The Visio Journal: Volume 2

Posted by in Gospodarstvo, Knjige, Pravni sistem 02 Apr 2018

Purchasing a printed copy of The Visio Journal

Obtaining permissions


No. 2

25 Years After the Fall of Communism: Eastern European Economies


EDITOR’S NOTE
By Tanja Porčnik*

This issue of The Visio Journal offers a number of papers analyzing the degree to which the public policies and political institutions of former socialist economies have been supportive of economic freedom following the collapse of communism, as well as what changes in economic performance of these countries occurred during the same period.

In doing that, the papers utilize data generated and published in credible sources, like the World Economic Forum, Fraser Institute’s Economic Freedom of the World Report, Freedom House’s Freedom of the World, Polity IV, Transparency International’s Corruption Perception Index, World Values Survey, Maddison Project Database, UNCTAD, Eurostat, and World Bank’s World Development Indicators, Doing Business, and World Development Indicators.

In their opening essay, James Gwartney and Hugo Montesinos take an in-depth look at 25 former socialist economies (Albania, Armenia, Azerbaijan, Bosnia & Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Macedonia, Moldova, Montenegro, Poland, Romania, Russia, Serbia, Slovak Republic, Slovenia, Tajikistan, and Ukraine) following the collapse of communism, demonstrating that, in many ways, the transition from socialism to markets has gone well. Trade liberalization, more stable monetary regimes, lower marginal tax rates, and deregulation have all contributed to the movement of the former socialist economies toward economic freedom. Further, they have grown rapidly, achieved large increases in international trade, attracted substantial foreign investment, and made progress against poverty. Furthermore, these countries have closed the income gap relative to the high-income countries of Europe and the world. Moreover, with only a few exceptions, these countries are now functioning democracies and government corruption has declined. However, these countries also have a major shortcoming: their legal systems are weak and little progress has been made in this area.

Following are five country-based papers analyzing the degree to which the policies and institutions of Poland, Czech Republic, Slovakia, Slovenia, and Bulgaria have been supportive of economic freedom following the collapse of communism. Aleksander Łaszek illustrates how changes in the ownership structure of companies in Poland affected productivity and GDP growth. With Polish corporate sector experiencing outstanding output growth during the past 25 years, more than 2/3 of this growth can be attributed to rapid growth of private companies, which resulted from both vibrant incentives for private owners and the opening of the Polish economy. Despite the visible success, there is still room for improvement in the Polish economy, as a stock of less productive, protected, state-owned enterprises remains sizeable.

Kryštof Kruliš examines specific features that have influenced the Czech Republic’s performance during this transition and what could determine Czechia´s economic growth in the upcoming technological revolution. Being at almost full employment, the growth paradigm of low wage economy has ended for the Czech Republic. The economy cannot grow further only by adding new production in newly built manufacturing plants. For the first time in the history of its transition, the Czech Republic can now focus only on attracting investments with higher added value and higher productivity.

In his paper, Martin Vlachynský argues that sound reforms mean a continuous process, not a one-time occurrence. After a Tatra Tiger introduced banking, tax, pension, labor code, healthcare, and other reforms in the 1998-2006 period, it attracted several prominent foreign investors and kick-started the sleeping economy. Following was a period of Slovakia’s abandonment of reform efforts by putting on a halt necessary reforms in the pension, social, and healthcare systems. At this point, it seems the decision makers in Slovakia are postponing the reforms until they will become inevitable.

Jure Stojan discusses the partial regressing of Slovenia along several dimensions of economic freedom, while notes that Slovenia was a noticeably freer country overall in 2015 than it was in 1995. Further, the paper compares the Slovene experience with that of other former Yugoslav countries. Finally, the paper reviews the major explanations put forward for the worsening performance of the rule of law in Slovenia. With several explanations being put forward, the old theory of the soft budget constraint offers new avenues of inquiry. It not only explains why it should have been the financial crisis that exposed backpedaling in the transition process but also provides a link between policy outcomes and public expectations.

In his paper, Adrian Nikolov explores the history, structure, and economic consequences of the currency board in Bulgaria, which was introduced as an emergency measure to combat the late-nineties economic crisis, though has stayed in place ever since. The paper explores the currency board introduced to remedy the economic crisis during the Videnov government, as well as its consequences for the reshuffling of the institutional setting and the stabilization of Bulgaria’s economy, in terms of inflation, gross domestic product, investment, public debt and stability of the banking system. Finally, the paper joins the present debate on whether the Bulgarian currency board should be abolished, arguing that it should not be reformed as the trade-off between economic and fiscal stability and freedom of monetary policy has been beneficial to Bulgaria.

