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Measuring Performance and Transition Progress

Measuring Performance and Transition Progress The Case of Western Balkans Prof. Dr Bozidar Cerovic Belgrade University, Faculty of Economics, YICGG’08, Rome, Aug 18-26, Tor Vergata University Introduction

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Measuring Performance and Transition Progress

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  1. Measuring Performance and Transition Progress The Case of Western Balkans Prof. Dr Bozidar Cerovic Belgrade University, Faculty of Economics, YICGG’08, Rome, Aug 18-26, Tor Vergata University

  2. Introduction This presentation deals with various concepts of economic performance measuring in transition economies and will be exploring the impact of initial conditions and policies on the GDP growth. After a brief literature review of this increasingly controversial issue, various approaches will be checked using examples of Western Balkan countries. The results will support those studies that find initial conditions predominant and policies as endogenous YICGG’08, Rome, Aug 18-26, Tor Vergata University

  3. What did we know about economic performance under transition? • At the beginning of transition we knew that a kind of recession will appear (named transition recession or the U shaped curve of output). • We were not fully aware how long it could last. • By 2005/06 (app. 16 years after the start) a good half of transition economies did not succeed to achieve their pre-transition level of output. • Moreover, both – ‘good’ and ‘bad’ runners – substantially differ regarding their growth rates. • What can explain such huge differences between the countries? YICGG’08, Rome, Aug 18-26, Tor Vergata University

  4. Literature survey • Seminal papers – de Melo et al. (1996; 1997) • Similarly, Sachs (1996). • They taught us that policy predominantly matters (with an increasing importance over time), although allow for initial conditions of a country to have some influence (but fading out over time). • Policy variables were based on World Bank’s Composite Liberalisation Index (CLI) or on EBRD assessments with a general idea – the faster reforms, the better results. • The first to question this doctrine were Aslund et al. (1996) who found the CLI insignificant under certain circumstances (dummy for war, FSU dummy, shadow economy etc.) YICGG’08, Rome, Aug 18-26, Tor Vergata University

  5. Literature survey • Krueger & Ciolko (1998) were among the first to point out that liberalisation speed could be affected by initial condition i.e. may be treated as an endogenousvariable. • Popov (2000) pointed out the importance of initial conditions and found, under certain specifications, the CLI insignificant. • Further on new variables expressing institutions capacity entered analyses to explain growth differences (and appeared significant) although Hoff & Stiglitz (2004, 2005) find that institutional development could also be endogenous. YICGG’08, Rome, Aug 18-26, Tor Vergata University

  6. Summary on literature • The two approaches on what affects performance predominantly: • liberalisation/privatisation speed as a policy measure OR • initial conditions and/or institutional level that make the speed endogenous • …clearly reflect the big-bang and the gradualist position. • In the light of these findings, we shall analyse the Western Balkans case. YICGG’08, Rome, Aug 18-26, Tor Vergata University

  7. Why Western Balkans? Transition economies On the eve of transition process a big part of the Western SE Europe was known as the former Yugoslavia, a country that has dissolved by the early nineties… 1990: Yugoslavia YICGG’08, Rome, Aug 18-26, Tor Vergata University

  8. What did happen? • At the beginning of transition the country was seen as a candidate for fast changes because of… • …its institutional arrangement developed since the mid-fifties (known as self-management or labour managed economy) with many market oriented elements. • Moreover, we know (now) that former Yugoslav republics exhibited significantly smaller distortions in industrial structure and trade than other EE countries (see: Godoy & Stiglitz, 2007) • Finally, the transition project adopted by the last Yugoslav government in 1989/90 seemed sound and prospective… YICGG’08, Rome, Aug 18-26, Tor Vergata University

  9. Despite a satisfactory outcome (inflation rate 0%, privatisation started, stable exchange rate, growing reserves etc.) there was a strong opposition and… …an angry debate over the state re-organisation was speeding up reflecting a much deeper conceptual differences: Weather the country will be transformed in line with contemporary trends of liberalisation and transition or... … will it follow the old collectivist pattern, which unsurprisingly, in absence of the former ideology, was converted into nationalism. Under these circumstances the break up was inevitable What did happen? YICGG’08, Rome, Aug 18-26, Tor Vergata University

