INSTITUTIONS IN TRANSITION COUNTRIES

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INSTITUTIONS IN TRANSITION COUNTRIES

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Authors:

Katarzyna Szarzec

Editor, Introduction, State institutions, countries’ charts concerning state institutions (Albania-Croatia, Czech Republic-Georgia, Kazakhstan, Kyrgyzstan, Lithuania, Montenegro), Conclusions

Adam Baszyński

Institutions of banking system, countries’ charts concerning institutions of banking system, Conclusions Dawid Piątek

State institutions, countries’ charts concerning state institutions (Hungary, Latvia, Macedonia, Moldova, Poland-Uzbekistan), Conclusions

Michał Pilc

Institutions of labour market, countries’ charts concerning institutions of labour market, Conclusions Reviewer: prof. Beata Stępień

Translator: Grażyna Chamielec Graphic design: Bożena Wróbel Typeface: Titillium

Publisher:

Global Development Reseach Group www.globaldevelopment.org.pl Print:

Drukarnia PAW Szczecin www.paw.szczecin.pl Poznań, 2014

Publication with support of the National Science Centre, NCN,

grant no. 2011/01/B/HS4/00802, titled: “State in relation to economic freedom. Theory and practice of transition”.

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STATE INSTITUTIONS

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INTRODUCTION

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INSTITUTIONS OF LABOUR MARKET

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INSTITUTIONS OF BANKING SYSTEM

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COUNTRIES’ CHARTS

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CONCLUSIONS

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5 INTRODUCTION

The transition which after 1989 has taken place in the countries of Central and Eastern Europe and in the territory of the USSR, inhabited by over 400 million people, was political, social and economic. As a result of the changes, a group of new sovereign countries appeared. In 1989, this group consisted of 9 countriesi_{, and in 2014 there are}

already 29 of them. New entities of international law emerged in the course of a relatively peaceful process of the dissolution of the USSR, but also through wars between nations which used to form a single country of Yugoslavia. All these countries at one point started to the process of transition – from dictatorship to democracy and from a centrally controlled economy based on state ownership to a market economy based on private property. Political changes involved introducing political freedom and the transition of the economy – increasing the scope of eco-nomic freedom and introducing the rule of law.

Hence, the economic transition required enormous institutional changesii_{. They included also the state “adjusting”}

to new economic circumstances. On the one hand, the state had to withdraw from the functions it had performed in the previous system, on the other – it had to remain powerful and efficient enough to perform tasks being part of the transition process, i.e. to stabilize the economy, liberalize the conditions for conducting business activity, privatize enterprises and change the institutional environment (the so-called “paradox of the adjusting state”iii_).

Effective state institutions, as it is confirmed by many studies, constitute one of the pillars of economic growth and an essential precondition for economic developmentiv_{. “Good” institutional solutions promote the}

develop-ment of entrepreneurship, innovativeness and production growth, as they protect property rights, lower transac-tion costs and ensure the effectiveness of the market mechanism.

This report is one of the results of the research project funded by the National Science Centre (NCN) entitled “State and economic freedom. Theory and practice of transition” (DEC-2011/01/B/HS4/00802), supervised by Prof. Wacław Jarmołowicz, Ph.D. and conducted at the Poznań University of Economics, Poland. The scientific problem in the centre of the project is the question of the relationships between the state and economic freedom, and of the functions which the state should perform in the economy. The aim of the study is to identify and analyse the relationships between the state and economic freedom in the process of economic development of the transition countries. This study is the result of the need for better understanding of the interdependencies between the state and economic freedom. In this context, the experiences of the transition countries (which not so long ago had to redefine the role of the state in the economy and significantly expand the scope of freedom) constitute what scholars describe as a “quasi natural experiment”v_{. What proves especially useful is the observation of formal institutions} in statu nascendi, which may provide a new perspective from which to see the analysed relationships and enable to verify the findings appearing in literature (concluded from the experiences of developed countries) and concerning the impact of the state on economic growth and the efficiency of functioning of different markets in the transition countries. One of the research tasks in this project is the analysis of formal institutions and their significance in the economies of the transition countries. This report is based on the results of these analyses precisely.

The aim of this report is to present and evaluate the changes which have taken place in institutions of 28 transition countries after 1989. Institutions are here understood as formal rules, including procedural and regulatory

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i.e. whether they ensure economic freedom and good governance. The choice of these factors was determined by the existence of the general consensus that a “good state”, conducive to economic development, is such which guarantees compliance with basic human rights – political and economic freedom, and private property, i.e. a state which is democratic, lawful and provides good governance. Also institutional solutions created by states were analysed, with focus on two areas particularly important for the economy: the labour market and the banking sector. These areas underwent fundamental reforms in the period of transition but then – it is the state which determines the rules according to which they operate and, thus, has an impact on their efficiency. The full employment remains one of the main social and economic goals of the state. In the case of the banking sector, it was assumed that it would become the foundation for the development of an economy based on competition and private property. The analysis concerned 28 transition countries belonging to the following regionsvii_:

- Central Europe and Baltic States (CEB): the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia; - South-East Europe (SEE): Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Montenegro, Romania,

Serbia, Slovenia;

- Russia and former Soviet republics, excluding the Baltic states (the Commonwealth of Independent States, CIS): Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.

In the report, particular countries are characterised with respect to state institutions and institutional solutions used on their labour markets and in their banking sectors. The definitions of applied indices and their sources are given in the glossary at the end of the report. At the beginning of each country chart, the start year of the systemic transitionviii_{is given, along with key macroeconomic indicators for the year 2012; the data come from the World}

Bank and the International Monetary Fund.

From the perspective of the institutional environment, the analysed countries constituted a homogenous group, at least at the beginning of their transition. This similarity stemmed from their common legacy of a centrally planned economy. All these countries were also characterised by low level of political and economic freedom and poor governance. Moreover, the societies of these countries had high deficits of democracy, rule of law and respect of human rights. There was overemployment on the labour market and low labour efficiency, as the state – through a network of state enterprises – guaranteed employees full protection against the unemployment risk. At the same time, the banking sector was a monopoly dominated by state ownership.

It was the intention of the Authors to give the report a synthetic form. Its aim is to disseminate knowledge on formal institutions and different development paths of political and economic transition. The report is addressed mostly to public officials and policy-makers responsible for the creation and implementation of regulations for the economy (including the labour market and banking sector regulations), also to the members of the Polish parliament and eurodeputies specialising in policies designed to encourage economic development in the transi-tion countries (particularly as part of the European Neighbourhood Policy and the Eastern Partnership). Potential readers of the report include, but are not limited to, the following: entrepreneurs planning to internationalise their businesses, journalists, NGO workers, those executing aid projects and interested in the issue of institu-tional changes in post-socialist countries. The emphasis is laid on the systemic and instituinstitu-tional aspects, which distinguishes this report from among other publications, concentrating strictly on economic and political issues. Emphasizing the popularising and synthetic nature of this publication, the Authors refer also to the results of their other studies conducted as part of the same NCN research project and published in the scientific journals. These articles are referred to in the footnotes, so that they could be easily found. The analyses being part of the research project are comprehensive and cross-sectional; they are also based on an over twenty-year long study period, which enables to evaluate both short-term and long-term consequences which the reforms of state institutions, the labour market and the banking sector has had for economic agents. The unified charts of particular countries, which are part of the report, are based on rich empirical material, and are a summary of the data previously scat-tered in many different sources.

