Transformation process in the Central and East European (CEE) countries. Classification - PowerPoint Presentation

Slide1

Transformation process in the Central and East European (CEE) countries. Classification of CEE countries

Lecture 2

Slide2

Learning objectiveThe CEE countries before 1990 – central planned economy

Stages of transformation process in CEE countries

Economic and social costs of transformation

Privatisation

in CEE

Classification

of CEE countries

Slide3

Market versus centrally planned economy

Market Economy

Dominant position of

private property

Market coordination (resources)

Prices are determined by market forces

High elasticity of economy (production is adjusted to the needs of customersHard budget constraint: the principle of self-financing, companies covers expenditure of their income, entrepreneurs bear the riskMarket forces competition fuel innovation

Centrally-planned Economy

Dominant position of the state ownershipBureaucratic coordination (resources)Prices are mostly set by governmentLow elasticity of the economy: central planning stiffens the functioning of the economySoft budget constraint: companies can count on steady supply of funds, state covers shortages and lossesPlans discourages entrepreneurs from innovative activities

Slide4

The stages of transformation and development in CEE

1990-1993 -

Initial Stabilization

and

Reforms

1994-1996

- Market Reforms1997-2001 - Recovery2002–2007 - Boom2008-2013 - Crisis2014 and Beyond

Slide5

Centrally Planned EconomyMain Characteristics

Lack of competition,

Lack of freedom,

Lack of equilibrium

.

Slide6

How did central planned economy manifest?

The

nationalized

economy (no private ownership),

The

prohibition of entrepreneurship

(except small-family business and farming in some countries),Centrally planned economy,Non-existent market, no competition,Non-existent prices (centrally established), in result – not efficient allocation of resources),The external relation under CMEA, (

Council for Mutual Economic

Assistance) - trading arrangement between Soviet bloc economies, No floating exchange rate of currencyMost of the

communist countries had big

foriegn debt. On the end

of 80’

they

are

not

able

to

pay

it

.

Slide7

CMEA (comecon

)

(Council for Mutual Economic Assistance)  the pre-1990 trading arrangement between Soviet bloc economies, which was the Eastern Bloc's reply to the formation of the Organization for European Economic Co-operation in western Europe

Slide8

The main goals of transformation

To

liberalize

the economy

To

stabilize

the economyTo restructure the economyLegal and institutional reforms (support of all the changes)

Slide9

Nobody knew how to transformThe Economist (March 24-30, 1990)

“Hundreds of books have been written on the transition from capitalism to communism but not the other way. There is no known recipe for unmaking an omelet.”

Slide10

Liberalization

the process of removing regulatory restriction in business, allowing most prices to be determined in free markets and lowering trade barriers that had shut off contact with the price structure of the world's market economies

Price

liberalization (the end of shortage economy –

Kornai

)

Trade liberalizationMarket entry liberalization

Slide11

Stabilization

To curb the

inflation

,

liberalize

prices and eliminate the shortages on the marketTo decrease national debt and make the budget deficit more balancedTo open the economy

to domestic and foreign competition

Slide12

National Debt as % of GDP,Poland 1970-2016

Slide13

Inflation, Poland 1970-2016

Slide14

Restructuring the economy

Privatization

New

Tax

system (VAT, PIT, CIT)

Independence of

National Bank

Slide15

Privatization in CEE

All larger political parties in CEE countries on the beginning of transformation supported privatization.

The reasoning behind were somewhat different in individual countries.

Main reasons:

– to create domestic middle class,

- to

establishe competition - to increase efficiecy - to finance budget deficit

Slide16

Privatization methods

Direct sales,

Initial public offering (IPO),

Public tender,

Self privatization

Auction,

Coupon or voucher privatization,The Management-Employee Buyout (MEBO) method,Restitution,National Investment Founds,Special methods,

Slide17

Direct salesConducted by founding organs or commissioned agencies on behalf of government

(Treasury – Poland, State Property Agency – Hungary).

Goal – fast ownership changes of

small and medium enterprises in good financial condition.

The main recipients – mainly

employees

of state enterprises.

Slide18

IPO – Initial Public Offering

Two phases process.

1

st

phase – transformation the state enterprise to

joint stock company or limited liability company

. 100% of shares held by Treasury or special state agency.2nd phase – sale of shares on domestic or foreign stock exchange.In cases of strategic importance of some companies, the Treasure kept the control packet (golden share), to ensure the state influence on the decisions.

Slide19

Public tender

The

public

invitation

for the investors selected by the representative of the state.

The state specify: the minimum price of the share, minimum number of shares the investor shall buy, minimum investment pledge and social commitments, The deadline for submission the offer,Negotiation an selection the best offer,Popular for privatization medium and large enterprises in Poland (banking sector, detergent, pharmaceutical, sugar companies).

