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EBRD’s report – “Crisis and Transition: The People’s Perspective”

Just as the global economic system faces its biggest test since the Great Depression, the European Bank for Reconstruction and Development has produced stark new analysis revealing how support for democracy and the market economy fluctuated dramatically as a result of the economic crisis.

The EBRD's report – 'Crisis and Transition: The People's Perspective' – explores the reasons behind an especially sharp drop in commitment to the principles of democracy and markets in the new Member States of the European Union and a surprising upswing in some other countries.

This Transition Report 2011 analyses a wealth of data contained in a survey of some 39,000 people, primarily from emerging Europe.

The third in a trilogy of annual Transition Reports assessing the impact of the crisis on the region where the EBRD invests, this year's report also explores why the crisis affected ordinary households in the transition region far more than in Western countries (Chapter 2) and analyses the factors that support the development of successful entrepreneurship in the transition region (Chapter 4).

Building on the data, the Transition Report concludes that attitudes to democracy and the free market can be explained partly by the experiences of individual groups during the crisis (Chapter 3).

People became less supportive of democracy if the recent crisis hit them hard relative to their memories of past crises. The findings of the report suggest that markets and democracy lost support in the more advanced transition countries because they experienced deeper downturns in this crisis than in earlier recessions in the early and mid 1990s. By comparison, the most recent crisis was generally milder in CIS countries than the output decline that followed the collapse of communism.

The report also finds compelling evidence to suggest that the crisis made people 'turn against what they had'. Those who lived in more market-oriented and democratic societies and were affected by the crisis became less likely to choose democracy and markets over other systems.

On the other hand, support for democracy and markets actually rose – in some cases quite sharply – in some of the less-advanced economies especially in the former Soviet Union.

The report says: 'This is particularly true of crisis-hit people in the CIS countries who perceived a high degree of corruption. It may be that for those individuals, the crisis diminished any sympathy they may have had for state-led systems.'

The findings of the Transition Report emerge from analysis of the data in the EBRD – World Bank's second Life in Transition Survey (LITS) survey, a comprehensive review of attitudes of people across the EBRD region. The first survey was conducted in 2006 and a follow-up was published in 2011, covering emerging Europe as well as a number of Western comparator countries.

According to the latest survey, Albania, Mongolia, Montenegro, Tajikistan, Turkey and Uzbekistan remained among the countries with the highest levels of democracy support in the region.

In the new survey, they were joined by Georgia, Kazakhstan, Belarus as well as Armenia, the country that saw the biggest change in democracy support levels in the past four years, showing a 28-point increase that brought it up from the 26th position in the region to 2nd, just behind the 2010 regional leader, Tajikistan.

Among the more advanced transition countries, the backing for democracy dropped off particularly sharply in the Slovak Republic, Slovenia and Hungary, with the Slovak support decreasing by over 20 percentage points.

The Transition Report also highlights the impact of the crisis on households in the transition region, pointing out that ordinary people were hit far harder by the downswing than their counterparts in western Europe.

A sharper reduction in consumption in the EBRD region can be traced to more severe shocks such as job losses, as well as the less-effective safety nets that were available in emerging Europe to cope with such personal setbacks.

But the report also homes in on the impact of bank borrowing, especially linked to debts taken out before the crisis which may have left some households across the transition region vulnerable.

It notes that while mortgages supported consumption during the crisis in the West, they had the opposite effect in the transition region, with this trend linked primarily to the take-up of foreign exchange-denominated mortgages in countries that experienced significant currency depreciation.

The chapter detailing the factors that support entrepreneurship finds that women are less likely to attempt to set up a business but no less likely to succeed than men once they try. It concludes that this may argue for policies targeted at encouraging potential female entrepreneurs.