The year 2014 is the year of the 25th_{anniversary of the beginning of unprecedented political and economic}

changes in this region of the world. Therefore, it is worth making an attempt and evaluate the success of transition countries with respect to changes in state institutions and institutional solutions on the labour market and in the banking sector. The experience of these countries may be interesting for other countries which are either already undergoing similar processes or will soon have to face important political and economic changes. Unfortunately, as the report suggests, this still concerns also many of the analysed countries. The comparison of the political and economic situation of transition countries shows that institutions created by the state have a significant impact on economic development and the improvement of their effectiveness should be a priority for governments of all countries. Especially that it also increases the chances for political stability and peace.

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i These were: Albania, Bulgaria, Czechoslovakia, Yugoslavia, the German Democratic Republic, Poland, Romania, Hungary, the Union of Soviet Socialist Republics (USSR).

ii Bałtowski M., Miszewski M., 2006, Transformacja gospodarcza w Polsce [Economic transition in Poland], Wydawnictwo Naukowe PWN, Warszawa, p. 25.

iii Ahrens J., 2000, Toward a Post-Washington Consensus: The Importance of Governance Structures in Less Developed Countries and Economies

in Transition, “Journal for Institutional Innovation, Development and Transition (IB Review)”, vol. 4, p. 9.

iv See: Szarzec K., 2013, Państwo w gospodarce. Studium teoretyczne – od Adama Smitha do współczesności [State in economy. A critical study –

from Adam Smith to the present day], WN PWN, Warszawa, Chapter 5.

v Acemoglu D., Johnson S., Robinson J.A., 2005, Institutions as a fundamental cause of long-run growth, in: P. Aghion, S.N. Durlauf, eds., Handbook

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9 STATE INSTITUTIONS

The transition from an authoritarian, centrally controlled economy into a democratic market economy, which took place in postsocialist countries, required fundamental reforms of political and economic institutions. As it is emphasized by Martin Laar (Estonian prime minister in 1992-1994 and 1999-2002, who conducted many important economic reforms), it is impossible to build a democratic market economy in a transition country without appropriate institutional solutions, such as protection of property rights, rule of law and governancei_.

This is why the legacy of the previous socialist system, with its low efficiency of the judiciary and administration, and significant corruption, was an enormous problem for any transition country.

In order to describe the condition of state institutions, the authors of the report selected political and economic freedom indices and the governance indicators. The political freedom index is the Freedom House Freedom Rating and the economic freedom index is the Index of Economic Freedom (IEF) of the Heritage Foundation. The notion of “governance” is here used in accordance with the definition of Kaufmann et al.ii_{– as traditions and institutions}

through which authority is exercised in a country. The governance is analysed in six areas (indices published by the World Bank): Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regu-latory Quality, Rule of Law and Control of Corruption. Information on political systems and events after 1989 come from the official government websites of particular countries, the reports of the Freedom House, the Heritage Foundation, the European Bank for Reconstruction and Development (EBRD) and the World Bank.

There are significant differences between transition countries with respect to the level of political and eco-nomic freedom. They have reached varying levels of democracy and market economy. The most advanced in the transition are now these countries which were motivated by their decision to access the NATO, the OECD and the EU. Having decided to apply for membership in these organizations, the candidate countries had to adapt to their binding principles, such as: democracy, human rights and civil liberties, the promotion of an open market economy. These criteria of membership appeared to be important “external anchors”iii_{, which – in a sense –}

forced the candidate countries to adopt a certain direction of changes. Usually, the changes in political and economic freedom took place at the same time. Countries of a significant scope of political freedom also offer a lot of economic freedom, and vice versa: in countries where the political system is repressive, the level of economic freedom is low. What is important, in transition countries, democracy and economic growth are not competitive goals of development, and economic freedom has a positive impact on economic growthiv_{. The CEB}

countries are regarded as fully democratic and have achieved a level of political freedom typical of the EU-15. Also the SEE countries systematically increase the level of civil liberties and political rights. At the same time, the CIS countries offer little political freedom and this situation is unlikely to change. According to the Freedom House Freedom Rating 2013, such countries as: Azerbaijan, Belarus, Kazakhstan, Russia, Tajikistan, Turkmeni-stan and UzbekiTurkmeni-stan were classified as dictatorships deprived of political freedom.

The scope of economic freedom in the CEB countries has almost reached the level offered by the EU-15 coun-tries. The Index of Economic Freedom in the SEE countries also significantly increased, narrowing the gap be-tween those countries and the EU-15. At the same time, in the CIS countries, after the initial growth, the Index

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With respect to governance in transition countries, there has been a clear divergence of institutions. The CEB countries, with Estonia as the leader, offer very good governance. These countries recorded improvement in governance in 1996-2012 and with respect to the criterion of Political Stability and Absence of Violence/Terror-ism they reached the level of the EU-15. Although governance in the SEE countries is visibly lower than in the CEB countries, it has also improved considerably in the analysed period, with Slovenia as the clear leader. The CIS countries, on the other hand, struggle with poor governance. In 1996-2012 no improvement was noted in the quality of governance in these countries. Governance is clearly lower than in the two other groups of transi-tion countries.

i Laar M., 2003, How Estonia Did It, w: Index of Economic Freedom 2002, The Heritage Foundation.

ii Kaufmann D., Kraay A., Zoido-Lobatón P., 1999, Governance Matters, The World Bank, World Bank Institute Policy Research Working Paper no. 2196.

iii Di Tommaso M.L., Raiser M., Weeks M., 2007, Home Grown or Imported? Initial Conditions, External Anchors and the Determinants of Institutional

Reform in the Transition Economies, “The Economic Journal”, vol. 117, no. 520.

iv Szarzec K., Piątek D., Pilc M., 2013, Economic Freedom, Democracy and Economic Growth. A Causal Investigation within Transition Countries, “Post-Communist Economies”, vol. 25, iss. 3.

1995 1990 2000 2005 2010 1995 2000 2005 2010 1995 2000 2005 2010 80 70 60 50 40 30 20 10 0 80 70 60 50 40 30 20 10 0 1996 2004 2012 -1,5 -0,5 0,5 1,5 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 _{EFEKTYWNOŚĆ} RZĄDÓW GŁOS OBYWATELI I ROZLICZALNOŚĆ RZĄDZĄCYCH KONTROLA KORUPCJI STABILNOŚĆ POLITYCZNA I BRAK PRZEMOCY JAKOŚĆ REGULACJI PRAWORZĄDNOŚĆ -1,5 -0,5 0,5 1,5 EFEKTYWNOŚĆ RZĄDÓW GŁOS OBYWATELI I ROZLICZALNOŚĆ RZĄDZĄCYCH KONTROLA KORUPCJI STABILNOŚĆ POLITYCZNA I BRAK PRZEMOCY/ TERRORYZMU JAKOŚĆ REGULACJI PRAWORZĄDNOŚĆ -1,5 -0,5 0,5 1,5 EFEKTYWNOŚĆ RZĄDÓW GŁOS OBYWATELI I ROZLICZALNOŚĆ RZĄDZĄCYCH KONTROLA KORUPCJI STABILNOŚĆ POLITYCZNA I BRAK PRZEMOCY/ TERRORYZMU JAKOŚĆ REGULACJI PRAWORZĄDNOŚĆ -1,5 -0,5 0,5 1,5 EFEKTYWNOŚĆ RZĄDÓW GŁOS OBYWATELI I ROZLICZALNOŚĆ RZĄDZĄCYCH KONTROLA KORUPCJI STABILNOŚĆ POLITYCZNA I BRAK PRZEMOCY/ TERRORYZMU JAKOŚĆ REGULACJI PRAWORZĄDNOŚĆ INDEKS WOLNOŚCI

GOSPODARCZEJ (LEWA OŚ) INDEKS WOLNOŚCI POLITYCZNEJ (PRAWA OŚ) 1.0 2.0 3.0 4.0 5.0 6.0 7.0

CEB CIS SEE UE-15 CEB CIS SEE UE-15

CEB CIS SEE UE-15

Fig. 1. Index of Political Freedom (Freedom House) Source: own estimation based on Freedom House [2014]

Fig. 3. Governance indicators

Source: own estimation based on WGI [2014]

Fig. 2. Index of Economic Freedom

Source: own estimation based on Heritage Foundation [2014]

A common problem of all transition countries – even those which are the EU members – is the low Regulatory Quality, poor Rule of Law and insufficient Control of Corruption. These features describe the system of justice and administration, and the respect of citizens and authorities to institutions which set the frameworks of their economic and social relations. Such low scores are the legacy of the previous political and economic system but also – prove the ineffectiveness of the ruling elites in adopting and executing the right laws. Only Estonia and Slovenia score high with respect to Rule of Law and Control of Corruption. The situation is the most difficult in the former Soviet republics, in particular in: Kyrgyzstan, Tajikistan and Uzbekistan.