  10. Outcome: GDP drop… …and some peculiarities Slovenia Macedonia Croatia (war) B&H (war) Serbia & MNE YICGG’08, Rome, Aug 18-26, Tor Vergata University

  11. Why Western Balkans? • We could observe different performance levels… • …which might imply various transition policies in Western Balkan countries. • On the other hand, all these countries come from the same institutional, pre-transition arrangement, which implies many similar initial conditions, although with different initial GDP levels. • For these reasons the Western Balkans provides a good laboratory for analysing the theories on economic performance in transition economies. • I shall start with the case of Serbia. YICGG’08, Rome, Aug 18-26, Tor Vergata University

  12. Despite declaring transition Serbia pursued a policy of centralisartion and regulation Even the inherited market independence of firms was substantially restricted… Hyperinflation started at 100% monthly rate in 1992 and in January 1994 reached a 330 million per cent, monthly rate!!! Politics and policy effect: an excessive GDP drop Domestic market squeeze – country break up (-25%) EU&UN bans on foreign trade (wrong politics, -15%) Hyperinflation (-50%) No policy changes whatsoever Disinflation programme 1994 unsupported by other reforms Entering new conflicts Serbia of the ninetiesTypical example of a wrong policy (and politics) YICGG’08, Rome, Aug 18-26, Tor Vergata University

  13. Some analysis • During the nineties we wanted to show how much Serbia was lagging behind the others due to a wrong policy and politics and how much did it cost. • I shall present some very simple OLS models that we have developed and made use of in 1996 and in 1999 (as an analytical illustration rather than an analytical tool). YICGG’08, Rome, Aug 18-26, Tor Vergata University

  14. Model 1: performance depends on transition progress (policy) Regression Equation 1 GDP96/89 = 101.5 - 6.4 TRA + 0.185 TRAsq (2.26) R-sq = 44.2% R-sq(adj) = 39.1% Regression Equation 2 GDP98/89 = 145 - 10.8 TRA99 + 0.313 TRA99sq (2.31) R-sq = 44.2% R-sq(adj) = 39.1% Now, what decides on an achievable level of TRA in a country? YICGG’08, Rome, Aug 18-26, Tor Vergata University

  15. Model 2: transition progress depends on initial conditions (endogenuity) Regression Equation 3 TRA99 = 17.8 + 0.00151 GDP89 (3.04) R-sq = 28.7%R-sq(adj) = 25.6% Regression Equation 4 TRA99 = 16.7 + 0.000754 GDP89 + 6.53 MREFdummy (1.96) (4.86) R-sq = 65.6%R-sq(adj) = 62.5% YICGG’08, Rome, Aug 18-26, Tor Vergata University

  16. TRANSITION PROGRESS ’99 EBRD assessments & Serbia average SRB YICGG’08, Rome, Aug 18-26, Tor Vergata University

  17. Costs of the Delay POSSIBLE ESTIMAT. REAL IN MONEY TERMS – LOSS IN 2000 WAS AROUND US$ 16 BILL. AND GDP AROUND US$ 11 BILL !!! YICGG’08, Rome, Aug 18-26, Tor Vergata University

  18. SE Europe: GDP (1999) Achieved and Possible Real GDP Equ. 3 – Possible GDP  Equ. 4 – Possible GDP  YICGG’08, Rome, Aug 18-26, Tor Vergata University

  19. What do these results point at? • We could remark that all Balkan countries except SLO and ALB were beneath the estimated GDPpc level (if transition progress was seen as endogenous). • However, remark that they would have different GDP-s anyway due to different inherited conditions. • The observed lag could have been easily explained if we had added some other variables in the model (war, for CRO, political instability or poor institutions for MAC and BUL, partially for ROM) • Bad policies could be directly blamed only in the case of Serbia (an excessive lag). • On the other hand SLO performed better than estimated. Why? YICGG’08, Rome, Aug 18-26, Tor Vergata University

