Transition reforms in transition economies - Case study for SEE countries

AuthorMalësor Kelmendi - Jeton Zogjani
Pages442-451
ISSN 2410-759X Balkan Journal of Interdisciplinary Research Vol 1 No 1
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442
Transition reforms in transition economies -
Case study for SEE countries
Malësor Kelmendi,
Jeton Zogjani, MSc
Abstract
In this research paper is analyzed transition reforms in transition economies with case study SEE
countries and the main theoretical arguments for discussions are as following: the eect of transition
reforms during transition processes in SEE countries, the impact of these reforms in institution and
policy aspects, then their eect to economy, education and overall aspects in these countries. In
methodology, the secondary data that is used is collected from international institutions and they
are calculated through STATA program. e main analysis include: descriptive statistic, multiple
regression analysis and correlation matrix. Based on empirical results, in the OLS regressions
analysis is found that economic growth and nancial market development have negative impact
on transition reforms (enterprises reforms and market & trade reforms). Innovation reform has
negative impact on enterprises reforms but it has shown positive impact on market and trade
reforms. Other variables have shown positive impact on transition reforms in the SEE countries.
In T-statistic analysis all independent variables have shown negative signicance (T
transition reforms. In correlation methods, all variables that are including on research paper have
shown positive correlation on transition reforms (except economic growth). In conclusion, all of
SEE countries must attempt the processes of reforms because the reforms are very necessary for
economic sustainable, political stability and institutional consolidation, process of integration and
in other important challenges in the future.
Keyword : Enterprises reform, growth, regression analyses, STATA program, trade reform
Introduction
Dierent discussion for few decades have existed about reforms in the transition economies
and still exist discussion over pacing and sequencing reforms and dynamic of transition
reforms (Stiglitz, J.E., 1999). When the transition countries changed their orientation in
economy and politic aspects from the totalitarian system to the liberalization markets,
institutional stability has played a crucial role in these countries. Also macroeconomic
stabilization and structural reforms have the important impacts in transition economies,
(Ubiergo et al, 2006). Processes of transition reforms have strong impact in economic and
state activity and it is realized through in two main aspects: a) privatization of enterprises
and the liberalization and b) changes in government expenditures, transfers and taxes
(Peev, E. & Muelle, D.C., 2012). en privatization and price liberalization are considered
as internal reform with greater eects in transition economies, (Barlow et al, 2009).
However, as a key detail to orient the market reforms in future is to focus on improving
innovation and knowledge in all transition economies, particularly being focused on
creating innovation culture, supporting innovative companies and rising the government
and local support for this eld in the future, (Baković, 2010).
During the initial phrase of transition, as main elements in most transition countries (in context
of economic development and growth) were sustainable institutions (Beck, . & Laeven,
L., 2006). In fact, transition processes in many transition countries have brought negative
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consequence and the process of construction in markets, economic system and institutional
was very hard and with many challenges. ese challenges have led to large regional uctuations
particularly on poverty in many aspects, such as poor condition for food and housing, low
system of healthcare and education, limited access to local and government services, migration,
etc; (Bezemer, 2006). It has consequences in many countries (particularly in Balkans countries)
and their eects always have failed to create sustainability comprehensive reforms during
transition processes, (Muço, 2001). Also, the experience in many transition countries shows
that economic “speed” reforms have aected negatively economic development, (Merlevedea,
B. & Schoors, K., 2007). In banking system, transition process has their two eects: a) banks
with low performance (weak banks), so these banks are aected mostly by limited entry and
poor troubled-bank intervention; b) as best opportunities for improving banking system is to
attract foreign banks in the most of transition economies; (Claessensa, 1998).
A Review of Selected Literature:
Over the past two decades in transition countries have had progress in institutional
development, it is realized through policy change and structural reform and these reforms
had strongly stimulated institutional reforms, banking liberalization, and enterprise
restructuring in privatization and corporate governance (Fang et al, 2011). en reforms
policy in recent years has had greater political support and intra-government division
to promote progress of reform in transition countries (Denizer et al, 2006). Dierent
experiences in transition economies have shown that reform policies in long term are
more benecial in economic growth than reform policies in short and medium term
(Staehr, 2005). In context of service policy reforms in many transition countries exist large
dierence and these policy reforms have high correlation eect from FDI particularly
nancial and infrastructure services (Eschenbach, F. & Hoekman, B., 2005). But according
to (EBRD Report, 2013) the experience in some transition economies has been erratic
then reforms are associated with stagnating reforms or even going into reverse. In these
circumstance is very important to analyze the level of reform in context of economic
reforms and constitutional transition, in fact many transition countries has not taken into
account appropriate reforms during transition processes (Sachs et al, 2000).
e most transition countries aer transformation their centralized economy to free market
economy are associated with important issues, in one hand is political liberalization and in
other hand is deep and protracted recession (Fidrmuc, 2003). Recession is associated with
dierent problems, such as economics, social welfare, healthcare, education and corruption.
