Structural reform

This section of the report presents updated transition scores for the economies in the EBRD regions and discusses reforms carried out by governments over the last year. While the Covid-19 pandemic has caused substantial economic turmoil in the EBRD regions, many governments have continued to push ahead with reform measures or have restarted reform efforts that were temporarily on hold owing to the increased uncertainty. Reforms have continued to be implemented in areas such as competitiveness, governance and energy efficiency, with transition scores capturing the gradual improvements seen in those areas. At the same time, however, several economies have seen the reversal of previous reforms, resulting in declining scores, with performance gaps and reform needs remaining acute in many cases.

Introduction

Over the last year, governments and policymakers across the EBRD regions have been preoccupied with dealing with the Covid-19 pandemic and its fallout. As detailed elsewhere in this report and in the online country assessments, the pandemic caused most countries’ economies to contract in 2020 and necessitated the development of comprehensive response packages, thus diverting attention away from reform agendas. The pandemic has also had important implications for the sustainability of economies, resulting in significant turmoil and uncertainty in the financial sector. Unemployment has increased, damaging efforts to make societies more inclusive. Border and trade restrictions have created problems for established production networks and global supply chains and have set back the process of integration. However, most economies are now bouncing back in 2021, allowing a renewed focus on reforms and a reversal of some of the most damaging effects of the pandemic. Encouragingly, the analysis in this section shows that many countries have pushed ahead with their reform agendas and continued to carry out important structural reforms.

The assessment in this section focuses on six qualities of a sustainable market economy, looking at whether economies are competitive, well-governed, green, inclusive, resilient and integrated. Analysis of changes to “assessment of transition qualities” (ATQ) scores over the last year points to a number of specific developments across the EBRD regions.1 Across those six qualities, increases in scores have been concentrated mainly in central Europe and the Baltic states (CEB), south-eastern Europe (SEE) and Central Asia, while declines have been observed primarily in eastern Europe and the Caucasus (EEC) and the southern and eastern Mediterranean (SEMED). Improvements have been observed mainly for governance, green and resilience scores, while declines have tended to be concentrated in scores for inclusion (see Chart S.1 and Table S.1).2

Competitive

Over the last year, competitiveness scores have improved – albeit modestly – in most economies in the EBRD regions, driven primarily by improvements in the business environment and increases in credit to the private sector. The most notable improvements have been seen in countries with lower initial scores (particularly Jordan, Tajikistan and Turkmenistan). Only Poland has seen its score decline – a development that reflects a modest deterioration in the business environment, as well as a decline in credit to the private sector. Meanwhile, Lebanon has seen declines in a number of business environment indicators over the last year (reflecting increases in the difficulty of setting up a new business and dealing with insolvency). That deterioration has been exacerbated by soaring inflation, significant weakening of the local currency and severe shortages of foreign currency.

Reform of state-owned enterprises and privatisation

Several economies in the EBRD regions have pushed ahead with reforms to their governance frameworks for state-owned enterprises over the last year. In April 2021, for example, Serbia adopted a new strategy governing the ownership and management of state-owned business entities, which covers the period 2021-27. That strategy proposes establishing a centralised ownership function for all state-owned enterprises (within the Ministry of the Economy), developing a single framework for the ownership and governance of all state-owned enterprises, and completing their corporatisation by transforming them into joint-stock or limited liability companies. In a similar vein, in March 2021 Uzbekistan adopted a strategy governing the management and reform of state-owned enterprises over the period 2021-25. That strategy introduced criteria justifying state ownership and set targets for reducing state-owned enterprises’ footprint in the economy, as well as calling for the drafting and adoption of new laws on privatisation and the management of state-owned property. Uzbekistan has also seen continued privatisation efforts over the last year, with a number of large assets being sold. Meanwhile, the Georgian government has announced plans to start reforming its state-owned enterprises in 2021 with a view to improving their corporate governance practices. A special council is expected to lead this reform effort, starting with work at Georgian State Electrosystem (GSE), a transmission system operator. Despite a challenging political environment, Tunisia has continued the process of reforming the operations and governance practices at STEG, the national electricity and gas company.