  20. Slovenian case • SLO was ranked 6th by the EBRD Report (behind HUN, CZR, EST, POL and SKR and slightly in front of LIT and LAT in 1999; in 2007 it was ranked even 10th). • This was to say that SLO was not particularly fast in conducting the reforms; hence, according to policy argument its performance should be poor. • However, SLO achieved its pre-transition GDPpc as a second in the group (after POL, in 1997/8). • Note that this was expected following our simple model (due to favourable initial conditions). However, it performed even better. YICGG’08, Rome, Aug 18-26, Tor Vergata University

  21. Slovenian case • Explanation: SLO was gradually transforming its institutions (inherited from the LM system) using their advantages (contrary to other Balkan countries that destroyed their institutions). • Besides, SLO was assessed as one among those with the best inherited institutions from pre-transition period (measured according Campos, 1999). • In that way, the SLO case confirms the argument on institutions and their impact on growth (missed in our simple model) together with other initial conditions and is a perfect example why policies and performance are endogenous. YICGG’08, Rome, Aug 18-26, Tor Vergata University

  22. Serbian case after 2000 • After the peaceful revolution in October 2000 there was a political will for faster changes. Comeback to a transition path. • First moves: liberalisation, monetary stability and sound fiscal policy introduced, privatisation re-emerged, some restructuring taken; • First results (2001-02): inflation drop to 10%, growth rate 4.5%, external debt decreased (from US$ 16 to 12 bill), reserves growth and according to the EBRD indices it moved from 13 to 21 points. YICGG’08, Rome, Aug 18-26, Tor Vergata University

  23. Slowdown • After the enthusiastic start a slowdown has been remarked • Reforms remained uncompleted … • …followed by a higher inflation and unstable growth rates Note: the slowdown coincided with the assassination of the prime minister and with political instability (bad institutions) – three government changes and two presidential elections (2003-2008) YICGG’08, Rome, Aug 18-26, Tor Vergata University

  24. TRANSITION PROGRESS ’07 EBRD assessments & Serbia YICGG’08, Rome, Aug 18-26, Tor Vergata University

  25. Analysis • In order to examine this slowdown we have developed a set of new OLS models. • Firstly, we wanted to define what would be an appropriate transition advancement for the country. • Our OLS model takes sum of the EBRD indices as a dependent variable while independent were initial GDP (GDP 1989), dummy for market reforms (MREF), number of years under communism (INST1) and the difference between black and official exchange rate (INST5) for all transition economies (except Serbia). We have estimated this OLS model for 1998 and 2001 i.e. in the years that could approximately represent the state of Serbia in 2007 (due to the previously explained Serbian delay). YICGG’08, Rome, Aug 18-26, Tor Vergata University

  26. Analysis Depenedent var:EBRD 1998 EBRD 2001 Variable Equation 1 Equation 2 Equation 3 Equation 1 Equation 2 Equation 3 constant Adj. statistics YICGG’08, Rome, Aug 18-26, Tor Vergata University

  27. Analysis • We can realise how much transition progress depends (31-65%) on various initial conditions. • As to the Serbian case we may conclude that the first post-2000 government made use of the relatively favourable initial conditions and… • …that second and third government did not (if they had done so the EBRD score would have been 28-29) • Note that under normal circumstances this was feasible around 2000 already! • Now we wanted to estimate what would be an appropriate GDPpc level YICGG’08, Rome, Aug 18-26, Tor Vergata University

  28. Analysis • We took GDPpc as a variable dependent on: • Initial GDPpc (GDP 1989) • Market reforms (MREF) • EBRD score (EBRD and EBRD-sq) • Inflation (INF; average, since 1994) • Budget deficit (BD; dummy: lower/higher than 5%) • First principal component of initial institutional conditions (PC1INST; based on Campos, 1999) • We have estimated this OLS model again for 1998 and 2001 for all transition economies since this represented an approximate state of Serbia in 2007 YICGG’08, Rome, Aug 18-26, Tor Vergata University

