Transition: The First Ten Years : Analysis and Lessons for Eastern Europe and the Former Soviet Union

by Mitra, Pradeep; Selowsky, Marcelo; World Bank

• ISBN13: 9780821350386
• ISBN10: 0821350382
• Format: Paperback
• Copyright: 2002-01-01
• Publisher: World Bank

Summary

This report by the World Bank considers the lessons to be drawn from the experience of the transition economies of Eastern Europe and the Commonwealth of Independent States between 1991-2000, and examines why economic growth has been stronger in some countries than others. It looks at the policy and institutional conditions that encourage the growth of new firms while imposing financial discipline on the older firms inherited from the socialist past, without granting special favours to either. Whilst emphasising the importance of market-oriented policy reforms, it also examines political strategies to push the reform process forward in different transition countries. The report finds that barriers to the creation of new firms are a critical obstacle to sustained growth in the transition economies; new firms, mostly employing 50 or fewer workers, have rapidly become the major source of employment in the fast-growing economies of Central Europe and the Baltics.

Table of Contents

Foreword	ix
Acknowledgments	xi
Overview	xiii
The Quest for Growth: Promoting Discipline and Encouragement	xv
The Flipside: Protection and Discouragement	xvii
Shading the Classification	xvii
New Enterprises Spur Economic Growth	xviii
When Is Transition Over?	xix
Do Central Europe and the Baltics Point the Way Forward?	xix
Can We Have It Both Ways: Encouragement without Discipline?	xx
Learning from China?	xxi
Institutions Are Important, but So Are Policies	xxi
The Political Economy of Discipline and Encouragement	xxii
Shifting Policy Priorities to Account for Experience and New Conditions	xxiv
Conclusions	xxviii
Annex 1. Discipline and Encouragement: The Reform Agenda	xxix
Part 1. The First Decade in Transition	1	(20)
How Did Transition Economies Perform?	3	(8)
Output Fell Sharply	3	(2)
Industry Shrank--Services Grew	5	(1)
Private Enterprises Overtook the State Sector	6	(1)
Exports Rose--Moving Toward Industrial Countries	6	(1)
Poverty Increased Sharply	6	(5)
Explaining Variation in Output Performance	11	(10)
Did Initial Conditions Affect Performance?	11	(2)
External Economic Shocks Delayed Recovery	13	(1)
Policies--Do They Matter?	13	(2)
What Initial Conditions Matter and When Do They Matter?	15	(1)
What If Policies Themselves Are Endogenous?	16	(1)
Does the Speed of Reform Matter?	16	(1)
Annex 2.1. Summary of Cross-Country Empirical Literature on Growth in Transition Economies	16	(3)
Annex 2.2. Additional Empirical Analysis	19	(2)
Part 2. Policy and Institutional Challenges Ahead	21	(68)
The Quest for Growth	23	(10)
A Tale of Two Approaches	26	(3)
The Associated Fiscal Adjustment	29	(1)
...And the Role of Labor Markets	30	(3)
Discipline and Encouragement	33	(20)
New Enterprises Drive the Transition	39	(2)
A Small Number of High-Productivity Small Enterprises Is Not Enough	41	(4)
Can We Have It Both Ways, That Is, Protecting Old Inherited Enterprises and Encouraging New Enterprises?	45	(3)
Annex 4.1. Assumptions for Small and New Enterprises	48	(2)
Annex 4.2. Implications of the Higher Productivity of SMEs	50	(3)
Imposing Discipline	53	(6)
Soft Budget Constraints Can Create Macroeconomic Crises	53	(1)
Nonpayments Weaken the Incentives for Efficiency and Restructuring	54	(2)
Exit Mechanisms--Implement Now, Revise Later	56	(1)
Competition Is Linked to Innovation and Growth	56	(3)
Extending Encouragement	59	(12)
Corruption and Anticompetitive Practices Mar the Investment Climate	59	(2)
Enterprises Lack Confidence in Legal and Judicial Institutions	61	(1)
Financial Deepening Is Slow but Progressing	62	(5)
Privatization Attracts Foreign Direct Investment, and Positive Spillovers Follow	67	(1)
Tax Reform: Broadening the Base and Lowering Rates	67	(1)
Intergovernmental Fiscal Relations Supporting Discipline and Encouragement	68	(3)
Privatization: Lessons and Agenda for the Future	71	(10)
Traditional Privatization or Rapid Privatization?	73	(1)
Why Countries Did What They Did	73	(5)
Were Vouchers a Mistake and Other ``What Ifs''	78	(1)
Summarizing Lessons	79	(2)
Supportive Social Policies	81	(8)
Reforming Pension Systems	81	(2)
Social Assistance Should Protect Children and the Most Destitute, Adding More as Budgets Allow	83	(1)
Severe Cuts Have Compromised the Quality of Education	84	(2)
Containing Costs Will Make Health Care Affordable for Those Who Need It Most	86	(3)
Part 3. The Political Economy of Discipline and Encouragement	89	(28)
The Winners and Losers from Discipline and Encouragement	91	(6)
Who Wins and Who Loses?	92	(2)
The Government Must Be Credible and Able to Constrain Oligarchs and Insiders	94	(3)
Classifying Political Systems in Transition	97	(6)
Competitive Democracies Have High Political Contestability	99	(2)
...and High Government Turnover	101	(2)
Political Systems Influence the Choice of Economic Reforms	103	(8)
Political Systems Create Rent-Seeking Opportunities	105	(2)
How Do Political Systems Affect Economic Reform?	107	(4)
Confronting the Political Challenge	111	(6)
For Concentrated Political Regimes, Mobilizing Potential Winners	112	(2)
For War-Torn Political Systems, Restoring Stability and Reducing Uncertainty	114	(1)
For Noncompetitive Political Systems, Taking Advantage of State Capacity	115	(1)
For Competitive Democracies, Using Momentum to Build Coalitions for Reform	115	(1)
Conclusion	116	(1)
Selected Bibliographic Guide to the Political Economy of Transition	117	(8)
References	125