Policy Documentation Center

Abashidze, Archil

English

Javakheti One Year after the August War

Atamanov, Aziz

Luecke, Matthias

Omar Mahmoud, Toman

CASE Network Reports
No. 86 Income and distribution effects of migration and remittances: an analysis based on CGE models for selected CIS countries

  
 
1 
 
 
The International Institute for Middle-East and Balkan Studies (IFIMES) in 
Ljubljana, Slovenia, regularly analyses events in the Middle East and the Balkans. 
IFIMES has prepared an analysis of the current political situation in Albania in the 
light of the forthcoming parliamentary elections scheduled for 28 June 2009. The 
most relevant and interesting sections from the comprehensive analysis entitled 
"Preparing for Election Fraud?" are given below. 
 
 
ALBANIA AND 2009 PARLIAMENTARY ELECTIONS: 
 
PREPARING FOR ELECTION FRAUD? 
 
In the beginning of 1990 Albania ended 46 years of xenophobic  communist regime 
and introduced a multi-party system.  The transition period was difficult and the 
governments which have led Albania more or less successfully since 1990 had to deal 
with the heavy burden of unemployment, widespread corruption, organised crime 
and poor state of infrastructure. .  
 
According to the latest census carried out in 2001 Albania had 3.069.275 inhabitants 
of which 1,294,196 lived in urban and  1,775,079 in rural communities. The 2001 
census survey was the first census organised after the end of the communist regime. 
Between 1923 and 1989 there were 10 census surveys carried out in Albania which is 
the highest number after World War II.  
 
 
PHENOMENON OF THE "POSITIVE" ROLE OF CORRUPTION  
 
In 2009, almost two decades after the fall of the communist regime, some political 
and economic changes may be observed in Albania, although crime and corruption 
still grow like cancer in the Albanian society. However, corruption plays a positive 
role in Albania since it "greases" the rusty bureaucratic wheels. Until the 
administrative procedures are simplified the country will not be able to eradicate 
corruption.  Prime Minister Sali Berisha has been attacking corruption more 
intensively than his predecessors, but he has dealt with its consequences rather than 
the reasons. According to the data on corruption from Transparency International 
(2008 CORRUPTION PERCEPTIONS INDEX) Albania is ranked 85th of the total of 
180 countries included in the study, sharing its place with India, Madagascar, 
Montenegro, Serbia, Panama and Senegal.  In the letter dated 21 January 2009 
Transparency International directly informed Prime Minister Sali Berisha about 
various forms of corruption and pressure committed by Albanian government.  
 
  
 
2 
 
TOO LATE FOR NATO MEMBERSHIP 
 
At 2008 NATO summit in Bucharest, Albania and Croatia received invitations to 
become full NATO members in 2009. After all members states conclude the 
ratification procedure Albania will become s full NATO member  and as such it will be 
able to contribute to the political stability and security in the Balkans. In addition to 
political stability and economic development, full membership in NATO will bring 
foreign investments to Albania, thus improving the standard of living of its citizens. 
From May 2009 onwards Albanian flag will fly in front of NATO headquarters in 
Brussels.  
 
Prime Minister Sali Berisha's circle stresses that 18 years ago there were not many 
who believed that Albania would become NATO member in 2009 and probably also a 
candidate country for EU membership in 2010 and that this will enable 
normalisation of the situation in Albania which will gradually resemble the countries 
that are already members of the two organisations. 
 
However, Albanian intellectuals and journalists believe that the reality is different – 
18 years is a long period which has disappointed all those who had dreamt of a 
European Albania in late 1980s. 
 
They argue that Albania has missed the train and that it now lacks the strategy and 
the national development plan including membership in various multinational 
organisations. The Albanian public has an impression that the government behaves 
as a corporation which can operate only on the basis of compensation, compensating 
one membership for another. 
 
JOINING THE EU THROUGH CZECH REPUBLIC OR SWEDEN 
 
In March 2008 the opposition Socialist Party (PS) leader Edi Rama called the 
government to submit the application for the status of EU candidate country by end 
2008. The Albanian government has still not announced when it plans to submit the 
application – whether during the Czech or the Swedish EU presidency. 
 
According to the circles near Berisha Albania will apply for the status of EU candidate 
country this year. The dilemma is whether it will do it during the Czech presidency or 
after 1 July 2009 when the EU presidency is taken over by Sweden. 
 
The Institute for Democracy and Mediation from Tirana has argued that the 
government should submit the application during the Czech presidency, anticipating 
that Albania would be granted the status of candidate country by end 2010 and start 
the negotiations by end 2011 or beginning 2012. 
 
  
 
3 
Greece has recently, as the last state, ratified the Stabilisation and Association 
Agreement (SAA) with Albania. Two days later Albanian Minister for EU Integration 
Majlinda Bregu stated that Albania would apply for membership by mid 2009. 
 
The IFIMES International Institute estimates that it would be realistic to expect 
Albania to apply for the status of candidate country during the Swedish EU 
presidency. Parliamentary elections in Albania are scheduled for 28 June 2009 and 
most EU member states want to make sure they will be carried out in accordance with 
all the relevant standards. If the elections meet the OSCE/ODIHR standards this will 
make it easier for Albania to carry out the accession process. However, should the 
elections turn out to be unfair and fraudulent this will further complicate Albania's 
internal affairs and hamper its EU integration. 
 
 
PARLIAMENTARY ELECTIONS AND ELECTION FRAUD 
 
President of the Republic of Albania Bamir Topi announced that parliamentary 
elections would be held on 28 June 2009. Albania will organise the forthcoming 
elections for the first time as a new NATO member, therefore this will be an 
important milestone for its EU integration process.  
 
In the 2005 parliamentary elections, the Democratic Party (PD) led by Sali Berisha 
won a decisive victory on pledges of reducing crime and corruption, promoting 
economic growth and ensuring democratic development. 
 
Four years later, the situation related to crime and corruption has not improved. 
Even the analysts close to the political right in Albania think that the government has 
not done enough. Some ministers and even Prime Minister Berisha's family members 
have been connected with corruption.  
 
According to the analysts, the political left dominated by the Socialist Party (PS) aims 
to eliminate the competitors in the left political block, i.e.  the Socialist Movement for 
Integration (LSI) led by former Prime Minister Ilir Meta, which usually receives 7%-
8% votes. Should the left-wing win the elections, it could use those votes in order to 
target the Prime Minister position. The analysts close to the political right claim that 
PS leader Edi Rama has decided to create conflicts in order to eliminate LSI from the 
political scene. However, the disunited left-wing would be useful for PD leader Sali 
Berisha who could use those conflicts in order to win the election again. 
 