Comparing transition countries with respect to state institutions and the level of income per capita, we can con-clude that those countries in which effective state institutions have failed to develop are more prone to political and social destabilisation and have a slow pace of economic growth.

80 70 60 50 40 30 20 10 0 1995 1990 2000 2005 2010 1990 1995 2000 2005 2010 80 70 60 50 40 30 20 10 0 -1,5 -0,5 0,5 1,5 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 GŁOS OBYWATELI I ROZLICZALNOŚĆ RZĄDZĄCYCH KONTROLA KORUPCJI STABILNOŚĆ POLITYCZNA I BRAK PRZEMOCY JAKOŚĆ REGULACJI -1,5 -0,5 0,5 1,5 -1,5 -0,5 0,5 1,5 -1,5 -0,5 0,5 1,5 1,0 2,0 3,0 4,0 5,0 6,0 7,0 -1.5 -0.5 0.5 1.5

CEB CIS SEE UE-15

-1.5 -0.5 0.5 1.5 -1.5 -0.5 0.5 1.5

CEB CIS SEE UE-15

EFEKTYWNOŚĆ RZĄDÓW GOVERNMENT EFFECTIVENESS VOICE AND ACCOUNTABILITY POLITCAL STABILITY NO VIOLENCE REGULATORY QUALITY RULE OF LAW 1996 2004 2012 CONTROL OF CORRUPTION

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The institutions of the labour market may be defined as rules influencing the scope of choices available to the participants of this market with respect to the amount of work offered and demanded and the level of wages. Labour market institutions are, then, legal regulations determining the rules of hiring and firing of employees, the minimum wage or non-wage employment costs established by the state. Researchers dealing with the institu-tions of the labour market often expand their analyses to include also organizainstitu-tions operating on the job market (especially trade unions) and the state’s passive or active labour market policy. The authors of this report decided to adopt a similar approach.

With respect to the labour market, it is difficult to choose one index which would allow a total assessment of the institutional changes taking place on it. What is more, the published indices differ with respect to periods they refer to and also with respect to availability. Bearing that in mind, the authors of this report decided to select the following indices: the Index of Labour Freedom of the Heritage Foundation (published since 2005), the Index of Labour Market Flexibility published by the World Economic Forum (since 2006), the Employment Protection Legislation Index (EPL) of the OECD, non-wage labour costs, trade union density, the level of expenditure on labour market policies, the amount of unemployment benefit in relation to the average wage and the maximum period of receiving it (for some countries the listed indicators are available from as early as 1990). Preparing the charts of particular countries, we also used articles and reports issued by the International Labour Organization. Other complementary sources included: the employment and unemployment rates published by the World Bank and the reports available at Doing Business.

In the relevant literature, it is frequently emphasized that labour market institutions in transition countries were shaped in a great variety of ways. Despite this diversity, some researchers have attempted to identify certain characteristic features common for particular groups of transition countries. The existence of such similarities stems mostly from the countries’ common legacy of centrally planned economies, in which states – through a network of state-owned enterprises – guaranteed employees full protection against the risk of losing a job. As a result, one of the common features of all socialist countries before the transition was overemployment (hidden unemployment) and low labour productivityi_.

S. Cazes and A. Nesporovaii_{, who were ones of the first researchers to conduct a comprehensive analysis of labour}

market institutions in post-socialist countries, conclude that in the 90s of the 20th_{c. particular countries –}

de-pending on the progress of the transition process – to a varying extent resigned from the model of protection of employees through enterprises. In the countries of Central and Eastern Europe (CEB) the responsibility for the pro-tection of employees against the unemployment risk was to a large extent shifted from enterprises to the public institutions. Regulations concerning firing and hiring of employees were relaxed, relatively generous systems of unemployment benefits were introduced and programmes of active labour market policies were started. Particu-lar institutional solutions were modelled on the UE-15 countries. These changes resulted in a rapid increase of un-employment and a decrease of un-employment rates, but also a dynamic increase in productivity and real wages. These changes were less visible in countries belonging to the Commonwealth of Independent States (CIS) and in

INSTITUTIONS OF LABOUR MARKET

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Moreover, in a situation of an economic downturn, enterprises operating in these group of countries often did not made employees redundant (as it was the case in the CEB countries), but rather reduced the number of hours or abstained from the payment of wages. As a result, these countries showed lower unemployment rates and higher employment rates, as well as a lower increase in labour productivity and real wages.

However, in the first years of the 21st_{c., the differences between particular regions started to decrease. In the CEB}

countries, unemployment rates dropped and employment rates rose, while many of the CIS and SEE countries liberalized their labour regulations. A feature distinguishing the CEB countries from other transition countries re-mained higher spending on labour market policies. A phenomenon characteristic for almost all transition countries is a significant drop in trade union density.

The analyzed groups of transition countries still differ also with respect to the degree of compliance with existing regulations. The labour law is to a greater extent respected in countries which entered the EU. In other analyzed countries, the level of compliance is much lower and the legal protection of employees often does not apply to people employed in the informal sector, particularly to immigrants. As a result, in the case of many of the analyzed countries which are not members of the EU, the presented institutional indices reflect the real “rules” of the labour market to a lesser extent than in the case of the analyzed EU countries.

1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 0 10 20 30 40 50 60 70 1995 2000 2005 2010

IEF FREEDOM HOUSE 1996 2004 2011

60%

55%

50%

45%

40%

CEB CIS SEE UE-15

20%

15%

10%

5%

CEB CIS SEE UE-15

2005 1995 1999 2003 2007 2010 70 65 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 60 55 50

GOVERNMENT EFFECTIVENESS VOICE AND ACCOUNTABILITY -1.5 -0.5 0.5 1.5 CONTROL OF CORRUPTION POLITICAL STABILITY NO VIOLENCE REGULATORY QUALITY RULE OF LAW 1995 2000 2005 2010 1995 2000 2005 2010

Fig. 1. Index of Employment Protection Legislation (EPL)

Source: Lehmann and Muravyev [2012], OECD Fig. 2. Index of Labour Freedom Source: Heritage Foundation [2014]

1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 0 10 20 30 40 50 60 70 1995 2000 2005 2010

IEF FREEDOM HOUSE 1996 2004 2011

60%

55%

50%

45%

40%

CEB CIS SEE UE-15

20%

15%

10%

5%

CEB CIS SEE UE-15

2005 1995 1999 2003 2007 2010 70 65 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 60 55 50

GOVERNMENT EFFECTIVENESS VOICE AND ACCOUNTABILITY -1.5 -0.5 0.5 1.5 CONTROL OF CORRUPTION POLITICAL STABILITY NO VIOLENCE REGULATORY QUALITY RULE OF LAW 1995 2000 2005 2010 1995 2000 2005 2010

Fig. 3. Employment to population ratio

Source: World Bank, 2014, World Development Indicators

(http://databank.worldbank.org/data/databases.aspx; DOA: 03.02.2014)

Fig. 4. Unemployment rate

Source: World Bank, 2014, World Development Indicators

(http://databank.worldbank.org/data/databases.aspx; DOA: 03.02.2014)

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13 INSTITUTIONS OF BANKING SYSTEM

An economic transition is composed of three processes: stabilization, liberalization and construction of mar-ket institutionsi_{. This concerns also the banking sector. In most of the transition countries, the first two}

processes have already been completed. The last process has been completed only in some of them. This means that some of the countries have not managed to achieve the final structure of the market, including the market of banking services. This possible immaturity of banking sectors is related to legislative and institutional gaps.

