Exclusive interview with Simeon Djankov, distinguished economist of the World Bank, former minister of finance and former deputy of prime minister of Bulgaria. Reason for this interview is publication of the book The Great Rebirth which will be published in June by Libek. Both with Swedish economist Anders Aslund, he is editor of this publication. Djankov is also creator of the Doing Business Report of the World Bank.
According to your experience what is a main incentive for politicians to implement the policies for a great rebirth successfully?
The desire to break with the past. The economic transformation in our region has often gone hand in hand with political transition as well, opening possibilities for democracy and entry into the European Union. Politicians who look towards the re-integration of Serbia into Europe are most willing to implement economic reforms as well. The same process took place in Central and Eastern Europe, but it largely stalled in the former Soviet Union where countries have no clear perspective for entry in Europe.
Serbia is facing a serious problem of unemployment, especially among younger population. What is a cure for that problem?
The financial sector, primarily the banks, has to find ways to support new businesses. This process has been slow in former Yugoslavia and in Bulgaria, resulting in high youth unemployment. The main alternative for young workers is to look westward to finding jobs, and leaving their countries. Long-term, this trend is worrisome as it reduces potential productivity. Recognizing this danger, several European Union programs, for example in agriculture or business competitiveness, provide start-up capital for young entrepreneurs. This does not resolve the issue, but is a good start.
In a nutshell, how would you describe a recipe for a successful economic and democratic transformation? What should be done first, and what should be avoided?
The experience from Central Europe and the Baltics teaches us that quick macroeconomic reforms come first, followed by the destruction of the agencies of the former regime – the secret police, mandatory army service, the propaganda machine. Some microeconomic reforms can wait – privatization was ultimately successful in both quick reformers like the Czech Republic and slow reformers like Poland. Judicial reform has so far been a failure in nearly all post-communist countries – independence came before reform, cementing bad practices. Healthcare reform has also trailed other changes, resulting in slower improvements in life expectancy than in comparator countries in the rest of the world. On average, life expectancy in former Yugoslavia has gone up by 4 years since 1990, while it has increased by over 6 years in other middle-income countries.
4. The transformation has not been successful in all countries. Those of the former Soviet Union and the Balkans on average show fewer results in social and economic transition than countries in Central Europe. Can we single out some important preconditions for a successful transformation?
The main reason for the less successful transition in former Yugoslavia and the former Soviet Union is the staying power of the old political elite. In central Europe, a year after the start of reforms about two-thirds of elected politicians are first-timers (have never held a political office before). In contrast, only 20% of politicians in post-communist governments and parliaments in other parts of the former socialist bloc are new. In other words, the same people run the country over a long period after the democratic changes take place. They clearly have an interest in slowing down the transformation, and in bending privatization to secure good deals for themselves and their friends. The economic transition is marred by corruption as a result.
5. The importance of economic institutions is gaining momentum among the mainstream economists, while the faith in the technocratic knowledge of the elite is as an important factor of economic growth is subsiding. It is often overlooked that the transformation process has predated these new interests in the importance of economic institutions, and that political decision makers in transformation countries knew from their own experience what many economists from the West have forgot. How so?
At the beginning of transition, we thought new institutions can be quick to build and we need them in order to have a successful reform process. Economists like Janos Kornai and Joseph Stiglitz stressed institutional build-up before microeconomic reforms. Fortunately, politicians did not take note, otherwise it would have taken a very long time to reform the economy. We have learned how slow the process of revising institutions can be – often longer than creating new ones from scratch. Eastern Europe has successfully created some new institutions, for example currency boards of three-pillars pension systems. But has yet failed to reform some existing institutions like the courts. Western economists took for granted that sufficient knowledge is available to know how to restructure institutions. That has turned out to be wrong.
6. The whole process of transformation in CEE is, in fact, destruction of old socialist and building of new capitalist and democratic institutions. However, do these two processes always go hand in hand, or is it possible to have one of them lagging? What would be the long term implications of this?
It does not have to be the case that economic and political reforms go together. Historically this is not the case, with Eastern Europe an exception rather than the rule. The early lessons from Eastern Europe were taken too literally to other regions, for example the Middle East and North Africa, with disastrous results. Many scholars are pointing to China and saying that economic reform comes first, creating the basis for political reform. I don’t think we know enough about sequencing – the experience of recent transformations tells us there is no particular order.
7. Should we take into account the ”resource curse” as one of the reasons behind slow democratic transformation in oil and gas rich countries of the former Soviet Union?
Certainly, and more generally access to natural resources. They create large opportunities for corruption in political and economic life, and distort the motivation to reform. But note that some of the least successful reformers are not resource-rich, for example Armenia, Moldova or Tajikistan. So there are different ways to get it wrong, but also various ways to catch up, for example as in Georgia. I would not blame oil and gas for all the ills of transition.
8. One of the messages of the book is that liberal transformation is not written in stone and is not ”the end of history”, as seen in Russia and Hungary. What should be done to prevent similar events from happening in other countries?
Recent years have seen a reversal towards more controlled economies, with larger participation by the government. This trend is seen even in countries like Poland or Slovakia with successful economic transformation. The difficulties during the Eurozone crisis are responsible in part. As is the feeling that the European Union is not able to deal with some significant issues like bankrupt Greece or immigration.
9. What was the role of EU integration in the process of transformation? Has the promised EU membership been an important catalyst for transformation (bearing in mind the Copenhagen criteria)?
The promise of EU entry (and re-entry to Europe of many countries, including Serbia) has been vital for implementing needed economic and political reforms. The post-communist region was early on divided in two groups – those with an European promise and those outside the EU frame. Several countries have meandered, for example Moldova and Ukraine, to the detriment of their populations. However, we have seen that EU entry does not guarantee subsequent economic convergence. Both Bulgaria and Croatia are testament to painful reforms left unaccomplished.
10. Countries that have experienced a more through transformation process were able to induce a higher and more stable rate of economic growth. Even when faced with economic slowdown, they were able to evade economic distress (for example, Poland) or when faced with economic downturn they were able to soon regain economic growth (the Baltic countries). Can this be attributed to the memory (both institutional and cultural) of the earlier successful transformation process?
Successful early reforms have created a generation of young entrepreneurs who look positively at the transformation process. This is in contrast to some of the late reformers like Bulgaria or Romania, where such a generation is yet to be created and as a result negativity on reforms runs high. In international surveys, such as EBRD’s Life in Transition, more than half of Polish or Baltic citizens are satisfied with the transformation process. In Bulgaria and Serbia, less than one quarter are satisfied.
11. What are possible lessons to be learnt for countries from the SEE region that are lagging behind on the transformation path?
The main lesson for me is that sequencing is overblown. Some countries like Slovakia started reforms fast, then stopped for 6 years (1993-1998), then started fast again. Other countries like Russia started fast and bogged down by 1996, then reversed after 2001. Georgia only started reforming in 2004, and went ahead of many of its peers. And Bulgaria is going back and forth on many reforms throughout the past quarter century. So whichever reforms are possible, Serbia should do them when it can.
12. What would be your message for Serbian readers of “The Great Rebirth” book?
There is a very high relation between economic reforms and life satisfaction in our region. So when we discuss which reforms were done and which not, we are really discussing how to make people happier. In contrast, political evolution to democracy is less clearly associated with life satisfaction. Economic reformers can hence be thought of as increasing the possibility that more Serbians will enjoy their life, and fewer will choose to leave the country when given the opportunity.