Tag: EBRD
The Long Shadow of Transition: The State of Democracy in Eastern Europe
In many parts of Eastern Europe, the transition towards stronger political institutions and democratic deepening has been slow and uneven. Weak political checks and balances, corruption and authoritarianism have threatened democracy, economic and social development and adversely impacted peace and stability in Europe at large. This policy brief summarizes the insights from Development Day 2019, a full-day conference organized by SITE at the Stockholm School of Economics on November 12th. The presentations were centred around the current political and business climate in the Eastern European region, throwing light on new developments in the past few years, strides towards and away from democracy, and the challenges as well as possible policy solutions emanating from those.
The State of Democracy in the Region
From a regional perspective, Eastern Europe has seen mixed democratic success over the years with hybrid systems that combine some elements of democracy and autocracy. Based on the V-Dem liberal democracy index, ten transition countries that have joined the EU saw rapid early progress after transition. In comparison, the democratic development in twelve nations of the FSU still outside of the EU has been largely stagnant.
In recent years, however, democracy in some of those EU countries, such as Bulgaria, the Czech Republic, Hungary, Poland and Romania have been in decline. Poland, one of the region’s top performers in terms of GDP growth and life expectancy, has experienced a sharp decline in democracy since 2015. Backlashes have often occurred after elections in which corruption and economic mismanagement have led to the downfall of incumbent governments and a general distrust of the political system. Together with low voter turnout, this created fertile ground for more autocratic forces to gain power helped by demand for strong leadership.
An example from Ukraine illustrated the role of media, both traditional and social, for policy-making. In some countries of the region, traditional media is strictly state-controlled with obvious concerns for democracy. This is less the case in Ukraine, where also social media plays an important role in forming political opinions. The concern is that, as elsewhere, opinions that gain traction on social media may not be impartial or well informed, affecting public perception about policy-making. A recent case showing the popular reaction to an attack on the former governor of the Central Bank suggests that those implementing important reforms may not get due credit when biased and partial information dominates the political discourse on social media.
Another case is the South Caucasian region: Armenia, Georgia and Azerbaijan. The political situation there has been characterized as a “government by day, government by night” dichotomy, implying that the real political power largely lies outside the official political institutions. In Georgia, the situation can be described as a competition between autocracy and democracy, with a feudalistic system in which powerful groups replace one another across time. As a result, trust in political institutions is low, as well as citizens’ political participation.
In the case of Azerbaijan, there is an elected presidency, but in reality, power has been passed on hereditarily, becoming a de facto patrimonial system. Lastly, in Armenia, the new government possesses democratic credentials, but the tensions with neighbouring Azerbaijan and Turkey have given increasing power to the military and important economic powers. Overall, democratisation in these countries has been hindered by a trend for powerful politicians to form parties around themselves and to retain power after the end of their mandates. Also, the historical focus on nation-building in these countries has led to a marked exclusion of minorities and a conflict of national identities.
The last country case in this part of the conference focused on the current political situation in Russia and on the likely outcomes after 2024. The social framework in Russia appears constellated by fears – a fear of a world war, of regime tightening and mass repressions, and of lawlessness – all of them on the rise. Similarly, the economy is suffering, in particular from low business activity, somewhat offset by a boost in social payments. Nonetheless, it was argued that it is not economic concerns, but rather political frustration, that has recently led citizens to take to the street. Despite this, survey data shows that trust in Putin is still over 60%, and that most people would vote for him again. However, survey data also points out that the most likely determinant of this trust is the lack of another reference figure, and that citizens are not averse to the idea of political change in itself. Lastly, Putin will most likely retain some political power after 2024, transiting “from father to grandfather of the nation”.
Voices from the civil society in the region also emphasized the importance of a free media and an active civil society to prevent the backsliding of democracy. With examples from Georgia and Ukraine, it was argued that maintaining the independence of the judiciary, as well as the public prosecutor’s office, can go a long way in building credibility both among citizens and the international community. The European Union can leverage the high trust and hopeful attitudes it benefits from in the region to push crucial reforms more strongly. For example, more than 70% of Georgians would vote for joining the EU if a referendum was held on the topic and the European Union is widely regarded as Georgia’s most important foreign supporter.