The countries which at the turn of the 80s and 90s of the 20th_{c. entered the transition path have been}

constructing their banking systems for over two decades to suit the needs of market economies. It is likely that in no other economic area the organizational system of central planning of the Soviet type and the capitalist system of market economy differed so greatly as in the area of financeii_{. J.E. Stiglitz}iii_{notices that}

“if capital is the heart of capitalism, properly working capital markets are the heart of a properly working capi-talist economy”. Hence, “restructuring, privatization and the reform of the banking system must be conducted simultaneously”iv_{. This task was treated as a priority, because it was assumed that the banking sector would}

become the foundation for the development of an economy based on the mechanisms of competition and private property – phenomena which had been absent in this part of the world for decadesv_.

Over more than two decades, the banking systems of transition countries have undergone an unprecedented transformation from the model of a monopoly dominated by state ownership to the competition model with a predominance of foreign private investors. This has been accompanied by a hasty improvement of the institutional environment and the harmonization of banking sectorsvi_.

The reforms of the banking sector are a process which can be divided into several stages. The first stage involves establishing a two-tier banking sector, usually through separating the function of commercial banks from the central bank. The second stage involves the liberalization of interest rates and the allocation of credit, limiting direct crediting or increasing the freedom of shaping interest rates. The third stage involves establishing the Capital Adequacy Ratio, banking supervision and prudential regulations. The goal is the full liberalization of interest rates, with slight preference in access to cheap refinancing; a significant level of lending private enterprises and a considerable presence of private banks. The fourth, big step involves changing the banking law and market regulation so that they meet the standards of the Bank for International Settlements (BIS). The aim is a well-functioning banking competition and effective supervision; longer terms of loans to private enterprises and visible deepening of the financial market. The fifth – and the last – step is establishing the standards and norms of operation typical for developed industrial economies. This means the full convergence of the banking law and regulations with the BIS standards, providing a full range of competitive banking servicesvii_{. The progress of banking reforms in transition countries according to the}

division into territorial groups, i.e. Central and Eastern Europe (CEB), South-East Europe (SEE) and the Commonwealth of Independent States (CIS) is shown in Figure 1.

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forms at the pace dictated by the CEB countries. At the same time, the CIS countries, which in 1992-1995 carried out banking reforms in a rapid pace, slowed down the process of changes and so far have failed to achieve the full liberalization of interest rates and the market allocation of credit in the economy. The results of the progress of banking reforms for transition countries in general is the function illustrated in Figure 1 as the TC line.

Two-tier banking systems were established in all transition countries as early as in the first half of the 90s of the 20th_{c. It was a top-down process, involving separating commercial functions from the structures of}

central monobanks through establishing commercial banks and providing them with assets. The aim was to ultimately privatize the commercial banks. Moreover, bottom-up founding initiatives combined with a fairly liberal policy of granting banking licences, led to the formation of private banks.

The liberalization of interest rates led to the market allocation of credit in the economy. The access to preferential financing of the economy was gradually limited. The governments of particular countries retained the right to intervene in the market with the use of special government credit institutions which remained the property of the state, e.g. the Polish National Economy Bank (Bank Gospodarstwa Krajowego, BGK), the Czech Export Bank (Česká exportní banka, CEB) or the Croatian Bank for Reconstruction and Development (Hrvatska banka za obnovu i razvitak, HBOR). The assets of banks in most of transition countries remain under the control of private and mostly foreign investors.

Due to the problem of the so-called bad debts, often inherited from the previous regime or accrued as a re-sult of implementing programmes to restructure economies, a need appeared to establish the framework of banking supervision, including determining standards of capital adequacy and deposit insurance. All transi-tion countries specified capital adequacy ratios in line with the guidelines of the Basel Committee on Banking Supervision (minimum 8%). Moreover, most of them (with the exception of Georgia and Turkmenistan) implemented the system of deposit insurance. The administration of the fund to guarantee the payment of deposits was entrusted to a specially established institution or – less often – the county’s central bank. The construction of the institutions of the banking services market was aimed at the creation of banking competition and at expanding the scope of credit intermediation. Banking reforms led to a departure from the state monopoly and the appearance of competition on the banking services market. Transition countries differ from one another with respect to the degree of concentration of banking sectors and competition on the banking services market. The number and size distribution of banking sector entities in transition countries differ significantly: from unconcentrated sectors (such as Bulgaria, Poland, Russia), through sectors moderately concentrated (such as the Czech Republic, Romania and Hungary), to highly concentrated sectors (such as Albania, Belarus and Montenegro), including the extremely concentrated sector of Estoniaviii_.

Figure 1. Index of banking reform in transition countries Source: own work based on the data of EBRD, 2012, Transition indicators by sector; http://www.ebrd.com/pages/research/ economics/data/macro.shtml [DOA: 18.05.2012]

Figure 2. The scope of credit intermediation in transition countries in 2011

Source: own work based on the data of the World Bank, 2012, World Development Indicators, http://data.worldbank.org/data-catalog/ world-development-indicators [DOA: 20.07.2012] 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 10 20 30 40 50 60 70 4,0 3,5 3,0 2,5 2,0 1,5 1,0 100 5000 10000 15000 20000 25000 90 80 70 60 50 40 30 20 10 0 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 0 10 20 30 40 50 60 70 1995 2000 2005 2010 IEF FREEDOM HOUSE INCOME PER CAPITA (USD)

CREDIT IN RELA TION T O GDP (%) VOICE AND ACCOUNTABILITY -1.5 -0.5 0.5 1.5 CONTROL OF CORRUPTION POLITICAL STABILITY NO VIOLENCE REGULATORY QUALITY

INDEKS REFORM BANKOWYCH UDZIAŁ SEKTORA PRYWATNEGO W AKTYWACH BANKÓW

10 20 30 40 50 60 70 80 90 100 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1,0 3,0 2,0 1,0 1995 1990 2000 2005 2010

CEB CIS SEE TC

LVA BGR BIH MNE SRB ROM KAZ BLR RUS LTU POL HUN HRV MKD ALB ARM GEO MDA UZB TKM AZE SVK CZE TJK KGZ UKR EST SVN TKM AZE KAZBLR RUS POL LTU MNE SRB MKD ALB ARM GEO MDA UZB TJK KGZ SVK CZE HUN HRV SVN EST LVA BGR BIH UKR ROM 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 0 10 20 30 40 50 60 70 4,0 3,5 3,0 2,5 2,0 1,5 1,0 100 5000 10000 15000 20000 25000 90 80 70 60 50 40 30 20 10 0 1995 2000 2005 2010 1990 1995 2000 2005 2010

