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Produced by the Office for the Chief Economist, EBRD.
© European Bank for Reconstruction and Development
20.11.13
TRANSITION REPORT 2013
Stuck in Transition?
1
Erik Berglof
Chief Economist
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Transition stuck, almost everywhere
2
Eco
no
mic
Tra
nsit
ion
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Income converged, but will it continue?
3
Growth since 1990
Pe
r ca
pit
a I
nco
me
(lo
g)
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Income converged, but will it continue?
4
Growth since 1990
Pe
r ca
pit
a I
nco
me
(lo
g)
Source: World Bank
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Motivation: will convergence resume?
5
Gro
wth
Real GDP growth y-o-y, per cent:
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
This Transition Report in a nutshell
6
I. Reinvigorating growth requires more reform and better 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. Democratisation more likely with economic development and 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
Why convergence may slow
7
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
Convergence driven by growth of total factor productivity
8
Gro
wth
19
93
-20
10
Total growth of real GDP (PPP) from 1993 to 2010:
Source: Penn World Tables 8.0
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
9 Source: Penn World Tables 8.0
Tota
l fa
cto
r p
rod
ucti
vit
y (l
og)
Income per capita (log)
… but this productivity catch-up may now be complete
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Similar trajectories for groups of countries To
tal fa
cto
r p
rod
ucti
vit
y (l
og)
Income per capita (log)
Source: Penn World Tables 8.0
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
With current policies, convergence will slow…
11
Inco
me
as a
sh
are
of
EU
15
in
co
me
GDP per worker as a share of EU15 average, actual and projected:
Source: EBRD calculations
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
…unless reform efforts can be reinvigorated
12
Inco
me
as a
sh
are
of
EU
15
in
co
me
GDP per worker as a share of EU15 average, actual and projected:
Source: EBRD calculations
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
This Transition Report in a nutshell
13
I. Reinvigorating growth requires more reform and better 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. Democratisation more likely with economic development and 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
14
Eco
no
mic
Tra
nsit
ion
Level of democracy
2012 Polity2 score (x-axis) and average country-level transition indicator (y-axis):
Source: Polity IV database and EBRD
© European Bank for Reconstruction and Development 2010 |
www.ebrd.com
15
Even political institutions in 1992
predict economic institutions in 2011 “Initial” political institutions matter
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Democratisation has propelled reform – but not always
16
Eco
no
mic
Tra
nsit
ion
Average of 6 country-level transition indicators:
Source: EBRD
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Democratic reversal impedes reform
17
Eco
no
mic
Tra
nsit
ion
Average of 6 country-level transition indicators:
Source: EBRD
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Improving economic institutions for given political system
18
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
International integration comes with good institutions
19
Exp
lan
ato
ry p
ow
er
Fin
an
cia
l Tr
ad
e
Factors explaining institutional quality difference between top and
bottom transition countries, using WGIs as measure of institutions :
Source: EBRD calculations
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Large variation in business environment at regional level
20
• 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: Banking Environment and
Enterprise Survey 2012
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
21
Le
vel o
f d
em
ocra
cy
Qu
ality
of
insti
tuti
on
s
Polity2 (left axis) and average worldwide governance indicator (right axis):
Source: Polity IV database and World Bank
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Missed opportunities: Romania (1995), Ukraine (2004)
22
Le
vel o
f d
em
ocra
cy
Qu
ality
of
insti
tuti
on
s
Polity2 (left axis) and average worldwide governance indicator (right axis):
Source: Polity IV database and World Bank
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Factors shaping the success of windows of opportunity
23
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
This Transition Report in a nutshell
24
I. Reinvigorating growth requires more reform and better 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. Democratisation more likely with economic development and 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
Economic reforms help democracy
25
1. Make societies richer and build constituencies for democratisation
2. Strengthen competition and weaken resisting special interests
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Early economic reforms help to predict democracy …
26
De
mo
cra
cy
in 2
01
1
Economic reform levels in 1992
Note: relationship holds controlling for initial levels of democracy.
Average country-level transition indicator 1992 (x-axis) and Polity2 score 2011 (y-axis) :
Source: Polity IV database and EBRD
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Demand for democracy
27
• 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 less likely than private sector workers to support democracy
• Education – better educated people 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 more likely to support democracy.
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Human capital, institutions and reform: the links
28
• Links to institutions in normal times: from human capital to
institutional capacity; from institutional quality to returns to education
• Importance in critical junctures – recruitment of young, educated
Georgians contributed to success of institutional reform after 2003.
• Effect via economic inclusion – quality of education and availability of
opportunities for young people across countries.
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
In transition region, tertiary education is the issue…
29
Qu
ality
of
ed
uca
tio
n
Nu
mb
er
of
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
…. but returns to education are also critical
30
• Better institutions improve returns to tertiary education
• Key to people acquiring education and to retaining them
Bra
in d
rain
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
The role of economic inclusion
31
• Reforms sometime undermined by lack of inclusion: e.g. Egypt before
revolution; privatisation in Russia ... (Euro area today?)
• Inclusion correlated with, but not fully captured by, democracy and
measures of institutional quality (e.g. rule of law).
This report
1. Measure economic inclusion “bottom up” as inequality of
opportunity (based on Life in Transition Survey)
2. 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 .
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Inequality of opportunity influences political and
economic perceptions
32
Average inequality of opportunity for people who answered:
Which is the most important
factor to succeed in life in our
country now?
What is the main reason why
there are some people in need in
our country today?
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Conclusion
33
1. Time is on the side of democracy and economic 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 – trade and financial – integration
• Strengthen regional competition and local accountability
• Invest in human capital and institutions
Transition Report 2013 Stuck in Transition?
© European Bank for Reconstruction and Development
20.11.13
Stuck in Transition – how to get unstuck
34
• Foster trade and financial openness
• Promote local competition/accountability
• Invest in people – and in institutions