STRUCTURAL
REFORM

Reform scores have converged in most areas since 2016, notably as regards competitiveness, resilience and economic integration. This contrasts sharply with developments in the area of green reform, with growing divergence between greener and less green economies. That divergence in the area of green reform could, in part, reflect cross-country differences in the tolerance of pollution and climate-related risks, whereas convergence appears to occur in areas where the relevant objectives are universally shared. Almost all of that convergence occurred before the Covid-19 pandemic, on progress having slowed in the last couple of years. That slowdown has been particularly stark in economies with lower initial reform scores, causing convergence to stall.

To some extent, progress on reforms is aligned with citizens’ preferences in the respective policy areas. Such alignment is strongest in the area of inclusion and weakest as regards the green economy. Citizens’ preferences themselves also vary considerably across economies. On average, survey data suggest that people in the EBRD regions have a greater desire for economic integration than their peers in advanced comparator economies, whereas support for the green economy is stronger in comparator countries.

The relationship between preferences and reforms is also affected by media freedom. Overall, policy preferences as reported in representative household surveys are more closely aligned with progress in the relevant areas of structural reform where economies have free media, while this relationship is not statistically significant in economies with censored media.

The last section of this chapter looks specifically at the various measures that have been implemented across the EBRD regions in response to high and rising prices of food staples and energy. Policymakers have used a wide range of measures to mitigate the impact that rising energy and food prices have on households and firms, with most countries taking action of some kind. The varied nature of countries’ responses reflects the multitude of policy objectives being pursued, such as the desire to reach out to those in need, ensure cost-effectiveness, avoid negative externalities (such as excessive consumption of energy or food) and achieve a broad consensus on such measures within society.

Energy subsidies (per unit consumed), means-tested support for individuals, subsidies for firms and price controls are all common across the EBRD regions. However, the policy responses of EBRD economies are, on average, estimated to be less effective overall than those of advanced comparator economies, partly reflecting inferior administrative capacity. Differences between the policies adopted by individual economies are, to some extent, aligned with differences in their “assessment of transition qualities” (ATQ) scores, particularly in the area of inclusion. This partly reflects the fact that at least a third of all policy responses have involved modifying and expanding existing schemes and initiatives (such as means-tested support programmes or subsidies).

Across those six qualities, increases in scores in 2022 have been concentrated mainly in central Europe and the Baltic states (CEB) and south-eastern Europe (SEE), while declines have been observed primarily in the southern and eastern Mediterranean (SEMED). Improvements have been seen mainly in the areas of competitiveness, the green economy and inclusion, while declines have tended to be concentrated in scores for governance (see Chart 5.1 and Table 5.1).

The last year has seen reforms in several countries aimed at improving the business climate and boosting investment. In May 2022, for example, Jordan launched a Support for Industry Development Fund Project, which aims to incentivise modernisation by providing direct support to 500 export-oriented companies. In Morocco, a new investment charter is focused on high value-added activities and making the country more attractive to foreign investors. In Tunisia, the National Programme of Reforms 2023-25, which was launched in June 2022, contains plans to (i) remove the need to apply for investment permits, (ii) incentivise investment in strategic sectors and (iii) establish a special legal framework for start-ups. In Uzbekistan, a new investment programme for the period 2022-26 provides for the establishment of a central project management office to oversee strategic investments. The Uzbek authorities have also announced further measures aimed at simplifying the procedures governing investment in special economic zones. In the Kyrgyz Republic and Tajikistan, amendments have been made to the tax code with the aim of reducing informality and levelling the playing field for companies operating in the formal sector. And in a similar vein, Egypt has introduced an automated tax management system, which is due to be rolled out across the country in the course of 2022.

At the same time, many EBRD economies in the EU have launched initiatives financed through the European Union’s Resilience and Recovery Facility in order to support companies affected by the Covid-19 pandemic and the war in Ukraine. In Bulgaria, for instance, the government launched a €130 million state-aid scheme to help SMEs with investment in new technology. In the Baltic states, similar packages are being used to drive investment in innovation and boost exports.

Many countries have also announced reforms supporting the improvement of governance frameworks for state-owned enterprises, as well as the privatisation of state assets. In Egypt, for example, a draft state ownership policy published in May 2022 aims to encourage privatisation in key sectors (including textiles, mining, chemicals and food processing), targeting US$ 40 billion in investment over the next four years. In Georgia, as part of the country’s SOE reform strategy for 2021-24, the authorities have launched a series of pilot projects aimed at enhancing the transparency and corporate governance of SOEs such as United Airports of Georgia and the Georgian Railway Company. In Greece, the country’s privatisation programme remains on-track, with a number of privatisations being completed in 2022 – including, most notably, that of the Public Gas Corporation (DEPA). In Uzbekistan, meanwhile, a presidential decree on “additional measures to further reduce state participation in the economy and accelerate privatisation” has set out a timeline for the privatisation of some SOEs (including Uzbekistan Airways and the country’s national oil and gas company), as well as initial public offerings (IPOs) for state-owned banks.