Weak Institutions and Business Development
The quality of political and legal institutions strongly affects the business environment, in particular with regards to the protection of property rights, rule of law, regulation and corruption. Research from the European Bank for Reconstruction and Development (EBRD) highlights that the governance gap between Eastern Europe and Central Asia and most advanced economies is still large, even though progress in this area has actually been faster than for other emerging economies since the mid-‘90s. This is measured through enterprise surveys as well as individual surveys. In Albania, for instance, a perception of lower corruption was linked to a decrease in the intention to emigrate equivalent to earning 400$ more per month. Another point concerned the complexity of measuring the business environment and the benefits of firm-level surveys asking firms directly about their own actual experience of regular enforcement. For example, in countries such as Poland, Latvia and Romania the actual experience of business regulation measured via the EBRD’s Business Environment Enterprise Performance Survey, is far worse than one would expect from the World Bank’s well known Doing Business rating.
From the perspective of Swedish firms, trade between Sweden and the region has remained rather flat in the past years, as the complexity and risks of these markets especially discourage SMEs. Business Sweden explained that Swedish firms considering an expansion in these markets are concerned with issues of exchange rate stability, and the institutional-driven presence of unfair competition and of excessive bureaucracy. Moreover, inadequate infrastructure and the presence of bribery and corruption make everyday business operations risky and costly. It was generally emphasized that countries have to create a safe investment environment by reducing corruption, establishing a clear and well enacted regulatory environment, having dependable courts and strengthening domestic resource mobilization. Swedish aid can play a part, but there is a need to develop new ways of delivering aid to make it more effective.
An interesting example is Belarus, that has seen more economic and political stability than most neighbours, but at the same time a lack of both economic and political reforms towards market economy and democracy. Gradually the preference towards private ownership, as opposed to public, has increased in recent years and the country has seen a rising share of the private sector, even without specific privatization reforms. Nonetheless, international businesses are still reluctant to invest due to high taxes, a lack of access to finance as well as to a qualified workforce, but most importantly due to the weak legal system. An exception has been China, and Belarus has looked at the One Belt One Road Initiative as a promising bridge to the EU. Scandals connected with the two main Chinese-invested projects have damped the enthusiasm recently, though.
The economic and political risks of extensively relying on badly diversified energy sources, as is the case with natural gas imports from Russia in many transition states were also discussed. It was shown how some countries such as Ukraine, Poland and Lithuania have improved their energy security by either benefitting from reverse-flow technology and the EU’s bargaining power or building their own LNG terminals to diversify supply sources. However, either of these, as well as other energy security improving solutions are likely to come with an economic cost, though, that not all countries in the region can afford.
A Government Perspective
The main focus of this section was the Swedish government’s new inspiring foreign policy initiative, “Drive for Democracy”. Drawing from a definition of democracy by Kerstin Hesselgren, an early Swedish female parliamentarian, democracy enables countries to realize and utilize the forces of the individual and draw them into a life-giving, value-creating society. It was emphasized that the values of democracy are objectives by themselves (e.g. freedom of expression, respect for human rights) but also that democracy has important positive effects in other areas of human welfare. The Swedish government views democracy as the best foundation for a sustainable society, equality of opportunity and absence of gender or racial bias.
The “Drive for Democracy” specifically identifies Eastern Europe as one of the main frontiers between democracy and autocracy, and the Swedish government promotes human rights and stability through various bilateral programmes through the Swedish International Development Cooperation Agency, Sida, and multilateral initiatives within the EU, such as the Eastern Partnership. It was also emphasized that democracy is a continuous process that can always be improved, as indeed experienced by Sweden. Political rights were granted to women only in 1919 followed by convicts and prisoners in 1933 and to the Roma people only in 1950. Political and democratic rights are thus never once and for all given, and it is crucial that the dividends from democracy are carried forward to the younger generation.
Conclusion
In sum, the day illustrated clearly how democracy engages all segments of society, from the business sector to civil society, and the potential for but also challenges involved for democratic deepening in Eastern Europe. To get more information about the presentations during the day, please visit our website.
Participants at the Conference
- PER OLSSON FRIDH, State Secretary, Ministry for Foreign Affairs.
- ALEXANDER PLEKHANOV, Director for Transition Impact and Global Economics at EBRD.
- TORBJÖRN BECKER, Director, SITE.
- CHLOÉ LE COQ, Associate Professor, SITE and Professor of Economics, University of Paris II Panthéon-Assas.
- THOMAS DE WAAL, Senior Fellow at Carnegie Endowment for International Peace.
- NATALIIA SHAPOVAL, Vice President for Policy Research at Kyiv School of Economics.
- ILONA SOLOGUB, Scientific Editor at VoxUkraine and Director for Policy Research at Kyiv School of Economics.
- KETEVAN VASHAKIDZE, President at Europe Foundation, Georgia.
- MARIA BISTER, Senior Policy Specialist, Sida.
- HENRIK NORBERG, Deputy Director, Ministry for Foreign Affairs.
- YLVA BERG, CEO and President, Business Sweden.
- LARS ANELL, Ambassador and formerly Volvo’s Senior Vice President.
- ERIK BERGLÖF, Professor in Practice and Director of the Institute of Global Affairs, London School of Economics and Political Science.
- KATERYNA BORNUKOVA, Academic Director, BEROC, Minsk.
- ANDREI KOLESNIKOV, Senior Fellow, Carnegie Moscow Center.
Preferences for Redistribution in Post-Communist Countries
Public attitudes toward inequality and the demand for redistribution can often play an import role in terms of shaping social policy. The literature on determinants of the demand for redistribution, both theoretical and empirical, is extensive (e.g., Meltzer and Richard 1981, Alesina and Angelotos 2005). Usually, due to data limitations, transition countries are usually considered to be a homogeneous group in empirical papers on the demand for redistribution. However, new data on transition countries allow us to look more deeply into the variation within this group, and to look at which factors are likely to play a significant role in shaping a society’s preferences over redistribution.
The data we use are from the second round of the EBRD and WB Life in Transition Survey (LiTS) (EBRD Transition Report 2011). This is a survey of nationally representative samples consisting of at least 1000 individuals in each of the 29 transition countries.[1] In addition, and for comparison purposes, this survey also covers Turkey, France, Germany, Italy, Sweden and UK. Furthermore, in six of the countries surveyed – Poland, Russia, Serbia, Ukraine, Uzbekistan and UK – the sample consists of 1500 individuals.
Redistribution is, in general, a complex issue, which can take various forms and rely on different mechanisms. In this policy brief, we will only focus on two forms of public attitudes towards redistribution. The first is direct income redistribution from the rich to the poor and public preferences for or against this form of redistribution. The second is indirect redistribution through the provision of public goods, some of which favor certain groups of population over others. In particular, we will consider preferences over extra government spending allocations in the areas of education, healthcare, pensions, housing, environment and public infrastructure. Generally, we would like to explore in greater detail to what extent there are differences across countries in terms of public preferences over redistribution and what might explain differences both within and across societies.
Both survey rounds include questions regarding public preferences towards income redistribution, direct (from the rich to the poor) and indirect (through government spending towards certain public goods). Data for exploring public preferences for direct redistribution can be obtained from a question in the survey that asks respondents to score from 1 to 10 whether they prefer more income inequality or less. More specifically, in the LiTS 2010, the question is the following:
Q 3.16a “How would you place your views on this scale: 1 means that you agree completely with the statement on the left “Incomes should be made more equal”; 10 means that you agree with the statement on the right “We need larger income differences as incentives for individual effort”; and if your views fall somewhere in between, you can choose any number in between?