To overcome all of these problems, transition countries are focused to reformat the overall
political and economic system. e biggest challenge for transition countries is not only
to punish someone who makes corruption but to destroy the cultural illusion that the
corruption is permissible or is something routine, (Obayelu, 2007). In the most of EBRD
countries structural market reforms and economic growth have been a positive eect
and some of them have had deep reforms while some of them less. is has helped these
countries during transition process and their eects were signicant in the later period as
well as to encourage these countries for further reforms, such as: freedom economic and
structural reform, (Falcetti, et al, 2005). e recent results show that the level of corruption
decline in SEE countries, if these countries include these important components: freedom
economic (Pieroni, L. & d’Agostino, G, 2013), progress toward transition and the degree
of economic perspective (Budak, J. & Goel, R.K., 2006) as well as economic performance
(growth, ination, the scal balance and FDI), (Abed, G.T & Davoodi, H.R, 2000).
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In the transition economies, democracy and political liberalization are considered as
a main force toward prevention of further economic recession and implementation
economic reforms, (Fidrmuc, J, 2003). e greater that has been the level of reforms in
these countries, it has reected a greater speed of processes of liberalization and economic
growth, (Heybeya, B. & Murrell, P., 1999). en, transition reforms have been closely
related to FDI and the FDI has reach to make reform toward nancial and infrastructure
services, then their eect has stimulated economic growth in transition economies,
(Eschenbach, F & Hoekman, B, 2006). Another element that has driven economic growth
and structural reforms in most transition countries has been stabilization programs and
keeping ination in control, (Sahay, R. & Végh, C., 1996). Regardless of credit expansion
in foreign banks as well as local ones, the level of production growth has not been proper
expectations; however on the other side the bank reforms in most transition economies
have progressed signicantly, (Fries, S. & Taci, A., 2002).
Table 1 e main indicators of economic growth in some of SEE countries (2014 - 2015)
ALB BLG CRO GRC HUN MCD MNE ROM SER
GDP* 12.9 53.0 58 241.8 132.4 10.2 4.4 189.7 42.5
GDP (per
capita)** 4.610 7.328 13.562 21.857 13.405 4.944 7.026 8.910 5.907
Domestic market
size index*** 2.7 3.6 3.3 3.3 3.9 2.6 1.9 4.2 3.4
Ination*** 1.9 0.4 2.2 2.2 1.7 2.8 2.2 4.0 7.7
Access to loans*** 1.9 3.0 2.4 2.4 2.0 3.0 3.0 2.9 2.2
Venture capital
availability*** 1.9 2.6 2.2 2.2 2.1 2.9 2.9 2.6 1.9
Quality of
the education
system***
4.1 3.4 3.2 3.2 3.3 4.0 4.3 3.8 3.9
Note: (*) - US$ Billions; (**) - US$; (***) - Index Value Score;
Source: e Global Competitiveness Report 2014 – 2015
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Methodology
In this research paper is estimated transition reforms (enterprises reforms and market
& trade reform) on transition economies, in case of SEE countries by using secondary
data. e data for analysis is collected from international institutions (World Bank,
IMF and EBRD) and these data included the most of SEE countries (see Appendix
1/A). e main variables for analyses are as following: depend variables (Enterprises
Reforms and Market & Trade Reforms) and independent variables (Economic Growth,
Macroeconomic Environment, Financial Market Development, Labor Market Eciency,
Business Sophistication and Innovation Reforms). e main analyses are as following:
descriptive statistics methods, multiple regression analysis and correlation method, then
all methods in this research paper are calculated through STATA (econometric - statistic
program). e econometric model is to analyze the relationship between dependent
and independent variables and the main methods are based on the following equations:
Ln(ERt)+ +Ln(M&TRt) = β0 + β1ln(EGt) + β2ln(MEt) + β3ln(FMDt) + β4ln(LMEt) +
β5ln (BSt) + β6ln(IRt) + et. Where the main variables for analyses are as following:
ER = Enterprises Reforms;
M&TR = Market & Trade Reforms;
EG = Economic Growth;
ME = Macroeconomic Environment;
FMD = Financial Market Development;
LME = Labor Market Eciency;
BS = Business Sophistication;
IR = Innovation Reforms;
• et = Stochastic Error Term;
β0, β1, β2, β3, β4, β5, β6 are the respective parameters;
Empirical Results
In this part of the research paper is represented the result of analysis and this is the most
important part because here are interpreted the implications of the parameters (variables)
that are involved in research paper with dierent methods (such as: Statistic descriptive,
Regression methods and Correlation method). All of variables that are included in
research paper are calculated through STATA program and each of variables have 10
observations. In table 2 is Descriptive Statistic method, and it is a method for quantitative
analysis data and it is used to describe the basic features of the data in a research paper.
