Central Eurasia: Making Markets

Another look at the map

 

Affiliations of Central Eurasian Countries
	Commonwealth of Independent States	European Union	Eurozone	NATO
Former Soviet Union
Central Slavic Area
Belarus	M
Russia	M
Ukraine	*			**
Caucasus/Black Sea Area
Armenia	M
Azerbaijan	M
Georgia	***	P (2022)		P
Moldova	suspended, 2022	C (2022)
Baltic Area
Estonia		M	M	M
Latvia		M	M	M
Lithuania		M	M	M
Central Asian Area
Kazakhstan	M
Kyrgyz Republic	M
Tajikistan	M
Turkmenistan	A
Uzbekistan	M
East-Central European Region
Former Czechoslovakia
Czech Republic		M	C	M
Slovak Republic		M	M	M
Hungary		M	C	M
Poland		M	C	M
Balkan Region
Albania		C		M
Bulgaria		M	C	M
Romania		M	C	M
Former Yugoslavia
Bosnia/Herzegovina		P
Croatia		M	M (2023)	M
Kosovo		P
Montenegro		C		M
North Macedonia		C		M
Serbia		C
Slovenia		M	M	M
M-Member; A-Associate Member; C-Candidate; Potential Candidate * Ukraine was a "founder " of the CIS but never a full member. Ceased participation in 2014 and fully withdrew in 2018 after Russian aggression and annexation of Crimea. ** NATO membership is  supported in West Ukraine and opposed in the East. NATO is considering a plan for its accession. *** Georgia joined the CIS in 1994, but withdrew in 2008 in connection with its war with Russia.

 

Source: World Bank, World Development Indicators

Heritage Foundation Economic Freedom Index

Economist Intelligence Unit Democracy Index 2020

Source: EBRD Life in Transition surveys “Life satisfaction” refers to the proportion of respondents in each country who “agree” or “strongly agree” with the statement: “all things considered, I am satisfied with my life now”. This chart (and all the other charts based on LiTS data) uses survey-weighted observations.  regional averages are based on simple averages of the country scores. “Western Europe” denotes the average of France, Germany, Italy, Sweden, and the United Kingdom in 2010 and the average of Germany and Italy in 2016.

I.    The Fall of Communism

A.  Contributing factors

1.   Soviet economic growth slowdown.

2.   East-West normalization, changing attitudes.

3.   Rise/fall of world energy prices, causing instability.

4.   Rise of labor movement in Poland, encouraged by Polish Pope.

5.   Soviet involvement in Afghanistan, causing social problems.

6.   Death of Tito, instability in Yugoslavia.

7.   Technological lead of industrial West and Asian NICs.

8.   Gorbachev’s glasnost, political reform, end Brezhnev doctrine.

9.   Chernobyl disaster (1986) and Armenian earthquake (1988).

10. Yeltsin's attack on Party privilege.

11. Failed coup attempt (1991), dissolution of Soviet Union.

B.  Lessons

1.   Fall of communism was result of many trends and events.

2.   Few problems that contributed to the fall of communism were quickly resolved by its failure.

II.  The Starting Line

A.  Historical advantages: background in Austro-Hungarian empire.

B.  Private sector development: Poland, Yugoslavia, Hungary, Bulgaria.

C.  Dominance of large firms, esp in Czechoslovakia.

D.  Military spending highest (% GDP) in Bulgaria, USSR, and Poland.

E.   Low unemployment, except in Yugoslavia.

F.   Largest budget deficits in USSR, Albania, Poland, Romania.

G.  Highest monetary growth and inflation in Poland and Yugoslavia.

H.    External debt heavy in Yugoslavia, Hungary, Poland and Bulgaria; light in Romania, USSR, and Czechoslovakia.

I.   Currencies were most overvalued—according to black market exchange rate premium—in Soviet Union and Romania; least overvalued in Yugoslavia and Hungary.

III. Transition Tasks and Strategies

A.  Tasks:

1.   Macroeconomic stabilization

2.   Price liberalization

3.   Privatization

4.   Military conversion

5.   Anti-monopoly reform

6.   Labor market reform

7.   Banking reform

8.   Financial market reform

9.   Tax reform

10. Legal reform

11. Social welfare reform

12. Foreign exchange market reform

13. Foreign trade reform

14. Foreign investment reform
 

B.  Strategic Concept

1.   Government-managed transition versus laissez faire

2.   Guiding importance of political stability, foreign investment, IMF support, EU membership, or independence.

C.  Pace

1.   Arguments for shock therapy

a.   interdependence of market institutions

b.   preempt political opposition

c.   aggressive programs in Central Eurasia are generally associated with milder transformational recession (but both of these may reflect historical and initial conditions).

2.   Arguments for gradualism

a.   “first things first”—legal and social foundation

b.   key sectors first?  agriculture?

c.   careful preparation, avoid mistakes

d.   spread pain of adjustment

D.  Sequence–typically, (1) stabilization, (2) price liberalization, (3) small-scale privatization, monopoly regulation, tax reform, and foreign market reform, (4) large-scale privatization, military conversion, legal reform, development of securities markets.

IV. Money, Public Finance, and Prices

A.  First stage of financial adjustment—release of repressed inflation, mildest in Czech and Slovak republics and Hungary.

