institutions in transition countries

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Dec 30, 1989 - of the country was Nursultan Nazarbayev, the former first secretary of the Kazakh communist party. In April. 1995, N. Nazarbayev announced a ...
INSTITUTIONS IN TRANSITION COUNTRIES

INSTITUTIONS IN TRANSITION COUNTRIES KATARZYNA SZARZEC (ED.) · ADAM BASZYŃSKI · DAWID PIĄTEK · MICHAŁ PILC

POZNAŃ · 2014

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 Copyright © Poznań University of Economics, 2014 ISBN: 978-83-939612-1-4 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”. The report is available on www.katmakro.ue.poznan.pl/Institutions.pdf Polish version of the report is available on www.katmakro.ue.poznan.pl/Instytucje.pdf

CONTENTS

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INTRODUCTION STATE INSTITUTIONS INSTITUTIONS OF LABOUR MARKET INSTITUTIONS OF BANKING SYSTEM COUNTRIES’ CHARTS CONCLUSIONS DEFINITIONS

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 economic 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 development of entrepreneurship, innovativeness and production growth, as they protect property rights, lower transaction 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 institutional solutions determining the economic and political structure of a country. These rules include a political and economic system, as well as an economic policy implemented by the statevi. Bearing this in mind, the report provides an analysis of the political system (democracy or dictatorship) and the efficiency of the state institutions,

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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 transition 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 institutional changes in post-socialist countries. The emphasis is laid on the systemic and institutional 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 scattered 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. The Editor

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These were: Albania, Bulgaria, Czechoslovakia, Yugoslavia, the German Democratic Republic, Poland, Romania, Hungary, the Union of Soviet Socialist Republics (USSR). Bałtowski M., Miszewski M., 2006, Transformacja gospodarcza w Polsce [Economic transition in Poland], Wydawnictwo Naukowe PWN, Warszawa, p. 25. 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. 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. 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 of economic growth, vol. 1A, Elsevier, Amsterdam. North D., 1990, Institutions, Institutional Change and Economic Performance, Cambridge Univ. Press, Cambridge, p. 3. Due to the lack of data, Kosovo was omitted in the analysis. In the case of 6 countries which emerged after the dissolution of Yugoslavia, it was assumed that their systemic transition started in 1990, i.e. when it started in Yugoslavia.

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, Regulatory 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 economic 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, Turkmenistan and Uzbekistan 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 countries. The Index of Economic Freedom in the SEE countries also significantly increased, narrowing the gap between those countries and the EU-15. At the same time, in the CIS countries, after the initial growth, the Index of Economic Freedom stabilised on the level typical of “mostly unfree” countries. In 2013, Estonia, Georgia and Lithuania were among the countries offering the greatest economic freedom, while Ukraine and Turkmenistan were classified as “repressed”.

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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 These countries recorded improvement in 1,0 governance. 80 GŁOS OBYWATELI JAKOŚĆ I ROZLICZALNOŚĆ REGULACJI governance in 1996-2012 and with respect to the criterion of Political Stability and Absence of Violence/Terror70 RZĄDZĄCYCH ism they reached the level of the EU-15. Although 2,0 governance in the SEE countries is visibly lower than in the 60 CEB countries, it has also improved considerably in3,0 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 50 STABILNOŚĆ POLITYCZNA KONTROLA 4,0 the quality of governance in these countries. Governance clearly lower than in the two other groups ofKORUPCJI transiIisBRAK PRZEMOCY 40 tion countries. 5,0 30

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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 con0,5 -0,5 -1,5 clude that those1,5 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. i ii

Laar M., 2003, How Estonia Did It, w: Index of Economic Freedom 2002, The Heritage Foundation. 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 CEB CIS SEE UE-15 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.

INSTITUTIONS OF LABOUR MARKET 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 institutions of the labour market often expand their analyses to include also organizations 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 – depending 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 protection 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. Particular institutional solutions were modelled on the UE-15 countries. These changes resulted in a rapid increase of unemployment and a decrease of 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 countries of South East Europe (SEE), in which a significant part of the responsibility for the protection of employees against the unemployment risk remained on the shoulders of enterprises. As a result, in these countries the legal protection of employees was generally higher, while the expenditures on active and passive labour market policies – lower.

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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 remained 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.

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Jarmołowicz W., Pilc M., 2013, Instytucje rynku pracy oraz uwarunkowania ich funkcjonowania w krajach transformujących się [Labour Market Institutions and Conditions of Their Functioning in Transition Countries], “Przegląd Zachodniopomorski”, year’s issue XXVIII (LVII), no. 3, vol. 2. ii Kornai J., 1979, Resource-Constrained versus Demand-Constrained Systems, “Econometrica”, vol. 47, no. 4. iii Cazes S., Nesporova A., 2003, Labour Markets in Transition: Balancing Flexibility and Security in Central and Eastern Europe, ILO, Geneva.

INSTITUTIONS OF BANKING SYSTEM An economic transition is composed of three processes: stabilization, liberalization and construction of market 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. Stiglitziii notices that “if capital is the heart of capitalism, properly working capital markets are the heart of a properly working capitalist 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. The implementation of banking reforms took place the earliest and the fastest in the CEB countries. They reached the level of banking sector development necessary to fulfil the needs of market economies on their level of development. The SEE and CIS countries entered this path later. The SEE countries, after the initial delays, related – among other reasons – to armed conflicts due to nationalistic issues, continued the re-

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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 4,0 (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. 3,5 Due to the problem of the so-called bad debts, often inherited from the previous regime or accrued as a re3,0 a need appeared to establish the framework of sult of implementing programmes to restructure economies, banking supervision, including determining standards of capital adequacy and deposit insurance. All transition countries specified capital adequacy ratios in line with2,5 the guidelines of the Basel Committee on Banking Supervision (minimum 8%). Moreover, most of them (with the exception of Georgia and Turkmenistan) 2,0 implemented the system of deposit insurance. The administration of the fund to guarantee the payment of deposits was entrusted to a specially established institution 1,5 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 1,0 competition and at expanding the scope of credit intermediation. Banking reforms led to a departure from 1990 services 1995 market. 2000 2005 2010 the state monopoly and the appearance of competition on the banking Transition countries differ from one another with respect to the degree of concentration competition TC CEB of banking CISsectors andSEE 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. 4,0

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to private sector 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 progress 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.

i ii iii iv

Anderson R.W., Kegels Ch., 1998, Transition Banking. Financial Development of Central and Eastern Europe, Clarendon Press, Oxford, p. 257. Ibidem, p. vii. Stiglitz J.E., 1994, Whither Socialism?, MIT Press, Cambridge, p. 207. 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 teoretycznoempiryczne [Concentration and competition in banking sectors of European transition countries. A theoretical and empirical study], Wydawnictwo Uniwersytetu Ekonomicznego w Poznaniu, Poznań, p. 271. ix Por. Baszyński A., 2013, Transformacja sektora bankowego w krajach Europy Środkowej, Wschodniej i Południowo-Wschodniej [The transformation of the banking sector in the countries of Central, East and South-East Europe], “Wiadomości Statystyczne”, no. 7, p. 91.

15

COUNTRIES’ CHARTS A B C E G H K 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 UKRAINE UZBEKISTAN

ALBANIA

KEY FACTS (2012) POPULATION.......................... 3.2 MLN GDP PER CAPITA (PPP)........... $ 9 443

1989 GDP........................... $ 12.6 BLN INFLATION (CPI).................. 2.0%

STATE INSTITUTIONS 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 instability, 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 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 3.8% UNEMPLOYMENT........14.7% PUBLIC DEBT........ 61.4% OF GDP

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 improvement in political freedom, as a new election law was introduced and streamlined the election system. The situation started to change for the better after 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 components 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. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

19

Wskaźniki instytucjonalne rynku pracy

20

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

The Albanian labour law is relatively restrictive and has Zasiłek dla bezrobotnych w 45% liberalized 18% not been significantly in 1995-2013. The relacji do średniej płacy minimal wage is -maintained on a relatively high level. In Zasiłek dla bezrobotnych 12 mies. 12 mies. maks. czasmore wypłacania Albania people are employed in agriculture than Wydatki na ALMP jako in industry – odsetek according - to the 0,1% estimates of the World PKB Bank in 2010 over 40% of the employed worked in the Odsetek prac. najemnych 20% należących do związków zaw. The level of informal employment is agriculture sector. 1995 2.6

2007 2.1

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

-

33.4%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

45%

18%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

12

12

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

EXPENDITURES ON ALMP AS A % OF GDP

-

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

-

0.1%

very high: depending on the method applied, it is estimated 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). 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50

20%

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

2,5

40

3,0

INSTITUTIONS OF BANKING SYSTEM 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) ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

and 30 the Capital Adequacy Ratio at the level of 12%. The 3,5 shape of the banking reforms triangle (BRT) indicates 20 uneven progress in the construction of the banking sec4,0 tor institutions in Albania. The far-reaching privatization of 10 4,5 banks is not accompanied by progress in reforming banks and enterprises. The surface area of the BRT indicates 0 2010 1995 2005 2000 that there is a significant transition gap in relation to IEF FREEDOM HOUSE industrialized market economies. The scope of bank intermediation, 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. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1990

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

ARMENIA

KEY FACTS (2012) POPULATION.......................... 3.0 MLN GDP PER CAPITA (PPP)......... $ 6 645

1989 GDP............................... $ 10 BLN INFLATION (CPI).................. 2.5%

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 member 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 country managed to control it only in 1994, after the implementation of the programme of macroeconomic stabilisation. Armenia is a member of the Commonwealth of Independent States (1991), the Council of Europe 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................1.0% UNEMPLOYMENT........18.5% PUBLIC DEBT........ 38.9% OF GDP

(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 Freedom House Freedom 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). VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

21

07 1

4%

8%

MIES.

1%

0%

Wskaźniki instytucjonalne rynku pracy

22

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

In 1992-2013 Armenia’s labour law was rather Zasiłek dla bezrobotnych w 45% 18% liberal. is characterized by both signifirelacji do The średniejcountry płacy cant freedom (78.5 in 2013) and good Labour Zasiłek labour dla bezrobotnych 12 mies. 12 mies. maks. czasFlexibility wypłacania Market (5 in 2013). The country has no Wydatki na ALMP jakolabour odsetek judiciary and disputes between specialized 0,1% PKB employees and employers are solved by civil courts. Odsetek prac. najemnych 20% należących do związków zaw.unions is relatively limited and nonThe role of trade 1995 1.82

2007 2.08

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

-

38.5%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

-

14%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

-

12

EXPENDITURES ON ALMP AS A % OF GDP

-

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

-

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

0.04%

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%. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50

20%

Tab. 1. Labour market institutional indicators Source: Lehmann and Muravyev [2012], Muravyev [2010]

2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The two-tier banking sector, built after the collapse of the USSR, is composed of the central bank (CBRA) and commercial banks (22). In the commercial 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 exchange rate of the dram (AMD) currency, the introduction ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

of 30 a system of deposit insurance (ADGF) and the Capital 3,5 Adequacy Ratio at the level of 12%. The shape of the 20 banking reforms triangle (BRT) indicates uneven progress 4,0 in the construction of the banking sector institutions in 10 4,5 Armenia. The surface area of the BRT indicates that there is0 a significant transition gap in relation to industrialized market1995 economies2000 and little 2005 progress in 2010 the banking IEF FREEDOM HOUSE 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. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

AZERBAIJAN

KEY FACTS (2012) POPULATION.......................... 9.3 MLN GDP PER CAPITA (PPP)........ $ 10 624

1989 GDP........................... $ 66.6 BLN INFLATION (CPI)..................1.0%

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 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 5.4% UNEMPLOYMENT.......... 5.4% PUBLIC DEBT........11.6% OF GDP

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). VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

23

Wskaźniki instytucjonalne rynku pracy

24

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

In Azerbaijan the labour law is restrictive in the case Zasiłek dla bezrobotnych w 45% 18% in the case of tempoofrelacji regular contracts but liberal do średniej płacy rary collective dismissals. The miniZasiłek contracts dla bezrobotnych and 12 mies. 12 mies. maks. czas wypłacania mum wage is low and non-wage labour costs are Wydatki na ALMP jako odsetek not high. Characteristic of the labour market - features 0,1% PKB inOdsetek Azerbaijan are: high unemployment benefits and prac. najemnych należących do związków zaw. very low expenditures on 20% active labour market pol1995 2.1

2007 2.32

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

-

29.8%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

-

37.9%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

-

6

EXPENDITURES ON ALMP AS A % OF GDP

-

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

63.8%

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

0.01%

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 considered moderate when compared to other former Soviet republics. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50

25%

Tab. 1. Labour market institutional indicators Source: Lehmann and Muravyev [2012], Muravyev [2010]

2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

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 ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

of 30 a system of deposit insurance (ADIF) and the Capital 3,5 Adequacy Ratio at the level of 12%. The shape of the 20 banking reforms triangle (BRT) indicates fairly even pro4,0 gress in the construction of the banking sector institu10 4,5 tions in Azerbaijan. The surface area of the BRT indicates that there is a significant transition gap in relation to in0 2010 1995 dustrialized market2000 economies2005 and that the progress of IEF FREEDOM HOUSE the banking reforms is slow. The scope of bank intermediation, measured by the domestic credit to private sector 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. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

BELARUS

KEY FACTS (2012) POPULATION.......................... 9.5 MLN GDP PER CAPITA (PPP)........ $ 15 592

1989 GDP........................... $ 63.3 BLN INFLATION (CPI)............... 59.2%

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 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 5.0% UNEMPLOYMENT........... 9.7% PUBLIC DEBT........ 41.9% OF GDP

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). VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

25

Wskaźniki instytucjonalne rynku pracy

26

1995 r.

2007 r.

45%

18%

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy Zasiłek dla bezrobotnych w relacji do średniej płacy Zasiłek dla bezrobotnych -

12 mies. 12 mies. Asmaks. theczasdevelopment of private entrepreneurship in wypłacania Wydatki na ALMP odsetek the characteristic feature of this Belarus is jako limited, 0,1% PKB country’s labour market is a significant employment Odsetek prac. najemnych 20% rate indo związków the public sector and a low employment należących zaw. rate in the private sector. The value of the Labour

1995 2.16

2007 1.95

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

-

35.5%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

10%

-

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

-

6

EXPENDITURES ON ALMP AS A % OF GDP

-

-

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

88%

-

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

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 concerning the freedom of trade unions’ activity, which in Belarus is in various ways restricted. In accordance with the official statistics, the highest unemployment 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%. 100 90 80 70 60 50 40 30 20

70

2005

2010

INDEX OF LABOUR FREEDOM

60 Fig. 3. Index of Labour Freedom Source: Heritage Foundation [2014] 50

Tab. 1. Labour market institutional indicators Source: Lehmann and Muravyev [2012], Muravyev [2010]

ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 2.0

2,0

3,0

The reforms of the banking sector in Belarus started as early as in the times of the USSR. The two-tier banking 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 liberalization of interest rates, the managed floating of the ruble (BYR) currency, the introduction of a system of deposit

1.0

1,5

2,5

40

INSTITUTIONS OF BANKING SYSTEM

1,0

3.0

insurance (ADC) and the Capital Adequacy Ratio at the 30 3,5 level of 8%. The shape of the banking reforms triangle 20 (BRT) indicates even progress in the construction of the 4,0 banking sector institutions in Belarus. The surface area 10 4,5 of the BRT indicates that there is a significant transition gap 0 in relation to industrialized market economies and 2010 1995 2005 no progress in the2000 banking reforms. The scope of bank IEF FREEDOM HOUSE 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 sector in Belarus is not conducive for the economic growth of the country. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

BOSNIA AND HERZEGOVINA

KEY FACTS (2012) POPULATION.......................... 3.8 MLN GDP PER CAPITA (PPP).......... $ 9 235

1989 GDP........................... $ 17.5 BLN INFLATION (CPI).................. 2.0%

STATE INSTITUTIONS Bosnia and Herzegovina was established as a result 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, 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 0.7% UNEMPLOYMENT........ 28.2% PUBLIC DEBT........ 44.3% OF GDP

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. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

27

Wskaźniki instytucjonalne rynku pracy

28

1995 r.

2007 r.