Slide20

Self Privatization

(tricky privatization)

Merger of state and private enterprises and undervalue the state assets in the merger (Poland).

Transfer property and financial assets to the private association (Hungary).

In the initial phase of privatization, when the state conception did not exist, but some transition laws was already approved by parliament

.

Slide21

Auction

called pre-privatization

The sale of the state property on an auction.

Small

enterprises

Popular on the

beginning of the transformation processMost popular in Czech Republic and Hungary.

Slide22

Coupon or voucher privatization

Mass privatization

The state assets were supposed to be handed over citizens, which could then be used to buy shares.

Czech Republic, Poland, Hungary (

compensation for nationalized lands in 1950

), Romania, Slovenia.

Not successful form – create corruption (Czech), unstable structure of ownership, devaluation of shares.

Slide23

Management-Employee Buyout (MEBO) method

The transfer of shares to employees through giveaways or sales at

low prices

.

Special association for holding shares during the repayment period

.

Repayment period 3-5 years. Most popular in Romanian privatization.

Slide24

Restitution

To give back to the original owner from whom it was taken during the nationalization

However it turnout to be

very complicate

to find the original owner, to established the proper value especially when the property has gone through significant changes.

In Czech Republic restitution claims were opened up in 1990 and moved about 100 000 properties (houses, farms, small businesses) to the private hands.

In Hungary this form was applied to lands.In Poland problem is not solved up to this time.In other CEE countries it became more political matter.

Slide25

Privatization

dominating

and most

efficient

methods in CEE

countries

were:direct sales, management-employee buyout

Slide26

Private Sector Share of GDP

Source: European Bank of Reconstruction and Development

Slide27

Income from privatization

Slide28

Transformation process in CEE countries

Two ways of transformation

:

Big bang (shock therapy)

S

low and steady (gradual or evolutionary approach)

Slide29

Shock Therapystrategy that involves moving quickly to eliminate the old order and to replace it with new organizational and policy arrangements, i.e. markets; transition policies could be implemented rapidly.

all at once and painful

causes immediate, sharp economic collapse

get it over with before it can be undone

The window of opportunity for reform must be exploited

It was often thought that markets would naturally emerge from decentralization as the state exited from its former dominant role.

Poland, other Central European countries (Hungary, Czech, Slovenia

, Slovakia) chose the big band strategy

Slide30

Slow and steady transformationE

mphasizes

complexity of organizations; process of learning and adaptation required.

This approach drew on the analogy of how m

ar

k

ets and related organizational arrangements and policies emerged in Western industrialized economies, typically over extended periods of time.spread out and less painfulavoids collapse, in principletakes longerThe gradual approach believe that institutional change is path-dependent. Organizations are viewed as complex hierarchies within which participants pursue objectives while guided by incentives but subject to bounded rationality. “Bounded rationality” refers to the limits of information; the limits faced by decision makers and personal limitations (inadequate education).

Hierarchy is an architecture in which there are superiors and subordinates. To an economist the hierarchical structure of an organization implies the principal-agent problem.

Organizational change is sequential, path-dependent and evolutionary through a process of organizational learning and adaptation.

Slide31

Slow or

shock

therapy

?

Slide32

Economic and social costs of transformation

1.

Growing inflation

– consequence of price liberalization.

P – Poland,

C

– Czech R.,

S

– Slovakia, H – Hungary,B – Bulgaria

Consumer Price Index

(Year 0 means the year of price liberalization)

Slide33

Economic and social costs of transformation

2.

Falling employment and growing unemployment rate

Employment trends in the CEECs,

1989-1999

(1989=100)

Slide34

Economic and social costs of transformation

3. Recession of transformation – falling GDP growth rate

By the

year 2000

, only four countries managed to

surpass the level of GDP in 1990. Poland - + 44% growth, Slovenia - +22%, Slovakia and Hungary - + 10%, Czech Republic - has just reached the GDP level of 1990 in 2000, Latvia has the poorest record with having in 2000 just 60%

of its GDP level a decade earlier, Lithuania and Bulgaria were in 2000 about 20% below its GDP of 1990 (

80% of GDP level frim 1990). The GDP Changes in Eastern Europe

CzechPL

UkrainaHungary

Slide35

The Transition Recessions in Post-Communist Countries

Slide36

Other economic and social costs of transformation

Growing

dispersion of income

Brake up of CMEA; search of new markets

Growing structural unemployment

Slide37

The Visegrad Group

The

Visegrad

Group –

15 February 1991, established by heads of Hungary, Poland and Czechoslovakia in

Visegrad.

The initial goals were economic cooperation and mutual help for the promotion of the democracy and Euro-Atlantic integration.One of the most important achievements of the Group was the establishment of CEFTA (the Central European Free Trade Agreement). This, together with the coordination in economic, technological, industrial and agrarian policies in the area, enhanced cooperation between its members, via the establishment of a pre-EU-like economic environment. The Group also established the International Visegrad Fund in order to support scientific research and culture.