The IFIMES International Institute estimates that the Albanian political right led by 
PD has never been as united as it is now, while the political left has become disunited. 
Sali Berisha has controlled the scene since 2007 when he won local elections in the 
rural areas where the left-wing had traditionally been stronger. At 2007 local 
elections the Democratic Party won with 47.86% votes, while the Socialist Party 
  
 
4 
received 43.74% of the total 1,314,633 eligible voters who participated at the 
elections.   
 
At the end of November 2008 the Democratic Party (PD) and the Socialist Party (PS) 
agreed on amendments to the election law.  Elections will be held in June 2009. 
According to the agreement made by the two largest parties Albania would introduce 
a new election system - the proportional model which would replace the previous 
partial majority model. This has triggered strong reactions from small parties which 
believe the new election model will keep them out of the parliament. The deputies 
from small parties went on a 10-day hunger strike which brought no results. The two 
main political parties insisted on what they had agreed on and adopted the new 
election law.   
 
Small parties such as LSI led by Ilir Meta and others have accused the Democratic 
Party and the Socialist Party  of planning an election fraud.  LSI claims that under the 
new election law the electoral commissions may be composed of the representatives 
of the DP and the SP only without the presence of other parties, thereby functioning 
as bipolar structures which will control and count the votes without the interference 
of other parties competing at the elections. This makes the election fraud much more 
plausible and endangers free elections and the democratic process in Albania. The 
new election law is also called "the deception law" of Sali Berisha's autocratic regime 
which was unfortunately supported also by the opposition Socialist Party. It should 
be noted that the election threshold for political parties is 3% while for coalitions it is 
5%.    
 
Analysts have pointed to the possibility that the Democratic Party may prepare an 
election fraud at the forthcoming elections in Albania. At the last elections (2005) the 
election fraud planned by the Socialist Party was prevented. 
 
Sali Berisha's Democratic Party has improved its image to some extent, but the 
question is, whether this is enough to win the elections. Despite a negative public 
perception it is quite possible that Berisha (PD) wins about 40% of votes and forms 
the government with one of the small political parties. 
 
 
POLITICAL LUSTRATION 
 
In late 2008 Albanian parliament passed the law on lustration without the 
participation of the opposition, which was strongly condemned by the international 
community. 
 
On the day the law was passed a strong reaction also came from the United States 
Ambassador to Albania John Withers who condemned the law as a document of the 
Democratic Party which opens some serious legislative and constitutional dilemmas,  
  
 
5 
and he called the government to withdraw it and consult international experts. 
Council of Europe Secretary General Terry Davis stated that the lustration law shows 
no good intentions and may cause great injustice. 
 
The lustration law was criticised also by Freedom House which fears that the law may 
jeopardise freedom in Albania, which will be negatively reflected in the 2009 report 
on Albania. 
 
Albania is currently burdened with the involvement of Sali Berisha's government in 
corruption problems.  Berisha therefore hastened the adoption of the lustration law 
in order to replace some people at important positions especially in the judicial 
administration and prosecution service who have been attacking the government and 
him personally. According to Berisha those people occupied some high positions 
during the communist regime. 
 
Although the lustration law triggered strong reactions and criticism inside and 
outside Albania, Berisha is determined to go through with it. The last hope is 
President of the Republic of Albania Bamir Topi who has the constitutional right to 
return the law to the parliament for reading, but he has not reacted yet. Berisha 
seems to be satisfied, but the question is how much longer? 
 
Despite his claims that the lustration law will be just and that the 2009 elections will 
be fair and free, Berisha's conflicts with the US Ambassador, EU delegation and 
OSCE representatives are very significant.  
 
Analysts have analysed Sali Berisha's personality as a typical dinarid type, acting very 
passionately, adding the unnecessary psychological tone to all topics and ready to 
oppose any challengers, including the international community.  His and therefore 
also DP's problem is that they lack a comprehensive, detailed and coherent political 
platform in order to resolve the problems Albania is facing. Berisha instead offers 
compensation, claiming that communism is still strong and using in the "fighting-
with-the-dead-Indian" style. Berisha would do anything and use any means to remain 
in power. For instance, the construction of highway connection with Kosovo is 
turning into a campaign to disunite the Albanians instead of being a project which 
would unite the nation. Like in other countries in transition Albania is experiencing 
restoration of totalitarianism, supplemented with autocracy at lower levels. For 
example, each leader is an authoritarian person and each party is totalitarian, which 
creates the conditions for an increasing number of fractions that eventually transform 
into new political parties. 
 
Many Albanians have an impression that the current events resemble those in 1996 
(one year later - in 1997 - Albania almost collapsed) when Sali Berisha's Democratic 
Party won the elections with 90 % of votes. The fear that is present among the people 
shows that 2009 will be a very intensive year for the political scene in Albania. 
  
 
6 
 
Analysts note that the lustration law as well as everything else is designed on the 
basis of some capricious political party principles. It is not understandable why so 
much energy is spent on something that no longer plays any significant role in 
Albania. Berisha is zealously fighting as if he had to deal with the dilemma of 
choosing between communism or democracy, while the real dilemma lies in opting 
for  democratura or democracy. 
 
The IFIMES International Institute believes that 2009 is not the same as 1996, nor in 
terms of internal nor foreign politics. Everything is different, only Sali Berisha is still 
the same.                          
                                                         
 
Ljubljana, 9 February 2009                       International Institute for Middle-East  
                                                                         and  Balkan Studies (IFIMES) - Ljubljana 
                              
                                                                         Directors: 
                   Bakhtyar Aljaf                                                                
        Zijad Bećirović, M.Sc. 
 
 
                                                    
 
 
 
 
 
 
 
 


Preparing for election fraud?