IEF FREEDOM HOUSE

1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 0 10 20 30 40 50 60 70 1995 2000 2005 2010 IEF FREEDOM HOUSE

1996 2004 2011 1990 2000 2010 POLE POWIERZCHNI

TRB (LEWA OŚ) KREDYT DLA SEKTORA PRYWATNEGO (W RELACJI DO PKB, PRAWA OŚ) INCOME PER CAPITA (USD)

CREDIT IN RELA TION T O GDP (%) GOVERNMENT EFFECTIVENESS VOICE AND ACCOUNTABILITY -1.5 -0.5 0.5 1.5 CONTROL OF CORRUPTION POLITICAL STABILITY NO VIOLENCE REGULATORY QUALITY

INDEKS REFORM BANKOWYCH UDZIAŁ SEKTORA PRYWATNEGO W AKTYWACH BANKÓW

INDEKS REFORM PRZEDSIĘBIORSTW RULE OF LAW 10 20 30 40 50 60 70 80 90 100 0,0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1,0 3,0 2,0 1,0 1995 1990 2000 2005 2010

CEB CIS SEE TC

LVA BGR BIH MNE SRB ROM KAZ BLR RUS LTU POL HUN HRV MKD ALB ARM GEO MDA UZB TKM AZE SVK CZE TJK KGZ UKR EST SVN TKM AZE KAZBLR RUS POL LTU MNE SRB MKD ALB ARM GEO MDA UZB TJK KGZ SVK CZE HUN HRV SVN EST LVA BGR BIH UKR ROM

The evaluation of the transformation of banking sectors should not be limited only to ascertaining whether the recommendations for transformation have been met. It should also include the evaluation of the main functions of banks, i.e. providing banking services for enterprises and households. At the most basic level, such evaluation includes deposit and credit services. The aggregate measure of the development of banking may be the domestic credit to private sector in per cent of GDPix_{. Figure 2 presents the level of domestic credit}

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15

i Anderson R.W., Kegels Ch., 1998, Transition Banking. Financial Development of Central and Eastern Europe, Clarendon Press, Oxford, p. 257. ii Ibidem, p. vii.

iii Stiglitz J.E., 1994, Whither Socialism?, MIT Press, Cambridge, p. 207.

iv Brainard L., 1991, Strategies for Economic Transformation in Central and Eastern Europe: The Role of Financial Market Reform, in: H. Blommestein, M. Marrese, (eds.), Transformation of Planned Economies, OECD Paris, p. 95.

v Barisitz, S., 2008, Banking in Central and Eastern Europe 1980-2006, Routledge, Abingdon, p. 20.

vi Bonin J.P., Schnabel I., 2011, The Great Transformation: From Government-owned to Foreign-controlled Banking Sectors, “Economics of Transition”, vol. 19, no. 3, p. 397.

vii EBRD, 2010, Transition Report 2010. Recovery and Reform, http://www.ebrd.com/transitionreport [DOA: 8.07.2012], p. 157.

viii Baszyński A., 2014, Koncentracja i konkurencja w sektorach bankowych transformujących się krajów europejskich. Studium teoretyczno-to private secteoretyczno-tor in per cent of GDP in all transition countries in 2011 and the estimated level of this credit (the pattern) for a market economy at the comparable level of development. Figure 2 indicates that the countries which are the closest to the pattern of the size of the credit to the economy are the Baltic and the SEE countries, whereas Central Asian CIS countries are the furthest from this pattern.

The charts presenting the institutional development of banking sectors in particular countries include the following information: the period when the reforms started (establishment of a two-tier banking sector), number of credit institutions, the dominant model of commercial banking, the exchange rate system, the allocation of credit to the economy, the institutional framework of banking supervision and the general pro-gress in the implementation of banking reforms.

The progress of banking reforms was measured with the use of the banking reforms triangle (BRT) which is a model aimed at determining the criteria for the evaluation of banking reforms. The vertices of the triangle indicate the extreme values of the following indicators of banking reforms: the EBRD indices of banking reforms and reforms of enterprises and the share of private banks in the total banking sector assets. The surface area of the resulting triangle is a relative measure of the progress of reforms in the banking services market. When the surface area increases – it represents progress in reforms, while when it shrinks – it means regress.

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COUNTRIES’ CHARTS

A

B

C

E

G

K

H

L

M

P

R

S

T

U

ALBANIA ARMENIA AZERBAIJAN BELARUS

BOSNIA AND HERZEGOVINA BULGARIA CROATIA CZECH REPUBLIC ESTONIA GEORGIA HUNGARY KAZAKHSTAN KYRGYZSTAN LATVIA LITHUANIA MACEDONIA MOLDOVA MONTENEGRO POLAND ROMANIA RUSSIA SERBIA SLOVAKIA SLOVENIA TAJIKISTAN TURKMENISTAN

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19 ALBANIA

KEY FACTS

(2012)

1989 1990 1991 1992 1993

STATE

INSTITUTIONS

POPULATION... 3.2 MLN

GDP PER CAPITA (PPP)... $ 9 443 GDP... $ 12.6 BLNINFLATION (CPI)... 2.0% 5-YEAR AVERAGE GDP GROWTH... 3.8%UNEMPLOYMENT...14.7% PUBLIC DEBT... 61.4% OF GDP

The systemic transition started in Albania in 1991, with the first free election. However, it was won by the communists. A year later, after another election, a non-communist government was formed and the leader of the former opposition Democratic Party – Sali Berisha – was elected president. In the same year, the programme of economic stabilisation was introduced. The second half of the 90s of the 20th_c.

in Albania was characterised by significant political in-stability, social unrest, violence and corruption among the ruling. In 1997, the collapse of pyramid schemes led to riots, the government’s loss of control over part of the country, and finally to earlier elections. Albania is a member of the Council of Europe (1995), the WTO (2000) and the NATO (2009). Since 2003 Albania has

been a potential candidate country for the European Union membership.

The political instability and abuse of power resulted in Albania being for years perceived as a flawed democracy. Since 2000 the country has seen an im-provement in political freedom, as a new election law was introduced and streamlined the election system. The situation started to change for the better af-ter the parliamentary election, but the FH Freedom Rating is still low and Albania is regarded as a partly free country. Significant problems are still corruption and protection of property rights (the relevant com-ponents of the Index of Economic Freedom in 2013 equalled 30.4 and 30 respectively). Nevertheless, the economic freedom in Albania in 1994-2013 increased significantly (with the IEF growing by more than 17 points) and currently the country is classified as moderately free. Although the indices concerning Rule of Law and Political Stability and Absence of Violence are still low (-0.57 and -0.16 respectively), the general governance has improved.