Competition policy

Some countries have also made significant progress with the frameworks governing the enforcement of competition policy. In Bulgaria and Croatia, for example, updated competition regulations entered into force in 2021, ensuring that those countries’ legal frameworks were aligned with the EU’s competition laws (particularly the European Competition Network (ECN+) Directive). Those new competition regulations give competition authorities greater autonomy and facilitate the enforcement of competition legislation. In Kazakhstan, meanwhile, a new agency for the protection and development of competition was created in October 2020, reporting directly to the country’s president. That agency has an extensive mandate to protect and promote competition, investigate anti-competitive behaviour by firms and regulate markets with dominant players. Previously, the functions of a competition authority were performed by a committee within the Ministry of the Economy.

Land reforms

Some economies have made progress with land reforms. After adopting a law on the deregulation of land sale transactions in May 2021, Ukraine established a market for farmland on 1 July 2021. That reform ended a 20-year ban on the sale of farmland in Ukraine, which was discouraging investment in that sector and restricting the expansion of agricultural finance. For the time being, the law only allows farmland to be sold by and to Ukrainian citizens, with legal persons not allowed to participate in the market. However, that issue will be reconsidered after 2024, with foreign citizens and legal persons allowed to participate in the market if approval is granted in a national referendum. The gradual liberalisation of the agricultural land market is expected to encourage significant investment in the sector, supporting the expansion of agricultural finance and improving both yields and agricultural productivity.

Well-governed

Over the last year, governance scores have improved in most economies in the EBRD regions, driven by increased compliance with AML/CFT standards and higher scores for participation in e-government. Marked improvements have been observed in a number of economies in the CEB region (the Czech Republic, Estonia, Latvia and Lithuania), as well as Egypt, Kazakhstan, Ukraine and Uzbekistan. In the CEB region and Egypt, increases have been driven by improvements in corporate governance standards and practices. And in Egypt, they have also been driven by increased scores for perceptions regarding informality, corruption, political stability and the effectiveness of the courts. Overall, the governance environment in Egypt has benefited from the implementation of important reforms under successive IMF programmes. In Kazakhstan, the increased score reflects improvements in perceptions regarding corruption and budgetary transparency. And in Uzbekistan, scores have increased primarily as a result of improvements in the enforcement of contracts, participation in e-government, freedom of the media and perceptions regarding corruption.

Corruption

Several countries have continued to push ahead with reforms aimed at improving the quality of governance, although some negative trends have also been observed. In particular, reforms aimed at addressing corruption have been initiated in several economies. In March 2021, for example, the Armenian parliament adopted a law creating a new anti-corruption body with stronger investigative and enforcement functions, merging several existing agencies with anti-corruption powers. The following month, the country’s parliament also adopted legislation establishing a specialist anti-corruption court to handle all corruption-related cases. New anti-corruption legislation also entered into force in Serbia in September 2020, expanding the competencies of the country’s anti-corruption agency, as well as increasing its legal and financial independence. In particular, that agency now has greater powers to access information on the assets of public officials and their relatives, resolve conflicts of interest and act on anonymous reports. The agency now also has the right to assess and evaluate legislation from an anti-corruption perspective.

Business environment

Several countries have made progress in terms of improving their business environments. Georgia, for example, has reformed its insolvency rules following the adoption of a new insolvency law in September 2020 (which entered into force in April 2021). That new insolvency framework provides for increased protection of creditors’ rights, with insolvency processes and rehabilitation mechanisms aligned with international best practices, as well as strengthening the role of the courts in insolvency proceedings. At the same time, however, long-awaited reforms relating to the rule of law and the judiciary are progressing slowly.