 
March 2009 1 
BELARUSIAN MONTHLY 
ECONOMIC REVIEW 
• Negotiations on joining the EU’s Eastern Partnership. 
• Exchange rate swap operation between NBB and People’s 
Bank of China. 
• A dramatic drop of exports to Russia. 
• Further decrease of the international reserves. 
Politics: Negotiations on joining the EU’s Eastern 
Partnership 
In February High Representative for the Common Foreign and 
Security Policy of the EU J. Solana came to Belarus with an 
official visit. During his meeting with the Belarusian President 
A. Lukashenka the issues of the cooperation between parties, 
and in particular, possible participation of Belarus in the EU 
program Eastern Partnership were discussed. Furthermore, it 
was stated that A. Lukashenka confirmed the readiness of 
Belarus to take part in the Eastern Partnership. No documents 
were signed after the meeting, but J. Solana expressed satis-
faction with the results of his visit. Later, the minister of for-
eign affairs of the Czech Republic that is the current chair in 
the EU K. Schwarzenberg stated that if Belarus recognizes the 
independence of Abkhazia and South Osetia it will “be out of 
the European context” and it will embarrass its participation 
in the Eastern Partnership. A similar statement was done by 
the European Commissioner B. Ferrero-Walnder, who also 
planned to visit Belarus in early March. But just before the 
visit it was postponed to April, which could suggest some 
growing contradictions between parties. However, later in 
March the EU Summit approved the Eastern Partnership pro-
gram having included Belarus as its member, which might 
influence the long-term geopolitical priorities of Belarus. 
Real sector: Deceleration of growth in 2009 
In January, real GDP grew by 4.2% yoy at the background of 
the economic recession in the neighboring countries. In Rus-
sia GDP dropped in January by 8.8% yoy, in Ukraine by more 
than 15%. However, Belarusian economic growth has been 
based on investment increase (financed by the government 
from 2008 funds) and consumption growth (caused by tem-
porary hike in expenditures after devaluation). Both of these 
sources cannot sustain for the whole year, so one can expect 
growth deceleration February onwards. 
Increase in inventories was another source of GDP increase 
(11.2% of the total industrial output in January). The problem 
is whether these inventories will be sold later, as Belarusian 
enterprises faces shrinking demand for their goods. In Janu-
ary merchandise exports in real terms dropped by 26.6% yoy, 
and domestic market can hardly substitute the external one. 
Structural trends: Exchange rate swap operation 
between NBB and People’s Bank of China 
Since the beginning of the financial crisis Belarusian authori-
ties declared the necessity of using national currencies in bi-
lateral settlements with trade partners. In March the NBB in-
formed about exchange rate swap with the People’s Bank of 
China in national currencies, the volume of which is equiva-
lent to the sum of about USD 2.9 bn. This transaction might 
be considered to be bilaterally beneficial. Belarus has a strong 
need in foreign currency for the stabilization of the domestic 
currency market and replenishment of the international re-
serves. From the Belarusian position this transaction might be 
considered as almost identical to direct borrowing. In its turn 
China might want to stimulate its exports to Belarus because  
 
 
 
No. 3 (78) 
March 2009 
 
 
 
 
 
 
 
 
Population: 9.67 m 
Industry / GDP: 28.1% 
Agriculture / GDP: 8.4% 
Investment / GDP: 27.9% 
Export destination: Russia 32%, EU 44% 
Import origin: Russia 60%, EU 22% 
 
 
 
 
 
 
 
 
 
 
Real GDP growth 
5.8
4.7 5.0
6.8
11.4
9.4 9.9
8.2
10.0
0.0
0
1
2
3
4
5
6
7
8
9
10
11
12
00 01 02 03 04 05 06 07 08 09
% yoy
Source: Ministry of Statistics and Analysis. Forecast 
for 2008: IPM Research Center. 
 
 
 
 
 
 
 
 
 
 
IPM Research Center 
 
German Economic Team 
in Belarus  
 
50Б Zakharova St., Minsk 220088, Belarus 
Tel./fax (+375 17) 210 0105 
E-mail: bmer@research.by 
Internet http://research.by/ 
 
 
© IPM Research Center, 2009 
 
Belarusian Monthly Economic Review №3 (78) 
 
 
 
March 2009 2 
of this transaction. It should be mentioned that problem of 
decreasing exports is the key one for China under the global 
crisis, while this sum of funds is not so substantial in the con-
text of this country. Hence, China is likely to test a new 
mechanism of exports stimulation that may be later used with 
other countries. 
NBB stated about launching measures directed at the de-
dollarisation of the economy. The intention to de-dollarisation 
might be consequent to the deficit of the foreign currency at 
the domestic market during last months. Due to such meas-
ures NBB wants to increase the demand for the national cur-
rency, which dropped significantly in 2009. But it is unlikely 
that limitation of the spheres where the settlements in the for-
eign currency are allowed will result in substantial increase of 
the demand for the Belarusian ruble. Hence, trying to give an 
additional impulse to the de-dollarisation NBB recommended 
banks to reduce the interest rates on the foreign currency 
deposits. But the effectiveness of this measure seems to be 
also doubtful, while the direct regulation of the deposit mar-
ket may cause a negative impact on the population behavior. 
Foreign trade: A dramatic drop of exports to Russia 
In 2008 the merchandise trade deficit amounted to USD 6.6 
bn, having increased by 49.0% yoy (48.1% yoy in Jan-Nov). 
In 2008 exports grew by 35.5% yoy, while imports by 
37.6% yoy. The growth of the trade volume was mainly 
driven by the price increase, which provided 95.3% of the 
exports growth and 61.2% of imports growth. Since the au-
tumn of 2008 both average prices and physical volumes be-
gan to fall. In December, in comparison to September aver-
age prices of exports dropped by 41.1% in trade with non-CIS 
countries and by 11.8% in trade with Russia. The physical 
volume to the non-CIS countries grew in December by 
4.1% yoy, while to Russia it dropped by 33.9% yoy. 
The supply of main goods to non-CIS countries – oil products 
and potash fertilizers – were touched by the global crisis 
through falling prices and hence exports (by 26.9% yoy in 
December). In trade with Russia the worst situation was with 
the supply of the investment goods. For instance, exports of 
tractors in December were about 50% of its monthly average 
volume in Jan-Sep, and trucks – 30.6%. The protection meas-
ures discussed in Russia may further worsen the stance of the 
Belarusian exporters of investment goods. Physical volumes of 
imports from Russia in December dropped only by 2.4% yoy, 
while the prices went down by 32.6% yoy. However, physical 
volume of imports from non-CIS countries kept on growing 
(by 5.8% yoy in December), while the prices decreased by 
only 1.3% yoy. This dynamics shows that Belarusian eco-
nomic agents have not yet adjusted to the new economic con-
juncture, keeping up the demand for both raw materials im-
ports from Russia and consumer imports from the EU. 
Public finance: Surplus of the consolidated budget 
In 2008 consolidated revenues amounted to 51% of GDP, 
which is by 1.5 percentage points more than in 2007. This 
growth was due to higher revenues (by 1.8% percentage 
points of GDP) from taxes on external economic operations 
because of the high oil prices in Jan-Sep and from taxes on 
incomes and profit. At the same time, there was a decline of 
revenues from taxes on goods and services (because of the 
lower rate of the agricultural levy) and taxes on the wage 
fund, because the share of wages in GDP decreased in 2008. 
Consolidated expenditures in 2008 amounted to 49.5% of 
GDP, which is by 0.6 percentage points more than in 2007. 
The growth was provided by the drastic increase of the gov 
 
GDP and Industrial Output 
0
3
6
9
12
15
Ja
n.
0
8
F
eb
.0
8
M
a
r.
0
8
A
p
r.
0
8
M
ay
.0
8
Ju
n
.0
8
Ju
l.
0
8
A
u
g
.0
8
S
e
p
.0
8
O
ct
.0
8
N
o
v.
08
D
ec
.0
8
Ja
n.
09
real GDP growth
real industrial output growth
% yoy cum.
Source: National Statistical Committee. 
 