1995 1990 2000 2005 2010 80 70 60 50 40 30 20 10 0 GOVERNMENTEFFECTIVENESS VOICE AND ACCOUNTABILITY CONTROL OF CORRUPTION POLITCAL STABILITY NO VIOLENCE REGULATORY QUALITY RULE OF LAW FREEDOM RATING INDEX OF ECONOMIC -1.5 -0.5 0.5 1.5 1.0 2.0 3.0 4.0 5.0 6.0 7.0

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20 INSTITUTIONS OF

LABOUR MARKET

INSTITUTIONS OF

BANKING SYSTEM

The Albanian labour law is relatively restrictive and has not been significantly liberalized in 1995-2013. The minimal wage is maintained on a relatively high level. In Albania more people are employed in agriculture than in industry – according to the estimates of the World Bank in 2010 over 40% of the employed worked in the agriculture sector. The level of informal employment is

The reforms of the Albanian banking sector started in the 90s of the 20th_{c. The two-tier banking sector,}

established in April 1992, consists of the central bank (BA) and commercial banks (16). In the commercial banking sector, dominated by foreign investors (>90%), the most common model is that of a universal bank. The banking reforms brought the full liberalization of interest rates, the floating exchange rate of the lek (ALL) currency, the introduction of a system of deposit insurance (DIA)

and the Capital Adequacy Ratio at the level of 12%. The shape of the banking reforms triangle (BRT) indicates uneven progress in the construction of the banking sec-tor institutions in Albania. The far-reaching privatization of banks is not accompanied by progress in reforming banks and enterprises. The surface area of the BRT indicates that there is a significant transition gap in relation to industrialized market economies. The scope of bank in-termediation, measured by the domestic credit to private sector in per cent of GDP, does not exceed 40% and is low in relation to the economy at this level of development. Nevertheless, the Albanian banking sector is stable. very high: depending on the method applied, it is esti-mated at 30% to even 60% of the whole employment. A significant problem is the high level of long-term unemployment: in 2010 it exceeded 85% of the whole unemployment. There is also a high level of economic migration (in 2012, remittance constituted 8% of the GDP).

Tab. 1. Labour market institutional indicators Source: Lehmann and Muravyev [2012]

Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility Source: Heritage Foundation [2014], World Economic Forum [2013]

1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 0 10 20 30 40 50 60 70 1995 2000 2005 2010 2005 2010 1990 1995 2000 2005 2010

IEF FREEDOM HOUSE

3,0 3,5 4,0 4,5 0 10 20 30 1995 2000 2005 2010

IEF FREEDOM HOUSE

1996 2004 2011

1990 2000 2010 POLE POWIERZCHNI

TRB KREDYT DLA SEKTORA PRYWATNEGO

2.6 2.1 1995 2007 - 33.4% 45% 18% - 0.1% - 20% 12 12 6.2 5.8 5.4 5.0 4.6 4.2 3.8 3.4 3.0 100 90 80 70 60 50 40 30 20

INDEX OF LABOUR FREEDOM

(LEFT AXIS) INDEX OF LABOUR MARKETFLEXIBILITY (RIGHT AXIS) EMPLOYMENT PROTECTION

LEGISLATION INDEX (EPL) SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

EXPENDITURES ON ALMP AS A % OF GDP

TRADE UNION MEMBERS AS A % OF THE EMPLOYED GOVERNMENT EFFECTIVENESS VOICE AND ACCOUNTABILITY -1.5 -0.5 0.5 1.5 CONTROL OF CORRUPTION

INDEKS REFORM BANKOWYCH

POLITICAL STABILITY NO VIOLENCE

REGULATORY QUALITY

UDZIAŁ SEKTORA PRYWATNEGO W AKTYWACH BANKÓW

INDEKS REFORM PRZEDSIĘBIORSTW

RULE OF LAW

Pole powierzchni trójkąta reform bankowych (lewa oś)

Kredyt dla sektora prywatnego (w relacji do PKB, prawa oś) 10 20 30 40 50 60 0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 1995 r. 2007 r.

Indeks prawnej ochrony

pracowników (EPL) 2,6 2,1 Udział podatków i składek na

ubez. społ. w kosztach pracy - 33,4% Zasiłek dla bezrobotnych w

relacji do średniej płacy 45% 18% Zasiłek dla bezrobotnych -

maks. czas wypłacania 12 mies. 12 mies. Wydatki na ALMP jako odsetek

PKB - 0,1% Odsetek prac. najemnych

należących do związków zaw. - 20%

Wskaźniki instytucjonalne rynku pracy

1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 0 10 20 30 40 50 60 70 1995 2000 2005 2010 1990 1995 2000 2005 2010 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 0 10 20 30 40 50 60 70 1995 2000 2005 2010

IEF FREEDOM HOUSE

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 3.0 2.0 1.0

BANKING REFORM AND INTEREST RATE LIBERALISATION ASSET SHARE OF PRIVATE BANKS

ENTERPRISE GOVERNMENT EFFECTIVENESS VOICE AND ACCOUNTABILITY -1.5 -0.5 0.5 1.5 CONTROL OF CORRUPTION POLITICAL STABILITY NO VIOLENCE REGULATORY QUALITY RULE OF LAW 10 20 30 40 50 60 70 80 90 100

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21 ARMENIA

KEY FACTS

(2012)

1989 1990 1991 1992 1993

STATE

INSTITUTIONS

In 1991 Armenia declared its independence from the USSR and a year later the systemic transformation began. The first president of the independent country was Levon Ter-Petrosyan, who was previously a mem-ber of the government of the Armenian Soviet Socialist Republic. He remained in this position until 1998. After the declaration of independence, the economic situation of Armenia was very difficult. In the worst 1993 the production dropped to 40.7% of the level from 1991. Additionally, the inflation was very high (3731.8% in 1993 and 5273.4% in 1994) and the coun-try managed to control it only in 1994, after the imple-mentation of the programme of macroeconomic sta-bilisation. Armenia is a member of the Commonwealth of Independent States (1991), the Council of Europe

(2001), the WTO (2003), and has observer status at the Eurasian Economic Community (2003).

The presidency of L. Ter-Petrosyan was dominated by restrictions on the activity of opposition parties, corruption and the involvement in the conflict in Nagorno-Karabakh. In 2004 the political freedom in Armenia deteriorates due to the election’s failure to meet democratic standards and due to the persecution of the opposition’s supporters. According to the Free-dom House FreeFree-dom Rating, Armenia is a party free country. However, the introduction of new electoral law in 2011 made it possible to conduct a peaceful parliamentary election in May 2012. Nevertheless, the freedom of the media is still significantly limited, there is corruption and nepotism, and the representatives of the government are rarely held responsible for the instances of abuse of power. The Index of Economic Freedom describes Armenia as “moderately free” and close to the “mostly free” category. The values of governance indices are still low, but the Regulatory Quality should be evaluated positively (0.33 in 2012).

GDP PER CAPITA (PPP)... $ 6 645 GDP... $ 10 BLNINFLATION (CPI)... 2.5% 5-YEAR AVERAGE GDP GROWTH...1.0%UNEMPLOYMENT...18.5% PUBLIC DEBT... 38.9% OF GDP

1995 1990 2000 2005 2010 80 70 60 50 40 30 20 10 0 -1.5 -0.5 0.5 1.5 1.0 2.0 3.0 4.0 5.0 6.0 7.0 GOVERNMENT EFFECTIVENESS VOICE AND ACCOUNTABILITY CONTROL OF CORRUPTION POLITCAL STABILITY NO VIOLENCE REGULATORY QUALITY RULE OF LAW FREEDOM RATING INDEX OF ECONOMIC

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22 INSTITUTIONS OF

LABOUR MARKET

INSTITUTIONS OF

BANKING SYSTEM

The two-tier banking sector, built after the collapse of the USSR, is composed of the central bank (CBRA) and com-mercial banks (22). In the comcom-mercial banking, dominated by foreign investors (>65%), the most common model is that of a universal bank. The banking reforms brought the full liberalization of interest rates, the floating ex-change rate of the dram (AMD) currency, the introduction In 1992-2013 Armenia’s labour law was rather liberal. The country is characterized by both signifi-cant labour freedom (78.5 in 2013) and good Labour Market Flexibility (5 in 2013). The country has no specialized labour judiciary and disputes between employees and employers are solved by civil courts. The role of trade unions is relatively limited and

non-of a system non-of deposit insurance (ADGF) and the Capital Adequacy Ratio at the level of 12%. The shape of the banking reforms triangle (BRT) indicates uneven progress in the construction of the banking sector institutions in Armenia. The surface area of the BRT indicates that there is a significant transition gap in relation to industrialized market economies and little progress in the banking reforms. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, does not exceed 30% and is low. The operation of the banking sector in Armenia is not conducive for the economic growth of the country.

wage labour costs moderate. A characteristic feature of Armenia’s labour market is a low employment rate – in 1992-2012 its average value was less than 50% (less than 40% among women). The unemployment rate, on the other hand, is high: in 2001-2005 it exceeded 30% and in 2012 it was estimated on the level of 19%.