Digitalisation of public services

Several governments have also made progress with the digitalisation of public services – motivated in part by the Covid-19 pandemic. In October 2020, for example, the Mongolian government launched the E-Mongolia electronic platform, which provides more than 180 government services in a single location (and is expected to provide over 500 services in the future). In Bulgaria, the digitalisation of the judiciary has accelerated following legislative amendments adopted in December 2020. Those amendments allow videoconferencing to be used in civil, administrative and criminal proceedings (albeit only for the collection of evidence in the case of criminal proceedings). In addition, telemedicine is now also allowed under Bulgarian legislation (although only in a state of emergency), after the government adopted regulatory amendments authorising digital referrals and prescriptions. In Armenia and Uzbekistan, meanwhile, important strategy documents have been adopted, outlining plans for the digitalisation of public services and the development of broadband and telecommunications infrastructure.

Green

Green scores have generally increased over the last year, especially in the SEE and CEB regions. Increases in those regions have stemmed primarily from improvements to carbon-pricing mechanisms and the strengthening of “nationally determined contributions” (NDCs) in the context of the Paris Agreement and the introduction of the European Green Deal. Meanwhile, declines have been observed in Egypt, Jordan and Turkmenistan, owing to a lack of progress with carbon-pricing mechanisms. (At the same time, Egypt issued its first green bond in September 2020 and has continued to support the transition to a green economy.)

Climate change and energy efficiency

Over the last year, several countries have improved their regulatory environments in the areas of climate change and energy efficiency. In December 2020, for example, the Albanian parliament adopted a law on climate change, which has paved the way for the establishment of a comprehensive framework combating climate change in the country. That law covers the integration of climate change mitigation and adaptation issues into other legislation and strategies, the submission of the country’s NDCs and the strengthening of emission control regulations. In Serbia, meanwhile, four new laws on renewable energy sources, energy, energy efficiency and mining were adopted in April 2021. Those laws bring about a number of notable changes, including the introduction of auctions for the allocation of market premiums and feed-in tariffs, and various incentives for adopting renewable energy technologies and energy efficiency measures, as well as simplifying the issuance of permits and approvals in the sector. In Kazakhstan, a new environmental code was adopted in January 2021, which introduced several important changes, including a requirement for the country’s 50 largest industrial companies (in the oil and gas, mining, metal processing and power generation sectors) to replace their carbon-intensive legacy technologies with market-leading alternatives by 2025. In Bulgaria, the country’s waste management law was amended in January 2021 to include more ambitious recycling targets for packaging materials. Several countries in the EEC region (including Armenia, Georgia and Ukraine) have also submitted updated NDCs in the last year.

Inclusive

Changes in inclusion scores over the last year have been mixed. Scores have deteriorated in many economies, including Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, Georgia, Kazakhstan, Russia, Serbia, Tajikistan and the West Bank and Gaza. Only Jordan has seen a significant improvement, driven by its improved performance in the Women, Business and the Law Index. Modest improvements in gender equality scores have also been observed in Estonia, Latvia and Moldova, mainly owing to increases in the percentage of women in managerial roles and the percentage of female employers. Other economies have seen declines in gender equality scores, however, driven by a variety of different factors. In Azerbaijan and Croatia, those scores reflect declines in the percentage of female employers. In Georgia, that development reflects the fact that women’s labour force participation rate has declined by more than men’s. And in the West Bank and Gaza, the decline stems primarily from a deterioration in the Women, Business and the Law Index. Turning to the youth component of the inclusion index, improvements in youth inclusion scores have been very modest over the last year, while notable deteriorations have been driven by only a couple of factors. In Georgia, Hungary, Latvia and Romania, for example, declining scores reflect increases in youth unemployment (relative to older adults). And in Bosnia and Herzegovina, Kazakhstan, Serbia and Tajikistan, declines reflect weaker performance in terms of harmonised test scores for students.4