 
 
 
 
 
 
 
 
Contribution to Industrial Output Growth 
Growth 
January 2009 
% Contribution* 
Industry, total -0.3 -0.3 
Electric power -10.6 -0.8 
Fuel 6.4 1.5 
Ferrous metallurgy 4.5 0.2 
Chemical and petro-
chemical industry 
29.6 3.2 
Machinery and  
metalworking 
-21.7 -4.5 
Logging, woodworking, 
pulp and paper 
-21.0 -0.6 
Building materials -21.6 -0.6 
Light -18.9 -0.6 
Food 5.5 0.6 
Other 8.6 1.1 
Note. * - data is given in percentage points. 
Source: National Statistical Committee. 
 
 
 
 
 
 
 
 
 
Merchandise Trade 
1000
1500
2000
2500
3000
3500
4000
4500
Ja
n
.0
7
M
ar
.0
M
a
y.
0
Ju
l.0
7
S
ep
.0
N
ov
.0
Ja
n.
08
M
a
r.
0
M
ay
.0
Ju
l.
0
8
S
ep
.0
N
o
v.
0
-1200
-1000
-800
-600
-400
-200
0
balance (right axis)
exports
imports
USD m
Source: National Statistical Committee. 
Belarusian Monthly Economic Review №3 (78) 
 
 
 
March 2009 3 
ernment investments, which led to the increase of the “state 
expenditure” by 1.7 percentage point of GDP. Moreover, the 
expenditures “on the economy” and housing and utilities in-
frastructure was increased as well. Other items of the budget 
performed decreasing expenditure: social policy by 0.8, edu-
cation by 0.5 and healthcare by 0.5 percentage points of 
GDP. This change in expenditure structure witnesses the 
change in priorities of the budget policy, which might express 
in substantial decrease of the social expenditure in 2009. 
Monetary policy: Drop of the international reserves 
In January, net foreign assets of the monetary authorities 
dropped by 11.4% mom (by USD 364.4 m). However without 
the first tranche of the IMF loan, net foreign assets would 
have dropped by 36% mom (USD 1.15 bn). The NBB tried to 
bound demand for hard currency, having increased the refi-
nancing rate by 2 percentage points up to 14% and corre-
spondingly other rates on the NBB operations. However, at 
the same time the NBB trying to stimulate domestic credit 
market increased the volume of resources for refinancing of 
banks and claims on banks increased by 45.5% mom. Finally, 
base money in January decreased by 28.0% mom, while in 
annual terms it decreased by 9.3% yoy. 
In this situation claims of banks on the economy grew by 
6.5% mom, while in annual terms its growth rate amounted to 
64.1% yoy (54.9% yoy in December), but without re-estima-
tion of the claims in foreign currency it was 52.5% yoy. Inter-
est rates at the interbank market and also at the credit and 
deposit market grew substantially on both national and foreign 
currency contracts. This allowed avoiding huge net outflow of 
saving by population from the banking system. In January, 
households withdraw about 13.8% of ruble deposits, but nearly 
all these funds were re-deposited in banks in hard currency – 
households’ deposits in foreign currency grew by 10.3% mom 
(about 38.0% mom in ruble equivalent). However, net outflow 
of the legal entities’ deposits was more significant, which along-
side with decreased demand for cash money (by 18.1% mom) 
exerted a pressure for the domestic money market. Finally ru-
ble money decreased in January by 18.4% mom, while broad 
money by 2.4%. In annual terms its growth rates amounted to 
11.3 and 32.0% yoy (28.0 and 30.2% yoy in December). 
Consumer prices in January grew by 4.1% mom and in annual 
terms inflation amounted to 15.1% yoy (13.3% yoy in De-
cember). The Belarusian ruble was devaluated through Janu-
ary by 25.1% and later in February by additional 3.9%. As of 
February 28, its exchange rate was 2858 USD/BYR. 
Banking sector: Argues about collector agencies 
NBB declared its intention to launch a legislative base in Bela-
rus for a legal activity of the collector agencies, which are 
rather wide-spread in other countries. The discussion on the 
necessity of establishment of the collector agencies was initi-
ated by the NBB because of the increasing non-performing 
loans in the banking system under the condition of the finan-
cial crisis. They hope that this kind of the specialized institu-
tions will contribute to the reduction of the overdue credit in-
debtedness. However, current Belarusian legislation allows 
debt assignment only for banks, while collector activity cannot 
be the main one. Furthermore, the experience of the 
neighboring countries shows that the activity of the collector 
agencies may contradict to the principle of the bank secret 
and thus lead to social protests. Thus, on the one hand, it 
may lead to higher financial discipline by borrowers, but on 
the other hand it may decrease propensity to borrow at least 
by physical entities and cause negative social consequences. 
 
Consolidated Budget 
30
40
50
60
70
80
90
Ja
n
.0
7
M
a
r.
0
7
M
ay
.0
7
Ju
l.
0
7
S
e
p.
07
N
o
v.
0
7
Ja
n
.0
8
M
ar
.0
8
M
ay
.0
8
Ju
l.0
8
S
e
p.
0
8
N
o
v.
0
8
-40
-30
-20
-10
0
10
20
balance (right axis)
revenues
expenditures
% of GDP
Source: calculations based on the National Statistical 
Committee data. 
 
 
 
 
 
 
 
 
Monetary Base and СPI 
-15
0
15
30
45
60
75
Ja
n
.0
8
Fe
b
.0
8
M
ar
.0
8
A
pr
.0
8
M
a
y.
0
8
Ju
n.
0
8
Ju
l.
0
8
A
u
g.
08
S
e
p.
0
8
O
ct
.0
8
N
o
v.
0
8
D
ec
.0
8
Ja
n
.0
9
6
8
10
12
14
16
18
CPI (right axis) monetary base
% yoy eop % yoy
 
Source: calculations based on the National Statistical 
Committee and the NBB data. 
 
 
 
 
 
 
 
Refinancing rate 
8
9
10
11
12
13
14
15
Ja
n
.0
8
Fe
b
.0
8
M
ar
.0
8
A
p
r.
0
8
M
ay
.0
8
Ju
n
.0
8
Ju
l.
0
8
A
u
g
.0
8
S
ep
.0
8
O
ct
.0
8
N
o
v.
0
8
D
ec
.0
8
Ja
n
.0
9
-6
-5
-4
-3
-2
-1
0
1
real (right axis) nominal
% per annum
Source: calculations based on National Statistical 
Committee and the NBB data. 
 
