Progress in transition and institutional performance
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At the beginning of a new decade of transition, progress in reform in central eastern Europe and the Baltic states (CEB), south-eastern Europe (SEE) and the Commonwealth of Independent States (CIS) has regained momentum. The past year has seen the largest improvement since 1997 in reform across the region, as measured by the EBRD’s transition indicator scores.
In 2000 progress has been achieved across most countries and dimensions of reform, as several countries at the early stages of transition have taken significant strides towards a market economy, particularly in the areas of privatisation and liberalisation. Some of the countries recently invited to enter into EU accession negotiations have redoubled their reform efforts. The 1998 crisis in Russia that led a number of CIS countries to backtrack in reform has also been largely overcome, with the lifting of most temporary trade and exchange restrictions imposed in response to the crisis. However, a small group of countries– Belarus, Turkmenistan and Uzbekistan– have yet to embark on comprehensive liberalisation and privatisation.
Even where sustained liberalisation and comprehensive privatisation have been achieved, countries continue to face considerable challenges in developing the institutions that are necessary to support their nascent market economies. The countries of CEB have slowly but steadily strengthened the performance of their market-supporting institutions. However, those in SEE and the CIS continue to lag well behind in terms of institutional performance. In these regions, legislative and regulatory changes have often been extensive, but the implementation and enforcement (effectiveness) of the new laws and regulations is weak. The institutional framework is often marred by inconsistencies within laws and regulations and their arbitrary interpretation, bureaucratic red tape and corruption. Moreover, as a result of continuing weaknesses in institutions, macroeconomic imbalances are difficult to manage and financial sectors remain vulnerable to bouts of instability. When instability strikes, governments often resort to increased administrative controls of prices, trade and access to foreign exchange as stopgap measures.
This chapter analyses recent progress in market-oriented reforms across the region, placing these changes in the context of the patterns that have emerged over the first decade of reform. These patterns include the introduction of liberalisation and privatisation ahead of the development of market-supporting institutions and the significant influence of economic, social and political conditions at the start of transition on future progress in reform.
Differences in starting points have had a strong impact on the reform process, with the countries in central Europe clearly benefiting from relatively favourable initial conditions. However, the initial advantage of these advanced reformers is now gradually fading. Moreover, the foundations appear to have been laid for strengthened institutional performance in countries where there has been sustained liberalisation and comprehensive privatisation, openness to international trade and investment, and the establishment ofdemocratic political systems that function freely and fairly. The chapter argues that this combination of factors will over time support the emergence of a well-functioning market economy.
At the same time, it is important to recognise that such evolutionary progress is not automatic. There are many pitfalls that can trap the reform process. For example, economic liberalisation does not necessarily ensure that newly created markets are competitive. Nor does it ensure that enterprises are free to enter and exit the market, particularly where liberalisation is haphazard and where there are strong incentives for certain individuals to block further progress in reform. While international integration can be a catalyst for growth, it can also be a source of macroeconomic and financial instability, especially where it is not accompanied by strong domestic reforms. Moreover, a formal constitutional and legal framework for democracy and civil liberties does not necessarily prevent powerful private interests from exercising undue influence over the state and from "capturing" it for their own benefit. The challenge is to ensure that newly established economic and political freedoms underpin robust economic and political competition.
The first section of this chapter introduces the EBRD’s transition indicators (see Table 2.1). Section 2.2 reports on recent progress across the region, as reflected in the transition indicator scores. Section 2.3 introduces a simple framework that identifies the main factors advancing reform across the region and guides the analysis in the remainder of the chapter. Sections 2.4 and 2.5 focus on progress in economic liberalisation and privatisation respectively. Section 2.6 analyses institutional reform and performance, highlighting how the lack of enforcement of new laws in the less advanced transition economies hinders the functioning of markets and private enterprise. Section 2.7 provides a statistical analysis of the main factors driving institutional change over the past ten years. For this purpose, the EBRD’s transition indicators have been backdated to 1989. Annex 2.1 provides the transition indicators scores for 1989-93 and describes progress in reform in the early 1990s.
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