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Reform Reversal in Central and Eastern Europe: Dangerous Aberration or Inherent Characteristic of the Process?

Paper Session

Saturday, Jan. 6, 2018 10:15 AM - 12:15 PM

Marriott Philadelphia Downtown, Grand Ballroom Salon D
Hosted By: Association for Comparative Economic Studies
  • Chair: Istvan Szekely, European Commission

Reform Reversal in Former Transition Economies of the European Union: Areas, Circumstances and Motivations

Istvan Szekely
,
European Commission
Melanie Ward-Warmedinger
,
European Commission

Abstract

The rapid journey from central planning to EU (euro area) membership stress-tested the social learning processes of FTEs. The desire to be anchored to the West, and to enter the EU spurred major reform waves and led to the introduction of best practice institutions very rapidly. This process most likely accelerated social learning, but apparently in many FTEs this learning was not fast enough to keep pace with the rapid reforms, leaving best-practice institutions with social norms that were not sufficiently strong to maintain them. So not surprisingly, wide-spread reversals emerged in the region, especially when the crisis hit these countries. In other words, reversals seem an inherent characteristic of the FTEs' journey towards a modern social market economy. Reform reversals can be formal reversals, which change legislation (or formal rules), or behavioral reversals, which erode the quality of an institution by materially changing the way it works, or a combination of the two. Spillovers, from formal to behavioral reversals (and vice versa), from reversals in one area to another one, and from one institution to another can play an important role in reform reversals by strongly impacting their nature and dynamics. In many cases, it was this interaction of reversals in different sectors that created a full-blown reform reversal episode. The financial sector seems particularly prone to behavioral reversals, both in public and private institutions. The Washington institutions played a dominant role in shaping the transition process. Following the start of the EU accession process, however, the EU gradually took over as the dominant external anchor. The EU acted as a strong anchor that could prevent or reverse formal reform reversals in areas covered by EU law. The anchoring role of the EU was however much weaker in the case of behavioral reversals. Our analysis naturally leads to the conclusion that the ultimate solution to prevent reform reversals is to accelerate social learning processes, particularly among parallel communities. It is also important to focus on the quality and internal coherence of reforms and newly created institutions.

Central Bank Independence in CEE: Attempts to Limit or Reverse

Iikka Korhonen
,
BOFIT Finland

Abstract

In this paper we first document how central bank independence was implemented in the new EU member states of Central and Eastern Europe as they prepared for membership. In this connection particular attention is paid to banking and financial regulation and supervision, whether they are officially part of central bank’s functions or not. Second, we assess whether reforms related to central bank independence have been partially reversed in some EU countries. In some countries central bank independence seems to have been compromised to some extent. However, often this reversal is not associated with explicit changes in legislation, but rather changes e.g. in the central bank boards. There have also been cases of seemingly frivolous criminal investigations and charges against high-ranking central bank officials in various countries of the region.

Retreat From Mandatory Pension Funds in Countries of the Eastern and Central Europe in Result of Financial and Fiscal Crisis: Causes, Effects and Recommendations for Fiscal Rules

Kamila Bielawska
,
University of Gdansk
Agnieszka Chlon-Dominczak
,
Warsaw School of Economics (SGH)
Dariusz Stanko
,
University of Warsaw

Abstract

The aim of the paper is to assess in various dimensions the causes and effects of the reduction of mandatory pension funds in selected countries of Central-Eastern Europe. The pension systems with partial funding were introduced during the 1998 – 2008 by eight CEE countries (Hungary, Poland, Latvia, Estonia, Bulgaria, Lithuania, Slovakia and Romania). The 2008 financial and economic crisis triggered the reversals of pension funding decisions. Many countries decided to diverge from their initial reform scenario, downscaling or fully reversing the development of the funded components of their mandatory pension schemes, by reducing the amount of contributions transferred to the funds or changing fund participation rules. These actions were a part of the fiscal consolidation undertaken by the countries of region due to the need to remove the excessive deficit and reduce government debt growth. Contrary to the initial plans, the transition costs related to the reforms were financed to a large extent with the public debt. At the same time, the social policies at the beginning of the century in many countries expanded, creating a fiscal pressure that escalated during the crisis, leading to the decisions of reversals of funded systems. After the economic crisis, the fiscal situation in many of the CEE countries worsened further, which means that the risk of fiscal sustainability, related also to the high level of implicit pension liabilities, remains high.

The Role of the State in Transition: Reversals of Reforms

Kalman Miszei
,
Central European University
Istvan Szekely
,
European Commission

Abstract

Rule-of-law (RoL) is a core element of the endeavor to transform former “socialist” countries. This paper investigates whether reform reversals have expanded to the area of RoL, if so in what way, to what extent and in which countries. It also looks briefly into the linkages between RoL and other areas of critical systemic characteristics such as economic freedom, democracy, centralization of public administration and human rights. Overall, the move towards the RoL, a key characteristic of the liberal state, has clearly been the most resolute in the group of the new EU member states, despite initial concerns about the accession of Bulgaria and Romania in 2007 in this regard. Perhaps somewhat unexpectedly though, the most widely discussed reform reversals have happened in Hungary and in Poland. In both cases, institutional changes have been significant and attentively followed, partially exactly because the EU is taken as a rule-of-law space and what happened in those two countries is thus rather unusual. The paper will examine the nature and extent of these changes. The criteria will be the state of judicial independence; centralization of judicial power vs freedom of judges to consider cases; quality of financial allocation to courts; role of the court presidents. Finally, we will examine the independence of the higher instances of the courts such as appellate courts, Supreme Court and constitutional court. The question will be raised how deep these reform reversals are and how likely it is that the countries themselves and the EU will be able to successfully address and remedy them. The paper will also focus on two important incidents of anti-corruption drives in Romania and Georgia.
Discussant(s)
John Bonin
,
Wesleyan University
Mitchell Ornstein
,
University of Pennsylvania
Sergei Guriev
,
European Bank for Reconstruction and Development and Sciences Po
JEL Classifications
  • O5 - Economywide Country Studies
  • H1 - Structure and Scope of Government