Belarusian Monthly Economic Review №3 (78) 
 
 
 
March 2009 4 
Economic Trends  Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 
Nov. 
08 
Dec 
08 
Jan 
09 
GDP growth % yoy 8.4 8.9 8.4 7.3 10.9 10.1 11.2 7.5    
GDP growth % yoy cum. 8.4 8.6 8.4 8.2 10.9 10.4 10.7 10.0 10.8 10.0 4.2 
Industrial Production % yoy cum. 5.9 7.7 8.2 8.5 14.7 13.0 13.1 10.8 12.7 10.8 1.2 
Agricultural Production % yoy cum. 4.4 5.2 5.6 4.1 6.8 5.4 6.9 8.9 8.9 8.9 8.4 
CPI % yoy eop 8.1 7.2 9.0 12.1 13.2 16.0 16.3 13.3 14.7 13.3 15.1 
PPI % yoy eop 11.6 13.6 16.8 17.1 13.5 16.2 18.5 14.2 18.2 14.2 19.9 
Merchandise export (USD)* % yoy 6.3 23.3 18.5 44.4 69.2 56.0 44.9 -11.6 -19.1 -29.8 -- 
Merchandise import (USD)* % yoy 20.8 23.7 23.8 42.4 56.5 55.3 53.1 -1.5 -11.4 -12.2 -- 
Merchandise trade balance 
(NBB data) 
USD m cum. –836 -1563 -2304 -3858 -647 -2049 -3835 -6104 -5059 -6104 -- 
Current account USD m cum. –641 -1152 -1652 -2944 -433 -1411 -2920 -5049 -- -5049 -- 
Current account % GDP cum –7.0 -5.8 -5.1 -6.6 -3.6 -5.5 -6.6 -8.0 -- -8.0 -- 
International reserves USD m eop 1565 2344 2155 4182 4746 4618 4120 3061 3775 3061 2929 
Monetary base % yoy eop 22 29 25 38 59 54 48 12 42 12 -9 
Lending rate** % p.a. aop 14 11 12 12 11 10 11 14 14 15 20 
Exchange rate 
(official) 
USD aop 2141 2145 2147 2152 2148 2136 2114 2147 2137 2190 2668 
Exchange rate 
(official) 
EUR aop 2805 2890 2948 3115 3215 3339 3183 2827 2719 2935 3544 
* Growth rates in value terms (source: Ministry of Statistics and Analysis). 
** Nominal rate of commercial banks for new loans for legal entities in national currency. 
Sources: Ministry of Statistics and Analysis, NBB. 
 
Key Economic Indicators 2002 2003 2004 2005 2006 2007 2008 
Nominal GDP* BYR trn 26.613 36.565 49.991 65.067 79.231 96.047 128.828 
Nominal GDP** USD bn 14.5 17.7 23.1 30.2 36.9 44.8 60.3 
GDP Growth % yoy 5.0 7.0 11.4 9.4 9.9 8.6 10.0 
Industrial production % yoy 4.5 7.1 15.9 10.5 11.3 8.7 10.8 
Agricultural production % yoy 0.7 6.6 12.6 1.7 6.1 4.4 8.9 
CPI % yoy aop 42.6 28.4 18.1 10.3 7.0 8.4 14.8 
CPI % yoy eop 34.8 25.4 14.4 8.0 6.6 12.1 13.3 
PPI % yoy aop 41.4 37.5 24.1 12.1 8.3 16.2 15.6 
PPI % yoy eop 42.7 28.1 18.8 10.0 8.5 17.1 14.2 
Exports (gs, USD) % yoy 9.8 24.4 35.5 15.9 22.3 24.0 35.5 
Imports (gs, USD) % yoy 9.0 25.0 40.4 3.8 33.2 28.0 37.6 
Current account USD m –334 –426 –1193 436 –1448 –3060 –5049 
Current account % GDP –2.3 –2.4 –5.2 1.4 –3.9 –6.8 –8.0 
FDI (net) USD m 453 170 163 303 351 1770 2143 
International reserves USD m 457 474 770 1297 1383 4182 3467 
Fiscal balance % GDP –0.2 –1.6 0.0 –0.6 2.2 0.6 0.9 
Domestic public debt % GDP eop 5.4 5.5 5.7 5.8 6.5 6.4 6.7 
External debt (total) % GDP eop 27.0 23.7 21.4 17.9 18.6 28.4 24.6 
Monetary base % yoy eop 32 50 42 74 20 38 12 
Exchange rate (official)* USD aop 1784 2075 2160 2154 2145 2146 2136 
Exchange rate (official)* USD eop 1920 2156 2170 2152 2140 2150 2200 
Exchange rate (official)* EUR aop 1690 2353 2684 2681 2692 2937 3135 
Exchange rate (official)* EUR eop 1989 2695 2956 2550 2817 3167 3077 
* On January 1, 2000 the Belarusian ruble was denominated 1:1000. All figures for 1999 are given in ‘new’ Belarusian rubles. 
** For the period of 1999–2000, GDP in USD is calculated by using the market (unofficial) exchange rate (source: IPM Re-
search Center). 
Sources: National Statistical Comittee, Ministry of Finance, NBB, IPM Research Center. 
 
Notes: 
aop average of period gs goods and services 
avg average trn trillion 
bn Billion NBB National Bank of Belarus 
cum. cumulative p.a. per annum 
eop end of period yoy year-on-year 
m million ytd year-to-date 
 


