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TRANSITIONTRANSITIONTRANSITIONTRANSITIONREPORTREPORTREPORTREPORT2013201320132013
Stuck inTransition?
1
Jeromin Zettelmeyer
Deputy Chief Economist
STUCK IN TRANSITION?STUCK IN TRANSITION?STUCK IN TRANSITION?STUCK IN TRANSITION?
Jeromin Zettelmeyer
Deputy Chief Economist, EBRD
Presentation at WIIW
January 27, 2014
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Motivation: will convergence resume?
2
Inco
me
pe
r ca
pit
a
Real GDP per capita 2005 USD PPP:
Source: Source: Source: Source: World Bank
2028 = 80%
2034 = 100%
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
The narrative
3
1. Absent a new reform push, convergence will not resume, due to:
(1) the inherent transitoriness of productivity catch-up associated
with transition;
(2) stagnation of reform since mid-2000s
2. One cause of stagnation is an under-reform trap involving autocratic
or imperfectly democratic regimes, weak economic institutions, and
low growth.
3. However, countries can break out of the trap.
• In imperfect democracies, through moderate political shocks
• More generally, through policies that allow improvements in
economic institutions even in autocratic political systems.
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
On current policies, convergence will mostly not happen
4
Inco
me
as
a s
ha
re o
f E
U1
5 in
com
e
Long-term growth projections, based on current economic and political institutions
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Post-communist productivity catch-up is largely
complete
5
Income per capita (log)
Tota
l fa
cto
r p
rod
uct
ivit
y (l
og)
Log of real GDP per capita PPP (x-axis) and log TFP (y-axis):
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Reforms have stagnated since mid-2000s
6
Eco
no
mic
Tra
nsi
tio
nAverage of 6 country-level EBRD transition indicators:
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Sector-level reform reversals, particularly in EU countries
7
Se
cto
r-le
vel d
ow
ngra
de
sNumber of sector level downgrades, EU10 vs other transition countries:
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
The narrative
8
1. Absent a new reform push, convergence will not resume, due to:
(1) the inherent transitoriness of productivity catch-up associated
with transition;
(2) stagnation of reform since mid-2000s
2. One cause of stagnation is an under-reform trap involving autocratic
or imperfectly democratic regimes, weak economic institutions, and
low growth.
3. However, countries can break out of the trap.
• In imperfect democracies, through moderate political shocks
• More generally, through policies that allow improvements in
economic institutions even in autocratic political systems.
![Page 9: Stuck inPresentation at WIIW Transition? January 27, 2014 ...... Produced by the Office for the Chief Economist, EBRD. © European Bank for Reconstruction and Development 20.11.13](https://reader033.vdocument.in/reader033/viewer/2022051907/5ff9bb2cdc2f975fb274ca57/html5/thumbnails/9.jpg)
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Democracy and reform are highly correlated in the
transition region
9
Eco
no
mic
Tra
nsi
tio
n
Level of democracy
2012 Polity2 score (x-axis) and average country-level transition indicator (y-axis):
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Causality from (lack of) democracy to reform: the case of
Belarus
10
Eco
no
mic
Tra
nsi
tio
nAverage of 6 country-level transition indicators:
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
(Imperfect) causality from democratization to reform:
Serbia and Montenegro, Croatia, Kyrgyz Republic
11
Eco
no
mic
Tra
nsi
tio
nAverage of 6 country-level transition indicators:
Source: Source: Source: Source: EBRD
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Causality the other way: resulting from higher levels of
state employment in less democratic countries
12
De
mo
cra
cy,
20
12
State-sector employment, 2010, per cent
Source: Source: Source: Source: LiTS (2010) and Polity IV
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Causality the other way: economic development and
reforms help democracy
13
• 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 fostering the growth of the
private sector (especially small businesses), leading to
demand for democratic reform
2. By creating competition and weakening special interests
opposed to democracy; reducing inequality
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
A caveat: natural resources may break the link between
rising incomes and democracy
14
Not oil producing Oil-producing
Le
vel o
f d
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ocr
acy
in
20
12
Income in 1992 Income in 1992
Log per capita income 1992 (x-axis) and Polity 2 score 2012 (y-axis):
Source: Source: Source: Source: Polity IV database and IFS
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
The narrative
15
1. Absent a new reform push, convergence will not resume, due to:
(1) the inherent transitoriness of productivity catch-up associated
with transition;
(2) stagnation of reform since mid-2000s
2. One cause of stagnation is an under-reform trap involving autocratic
or imperfectly democratic regimes, weak economic institutions, and
low growth.