Note, however, that we use the reverse of this so that 10 represents greater equality and 1 represents wider differences. Bearing this in mind, figure 1 shows the average scores for redistribution preferences for a selection of the countries for 2010 and shows a sizeable variation ranging from 4.4 (more inequality) in Bulgaria to 7.87 (greater equality) in Slovenia. The mean for Russia is 6.92.
The data also allows for a comparison to be made between these preferences in transition countries and in the developed economies covered in the survey. For instance, Russians are on average close to Germans in their preferences for redistribution, while Estonians and Belarusians prefer less redistribution and are closer to the British, on average.
Figure 1. Preferences for Direct Redistribution
Indirect measures of attitudes towards redistribution can add further depth to these societies’ preferences. In particular, the indirect measures in the 2010 survey are derived from a question that asks respondents to rate from 1 to 7 their first priorities for extra government spending.
Q 3.05a “In your opinion, which of these fields should be the first priority for extra government spending: Education; Healthcare; Housing; Pensions; Assisting the poor; Environment (including water quality); Public infrastructures (public transport, roads, etc.); Other (specify)”?
The country averages for these indirect measures for 2010 are presented in Figure 2. The graph reveals a sizeable cross-country variation. For instance, 43.5% of respondents in Mongolia preferred channeling extra government money to education, while 48.7% of respondents in Armenia selected higher healthcare spending. Almost 39% of respondents in Azerbaijan chose assistance to the poor as the first priority for government spending, while the corresponding figure was only 8.3% in Bulgaria and 4% in the Czech Republic. More than 34% of the Russians choose healthcare as their first priority, another 20% choose education, 15% would like the money to be channeled to housing, 14.5% to pensions, 11% to support the poor, 3% to support environment, and only 2% to public infrastructure (2010).
These numbers highlight that there are sizeable differences across the transition countries regarding preferences for redistribution. Also, regarding the form of indirect redistribution in terms of preferences over how government budgets should be prioritized and allocated. Several groups of factors or determinants are typically listed in academic literature to help explain what drives public preferences over the degree and form of redistribution. In the first group of factors, there are various determinants at the individual level. Within the group of individual determinants, self-interest or rational choice of a degree of redistribution favorable to the individual with usual (individual) preferences are stressed. Alternatively, motives behind a preference for redistribution can be related to social preferences (preferences for justice or equity) and reciprocity. Within this general group of self-interest, attitudes towards risks can be stressed as a crucial factor behind demands for social insurance and hence for indirect forms of redistribution. Individuals’ prospects of upward mobility, expectations about their future welfare or ‘tunnel effect’ in shaping their views and preferences over redistribution are also underlined. Also, the commonly held beliefs about the causes of prosperity and poverty are considered to be important in shaping the public’s attitudes under the umbrella of social preferences.
The literature covers possible institutional determinants for preferences towards redistribution and emphasizes the role of the level of inequality in a society and typically relates to the median voter hypothesis in democracies. It is also stressed that welfare regimes (liberal, conservative) can play a role in shaping the level of public support for redistribution.
Figure 2. Preferences for Indirect Redistribution
A closer examination of the data and estimates of the factors shaping individuals preferences over redistribution in the 2010 survey, are consistent with motives involving strong self-interests of the respondents.[2] Those from richer households have less support for redistribution, with the result being robust to the measure of household income used. The past trend in household income positions is insignificant, while the higher the expected income position of household in the coming four years, the less supportive the respondents are of income redistribution (elasticity -0.1). Those who experienced severe hardships with the recent crisis tend to support redistribution more than those who had little problems or not at all (elasticity 0.13).