EBRD: Over One Third Of Romanians Blame The West For Economic Crisis

Over one third of Romanians blame the West for the economic crisis and the population's support for democracy and free markets decreased over the past five years, according to a report published Tuesday by European Bank for Reconstruction and Development (EBRD)

Highlights of the past year

The deep recession has ended and modest growth has returned. The return to growth has been aided by prudent macroeconomic policies and successful cooperation with the International Monetary Fund (IMF) and the European Union (EU). However, short-term growth rates are likely to be low.

Absorption of EU funds remains inadequate. Only a small percentage of available structural and cohesion funds have been used so far. The authorities have recently stepped up eff orts to improve the utilisation rate.

New privatisations have been launched. Off ers of minority stakes in a number of energy companies are being prepared in line with the government's commitment to the new precautionary Stand-By Arrangement (SBA) with the IMF. However, an attempted sale of a minority stake in the major oil and gas company Petrom failed because of insuffi cient interest at the minimum price.

Key priorities for 2012

Further fi scal reforms are needed. These include the clearing of public arrears and ongoing reforms to the social security, pension and health care system.

Road commercialisation measures should be advanced. Private finance should be attracted into the road sector, where major investments are greatly needed, either under the Concession Law, or under the new Public-Private Partnership (PPP) Law once it is approved by the European Union.

The government's energy sector strategy should be clarified.The uncertainty over whether two national champions will be created should be resolved by the end of the year, by which time the government's plans and timings for further privatisations of energy companies should be clarifi ed, thus providing opportunities to attract fresh investment into the sector.

Macroeconomic performance

Following a deep recession in 2009, the economy has struggled to recover in 2010. Real gross domestic product (GDP) decreased further in 2010 by 1.3 per cent despite a strong performance in exports, which increased substantially by more than 20 per cent year-on-year. Foreign direct investment (FDI) also fell by approximately 26 per cent in 2010 after an already sharp drop in 2009.

The recovery has consolidated somewhat in 2011, as exports continue to grow. Imports are also rising. Industrialproduction performed strongly in early 2011 but has slowed in mid-2011. Inflation peaked in May 2011 at 8.4 per cent on an annual basis, but has dropped signifi cantly since then, partly because of base eff ects. Despite an increase in the ratio of non-performing loans (NPLs), the banking sector remains liquid and well capitalised, while private sector credit growth has gradually returned. In July 2011 the international ratings agency Fitch Ratings improved Romania's sovereign rating to 'investment grade'.

Fiscal performance has been quite disciplined in the past two years

Fiscal policies are anchored by a 24-month precautionary IMF Stand-By Arrangement (SBA) of €3.5 billion approved in March 2011, together with an EU precautionary Balance of Payments assistance programme of €1.4 billion in force since June 2011. These programmes follow the successful completion of the joint IMF/EU assistance programmes initiated in 2009. The 2010 budget defi cit stood at 6.5 per cent of GDP, which was partly achieved by major cuts to social benefi ts and public wages reform, as well as an increase in the VAT rate.

The 2011 budget defi cit is targeted at 4.4 per cent of GDP (on a cash basis). The National Bank of Romania (BNR) has kept its key policy rate unchanged since May 2010 at 6.25 per cent. It further implemented measures to align with standards of the European Central Bank and introduced a number of amendments to the minimumreserve requirements. The economy is expected to remain stable but grow slowly.

Full commitment by the government to the IMF/EU programmes will help maintain macroeconomic stability, though risks continue to stem from the still high level of accumulated domestic arrears. In addition, the Romanian banking system remains exposed to subsidiaries of foreign parent banks, and could suff er signifi cant setbacks if the eurozone debt crisis were to further deteriorate.

Major structural reform developments

Absorption of EU structural and cohesion funds remains at a low level. According to recent fi gures, Romania has absorbed only about 4 per cent of the €20 million allocated to the country for the period 2007-13. To increase the absorption rate, a new ministry to coordinate implementation of EU programmes is being established, and public procurement legislation is being amended.