Belarusian Monthly Economic Review, \u21163(78), March 2009

Buhrer Tavanier, Yana

Institutions Remain Dumping Grounds for Forgotten People

Grguric, Ivan

101
PARTICIPATORY BUDGETING: CONCEPTS AND COUNTRY 
EXPERIENCES
Jayshree Bose (ed.), 2008, the Icfai University Press, Hyderabad, India, pp. 289
Review*
In economic theory, median voter theorem suggests that democratic countries with 
higher inequalities should have more progressive tax systems. The logic of this theorem 
is simple: the larger the segment of the poorer majority, the more likely it is for them to 
“team up” and vote for parties that will impose more taxes on the rich minority. Regard-
less of how “logical” this theorem is, in reality it does not hold. It is not countries with 
high inequality that have a highly redistributive tax system (e.g. Latin American coun-
tries), rather those with low inequality that continue to have very redistributive tax sys-
tems (e.g. Scandinavian countries). It seems obvious that the rich minority, through legit-
imate processes of representative democracy, is able to force its will on the poor majority 
– the rich finance political parties, often control a large portion of media and political elit-
es often recruit themselves from economic elites. One way of making democracy work 
better for the poor is introducing direct democracy into budgeting practices. Participatory 
budgeting is a form of economic democracy in which distribution of budget funds based 
on the decision not of the majority of elected politicians but on the will of the majority of 
people. The book under review consists of two parts – theoretical and case studies, and 
sixteen chapters.
The first part has six chapters. In Chapter 1 Jayshree Bose provides a definition of 
participatory budgeting as the active participation of non-governmental organizations 
(NGOs) and civil activist groups in budgeting formulation to ensure that minority stake-
holders (e.g. women, children) are allocated their dues in the budget, and that the funds 
are well spent. In addition, common characteristics of participatory budgeting groups are 
outlined – being pro-poor and independent of the government. 
In Chapter 2 she analyzes gender budgets – budgets that are sensitive to women’s 
needs. The first gender budget was implemented in Australia in 1984. This budget was 
government-led, without input from stakeholders (i.e. participatory budgeting groups). As 
a result, it failed to change the mindset, even though it did improve the position of women. 
* Received: January 11, 2010
* Accepted: January 28, 2010
102
J. Bose: Participatory budgeting: concepts and country experiences
Financial Theory and Practice 34 (1) 101-105 (2010)
Women are a particularly vulnerable group especially in the developing countries, where 
a number of obstacles to their inclusion in budgeting issues exist. For instance, the female 
workforce is often concentrated in the non-paid sector, e.g. housework, and budgets deal 
primarily with the paid sector. In addition, women are concentrated in the care-giving sec-
tor (for children and elderly), primarily for family members, and due to cultural reasons 
these are often not considered productive investments. 
Chapter 3 gives a proposal on how practically to implement participatory budgeting 
policies. manolis kalikakis et al. suggest creating a sort of catalogue out of which citi-
zens can choose how much funding should be allocated to each item in the catalogue. Of 
course, some items should not be a part of that catalogue. For instance, citizens should 
not be given the opportunity to assign funds to services which are not directly observed 
by them (e.g. army). In addition, in some cases maintaining funds is necessary for normal 
functioning of the system (e.g. healthcare).
In Chapter 4 Sveinung Legard puts the idea of participatory budgeting into the broa-
der framework of communitarianism. The author concludes that participatory budgeting 
leads to more redistributive budgets and more funds for the society’s unprivileged. In ad-
dition, participatory budgeting creates a more active citizenry and is therefore good for 
the development of the civil society. Also, participatory budgeting is meant to strengthen 
ties between the elected and the electorate, enhance administrative transparency and cre-
ate a sense of “ownership” among stakeholders. Still, in its application, participatory budg-
eting has fallen short on some of its possible effects. In Puerto Alegre, Brazil, which is 
one of the first cities in the world successfully to implement participatory budgeting pol-
icies, starting from the late 1980s, the “people’s budget” could always be vetoed by the 
city council, making participatory budgeting only a tool to promote the agenda of the rul-
ing party. Thus, there was room only for programs which were in line with the program 
of the ruling party. 
In Chapter 5 Jayshree Bose discusses problems in accounting for what percentage of 
funds allocated to certain projects actually reach their destination. Budget allocations are 
a very poor indicator of actual funds received. Therefore, more sophisticated methods like 
the public expenditure tracking survey (PETS) and the quantitative service delivery sur-
vey (QSDS) are more appropriate. A PETS tracks resource flows through various chan-
nels and evaluates what proportion of the resources allocated by the budget comes in at 
every stage. QSDS has a more detailed, micro approach, making it time- and effort-con-
suming, as well as costly. Both methods suggest that funds actually allocated are much 
lower than funds initially assigned through budget allocations. 
In Chapter 6 the municipal Research & Services Center of Washington investigates 
how Internet technology can be used to increase citizen participation. The Internet pro-
vides accessible information to everyone with e-mail access through e-newsletters and 
e-notifications. In addition, online surveys are a common form of Internet-based citizen 
participation, as are online discussion boards and forums. The problem with Internet, as 
a tool of mobilizing citizenry is its limited applicability across countries. Internet can be 
used only in countries where the Internet is accessible to all segments of the society, i.e. 
the most developed countries. Using the Internet as a citizen-mobilizing tool in less de-
veloped countries can be counter-productive, because it is able to reach only limited seg-
103
J. Bose: Participatory budgeting: concepts and country experiences
Financial Theory and Practice 34 (1) 101-105 (2010)
ments of the society – generally the more well-off. Therefore, use of the Internet in this 
way would be only likely to increase the disenfranchisement of the poorest segments of 
the society. 
The second part consists of ten chapters, which are case studies of participatory budg-
eting policies in different countries. In Chapter 7 Jose Sterling et al. provide an insight 
into the “homeland” of participatory budgeting – Porto Alegre in Brazil. In Porto Alegre 
participatory budgeting process is performed on three levels – local, regional and munic-
ipal councils. In the beginning, the number of people who participated in different levels 
of this process fell. It started rising again after people saw it had an impact on their lives. 
The main problem was the lack of a pedagogical basis to support the decision-making 
process. In other words, the community had to be previously informed and educated about 
rights to participate but also had to have some idea about how the city was being organ-
ized. Often people were only interested in the end result but not in understanding the proc-
ess, which limits future participation. 
In Chapter 8 S. Bhaskaran looks into implementation of participatory budgeting pol-
icies in Uganda, the country that created a poverty action fund from debt relief funds. 
Characteristic of this fund was that it allowed community councils to oversee how money 
from this fund was being spent. This provided linkage between local budget monitoring 
and national policy processes. 
In chapter 9 katarina Ott analyzes the legal systems of Croatia, macedonia and Ukraine 
to look for legal opportunities for participatory budgeting policies as well as for usage of 
these opportunities in budgeting practice. She concentrates on three specific issues. First, 
can citizens oversee the budget? Second, are budget data available? And third, is it clear 
who is accountable for what? Ott concludes that Ukraine offers legal opportunities for its 
citizens to oversee the budget, but the relevant procedures are not well defined. macedo-
nia, on the other hand, has no legal framework to allow citizens to participate in the budg-
etary process. Still, other laws support participation in decisions about common matters. 
Therefore, it should be said that legal opportunities for overseeing budgetary process are 
provided indirectly. Croatia has the best legal framework. Still, all three countries show 
very little interest in overseeing the budgetary system. In Ukraine it is a problem of lack 
of clearly defined procedures. macedonia should install a legal framework that supports 
overseeing the budgetary process. Croatia, on the other hand, has a problem with willing-
ness rather than opportunities. For cultural and psychological reasons, citizen participa-
tion is weak and government accountability low in all three countries. 
Chapter 10, by the Africa Social Accountability Action Forum, presents a summary 
of conclusions reached during a training workshop on participatory budgeting in Africa. 
The workshop highlighted several issues. In order for the project to work, a certain de-
gree of open-mindedness among participants is required. Also, participatory budgeting 
allows different stakeholders to work together to improve budget efficiency and transpar-
ency, as well as giving marginalized groups a chance to be heard. Therefore, participatory 
budgeting can be used for creating strategic alliances between different stakeholders, which 
can enhance solidarity in the society and increase redistribution to the poorest segments 
of the society. 
104
J. Bose: Participatory budgeting: concepts and country experiences
Financial Theory and Practice 34 (1) 101-105 (2010)
In Chapter 11 Vinod Bhanu analyzes budgeting policies in India. The Indian govern-
ment has an unfortunate habit of presenting to the public the details of the budget propo-
sal on the same day as the vote for the budget in parliament is being held. This practice 
excludes any public discussion during the process in which a budget proposal is created. 
Therefore, parliament can reject or shrink the budget, but it cannot fundamentally alter it. 
The only institutions consulted in the process of making the budget are the unions. This 
veil of secrecy surrounding the process of budget-making is justified by the claim that if 
the process were made public, it could have detrimental effects on the markets and the 
economy. Unfortunately for the Indian government, there is no empirical evidence to sup-
port this claim.
Chapter 12, by Jhuma mukhopadhyay, is a case study of an intermediary transparen-
cy institution, DISHA, in India’s province of Gujarat. Among its activities are providing 
training for budget overview and creating budget briefs and circulating them to other 
NGOs and media. It has ensured more funds go into priority sectors like health and edu-
cation as well as contributing to the creation of new NGOs. The shortcomings of its pro-
gram are that it distributes its briefs only to selected institutions. Briefs are not available 
to the general public, e.g. online. In addition, its briefs do not have summary of main find-
ings or recommendations. In conclusion, an intermediary institution like DISHA has con-
tributed a lot to improving budgeting transparency in Gujarat, but failures in its organiza-
tion and way of work have acted as a constraint on the full positive impact it could have 
on budgeting transparency and targeting. 
In Chapter 13 Jayshree Bose analyzes the mazdoor kisan Shakti Sangathan organi-
zation, which has gone a step further than most other budget monitoring organizations. It 
has entered into the field of social audits. Among its activities were public hearings (which 
also served as a “wall of shame” for wrongdoers), collecting government bills (often by 
coercing and bribing government officials), probing into issues like fictitious identities 
and payments made to them. Unorthodox methods, to say the least, led to surprising re-
sults – finding payments to “ghost” workers and works, overpayment on projects and 
usage of inferior and inadequate material in public projects. As a result of the exposure of 
many scandals, it has created a culture of awareness about misconduct and made a number 
of wrongdoers admit their mischief and rectify it. 
Chapter 14, by Participatory Budgeting, and chapter 15, by Tricia Zipfel et al. discuss 
the implementation of participatory budgeting in North America and Europe respectively. 
Each program is specific to the environment in which it is being implemented. What these 
programs have in common is the party in power. It is clear that participatory budgeting 
programs are mostly implemented in communities where leftist parties hold power. The 
last chapter, from internationalbudget.com, provides an overview of latest experiences in 
the implementation of participatory budgeting policies in various countries, but mainly in 
Africa and Latin-America. Topics also vary – from synergy problems between different 
NGOs to social accountability and lack of transparency.
Participatory budgeting is relatively new “experiment” in economic democracy. Its 
implementation is still limited, but in many places where it has been implemented, it has 
improved the lives of the people in communities that have implemented participatory 
105
J. Bose: Participatory budgeting: concepts and country experiences
Financial Theory and Practice 34 (1) 101-105 (2010)
budgeting policies. There are number of obstacles to spreading participatory budgeting 
system. Some are ideological – it has an appeal mostly to leftist political parties; others 
are practical – it is easier to implement participatory budgeting at the local than at the na-
tional level, so it can have an influence mainly on budgets in local communities. One in-
teresting fact is that probably the biggest experiment in economic democracy was made 
in the former Yugoslavia’s self-governing socialism. Nostalgia for bygone times is still 
strong in Croatia, one of the former Yugoslav republics and it is not uncommon for Croatia’s 
leading economists, when comparing today and before, to speak of the loss of economic 
democracy. Still, rarely will you hear them speak of participatory budgeting. This is even 
more interesting when taking into account katarina Ott’s article, which clearly shows that 
Croatia’s legal system leaves plenty of room for introducing participatory budgeting pol-
icies. This book provides a must-read for our politicians and their economic advisors, es-
pecially for those who continue to grieve about the times we have lost instead of imple-
menting good socialist ideas about economic democracy in a slightly modified form. 
Ivan Grgurić