Much can be learned from the transition from socialism to markets in Eastern Europe. One of the most vital lessons will be the role of government in a free society, especially the rule of law in protecting the rights of the people.

Finally, I would like to recognize the generous contribution of the Friedrich-Naumann-Foundation for Freedom for supporting the journal that is before you.

* Tanja Porčnik is President of the Visio Institute. Porčnik is coauthor of the Human Freedom Index.


An Examination of the Former Socialist Economies 25 Years After the Fall of Communism
By James Gwartney* and Hugo Montesinos**

ABSTRACT
This research report analyzes the changes in economic freedom, political institutions, and performance of 25 former socialist (FS) economies following the collapse of communism. The degree of economic freedom among these countries varied considerably. The FS countries with higher levels of economic freedom in 2015 as measured by the Economic Freedom of the World summary ratings tended to grow more rapidly, achieve larger increases in international trade, and attract more foreign direct investment than their counterparts with less economic freedom. Differences among the FS countries in the protection of civil liberties, democratic political institutions, and administration of government with less corruption are also identified and analyzed. A regression model of economic growth during 1995-2015 for 122 countries was developed and used to examine the determinants of growth and the performance of the FS economies relative to high-income and other developing countries throughout the world. Regression analysis was also used to analyze the life satisfaction measure of the World Values Survey. The regression analysis indicates that economic freedom exerts a strong positive impact on both the growth of per capita GDP and the life satisfaction of individuals. Finally, the economic freedom area ratings were used to identify strengths and weaknesses of the FS economies. Most of the FS countries registered substantial increases in economic freedom in the areas of size of government, access to sound money, international trade, and regulation. But they have failed to improve their legal systems, and several FS countries have even experienced recent deteriorations in this area. While the FS countries achieved impressive growth and closed the income gap relative to high-income countries during 1995-2015, without improvements in the legal area, it is unlikely that this progress will continue. The addendum provides additional details for ten countries that have made the transition from communism to markets most successfully.

* James D. Gwartney is a Professor of Economics and the Gus A. Stavros Eminent Scholar at Florida State University.
** Hugo M. Montesinos is a doctoral student and resident econometrician at Florida State University


How Changes in Ownership of Companies Enabled Economic Growth in Poland
By Aleksander Łaszek*

ABSTRACT
The main aim of this paper is to explain how changes in the ownership structure of companies in Poland affected productivity and GDP growth. Despite only minor changes in employment, which was stable around the level of 5-6 million people, corporate sector (i.e. companies em-ploying 10 persons and more) experienced enormous output growth during last 25 years. As a result, value added of Polish economy more than doubled and more than 2/3 of this growth can be attributed to rapid growth of private companies (both domestic- and foreign-owned) and the demise of state-owned companies. Such rapid growth was a result of both better incentives (profit-oriented private owners) and the opening of the Polish economy. The large inflow of foreign investors enabled for inflow of new technologies and know-how but also increased competition thus boosting the productivity of domestic companies. It also enabled the Polish companies to become part of global value chains. Despite huge success, there is still room for improvement in the Polish economy, as a stock of less productive, protected, state-owned enter-prises remains significant.

* Aleksander Łaszek is Chief Economist and Executive Board Member at Civil Development Forum (FOR). He holds Ph.D. in Economics from the Warsaw School of Economics.


The Czech Story: Liberal-Equality and Changes Expected with the Upcoming Technological Revolution
By Kryštof Kruliš*

ABSTRACT
This paper takes a closer look at how the Czech Republic navigated through its transition from central planning to market oriented economy. It examines specific features that have influenced its performance during this transition and what could determine Czechia´s economic growth in the upcoming technological revolution that will bring us to the worlds 4.0 and beyond.

* Kryštof Kruliš holds a Ph.D. in EU Law from Charles University, Czech Republic. He is a research fellow at AMO and founder and chairmen of the board of Spotřebitelské forum, z.ú.


Fast Though Fragile: A Roller-Coaster Ride of the Slovak Economy
By Martin Vlachynský*

ABSTRACT
Following Slovakia’s independence in 1993, its economy has experienced two notable cycles of bust and boom. The first decline occurred during the authoritative rule in the mid-nineties when Slovakia was an unpopular place for investors and its economy was ravaged by incompetent local privatizers, who syphoned resources out of the companies destined to go bankrupt.

