stuck inpresentation at wiiw transition? january 27, 2014 ...... produced by the office for the...

www.tr.ebrd.com

Produced by the Office for the Chief Economist, EBRD.

© European Bank for Reconstruction and Development

20.11.13

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

Transition Report 2013 Stuck in Transition?


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%



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.



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



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):



20.11.13

Reforms have stagnated since mid-2000s

6

Eco

no

mic

Tra

nsi

tio

nAverage of 6 country-level EBRD transition indicators:



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:



20.11.13

The narrative

8



with transition;




low growth.







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):



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:



20.11.13

(Imperfect) causality from democratization to reform:

Serbia and Montenegro, Croatia, Kyrgyz Republic

11

Eco

no

mic

Tra

nsi

tio


Source: Source: Source: Source: EBRD



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



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



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

em

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



20.11.13

The narrative

15



with transition;




low growth.







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)



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



20.11.13

Windows of opportunity leading to better economic

institutions: Slovak Republic and Georgia

18

Le

vel o

f d

em

ocr

acy

Qu

alit

y o

f in

stit

uti

on

s

Polity2 (left axis) and average worldwide governance indicator (right axis):

Source: Source: Source: Source: Polity IV database and World Bank



20.11.13

Missed opportunities: Romania (1996), Ukraine (2004)

19

Le

vel o

f d

em

ocr

acy

Qu

alit

y o

f in

stit

uti

on

s


Source: Source: Source: Source: Polity IV database and World Bank



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



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



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



20.11.13

Much scope for improving quality of tertiary education

23

Qu

alit

y o

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



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.



20.11.13

Backup slides

25



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:



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):



20.11.13

Democratisation has propelled reform – but not always

28

Eco

no

mic

Tra

nsi

tio




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



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)



20.11.13

Political change creates windows of opportunity which

sometimes lead to better economic institutions…

31

Le

vel o

f d

em

ocr

acy

Qu

alit

y o

f in

stit

uti

on

s




20.11.13

… but opportunities are also sometimes missed

32

Le

vel o

f d

em

ocr

acy

Qu

alit

y o

f in

stit

uti

on

s




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



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 .



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:

stuck inpresentation at wiiw transition? january 27, 2014 ...... produced by the office for the...

Documents