45%

18%

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy Zasiłek dla bezrobotnych w relacji do średniej płacy Zasiłek dla bezrobotnych -

12 mies. employees 12 mies. In maks. Bosnia and Herzegovina can count on a sigczas wypłacania Wydatki na ALMP jako odsetek of the labour law and relatively high nificant protection 0,1% PKB unemployment benefits. There is also high trade union Odsetek prac. najemnych 20% density.doThe labour należących związków zaw. market in Bosnia and Herzegovina is characterized by very low employment rates, especially

1995 -

2007 2.59

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

-

34.9%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

-

33%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

-

12

EXPENDITURES ON ALMP AS A % OF GDP

-

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

-

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

0.08%

in the case of women (in 2012 only 23.7% adult women were professionally active). The general unemployment rate is also high (in 2012 it exceeded 28%). The informal employment rate is estimated at about 33% of the total employment. Another characteristic feature of the labour market in Bosnia and Herzegovina is a significant level of economic migration. The World Bank estimates that in 1998, remittances constituted as much as 50% of the GDP. However, in subsequent years their values in relation to the GDP decreased and in 2012 it was about 11%. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50

67%

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

2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

Important reforms of the banking sector in Bosnia and Herzegovina were carried out only in 1999. The two-tier banking sector, established in January 1996, is composed of the central bank (CBBH) and commercial banks (30). In the commercial banking sector, dominated by foreign investors (>95%), the most common model is that of a universal bank. The banking reforms brought the full liberalization of interest rates, the establishment of a currency board to through which convertible mark (BAM) is linked to euro as a reserve ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

currency, the introduction of a system of deposit insurance 30 3,5 (DIA) and the Capital Adequacy Ratio at the level of 12%. 20 shape of the banking reforms triangle (BRT) indicates The 4,0 uneven progress in the construction of the banking sector 10 institutions in Bosnia and Herzegovina. The surface area4,5 of the 0 BRT indicates that there is a significant transition gap in 2000 relation1995 to industrialized market2005 economies. 2010 The scope of IEF FREEDOM HOUSE bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has exceeded 65%, which corresponds to the level of development of the country’s economy. The banking sector in Bosnia and Herzegovina is stable and conducive for the economic growth of the country. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1992

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

BULGARIA

KEY FACTS (2012) POPULATION.......................... 7.3 MLN GDP PER CAPITA (PPP)......... $ 15 933

1989 GDP........................... $ 51.0 BLN INFLATION (CPI).................. 2.4%

STATE INSTITUTIONS In Bulgaria the systemic transition started in 1991 and in the same year an economy stabilising programme was introduced. Bulgaria is a democratic parliamentary republic. The first free election was won by the Bulgarian Socialist Party (which originated from a communist party) but the first democratically elected president was Zhelyu Zhelev – a former political dissident. Since the beginning of the transition, the power in the country is held alternately by the representatives of the socialist party and the centre-rightist party. Bulgaria is a member of the Council of Europe (1992), the WTO (1996), the NATO (2004) and the UE (2007). The accession into the EU required the previous implementation of many political and economic reforms. According to the FH Freedom Rating, 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 0.7% UNEMPLOYMENT........12.3% PUBLIC DEBT........17.6% OF GDP

Bulgaria is a free country. Nevertheless, corruption and organised crime are still serious problems. The European Commission report of July 2012 (COM (2012) 411 final) says that in these two areas, as well as with respect to the judicial reform, the efforts made by the Bulgarian authorities are insufficient. As far as the Index of Economic Freedom is concerned, Bulgaria is categorised as “moderately free”. The economic transition was slow and in 1994-1998 economic freedom decreased. In 2013 the lowest values were recorded in the components of Property Rights and Freedom from Corruption (30 and 35.2 respectively) and the highest – in the component of Fiscal Freedom (91.2). The latter is related to the fact that the highest rate of both personal and corporate income tax is only 10%. The quality of governance increased significantly (improvement has been recorded in almost all governance areas, except for the Voice and Accountability). Nevertheless, the indices of Control of Corruption and Rule of Law for this country have negative values (-0.24 and -0.12 in 2012). VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

29

Wskaźniki instytucjonalne rynku pracy

30

1995 r.

2007 r.

45%

18%

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy Zasiłek dla bezrobotnych w relacji do średniej płacy Zasiłek dla bezrobotnych -

12 mies. of 12 a mies. Bulgaria is an example country which has sigmaks. czas wypłacania Wydatki na ALMP jako odsetek nificantly liberalized its labour market. Even in 0,1% PKB 1995 the Employment Protection Legislation Index Odsetek prac. najemnych (EPL) was on azaw.high -level 20% of 2.9; in 2007 it was alnależących do związków ready only 1.9. Also non-wage labour costs had

1995 2.9

2007 1.9

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

40.3%

32.3%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

34%

40%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

12

12

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

EXPENDITURES ON ALMP AS A % OF GDP

0.16%

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

58.2%

0.34%

been significantly lowered and in 2012 they were on the lowest level among all the new EU member states. Bulgaria stood out also with respect to significant expenditures on the active labour market policy – in 2005 the spending on this aim was over twice as high as on the passive policy. This tendency, however, reversed with the increase in the unemployment rate after 2008 (from 5.6% in 2008 to 12.3% four years later) – since then, the expenditures on the passive policy have been considerably rising. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4

70

20%

Tab. 1. Labour market institutional indicators Source: Eurostat, Lehmann and Muravyev [2012], OECD, Visser [2013]

3.0

20 2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50 2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The reforms of the Bulgarian banking sector started in 1987. The two-tier banking sector, established in December 1990, is composed of the central bank (BNB) and commercial banks (30). In the commercial banking, dominated by foreign investors (>80%), the most common model is that of a universal bank. The banking reforms brought the full liberalization of interest rates, the ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

fixed exchange rate of the lev (BGN) currency, the intro30 3,5 duction of a system of deposit insurance (DIF) and the 20 Capital Adequacy Ratio at the level of 12%. The shape 4,0 of the banking reforms triangle (BRT) indicates that 10 4,5 there have been delays in reforming enterprises in Bulgaria. The surface area of the BRT indicates that there 0 2010 1995 2000 is a moderate transition gap in2005 relation to industrialized IEF FREEDOM HOUSE market economies. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has exceeded 70%, which is the right level for an economy at this stage of development. The banking sector in Bulgaria is efficient. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1990

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

CROATIA

KEY FACTS (2012) POPULATION.......................... 4.3 MLN GDP PER CAPITA (PPP)....... $ 20 532

1989 GDP........................... $ 59.2 BLN INFLATION (CPI).................. 3.4%

STATE INSTITUTIONS Croatia was formed as a result of the dissolution of Yugoslavia and proclaimed its independence in 1991. In the same year the war for independence started, which ended in 1995 with a peace treaty in Dayton. From the beginning of the existence of the country until 1999, the Croatian politics was dominated by nationalists led by Franjo Tuđman. The parliamentary election held in 2000 and the presidential election of 2001 met the standards of democracy and fairness. The parliamentary and government authorities elected at that time, supported by president Stjepan Mesić (a former anti-communist oppositionist), introduced a programme of political and economic reforms aimed at the creation of a market economy, respect for civil rights and fight against corruption; they also expressed the country’s wish to join the EU. Croatia is a member of the Council of Europe (1996), 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH..............................................-1.9% UNEMPLOYMENT........15.8% PUBLIC DEBT........ 53.7% OF GDP

the WTO (2000), the NATO (2009) and the UE (2013). According to the FH Freedom Rating, Croatia has been regarded a free country since 2000. Since then, the FH Rating for Croatia has been growing steadily to reach the level of 1.5 in 2013. Croatia cooperates with the International Criminal Tribunal for the former Yugoslavia, which was one of the conditions for its accession to the EU. Also, the situation of national minorities in the country has improved, including the Serbian minority. As far as the Index of Economic Freedom is concerned, Croatia is categorised as “moderately free”. In 2013 the lowest indices were recorded in the following areas: Labour Freedom (39.4), Property Rights (40), Freedom from Corruption (41.1) and Government Spending (45.8). The quality of governance in 1996-2012 increased significantly, although the Control of Corruption index remains negative. The country achieves especially good results in the field of Government Effectiveness and Political Stability and Absence of Violence / Terrorism (in 2012: 0.70 and 0.58 respectively). It can be stated that the state institutions in Croatia are at a fairly high level. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

31

Wskaźniki instytucjonalne rynku pracy

32

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

In the 90s of the 20th century, Croatia was characterized Zasiłek dla bezrobotnych w 45% 18% byrelacji a very strict do średniej płacy labour law. Although in subsequent years law was somewhat relaxed, in 2013 the Zasiłek dlathe bezrobotnych 12 mies. 12 mies. maks. czas value of wypłacania the Labour Freedom Index remained one Wydatki na ALMP jako odsetek of the lowest, not only among the transition coun0,1% PKB tries but also among the EU states. Also the Index of Odsetek prac. najemnych 20% należących związków zaw. LabourdoMarket Flexibility – which dropped under 4 1995 3.6

2007 2.7

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

48.3%

40.3%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

33%

25%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

15

13

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

EXPENDITURES ON ALMP AS A % OF GDP

0.14%

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

64%

0.06% 42.5%

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

points in 2013 – indicates that there are numerous restrictions on the free formation of labour relations. Another characteristic feature of the Croatian labour market is a low level of expenditures on the active labour market policy and persistent high trade union density. The employment rate is low – since 1995 it has not exceeded 50%. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50 2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The reforms of the Croatian banking sector started as early as in 1990. The two-tier banking sector, established in October 1993, is composed of the central bank (CNB) and commercial banks (32). 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, ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

the 30 managed floating of the kuna (HRK) currency, the 3,5 introduction of a system of deposit insurance (SADIBR) 20 the Capital Adequacy Ratio at the level of 10%. The and 4,0 shape of the banking reforms triangle (BRT) indicates 10 4,5 even progress in the construction of the banking sector institutions in Croatia. The surface area of the BRT 0 2010 1995 2005 2000 indicates that there is a moderate transition gap in IEF FREEDOM HOUSE relation to industrialized market economies. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has approached 70% and is relatively low. The Croatian banking sector is efficient and provides a wide range of financial services. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

CZECH REPUBLIC

KEY FACTS (2012) POPULATION........................10.5 MLN GDP PER CAPITA (PPP)....... $ 26 590

1989 GDP........................ $ 196.4 BLN INFLATION (CPI)................. 3.3%

STATE INSTITUTIONS In 1989 the Czech Republic was part of Czechoslovakia. In the same year, the so-called Velvet Revolution started, which led to the collapse of the communist regime. On 30th December 1989 a famous playwright and oppositionist – Vaclav Havel – was elected president of the Czech Republic. The country started to undergo systemic and economic changes. In 1993, as a result of a peaceful dissolution of the Czech and Slovak Federal Republic (the name used since 1990) – two independent countries emerged: the Czech Republic and the Slovak Republic. The Czech Republic is a parliamentary democracy headed by a president. The first president of the republic, elected in January 1993, was Vaclav Havel (who remained in this position until 2003). The Czech Republic is a member of the Council of Europe (1993), 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 0.3% UNEMPLOYMENT..........7.0% PUBLIC DEBT......... 45.9% OF GDP

the WTO (1995), the OECD (1995), the NATO (1999) and the EU (2004). Since 2006 the Czech Republic has been classified by the World Bank as a high income country. Since the beginning of the systemic transition, the Czech Republic has been regarded a free country, ensuring political freedom and civil liberties. Since 2004 the country has been receiving top scores in the FH Freedom Rating. Some remaining problems include corruption and the lack of transparency in politicians’ actions. For example, due to irregularities in the spending of the EU funds, in 2012 the European Commission put on hold the payment of EU funds to this country. The value of the Civil Liberties index for the Czech Republic places this country among the “mostly free” ones. As far as the Index of Economic Freedom is concerned, in 2013, only Estonia and Lithuania achieved better scores then the Czech Republic. The quality of governance in the Czech Republic remains high, although there has been some deterioration in the field of Control of Corruption – in 2012 this index reached its lowest level for the Czech Republic (0.23). VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

33

Wskaźniki instytucjonalne rynku pracy

34

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

The institutions of the labour market in the Czech Zasiłek dla bezrobotnych w 18% in the countries of the Republic arepłacy similar 45% to those relacji do średniej EU-15. In 1995-2012 non-wage labour costs were Zasiłek dla bezrobotnych 12 mies. 12 mies. czas wypłacania atmaks. a moderate level of 40.8% on average. Due to a low Wydatki na ALMP jako odsetek rate of unemployment level in 1993-2012 - (its average 0,1% PKB was 6.5%) the expenditures on active and passive Odsetek prac. najemnych należących związków policies zaw. labour domarket were20% relatively low – less than 1995 1.94

2007 1.99

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

41.4%

40.5%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

27.0%

22.4%

6

6

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS) EXPENDITURES ON ALMP AS A % OF GDP

0.14%

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

43.5%

0.31% 17.9%

Tab. 1. Labour market institutional indicators Source: Eurostat, Lehmann and Muravyev [2012], OECD, Visser [2013]

0.6% of the GDP in 2011. The labour law in the Czech Republic in 1993-2004 was little restrictive and was even further liberalized after the country joined the EU. As a result, in 2013 the value of the Labour Freedom Index was in the Czech Republic higher than in most transition countries and among the highest in the EU (with the exception of Denmark, where it was higher). 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50 2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The reforms of the Czech banking system started as early as in the times of Czechoslovakia. The twotier banking sector, established in January 1990, is composed of the central bank (CNB) and commercial banks (45). In the commercial banking, dominated by foreign investors (>85%), 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 koruna currency (CZK), the introduction ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

of 30 a system of deposit insurance (DIA) and the Capital 3,5 Adequacy Ratio at the level of 8%. The shape of the 20 banking reforms triangle (BRT) indicates even progress 4,0 in the construction of the banking sector institutions 10 4,5 in the Czech Republic. The surface area of the BRT indicates that there is a small transition gap in rela0 2010 2005 2000 tion to1995 industrialized market economies. The scope of IEF FREEDOM HOUSE bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has exceeded 50% and is relatively low. The banking sector in the Czech Republic is stable and provides a wide range of financial services. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1990

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

ESTONIA

KEY FACTS (2012) POPULATION..........................1.3 MLN GDP PER CAPITA (PPP)....... $ 23 065

1989 GDP........................... $ 22.4 BLN INFLATION (CPI).................. 4.2%

STATE INSTITUTIONS Estonia declared independence in 1991 and a year later it started a systemic transition and the implementation of an economic stabilisation programme. In the first democratic election in 1992 Lennart G. Meri was elected president. Estonia is a member of the Council of Europe (1993), the WTO (1999), the NATO (2004), the EU (2004), the OECD (2010) and the eurozone (2011). Since the beginning of its independence, Estonia is regarded as a politically and macroeconomically stable country, which respects the rules of democracy and civil liberties (since 1993 the FH Freedom Rating describes Estonia “free”). Since 2004 the country’s score in the FH Freedom Rating has been at top levels. Sometimes corruption instances occur among the representatives of the authorities. In order to fight this 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH..............................................-0.8% UNEMPLOYMENT..........10.1% PUBLIC DEBT......... 9.7% OF GDP

problem, in February 2012, the parliament adopted a new anti-corruption law which is to increase the transparency in the public sector. As far as the Index of Economic Freedom is concerned, in 2013 Estonia occupied the 11th highest position in the whole world, which is the best result among all transition countries. The country suffered significantly under the financial crisis of 2007-2009. In 2009, the government introduced a savings programme, involving the reduction of salaries in the public sector and the increase in taxes. Nevertheless, the country was unable to avoid a growth in government spending (the value of the IEF component Government Spending dropped from 67.3 in 2008 to 38.8 in 2011). The quality of governance in Estonia is high, although the value of the Political Stability and Absence of Violence / Terrorism index was in 2012 only 0.60. However, in the fields of Control of Corruption, Rule of Law and Government Effectiveness significant improvement was recorded. Estonia is regarded as the least corrupted among all transition countries. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

35

Wskaźniki instytucjonalne rynku pracy

36

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

The level of restrictiveness of the labour law in Estonia Zasiłek dla bezrobotnych w 45% on a 18% in relacji 2004-2013 remained relatively high, equal level, do średniej płacy despite several significant changes in the legislation inZasiłek dla bezrobotnych 12 mies. 12 mies. maks. czas wypłacania troduced in this period (in particular, the entry into force Wydatki ALMP jako odsetekcode in 2008). Non-wage labour costs of thenanew labour 0,1% PKB were established in 1995-2012 at a moderate level. Odsetek prac. najemnych 20% należących do związków zaw. Estonia’s characteristic feature is very low union den1995 2.2

2007 2.55

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

38.5%

37.6%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

7.6%

8%

6

12

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS) EXPENDITURES ON ALMP AS A % OF GDP

0.1%

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

32.2%

0.05%

sity (in the record year 2008 only 7.1% employees belonged to trade unions), low expenditures on the active labour market policy (in 2011 it was only 0.15% of the GDP) and rather low unemployment benefits. Another characteristic feature of the labour market in this country is a small percentage of employees with temporary contracts – in 1997-2012 it was 2.7% on average. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4

70

7.3%

Tab. 1. Labour market institutional indicators Source: Eurostat, Lehmann and Muravyev [2012], OECD, Visser [2013]

3.0

20 2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50 2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The two-tier banking sector in Estonia was established in January 1992. It is composed of the central bank (BE) and commercial banks (17). In the commercial banking sector, dominated by foreign investors (>98%), the most popular is the Swedish bank Svedbank, which in 2012 controlled 63% of all the assets of the banking sector in Estonia. The banking reforms brought the full liberalization of interest rates, the introduction of a system of deposit insurance (GF) and the Capital ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

Adequacy Ratio at the level of 10%. On 1 January 2011 30 3,5 the Estonian currency – kroon (EEK) – was replaced 20 euro. The shape of the banking reforms triangle by 4,0 (BRT) indicates even progress in the construction of 10 4,5 the banking sector institutions in Estonia. The surface area of the BRT indicates that there is a small transi0 1995 2005 tion gap in relation2000 to industrialized market2010 economies. IEF FREEDOM HOUSE The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has slightly exceeded 100% and is relatively high. The Estonian banking sector is efficient and provides a wide range of financial services. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

GEORGIA

KEY FACTS (2012) POPULATION.......................... 4,5 MLN GDP PER CAPITA (PPP)........ $ 5 902

1989 GDP........................... $ 15.7 BLN INFLATION (CPI)................-0.9%

STATE INSTITUTIONS Georgia declared independence in 1991 and a year later its systemic transformation began. A former dissident – Zviad Gamsakhurdia – was elected president but was soon criticized for his authoritarian tendencies. The political situation in the country became increasingly unstable and the conflicts finally escalated. At the beginning of 1992 the president fled the country. The power was then taken over by Eduard Shevardnadze – a former leader of the Georgian communist party and a soviet foreign minister. He was president in 19952003. As a result of peaceful protests of 2003, called the Rose Revolution, President Eduard Shevardnadze resigned and was replaced by Mikheil Saakashvili. The protests were triggered by the rigging of the parliamentary elections by the government. Georgia is a member of the Council of Europe (1999) and the WTO (2000). Georgia government concentrates the 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 3.5% UNEMPLOYMENT........15.0% PUBLIC DEBT........ 32.3% OF GDP

country’s foreign policy on cooperation with the USA and partnership with the EU and the NATO (in 2011 Georgia was granted the status of an aspiring country). Since the beginning of its regained independence, Georgia has been a politically unstable country. The changes of power have been accompanied by riots and the country has struggled with domestic conflicts (in Abkhazia and South Ossetia). In 2008, Georgia’s attempt at restoring the “constitutional order” in South Ossetia led to a military conflict with Russia. According to the FH Freedom Rating, Georgia is a partly free country. However, the level of freedom in the country changes frequently. Nevertheless, despite political problems, Georgian authorities are determined to conduct economic reforms. Georgia is regarded as the leading reformer among all the former Soviet republics. The country offers a considerable scope of economic freedom and with this respect ranks 22nd in the whole world (2013). The quality of governance, however, is low. Still, in comparison to 1996, the country has changed dramatically for the better. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