The 1998-2006 era introduced us to a “Tatra Tiger”, as a centre-right ruling coalition undergone several reforms. Banking, tax, pension, labor code, healthcare, and other reforms attracted foreign investors and kick-started the sleeping economy.

The economy nosedived in the 2009-2010 period, as the new centre-left government openly resented the market reforms of its predecessor, reacting to the crisis with higher taxes and more regulations. This crisis showed that without perpetual reform efforts and prudent government, a small open economy can quickly succumb to external economic factors, especially those influencing biggest trade partners.

The economic situation improved once more since 2015, with new investors coming to Slovakia and unemployment dropping to 5,94% in December 2017. Yet once again, the government is not trying to size the opportunity of the good times and implement needed reforms, such as the pension reform, healthcare reform, and education reform.

* Martin Vlachynský is an Analyst at Institute of Economic and Social Studies in Slovakia. He received his MSc in eco-nomic policy from Faculty of Economics and Administration, Masaryk University, and a MSc in economics, manage-ment, and international relations from Business School, University of Aberdeen.


Basic Forward, Basic Back, Turn Left: Slovenia’s Polka-Step Transition
By Jure Stojan*

ABSTRACT
During 1995–2015, Slovenia saw substantial improvements in overall economic freedom. Pro-gress, however, was far from uniform and even laced with outright reversals. Measured with the Economic Freedom of the World ratings framework, Slovenia’s situation in 2015 was inferior, relative to 1995, in several areas. Notably, regarding government consumption, private sector credit, the legal system, and property rights – even though problems in the latter area are to be found in several former socialist economies, as emphasized by Gwartney and Montesinos in this issue.

This paper aims at situating Slovenia in a wider context. Section 1 discusses the partial “back-sliding” of Slovenia along several dimensions of economic freedom. Section 2 compares the Slovene experience with that of other former Yugoslav countries. Section 3 finally reviews the major explanations put forward for the worsening performance of the Slovene legal system.

* Jure Stojan is Senior Fellow at the Visio Institute in Slovenia. He holds a doctorate in economic history from St Antony’s College, University of Oxford.


The Bulgarian Currency Board – A Relic from a Turbulent Past or a Necessary Tool for Economic Stability?
By Adrian Nikolov*

This paper aims to explore the history, structure, and economic consequences of the currency board in Bulgaria, which was introduced as an emergency measure to combat the late-nineties economic crisis, though has stayed in place ever since. The paper provides a brief description of the general theory of currency boards, followed by a detailed analysis of the various aspects of the economic crisis during the Videnov government, resulting from the return to centralized and state-led economic policies: high inflation, shrinking of household incomes and savings, deterioration of trust in the banking system, collapse of the baking system and national budget crisis. Then, the paper explores the currency board introduced to remedy the crisis, as well as its consequences for the reshuffling of the institutional setting and the stabilization of Bulgaria’s economy, in terms of inflation, gross domestic product, investment, public debt and stability of the banking system. A comparison with similar instruments put in place in the Baltic countries and their role in those countries in the process of accession to the Eurozone is also provided. Finally, it attempts to contribute to the current debate on whether the Bulgarian currency board should be scrapped, arguing that the trade-off between economic and fiscal stability and freedom of monetary policy has so far been well worth it and there is little need for reform at the current point given the country’s trajectory towards adopting the euro in the near future.

* Adrian Nikolov is a researcher at the Institute for Market Economics, Bulgaria. He holds an MA in Democracy and Governance from the University of Tartu, Estonia.


Copyright © 2018 by Visio institut. All rights reserved. No part of this journal may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews.

The authors of this publication have worked independently and opinions expressed by them are, therefore, their own and do not necessarily reflect the opinions of the supporters or staff of the Visio Institute. This publication in no way implies that the Visio Institute or its staff are in favor of, or oppose the passage of, any bill; or that they support or oppose any political alliance, party, or candidate.


PURCHASING a printed copy of THE VISIO JOURNAL: Price of a single copy of The Visio Journal is 9 euro. For an order, kindly contact us at info@visio-institut.org.

OBTAINING PERMISSIONS: To obtain permission to reproduce or reuse text or /bjc/images from our journals, kindly contact us at info@visio-institut.org.
[gview file=”http://visio-institut.org/wp-content/uploads/2018/04/The-Visio-Juornal-2018-FINAL-web.pdf”]

Sorry, the comment form is closed at this time.