e main analyses in table 2 are as following: the enterprises reforms (ER) has minimum
value of 3 (it means, the lower value of “ER” in period of research) and maximum value
is 4 (it means, the higher value of “ER” in period of research), the value of mean is 3.5 (it
means, average value of “ER” in the period of research) and standard deviation values is
0.36 (it means, how many the “ER” variable are quite close between 3 to 4). e market
and trade reforms (M&TR) have minimum index value 3.33 and maximum index value is
3.67, then the mean index value is 3.57 and standard deviation value is only 0.16.
Table 2 Statistic Descriptive Methods
Observation Stand.
Devi. Minimum Mean Maximum
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Enterprises Reforms 10 0.36 3.0 3.5 4.0
Market & Trade
Reforms 10 0.16 3.33 3.57 3.67
Economic Growth 10 1.48 -1.0 1.92 3.6
Macroeconomic
Environment 10 0.62 3.5 4.6 5.4
Financial Market
Developme. 10 0.52 2.9 3.92 4.5
Labor Market
Eciency 10 0.17 3.7 4.02 4.2
Business
Sophistication 10 0.24 3.2 3.74 4.1
Innovation Reforms 10 0.29 2.7 3.19 3.6
Source: Authors
e minimum index value of economic growth (EG) variable is -1.0, the maximum
index value is 3.6, the mean index value is 1.92 and standard deviation has value of
1.48. Macroeconomic environment (ME) has minimum index value 3.5 and maximum
index value 5.4, then mean index value is 4.6 and standard deviation value is 0.62. In
this method, nancial market developments (FMD) have minimum and maximum index
values 2.9 respectively 4.5 and the mean and standard deviation values are 3.92 and 0.52.
e variable of Labor market eciency (LME) has minimum index value 3.7, maximum
4.2, the mean 4.02 and standard deviation 0.17. In Business sophistication (BS) variable
has follow index values: minimum is 3.2, maximum is 4.1, the mean is 3.74 and standard
deviation value is 0.24. e last variables on statistics descriptive analysis is Innovation
reforms (IR), it has minimum index values of 2.7, maximum index value is 3.6, the mean
value is 3.19 and standard deviation is 0.29.
In table 3 is presented multiple regression method, it shows the level of impact between
two dependent variables to other independent variables, also in this method are analyzed
separately two dependent variables. e rst analysis in regression method describes
the level of impact that enterprises reforms have on independent variables. e results
shown that economic growth has negative impact (β1 = -0.15) on enterprises reforms.
Explanation of result is: when other variables in analysis (macroeconomic environment,
nancial market development, labour market eciency, business sophistication,
innovation reforms) are xed or constant and when the economic growth increase for
a unit, it will have eect on enterprises reforms with -0.15 per unit (negative impact).
Also nancial market development (β3 = -0.17) and innovation reforms (β6 = -0.25)
have negative impact on enterprises reforms. Macroeconomic environment has positive
impact (β2 = 0.33) on enterprises reforms and the result means, when other variables in
analysis are xed or constant and when the macroeconomic environment increase for a
unit, it will have eect on enterprises reforms with 0.33 per unit (positive impact). en
labour market eciency (β2 = 0.75) and business sophistication (β2 = 0.20) have positive
impact on enterprises reforms.
Also in regression method is including T-statistics analysis, it shows the level of explanatory
capability (or signicance) that the variables have between them and their signicance can
be positive (T > 2) or negative (T t all variables that are included
in the research paper (economic growth 0.19, macroeconomic environment 0.28, nancial
market development 0.61, labour market eciency 0.29, business sophistication 0.78 and
innovation reforms 0.64) have non - signicant (T
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3 is the coecient of determination (R²), it measures the correlation between dependent
variable and independent variables, then in this analysis the main question is: What does
mean the coecient of determination of (R² = 0.99) between enterprises reforms and
economic growth macroeconomic environment, nancial market development, labour
market eciency, business sophistication, innovation reforms? In fact the result 0.99 tells
us that the relationship is quite strong (since the value of determination is pretty close to
1 (0.99) while 0.01% (100% - 99%) are other factors that are not involved.