Tab. 1. Labour market institutional indicators

Source: Lehmann and Muravyev [2012], Muravyev [2010]

1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 0 10 20 30 40 50 60 70 1995 2000 2005 2010 2005 2010 1990 1995 2000 2005 2010

IEF FREEDOM HOUSE

3,0 3,5 4,0 4,5 0 10 20 30 1995 2000 2005 2010

IEF FREEDOM HOUSE

1.82 2.08 1995 2007 - 38.5% - 14% - 0.04% - 20% - 12 100 90 80 70 60 50 40 30 20 INDEKS REFORM BANKOWYCH UDZIAŁ SEKTORA PRYWATNEGO W AKTYWACH BANKÓW

6.2 5.8 5.4 5.0 4.6 4.2 3.8 3.4 3.0 2,6 2,1 1995 2007 - 33,4% 45% 18% - 0,1% - 20% 12 MIES. 12 MIES. INDEKS PRAWNEJ OCHRONY

PRACOWNIKÓW (EPL) UDZIAŁ PODATKÓW I SKŁADEK NA UBEZPIECZENIA SPOŁECZNE W KOSZTACH PRACY

ZASIŁEK DLA BEZROBOTNYCH W RELACJI DO ŚREDNIEJ PŁACY ZASIŁEK DLA BEZROBOTNYCH - MAKSYMALNY CZAS WYPŁACANIA WYDATKI NA ALMP

JAKO ODSETEK PKB ODSETEK PRACOWNIKÓW NAJEMNYCH NALEŻĄCYCH DO

ZWIĄZKÓW ZAWODOWYCH INDEX OF LABOUR FREEDOM_{(LEFT AXIS)} INDEX OF LABOUR MARKET_{FLEXIBILITY (RIGHT AXIS)}

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL) SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

TRADE UNION MEMBERS AS A % OF THE EMPLOYED 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 0 10 20 30 40 50 60 70 1995 2000 2005 2010 1990 1995 2000 2005 2010 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 0 10 20 30 40 50 60 70 1995 2000 2005 2010

IEF FREEDOM HOUSE

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 3.0 2.0 1.0

ENTERPRISE GOVERNMENT EFFECTIVENESS VOICE AND ACCOUNTABILITY -1.5 -0.5 0.5 1.5 CONTROL OF CORRUPTION POLITICAL STABILITY NO VIOLENCE REGULATORY QUALITY RULE OF LAW 10 20 30 40 50 60 70 80 90 100

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23 AZERBAIJAN

KEY FACTS

(2012)

1989 1990 1991 1992 1993

STATE

INSTITUTIONS

Azerbaijan declared its independence from the USSR in 1991 and a year later the systemic transition of the country began. The first and so far the only free election was held in 1992 and was won by the leader of the opposition Abulfaz Elchibey. However, he was overthrown a year later as a result of a military coup and replaced by the first secretary of the communist party – Heydar Aliyev. The economic situation of the country was then very difficult, with a significant decrease in production (in 1996 the production level constituted 41.3% of the level recorded in 1991) and high inflation. In 1995 a stabilisation programme was introduced. H. Aliyev remained in power until his death in 2003, when his son became the new president (he is still holding this position). Azerbaijan is a member

of the Commonwealth of Independent States (1991), the Council of Europe (2001) and has been negotiating its way to the WTO (since 1997).

According to the FH Freedom Rating, Azerbaijan is “not free”. In theory, it is a presidential democracy, but in practice – it is a dictatorship. Elections are rigged and the opposition is persecuted. High income derived from the extraction of oil contributes to the spread of corruption. The government restricts the freedom of the media. In 1995-2013 the value of the Index of Economic Freedom in Azerbaijan increased significantly (by 31.3 points). With this respect, the country is regarded as “moderately free”. However, the values of the Property Rights and the Freedom from Corruption components are very low (20.0 and 22.7). The quality of governance is also very low. The Voice and Accountability Index deteriorated in 2013 in comparison to 1996. In none of the other areas of governance the respective index is higher than 0 and the situation looks best in the case of Regulatory Quality (-0.47).

GDP PER CAPITA (PPP)... $ 10 624 GDP... $ 66.6 BLNINFLATION (CPI)...1.0% 5-YEAR AVERAGE GDP GROWTH... 5.4%UNEMPLOYMENT... 5.4% PUBLIC DEBT...11.6% OF GDP

1995 1990 2000 2005 2010 80 70 60 50 40 30 20 10 0 -1.5 -0.5 0.5 1.5 1.0 2.0 3.0 4.0 5.0 6.0 7.0 GOVERNMENT EFFECTIVENESS VOICE AND ACCOUNTABILITY CONTROL OF CORRUPTION POLITCAL STABILITY NO VIOLENCE REGULATORY QUALITY RULE OF LAW FREEDOM RATING INDEX OF ECONOMIC

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24 INSTITUTIONS OF

LABOUR MARKET

INSTITUTIONS OF

BANKING SYSTEM

In Azerbaijan the labour law is restrictive in the case of regular contracts but liberal in the case of tempo-rary contracts and collective dismissals. The mini-mum wage is low and non-wage labour costs are not high. Characteristic features of the labour market in Azerbaijan are: high unemployment benefits and very low expenditures on active labour market

pol-The two-tier banking sector, established in 1992, is composed of the central bank (CBAR) and commercial banks (46). In the commercial banking sector, dominated by domestic investors (>90%), the most common model is that of a universal bank. The banking reforms brought the full liberalization of interest rates, the managed floating of the manat (AZN) currency, the introduction

of a system of deposit insurance (ADIF) and the Capital Adequacy Ratio at the level of 12%. The shape of the banking reforms triangle (BRT) indicates fairly even pro-gress in the construction of the banking sector institu-tions in Azerbaijan. The surface area of the BRT indicates that there is a significant transition gap in relation to in-dustrialized market economies and that the progress of the banking reforms is slow. The scope of bank interme-diation, measured by the domestic credit to private sec-tor in per cent of GDP, does not exceed 20% and is very low. The operation of the banking sector in Azerbaijan is not conducive for the country’s economic growth. icy. The employment rate is high (62% in 2012) and the unemployment rate – low (5.2% in 2012). Many people are employed in the informal market, although its size (in 2009 estimated at the level of 10% to 26%, depending on the applied method) can still be con-sidered moderate when compared to other former Soviet republics.

1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 0 10 20 30 40 50 60 70 1995 2000 2005 2010 2005 2010 1990 1995 2000 2005 2010

IEF FREEDOM HOUSE

3,0 3,5 4,0 4,5 0 10 20 30 1995 2000 2005 2010

IEF FREEDOM HOUSE

1996 2004 2011

2.1 2.32 1995 2007 - 29.8% - 37.9% - 0.01% 63.8% 25% - 6 6.2 5.8 5.4 5.0 4.6 4.2 3.8 3.4 3.0 GOVERNMENT EFFECTIVENESS VOICE AND ACCOUNTABILITY -1.5 -0.5 0.5 1.5 CONTROL OF CORRUPTION

REGULATORY QUALITY

RULE OF LAW

100 90 80 70 60 50 40 30 20

INDEX OF LABOUR FREEDOM

(LEFT AXIS) INDEX OF LABOUR MARKETFLEXIBILITY (RIGHT AXIS) EMPLOYMENT PROTECTION

IEF FREEDOM HOUSE

10 20 30 40 50 60 70 80 90 100 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 3.0 2.0 1.0

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25 BELARUS

KEY FACTS

(2012)

1989 1990 1991 1992 1993

STATE

INSTITUTIONS

Belarus declared independence from the USSR in 1991 and a year later the systemic transition began. In 1994 a stabilisation programme was introduced. In the same year, Alexander Lukashenko became the first elected president. He has held the position since then. From the very beginning, he made no secret that his goal is to gain absolute power. Although he keeps being elected, the elections do not meet the standards of freedom and democracy. Since 1994 the condition of political rights and civil liberties in Belarus deteriorates and the country is regarded as the last dictatorship in Europe. In 2006 social protests were held against the rigging of presidential election and generally – against the violation of civil liberties and restricting the activity of the opposition. However, the protests failed to bring

any changes into the system of governance in Belarus. In 2010, A. Lukashenko was elected the president of the country for the fourth time. Belarus is a member of the Commonwealth of Independent States (1991), the Eurasian Economic Community (2000) and has been negotiating its way to the WTO (since 1993). According to the FH Freedom Rating, Belarus is “not free” (the value of the index in 2013 was 6.5). The president has both political and economic power. The authorities do not take any effort to build a market economy. The economic freedom is very limited: Belarus is categorized as “mostly unfree” but very close to the lowest of the IEF categories – “repressed”. The dependency of the banking sector on the authorities results in a very low Financial Freedom Index, which was only 10 in 2013. Also very low were the values of the Property Rights and the Freedom from Corruption indices (20 and 24.6 respectively). The quality of governance is also low, with most the governance indices clearly negative and the Voice and Accountability Index particularly low (-1.54 in 2012).

GDP PER CAPITA (PPP)... $ 15 592 GDP... $ 63.3 BLNINFLATION (CPI)... 59.2% 5-YEAR AVERAGE GDP GROWTH... 5.0%UNEMPLOYMENT... 9.7% PUBLIC DEBT... 41.9% OF GDP

1995 1990 2000 2005 2010 80 70 60 50 40 30 20 10 0 -1.5 -0.5 0.5 1.5 1.0 2.0 3.0 4.0 5.0 6.0 7.0 FREEDOM RATING INDEX OF ECONOMIC GOVERNMENT EFFECTIVENESS VOICE AND ACCOUNTABILITY CONTROL OF CORRUPTION POLITCAL STABILITY NO VIOLENCE REGULATORY QUALITY RULE OF LAW

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26 INSTITUTIONS OF

LABOUR MARKET

INSTITUTIONS OF

BANKING SYSTEM

The reforms of the banking sector in Belarus started as early as in the times of the USSR. The two-tier bank-ing sector, established in December 1990, is composed of the central bank (NBRB) and commercial banks (31). The commercial banking sector, dominated by the state (>75%), is based on the universal bank model. The banking reforms brought, in practice, limited liberaliza-tion of interest rates, the managed floating of the ruble (BYR) currency, the introduction of a system of deposit As the development of private entrepreneurship in Belarus is limited, the characteristic feature of this country’s labour market is a significant employment rate in the public sector and a low employment rate in the private sector. The value of the Labour

insurance (ADC) and the Capital Adequacy Ratio at the level of 8%. The shape of the banking reforms triangle (BRT) indicates even progress in the construction of the banking sector institutions in Belarus. The surface area of the BRT indicates that there is a significant transition gap in relation to industrialized market economies and no progress in the banking reforms. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, does not exceed 50% and is relatively low. The condition of the banking sec-tor in Belarus is not conducive for the economic growth of the country.

Freedom Index is high – in 2013 it was 77.7. For many years Belarus has been in conflict with the International Labour Organization with respect to the issue of compliance with the conventions con-cerning the freedom of trade unions’ activity, which in Belarus is in various ways restricted. In accordance with the official statistics, the highest unemploy-ment rate in Belarus was recorded in 1996 and it was 4%. Since then, it has been decreasing steadily and since the beginning of 2008 it has been less than 1%.

Fig. 3. Index of Labour Freedom Source: Heritage Foundation [2014]

1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 0 10 20 30 40 50 60 70 1995 2000 2005 2010 2005 2010 1990 1995 2000 2005 2010

IEF FREEDOM HOUSE

3,0 3,5 4,0 4,5 0 10 20 30 1995 2000 2005 2010

IEF FREEDOM HOUSE

1996 2004 2011

2.16 1.95 1995 2007 - 35.5% 10% -- -88% -- 6 GOVERNMENT EFFECTIVENESS VOICE AND ACCOUNTABILITY -1.5 -0.5 0.5 1.5 CONTROL OF CORRUPTION

REGULATORY QUALITY

RULE OF LAW

100 90 80 70 60 50 40 30 20

INDEX OF LABOUR FREEDOM EMPLOYMENT PROTECTION

IEF FREEDOM HOUSE

10 20 30 40 50 60 70 80 90 100 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 3.0 2.0 1.0

(29)

27 BOSNIA AND HERZEGOVINA

KEY FACTS

(2012)

1989 1990 1991 1992 1993

STATE

INSTITUTIONS

Bosnia and Herzegovina was established as a re-sult of the dissolution of Yugoslavia and declared its independence on the basis of the referendum held in 1992. In the same year, a bloody ethnic civil war began, in which many thousands of people were killed and about 2 million left their place of residence. In 1995, a peace treaty was signed in Dayton and a constitution was adopted. According to the constitution, Bosnia and Herzegovina is a federal republic consisting of the Federation of Bosnia and Herzegovina and Republika Srpska and the civilian peace implementation is supervised by the High Representative for Bosnia and Herzegovina. Bosnia and Herzegovina is an ethnically diverse country, which is reflected in the share of the representatives of various ethnic groups (Bosnian,

Croatian and Serbian) in the country’s authorities. The country is a member of the Council of Europe (2002), has been negotiating its way to the WTO (since 1999) and since 2003 it has been a potential candidate for the EU membership.

Since 1992 the ratings of Bosnia and Herzegovina have been gradually improving but in 2013 the country was still regarded as only “partly free”. The country’s citizens can elect their representatives but the High Representative has the right of appeal if he decides that given representatives impede the peace process. Corruption is a significant problem. In 1997-2013 the value of the Index of Economic Freedom in Bosnia and Herzegovina increased considerably (by 29 points). Still, the country is categorised as “mostly unfree”, but it is approaching the “moderately free” level. The Property Right index is particularly low. The quality of governance also remains low, with all the relevant governance indices negative; only with respect to Regulatory Quality and Government Effectiveness some improvement has been observed.

GDP PER CAPITA (PPP)... $ 9 235 GDP... $ 17.5 BLNINFLATION (CPI)... 2.0% 5-YEAR AVERAGE GDP GROWTH... 0.7%UNEMPLOYMENT... 28.2% PUBLIC DEBT... 44.3% OF GDP

1995 1990 2000 2005 2010 80 70 60 50 40 30 20 10 0 -1.5 -0.5 0.5 1.5 1.0 2.0 3.0 4.0 5.0 6.0 7.0 FREEDOM RATING INDEX OF ECONOMIC GOVERNMENT EFFECTIVENESS VOICE AND ACCOUNTABILITY CONTROL OF CORRUPTION POLITCAL STABILITY NO VIOLENCE REGULATORY QUALITY RULE OF LAW

INSTITUTIONS IN TRANSITION COUNTRIES