Gender equality

Several countries have significantly improved their regulatory frameworks in terms of facilitating the achievement of gender equality. In Serbia, for example, a new law on gender equality was adopted in May 2021. That law requires state agencies to perform gender budgeting and places several obligations on public and private-sector employers in terms of assessing their gender balance and identifying specific measures to achieve and monitor gender equality goals. Meanwhile, several countries in Central Asia have adopted comprehensive gender equality strategies. In May 2021, for example, Uzbekistan adopted a long-term strategy on gender equality that will run until 2030. That strategy focuses on several different areas with a view to improving gender equality, emphasising (i) the goal of increasing the percentage of women in management positions at state authorities, (ii) measures to facilitate women’s economic empowerment, including through increased access to employment and entrepreneurial opportunities (particularly in rural areas), (iii) the strengthening of gender-related statistics and (iv) measures to prevent violence and discrimination against women. In April 2021, Tajikistan adopted a national strategy aimed at enhancing the role of women, which will run from 2021 to 2030 and outlines the country’s policies in relation to various gender equality objectives. And in December 2020, Turkmenistan adopted a national action plan for gender equality covering the period 2021-25. That action plan outlines a number of goals regarding access to education, the prevention of gender-based violence and economic empowerment of women.

Disabilities

In May 2021, the Armenian parliament adopted a law on the rights of people with disabilities, paving the way for further progress in this area. That law, which represents a significant development, includes several guarantees (on accessibility, reasonable accommodation and access to justice) and bans disability-based discrimination. Georgia, meanwhile, adopted a major package of labour legislation in September 2020, bringing the country into line with ILO labour standards and EU directives and extending the protections afforded by labour rights.

Resilient

ATQ scores for resilience combine data and information on (i) energy resilience and security and (ii) financial institutions. The discussion below considers each one in turn.

Energy

Energy resilience scores have only changed very modestly over the last year. Scores have improved in Croatia, Estonia, Morocco and Serbia, while Ukraine has seen its score deteriorate. In Croatia, improvements are related to the diversification of gas supplies following the commissioning of the Krk liquefied natural gas terminal in January 2021. In Estonia, that increase reflects improvements to the country’s gas supply following the establishment of a common gas market for the Baltic states and the completion of the Balticonnector pipeline. In Morocco, improvements have been driven by progress with the establishment of an energy regulator. And in Serbia, the increased score reflects improvements in the international connectivity of the country’s gas network, with interconnection agreements being aligned with the Network Code on Interoperability.

Renewable energy

Several countries have pushed ahead with reforms to their regulatory frameworks over the last year with a view to facilitating the broader deployment of renewable energy projects. Bulgaria, for example, amended its energy legislation in January 2021 to eliminate certain levies and increase support for new renewable energy projects. Meanwhile, Kazakhstan has amended its energy regulations to introduce a special surcharge on end-user tariffs, with a view to covering costs associated with the growing share of electricity coming from renewable sources. In Lebanon, on the other hand, the country’s continued energy crisis (which has seen significant nationwide power cuts) is a source of considerable concern and points to a major lack of resilience in the country’s power system. In Poland, an important regulatory measure governing offshore wind was adopted in January 2021, paving the way for significant investment in that area.

Financial institutions

Financial resilience scores have improved in most economies in the EBRD regions over the last year, with notable improvements being observed in Bulgaria, Hungary, Jordan, Latvia, Lithuania, Montenegro, the Slovak Republic, Slovenia and Tunisia. The increases seen in Bulgaria, Slovenia and Tunisia have been driven by improvements to existing sectoral regulations, governance practices and safety nets. Specifically, those increases reflect improvements to (i) the deposit insurance scheme in Tunisia, (ii) the legal and regulatory frameworks in Bulgaria and Slovenia, (iii) risk management and corporate governance practices in Tunisia and (iv) the quality of supervision in Bulgaria and Tunisia. The improvements seen in the other economies reflect higher capital adequacy ratios (Hungary, Latvia and Lithuania) and increased activity by private banks (Jordan and Montenegro). At the same time, several economies (particularly Belarus and Lebanon) have seen marked deteriorations in their financial resilience scores. In Lebanon, most financial resilience indicators have declined in the last year amid the ongoing economic and financial crisis. In Belarus, that deterioration reflects lower levels of liquidity in the banking sector and an increase in loan-to-deposit ratios.