Furthermore, the role of preferences towards uncertainty is confirmed: the higher the (self-reported) willingness to take risks, the less likely the individual is to support or favor redistribution. Respondents with tertiary education are less inclined to support redistribution of income from the rich to the poor, compared to those with secondary education (elasticity is -0.4). Having a successful experience with business start-ups also decreases demand for income redistribution from the rich to the poor (elasticity -0.3). Those living in rural areas are more in favor of redistribution compared to metropolitan areas, while living in urban areas shows the same level of support for redistribution as those living in metropolitan areas. In each of these cases, it appears that those who would benefit the most from redistribution favor it more than those who view it as coming at their expense, or possible expense in the future.
Beliefs regarding the origins of success and poverty are also shown to be statistically significant and negative, as predicted: those who believe effort and hard work or intelligence and skills are the major factors for success are less supportive of income redistribution (elasticity -0.16). Those who consider laziness and lack of will power the major factors for people’s lack of success are also, consistently, less supportive of redistribution (elasticity -0.2).
It also turns out that better democratic institutions are correlated with a higher demand for redistribution. The result is robust across the measures used, i.e. it does not seem to depend on the particular measure used. The size of the effect is quite pronounced: a one standard deviation increase in the democracy measure increases demand for redistribution from 16 percentage points, when the voice and accountability measure is used, to 33 and 36 percentage points when controls of the executives and democracy index are used.
Furthermore, the better the governance institutions, as measured by the rule of law and control of corruption indexes, the higher is the demand for redistribution. However, the result is not robust to the various measures used. Government effectiveness appears to be insignificant (though with a positive direction), and the regulatory quality measure is insignificant but with a negative direction. The size of the effects is again quite pronounced. A one standard deviation increase in the rule of law measure increases demand for redistribution by 17 percentage points, and a one standard deviation increase in the control of corruption measure increases demand for redistribution by 27 percentage points.
The higher the level of inequality, the larger is the demand for redistribution as might be expected. This result is robust across all measures used. The size of the effect varies from 16 to 18 percentage points in response to a one standard deviation increase.
A regression analysis of preferences towards indirect redistribution also shows that self-interest motives are very pronounced, but there are traces of social preferences as well. In particular, younger people (age 18-24) would like to have more subsidized education and housing at the expense of healthcare and pensions in comparison with the age 35-44 reference group. Those in the age 25-34 group would like to redistribute public spending to housing and environment at the expense of education, pensions and public infrastructure. Respondents in the age 45-54 group would also like to redistribute additional spending from education but to pensions. The two groups of older people (age 55-64 and 65+) would like to shift extra spending from education and housing to healthcare and pensions. The group of age 65+ would also like to shift money from assistance to the poor.
Respondents with tertiary education (in comparison with holders of a secondary degree) favor extra spending for education, environment and public infrastructure at the expense of healthcare, pensions and assisting to the poor, thus revealing additional elements of social motivations. Respondents with primary education, when compared to holders of secondary degree, would like to redistribute public money from education to pensions and assistance to the poor. Respondents with poor health favor additional spending on healthcare and pensions at the expense of education.
High skilled (in terms of occupational groups) respondents would like to redistribute public money from pensions to education. Those with market relevant experience of being successful in setting up a business tend to support education and public infrastructure at the expense of housing and pensions, though the result lack statistical power.
Respondents from households with higher income support extra spending for education, environment and public infrastructure at the expense of healthcare, pensions and assistance to the poor; again pointing to the other elements of possible social motivations. Those with a self-reported positive past trend in income position tend to support spending extra money on the environment at the expense of assistance to the poor (the latter lacks statistical power). If the respondent lives in its own house or apartment, s/he tends to support redistribution from housing and assistance to the poor, to healthcare and pensions.
Respondents whose households were strongly affected by the crisis would like expenditure on environment and public infrastructure to be reduced. Those with higher self-reported willingness to take risks would redistribute extra public money to education at the expense of healthcare and housing.
Respondents who believe that success in life is mainly due to effort and hard work, intelligence and skills favor education at the expense of assistance to the poor and public infrastructure, suggesting they might view education as the key to escape poverty. Those who think that laziness and lack of willpower are the main factors behind poverty would, unsurprisingly, redistribute extra public money from assistance to the poor to healthcare.