Table 3 Multiple Regression (OLS) Method
Coe. Std. Err T P>t [95%
conf. interval] R²
Enterprises
Reforms 0.99
Economic Growth -0.15 0.09 -1.59 0.19 -0.41 0.11
Macroeconomic
Environm. 0.33 0.26 1.25 0.28 -0.40 1.05
Financial Market
Develop. -0.17 0.31 -0.56 0.61 -1.03 0.68
Labor Market
Eciency 0.75 0.61 1.22 0.29 -0.95 2.45
Business
Sophistication 0.20 0.67 0.29 0.78 -1.67 2.07
Innovation
Reforms -0.25 0.49 -0.51 0.64 -1.60 1.10
Market & Trade
Reforms 0.99
Economic Growth -0.08 0.05 -1.70 0.16 -0.21 0.05
Macroeconomic
Environm. 0.10 0.13 0.77 0.48 -0.26 0.46
Financial Market
Develop. -0.10 0.15 -0.66 0.54 -0.53 0.33
Labor Market
Eciency 0.70 0.31 2.29 0.08 -0.15 1.55
Business
Sophistication 0.18 0.34 0.54 0.61 -0.75 1.12
Innovation
Reforms 0.05 0.24 0.19 0.86 -0.63 0.72
Source: Authors
e second analysis in regression method describes the level of impact that market and trade
reforms have on independent variables. e results shown that economic growth (β1 = -0.08)
and nancial market development (β3 = -0.10) have negative impact on enterprises reforms
otherwise other variables in analysis (macroeconomic environment β2 = 0.10, labour market
eciency β4 = 0.70, business sophistication β5 = 0.18, innovation reforms β6 = 0.05) have
positive impact on market and trade reforms. In second T-statistic analysis, the results shown
that all variables that are included in the research paper (economic growth 0.16, macroeconomic
environment 0.48, nancial market development 0.54, labour market eciency 0.08, business
sophistication 0.61 and innovation reforms 0.86) have non - signicant (T et and
trade reforms. In second analysis of coecient of determination (R² = 0.99) the result shows
that the relationship between dependent and independent variables is strong and only 0.01
are other factors that are not involved in this analysis.
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In table 4 is Correlation Matrix, it shows the level of relationship between dependent
variables and independent variables. e rst correlation analysis is between enterprises
reforms and independent variables and the results shown that economic growth (-0.46)
has negative correlation on enterprises reforms. Other independent variables (such as:
macroeconomic environment 0.66; nancial market development 0.32; labour market
eciency 0.17; business sophistication 0.50 and innovation reforms 0.16) have positive
correlation on enterprises reforms. e second correlation analysis is between market &
trade reforms and independent variables, the results shown that only economic growth
(-0.33) has negative correlation on market and trade reforms. Other independent variables
(such as: macroeconomic environment 0.74; nancial market development 0.25; labour
market eciency 0.21; business sophistication 0.67 and innovation reforms 0.45) have
positive correlation on market and trade reforms.
Table 4 Correlation Matrix
ER EG ME FMD IM BS IN
Enterprises Reforms 1.00
Economic Growth -0.46 1.00
Macroeconomic
Environment
0.66 -0.07 1.00
Financial Market
Development
0.32 0.04 0.69 1.00
Labor Market Eciency 0.17 0.65 0.57 0.51 1.00
Business Sophistication 0.50 -0.20 0.51 0.06 0.21 1.00
Innovation Reforms 0.16 0.04 0.32 0.03 0.27 0.68 1.00
Market & Trade Reforms 1.00
Economic Growth -0.33 1.00
Macroeconomic
Environment
0.74 -0.07 1.00
Financial Market
Development
0.25 0.04 0.69 1.00
Labor Market Eciency 0.21 0.65 0.57 0.51 1.00
Business Sophistication 0.67 -0.20 0.51 0.06 0.21 1.00
Innovation Reforms 0.45 0.04 0.32 0.03 0.27 0.68 1.00
Source: Authors
Conclusions
In this research paper is analyzed transition reforms in transition economies with case
study of SEE countries. e data used is secondary data and is collected from international
institutions. e most included data in research paper is from annual reports of 2014.
e results of regression show that economic growth and nancial market development
have negative impact on two transition reforms (enterprises reforms and market & trade
reforms), then innovation reforms has negative impact on enterprises reforms, while the
same variable has show positive impact on market and trade reforms. Other variables in
this analysis have show positive impact on transition reforms. In T-Statistic analysis all
variables that are included in research paper have show non - signicant (T
transition reforms. e coecient of determination have show the same results (R² =
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0.99) in both analysis of enterprises reforms and market & trade reforms (as dependent
variables) on independent variables. Our conclusion is that, the transition countries need
to continue further with transition reforms particularly in area that we have including on
our analysis (such as: economic growth, business sophistication, innovation, etc) because
their impact is very low (it is based on results of our analysis).