B.  Second stage of adjustment—inflation declined to still-high levels

1.   Inflation sustained by:

a.   state budget deficits caused by large subsidies to state enterprises and poor enforcement of tax collections from the new private sector.

b.   subsidized central bank credits to unprofitable state enterprises.

c.   reorientation of production from plan to market.

d.   disruption of regional production and trade relations.

2.   During stage 2, inflation fought by:

a.   deficit reduction—reduce subsidies, strengthen tax collections.

b.   selling treasury securities to general public, rather than central bank.

c.   incomes policies—taxes on excessive wage increases, real wage agreements among government officials, employers, and union leaders.

d.   monetary anchors—fixed exchange rates—to impose additional discipline.

C.  Third stage of adjustment—inflation below 40 percent per year.

1.   Benefits are less certain, but include domestic and international confidence in currency and policy.

2.   Disadvantage—continued disinflation may reduce the flexibility of relative prices if some prices are inflexible downward.

V.  Privatization

A.  Objectives

1.   Raise efficiency.

2.   Obtain skills and capital.

3.   Reduce budget deficits.

4.   Pursue social justice. Return to pre-Communist owners? Highest bidder? Workers? Population?

5.   Simplicity and speed.

B.  Methods

1.   Differ for small and large privatizations.

2.   Distinction between managed and spontaneous privatizations.

3.   Options

a.   restitution

b.   equal-access voucher privatizations

c.   management-employee buy-outs (MEBO)

d.   auction

e.   strategic investors in a closed-bid tender offers.

f.    loans for shares auctions

C.  Results

1.   Most aggressive privatizations in East-Central Europe EU candidates. Least aggressive in Turkmenistan, Belarus, Uzbekistan, and Tajikistan.

2.   In Bulgaria, the Czech Republic, Hungary, and Poland, the share of subsidies in GDP quickly declined from an average of 16 percent in 1989 to 3 percent in 1994.

3.   “Outside” sales to domestic entrepreneurs and foreign purchasers apparently more effective than “inside” sales to employees.  In 2007, Bennett, Estrin, and Urga found that voucher privatizations promoted economic growth most quickly, probably because they caused a quick change in ownership. However, looking over a longer period of time and a broader range of studies, Ichiro Iwasaki and Satoshi Mizobata found that firms transferred to the public through quick voucher programs generally experienced minor restructuring and little long-term improvement in productivity. Instead, “direct sale to strategic investors was quite an effective method from the viewpoint of improved post-privatization firm performance.” The method of privatization, they found, was more important than the amount. (Annals of Public and Cooperative Economics 89:2 2018)

 

	Competitive	Well-governed	Green	Inclusive	Resilient	Integrated
	2019	2019	2019	2019	2019	2019
Estonia	7.63	8.27	6.42	7.66	8.11	7.49
Slovenia	7.09	6.65	7.08	7.35	7.73	7.14
Poland	6.76	6.82	6.52	6.81	7.86	6.81
Slovak Republic	6.76	6.21	6.87	6.54	7.97	7.10
Cyprus	6.68	7.07	6.32	6.66	5.60	7.68
Latvia	6.48	6.66	6.77	7.07	7.89	7.00
Hungary	6.36	6.01	6.27	6.65	7.15	6.84
Lithuania	6.27	6.85	6.63	6.94	7.34	7.05
North Macedonia	6.02	5.57	5.16	5.90	5.93	5.75
Romania	6.01	6.04	6.14	5.74	7.11	6.75
Russia	5.83	5.90	5.09	6.83	6.42	5.00
Greece	5.78	5.22	6.13	6.24	7.04	6.41
Bulgaria	5.71	5.79	6.04	6.24	6.91	6.85
Croatia	5.64	5.97	6.38	6.39	7.47	6.54
Montenegro	5.44	6.11	5.41	5.98	6.44	6.15
Serbia	5.36	5.52	5.79	6.16	5.86	5.99
Kazakhstan	5.26	5.67	5.36	6.46	5.95	4.91
Belarus	5.17	5.15	6.22	6.63	4.16	5.43
Albania	5.14	5.11	4.49	5.31	5.22	5.66
Georgia	4.98	6.40	5.32	5.14	6.19	6.35
Armenia	4.97	5.78	5.72	5.97	6.40	5.45
Kosovo	4.78	4.56	3.47	5.28	5.18	4.67
Ukraine	4.77	4.78	5.87	6.21	5.67	4.75
Bosnia/Herzegovina	4.68	4.53	5.20	5.48	5.91	5.08
Azerbaijan	4.39	5.79	5.35	4.94	3.97	5.59
Moldova	4.36	4.81	4.68	5.58	5.82	4.94
Mongolia	4.22	5.11	5.36	5.19	5.37	4.53
Kyrgyz Republic	4.04	4.12	4.48	4.62	5.12	4.92
Uzbekistan	3.39	4.45	4.41	5.41	3.96	3.93
Tajikistan	3.25	3.63	4.84	5.05	3.68	3.51
Turkmenistan	2.81	2.28	4.09	5.41	3.21	3.97

Ease of Doing Business Rankings, 2019

The World Bank, doingbusiness.org