Transition to Transition : Eastern Europe meets North Africa

1. Transition to Transition: Eastern Europe meets North Africa Erik Berglof Leontief Award Ceremony Saint Petersburg February 16, 2013

2. 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

3. European transition experience:Andrei Shleifer’s five lessons • 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) • Exaggerated benefits of incentives on their own – changes in people also necessary

4. 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

5. Outline • 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

6. 1. What are the outcomes to date?

7. 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” (bank-dominated, concentrated ownership, weak capital markets...)

8. 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)

9. 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

10. 2. What have we learned about transition?

11. 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

12. 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)

13. 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))

14. 3. Where is North African transition today?

15. 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

16. Assessment of transition challenges: Urban transport in Ukraine Two dimensions: Market Structure and Market Institutions 1 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

17. ATC heat map

18. “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.

19. 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

20. 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)

21. 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)

22. 4. What can North Africa learn from Eastern Europe

23. 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)

24. 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 medium-term challenge • More inclusive growth (women and youth)

25. 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)

26. 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

27. 4. What can Eastern Europe learn from North Africa

28. 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?

29. 5. Conclusions

30. 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 “governance-heavy” capital (like EBRD) • Can popular uprisings in North Africa provoke political transition in less democratic parts of Eastern Europe?