Regulation and restructuring of the banking sector

Several countries have made progress with reforms to the regulatory and governance frameworks for their banking sectors over the last year. Mongolia, for example, made important amendments to its banking law in January 2021, requiring banks to have at least nine directors sitting on their supervisory boards, with at least a third of those directors being independent. Moreover, the suitability and professional qualifications of proposed board members must now be reviewed by the country’s central bank before they can take up their positions. What is more, a single shareholder can now hold a maximum of 20 per cent of a bank’s shares, with mandatory IPO procedures being used to ensure compliance with that threshold. In addition, the definition of a “systemic bank” has been expanded to include factors other than the amount of bank capital, and new reporting and transparency obligations have been imposed on banks. Egypt, meanwhile, adopted significant new legislation in September 2020, allowing the country’s central bank to issue banking licences to fintech firms and giving it a mandate to oversee non-bank fintech businesses. Those changes to the country’s regulatory environment are expected to encourage further investment in Egypt’s fintech sector and support the development of new fintech services. In Ukraine, a new law on payment services was adopted in July 2021, introducing the concept of “open banking” and various new types of payment service. Ukraine also made a number of amendments to its banking law in July 2021, strengthening banks’ capital requirements and other supervisory requirements. Moldova amended its banking legislation in November 2020 to strengthen the independence of the country’s central bank and ensure the integrity and finality of its decisions regarding monetary policy, regulation and banking supervision.

Integrated

Changes in integration scores have been very modest over the last year. Marked improvements have been observed in Estonia, Mongolia and Uzbekistan, while Azerbaijan has seen its score deteriorate somewhat. The increases seen in Estonia, Mongolia and Uzbekistan have been driven mainly by greater FDI inflows. In addition, Uzbekistan has also seen improvements in the conditions for international trade, as captured by trade volumes and the cost of cross-border trade. The deterioration seen in Azerbaijan, meanwhile, reflects significant fluctuations in both FDI and non-FDI inflows. Across the EBRD regions, there have also been moderate improvements in external integration on the back of increased numbers of enforced regional trade agreements and declines in the cost of cross-border trade.

Methodological notes

Transition indicators: six qualities of a sustainable market economy

The transition indicators reflect the judgement of the EBRD’s Office of the Chief Economist and the Economics, Policy and Governance department on the transition progress in the economies where the EBRD invests. According to this approach a sustainable market economy is characterised by six qualities: Competitive, Well-governed, Green, Inclusive, Resilient and Integrated.

This approach measures the state of each quality and its components in a given economy, as compared with the other economies in the EBRD regions and a few select developed economies,5 against a frontier. The frontier is set either by the best performance in this group of economies or by an unobserved theoretical value and provides a common benchmark against which all economies are assessed consistently and comparably. The same frontier values are also applied across the years to ensure that computed scores are comparable and capture changes in underlying indicators through time.

Assessments of Transition Qualities (ATQs) are composite indices combining information from a large number of indicators and assessments in a consistent manner. The underlying indicators within each ATQ are constructed using a wide range of sources, including national and industry statistics, data from other international organisations and affiliated databases (World Bank, IMF, UN); surveys (The Business Environment and Enterprise Performance Survey (BEEPS); Life in Transition Survey (LiTS) and assessments prepared internally by EBRD experts (see Table M.1 below for the list of indicators).

The computation of ATQ indices involves multiple steps, namely: data preparation, normalisation and aggregation. Details of each of these steps are provided below.

