grown significantly since the 1998 crash – roughly 4%
p.a. between 1998 and 2012, GDP doubled, large middle class.
• Russia is less democratic than its level of economic development
would predict. Why?
 State-dominated middle class
 Demographic distribution of pro-reform segments
 Reliance on natural resource rents and side payments
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
32
Conclusion
1. Time is on the side of democracy and reform
2. But the process can be slow, and some factors – like natural
resource abundance – can hold it back.
3. In the meantime, countries can:
• Foster international integration
• Improve transparency and accountability at local levels
• Improve human capital
4. International community can help by:
•
Promoting international integration (trade and financial)
•
Supporting diversification
•
Supporting education
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
33