Governance in transition
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The challenge of transforming the state’s role in the economy remains central to further progress in transition. Although there is no single model of governance in market economies, the state in many transition countries has still not fully adapted to the functions and tasks necessary for a developed market system. Legacies of central planning still shape the relationship between the state and firms in parts of the region. Key state institutions for protecting property rights and enforcing contracts are still functioning poorly. In many transition countries, the state has proven unable to provide an adequate social safety net for its citizens. Despite the considerable achievements of the transition over the first decade, the promise of good governance remains largely unfulfilled.
This chapter examines the extent to which the transition has transformed the role of the state and the nature of governance in the post-communist economies. It reports on the results of a major new survey of over 3,000 firms in 20 transition countries, conducted by the EBRD in collaboration with the World Bank. The Business Environment and Enterprise Performance Survey asked entrepreneurs and managers about the extent and nature of their dealings with the state and the associated obstacles to their business. It included questions on difficult issues, such as corruption, organised crime, state intervention and the influence of firms on governments. These are crucial determinants of the business environment that are rarely reflected in standard measures of country performance. Consequently, the survey provides an opportunity to assess and compare the quality of governance across countries from the viewpoint of those most directly affected. In addition, the focus on enterprises provides an opportunity to examine differences across firms within a given country to see how the relationship with the state depends on characteristics that vary across firms.
The survey results have important implications for an understanding of the factors that advance or impede the development of good governance. The chapter presents five key findings:
1. The relationship between governance and economic reform (in terms of liberalisation and privatisation) is not uniform. Firms in the most advanced and least advanced transition economies have more favourable assessments of governance than those in countries that have adopted partial reforms.
2. An important factor in explaining differences across countries in the quality of governance is the extent to which the state is prone to "capture"– or undue influence– by powerful vested interests in the economy. "High-capture" states tend to focus on providing specific advantages to influential firms and lobbies, while under-providing the institutions essential to improving governance.
3. The effects of privatisation on the quality of governance differ sharply according to the degree of state capture. Privatisation is associated with improved governance in countries where the state has been less subject to undue influence through capture by vested interests. However, in high-capture states, privatisation is associated with a lower quality of governance.
4. Progress in economic reform has not been synonymous with the elimination of state intervention in enterprise decision-making, although it has affected the types of decisions in which the state intervenes.
5. The initial hopes that economic reforms would largely eliminate the state’s role in the operations of enterprises– a process that has been referred to as "depoliticising" firms– have not been fully realised in most transition economies. States and firms continue to be tied together in a web of interactions in which the state provides a wide range of direct and indirect subsidies to firms, while firms provide public officials with some combination of control over company decisions and bribes.
The chapter documents each of these findings. Section 6.1 compares the level of governance across the transition economies and relates this to progress in economic reform. Section 6.2 shows the relationship between the quality of governance and the degree of state capture, based on a unique measure of state capture constructed from the survey. Section 6.3 demonstrates how the effects of privatisation on the quality of governance depends critically on the degree of state capture. In Section 6.4, various aspects of the state’s relations with businesses are examined, focusing on costs to the firm in terms of state intervention, time spent dealing with officials and the extent of bribery. The benefits received from the state in terms of direct and implicit subsidies are examined in Section 6.5. The nature of the dealings between the state and firms are analysed both across countries and across different types of firms in the overall sample. The final section draws conclusions on the quality of governance in transition.
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