Participatory budgeting: concepts and country experiences

Horvath, Hedvig

Szalai, Zoltan

Labour market institutions in Hungary with a focus on wage and employment flexibility

Kesner-Skreb, Marina

99
THE EUROPEAN UNION CUSTOmS UNION
marina kESNER-škREB, mSc Glossary*
Institute of Public Finance, Zagreb
The European Union Customs Union 
is a customs union (i.e. a group of econo-
mies with no internal barriers to trade and 
a common external tariff) consisting of all 
the member states of the EU and a number 
of surrounding countries (i.e. EFTA coun-
tries – Norway, Iceland, Liechtenstein and 
Switzerland). 
The Customs Union is an essential ele-
ment in the functioning of the single market 
and fulfils a principal task of the European 
Economic Community established in 1958 
by the Treaty of Rome. The single market 
can only function properly when there is a 
common application of common rules at its 
external borders. No customs are levied on 
goods travelling within the Customs Union 
and members of the Customs Union impose 
a common external tariff on all goods enter-
ing the union. One of the consequences of 
the Customs Union is that the European 
Union has to negotiate as a single entity in 
international trade deals such as with the 
World Trade Organization (WTO).
The EU is the world’s biggest trader, ac-
counting for 20% of global imports and ex-
* Received: February 8, 2010
* Accepted: February 15, 2010
ports. The EU is the leader in the world trade 
system, both as a key player in the World 
Trade Organization and a prolific signer of 
bilateral trade agreements. 
The EU has been a key player in inter-
national trade liberalisation negotiations. 
The latest of these is the so-called Doha De-
velopment Round which began in 2001. The 
aim of these negotiations, held in the frame-
work of the WTO, is to reduce tariffs and 
remove other barriers to world trade.
Trade rules are multilateral, but trade 
itself is bilateral – between buyers and sell-
ers, exporters and importers. This is why 
the EU, in addition to its participation in 
Doha and previous WTO rounds, has also 
developed a network of bilateral trade 
agreements with individual countries and 
regions across the world.
It has partnership and cooperation agree-
ments with its neighbours in the mediterra-
nean basin and with Russia and the other re-
publics of the former Soviet Union.
The EU’s trade policy is closely linked 
to its development policy. The Union has 
granted duty-free or cut-rate access to its 
100
M. Kesner-Škreb: The European Union Customs Union
Financial Theory and Practice 34 (1) 99-100 (2010)
market for most of the imports from devel-
oping countries under its generalised sys-
tem of preferences (GSP). It goes even fur-
ther for the world’s 49 poorest countries, all 
of whose exports – with the sole exception 
of arms – enter the EU duty-free.
The EU has developed a new trade and 
development strategy with its 78 partners in 
the Africa-Pacific-Caribbean (ACP) group 
aimed at integrating them into the world 
economy. It also has a trade agreement with 
South Africa that will lead to free trade, and 
it is negotiating a free-trade deal with the six 
members of the Gulf Cooperation Council 
(GCC) – Bahrain, kuwait, Oman, Qatar, 
Saudi Arabia and the United Arab Emirates. 
The EU has agreements with mexico and 
Chile and has been trying to negotiate a deal 
to liberalise trade with the mercosur group 
– Argentina, Brazil, Paraguay and Uru-
guay.
It does not, however, have specific trade 
agreements with its major trading partners 
among the developed countries like the 
United States and Japan. Trade is handled 
through the WTO mechanisms, although the 
EU has many agreements in individual sec-
tors with both countries.
The WTO framework also applies to 
trade between the EU and China, which 
joined the world trade body in 2001. China 
is now the Union’s second biggest trading 
partner after the United States.
According to the Stabilization and As-
sociation Agreement signed between Croatia 
and the EU in 2001, the EU abolished tar-
iffs and other trade barriers on the imports 
of Croatian goods. Also, since the beginning 
of 2002 there have been no Croatian tariffs 
on or quotas for most manufactured goods 
of EU origin. 
Although the EU has preferential tar-
iffs on imports from all but nine nations in 
the world, those nine nations account for 
about one-third of the EU’s external trade, 
so the tariff it charges these nations matters. 
The EU defines individual tariff rates for 
about ten thousand products. The average 
rate is 6.5 per cent but this hides a wide var-
iation. About one-quarter of the rates on all 
products are set at zero (mostly industrial 
goods, including electronics), while the av-
erage for industrial goods is 4.1 per cent. 
The average on agricultural imports is just 
over four times this, at 16.5 per cent, which 
means that most food imports are subject to 
high tariffs.
LITERATURE
Baldwin, R. and Wyplosz, Ch., 2006. 
The Economics of European Integration. 
New York: The mcGraw-Hill. 
European Communities, 2009. What 
is Europe’s trade policy? [online]. Available 
from: [http://trade.ec.europa.eu/doclib/
docs/2009/may/tradoc_143154.pdf].
European Parliament Fact Sheets [on-
line]. Available from: [http://www.europarl.
europa.eu/factsheets/1_5_1_en.htm].
Glossary [online]. Available from: 
[http://europa.eu/scadplus/glossary/index_
en.htm].