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Appendixes
Appendix 1/A
List of SEE countries that are including in research paper:
Albania Bulgaria Croatia
Hungary Macedonia FRY Montenegro
Romania Serbia Slovakia
Slovenia
Source: Authors
Appendix 1/B
Description of data collection and analysis in research paper:
Names of
Countries
Enterpreu.
Reforms
(ER)
Market Tr.
Reforms
(M&TR)
Economic
Growth
(EG)
Macroecono.
Environment
(ME)
Financial
Market
(FM)
Labor
Market
(LM)
Business
Sophistication
(BS)
Innovation
Reform
(IR)
ALB 3.33 3.33 3.3 3.8 3.4 4.0 3.33 3.3
BUL 3.67 3.67 2.0 5.4 4.2 4.2 3.67 2.0
CRO 3.67 3.67 0.5 4.4 3.9 3.9 3.67 0.5
HUN 4.0 3.67 2.3 4.8 3.9 4.2 3.67 2.3
MAC 3.33 3.67 3.6 4.9 4.5 4.2 3.67 3.6
MON 3.0 3.33 3.6 4.5 4.3 4.2 3.33 3.6
ROM 3.67 3.67 2.5 5.2 4.1 4.0 3.67 2.5
SER 3.0 3.33 1.0 3.5 3.5 3.7 3.33 1.0
SLV 4.0 3.67 -1.0 5.2 4.5 3.9 3.67 -1.0
SLO 3.33 3.67 1.4 4.3 2.9 3.9 3.67 1.4
Source: Enterprises Reforms & Market and Trade Reforms - EBRD 2014; Economic Growth
- IMF 2014; Macroeconomic Environment, Financial Market Development, Labor Market
Eciency, Business Sophistication, Innovation Reforms - World Economic Forum 2014
Appendix 1/C
Variable Denitions and Sources
1. Dependent Variables
Variables: Source: Denition:
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Enterprises
Reforms
(ER)
EBRD 2014
(Annual Report 2014)
e Enterprises Reform range from 1 to 4+,
with 1 representing little or no change relative
to a rigid centrally planned economy and 4+
representing the standards of an industrialised
market economy.
Market and
Trade Reforms
(M&TR)
EBRD 2014
(Annual Report 2014)
e Market and Trade Reforms range from 1
to 4+, with 1 representing little or no change
relative to a rigid centrally planned economy
and 4+ representing the standards of an
industrialised market economy.
1. Independent Variables:
Variables: Source: Denition:
Real GDP /
Economic
Growth
(EG)
IMF:
World Economic
Outlook 2014
Real GDP is dened as the value of the total
nal output (of all goods and services) that
is produced in a one year within a country’s
boundaries and the growth / decrease of Real
GDP is expressed as a percent (%).
Macroeconomic
Environment
(ME)
e World Bank 2014
(e Global
Competitiveness
Report 2014 - 2015)
Macroeconomic Environment includes dierent
indications, such as: government budget balance,
gross national savings, ination, government
debt, country credit rating, etc;
Financial Market
Development
(PS)
e World Bank 2014
(e Global
Competitiveness
Report 2014 - 2015)
Financial Market Development has values
score between 0 (non - develop) to 7 (develop)
and this indicator includes dierent factors:
nancing through local equity market,
availability and aordability of nancial services,
ease of access to loans, etc;
Labor Market
Eciency
(LME)
e World Bank 2014
(e Global
Competitiveness
Report 2014 - 2015)
Labor market eciency has values score
between 0 (non - eciency) to 7 (eciency) and
this indicator includes dierent factors, such
as: cooperation in labor-employer relations,
exibility of wage determination, female
participation in the labor force, etc;
Business
Sophistication
(BS)
e World Bank 2014
(e Global
Competitiveness
Report 2014 - 2015)
Business sophistication includes values score
between 0 (low) to 7 (high) sophistication and
this indicators includes dierent factors, such
as: extent of marketing, nature of competitive
advantage, production process sophistication,
control of international distribution, etc;
Innovation
Reforms
(IR)
e World Bank 2014
(e Global
Competitiveness
Report 2014 - 2015)
Innovation has values score between 0 (low -
innovation) to 7 (high - innovation) and this
indicator includes dierent factors, such as:
patent applications, capacity for innovation,
quality of scientic research institutions,
university-industry collaboration in R&D;
Source: Authors

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