Slide38

Towards EU

After years of isolation from the Western economic system, and after the distortions and

deprivations of the communist system, most citizens just wanted to live in a normal country with a normal

economy, and, given their history and geography, that vision was captured in the allure of

reintegrating with Western Europe. From the very beginning of transformation the main goals for all CEE countries was to become: a memeber of NATO; OECD, and finally EU.The historic offer from the European Union to countries in the region provided a gravitational pull that helped policymakers justify and implement difficult reform steps.

Slide39

CEE countries in NATO

March 1999

– Czech Rep., Hungary, Poland;

March 2004

– Bulgaria, Estonia, Latvia,

Lithuania, Romania, Slovakia, Slovenia,

April 2009 - Croatia

Slide40

CEE countries in OECD

In 1989

,

the OECD started to assist countries in Central Europe (especially the Visegrád Group) to prepare market economy reforms. In 1990, the Centre for Co-operation with European Economies in Transition was established, and in 1991, the Program "Partners in Transition" was launched for the benefit of Czechoslovakia, Hungary, and Poland

.

This

program also included a membership option for these countries. As a result of this, Czech Republic (1995), Poland and Hungary (1996), Slovakia (2000), Estonia and Slovenia (2010) as well as Latvia (2016) became members of the OECD

.Other CEE countries which are not the members, expressed the interest to joint.

Slide41

Steps of EU integration History

1951:

The European Coal and Steel Community

is established by the six founding members

1957: The

Treaty of Rome

establishes European Economic Community and common market1973: The Community expands to nine member states and develops its common policies1979: The first direct elections to the European Parliament1981: The first Mediterranean enlargement

1985: Schengen Agreement – open borders1993: Completion of the

single market1993: The Treaty of Maastricht establishes the European Union1995: The EU expands to 15 members2002: Euro notes and coins are introduced2004: Ten more countries join the Union2007: Romania and Bulgaria became EU members

2013: Croatia became EU member

Slide42

Membership conditions for CEE countries to join EU

European integration has always been a political and economic process that

is open

to all European countries prepared to

sign up

to the

founding treaties and take on board the full body of EU law. According to Article 237 of the Treaty of Rome ‘any European state may apply to become a member of the Community.Article F of the Maastricht Treaty adds that the member states shall have ‘systems of government […] founded on the principles of democracy

’.

Slide43

The ‘Copenhagen criteria’In 1993, following requests from the former communist countries to join the Union, the European Council laid down three criteria they should fulfill so as to become members. By the time they join, new members must have:

Slide44

Integration and enlargement of EU institutional framework to international business in Europe

Four freedoms of the EU single market

freedom

of

movements

of people,

goods, services, andcapital- the single market – rules: mutual recognition – the principle that products recognized as legal in one country may be sold throughout the EU;

harmonization of selected sectors – sectors in which EU has created common rules; subsidiary – the privilege to take the action by EU only if it is more effective than actions taken by local level (priority for decentralization).

the euro -Maastricht Criteria (annual budget deficit not exceeding 3% of GDP, public debt under 60% of GDP, inflation rates and long-term interest rates within 1.5% of the three EU countries with lowest rate and the exchange rate stability and the lowest long-term interest rates)

Slide45

Integration and enlargement of EU,

timeline

The beginning

of the transition

The Copenhagen Criteria

To set the political, economic

And legislative criteria that applicants need to fulfill

Negotiation

The launch of

Negotiations with

Luxemburg group

Entering

EU

Association

Agreement

The signing of Europe

Agreements with Poland and

Hungary

Application for the EU Membership

Pol

a

nd

and Hungary apply for the EU membership

Accession Treaty

The signing of

Accession Treaty

Slide46

EU Accession Referendums in Central & Eastern Europe

, 2003

The graph summarizes the results of referendums in 8 post-communist countries – the new members that entered EU on the 1st May 2004.

T

he 2003 referendums were a huge victory for the European idea and the European integration project. Central and Eastern European citizenries expressed in this way their strong support for the idea of European integration.

Slide47

The accession processThe entry negotiations are carried out

between each candidate country and the European Commission

which represents the EU.

Once these are concluded, the decision to allow a new country to join the EU must be taken

unanimously by the existing member states meeting

in the Council.

The European Parliament must give its assent through a positive vote by an absolute majority of its members. All accession treaties must then be ratified by the member states and the candidate countries in accordance with each country’s own constitutional procedures.During the years of negotiation, candidate countries receive EU aid so as to make it easier for them to catch up economically. For the enlargement of the 10 countries in 2004, this involved a package of

€41 billion aimed mainly at funding structural projects to allow the newcomers to fulfill the obligations of membership.

Slide48

Thank you !