Data preparation and treatment of missing observations

The underlying data for the majority of indicators either enter the composite index directly or are scaled using a meaningful related measure. A number of indicators may themselves be composite indices (for example, EBRD SME index or EBRD Knowledge Economy index) and they enter the ATQ composites in index form. No further transformation is applied to the underlying indicators before normalisation. For some indicators no data is available for the current year and simple imputation methods are used.6 One method of imputation uses the latest available observation from past years, thus assuming that no change from the latest available observation has been observed. When there are no past or present observations available for a particular indicator, then, based on the judgement of EBRD experts, either the regional mean (using the EBRD classification of regions for the economies where it invests) or the observed regional minima are used to impute the missing observations.

For the regional disparity component of the Inclusive ATQ, imputations for the southern and eastern Mediterranean (SEMED) economies and Turkmenistan are necessary due to the LiTS (source of the data for this indicator) not being administered in these economies. In particular, a new series is generated for a full set of economies including SEMED and Turkmenistan based on available indicators on rural-urban disparities from other sources. Using the statistical relationship between the scores produced by this series and LiTS-based regional inclusions scores, missing SEMED and Turkmenistan values were imputed. Further details of this imputation are available on request.

To mitigate the effect that extreme values may have on scores, observations that lie above the 98th percentile are considered outliers and replaced by the next value within the acceptable range. Outlier detection and replacement is only applied to select continuous variables.

Normalisation

The raw data for each indicator are normalised to the same scale using the min-max normalisation method as follows:

The resulting scores are then rescaled from 1 to 10, where 10 represents the frontier for each quality. The frontier is taken to be the best performance, observed either in an economy where we invest, a comparator country or a theoretical value determined based on expert judgement.

If an observation for a country exceeds the selected frontier, then the normalised value of the indicator is capped at the frontier value. For indicators where any deviation from the frontier is undesirable, values either below or above the frontier are treated similarly (the same score is computed and assigned to two observations that are equally distant from the frontier).

Aggregation

Normalised indicators are aggregated to a single composite index (by quality) using weights determined by expert judgement (see Table M.1 for details of weights). A simple weighted averaging method is used for aggregation.

Changes to methodology from 2020

During the past year, further work on strengthening the methodology for computing ATQ indices was carried out. This work did not involve changes to the process of computation of ATQ indices and it focused largely on modifications to the set of underlying indicators. The primary purpose of this work has been ensuring that ATQs better capture the relevant phenomena and allow adequate monitoring of the pace of reforms and transformation in the region. This work resulted in the addition of new indicators, discontinuation of the use of others and use of equivalent data series from alternative sources. Details of these changes are provided below.

 Overall

• Following changes to the EBRD mandate in Cyprus and the Czech Republic in 2020-21, ATQ indices for Cyprus have been discontinued, while the Czech Republic is considered an economy where the EBRD invests (previously a comparator country).

Well-governed

• A new indicator measuring the quality of e-government services produced by the United Nations Department of Economic and Social Affairs (UNDESA) was added to the composite index.

Green

• A new indicator measuring the existence of a large-scale “Just Transition Plan” (capturing the measures that governments are taking to mitigate the impact of the green transformation on their economies and societies) produced by the EBRD was added to the composite index.

The following indicators previously produced by the World Bank were replaced with new, equivalent ones from alternative sources: the number of people affected by extreme weather conditions is sourced from the Emergency Events Database (EM-DAT), and the indicator measuring PM2.5 particle exposure is sourced from the Organisation for Economic Co-operation and Development (OECD).

The following tables show, for each quality, the components used in each quality index along the indicators and data sources that were fed into the final assessments.

^* Additional economies are at the frontier. Further information is available on request.
^a Inverted before normalisation.
^b Capped at frontier.
^c Mirrored from frontier.

Disclaimer: The 2021 ATQ indices were produced prior to the World Bank’s announcement on the discontinuation of the Doing Business Report. Doing Business indicators are used in three ATQ composite indices: Competitive, Well-governed and Integrated. The relevant revisions to ATQ indices reflecting the discontinuation of the Doing Business Report will be made in the 2022 Transition Report.