MONITORING COUNTRY PROGRESS IN EASTERN EUROPE & EURASIA USAID/E&E/PO Program Office Bureau for Europe & Eurasia U.S. Agency for International Development December 2008 No. 11 1 2 Executive Summary Economic and Democratic Reforms. The three primary sub-regions of Eastern Europe and Eurasia (E&E) have very distinct economic and democratic reform profiles. The Northern Tier Central and Eastern Europe (CEE) countries are well out front. Eurasia is lagging considerably, particularly in democratic reforms. The most recent trends show continued advancement, albeit modest, in economic reforms, particularly in the Southern Tier CEE and Eurasia. However, the large democratization gap between CEE and Eurasian countries continues to grow. In fact, drawing from a six indicator index from available global datasets, we find that Eurasia lags behind all other major regions of the world in democracy and governance. Moreover, we find evidence that history, economic structural conditions, and geography matter to democratization prospects. An important implication is that democratic progress is not likely to advance quickly nor easily in Eurasia any time soon. Economic performance. Economic growth in the transition region has exceeded the global average every year since 2000 through 2007, and is forecast to do the same in 2008 and 2009. However, economic growth worldwide is forecast to be significantly lower in 2008 and 2009 primarily as a result of the still unfolding global financial crisis. Global economic growth in 2009 is now forecast to be less than half its 2007 rate (from 5% in 2007 to only 2.2% in 2009). For the E&E region overall, economic growth is forecast to fall even more, from 7.2% in 2007 to 2.9% in 2009. A key characteristic of Eurasia’s economic integration into the global economy has been a significant and growing reliance on primary products for exports. Eight Eurasian countries have at least one-half of their export sectors concentrated in energy and/or metals. Dependency on Russian energy is high; at least ten transition countries had close to 80% of their domestic consumption of natural gas or more come from Russia in 2006. Human capital. Open unemployment rates remain extraordinarily high in a handful of transition countries (i.e., close to 20% or higher), and are double-digit in almost one-half of the transition countries. However, most unemployment rates in E&E are now falling. In CEE, life expectancy has been increasing steadily since the mid-1990s. In Eurasia, life expectancy did not return to pre-transition level until 2006. The highest life expectancy gender gap in the world is found in a number of E&E countries. The most significant declines in population worldwide from 2006 to 2015 are forecast to take place in seven E&E countries: Bulgaria; Moldova; Ukraine; Russia; Romania; Latvia; and Belarus. High primary school enrollments have been maintained across the sub-regions, and tertiary enrollments have been increasing since the mid-1990s. However, secondary and tertiary enrollment rates remain very low in many Eurasian and Southern Tier CEE countries. There is still no clear trend in Eurasia that secondary school enrollment rates are recovering. While traditionally-measured literacy rates in the E&E region are high, “functional literacy,” or how well students and adults can function in a market economy given their formal and informal education, may be a concern in at least some countries. 3 (1) Introduction and General Method This paper updates USAID/Europe & Eurasia (E&E) Bureau’s analysis of transition region trends. It is the eleventh such report in a series of periodic Monitoring Country Progress (MCP) in E&E reports. As in past editions, transition progress is tracked and analyzed along four primary dimensions: (1) economic reforms; (2) democratization; (3) macroeconomic performance; and (4) human capital. Much of the focus of this report is to assess the change that has occurred in the region since the last MCP report in August 2006, and to provide salient findings from related research efforts. In regards to the latter, two themes in particular are examined in some detail here: (1) the democratization gap in Eurasia, and some aspects as to why it is so prevalent and seemingly intractable; and (2) key concerns regarding global economic integration, including very recent regional trends and considerations stemming from the yet unfolding global financial crisis. The MCP method employs a two step analysis. First, we examine reform progress (both economic and democratic reforms). Next, we examine progress in macroeconomic performance and human capital. Data are from publicly available sources. The primary data used in the four MCP indices are all converted into a “1” to “5” scale, where a “1” represents the worst performance on that indicator in the E&E region and a “5” the best worldwide. The MCP technique incorporates several basic principles. One, reform progress is necessary but not sufficient for a country to complete the transition to a market-oriented democracy. Solid macroeconomic performance and human capital development must ensue for reform progress to be sustained. Two, gains in macroeconomic performance and human capital are also necessary though not sufficient. Countries (such as Belarus in the case of human capital and Turkmenistan in the case of economic performance) may do relatively well on these “outcome” dimensions in the absence of adequate reform progress, but such conditions cannot be sustained over the long term. It’s also important to bear in mind that, in some circumstances, progress in economic performance can forestall reform progress, such as seems particularly plausible in the case of energy- exporting economies. Hence, the third principle: the sequence is important; reform progress needs to precede or at the least accompany economic performance and human capital progress. These principles underscore the beneficial and critical linkages between reform progress and favorable outcomes from the reforms. A fourth underlying principle stems from the inter-connectedness of the two reform dimensions as well as mutual causality of the two sets of outcome indicators (i.e. between economic performance and human capital). Restated, another key consideration in the analysis is the importance of the causal relationships between the transition sectors. Economic progress contributes to democratization and vice-a-versa; so, too the relationship between the economic sector and the social sector (or human capital), and democratization and human capital. These inter-relationships suggest that sustaining the gains in any one sector is less likely to occur if other sectors are lagging considerably. The fourth principle re-phrased: the 4 sustainable development path necessarily involves economic and democratic reforms progressing together in the medium term if not year-to-year; similarly, we want to see relatively balanced results and progress between economic performance and human capital. (2) Economic and Democratic Reforms Figure 1 and Table 1 provide the most recent picture of economic and democratic reform progress across the twenty-nine country transition region. Figures 2 and 3 compare 2007-2008 progress with that of the status of reforms ten years ago. Economic reform data are taken from the EBRD’s annual Transition Report, and democratic reform data are from Freedom House’s annual Nations in Transit report.1 Both sets of data are converted to a 1 to 5 scale in which a “5” represents standards of advanced industrial market economies. Four summary findings stand out in a comparison of reform progress today vs. that of roughly ten years ago. First, there has been reasonably good progress in economic reforms in most of the E&E countries, and across the three primary sub-regions (of Eurasia, the Southern Tier Central & Eastern Europe (CEE) countries and the Northern Tier CEE countries).2 Turkmenistan, Belarus, and Uzbekistan are the salient exceptions, the laggards. Second, democratization paths between Eurasia and CEE have been widely divergent. There have been impressive gains in democratic reforms in CEE since 1998 and stagnation if not backsliding in most of Eurasia. Ukraine is the salient exception to the Eurasian trend. Third (and partly stemming from the second observation), the reform profiles of countries within the three sub-regions have become increasingly similar and the reform profiles between the sub-regions have become notably different. The Northern Tier CEE countries are much more similar in levels of reform progress in 2007-2008 than they were 1 The economic reform index consists of nine indicators drawn from the EBRD’s annual Transition Report: (1) small-scale privatization; (2) large-scale privatization; (3) price liberalization; (4) trade and foreign exchange liberalization; (5) banking reforms; (6) non-bank financial reforms; (7) enterprise reforms (or policies towards corporate governance); (8) infrastructure reforms (electric power, water and waste water, railways, telecommunications, and roads); and (9) competition policy. The democratic reform index is drawn from Freedom House’s annual Nations in Transit: (1) electoral process (largely, the extent to which elections are free, fair, and competitive); (2) civil society (primarily the development of the non- government organization (NGO) sector); (3) the independence of media; (4) national public governance; (5) local public governance; (6) rule of law (primarily judicial reform); and (7) anti-corruption measures. Appendix