3. However, countries can break out of the trap.
• In imperfect democracies, through moderate political shocks
• More generally, through policies that allow improvements in
economic institutions even in autocratic political systems.
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
What we mean by “economic institutions”
16
Eco
no
mic
In
stit
uti
on
s
• Worldwide Governance Indicators (survey based)
• Doing Business “distance to the frontier” (laws and regulations)
• EBRD transition indicators (cumulative market reform)
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Getting out of the political under-reform trap
17
1. In imperfect democracies, political shocks can sometimes trigger
large improvements in economic institutions.
• Comparative study of four cases: Romania (pivotal election,
1996); Slovak Republic (pivotal election, 1998), Georgia (Rose
Revolution, 2003) , Ukraine (Orange Revolution, 2004).
2. Some policies can trigger or facilitate improvements in economic
institutions almost regardless of the political system.
• “Feasible political reform” -- particularly at local/regional level
• Openness to trade and FDI
• Education, particularly higher education
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Windows of opportunity leading to better economic
institutions: Slovak Republic and Georgia
18
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s
Polity2 (left axis) and average worldwide governance indicator (right axis):
Source: Source: Source: Source: Polity IV database and World Bank
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Missed opportunities: Romania (1996), Ukraine (2004)
19
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Qu
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Polity2 (left axis) and average worldwide governance indicator (right axis):
Source: Source: Source: Source: Polity IV database and World Bank
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Factors shaping the success of windows of opportunity
20
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
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Large variation in business environment at regional level
21
• e.g. corruption as a business obstacle in Russian regions.
1st 3rd 5th 10th
2nd 4th 6th
Ranking of corruption relative to other obstacles to business
Source: Source: Source: Source: Banking Environment and
Enterprise Survey 2012
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
International integration comes with good institutions
22
Exp
lan
ato
ry p
ow
er
Fin
an
cia
lTr
ad
e
Factors explaining institutional quality difference between top and
bottom transition countries, using WGIs as measure of institutions :
Source: Source: Source: Source: EBRD calculations
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Much scope for improving quality of tertiary education
23
Qu
alit
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f e
du
cati
on
Nu
mb
er
of
Comparison of human capital in Advanced and Transition countries:
Source: Source: Source: Source: EBRD calculations, National
Science Foundation, WIPO
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Conclusion
24
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, some reforms may be feasible in democratic and
less democratic countries alike:
• Allowing international integration
• Improving transparency and accountability at local levels
• Improving and opening education
4. International community can help by promoting international
integration (trade and financial), supporting diversification, and
supporting education.
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Backup slides
25
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
How convergence might change if reform is invigorated
26
Inco
me
as
a s
ha
re o
f E
U1
5 in
com
e
GDP per worker as a share of EU15 average, actual and projected:
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
In more advanced transition countries, attitudes shifted
against the market after the crisis
27
Su
pp
ort
fo
r m
ark
ets
Share of respondents that unequivocally supports the free market (LiTS):
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Democratisation has propelled reform – but not always
28
Eco
no
mic
Tra
nsi
tio
nAverage of 6 country-level transition indicators:
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Go
vern
me
nt
eff
ect
ive
ne
ss
… but “distance to frontier” can still shrink
29
Dis
tan
ce t
o t
he
fro
nti
er
Source: Source: Source: Source: World Bank
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
What we mean by “economic institutions”
30
Eco
no
mic
In
stit
uti
on
s
• World Bank Global Governance indications (survey based)
• Doing business “distance to the frontier” (laws and regulations)
• EBRD transition indicators (cumulative market reform)
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Political change creates windows of opportunity which
sometimes lead to better economic institutions…
31
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f in
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uti
on
s
Polity2 (left axis) and average worldwide governance indicator (right axis):
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
… but opportunities are also sometimes missed
32
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s
Polity2 (left axis) and average worldwide governance indicator (right axis):
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Factors shaping the success of windows of opportunity
33
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
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
The role of economic inclusion
34
• Reforms sometime can be undermined by lack of inclusion: e.g. Egypt
before revolution; privatisation in Russia ... (Euro area today?)
• Inclusion is correlated with, but not fully captured by, democracy and
measures of institutional quality (e.g. rule of law).
This report
1. Initial attempt to measure economic inclusion “bottom up”: as
inequality of opportunity (based on Life in Transition Survey)
2. Attempt to measure “inclusion gaps” across countries “top down”: by
rating capacity of markets and institutions to create opportunities
for women, young, and across sub-national regions .
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Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Wide variations in inequality of opportunity with respect
to wealth
35
Ine
qu
alit
y o
f o
pp
ort
un
ity:
ass
ets
Percentage variation in household asset index explained by pre-determined factors: