Transition to Transition:
Eastern Europe meets North Africa
Erik Berglof
Leontief Award Ceremony
Saint Petersburg
February 16, 2013
Sharing of development experiences
• Advanced economies imposed their experiences for
centuries - with brute force or through “soft power”
• Central European countries actively promoted their own
experience; “soft power”, but no hidden agenda
• Russia expanded its development assistance; soft power
in circumference, but little beyond
• What can North Africa learn from Eastern Europe –
and what can Eastern Europe learn from North Africa?
• ..\..\..\..\..\..\..\Program Files\Gapminder
Desktop\Gapminder Desktop.exe
European transition experience:
Andrei Shleifer’s five lessons
1.
2.
3.
4.
Dramatic output drop in first years of transition
Recovery and rapid growth nearly everywhere
Decline in output did not lead to populist revolts
Economists and policymakers overstated their
ability to sequence reforms and importance of
particular strategic choices (e.g., privatisations)
5. Exaggerated benefits of incentives on their own
– changes in people also necessary
Main points
• Success leads to convergence of systems, but
many ways of getting stuck in transition
• Egypt today more like Ukraine 2013 than
Poland in 1989 or Russia in 1991
– No deep transitional recession - no strong rebound
– Many institutions in place – poor business climate
– Need outside anchor + “governance-heavy” capital
• Uprisings in North Africa may trigger political
transition in less democratic Eastern Europe
Outline
1.
2.
3.
4.
5.
6.
What are the transition outcomes to date?
What have we learned about transition?
Where is North African transition today?
Can North Africa learn from Eastern Europe?
Can Eastern Europe learn from North Africa?
Conclusions
1. What are the outcomes to date?
Successful transition
• Many reform trajectories...
– Differed in almost any conceivable aspect of
reform (privatisation method, bank restructuring,
equity markets, foreign bank entry...)
• ...but convergence towards one model
– ”emerging market form of capitalism” (bankdominated, concentrated ownership, weak capital
markets...)
What explains success in transition?
• Policies matter, of course, BUT...
• Initial conditions (distance to EU + rule of law)
• Outside anchor of EU accession
– a prize awarded based on transition progress
– the larger the prize, the more certain, the closer in
time (Berglof and Roland, 2000)
– weaker once inside; clubs-in-clubs can help sustain
reform momentum (Berglof et al., 2010 and 2013)
Many ways to get ”stuck in transition”
• Non-reformers – old guard hanging on
(Turkmenistan, Belarus, Uzbekistan)
• ”Failed” states (Tadjikistan, Kyrgyz Republic)
• Initial winners of reform captured process
(Ukraine)
• Resource trap (Kazakhstan)
• Middle-income trap? (Tunisia, Egypt)
– ¾ of all middle income countries in 1960 were also
middle income countries in 2012
2. What have we learned about
transition?
Transition – historical learning process
• Conceptual understanding improved
–
–
–
–
Initial linear notion of reform – turned out differently
Institutions required for markets to function
Private sector critical, but state also essential
Political economy of reform – threat of reversal
• Availability of data better
• Perceptions shaped by experience: concepts like
”privatisation” and ”liberalisation”, but also
”democracy” have a context and connotation
View of institutional change evolved
• Culture, geography and institutions – primacy of
institutions (Acemoglu et al., 2001, 2002)
• Extractive-productive economic institutions,
exclusive-inclusive political institutions (Acemoglu
and Robinson, 2012)
• Human capital influences success in institutional
change (Shleifer, 2012)
• Role of institutions depends on stage of
technological development (Aghion et al., 2013)
History shapes transition perceptions
• Pre-communist patterns influence transition process
–
–
–
–
–
eastern Europe backwardness (Berend, 2003)
experience of rule of law in Central Europe
Pale of settlement (Grosfeld, Rodnyansky and Zhuravskaya, 2013)
Habsburg empire (Grosjean, 2012a; Baecker et al. (2012)
World War II(Grosjean, 2012b; Grosfeld and Zhuravskaya, 2013)
• Differences among communist systems
– Soviet Union vs. rest of Eastern Europe, former Yugoslavia, within
SU differences (Baltic states vs. other republics)
• Conflicts during transition
– affect political trust and legitimacy, slow to change afterwards
(Tajik civil war (Grosjean, 2012c)); Ex-Yugoslavia (EBRD, 2006))
3. Where is North African transition
today?
From the EBRD transition indicators to
“Assessment of transition challenges”
•
•
•
•
•
•
More transparent, less judgmental
Sector by sector assessments
Benchmark to advanced economies
Indicators aggregate data (limit judgement)
13 sectors in 34 countries
Small, medium and large challenges
Assessment of transition challenges:
Urban transport in Ukraine
Two dimensions: Market Structure and Market Institutions
Urban Transport Sector
Dimensions
Components1
Urban Transport in Ukraine: 3Transition Score: 3- (Medium /Large)
Market
structure
[50%]
Decentralisation +
corporatisation [33%]
• Decentralisation complete, but corporatisation
only partial - operators not independent
Commercialisation
[33%]
• Public operators not oriented to customers +
loss making; private operators break even
Marketsupporting
inst. [50%]
1
Private sector part +
competition [33%]
Tariff reform [50%]
Contractual,
institutional +
regulatory
development [50%]
• Substantial but fragmented private sector
• Tariffs highly regulated - municipal operators
socially oriented not reflecting costs; private
operators better, but not high-quality service
• Municipal regulation of tariffs
• Regulation weak (ad-hoc), no service contracts
Components comprise sub-indicators such as: Degree of corporatisation; Financial, commercial, operational
performance; Extent of private sector participation; Degree of tariff levels and setting; Degree of regulatory
authority capacity and risks of political interference
ATC heat map
Sector Transition Indicators 2012: Overall scores
Corporate Sectors
Central Europe and Baltics
Croatia
Estonia
Hungary
Latvia
Lithuania
Poland
Slovak Republic
Slovenia
South Eastern Europe
Albania
Bosnia and Herzegovina
Bulgaria
FYR Macedonia
Montenegro
Romania
Serbia
Turkey
Eastern Europe and
Caucasus
Armenia
Azerbaijan
Belarus
Georgia
Moldova
Ukraine
Russia
Central Asia
Kazakhstan
Kyrgyz Republic
Mongolia
Tajikistan
Turkmenistan
Uzbekistan
SEMED
Egypt
Jordan
Morocco
Tunisia
Energy
Agri
business
General
Industry
Real
estate
Natural Sustainable
energy
resources
Infrastructure
Power
Urban
Water &
Telecoms Wastewater
Transport
Financial Sectors
Roads
Railways
Banking
Insurance &
other fin
services
MSME
Finance
Private
Equity
Capital
Markets
3
3
3+
3+
4-
3-
3
4
3+
3+
3+
3-
3+
3
3-
2+
3+
4+
4+
4
3-
4
4
4
4-
3
4
4-
3+
3
3-
3
4
4-
4-
4-
3
4-
4
4
3+
4-
3+
3+
3
3
3
3+
3
4-
4-
3+
3+
3+
3+
3+
4-
3
4-
3+
3+
3
3-
3
3+
4-
4-
3+
3+
3+
4-
3+
4-
3
3
3+
3+
3
2+
3
3+
4-
4-
3
3
3+
4
4-
4-
4-
4
4-
4-
3
3+
4
3+
4+
4
3+
3
4
4-
3+
3+
3-
3+
4-
3+
3+
2+
3
4-
3+
4
3+
3+
3
3+
3+
3+
3
3
3
3
3
3-
3
3-
2+
3-
3-
3+
3
3+
2+
3-
3-
2
3-
2
2+
1
2-
3-
2
2-
2
2
2+
2+
2
2+
3
3+
3-
2+
2+
2-
2-
3
3+
3+
3+
3-
3+
4-
3
3+
3-
3+
3
3+
3-
3-
3
3-
3
3-
2+
2+
3
4-
2+
3-
3-
3-
3-
3-
2+
1
2-
2+
2+
2+
3+
2
3-
3+
2
3
2+
2+
3-
2+
2+
1
2+
3
3+
3+
4-
3+
3+
3+
3+
3+
3
3+
3
3+
3-
2+
3
3-
3-
3-
2
2+
2+
3
2+
3-
3-
3
3-
3
3
2-
3-
3-
3
3+
3+
3
3+
3+
3
3+
3-
3-
3+
3
3-
3-
4-
3-
3
3-
3-
3-
3+
3
3-
2+
3-
2+
2+
2
2+
1
2
2+
2
2
2+
2+
2+
2-
2-
2
2+
2+
2
2
2
1
22-
2+
2
2
1
2
1
2
2-
2
2
1
2
2
2
1
3-
3-
3-
2
3-
3+
3-
2
2+
2+
3
3-
2
3-
1
2-
3-
2-
2+
3
2+
3
3
2
3-
3-
2
2+
2+
2
2-
2+
3-
2+
3-
2-
2+
3
3-
2+
3-
3-
2+
3-
2+
2
2
3-
3-
3-
3-
2
2
3+
3+
3
3
3-
4-
3-
3-
2
2+
4-
3-
2
3
2-
2-
3
3
2+
2+
2+
3
3-
2+
2
2-
3
2+
2
2+
2+
2
2+
3
2-
2
2-
1
2
2-
2-
1
2-
3-
2+
2
2
2
2+
3
2
2
2-
3-
2+
2
2
2-
2+
2
2-
2-
1
2+
2
2+
2
2
2-
1
2
2-
1
1
1
1
1
1
1
1
1
2-
1
1
1
1
1
2-
1
1
1
2
1
2
1
2-
2+
2
2-
2
1
3-
1
2
1
1
1
2
2
2+
1
2+
2+
3
1
2
2+
2-
2+
2+
2-
2
2+
2
2+
3-
2+
2+
3
3+
2-
2+
3-
2
3
3-
2+
2
3-
2+
3-
3-
2-
3
2
3+
2+
3
3-
2
3-
3-
2+
2+
3-
3-
3+
3-
2
3-
2
3
2
2+
2+
2+
2+
2+
2
2-
2+
“Transition gaps”: traditional EBRD region
and southern Mediterranean countries
SEMED region comparable to Caucasus
countries, Kazakhstan, and Ukraine.
Note: Country averages of 16 sector transition indicator scores in 2012.
North Africa has most institutions
• Real sector operates like market economy, BUT
–
–
–
–
Lack of competition – weak competition policy
Subsidies play important role in many sectors
Business climate among the worst in the world
Corporate governance poorly developed
• Financial sector developed, BUT
– Banks dominate with rudimentary capital markets
– Strong state presence
– Funding government, but limited penetration and do
not lend to SMEs
Deep differences in demographics and distribution
• Demographics fundamentally different
– Outlook very different - must grow at 7 per cent just to
keep pace with population growth
– Pressure on infrastructure (education, transport...) and
job creation (EE: ratio of old-to-young growing)
• Pockets of poverty + illiteracy; profound exclusion
– 80 per cent of women outside labour markets
– 50 per cent of youth unemployed (also highly educated)
Main observations
• Egypt today not like Poland in 1989 or like
Russia in 1991 – more like Ukraine 2013
• Economy not as distorted as in post-socialist
countries
• North African countries already done many of
the transition reforms
• Important differences in demographics and
distribution (in particular extent of exclusion)
4. What can North Africa learn from
Eastern Europe
Many market reforms implemented
• Should not suffer deep transitional recession
• But strong post-recession rebound also unlikely –
low-hanging fruit already picked
• Should escape wide-spread unhappiness due to
output shock and shock to human capital
• But key reforms like ”privatisation” and
”liberalisation” colored by decades of experience
• Growth affected by political uncertainty, but
impact should be short-lived, assuming that
political transition does not get stuck (not trivial)
Key reform challenges in North Africa
•
•
•
•
•
Establishing macroeconomic stability urgent
Scale down subsidies of food and energy
Restructure banking system to support SMEs
Improve competition and break “clientelism”
Reforming business climate the main mediumterm challenge
• More inclusive growth (women and youth)
What can the outside do?
• External anchor critical determinant
–
–
–
–
Some countries have more anchors (Egypt, Ukraine)
Economic growth in anchor important
Institutional superiority recognised (soft power)
Overcome status quo bias and individual veto players
• Marshall Plan - not the answer
– Problem one of micro institutions (and short-term
financial instability), not macro-economic demand
shock and reconstruction after World War II
– Egypt needs ”governance-heavy” investment (and
”governance-light” short-term financial support)
What can EBRD do in North Africa?
• Existence of banking system helps roll out key
products (SME, energy and water efficiency, trade
credit)
• Bring transition experience from Eastern Europe –
at sectoral level
• Create transparency around foreign direct
investment and municipal infrastructure
• Provide support to building legal framework and
corporate governance
• Help manage political risk for investors
4. What can Eastern Europe learn from
North Africa
From North Africa to Eastern Europe
• ”Authoritarian bargain” – lack of voice in exchange for
political stability + economic security (Desai et al, 2009)
• North Africa really about political transition - political
transition much more varied than economic transition
– Could ”Jasmine revolution” spread to Eastern Europe?
• Political islam have elements of populism (what
reformers feared in early transition)
– Response to the distributional consequences and a failure to
create meaningful jobs for young people (and women)
– Education and healthcare – could a further collapse in
Eastern Europe trigger similar counter-reactions?
5. Conclusions
Transferring transition treachorous,
but suggestive...
• Successful transition fosters convergence, but many
ways to get stuck in transition
• Pre-transition history shapes transition perceptions
• ”Egypt 2013 - more like Ukraine 2013 than Poland in
1989 or Ukraine in 1991”
• External anchors help break out of ”transition traps”
• ”Marshall Plan” not the solution – need “governanceheavy” capital (like EBRD)
• Can popular uprisings in North Africa provoke political
transition in less democratic parts of Eastern Europe?