Males (as compared to females) favor extra spending on education, housing, environment and public infrastructure at the expense of healthcare. The self-employed favor extra spending of public money to pensions at the expense of housing. There is no difference across respondents living in metropolitan, rural or urban locations.
A regression analysis shows that better democratic institutions are correlated with higher support for allocation of additional public spending to education and healthcare, environment and public infrastructure. The effects are larger for education and healthcare: one standard deviation in the democracy index increases the support for spending money on education by 3 percentage points, for healthcare by 3.1 percentage points, and only by 0.4 and 0.6 percentage points for environment and public infrastructure, respectively. This reallocation is at the expense of assistance to the poor (3.5 percentage points), housing (2.6 percentage points) and pensions (1.1 percentage points). The pattern is robust to the measure of democratic institutions used, though the marginal effects vary slightly depending on the measure.
The influence of governance institutions is similar. Respondents in countries with better governance institutions favor allocation of extra public money to education (3.2 percentage points in response to one standard deviation in government effectiveness), health care (2.9 percentage points), environment (0.9 percentage points) and public infrastructure (0.6 percentage points). The reallocation is at the expense of assistance to the poor (4.2 percentage points), housing (3.3 percentage points) and pensions (0.2 percentage points). The pattern is also robust to the measure of governance institutions with the marginal effects varying slightly depending on the measure.
The higher the level of inequality in a country, the higher the demand for spending extra public money for education at the expense of assistance to the poor, pensions and public infrastructure. A one standard deviation increase in the index, increases demand for spending extra public money on education by 3.8 percentage points, and decreases spending on assistance to the poor by 2 percentage points, pensions by 1.9 percentage points, and public infrastructure by 0.06 percentage points. The results are robust to the inequality measure used.
Overall, the analysis provides empirical evidence that transitional countries are not homogeneous with respect to preferences for redistribution, with sizeable variations in country averages and in public preferences. The study of individual determinants of preferences for redistribution confirms a dominant role of self-interest, with some indications of social sentiments as well. In addition to the usual measures used in individual level analysis, these data allow better control for both positive and negative personal and household experience. The study of institutional determinants also confirms the role of income inequality in shaping public attitudes. In particular, higher inequality is confirmed to increase the demand for direct income redistribution. A novel motive of the paper is the influence of democracy and governance institutions on demand for redistribution. Better democracy and governance institutions are likely to stimulate demand for income redistribution, revealing both higher societal demand for redistribution and appreciation of the potential capability of the government to implement redistribution effectively.
The study of individual determinants of indirect demand for redistribution adds to the overall picture and confirms not only the self-interest motives but also social preferences especially pronounced among people with tertiary education and in high income groups. Better democratic and governance institutions stimulate redistribution of public money towards education, healthcare, environment and public infrastructure, while weaker democratic and governance institutions increases demand for allocation of public money to assistance to the poor, housing and pensions.
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References
Meltzer, A., Richards, S., 1981. “A Rational Theory of the Size of Government”. Journal of Political Economy 1989, 914–927.
Alesina, A., Angeletos, G.M., 2005. “Fairness and Redistribution”. The American Economic Review, 95(4), 960-98
[1] The countries covered were: Albania, Armenia, Azerbaijan, Belarus, Bosnia, Bulgaria, Croatia, Czech Republic, Estonia, FYROM, Georgia, Hungary, Kazakhstan, Kosovo, Kyrgyzstan, Latvia, Lithuania, Moldova, Mongolia, Montenegro, Poland, Romania, Russia, Serbia, Slovak Republic, Slovenia, Tajikistan, Turkey, Ukraine and Uzbekistan.
[2] The basic empirical equation to study individual determinants of public preferences towards income redistribution is the OLS with country fixed effects (for direct redistribution) and multinomial regression with country fixed effects (for indirect measures). When studying the influence of institutions, the equations are transformed to replace country fixed effects with an institutional measure (one at a time). To control for the basic economic differences, average GDP per capita was included.