37

Wskaźniki instytucjonalne rynku pracy

38

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

Since 2006 Georgia has had the highest level of Zasiłek dla bezrobotnych w 45% 18% freedom with relacji do średniej płacy respect to the formation of labour relations among- all the transition countries. Here, Zasiłek dla bezrobotnych 12 mies. 12 mies. maks. czas wypłacania the highest values of the Index of Labour FreeWydatki ALMP jako odsetek dom na(100 in 2007) and the 0,1%Index of Labour Market PKB Flexibility (over 5.7 in 2009) were recorded. In Odsetek prac. najemnych 20% należących do związków Georgia therezaw.are no restrictions on temporary 1995 1.69

2007 0.41

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

41%

26.7%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

-

0.0%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

-

0

EXPENDITURES ON ALMP AS A % OF GDP

-

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

-

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

-

contracts and labour contracts may be terminated without a period of notice. There is minimum wage but it is very low (in 2013 it was the equivalent of only 22.7 USD a month). Georgia has no state system of unemployment benefits. Nevertheless, the unemployment rate remains high and in 2011 it exceeded 15%. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50

80%

Tab. 1. Labour market institutional indicators Source: Lehmann and Muravyev [2012], Muravyev [2010]

2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The two-tier banking sector, established in June 1995, is composed of the central bank (NBG) und commercial banks (19). 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 managed floating of the lari (GEL) currency and the ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

Capital Adequacy Ratio at the level of 12%. No system 30 3,5 of deposit insurance was introduced. The shape of the 20 banking reforms triangle (BRT) indicates uneven pro4,0 gress in the construction of the banking sector institu10 4,5 tions in Georgia. The surface area of the BRT indicates that there is a significant transition gap in relation to 0 2010 1995 2005 2000 industrialized market economies. The scope of bank IEF FREEDOM HOUSE intermediation, measured by the domestic credit to private sector in per cent of GDP, has exceeded 30% and is low. The functioning of the banking sector in Georgia does not contribute to the economic growth of the country. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

HUNGARY

KEY FACTS (2012) POPULATION......................... 9.9 MLN GDP PER CAPITA (PPP)....... $ 22 119

1989 GDP......................... $124.6 BLN INFLATION (CPI).................. 5.7%

STATE INSTITUTIONS The systemic transition in Hungary started in 1990 and in the same year a stabilization programme was introduced. The first democratic election was won by the Hungarian Democratic Forum and its leader, opposition activist József Antall, became the prime minister. The country started to reform the economy and strive for the integration with the countries of Western Europe. Just as in Poland, the high social costs of the transition led to the victory of a post-communist party in the next election. This, however, did not change the pro-Western attitude of the country. Hungary is a member of the Council of Europe (1990), the WTO (1995), the OECD (1996), the NATO (1999) and the EU (2004). According to the FH Freedom Rating, Hungary has been a free country since the beginning of its transition. Nevertheless, Hungarian politics abounds in tensions. 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH.............................................-1.0% UNEMPLOYMENT.........10.9% PUBLIC DEBT........79.2% OF GDP

After the scandal related to the words of Prime Minister Ferenc Gyurcsány from the Hungarian Socialist Party, in which he admitted that the government repeatedly lied to the society, the parliamentary election of 2010 was won by the opposition – The Fidesz (Hungarian Civic Alliance). Viktor Orbán became the Prime Minister and used his significant social support to introduce many controversial reforms and to adopt a new constitution. The law on the judiciary and the media adopted in 2012 met with the opposition of the European Commission. With respect to economic freedom Hungary is classified as “moderately free”. The high level of government spending means that the Index of Economic Freedom was in 2013 the lowest (26.8) with respect to this component. The governance indices are a bit lower than in other countries of the region, e.g. the Czech Republic, Poland or Slovakia. In 2007-2012 the quality of governance lowered, especially in the following areas: Voice and Accountability (by 0.32), Rule of Law (by 0.32), Control of Corruption (by 0.28) and Regulatory Quality (by 0.22). VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

39

Wskaźniki instytucjonalne rynku pracy

40

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

The Hungarian labour market is characterized mostly Zasiłek dla bezrobotnych w 45% labour 18% byrelacji very highpłacy non-wage costs, which in 2012 do średniej were almost the- highest among all the EU countries Zasiłek dla bezrobotnych 12 mies. 12 mies. maks. czas only wypłacania (second to Belgium). In 1995-2013 the labour Wydatki na ALMP jako relatively odsetek law enabled formation of labour rela- free0,1% PKB tions and the relevant regulations did not undergo any Odsetek prac. najemnych należących do związków zaw. considerable changes. The 20% value of the Labour Free-

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL) SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

dom Index in 2013 was at a level similar to the average for the transition countries and slightly exceeded the average for the EU states. The expenditures on the labour market policy in Hungary reach similar amounts as in other new EU member states and in 2011 they were 1% of the GDP. The minimum wage is relatively low.

1995

2007

100

6.2

1.52

1.85

90

5.8

46.8%

46%

80

5.4

70

5.0

23.3%

20%

60

4.6

50

4.2

12

9

40

3.8

30

3.4

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS) EXPENDITURES ON ALMP AS A % OF GDP

0.61%

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

49.1%

0.27% 16.9%

Tab. 1. Labour market institutional indicators Source: Eurostat, Lehmann and Muravyev [2012], OECD, Visser [2013]

3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50 2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The reforms of the Hungarian banking sector started as early as in 1978. The present two-tier banking sector, established in January 1987, is composed of the central bank (NBH) and commercial banks (38). In the commercial banking sector, dominated by foreign investors (>80%), 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 forint currency (HUF), the introduction of a system of ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

deposit insurance (NDIF) and the Capital Adequacy 30 3,5 Ratio at the level of 8%. The shape of the banking re20 forms triangle (BRT) indicates even progress in the 4,0 construction of the banking sector institutions in Hun10 4,5 gary. The surface area of the BRT indicates that there is0 a small transition gap in relation to industrialized 2010 1995 2000 market economies. The scope2005 of bank intermediation, IEF FREEDOM HOUSE measured by the domestic credit to private sector in per cent of GDP, has reached 70% and is appropriate for the economic development of the country. The Hungarian banking sector is efficient and provides a wide range of financial services. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1990

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

KAZAKHSTAN

KEY FACTS (2012) POPULATION.......................16.8 MLN GDP PER CAPITA (PPP)........ $ 13 917

1989 GDP........................ $ 203.5 BLN INFLATION (CPI)................. 5.1%

STATE INSTITUTIONS Kazakhstan declared independence in 1991, as the last Soviet republic. The systemic transition started in 1992 and two years later an economic stabilisation programme was introduced. The first president of the country was Nursultan Nazarbayev, the former first secretary of the Kazakh communist party. In April 1995, N. Nazarbayev announced a referendum, as a result of which his term was prolonged until 2000. In the elections that followed the president was re-elected and so he holds the position to this day. Kazakhstan is a member of the Commonwealth of Independent States (1991) and the Eurasian Economic Community (2000), it has been negotiating its way to the WTO (since 1996). According to the FH Freedom Rating Kazakhstan is a not free country. The president has significant con80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 4.8% UNEMPLOYMENT........... 5.3% PUBLIC DEBT........12.,4% OF GDP

trol over the legislative and the judiciary, as well as over local authorities. Elections do not meet democratic standards, the media favour candidates from the president’s party and the representatives of the opposition are persecuted. Corruption is present at all levels of government. Although formally the constitution guarantees the freedom of press, in reality this freedom is restricted by the government: indomitable journalists are persecuted and newspapers closed down. According to the Index of Economic Freedom the country is classified as “moderately free”. The lowest values are those of the Freedom from Corruption and Property Rights components (in 2013, 25.7 and 30.0 respectively). The high income from crude oil makes it possible to maintain taxes at a low level (Fiscal Freedom is 92.9). The quality of governance is very low and does not show any tendency to improve. The lack of political freedom and corruption are the reasons why the lowest governance values are those of the Voice and Accountability and Control of Corruption indices (in 2012, -1.15 and -0.88 respectively). VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

41

Wskaźniki instytucjonalne rynku pracy

42

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

Since 1992 Kazakhstan has a liberal labour law with Zasiłek dla bezrobotnych w 45% 18% norelacji restrictions do średniej płacy on the use of temporary contracts and separate- regulations for collective dismissals. Zasiłekno dla bezrobotnych 12 mies. 12 mies. maks.non-wage czas wypłacania labour costs and the minimum wage Also Wydatki na ALMP jako odsetek are established at a -low level. The labour market in 0,1% PKB Kazakhstan is characterized by a high level of employOdsetek prac. najemnych 20% należących do związków zaw.unemployment rate – in 2012 they ment and a low 1995 1.98

2007 1.4

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

-

28.2%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

-

20%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

-

4

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

EXPENDITURES ON ALMP AS A % OF GDP

0.1%

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

-

-

were 68% and 5.3% respectively. Due to the fast economic growth, the country has for many years been attractive to many immigrants, mostly from Uzbekistan. Most of them, however, work in the shadow economy, where (despite the efforts of the authorities to promote greater compliance with the labour law) workers’ rights are still routinely violated. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50

-

Tab. 1. Labour market institutional indicators Source: Lehmann and Muravyev [2012], Muravyev [2010]

2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The two-tier banking sector in Kazakhstan, established in April 1993, is composed of the central bank (NBK) and commercial banks (39). In the commercial banking, dominated by domestic investors (>80%), the most common model is that of a universal bank. The banking reforms brought the full liberalization of interest rates, the fixed exchange rate of the tenge (KZT) currency against ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

American dollar, the introduction of a system of deposit 30 3,5 insurance (DIF) and the Capital Adequacy Ratio at the 20 level of 12%. The shape of the banking reforms triangle 4,0 (BRT) indicates uneven progress in the construction of 10 4,5 the banking sector institutions in Kazakhstan. The surface area of the BRT indicates that there is a significant 0 2010 1995 2005 2000 transition gap in relation to industrialized market econoIEF FREEDOM HOUSE mies. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, reached the level of about 50%, which corresponds with the needs of an economy at this level of development. The banking sector in Kazakhstan functions properly. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

KYRGYZSTAN

KEY FACTS (2012) POPULATION.......................... 5.6 MLN GDP PER CAPITA (PPP)......... $ 2 409

1989 GDP.............................. $ 6,5 BLN INFLATION (CPI).................. 2.8%

STATE INSTITUTIONS Kyrgyzstan declared independence in 1991 and a year later the systemic transition started and Askar Akayev was elected president. In 1993, a programme of macroeconomic stabilization was introduced, along with economic reforms aimed at transition to market economy. In 1995, A. Akayev was elected for the next term and – as a result of amendments to the constitution – in 1996 the power of the president significantly increased. In the elections that followed the incumbent president was again reelected, but international observers pointed out numerous irregularities. The parliamentary election of 2005 also did not meet democratic standards and it contributed to the outbreak of the so-called Tulip Revolution. These were the protests of the Kyrgyz opposition and society, the participants of which demanded the resignation of president A. Akayev and the annulment of the election results. The president fled the country, the Supreme Court annulled 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 3.1% UNEMPLOYMENT.......... 8.4% PUBLIC DEBT........ 48.9% OF GDP

the election and Kurmanbek Bakiyev became the new president. However, the year 2010 saw more bloody riots and protests against the irregularities in the parliamentary election, the corruption of the government and a bad economic situation. There were also clashes between the Kyrgyz and the Uzbeks. President Bakiyev resigned and, in the course of election, Roza Otunbayeva became the temporary president. New parliamentary and presidential elections were held in 2011. Kyrgyzstan is a member of the Commonwealth of Independent States (1991), the WTO (1998) and the Eurasian Economic Community (2000). In comparison with the previous ones, the last parliamentary and presidential elections were more democratic and the country moved up to the category of “partly free” in the FH Freedom Rating. Nevertheless, corruption and nepotism are common problems (the value of the Freedom from Corruption component of the IEF in 2013 was only 19.2). Also, the situation of the Uzbek minority is difficult. The country offers a moderate level of economic freedom. The quality of governance remains low and – when compared to 1996 – it has even deteriorated. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

43

Wskaźniki instytucjonalne rynku pracy

44

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

The labour market in Kyrgyzstan can be described as Zasiłek dla bezrobotnych w 45% 18% the protection of those relatively liberated. Although relacji do średniej płacy employed for indefinite period is significant, there Zasiłek dla bezrobotnych 12 mies. 12 mies. czas wypłacania is maks. quite a large freedom of concluding temporary Wydatki na ALMP Both jako odsetek contracts. non-wage labour costs and the mini0,1% PKB mum wage are low. Although there is high trade union Odsetek prac. najemnych 20% należących zaw. density,do związków the International Labour Organization points 1995 1.57

2007 2.12

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

-

31.6%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

-

9.8%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

-

6

EXPENDITURES ON ALMP AS A % OF GDP

-

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

-

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

0.02%

out that the unions are rather passive and often depend on employers. Kyrgyzstan has a high employment rate, which in 2012 reached the level of 61.4%. There is a significant economic emigration. It is estimated that every year about 20% of economically active people look for work abroad, mostly in Russia. In 2012 remittances amounted to as much as 31% of the GDP. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50

94%

Tab. 1. Labour market institutional indicators Source: Lehmann and Muravyev [2012], Muravyev [2010]

2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The two-tier banking sector, established in June 1991, is composed of the central bank (NBKR) and commercial banks (21). In the commercial banking dominated by foreign investors (>70%), 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 som (KGS) currency, the inASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

troduction of a system of deposit insurance (DPA) and 30 3,5 the Capital Adequacy Ratio at the level of 12%. The 20 shape of the banking reforms triangle (BRT) indicates 4,0 uneven progress in the construction of the banking 10 sector institutions in Kyrgyzstan. The surface area 4,5 of the 0 BRT indicates that there is a significant transition 2010 2005 2000 gap in1995 relation to industrialized market economies. The IEF FREEDOM HOUSE scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has exceeded 15% and is very low. The banking sector of Kyrgyzstan is not conducive for the economic growth of the country. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

LATVIA

KEY FACTS (2012) POPULATION.......................... 2.0 MLN GDP PER CAPITA (PPP)....... $ 20 969

1989 GDP........................... $ 28.4 BLN INFLATION (CPI).................. 2.3%

STATE INSTITUTIONS Latvia announced the declaration of state sovereignty on 28th July 1989, but it did not gain complete independence until 21st August 1991. After the restoration of independence, a rule was adopted that the knowledge of the Latvian language is a necessary condition for obtaining Latvian citizenship. As a result of this decision, part of the Russian minority in Latvia (about 300 thousand people, i.e. 15% of the general population) did not receive the citizenship. The systemic transition started in 1992 and an economic stabilization programme was introduced. The first free parliamentary election was held in June 1993. Latvia is a member of the Council of Europe (1995), the NATO (2004), the EU (2004) and the eurozone (2014). 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH..............................................-2.8% UNEMPLOYMENT........14.9% PUBLIC DEBT........ 36.4% OF GDP

Latvia is a democratic country, which respects civil rights and liberties. In the FH Freedom Rating it is regarded as “free”. Since 2005, the FH Freedom Rating for the country has remained on top levels. Nevertheless, corruption at all levels of government is still a considerable problem, affecting also the judiciary, which is additionally politicized and inefficient. The scope of economic freedom is quite broad (the value of the Index of Economic Freedom in 2013 was 68.7). As a result of the financial crisis of 2007-2009 regulations were introduced which reduced Financial Freedom (the value of which dropped from 70 in 2008 to 50 in 2013). However, at the same time, Government Spending was reduced and Business Freedom increased. In the period of 1996-2012 the quality of governance improved, especially in the areas of Control of Corruption, Rule of Law and Government Effectiveness. The quality of governance in Latvia was in 2012 at a slightly lower level then in the case of other Baltic countries. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

45

Wskaźniki instytucjonalne rynku pracy

46

1995 r.

2007 r.

45%

18%

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy Zasiłek dla bezrobotnych w relacji do średniej płacy Zasiłek dla bezrobotnych -

12th mies. 12 mies.the freedom of formacentury In maks. the czas 90s of the 20 wypłacania Wydatki jako odsetek tion na ofALMP labour relations in 0,1% Latvia was relatively high. PKB However, as a result of the tightening of regulations Odsetek prac. najemnych - contracts 20% concerning temporary and collective redunnależących do związków zaw. dancies (in 2001-2002), the scope of this freedom was

1995 1.57

2007 2.39

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

39.3%

41.1%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

-

34%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

6

9

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

EXPENDITURES ON ALMP AS A % OF GDP

0.2%

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

28.3%

0.17% 16.3%

Tab. 1. Labour market institutional indicators Source: Eurostat, Lehmann and Muravyev [2012], OECD, Visser [2013]

significantly limited and in 2013 it was already much closer to the EU average. Non-wage employment costs in Latvia in 2012 were ones of the highest in the EU and amounted to 43.6%. In 2009-2010, due to the severe impact of the financial crisis (the unemployment rate in Latvia increased from 7.7% in 2008 to 19% in 2010), the expenditures on the labour market policy increased significantly and in 2009 they reached the level of 1.3% of the GDP. However, in subsequent years this amount was quickly reduced and in 2012 it was only 0.5% of the GDP. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50 2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The two-tier banking sector in Latvia was established in May 1992. It is composed of the central bank (BL) and commercial banks (27). In the commercial banking sector, dominated by foreign investors (>70%), the most common model is that of a universal bank. The banking reforms brought the full liberalization of interest rates, the introduction of a system of deposit insurance ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

(FCMC) and the Capital Adequacy Ratio at the level of 30 3,5 8%. On January 1, 2014, the Latvian currency lats (LVL) 20 was replaced by euro. The shape of the banking re4,0 forms triangle (BRT) indicates uneven progress in the 10 4,5 construction of the banking sector institutions in Latvia. 0 The surface area of the BRT indicates that there is 2010 1995 2000 a moderate transition gap in 2005 relation to industrialized IEF FREEDOM HOUSE market economies. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has exceeded 100% and is relatively high. The Latvian banking sector is efficient and provides a wide range of financial services. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT(LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

LITHUANIA

KEY FACTS (2012) POPULATION.......................... 3.0 MLN GDP PER CAPITA (PPP)....... $ 23 399

1989 GDP........................... $ 42.3 BLN INFLATION (CPI).................. 3.2%

STATE INSTITUTIONS The Reform Movement of Lithuania called Sąjūdis was established in the country as early as in 1988. Sąjūdis won a spectacular victory in the election to the Supreme Council of the Lithuanian Soviet Socialist Republic on 24th February 1990 and as soon as on 11th of March Lithuania declared independence, as the first of the Soviet republics, more than a year before the dissolution of the USSR. The first free election was held in 1992 and was won by the post-communist Democratic Labour Party of Lithuania. In the same year, the systemic transition began and an economic stabilization programme was introduced. Lithuania is a member of the Council of Europe (1993), the WTO (2001), the NATO (2004) and the EU (2004). Since the beginning of its existence, Lithuania has 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH..............................................-0.5% UNEMPLOYMENT........13.2% PUBLIC DEBT........ 41.2% OF GDP

been regarded as politically and macroeconomically stable, respecting the rules of democracy and civil liberties (since 1993 it has been a free country according to the FH Freedom Rating). Since 2005, the FH Freedom Rating for the country has remained on top levels. There are some problems with corruption, although the government takes measures to bring to justice those who abuse their positions. Lithuania has succeeded in its transition into a market economy. The country offers a significant scope of economic freedom; in 2013, in the group of transition countries only Estonia received better scores in the IEF. With respect to economic freedom, Lithuania ranks 21st in the whole world (2013). However, the financial crisis of 2007-2009 contributed to worsening the country’s results in the field of Government Spending. The quality of governance in Lithuania is high. In comparison to 1996, the most considerable improvement is visible in the fields of Government Effectiveness and Rule of Law (in 2012 the values of these indices were 0.51 and 0.45 respectively). VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

47

Wskaźniki instytucjonalne rynku pracy

48

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

The level of economic freedom on the labour market Zasiłek dla bezrobotnych w 45% 18% to the EU average. The ofrelacji Lithuania moderate, close do średniej is płacy scope this freedom did not change significantly Zasiłek dla of bezrobotnych 12 mies. 12 mies. czas wypłacania although in 2002 the regulations in maks. 1991-2013, Wydatki na ALMP jako odsetek concerning temporary contracts were considerably 0,1% PKB tightened. Also with respect to non-wage labour costs Odsetek prac. najemnych 20% należących do związków Lithuania doeszaw. not differ significantly from the EU 1995 2.56

2007 2.95

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

41.2%

41.2%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

16.9%

27%

6

9

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS) EXPENDITURES ON ALMP AS A % OF GDP

0.2%

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

32.7%

0.32%

average and the level of these costs was only slightly lowered over the years (from 41.2% in 1995 to 39.2% in 2012). As far as expenditures on the labour market policy are concerned, Lithuania is below the EU average – in 2011 it earmarked for this purpose less than 1% of its GDP. The unemployment rate was in 1994-2012 relatively high, with the average level at 13%. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4

70

8.9%

Tab. 1. Labour market institutional indicators Source: Eurostat, Lehmann and Muravyev [2012], OECD, Visser [2013]

3.0

20 2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50 2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The two-tier banking sector of Lithuania, established in September 1992, is composed of the central bank (BL) and commercial banks (17). 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 litas ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

(LTL) currency, the introduction of a system of deposit 30 3,5 insurance (DIF) and the Capital Adequacy Ratio at the 20 level of 8%. The shape of the banking reforms triangle 4,0 (BRT) indicates uneven progress in the construction 10 4,5 of the banking sector institutions in Lithuania. The surface area of the BRT indicates that there is 0 2010 1995 2000 a moderate transition gap in 2005 relation to industrialized IEF FREEDOM HOUSE market economies. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has exceeded 65% and is relatively low. The banking sector in Lithuania is efficient and provides a wide range of financial services. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

MACEDONIA

KEY FACTS (2012) POPULATION.......................... 2.1 MLN GDP PER CAPITA (PPP)....... $ 11 654

1989 GDP.............................. $ 9.6 BLN INFLATION (CPI).................. 3.3%

STATE INSTITUTIONS Macedonia declared independence and separation from Yugoslavia in 1991. The first democratically elected president was Kiro Gligorov, who had previously been in the government of the socialist Yugoslavia. Macedonia’s main challenge was to build the country’s statehood. This was all the more difficult that the significant Albanian minority (23%) did not want to accept the unitary model of the country and sought the official acknowledgement of the existence of two nations within one country. Macedonia did not take part in the Yugoslavian war, but was negatively affected by the conflict in Kosovo in 1999. The decision to temporarily accept Albanian refugees from Kosovo strengthened the Albanian nationalists’ demands for the autonomy of the region inhabited mostly by Albanians and led to a military conflict in 2000-2001. In August 2001, an agreement was signed, which prevented the break-out 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................1.9% UNEMPLOYMENT........ 31.3% PUBLIC DEBT........ 34.0% OF GDP

of a civil war. Ultimately, the constitution was amended and the autonomy of Albanians increased. Macedonia is a member of the Council of Europe (1995) and the WTO (2003). In 2003, it was granted the status of a potential candidate for the EU membership and in 2005 it was granted the status of a candidate country. However, Macedonian accession to the EU and the NATO is blocked by Greece, which does not accept the name of the country. According to the FH Freedom Rating, Macedonia is a partly free country. Elections are regarded as meeting international standards. With respect to economic freedom, Macedonia is classified as “moderately free”, although in 2001-2013 the scope of the economic freedom considerably increased (the IEF grew by 10.6 point). The quality of governance is low but improving, especially with respect to Control of Corruption and Regulatory Quality. Nevertheless, the problem of corruption is still a significant one. Apart from that, there is the low political stability of the country, related to recurring ethnic tensions. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

49

Wskaźniki instytucjonalne rynku pracy

50

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

In 1995-2008 Macedonia had a restrictive labour law, Zasiłek dla bezrobotnych w 45% 18% which was topłacy some extent liberalized in 2009. Thanks to relacji do średniej the Zasiłekliberalization, dla bezrobotnych - the Labour Freedom Index increased 12 mies. 12 mies. czas wypłacania tomaks. almost the highest level among all the countries of Wydatki na ALMP jako odsetek Also the Index of Labour Market Southeast Europe. 0,1% PKB Flexibility increased considerably (and reached 5.2 in 2010). Odsetek prac. najemnych 20% należących do związków zaw. However, the introduced changes have not improved the 1995 3.4

2007 3.1

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

40.8%

41.4%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

36%

33%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

14

12

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

EXPENDITURES ON ALMP AS A % OF GDP

0.05%

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

45%

0.1%

very bad labour market outcomes. In 2012 the employment rate was only 38%, whereas the unemployment rate was as much as 31% and even higher among young people – 54%. Macedonia is characterized by significant trade union density, but – as it is indicated by the International Labour Organization – in practice, the influence of unions on the labour market is generally insignificant. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50

75%

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

2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

Formally, the two-tier banking sector in the territory of the present Macedonia (previously Yugoslavia) has existed since the 50s of the 20th c. The present two-tier banking sector, established in April 1992, is composed of the central bank (NBRM) and commercial banks (18). 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 introduction of a system of deposit ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

insurance (DIF) and the Capital Adequacy Ratio at the 30 3,5 level of 8%. In practice, the exchange rate of denar (MKD) 20 fixed against euro. The shape of the banking reforms is 4,0 triangle (BRT) indicates uneven progress in the construc10 4,5 tion of the banking sector institutions in Macedonia. The surface area of the BRT indicates that there is a moderate 0 2010 1995 2005 2000 transition gap in relation to industrialized market econoIEF FREEDOM HOUSE mies. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has approached 45% and is relatively low. The Macedonian banking sector is efficient, although it could contribute more to the economic growth of the country. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

MOLDOVA

KEY FACTS (2012) POPULATION.......................... 3.6 MLN GDP PER CAPITA (PPP)......... $ 4 182

1989 GDP.............................. $ 7.3 BLN INFLATION (CPI).................. 4.6%

STATE INSTITUTIONS Moldova declared independence in 1991. The first president of the country was Mircea Snegur (in years 1991-1996), a former member of the Moldovan communist party. He “won” the election, in which he had no rival. The systemic transition of the country started in 1992 and a year later an economic stabilization programme was introduced. Since the beginning of its independence the country has struggled with the problem of Transnistria. This part of Moldova is inhabited by a great number of Russians and Ukrainians and – after the dissolution of the USSR – it declared separation; after a short civil war, Transnistria started to function as an independent country – the Pridnestrovian Moldavian Republic with a capital in Tiraspol. The country has not been internationally recognized. Despite the involvement of the OSCE in uniting talks, at present it seems that no immediate solution to the problem 80

1,0

70

2,0

60

1990

1991

1992

1993

5-YEAR AVERAGE GDP GROWTH................................................ 2.8% UNEMPLOYMENT.......... 5.6% PUBLIC DEBT........ 23.9% OF GDP

is possible. Moldova is a member of the Commonwealth of Independent States (1991), the Council of Europe (1995), the WTO (2001) and has the observer status in the Eurasian Economic Community (2002). In the FH Freedom Rating Moldova is regarded as “partly free”. Parliamentary elections usually do not meet international standards, but some improvement was visible during the election of 2010. The political situation is not very stable and between 2009 and 2012 the parliament was not even able to choose the president. Corruption is still a very serious problem. Political competitors regularly accuse one another of bribery and participation in illegal business undertakings. Moldova offers also a relatively narrow scope of economic freedom – according to the IEF, the country is “mostly unfree”. The indices of Freedom from Corruption and Labour Freedom have very low values (in 2013, it was 29.5 and 37.9 respectively). The quality of governance is low and has deteriorated in comparison to 1996, especially in the areas of Control of Corruption (-0.60) and Government Effectiveness (-0.55). GŁOS OBYWATELI I ROZLICZALNOŚĆ RZĄDZĄCYCH

JAKOŚĆ REGULACJI

STABILNOŚĆ POLITYCZNA I BRAK PRZEMOCY

KONTROLA KORUPCJI

3,0

50

4,0

40

5,0

30

1,5 0,5 -0,5 -1,5

6,0

20

7,0

10 0 1990 1995 2000 INDEKS WOLNOŚCI GOSPODARCZEJ (LEWA OŚ)

2005 2010 INDEKS WOLNOŚCI POLITYCZNEJ (PRAWA OŚ)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

EFEKTYWNOŚĆ RZĄDÓW 1996 Fig. 2. Governance Source: WGI [2014]

PRAWORZĄDNOŚĆ 2012 2004

51

Wskaźniki instytucjonalne rynku pracy

52

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

In 1993-2007 Moldova had a quite restrictive labour Zasiłek dla bezrobotnych w 45% 18%permanent contracts and law, especially with respect to relacji do średniej płacy collective dismissals. The degree of this restrictiveness Zasiłek dla bezrobotnych 12 mies. 12 mies. maks. czas wypłacania increased further in subsequent years and, as a result, Wydatki na ALMP jako odsetek the Labour Freedom Index in 2010 was almost at the 0,1% PKB lowest level among all transition countries (with the sole Odsetek prac. najemnych 20% należących do związków zaw. exception of Turkmenistan). However, the World Bank 1995 2.48

2007 2.88

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

-

32.4%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

-

27.9%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

9

12

EXPENDITURES ON ALMP AS A % OF GDP

-

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

-

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

0.08%

points out that the labour law in Moldova is often not respected and does not constitute a significant limitation for employers. This is evidenced also by a significant percentage of people working in the shadow economy (estimated at even 30% of the whole employment). In 1999-2012 the unemployment rate in Moldova was low, with the average value of 7.1%. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 50 Source: Heritage Foundation [2014], World Economic Forum [2013]

80%

Tab. 1. Labour market institutional indicators Source: Lehmann and Muravyev [2012], Muravyev [2010]

2,5

40

3,0

INSTITUTIONS OF BANKING SYSTEM The two-tier banking sector, established in January 1991, is composed of the central bank (NBM) and commercial banks (15). The commercial banking sector is dominated by domestic investors (>55%) and there are only universal banks. The banking reforms brought the full liberalization of interest rates, the managed floating of the leu (MDL) currency, the introASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

duction of a system of deposit insurance (FDIC) and 30 3,5 the Capital Adequacy Ratio at the level of 17%. The 20 shape of the banking reforms triangle (BRT) indicates 4,0 uneven progress in the construction of the banking 10 sector institutions in Moldova. The surface area 4,5 of the 0 BRT indicates that there is a significant transition 2010 1995 2005 gap in relation to2000 industrialized market economies. IEF FREEDOM HOUSE The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has exceeded 35% and is low. The Moldovan banking sector does not sufficiently support the economic growth. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

MONTENEGRO

KEY FACTS (2012) POPULATION.......................... 0.6 MLN GDP PER CAPITA (PPP)....... $ 14 206

1989 GDP.............................. $ 4.4 BLN INFLATION (CPI).................. 3.6%

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................1.2% UNEMPLOYMENT........19.6% PUBLIC DEBT........ 51.9% OF GDP

STATE INSTITUTIONS Montenegro is a very young country. It is a former republic of Yugoslavia, which – after its breakup – in 1992, together with Serbia created the Federal Republic of Yugoslavia. Under the agreement of 2002, the Federal Republic of Yugoslavia was transformed into Serbia and Montenegro in 2003. In 2006, as a result of a referendum, Montenegro declared independence. Montenegro is a member of the Council of Europe (2007) and the WTO (2012). In 2008 the country applied for the accession into the EU and two years later it was granted the status of a candidate state. In 2012, the European Commission started negotiation, recognising the efforts made by Montenegro to respect civil liberties and the rule of law. The official currency of Montenegro is euro, although the country does not belong to the eurozone.

According to the FH Freedom Rating, the country is politically free. A significant problem is still corruption, which is partly the legacy of the 90s of the 20 th c., when the income from smuggling fed the state budget. As far as the Index of Economic Freedom is concerned, Montenegro is classified as “moderately free”, with the best score in the Fiscal Freedom component (92.5 in 2013) and the worst in the Freedom from Corruption component (37.8 in 2013). The quality of governance remains at a relatively low level. In 2012, the value of the governance index, in all its areas, fluctuated around zero. The lowest were the values of the Control of Corruption and Rule of Law components (-0.10; -0.01 respectively). Only with regard to Political Stability and Absence of Violence/Terrorism, the score was significantly higher and equalled 0.56.

80

1.0

70

2.0

VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

60

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 2006

Fig. 2. Governance Source: WGI [2014]

2012

53

Wskaźniki instytucjonalne rynku pracy

54

1995 r.

2007 r.

45%

18%

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy Zasiłek dla bezrobotnych w relacji do średniej płacy Zasiłek dla bezrobotnych -

12 mies. 12 mies. In maks. 2008-2010 the Labour Freedom Index in Monteneczas wypłacania Wydatki na ALMP jako odsetek gro increased significantly, reaching the highest level 0,1% among PKB all the transition countries. Such significant Odsetek prac. najemnych 20% changes were first należących do związków zaw. of all the result of the willingness of the country’s authorities to improve the difficult

1995 -

2007 2.2

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

-

40.2%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

-

10%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

-

12

EXPENDITURES ON ALMP AS A % OF GDP

-

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

-

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

0.38%

situation on the labour market – in 2008 the employment rate was as low as 41%, and the unemployment rate as high as 17%. Still, the liberalization of the labour market has not brought the expected results. Therefore, in 2011 it was decided that the minimum wage should be increased and some restrictions were put on fixed-term contracts. Although as a result of these changes the Labour Freedom Index has dropped significantly, it can still be claimed that the freedom of formation of labour relations in Montenegro is significant. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50

31%

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

2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The two-tier banking sector, established in the territory of today’s Montenegro in October 1997, is composed of the central bank (CBM) and commercial banks (10). In the commercial banking, dominated by foreign investors (>85%), the most common model is that of a universal bank. The banking reforms brought the full liberalization of interest rates, the German mark as the official currency of Montenegro (introduced in 2000, in 2002 replaced with euro), the introduction of a system ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

of 30 deposit insurance (DPF) and the Capital Adequacy 3,5 Ratio at the level of 10%. The shape of the banking re20 forms triangle (BRT) indicates uneven progress in the 4,0 construction of the banking sector institutions in Mon10 4,5 tenegro. The surface area of the BRT indicates that there is a significant transition gap in relation to indus0 1995 2005 2000 trialized market economies. The scope of2010 bank interIEF mediation, measured by the domestic FREEDOM credit toHOUSE private sector in per cent of GDP, has even exceeded 85% and is relatively high in relation to the economy’s potential. The banking sector in Montenegro is conducive for the economic growth of the country. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

2002

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2006

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

POLAND

KEY FACTS (2012) POPULATION........................ 38.5 MLN GDP PER CAPITA (PPP)....... $ 22 162

1989 GDP........................ $ 489.8 BLN INFLATION (CPI).................. 3.7%

STATE INSTITUTIONS The first partly free election took place in Poland in 1989: the opposition parties won the maximum of allowed number of seats in the lower chamber of the parliament (the Sejm) and in the upper chamber of the parliament they won all the allowed seats but one. As a result of the agreement between the communist party and the opposition, the parliament elected Wojciech Jaruzelski, a former communist politician for president and a former oppositionist Tadeusz Mazowiecki – for prime minister. A year later, a direct free presidential election was held, which was won by Lech Wałęsa, the leader of the Independent Self-governing Trade Union „Solidarity”. The systemic transition started in 1990 and in the same year a programme of macroeconomic stabilization was introduced, prepared by the government under the direction of the Minister of Finance Leszek Balcerowicz. Poland is a member of the 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 3.4% UNEMPLOYMENT........10.1% PUBLIC DEBT........ 55.6% OF GDP

Council of Europe (1991), the WTO (1995), the OECD (1996), the NATO (1999) and the EU (2004). Since the beginning of the transition process Poland has been considered a free country, in which elections are held in a democratic way and civil rights are respected. Since 2004 the FH Freedom Rating for Poland has been at top levels. The scope of economic freedom seems a bit worse – according to the IEF Poland is “moderately free”. Corruption is still a significant problem, although the value of the Freedom from Corruption component of the IEF increased significantly: from the level of 34 points in 2007 to 54.8 in 2013. Due to high budgetary taxes, the Fiscal Freedom component of the IEF equalled 43.2 (in 2013). The quality of governance improved in 2012 in comparison to the period of 2004-2007. However, the changes of the state institutions between 1996-2013 must be critically evaluated, as the high initial level of governance quality did not improve considerably and the increase in economic freedom was lower than in many other transition countries. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

55

Wskaźniki instytucjonalne rynku pracy

56

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

In 1990-2013 Poland’s labour law was relatively liZasiłek dla bezrobotnych w 45% 18%transition countries. The beral comparison to other relacji in do średniej płacy only exception Zasiłek dla bezrobotnych -was regulations concerning collecti12 mies. 12 mies. czas wypłacaniawhich might be seen as restrictive. In vemaks. dismissals, Wydatki na ALMP jakonon-wage odsetek 1996-2012 - labour 0,1% costs were significantly PKB reduced (from 43.6% to 34.3%) and in 2012 they were Odsetek prac. najemnych 20% należących związków lower do than thezaw.EU average. In 1993-2007, due to 1995 1.86

2007 2.19

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

43.6%

37.1%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

36%

20.3%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

18

18

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

EXPENDITURES ON ALMP AS A % OF GDP

0.34%

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

27.0%

0.50% 15.2%

Tab. 1. Labour market institutional indicators Source: Eurostat, Lehmann and Muravyev [2012], OECD, Visser [2013]

a high unemployment rate (in the 1st quarter of 2004 it reached the record level of 20.7%), the labour market policy was mostly passive. The spending on the active labour policy grew significantly in 2008-2010; in 2010 they reached the level of 0.6% of the GDP – the highest among the new EU member states and close to the EU average. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50 2,5

40

3,0

INSTITUTIONS OF BANKING SYSTEM The reforms of the Polish banking sector started as early as in the 80s of the 20th c. The present twotier banking sector is composed of the central bank (NBP), commercial banks (45) and cooperative banks (574). In the commercial banking sector, dominated by foreign investors (>75%), 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 złoty (PLN) currency, the introducASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

tion 30 of a system of deposit insurance (BGF) and the 3,5 Capital Adequacy Ratio at the level of 8%. The shape 20 the banking reforms triangle (BRT) indicates even of 4,0 progress in the construction of the banking sector in10 4,5 stitutions in Poland. The surface area of the BRT indicates that there is a moderate transition gap in rela0 2010 2005 2000 tion to1995 industrialized market economies. The scope of IEF FREEDOM HOUSE bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has exceeded 50% and is relatively low. The banking sector in Poland is efficient and provides a wide range of financial services. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1990

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

ROMANIA

KEY FACTS (2012) POPULATION........................ 20.1 MLN GDP PER CAPITA (PPP)....... $ 16 518

1989 GDP........................ $ 169.4 BLN INFLATION (CPI).................. 3.3%

STATE INSTITUTIONS The systemic transition in Romania started in 1991. In 1993, the country introduced a macroeconomic stabilization programme. The first democratically elected president (in 1990) was Ion Iliescu, who took an active part in overthrowing the communist president of the country Nicolae Causescu and in the beginning of political changes. In the 90s of the 20th c., Romania went through serious political and economic problems, including strikes and social protests against the bad economic situation and difficult reforms. This led to frequent changes of governments. Romania is a member of the Council of Europe (1993), the WTO (1995), the NATO (2004) and the EU (2007). Despite significant political instability of Romania, political elections meet democratic standards. Since 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 0.4% UNEMPLOYMENT...........7.0% PUBLIC DEBT........ 38.2% OF GDP

1996 Romania has been classified as “free” by the FH Freedom Rating. As far as the scope of economic freedom is concerned, Romania is regarded as “moderately free”, although, since 2004, the scope of economic freedom in the country has been expanding rapidly. The improvement is particularly visible in such IEF components as: Investment Freedom, Trade Freedom, Fiscal Freedom and Monetary Freedom. The lowest value is that of the Freedom from Corruption component (37.7 in 2013). Corruption remains a serious problem, although there have been some successes in fighting it, e.g. in 2012, former prime minister Adrian Năstase was sentenced to two years of prison for using public funds for his presidential campaign in 2004. The quality of governance in Romania is low, much lower than in the countries of Central Europe and there does not seem to be a clear tendency to improvement. As far as governance is concerned, in 2012, the lowest were the values of such indices as: Control of Corruption (-0.27) and Government Effectiveness (-0.31). VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

57

Wskaźniki instytucjonalne rynku pracy

58

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

The institutions of the labour market in Romania have Zasiłek dla bezrobotnych w 45% last18% changed littlepłacyover the twenty years. Non-wage relacji do średniej labour between 1995 and 2012 changed only Zasiłek dla costs bezrobotnych 12 mies. 12 mies. maks. czas wypłacania minimally – from 42.7% to 43.4%. Also the expendiWydatki ALMP jakolabour odsetek market policy remained stable and turesnaon the 0,1% PKB inOdsetek 2011 they were almost the lowest among all the EU prac. najemnych 20% należących do związków countries. Evenzaw. the decrease in the degree of unioniza1995 1.9

2007 3

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

42.7%

41.8%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

28%

30%

9

12

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS) EXPENDITURES ON ALMP AS A % OF GDP

0.16%

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

40.7%

0.11% 33.7%

Tab. 1. Labour market institutional indicators Source: Eurostat, Lehmann and Muravyev [2012], OECD, Visser [2013]

tion (characteristic for almost all transition countries) was rather limited and in 2008 trade union density was estimated at the level of 32.8%. In 1995-2006 the freedom of the formation of labour relations was gradually restricted. Nevertheless, in 2007 this trend reversed and the Labour Freedom Index increased in 2007-2013 by almost 10 points. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50 2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The reforms of the Romanian banking sector started after the overthrow of the dictatorship of N. Ceaușescu. The two-tier banking sector, established in December 1990, is composed of the central bank (NBR) and commercial banks (31). In the commercial banking sector, dominated by foreign investors (>85%), 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 leu (RON) currency, the ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

introduction of a system of deposit insurance (BDGF) 30 3,5 and the Capital Adequacy Ratio at the level of 12%. The 20 shape of the banking reforms triangle (BRT) indicates 4,0 even progress in the construction of the banking sec10 4,5 tor institutions in Romania. The surface area of the BRT indicates that there is a moderate transition gap in re0 2000 lation 1995 to industrialized market2005 economies.2010 The scope of IEF HOUSE bank intermediation, measured by the FREEDOM domestic credit to private sector in per cent of GDP, has exceeded 45% and is relatively low. The Romanian banking sector does not sufficiently support the economic growth of the country. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1990

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

RUSSIA

KEY FACTS (2012) POPULATION.....................143.5 MLN GDP PER CAPITA (PPP)....... $ 23 501

1989 GDP.................... $ 2 014.8 BLN INFLATION (CPI).................. 5.1%

STATE INSTITUTIONS Russia is a country which emerged as the successor of Soviet Russia in 1991, after dissolution of the USSR. These political changes were preceded by the policies of “glasnost” (publicity) and “perestroika” (restructuring) introduced in 1985-1991 by Mikhail Gorbachev – the last communist leader of the Communist Party of the Soviet Union. The first Russian democratically elected president was Boris Yeltsin (1991). The systemic transition started in 1992 and three years later a stabilization programme was introduced. In 1996, Boris Yeltsin was re-elected but, since he took advantage of the support of oligarchs during his presidential campaign, they – in exchange – started to take over state-owned enterprises dealing with raw materials. The year 1998 brought a financial crisis, which significantly affected the Russian economy. In 1999, Vladimir Putin became prime minister, in 2000 – president. Since then, he has alternately occupied the 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................1.8% UNEMPLOYMENT........... 5.5% PUBLIC DEBT........12.5% OF GDP

positions. Over the years, Russia has seen deterioration in the area of civil liberties and persecution of the opposition. Russia was involved in military conflicts in Chechnya and Georgia. Russia is a member of the Commonwealth of Independent States (1991), the Council of Europe (1996), the Eurasian Economic Community (2000) and the WTO (2012). Elections in Russia are held in peaceful conditions but have little to do with democratic standards. According to the FH Freedom Rating, political freedom in Russia continues to be restricted and so the country is regarded as “not free”. Not much better is the situation of the economic freedom – according to the IEF Russia is classified as “mostly unfree”. Particularly low are the values of such IEF components as: Freedom from Corruption, Property Rights, Investment Freedom and Financial Freedom (in 2013: 22.1, 25, 25, 30 respectively). The quality of governance is very low. The consolidation of power by President Putin led on the one hand to the improvement in the political stability of the country, but on the other hand – to significant deterioration in the field of Voice and Accountability. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

59

Wskaźniki instytucjonalne rynku pracy

60

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

In 1992-2000 Russia’s labour law was restrictive. It was, Zasiłek dla bezrobotnych w however, liberalized in45%200118% and 2006 and can be now relacji do średniej płacy described as relatively liberal. Moreover, due to a signifiZasiłek dla bezrobotnych 12 mies. 12 mies. maks.scale czas wypłacania cant of non-compliance with the labour law (esWydatki na ALMP jakorespect odsetek pecially with to- numerous immigrants), the real 0,1% PKB protection of employees on Russian labour market is Odsetek prac. najemnych 20% należących do związków zaw. than it could seem on the basis of considerably lower 1995 2.79

2007 2.11

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

41%

31%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

20%

14%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

24

24

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

EXPENDITURES ON ALMP AS A % OF GDP

0.17%

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

76.3%

0.07% 44.4%

Tab. 1. Labour market institutional indicators Source: Lehmann and Muravyev [2012], Muravyev [2010], Visser [2013]

the legal regulations. In 1995-2007 non-wage costs of labour were systematically reduced, along with the expenditures on the active labour market policy. In the same period, trade union density decreased significantly in the country. The labour market in Russia is characterized by a high employment rate and a low unemployment rate – in 2012 their values were 60% and 5.5% respectively. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50 2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The beginning of the reforms of the Russian banking sector goes back to 1987, when in the period of perestroika, joint venture companies and semi-private cooperative banks were allowed to operate on the Russian market. The twotier banking sector, established in December 1990, is composed of the central bank (CBRF) and commercial banks (995). In the commercial banking sector, dominated by domestic investors (>80%, half of these shares are controlled by the state), the most common model is that of a uniASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

versal bank. The banking reforms brought the full liberali30 3,5 zation of interest rates, the moderate floating of the ruble 20 (RUB) currency, the introduction of a system of deposit in4,0 surance (DIA) and the Capital Adequacy Ratio at the level 10 4,5 of 10%. The shape of the banking reforms triangle (BRT) indicates fairly even progress in the construction of the 0 2010 1995 2005 2000 banking sector institutions in Russia. The surface area of IEF FREEDOM HOUSE the BRT indicates that there is a significant transition gap in relation to industrialized market economies. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has exceeded 45% and is low in the light of the economic potential of the country. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1990

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

SERBIA

KEY FACTS (2012) POPULATION..........................7.2 MLN GDP PER CAPITA (PPP)...... $ 11 544

1989 GDP........................... $ 37.5 BLN INFLATION (CPI)..................7.3%

STATE INSTITUTIONS Serbia is a former republic of Yugoslavia, which – after the dissolution of the latter – together with Montenegro, created the Federal Republic of Yugoslavia in 1992. Since 2006, when Montenegro declared independence and left the common country, Serbia has been on its own. In the 90s of the 20th c. Serbia, governed by nationalists and with President Slobodan Milošević as the country’s leader, supported its compatriots in wars in Bosnia and Herzegovina and in Croatia. As a result, it was isolated in the international arena. In 1998-1999, recurrent armed clashes in Kosovo between the Albanian Kosovo Liberation Army and the military and police forces of the Federal Republic of Yugoslavia caused the exodus of Albanian people and a NATO intervention. In 1999, a peaceful agreement was concluded, under which Kosovo came under the UN management and protection of NATO peacekeepers. S. Milošević lost his power in 2000, when 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 0.2% UNEMPLOYMENT.........19.6% PUBLIC DEBT........ 61.8% OF GDP

his attempt at rigging the presidential election and depriving the candidate of the opposition of his victory in the election cause mass protests. In 2008, Kosovo unilaterally declared independence and separation from Serbia, which was acknowledged by some countries (at the beginning of 2014 it was 110 states). Serbia is a member of the Council of Europe (2003). In 2003, it was granted the status of a potential candidate for the EU and since 2012 it has been a candidate country. Since the beginning of its independent existence (2006), Serbia is classified as “free” in the FH Freedom Rating. Elections are free and democratic. The problem is a high level of corruption and discrimination of ethnic minorities. The level of economic freedom is low and the country oscillates between two IEF categories: “mostly unfree” and “moderately free”. In 2013, the country scored the least in the Freedom from Corruption IEF component (34 points) and the most – in the Fiscal Freedom IEF component (83.1). The quality of governance is low, although it has improved significantly in comparison to the 1996 data for the Federal Republic of Yugoslavia. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

61

Wskaźniki instytucjonalne rynku pracy

62

1995 r.

2007 r.

45%

18%

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy Zasiłek dla bezrobotnych w relacji do średniej płacy Zasiłek dla bezrobotnych -

12 mies. 12 mies. In maks. 2008-2013 czas wypłacania the labour law in Serbia guaranteed Wydatki jako odsetek freedom of formation of labour requitenaaALMP significant 0,1% lations. PKB Non-wage labour costs were rather high, just Odsetek prac. najemnych 20% as the do benefits for the- unemployed. Also the minimum należących związków zaw. wage was established at a high level – in 2005-2012

1995 -

2007 2.2

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

-

42.2%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

-

60%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

-

24

EXPENDITURES ON ALMP AS A % OF GDP

-

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

-

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

0.13%

it was on average 42% of the average payment. Serbia is characterized by high trade union density, although, as it is pointed out by the International Labour Organization, the quality of the social dialogue still differs from the standards of the EU-15 (despite some positive changes which have taken place in this area in recent years). Just as in other countries of the region, a considerable problem of the Serbian labour market is a significant level of employment in the shadow economy – in 2012 it accounted for 18% of the whole employment. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50

38%

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

2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The reforms of the banking sector in Serbia started only at the end of the 90s of the 20th c. The two-tier banking sector, established in June 1992, is composed of the central bank (NBS) and commercial banks (32). In the commercial banking sector, dominated by foreign investors (>75%), 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 dinar (RSD) currency, the introduction of a system of ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

deposit insurance (DIA) and the Capital Adequacy Ratio 30 3,5 at the level of 8%. The shape of the banking reforms 20 triangle (BRT) indicates even progress in the construc4,0 tion of the banking sector institutions in Serbia. The 10 4,5 surface area of the BRT indicates that there is a significant transition gap in relation to industrialized market 0 2010 1995 2000 economies. The delays are the2005 result of the wars in the IEF FREEDOM HOUSE countries of the former Yugoslavia. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has exceeded 50% and is relatively low. The banking sector in Serbia functions properly. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1992

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

SLOVAKIA

KEY FACTS (2012) POPULATION.......................... 5.4 MLN GDP PER CAPITA (PPP)....... $ 25 300

1989 GDP........................... $ 91.1 BLN INFLATION (CPI).................. 3.7%

STATE INSTITUTIONS In 1989, when the so-called velvet revolution overthrew the communist regime, Slovakia was part of Czechoslovakia. In 1990, the name of the country was changed into the Czech and Slovak Federal Republic (ČSFR) and systemic and economic changes started. As a result of the peaceful dissolution of the ČSFR in 1993, two independent countries emerged – the Slovak Republic and the Czech Republic, and in both of them governments continued the process of economic transformation. Slovakia is a member of the Council of Europe (1993), the WTO (1995), the OECD (2000), the NATO (2004), the EU (2004) and the eurozone (2009). Although in 1991 Slovakia was classified as a free country with respect to the level of political freedom (the FH Freedom Rating), in the years to come, the 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 2.1% UNEMPLOYMENT..........13.9% PUBLIC DEBT...... 52.1% OF GDP

situation changed for the worse. Since the beginning of the transition, the Slovak politics was dominated by Vladimír Mečiar and his People’s Party - Movement for a Democratic Slovakia. The authoritarian ambitions of V. Mečiar led to a decrease in the level of political freedom. The situation improved after 1998, when the opposition won the election and Mikuláš Dzurinda became the prime minister. Since 2004 the FH Freedom Rating for the country has been at the highest level. Also the scope of economic freedom has increased considerably – the value of the IEF rose from 54.2 in 1998 to 66.4 in 2013. Similarly as in the majority of other transition countries, corruption remains a significant problem in Slovakia, mostly in the areas of public procurement and health care. The quality of governance in comparison to the times of the premiership of V. Mečiar has improved significantly. Nevertheless, the value of the governance index is still not high, with the worst scores in the fields of Control of Corruption and Rule of Law (in 2012, 0.07 and 0.46 respectively). VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

63

Wskaźniki instytucjonalne rynku pracy

64

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

The Slovakian labour market in 1995-2002 was Zasiłek dla bezrobotnych w 45% 18% restrictive labour law, characterized by a moderately relacji do średniej płacy which partially liberalized in 2003 (especially Zasiłek dla was bezrobotnych 12 mies. 12 mies. maks. respect czas wypłacania with to temporary contracts and collective Wydatki na ALMP jako odsetek 2008, however, the freedom of fordismissals). Since 0,1% PKB mation of labour relations has been restricted again Odsetek prac. najemnych 20% należących związkówof zaw. and thedoIndex Labour Market Flexibility decreased to 1995 2.17

2007 1.74

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

40.3%

35.5%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

24.6%

20%

12.

6.

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS) EXPENDITURES ON ALMP AS A % OF GDP

0.76%

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

56.1%

0.22% 18.8%

Tab. 1. Labour market institutional indicators Source: Eurostat, Lehmann and Muravyev [2012], OECD, Visser [2013]

one of the lowest among all the transition countries. In 1995-2012 non-wage labour costs were systematically reduced and since 2004 they have not exceeded 40% of the total labour costs. The total expenditure on the labour market policy is on a level similar to other new EU member states – in 2011 it was less than 1% of the GDP. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50 2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The reforms of the Slovak banking sector started as early as in the times of Czechoslovakia. The two-tier banking sector, established in January 1990, is composed of the central bank (NBS) and commercial banks (22). In the commercial banking sector, extremely dominated by foreign investors (>95%), the most common model is that of a universal bank. The banking reforms brought the full liberalization of interest rates, the introduction of a system of deposit insurance ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

(DPF) and the Capital Adequacy Ratio at the level of 8%. 30 3,5 On January 1, 2009, euro replaced koruna (SKK). The 20 shape of the banking reforms triangle (BRT) indicates 4,0 even progress in the construction of the banking sec10 4,5 tor institutions in Slovakia. The surface area of the BRT indicates that there is a minor transition gap in rela0 2010 2005 2000 tion to1995 industrialized market economies. The scope of IEF FREEDOM HOUSE bank intermediation, measured by the domestic credit to private sector in per cent of GDP, does not exceed 50% and is relatively low. The banking sector in Slovakia is relatively small as for a country belonging to the eurozone. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1990

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

SLOVENIA

KEY FACTS (2012) POPULATION.......................... 2.1 MLN GDP PER CAPITA (PPP)....... $ 27 475

1989 GDP........................... $ 45.3 BLN INFLATION (CPI).................. 2.6%

STATE INSTITUTIONS Slovenia separated from Yugoslavia in 1991. The systemic transition of the country started even before the separation – in 1990, when Slovenia was still the Slovenian Republic within Yugoslavia. In 1992, a programme of economic reforms was introduced; the reforms concerned macroeconomic stabilisation, privatisation and deregulation of the economy. Slovenia was the only one of the former Yugoslavian republics which was not affected by the military conflict that followed the dissolution of Yugoslavia. Slovenia is a member of the WTO (1995), the NATO (2004), the EU (2004), the eurozone (2007) and the OECD (2010). As the first of all transition countries, Slovenia was classified by the World Bank as a high income country (in 1997). It was also the first transition country to join the eurozone. Since the beginning of its independence, Slovenia has 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH..............................................-1.1% UNEMPLOYMENT........... 8.9% PUBLIC DEBT........ 52.8% OF GDP

been regarded as a free country, according to the FH Freedom Rating. Elections are free and democratic. The country is politically and economically stable. Corruption is an issue, but not to such extent as in other Central and Eastern European countries. The Index of Economic Freedom classifies Slovenia as “moderately free” (2013). It was regarded as such as early as in 1997 and since then the IEF for the country has remained stable most of the time. Sometimes, however, the value of the IEF has dropped so much that Slovenia has been reclassified as “mostly unfree”. As a result of the financial crisis 2007-2009, the share of government spending increased and reached 51% of the GDP in 2013. The lowest value of the Government Spending index was recorded in 2013 (22.6). The quality of governance in Slovenia is traditionally high, when compared to other transition countries. Although the situation seems stable, there are some reasons to worry, e.g. a decrease in the quality of governance, mostly in such areas as Regulatory Quality and Control of Corruption. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

65

Wskaźniki instytucjonalne rynku pracy

66

1995 r.

2007 r.

45%

18%

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy Zasiłek dla bezrobotnych w relacji do średniej płacy Zasiłek dla bezrobotnych -

12 mies. Since thewypłacania beginning12 mies. of the 90s of the 20th century, maks. czas Wydatki na ALMP jakohad odsetek Slovenia has restrictive labour market regulations, 0,1% PKB especially with respect to permanent contracts. In 2012, Odsetek prac. najemnych 20% the Index of Labour należących do związków zaw. Market Flexibility in Slovenia was at the lowest level among all the transition countries. As

far as the Index of Labour Freedom is concerned, the country ranked in the penultimate position (second only to Turkmenistan). What is more, in 2010 the country significantly increased the minimum wage (by as much as 23%), which made it one of the highest in the EU (in relation to the average payment). Trade union density is also relatively high (25% in 2011). The system of benefits for the unemployed is rather generous and expenditures on the passive labour market policy were in 2011 the highest among all the new EU member states.

1995 4.1

2007 2.57

100

6.2

90

5.8

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

40.9%

40.9%

80

5.4

70

5.0

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

45%

39%

60

4.6

50

4.2

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

24

24

40

3.8

30

3.4

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

EXPENDITURES ON ALMP AS A % OF GDP

0.64%

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

47.8%

0.2%

3.0

20

70

29%

Tab. 1. Labour market institutional indicators Source: Eurostat, Lehmann and Muravyev [2012], OECD, Visser [2013]

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50 2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The two-tier banking sector of Slovenia, established in June 1991, is composed of the central bank (BS) and commercial banks (25). In the commercial banking sector, dominated by domestic investors (>70%), mostly private, the most common model is that of a universal bank. The banking reforms brought the full liberalization of interest rates, the introduction of a system of ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

deposit insurance (BS) and the Capital Adequacy Ratio 30 3,5 at the level of 11%. On January 1, 2007, the Slovenian 20 currency tolar (SIT) was replaced by euro. The shape4,0 of the banking reforms triangle (BRT) indicates even pro10 4,5 gress in the construction of the banking sector institutions in Slovenia. The surface area of the BRT indicates 0 2010 1995 2005 2000 that there is a moderate transition gap in relation to IEF FREEDOM HOUSE industrialized market economies. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has reached the level of 95% and is adequate for the level of development of the country. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

TAJIKISTAN

KEY FACTS (2012) POPULATION.......................... 8.0 MLN GDP PER CAPITA (PPP)......... $ 2 247

1989 GDP.............................. $ 7.6 BLN INFLATION (CPI).................. 5.8%

STATE INSTITUTIONS Tajikistan declared independence in 1991 and in the same year Rahmon Nabiyev – the former leader of the communist party – was elected president. This election did not meet democratic standards. The lack of agreement between the ruling Communist Party and the pro-west and Muslim opposition lead to a civil war, which started in 1992. In the same year, President R. Nabiyev was forced to resign and his position was taken by Emomalii Rahmon, who is still the incumbent president of the country. In 1997, an agreement with the opposition was signed, which ended the civil war. Tajikistan is a member of the Commonwealth of Independent States (1991), the Eurasian Economic Community (2000) and the WTO (2013). The FH Freedom Index classifies Tajikistan as “not free”. Human rights are not respected, the activity of the opposition and the freedom of the press are restricted. 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 6.6% UNEMPLOYMENT..........11.5% PUBLIC DEBT...... 32.3% OF GDP

Under the constitutional referendum of 2003 President Rahmon may stay in his position for another two seven-year long terms. The first of the terms started in 2006, after the president’s victorious election. There is, then, no hope for an imminent democratization of the country. Corruption is everywhere. Politics is dominated by regional clans and the president and his family are accused of appropriation of the state’s property. The scope of economic freedom is little, although in 2004 Tajikistan moved from the IEF category of “unfree” to “mostly unfree”. In 2013, the values of the IEF components of Freedom from Corruption and Property Rights were 19.4 and 20 respectively. The quality of governance is at an extremely low level. In comparison to 1996, when there was still a civil war, the quality of governance increased, but in the last years no clear tendency for improvement was visible. Although President Rahmon exercises authoritarian power, the threat of destabilisation of the country is regarded as high (the value of Political Stability and Absence of Violence/Terrorism equalled 1.16 in 2012). VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

67

Wskaźniki instytucjonalne rynku pracy

68

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

With respect to temporary contracts, the labour law in Zasiłek dla bezrobotnych w 45% was 18% Tajikistan in 1992-2002 very restrictive. Although relacji do średniej płacy itZasiłek was liberalized dla bezrobotnych - in 2003, the value of the Labour 12 mies. 12 mies. maks. czas wypłacania Freedom Index in 2004-2013 was one of the lowest Wydatki na ALMP among all jako theodsetek transition countries. In practice, how0,1% PKB ever, the labour law in Tajikistan is often not respected Odsetek prac. najemnych 20% należących do związków zaw. and labour relations are formed freely. Tajikistan has 1995 1.98

2007 2.34

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

-

29.6%

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

-

63%

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

a high employment rate (in 1998-2012 it reached the average value of 59%), but most of the employed work in the agricultural sector. The unemployment rate in 2009 was estimated at 11.5%. There is also significant economic emigration: it is estimated that about 16% of people in the production age work currently outside of Tajikistan. 100 90 80 70 60 50 40 30 20

70

2005

2010

INDEX OF LABOUR FREEDOM

60 Fig. 3. Index of Labour Freedom Source: Heritage Foundation [2014] 50

Tab. 1. Labour market institutional indicators Source: Lehmann and Muravyev [2012], Muravyev [2010]

ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 2.0

2,0

3,0

The reforms of the banking sector in Tajikistan started as early as in the second half of the 80s of the 20th c. The present two-tier banking sector, established in 1991, is composed of the central bank (NBT) and commercial banks (13). 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 floating exchange rate of the samoni (TJS) curren-

1.0

1,5

2,5

40

INSTITUTIONS OF BANKING SYSTEM

1,0

3.0

cy, 30 the introduction of a system of deposit insurance (IDIF) and the Capital Adequacy Ratio at the level 3,5 of 20 12%. The shape of the banking reforms triangle (BRT) 4,0 indicates extremely uneven progress in the construc10 4,5 tion of the banking sector institutions in Tajikistan. The surface area of the BRT indicates that there is 0 2010 1995 2000 a significant transition gap in 2005 relation to industrialized IEF FREEDOM HOUSE market economies. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, remains at an extremely low level (under 20%). The banking sector in Tajikistan does not support the economic growth of the country. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

TURKMENISTAN

KEY FACTS (2012) POPULATION.......................... 5.2 MLN GDP PER CAPITA (PPP)....... $ 10 583

1989 GDP........................... $ 35.2 BLN INFLATION (CPI).................. 5.3%

STATE INSTITUTIONS Turkmenistan declared independence in 1991. The economic changes started in 1992, but the government was still in the hands of the communists. In 1992 Saparmurat Niyazov was elected president and became a dictator, as he performed at the same time the functions of the leader of the parliament, the prime minister and the president. In 1999, the parliament decided that he can hold the positions for life. There was a cult of personality. S. Niyazov remained in his position until his death in 2006. His successor, elected in elections of 2007, was Gurbanguly Berdimuhamedow, who continues the policy of his predecessor. Turkmenistan is an associated member of the CIS (1991). Turkmenistan is regarded as a country which has not undergone systemic transition. According to the FH Freedom Rating, since the beginning of its independence 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH..............................................11.1% UNEMPLOYMENT.........11.3% PUBLIC DEBT.......18.1% OF GDP

Turkmenistan has not been a free country. So far, no elections have been held in a free and democratic way. In the parliamentary elections, the candidates on election lists are selected by the government. Both parliamentary and presidential elections are not monitored by any foreign observers. The government is authoritarian. The president controls all sectors of power, including the economy and the media. With respect to economic freedom, the IEF classifies the country as “unfree”. The value of the IEF for 2013 equalled 0, with the Property Rights component at the level of 5, Financial Freedom – 10, and Freedom from Corruption – 13.4. The government leads the country towards isolationism, although some influx of foreign investment into the energy sector from Russia, China and Iran is allowed. The model of the country’s economy is far from the market economy model and closer to central control. The quality of governance is low. The country’s best score in the field of governance is the value of the Political Stability and Absence of Violence index, which equalled 0.35 in 2012. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

69

Wskaźniki instytucjonalne rynku pracy

70

1995 r.

2007 r.

45%

18%

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy Zasiłek dla bezrobotnych w relacji do średniej płacy Zasiłek dla bezrobotnych -

12 mies. 12 mies. In maks. 1992-2013 czas wypłacania the labour law in Turkmenistan was Wydatki na ALMP jako odsetek characterized by very restrictive regulations con0,1% cerningPKB the conclusion and dissolution of employOdsetek prac. najemnych 20% ment contracts należących do związków zaw.(this was not changed even when the new labour code entered into force in 2009). As

1995 2.55

2007 2.55

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)

-

3

EXPENDITURES ON ALMP AS A % OF GDP

-

-

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

-

-

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

a result, the value of the Labour Freedom Index is estimated at the lowest level among all the transition countries – and it has been so since the first publishing of the index for this country. It is difficult to estimate to which extent the labour law in Turkmenistan is respected. Neither the values of the Index of Labour Market Flexibility, nor Doing Business reports of the World Bank are published for this country. The Heritage Foundation estimates that in 2013 the unemployment rate in Turkmenistan could reach as much as 60%. 100 90 80 70 60 50 40 30 20

70

2005

2010

INDEX OF LABOUR FREEDOM

60 Fig. 3. Index of Labour Freedom Source: Heritage Foundation [2014] 50

Tab. 1. Labour market institutional indicators Source: Lehmann and Muravyev [2012], Muravyev [2010]

ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 2.0

2,0

3,0

The two-tier banking sector of Turkmenistan, established in November 1993, is composed of the central bank (CBT) and commercial banks (11). In the commercial banking sector, dominated by the state (>95%), the most common model is that of a universal bank. The banking reforms brought legal restrictions on the liberalization of interest rates, the fixed exchange

1.0

1,5

2,5

40

INSTITUTIONS OF BANKING SYSTEM

1,0

3.0

rate 30 of the manat currency (TMT), no system of de3,5 posit insurance and the Capital Adequacy Ratio at the 20 level of 10%. Both the shape and the surface area 4,0 of the banking reforms triangle (BRT) indicate the lack 10 4,5 of progress in the construction of the banking sector institutions in Turkmenistan. No institutions typical 0 2010 1995 2005 2000 of industrialised market economies developed in this IEF FREEDOM HOUSE country. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, is practically non-existent. The banking sector in Turkmenistan does not meet the needs of a market economy. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

UKRAINE

KEY FACTS (2012) POPULATION........................ 45.6 MLN GDP PER CAPITA (PPP)......... $ 7 421

1989 GDP......................... $ 176.3 BLN INFLATION (CPI).................. 0.6%

STATE INSTITUTIONS Ukraine proclaimed independence in 1991. Its first president became Leonid Kravchuk. The systemic transition started in 1992 and two years later a programme of economic stabilization started to be introduced. Ukraine’s economic results at that time were very bad – the transition recession lasted as long as 10 years. In 2004, the so-called Orange Revolution took place in Ukraine. It involved large social protests against the rigging of presidential elections. The Constitutional Court decided to repeat the election, which was finally won by the leader of the opposition Viktor Yushchenko. Later conflicts between politicians from parties taking part in the Orange Revolution led to political crises and an early election. In 2010, Viktor Yanukovych – a politician supported by the oligarchs – was elected president. In 1998, the Partnership and Cooperation Agreement between Ukraine and the EU came into force and ten years later negotiations 80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH..............................................-0.9% UNEMPLOYMENT.............7.7% PUBLIC DEBT....... 37.4% OF GDP

on an association agreement started. The agreement was to be signed on 28-29 November 2013, but the Ukrainian president did not do that. This led to large protests in Kiev. A bloody attempt to disperse the demonstrators failed. As a result of the events, in February 2014, the Ukrainian parliament decided to remove President V. Yanukovych from his position and call an early election. The political situation in Ukraine is very instable, as Russia became a party to the conflict. Ukraine is a member of the Council of Europe (1995) and the WTO (2008), it takes part in the activities of the Commonwealth of Independent States (1991) and has an observer status in the Eurasian Economic Community (2002). With respect to political freedom, the FH Freedom Rating classifies Ukraine as “partly free”. The country’s score in the rating has deteriorated since 2010. The ruling are accused of corruption, money laundering and taking over privatized state-owned enterprises on privileged terms. The level of economic freedom is also low – the IEF classifies the country as “unfree”. Also the quality of governance is very low. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

71

Wskaźniki instytucjonalne rynku pracy

72

1995 r.

2007 r.

45%

18%

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy Zasiłek dla bezrobotnych w relacji do średniej płacy Zasiłek dla bezrobotnych -

12 mies. 12 mies. In maks. 1992-2009 czas wypłacania Ukraine had restrictive regulations Wydatki na ALMP jako odsetek contracts and no regulations with concerning regular 0,1% respectPKB to collective redundancies. As a result, the Odsetek prac. najemnych 20% LabourdoFreedom należących związków zaw.Index in 2004-2013 was estimated at almost the lowest level among all transition

1995 2.11

2007 2.38

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

-

39.2%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

14%

21.3%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

-

12

EXPENDITURES ON ALMP AS A % OF GDP

-

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

100%

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

0.19%

countries. At the same time, Ukraine had a high score in the Index of Labour Market Flexibility, which is confirmed by the World Bank’s observation that the labour law in Ukraine is respected only to a limited extent. Ukraine has significant trade union density. However, as it is indicated by the International Labour Organization, the quality of social dialogue – despite positive changes which have taken place in this area in the last decade – still needs improvement. The average level of unemployment in 1995-2012 was low and equalled 9%. 100

6.2

90

5.8

80

5.4

70

5.0

60

4.6

50

4.2

40

3.8

30

3.4 3.0

20

70

2005

2010

1,0 INDEX OF LABOUR FREEDOM INDEX OF LABOUR MARKET FLEXIBILITY (RIGHT AXIS)1,5 60 (LEFT AXIS) Fig. 3. Index of Labour Freedom and Index of Labour Market Flexibility 2,0 Source: Heritage Foundation [2014], World Economic Forum [2013] 50

53%

Tab. 1. Labour market institutional indicators Source: Lehmann and Muravyev [2012], Muravyev [2010]

2,5

40

INSTITUTIONS OF BANKING SYSTEM

3,0

The two-tier banking sector of Ukraine, established in October 1991, is composed of the central bank (NBU) and commercial banks (186). The commercial banking sector, dominated by the model of a universal bank, has been divided “fifty-fifty” between the domestic and foreign investors. The banking reforms brought the full liberalization of interest rates, the fixed float ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 1.0

2.0

3.0

of 30 the hryvnia currency (UAH), the introduction of 3,5 a system of deposit insurance (HDIF) and the Capital 20 Adequacy Ratio at the level of 10%. The shape of the 4,0 banking reforms triangle (BRT) indicates uneven pro10 4,5 gress in the construction of the banking sector institutions in Ukraine. The surface area of the BRT indicates 0 2010 1995 2005 2000 that there is a moderate transition gap in relation to IEF FREEDOM HOUSE industrialized market economies. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has exceeded 45% and is relatively low. The banking sector in Ukraine does not support the country’s economic growth. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

UZBEKISTAN

KEY FACTS (2012) POPULATION........................ 29.8 MLN GDP PER CAPITA (PPP)........ $ 3 591

1989 GDP........................... $ 51.1 BLN INFLATION (CPI)...............12.1%

STATE INSTITUTIONS Uzbekistan declared independence in 1991. The first president of the country was Islam Karimov – the former First Secretary of the Communist Party of the Uzbek Socialist Republic. He was first elected in 1991 and is still holding the position. When he was first elected, the opposition accused the government of rigging the election. The systemic transition started in 1992 and two years later an economic stabilization programme was introduced. In 1994 and January 1995, the first election to the parliament was held but only pro-government parties were allowed to take part in it. The anti-government protests which took place in May 2005 in the Fergana Valley were bloodily suppressed by the authorities. In 2007, I. Karimov was elected for another, seven-year long presidential term, against the constitution, which limits the number of terms in this position to two. Uzbekistan is a member of the Com80

1.0

70

2.0

60

1990

1991

1993

1992

5-YEAR AVERAGE GDP GROWTH................................................ 8.4% UNEMPLOYMENT...........11.3% PUBLIC DEBT......... 8.6% OF GDP

monwealth of Independent States (1991) and has been negotiating its way to the WTO (since 1994). Just as in the case of Belarus and Turkmenistan, Uzbekistan is regarded as a country which has not undergone systemic transition. According to the FH Freedom Rating, Uzbekistan is regarded as “not free”. The government is authoritarian in nature and civil liberties are restricted. Parliamentary and presidential elections do not meet international standards. The political opposition is persecuted – there are only 4 formally registered parties and they are all progovernment. Corruption is everywhere. Also with respect to economic freedom, Uzbekistan is classified as “unfree”. Property rights are not respected and the execution of contracts is not enforced. In 2013, the lowest scores of the Index of Economic Freedom the country received in the following components: Investment Freedom (0), Financial Freedom (10), Freedom from Corruption (13.4) and Property Rights (15). The quality of governance is at a very low level and there are no prospects for improvement. VOICE AND ACCOUNTABILITY

REGULATORY QUALITY

POLITCAL STABILITY NO VIOLENCE

CONTROL OF CORRUPTION

3.0

50

4.0

40

5.0

30

1.5 0.5 -0.5 -1.5

6.0

20

7.0

10 0 1990 1995 2000 INDEX OF ECONOMIC FREEDOM (LEFT AXIS)

2005

2010 FREEDOM RATING (RIGHT AXIS)

Fig. 1. Index of Economic Freedom and Freedom Rating Source: Heritage Foundation [2014], Freedom House [2014]

GOVERNMENT EFFECTIVENESS

RULE OF LAW 1996

Fig. 2. Governance Source: WGI [2014]

2004

2012

73

Wskaźniki instytucjonalne rynku pracy

74

1995 r.

2007 r.

INSTITUTIONS OF2,1 2,6 LABOUR Udział podatków i składekMARKET na 33,4% Indeks prawnej ochrony pracowników (EPL)

ubez. społ. w kosztach pracy

The labour code of Uzbekistan (adopted in 1995) Zasiłek dla bezrobotnych w 45% formation 18% enables relatively free of labour relations. relacji do średniej płacy However, there - are restrictions concerning the apZasiłek dla bezrobotnych 12 mies. 12 mies. maks. czas wypłacania plication of temporary contracts and the period of Wydatki na ALMP jako odsetek notice is independent seniority and equals two - of 0,1% PKB months. There is a minimum wage but established Odsetek prac. najemnych 20% należących do związków at a low level.zaw. In 1992-2012 the employment rate 1995 2.6

2007 2.33

SHARE OF TAXES AND SOCIAL SECURITY CONTRIBUTIONS IN LABOUR COSTS

-

38%

AVERAGE UNEMP. BENEFIT AS A % OF THE AVERAGE WAGE

-

36%

MAXIMUM DURATION OF UNEMP. BENEFITS (IN MONTHS)

-

6

EXPENDITURES ON ALMP AS A % OF GDP

-

-

TRADE UNION MEMBERS AS A % OF THE EMPLOYED

-

-

EMPLOYMENT PROTECTION LEGISLATION INDEX (EPL)

hardly changed, remaining largely at the average level of 53% (42% for women). Just as in other countries of Central Asia, the scale of economic emigration is quite significant, especially to Russia. It is estimated that the value of remittances sent to Uzbekistan was the largest among all the immigrant groups working on the Russian market. 100 90 80 70 60 50 40 30 20

70

2005

2010

INDEX OF LABOUR FREEDOM

60 Fig. 3. Index of Labour Freedom Source: Heritage Foundation [2014] 50

Tab. 1. Labour market institutional indicators Source: Lehmann and Muravyev [2012], Muravyev [2010]

ASSET SHARE OF PRIVATE BANKS

BANKING REFORM AND INTEREST RATE LIBERALISATION 2.0

2,0

3,0

The two-tier banking sector, established in 1991, is composed of the central bank (CBRU) and commercial banks (29). In the commercial banking sector, dominated by the state (>65%), the most common model is that of a universal bank. The banking reforms brought legal restrictions on the liberalization of interest rates, the crawling peg of the som currency (UZS), the in-

1.0

1,5

2,5

40

INSTITUTIONS OF BANKING SYSTEM

1,0

3.0

troduction of a system of deposit insurance (DGF) 30 3,5 and the Capital Adequacy Ratio at the level of 1%. 20 Both the shape and the surface area of the banking 4,0 reforms triangle (BRT) indicate the lack of progress in 10 the construction of the banking sector institutions4,5 in Uzbekistan. In relation to industrialised market econo0 2010 2005 mies, 1995 the country2000 exhibits a very significant transition IEF FREEDOM HOUSE gap. The scope of bank intermediation, measured by the domestic credit to private sector in per cent of GDP, has dropped below 20% and is relatively low. The banking sector in Uzbekistan does not support the economic growth of the country. 1.0

100

0.9

90

0.8

80

0.7

70

0.6

60

0.5

50

0.4

40

0.3

30

0.2

20

0.1

10

0.0 ENTERPRISE RESTRUCTURING

1991

Fig. 4. Banking reforms triangle (BRT) Source: EBRD [2012]

2000

2010

1990 1995 SURFACE AREA OF BRT (LEFT AXIS)

2000 2005 2010 DOMESTIC CREDIT TO PRIVATE SECTOR (IN % OF GDP; RIGHT AXIS)

Fig. 5. Progress of banking reforms Source: own calculations and The World Bank [2014]

CONCLUSIONS When at the beginning of the 90s of the 20th c. the transition process began, the countries of Central and Eastern Europe were quite a homogenous group, at least with respect to their institutional environment. This homogeneity was the result of the lack of political and economic freedom, and the low quality of governance. The economy was dominated by the state ownership of the means of production and the non-market, planned allocation of resources. On the labour market one could observe the imbalance of demand and ineffective use of workforce. In the banking sector, there was a monopoly dominated by state ownership. However, with time, transition countries started to differ with respect to institutions and economic results. These were influenced by the pace of democratization, the adopted strategies of economic transition (concerning macroeconomic liberalization and stabilization, as well as ownership transformation), initial conditions (especially with respect to the structure of the economy), the extent of transition recession, the size of the country, etc.i Apart from that, some of them, i.e. countries which emerged after the dissolution of Yugoslavia and the USSR, were additionally affected by political instability and ethnic conflicts. Another factor important for the efficiency of political and economic reforms was a country’s willingness to join the EU, the OECD or the NATO, as membership in these organizations is subject to compliance with standards of democracy and civil liberties. After more than two decades, the group of transition countries is quite heterogeneous with respect to both politics and economy. It includes both fully democratic and authoritarian countries, countries of both high and low income per capita. In some countries, the transition process may be regarded as completed – they have turned into democratic market economies, which was confirmed by their accession to the EU (at the end of 2013 this applied to as many as 11 of these countries) or the OECD (6 countries in 2013). The pioneers of changes with respect to political and economic reforms were the countries of Central Europe and Baltics (CEB) and Slovenia. In 2012, 8 countries regarded as fully democratic (Croatia, the Czech Republic, Estonia, Latvia, Lithuania, Poland, Slovakia, Slovenia) were classified as countries of high income per capita ii (according to the World Bank’s methodology, these are countries with the income exceeding 12 615 USD). Still, not all the transition countries have smoothly undergone their transition into a democratic market economy. Some are still in the process, encountering serious political and economic problems. In 2012, two countries – Kyrgyzstan and Tajikistan – were still classified as countries of low income per capita (below 1 035 USD). At the same time, Belarus, Turkmenistan and Uzbekistan are regarded as countries which have not introduced reforms to become democratic market economy. They are still dictatorships and their economic systems are far from market economies. The analysis carried out in this report, as well as in other studies conducted by its Authors as part of a research project of the National Science Centre, NCN (referred to in the footnotes), brings conclusions and recommendations concerning institutions conducive to the economic efficiency in the transition countries. Having analysed and compared state institutions in the transition countries, the Authors of the report drew the following conclusions: 1. As far as the institution of state is concerned, there has been an institutional divergence among the transition countriesiii. We can distinguish between two main groups: - the countries of Central Europe and Baltics, as well as the countries of South-East Europe, which offer significant political and economic freedom and good governance. Among them, the most successful are those which joined the EU. In the case of the other countries in this group, the situation is a bit worse. With respect to

77

78

political and economic freedom, we can observe the progress of institutional convergence between the EU-15 countries and the CEB and SEE countries. With respect to governance and the execution of property rights, the distance to the EU-15 countries is still significantiv. Only in Estonia and Slovenia the rule of law and control of corruption are at a high level. - the countries belonging to the Commonwealth of Independent States (CIS), in which the results of the transition of state institutions have been very diverse. In countries such as Belarus, Turkmenistan and Uzbekistan, the transition has come to a halt. They are dictatorships, offering little economic freedom and poor governance. The situation is lightly better in Armenia, Azerbaijan, Kazakhstan, Kirgizstan, Russia and Tajikistan. The greatest scope of political freedom is offered by Georgia, Moldova and Ukraine, but only in the first two of them, political freedom is combined with a significant scope of economic freedom and a high – in comparison to other countries in this group – quality of governance. 2. In the transition countries, the changes in the scope of political and economic freedom have usually taken place simultaneously. The countries with a significant scope of political freedom have also significant scope of economic freedom and vice versa – in countries where the political system is repressive, the level of economic freedom is also low. Countries which made the greatest progress with respect to political freedom, have also significantly increased their economic freedom and governance. There are no clear examples of the so-called “benevolent dictatorships”, i.e. countries deprived of political freedom but offering economic freedom, rule of law and good governancev. 3. In the transition countries, democracy and economic growth are not competitive goals of development. The countries which had at their disposal the best state institutions achieved in the analysed period the greatest pace of economic growth. The relation between state institutions and the economic growth was not only positive but also mutualvi. 4. Countries which have not developed efficient state institutions are more prone to political and social destabilisation and a slow pace of economic growth. The persisting significant distance between the developed countries and the transition countries (mainly from the CIS group) with respect to state institutions may indicate that these institutions may function as barriers to economic development. Having analysed and compared the labour market institutions in the transition countries, the Authors drew the following conclusions: 1 The labour market institutions in the transition countries were developing in 1990-2013 in a very diverse way, as a consequence ofvii: - the heterogeneous pace of transition in particular countries; - the structural differences between particular economies at the starting point of the transition; - frequent changes of economic policies concerning the labour market. It must, however, be mentioned that the fact that many governments implemented interim labour market policies is not only a manifestation of low political stability of the transition countries, but also a result of the lack of clear-cut recommendations concerning the labour market policy, which could be successfully implemented in these countries. 2. Despite significant differences, some general tendencies common for the transition countries can be found. Those countries which at the early stage of the transition decided to significantly increase the flexibility of their labour markets, recorded a quicker growth of labour productivity and real wagesviii. In spite of the considerable increase of the unemployment in the short run – in the long run, the changes resulted in easier access to the global economic system and enabled the integration with the EU. At the same time, those countries which chose a slower pace of reforms, recorded a slower increase in labour productivity and a slower pace of economic development. As a result, the level of expenses on the labour market policy has been lower, just as real wages. A common problem is also a lower level of respect for the labour law, as well as significant informal employment. 3. The transition countries have been a kind of laboratory in which one can observe interdependencies between the changes in the labour market institutions and the changes in other institutions of the social and economic life. The findings includeix: - there is a correlation between the progress of the privatisation process and the increase in expenses on the labour market policy and the decrease in the trade union density; - those transition countries which supported the development of free competition also often decided to strengthen the legal protection of employees; - the changes in the scope of political freedom had no effect on the changes of the labour market institutions. 4. In the case of the labour market institutions, it is still difficult to make clear-cut recommendations for the transition countries to follow. However, definitely one recommendation could be implemented in order to shape informal institutions of the labour market through raising the legal awareness of the society, improving the

administration of justice, limiting corruption and promoting social dialogue. The changes in these fields should contribute to both improving the real protection of employees on the labour market and increasing the efficiency of this market. Having analyzed and compared the institutions of the banking sector in the transition countries, the Authors drew the following conclusions: 1. In 1987-97, in all the transition countries a two-tier banking sector was established. This happened through commercialisation, i.e. the separation of commercial banking functions from the central bank. 2. All the transition countries, apart from three (Belarus, Turkmenistan and Uzbekistanx), achieved the full liberalisation of interest rates and market allocation of credit, and thus limited direct, planned crediting. 3. All the transition countries adopted the necessary banks’ solvency standards, banking supervisory framework and prudential regulations, with: - the crucial role in supervising credit institutions being played by the Capital Adequacy Ratio, whose value – adopted on the basis of statistical research concerning capital requirements – should be minimum 8%; - banking supervision authorities in particular transition countries adopting the Capital Adequacy Ratio ranging from 8 to 12%xi, following the standards of the Bank for International Settlements, BIS; - the introduction of a system of deposit insurance in most of the transition countries, with the exception of Georgia and Turkmenistan; the administration of the guarantee fund was usually given to a specialised state entity, less frequently, it remained one of the competences of the central bank (e.g. in Slovenia). 4. As a result of the processes of privatisation and consolidation, the ownership structure of banks is dominated by private entities, mostly institutional foreign investorsxii. 5. In the majority of the transition countries, the competition between banks functions well and few episodes of use of market power do not concern banking sectors of the highest level of concentration of the banking services market and they are rather a manifestation of the market’s immaturityxiii. 6. The financial sectors of the transition countries are usually dominated by the banking sector, although the scope of credit intermediation is usually smaller than it would appear from the economic development of particular countries. As far as credit to private sector is concerned, the CIS countries of Central Asia are particularly far from the standard model for the economy at this level of development. 7. The greatest development with respect to the construction of the banking sector institutions was achieved by the CEB countries, which to a significant extent adjusted the sector’s rules to the standards and norms typical of industrialised market economies; the leaders in this group are the early reformers – the Czech Republic and Hungary. Most of the CIS countries are characterised by a gigantic transition gap with respect to the development of banking sectors conducive to market economy; this concerns mostly the countries in Central Asia (with the special case of Turkmenistan, which has not conducted any significant banking reforms, apart from the introduction of a two-tier banking sector), but also Belarus. In the latter, since the mid-90s of the 20th c., despite maintaining the facade of the competitive banking services market – there is practically no convergence of the banking law with international standards, and therefore, the set of provided banking services is incomplete. The SEE countries – although late to introduce banking reforms – have so far achieved the level of progress in this sector equal to the transition countries’ average. 8. In most of the transition countries, a significant progress has been made towards the adjustment of the banking sectors to the market economy conducive to economic growthxiv. At the same time, many negative phenomena have been fortunately avoided, including widespread bankruptcies of banks, although the costs of restructuring of credit portfolios severely affected by bad debts were considerable burdens for the budgets of these countries. 9. All the CEB and some SEE countries – as opposed to the CIS countries – have provided the conditions for the development of modern banking sectors. However, the CIS countries have at their disposal the models used in the CEB countries and through careful observation may avoid some of the mistakes made by the early reformers. The continuation of market-oriented banking reforms in these countries seems to be indispensable. The institutions of the state, the labour market and the banking sector in particular countries have been formed in a diverse way, due to a number of factors, including: different starting conditions with respect to the structure of the economy, the implemented strategies of the economic transition, the attracting force of the EU and its cultural proximity, as well as the lack of the tradition of statehood. On the way to democratic market economy, the greatest changes of state institutions, the labour market and the banking sector have taken place in the CEB countries and in Slovenia, which are all members of the EU. Research shows that formal institutions have a great significance for the social and economic development, as well as for political stability. But when designing and implementing those formal institutions, authorities should take into account also informal ones, such as culture, customs, respect for and trust in the concept of the state.

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All these phenomena have an impact on the efficiency of the national economy – its competitiveness and innovativenessxv. The reasons for failure to complete market-oriented reforms and for the political and economic destabilisation in many transition countries should be looked for in the position of these informal institutions, but also in the weakness of state power (understood here, after Francis Fukuyama, as the ability of the government to achieve its goalsxvi) and the lack of the rule of law and democracy. Democracy makes it possible to take advantage of the fundamental right to freedom in all the spheres of life and in many transition countries this right is unfortunately being restricted.

i See: Liberalne przesłanki polskiej transformacji gospodarczej [Liberal premises for the Polish economic transition], 2011, W. Jarmołowicz, K. Szarzec (eds.), PWE, Warszawa, chapter 5. ii GNI per capita acc. to the methodology of the Atlas World Bank. iii See also: Piątek D., 2014, Instytucje państwa jako determinanta wzrostu gospodarczego w krajach transformujących się [State institutions as determinant of economic growth in transition countries], unpublished typescript. iv Piątek D., 2013, Analiza instytucji państwa tworzących rynek w krajach transformujących się [Analysis of state institutions creating market in transition countries], paper presented at the 9th Congress of Polish Economists “Ekonomia dla przyszłości. Odkrywać naturę i przyczyny zjawisk gospodarczych” [“Economy for the future. Discovering the nature of economic phenomena], Warszawa, 28-29 November 2013. v Piątek D., Szarzec K., Pilc M., 2014, Analiza przyczynowości pomiędzy wolnością gospodarczą i demokracją a wzrostem gospodarczym – na przykładzie krajów transformujących się [Analysis of causality between economic freedom and democracy and economic growth – on example of transition countries], “Ekonomista”, issue 3. vi Piątek D., Szarzec K., Pilc M., 2013, Economic Freedom, Democracy and Economic Growth: a Causal Investigation in Transition Countries, “PostCommunist Economies”, no. 3, p. 283. vii Jarmołowicz W., Pilc M., 2013, Instytucje rynku pracy oraz uwarunkowania ich funkcjonowania w krajach transformujących się [Labour market institutions and conditions for their functioning in transition countries], “Przegląd Zachodniopomorski”, annals XXVIII (LVII), issue 3, vol. 2. viii Kuźmar S., Pilc M., 2014, The Role of Labour Market Institutions for the Labour Market Performance in Transition Countries, unpublished typescript. ix Pilc M., 2014, Determinants of the Labour Market Institutions in Post-Socialist Economies, unpublished typescript. x In the case of Belarus the liberalisation of interest rates is practically limited, whereas in the case of Turkmenistan and Uzbekistan – it is restricted by law. xi One exception is Moldova, where the Capital Adequacy Ratio is 17%. xii Apart from Belarus, Turkmenistan and Uzbekistan, where the state has maintained its dominant position. Moreover, the banking sectors of six countries – Azerbaijan, Kazakhstan, Moldova, Russia, Slovenia and Tajikistan – have been dominated by private domestic investors. xiii More: Baszyński A., 2014, Koncentracja i konkurencja w sektorach bankowych transformujących się krajów europejskich. Studium teoretycznoempiryczne [Concentration and competition in banking sectors of transition countries. Theoretical and empirical study], Wydawnictwo Uniwersytetu Ekonomicznego w Poznaniu [published by the Poznań University of Economics], Poznań, p. 233-241. xiv More: Baszyński A., 2013, Transformacja sektora bankowego w krajach Europy Środkowej, Wschodniej i Południowo-Wschodniej [Transformation of banking sector in countries of Central, Eastern and South-Eastern Europe], “Wiadomości Statystyczne”, no. 7, p. 95-96. xv See: Stępień B., 2012, Wpływ charakteru instytucji nieformalnych na innowacyjność i konkurencyjność podmiotów i gospodarki [Impact of informal institutions on innovativeness and competitiveness of economic agents and economy], in: Znaczenie innowacji dla konkurencyjności międzynarodowej gospodarki [Significance of innovativeness to competitiveness of international economy], E. Mińska-Struzik, T. Rynarzewski (eds.), Wydawnictwo Uniwersytetu Ekonomicznego w Poznaniu [published by the Poznań University of Economics], Poznań. xvi See: Fukuyama F., 2012, The Origins of Political Order: From Prehuman Times to the French Revolution, Farrar, Straus and Giroux, New York.

DEFINITIONS

Asset share of private banks

a percentage share of domestic and foreign private investors in the assets of commercial banks scaled in a way enabling the comparability with the ▶banking reforms index and the ▶ enterprises restructuring index. A zero share of private investors is marked as 1 and a one hundred percent share of private investors is marked as 4.33. Source: EBRD Structural change indicators (http://www.ebrd.com/pages/research/economics/data/macro. shtml#ti; DOA: 02.04.2012)

Banking reform and interest rate liberalisation

a synthetic indicator of progress in banking reform from a centrally planned economy to industrialized market economy published by the EBRD for years 1989-2010. The values of the index range from 1 to 4.33. Source: EBRD Transition indicators (http://www.ebrd.com/pages/research/economics/data/macro.shtml#ti; DOA: 02.04.2012). Banking reforms triangle

a diagram in the form of a radar chart used to illustrate the progress in banking reforms basing on three variables: ▶ banking reforms index ▶ enterprises restructuring index and ▶ asset share of private banks. Source: own work based on EBRD and World Bank data. Business Freedom Index

a component of the ▶ the Index of Economic Freedom, developed by the Heritage Foundation. It evaluates the efficiency of business regulations introduced by the government.

Control of Corruption

an index developed by the World Bank to describe ▶ governance. It assesses the degree to which public authorities use their power for the achievement of private benefits (this includes different forms of corruption), as well as the extent to which the state is “seized” by elites and groups of interest.

Domestic credit to private sector in per cent of GDP

an aggregate measure of banking development calculated as a ratio of domestic credit for the private sector to the gross domestic product, which enables the assessment of the level of involvement of financial intermediation in the financing of the economy at a given level of development. Source: World Development Indicators (http://data.worldbank.org/indicator/FS.AST.PRVT.GD.ZS/countries; DOA: 02.01.2014).

Employment Protection Legislation, EPL

an index developed by the OECD to measure the degree of restrictiveness of the labour law with respect to establishing and terminating labour relations. It is compiled as the average of three component indices calculated separately for regular contracts, temporary contracts and collective dismissals; it takes the values from 0 to 6, where 6 means the maximum level of legal protection of employees. Source: Lehmann H., Muravyev A., 2012, Labour Market Institutions and Labour Market Performance: What Can We Learn from Transition Countries?, “Economics of Transition”, vol. 20, iss. 2; Muravyev A., 2010, Evolution of Employment Protection Legislation in the USSR, CIS and Baltic States, 1985-2009, “IZA Discussion Paper”, no. 5365, Institute for the Study of Labour, Bonn; OECD, 2013, OECD. Stat Extracts (http://stats.oecd.org/; DOA: 01.04.2012).

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Enterprises restructuring

a synthetic indicator of progress in the reform of enterprises from a centrally planned economy to industrialized market economy published by the EBRD for years 1989-2010. The values of the index range from 1 to 4.33. Source: EBRD Transition indicators (http://www.ebrd.com/pages/research/economics/data/macro.shtml#ti; DOA: 02.04.2012).

Expenditures ON ALMP AS PERCENTAGE OF GDP

The government spending earmarked for the Active Labour Market Policy (ALMP), aimed at helping the unemployed return to work. The active policy is complementary to the passive one (PLMP – Passive Labour Market Policy), aimed at alleviating the negative effects of the unemployment, mostly through a system of unemployment benefits. Source: Eurostat, 2014, LMP expenditure by type of action - summary tables (http://epp.eurostat.ec.europa.eu; variable: lmp_expsumm; DOA 25.01.2014); Lehmann H., Muravyev A., 2012, Labour Market Institutions and Labour Market Performance: What Can We Learn from Transition Countries?, “Economics of Transition”, vol. 20, iss. 2.

Financial Freedom

a component of ▶ the Index of Economic Freedom, developed by the Heritage Foundation. It evaluates the efficiency of the banking system and the financial sector’s independence from the government’s control and interference.

Fiscal Freedom

component of ▶ the Index of Economic Freedom, developed by the Heritage Foundation. It measures the tax burden imposed by the central government and local governments; it assesses the level of direct and indirect taxes and the amount of tax revenue in relation to the level of the GDP.

Freedom from Corruption

a component of ▶ the Index of Economic Freedom, developed by the Heritage Foundation. It measures the size of corruption; its value is obtained mostly from the Corruption Perceptions Index published by Transparency International.

Freedom House Freedom Rating, FH

FH is calculated as the average of the indices of Civil Liberties and Political Rights. The Civil Liberties index includes the evaluation of 4 areas: the freedom of speech and religion, the freedom of association, the rule of law, personal freedom and individual rights. The Political Rights index includes 3 areas, i.e.: the election process, political pluralism and the operation of the government. The Freedom House Freedom Rating takes values from 1 to 7; the lower the value, the greater the freedom. Depending on the value of the index, a country may be classified as: free (from 1.0 to 2.5), partly free (from 3.0 do 5.0) or not free (5.5 to 7.0). The index is published by the Freedom House. Source: http://www.freedomhouse.org/report-types/freedom-world#.UxX6f4WSze4, [DOA: 1.03.2014]

Governance

according to the definition proposed by Kaufmann et al., it is: traditions and institutions by which authority is exercised in a country; they include: “the process by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them”. Basing on this definition, governance is analyzed in 6 areas, expressed in the form of indices: ▶ Voice and Accountability, ▶ Political Stability

and Absence of Violence, ▶ Government Effectiveness, ▶ Regulatory Quality, ▶ Rule of Law and Control of Corruption. The maximum value for any of these indices is 2.5 and the minimum -2.5. The higher the value the better governance in a given area. The indices are published by the World Bank. Source: Kaufmann D., Kraay A., Zoido-Lobatón P., 1999, Governance Matters, The World Bank, World Bank Institute Policy Research Working Paper no. 2196; the database of World Bank - Worldwide Government Indicators “Governance Matters”, http://info.worldbank.org/governance/wgi/index.aspx#home, [DOA: 1.03.2014]

Government Effectiveness

an index describing ▶ governance developed by the World Bank. It evaluates the quality of public and civil service, the extent to which they are independent from political pressure, as well as the quality of the developed policies and its implementation, and the credibility of the ruling in the implementation of these policies.

Government Spending

a component of ▶ the Index of Economic Freedom, developed by the Heritage Foundation. It assesses the level of all government spending (both equivalent and transfers).

Index of Economic Freedom (IEF) of the Heritage Foundation

a synthetic indicator assessing the scope of economic freedom in 10 areas constituted by the following indices: ▶ property rights, ▶ freedom from corruption, ▶ fiscal freedom, ▶ government spending, ▶ business freedom, ▶ labour freedom, ▶ monetary freedom, ▶ trade freedom, ▶ investment freedom, ▶ financial freedom. The Index of Economic Freedom and its particular components take values from 0 to 100, where 100 means the maximum scope of freedom. Depending on the value of the index, countries are categorized as: repressed (049.9), mostly unfree (50-59.9), moderately free (60-69.9), mostly free (70-79.9) and free (80-100). The index is published by the Heritage Foundation. In this report, the values of the Index of Economic Freedom are given for the year they concern and not the year of their publication. Source of the data: http://www.heritage.org/index/explore?view=by-region-country-year [DOA: 1.03.2014]

Index of Labour Market Flexibility

one of the components of the Global Competitiveness Index, Pillar 7A - Flexibility published by the World Economic Forum. The values of this index are obtained from surveys conducted in particular countries among managers of companies. Thus, it is a subjective measurement of labour market flexibility. It takes values from 1 to 7, where 7 means the maximum level of flexibility. This index has been published since 2006 and its values are calculated as a weighted average of observations from two consecutive years. Source: World Economic Forum (http://www.weforum.org/issues/competitiveness-0/gci2012-data-platform/; DOA: 12.12.2013).

Investment Freedom

a component of ▶ the Index of Economic Freedom, developed by the Heritage Foundation. It assesses the freedom of locating capital in a given country by both domestic and foreign owners.

Labour Freedom

a component of ▶ the Index of Economic Freedom, developed by the Heritage Foundation. It specifies the scope of economic freedom in the formation of work relations.

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Monetary Freedom

a component of ▶ the Index of Economic Freedom, developed by the Heritage Foundation. It assesses the stability of the level of inflation and price control.

Non-wage labour costs/ tax wedge

it is the amount of taxes and social security contributions expressed as the percentage of the total labour costs. This indicator was calculated for a single person earning 67% of the average wage. Źródła: Eurostat, 2014, Tax rate on low wage earners: Tax wedge on labour costs (http://epp.eurostat.ec.europa.eu; zmienna: earn_nt_taxwedge; DOA: 25/01/2014); Lehmann H., Muravyev A., 2012, Labour Market Institutions and Labour Market Performance: What Can We Learn from Transition Countries?, “Economics of Transition”, vol. 20, iss. 2.

Political Stability and Absence of Violence/Terrorism

an index describing ▶ governance, developed by the World Bank. It assesses the likelihood of destabilization of power and that the government will be overthrown in an unconstitutional way or by violence, including by politically motivated violence and terrorism.

Property Rights

a component of ▶ the Index of Economic Freedom, developed by the Heritage Foundation. It assesses the degree to which the state protects the property rights of individuals and the execution of economic contracts.

Regulatory Quality

an index developed by the World Bank to describe ▶ governance. It assesses the capability of the government to formulate and implement appropriate policies and regulations enabling and facilitating development of the private sector. Rule of Law

an index describing ▶ governance, developed by the World Bank. It assesses the extent to which economic entities have confidence in the rules prevailing in the society and to which they respect them themselves; this concerns in particular: the quality of the performance of contracts, property rights, the police and the courts, as well as the likelihood of crime and violence.

Trade Freedom

a component of ▶ the Index of Economic Freedom, developed by the Heritage Foundation. It measures the extent to which the state applies tariff and non-tariff barriers to international trade.

Trade union density

it is the percentage of employees who are members of trade unions. The values of this variable for some transition countries differ significantly from publication to publication. The values presented in this report come from: Lehmann H., Muravyev A., 2012, Labour Market Institutions and Labour Market Performance: What Can We Learn from Transition Countries?, “Economics of Transition”, vol. 20, iss. 2; Visser J., 2013, Database on Institutional Characteristics of Trade Unions, Wage Setting, State Intervention and Social Pacts in 34 countries between 1960 and 2007. Version 4, Amsterdam Institute for Advanced Labour Studies AIAS, University of Amsterdam (http://www.uva-aias.net/208; DOA: 13.12.2013).

Voice and Accountability

an index developed by the World Bank to describe ▶ governance. It includes the assessment of the involvement of the citizens of a given country in the election of the authorities and the assessment of the freedom of speech, association and the media.

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ABOUT THE AUTHORS Adam Baszyński

Doctor of Economic Sciences, senior lecturer in the Department of Macroeconomics and National Economy Research of the Poznań University of Economics. His scientific interests are focused on the processes of transformation of banking sectors in the transition countries. Contact: [email protected]

Dawid Piątek

Doctor of Economic Sciences, Assistant Professor (adiunkt) in the Department of Macroeconomics and National Economy Research of the Poznań University of Economics. His scientific interests are focused on macroeconomics and post-socialist economic transition. Contact: [email protected]

Michał Pilc

Doctor of Economic Sciences, works in the Department of Macroeconomics and Economic Research of the Poznań University of Economics. His scientific interests concentrate on the problems of the labour market, with particular focus on the role of institutions. Contact: [email protected]

Katarzyna Szarzec

Doctor of Economic Sciences, Assistant Professor (adiunkt) in the Department of Macroeconomics and National Economy Research of the Poznań University of Economics. Her scientific interests are related to macroeconomics, economic policy and the role of the state in economic development. Contact: [email protected]

ISBN 978-83-939612-1-4