Romania has made progress in judicial and integrity reforms, but more work is needed. In its annual progress report on Romania under the Cooperation and Verification Mechanism, the European Commission (EC) welcomed continued improvements in the effi ciency of judicial procedures and the fact that the National Integrity Authority has started operating under an amended legal framework, as recommended in last year's report.

However, the EC urged the authorities to further enhance the fi ght against corruption and to swiftly complete the reform of the judiciary system. At a meeting of the EU justice and interior ministers in June 2011, Romania's planned access to the Schengen Zone was postponed, with the delay linked to insuffi cient progress in the fi ght against corruption. Meanwhile, implementation of anti-monopoly laws has been strengthened over the past year. The government has committed to divest remaining state assets in a variety of companies, mostly in energy and transport.

In November 2010 the authorities off ered the state's 46 per cent stake in the landline operator Romtelecom to the majority shareholder, Greece's OTE, which holds the remaining 54 per cent. However, OTE turned down the authorities off er in May 2011, citing mainly external economic diffi culties. In July 2011 the government and OTE agreed to sell some or all stateowned shares through an initial public off ering on the local stock exchange in the coming year.

In February 2011 the government launched an international tender for the sale of a 9.84 per cent share in the oil and gas company OMV Petrom, in which it currently holds 20.58 per cent, hoping to raise up to €500 million through a secondary public off er (SPO) on the Bucharest stock exchange. The minimum asking price was set at €485 million, but the SPO failed at the end of July 2011 after off ers were below the floor price.

Plans to restructure and sell stakes in other state companies are being agreed with the IMF.

Shares are being off ered in a number of energy companies. Two 15 per cent SPOs are planned for the electricity transporter Transelectrica and the natural gas transporter Transgaz. The government is also considering an issue of 10 per cent shares in the country's two main electricity producers, the hydro power system operator, Hidroelectrica, and the nuclear plant operator, Nuclearelectrica. Both companies were involved inplans to restructure 21 state-owned power utilities and merge them into

two 'national champions'. However, these plans have faced opposition and may be cancelled if nothing happens by the end of 2011. New energy sources are being developed. The government's revised energy strategy 2011-35 aims to increase the share of renewable energy sources to 16.3 per cent in 2011, and envisages the creation of two additional nuclear power plants, which are to replace fossil-fuelled capacities. In July 2011 the European Commission approved the green certifi cates renewable energy support scheme, which is expected to signifi cantly increase investments in the renewable generation sector in the short to medium term.

The development of public-private partnerships (PPPs) in the roads sector is still lagging behind. A new PPP law entered into force in October 2010, but it faced signifi cant national and international opposition on the grounds that it breached EU legislation on public procurement and the Romanian constitution. In April 2011 the law was amended to harmonise it with EU standards, primarily by increasing transparency on PPP projects. It currently awaits approval from the European Union, but in the meantime new motorways can still be developed with private sector fi nancing, under the existing Concession Law. In August 2011 the government renegotiated and scaled down the contract with the US company Bechtel on the construction of the 415 km Transylvania motorway project signed in 2004.

There were issues with Bechtel's performance and the payment from the state budget. The construction of the remaining planned motorway sections may be carried out under concession or PPP contracts.

The banking system has remained well capitalised and profi table. The Vienna Initiative, under which the main foreign banks committed to maintain their exposures to their subsidiaries in Romania through the crisis, formally expired in early 2011. However, in March 2011 the parent banks of the nine largest foreign-owned bank subsidiaries further affi rmed their long-term support to the Romanian banking sector. Preparations have begun to introduce International Financial Reporting Standards (IFRS) for the banking sector in 2012. Important social reforms have been implemented or are under way. These include pension reforms, increasing the retirement age to 63 for women and 65 for men, harmonisation of public wages, reform of social benefi ts (including employment insurance, maternity benefi ts and social assistance programmes), and health care reform.

Sursa: http://www.actmedia.eu

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