The European Union Customs Union

Giragosian, Richard

ACNIS Policy Brief No.3: a comparative analysis: lessons for Armenia from the unrest in Iran

Guriev, Sergei

  
 
Unique Russian Values 
Russian officials commonly justify anti-market economics by citing the Russian public's "nonliberal" values. 
Policymakers often refer to the fact that the majority of Russians would prefer to reverse the privatizations of 
the 1990s and return to regulated prices.  
 
Is it true? Should — and could — anything be done about it?  
 
Recent research suggests that anti-market sentiment is indeed shared by the majority of Russians. Moreover, 
it may be a rational response to the country's economic and societal realities.  
 
Ironically, the research also implies that in order to change these attitudes, the government should commit to 
fighting corruption, reforming the economy, allowing free public debate and improving the education system.  
 
There is a long tradition to claim "Russian exceptionalism" — especially in terms of "mentality" or "spirituality" 
or the "mystery of Russian soul" being not compatible with a market economy and democracy. However, many 
countries have gone through enormous changes in values within reasonably short time spans. East and West 
Germany, and likewise North and South Korea, managed to build very different values within just one 
generation. And it looks as if it is going to take no more than one generation for East Germans' values to revert 
back to Western European norms.  
 
Also, many European countries have lost their colonies and have overcome the post-imperial syndrome. While 
this process is always painful, it is crucial to make sure there are no reversals. Politicians should be 
responsible; they must resist the temptation to use imperial nostalgia to solve their short-term problems.  
 
Most important, changes in values can be driven by citizens' rational interests. Modern political economic 
literature suggests that there may be situations in which a majority of citizens benefit from the status quo and 
oppose reforms, even though reforms would create a pro-reform majority after they are carried out. This 
occurs before reforms happen whenever the majority is certain that there will be benefits from said reforms but 
is not sure who will benefit from them.  
 
This is known as the "status quo bias" and was spelled out in an influential paper by U.S. economists Raquel 
Fernandez and Dani Rodrik. It is thought to describe the situation in many European countries where crucial 
pro-market reforms have been discussed for decades but are never carried out. Recent empirical work 
suggests that this theory is also relevant for Russia.  
A comprehensive "Life in Transition" survey conducted by the European Bank for Reconstruction and 
Development in all transition countries in 2006 showed that Russians are rather unique in their negative 
attitudes toward democracy and markets. Probably the most worrisome result of this survey was the fact that 
the negative attitude to markets was not only prevalent among the older generation but also among younger 
Russians, who more strongly opposed markets and private property than middle-aged respondents.  
 
This finding is confirmed by all other recent polls. For example, in FOM data on attitudes to markets and the 
Western model of society, Russians in their 20s are more pro-Soviet than Russians between 30 and 40 years 
old.  
 
How can one explain this puzzle? A recent paper by my colleagues Irina Denisova and Yekaterina 
Zhuravskaya — co-authored with Markus Eller from Austrian National Bank and Tim Frye from Columbia 
University — sheds light on this question. They look at the "Life in Transition" data on attitudes toward 
privatization across all transition countries. The major finding is that negative attitudes are explained by very 
pragmatic benefits from privatization: Nationalization is supported by poor and less educated individuals.  
 
This is perfectly rational because these individuals expect to benefit from state support rather than from a 
market economy. More interesting, the support for privatization among entrepreneurs is also not universal but 
depends instead on the quality of institutions in the respective country. Essentially, only in countries with good 
institutions — a high quality of governance — do entrepreneurs support privatization. If the institutions are 
weak, then the entrepreneurs fear expropriation and do not support privatization.  
 
What should we make of these results? First and foremost, the government should fight corruption. Second, 
there should be a free debate on the benefits of a market economy, competition and private property. The 
current pro-Soviet stance of the state media not only conforms to extant views of the Russian public; it also 
strengthens stereotypes about the benefits of state intervention by providing false arguments concerning the 
relative prosperity of the Soviet Union. The argument that the Soviet Union disappeared because it was 
bankrupt — and not thanks to a CIA conspiracy to bring it down — is obvious for anyone who looks at the 
macroeconomic data of late 1980s and early 1990s. But this argument is conspicuously absent from policy 
debates.  
 
Yet another crucial challenge is to reform the education system. Russian students should obtain skills that are 
adequate for the market economy. Otherwise they will — rationally — support populist interventionist policies 
and rely on a paternalistic state.  
 
 
02 April 2009 
By Sergei Guriev 
 
Sergei Guriev is rector of the New Economic School in Moscow.  
 
 
 
 
© Copyright 2007. The Moscow Times. All rights reserved.  
 


Unique Russian values