  29. Analysis Depenedent variable: GDPpc 1998 Variable Eq 1 Eq 2 Eq 3 Eq 4 Eq 5 Eq 6 Constant Adj. statistics YICGG’08, Rome, Aug 18-26, Tor Vergata University

  30. Analysis Depenedent variable: GDPpc 2001 Variable Eq 1 Eq 2 Eq 3 Eq 4 Eq 5 Eq 6 Constant Adj. statistics YICGG’08, Rome, Aug 18-26, Tor Vergata University

  31. The results of general importance • Initial GDP is always highly and in 11/12 equations the most significant (initial conditions, after 8 and 11 years) • MREF highly sig. (somewhat less in Eq-s 5&6 for 2001) • EBRD (policy) is the least significant (although significant) except for equations 5&6 • Macroeconomic stability (INF) proved to be very important (somewhat less for equations 5&6 in 1998), although BD was insignificant for 2001 • Conclusion: in the whole fist decade (and beyond) initial conditions strongly determine GDP levels, which cannot be offset by policies (that is logical provided policies are endogenous). This finding severely questions theories advocating speedy reforms and the power of policies. YICGG’08, Rome, Aug 18-26, Tor Vergata University

  32. The results important for Serbia • The results proved that after 2002 governments’ policies were below desirable (and achievable) level. • In terms of GDPpc this resulted in a loss of around US$ 1000 p.c. (around 4000 instead of around 5000) by the end of 2007… • …which, in turn, confirms the importance of the past elections in Serbia that endorsed a pro-reform government, which will have to make use of the disposable factors for faster advancement. YICGG’08, Rome, Aug 18-26, Tor Vergata University

  33. CONCLUSIONS • Our results confirm that early studies on transition and its impact on growth failed to properly assess initial conditions and institutions (as put by Godoy and Stiglitz, 2007). • The level of initial development, strongly influence market reforms and growth for a relatively long period. It cannot be offset by rapid reforms since the policies themselves appear endogenous. • This may add to understanding of the Balkan lags – except for Serbia (bad policy) – as well as in some of the FSU and Asian countries except for China (a new gradual approach) • The findings might help in proper analysing of further developments in transition economies and undrstanding of their performance in a longer run. YICGG’08, Rome, Aug 18-26, Tor Vergata University

  34. References: • Aslund, A. Boone, P. and Johnson, S. (1996) “How to Stabilize: Lessons from Postcommunist Countries” Brookings Papers on Economic Activity,1, pp. 217-291 • Campos, N. F. (1999) “Context is Everything: Measuring International Change in Transition Economies” World Bank Working Paper, no. 2269 • de Melo, M. Denizer, C. and Gelb, A. (1996) “From Plan to Market: Patterns of Transition” Policy Research Working Paper no. 1564, The World Bank, Policy Research Department • de Melo, M. Denizer, C. Gelb, A. Tenev, S. (1997) “Circumstance and Choice: The Role of Initial Conditions and Polices in Transition Economies.” Policy Research Working Paper no. 1866, The World Bank, Policy Research Department • Godoy, S and Stiglitz, J. E. (2007) “Growth, Initial Conditions, Law and Speed of Privatization in Transition Countries: 11 Years Later” u: Estrin, S. Kolodko, G. W. Uvalic, M. eds. “Transition and Beyond”, Palgrave Macmillan, Basingstoke, New York, pp. 89-117 • Hoff, K. and Stiglitz, J. E. (2004) “After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies”, American Economic Review, Vol. 94, 3, pp. 753-63 • Hoff, K. and Stiglitz, J. E. (2005) “The Creation of the Rule of Law and the Legitimacy of Property Rights: The Political and Economic Consequences of a Corrupt Privatization” NBER Working Paper, no. 11772 • Krueger, G. and Ciolko, M. (1998) “A Note on Initial Conditions and Liberalization during Transition”, Journal of Comparative Economics, Vol. 26, 4, December, pp. 718-734. THANK YOU FOR YOUR ATTENTION YICGG’08, Rome, Aug 18-26, Tor Vergata University

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