Marek Dabrowski Transition in Central and Eastern Europe

Marek Dabrowski Transition in Central and Eastern Europe and the Former USSR: The Role of External Institutional Anchors Presentation at the Symposium of the High School of Economics, Moscow, May 23 -25, 2011 www. case-research. eu

Presentation outline • What was transition about? • Increasing heterogeneity of transition economies • The role of EU and other international institutions in modernization process • Challenges ahead www. case-research. eu

Transition in CEE/FSU • • • Macroeconomic stabilization Domestic and external liberalization Privatization and enterprise restructuring Institutional and legal reform Building a market-based social safety net Political reform www. case-research. eu

Sources of Macroeconomic Disequilibrium • Price control market shortages forced savings monetary overhang (hidden [hyper] inflation) • Price control subsidies to basic goods budget deficit money printing • Decrease of oil prices (f. USSR) • Social populism of late communism • Long public debate about price liberalization www. case-research. eu

Macroeconomic stabilization • Fiscal adjustment (reducing subsidies [price liberalization] and government investment spending, market-based tax reform, creating room for SSN) • Stopping quasi-fiscal activities of central bank • Limiting credit expansion, active role of central bank, central bank independence, market-based monetary policy instruments • Temporary wage control in some countries www. case-research. eu

Liberalization • Price deregulation, removing subsidies • Unification of exchange rate, current account convertibility, then capital account convertibility • Free private entrepreneurship, business deregulation • Trade liberalization (unilateral then followed by AA with the EU and EU/WTO accession) • Dismantling monobank, opening door for private and foreign banks, abolishing interest rate control www. case-research. eu

Privatization and enterprise restructuring • Limited results of enterprise restructuring without privatization • Corporatization works only as the intermediate stage to privatization • The role of hard budget constraints and competition • Experience with various privatization schemes (IPO, sales to strategic investor, voucher privatization, employee/management buy-out, debt-equity swap, jointventures) www. case-research. eu

Institutional and legal reform • Building of various kind of market-support institutions and adopting market-oriented legislation • Crucial role of independent, professionally competent and uncorrupted judiciary as well as civil service • Helpful role of EU AA and EU accession (second-generation reforms) www. case-research. eu

Social safety net • Moving from subsidies, benefits in-kind, labor safety and enterprise-based SSN to targeted SSN • Better targeting (political and institutional constraints) • Unemployment benefits and ALMP • Building a multi-pillar pension system • Demographic challenges (pension system & health care • Mixed results of SSN (“premature post-communist welfare state”) www. case-research. eu

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End of transition? • Basic transition agenda completed in early 2000 s: the largest, fastest and most complex reform episode in contemporary economic history (ca. 15 years)? • In most former communist countries market mechanism coordinates most of production and investment decisions • Private sector contributes between 60% and 80% of GDP (EBRD, 2010). Exceptions: Turkmenistan (25%), Belarus (30%), Uzbekistan (45% of private sector in GDP) + North Korea and Cuba • Openness to international trade • Various level of market distortions and various quality of governance • Decade of 2000 s: rapid economic growth, low or moderate inflation, remonetization, high international reserves, improvement of fiscal balances; but part of these achievements reversed in 20082010 www. case-research. eu

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Heritage Foundation Index of Economic Freedom, 2008 www. case-research. eu

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Corruption Perception Index – A Map www. case-research. eu

Factors determining transition progress • Initial conditions • Internal factors (mostly ability to build durable political consensus around key elements of reform program) • External factors (EU and NATO integration prospects, support of Bretton Woods institutions, WTO, regional conflicts) www. case-research. eu

External vs. internal anchoring of reforms • Problems with domestic anchors • Ex ante and ex post political constraints of reform • Time inconsistency • Multiple equilibria (coordination failures) • External influence • Incentives • Guidance • Monitoring www. case-research. eu

Magnetism of EU integration • Political (‘club’) membership • Geopolitics and security • Four basic freedoms (goods, services, capital, labor) • Prospects of prosperity • Structural funds www. case-research. eu

Historical and actual role of EU anchor • Mediterranean Enlargement of 1980 s (Greece, Portugal and Spain); • Eastern Enlargement 2004 and 2007 (Bulgaria, Czech Rep. , Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia); • Candidates and potential candidates (Croatia, Turkey, other Western Balkans) • ENP and Ea. P for European part of CIS • Central Asia left behind even this pretty weak policy frameworks www. case-research. eu

Examples of empirical studies • Dabrowski and Radziwill (2007) ‘Regional vs. Global Public Goods: The Case of Post-communist Transition’, CASE Studies and Analyzes, No. 336 • Schweickert et al. , Institutional Convergence of CIS towards European Benchmarks, CASE Network Reports No. 82/2008) www. case-research. eu

Reform progress: Index of democratization Composite index: civil liberties and political rights. www. case-research. eu Source: Freedom House

Reform progress: Index of structural reforms Composite index: competition policy, enterprise reform, banking and non-banking financial sector reform. Source: World Bank www. case-research. eu

Challenges and problems ahead • Post-crisis environment: slower and more fragile growth, higher debts, volatile commodity markets, inflation pressures • How to improve business climate and governance (CIS and Western Balkans)? • How to avoid economic marginalization (CIS, Central Asia) • Unsustainable welfare state (NMS, Western Balkans, Western CIS) www. case-research. eu