Bosnia and Herzegovina has taken incremental steps to improve the management of SOEs by establishing central oversight units. And in Serbia, a consolidated list of SOEs has been drawn up as a first step towards implementing the SOE reform action plan that was adopted a year ago.

In Kosovo, the government has dismissed the board of the Privatization Agency of Kosovo (PAK) and is in the process of closing the agency. According to a concept paper approved in June 2022, the government plans to replace the agency with a sovereign fund managing state-owned assets. In Montenegro, further setbacks have been seen in the area of SOE reform, with the country’s SOE management company, Montenegro Works, being liquidated after only a year in operation on account of its ineffectiveness. And in Hungary, the government has announced its intention to participate in the buyout of Telecom Vodafone Hungary in 2022, in line with its objective of increasing state participation in strategic sectors.

Over the period 2016-22, marked improvements have been observed in eastern Europe and the Caucasus (EEC) and the SEE region, driven mainly by increased credit to the private sector, improved logistical services, greater access to finance for SMEs, higher labour productivity and the increased sophistication of service exports. Deteriorations have been seen in a number of countries (Greece, Lithuania and Poland) on account of reductions in the quality of logistical and transport services, and declines in credit to the private sector. In Bosnia and Herzegovina, there has been an increase in tariff rates and a decline in the level of participation in global value chains. In North Macedonia, deteriorations stem from an increase in government spending on subsidies, a fall in the quality of transport infrastructure and a decline in the entry of new firms into the market. In Lebanon, meanwhile, declining scores reflect reductions in both labour productivity and the sophistication of the country’s exports (as measured by the Index of Economic Complexity).

A number of countries have recently introduced reforms aimed at improving governance in the public sector and tackling corruption. In Armenia, for example, a new public administration reform strategy announced in May 2022 aims to create more effective governance structures, ensure the independence of the civil service and introduce new digital systems for public administration by 2030. In Georgia, a new public service development strategy for 2022-25 sets clear guidelines for improving the design and delivery of public services. In Azerbaijan, the government has launched a National Action Plan to Combat Corruption spanning the period 2022-26, which introduces measures aimed at increasing transparency, improving public services and strengthening public oversight of government agencies. In Moldova, meanwhile, steps have been taken to increase the independence and accountability of the country’s anti-corruption body, which was created in 2021. Further legislation on the selection of specialist prosecution bodies was adopted earlier this year, which resulted in the election of an Anti-Corruption Prosecutor in June 2022.

In Ukraine, despite delays caused by the Russian invasion, the government has continued to make progress with tackling corruption. In June 2022, the Ukrainian parliament adopted a new anti-corruption strategy for the period 2021-25, outlining plans to tackle corruption across a number of sectors with a view to meeting the EU accession criterion of accountable government.

Meanwhile, several countries have implemented judicial reforms. In the Czech Republic, for instance, the country’s new Law on Courts and Judges, which was adopted at the end of 2021 following recommendations by the Group of States against Corruption (GRECO), reduces the influence of the Ministry of Justice on the selection of judges and officials, narrows the mandate of court chairs and requires that the decisions of lower courts be published online. In Kosovo, a new law establishing a commercial court was passed in January 2022, paving the way for the creation of a special court handling corporate disputes. That court is expected to be operational by the end of 2022. In Albania, meanwhile, judicial reform – a key condition for starting the EU accession process – has progressed at a slow pace. Further constitutional amendments are required to extend the timeline for vetting judges, while the country’s high rate of judicial resignations has resulted in growing backlogs of court cases.

Many countries have continued to digitalise public services. In Mongolia, for example, the government signed a memorandum of understanding with Estonia’s E-governance Academy in April 2022. That partnership is expected to facilitate the introduction of digital identities and signatures, enhance digital skills training for the civil service and help to further develop the e-service platform that was launched in response to the Covid-19 pandemic. In Armenia, meanwhile, the State Revenue Committee has launched a one-stop digital system for permits and customs clearance. For a number of EBRD economies in the EU, digital transformation is a major component of the country’s recovery and resilience plan. In Bulgaria, for instance, a sum of up to €297 million has been earmarked for investment in the digitalisation of public services (including judicial services, healthcare, postal services and social services). Similarly, Romania adopted new government cloud legislation in June 2022 – a first step towards the establishment of secure government cloud infrastructure – and has plans to digitalise the country’s healthcare system and introduce electronic identity cards. In August 2022, meanwhile, Tunisia launched a pilot project to introduce electronic identity cards. It has also expanded its range of e-government services.

Over the period 2016-22, notable improvements in governance scores have been observed in countries such as Armenia, Azerbaijan, Egypt, Latvia and Lithuania. In Armenia, the increase in the country’s score reflects improvements as regards participation in e-government, the provision of public services online, perceptions of corruption, the framework for challenging regulations, judicial independence and the protection of property rights. In Azerbaijan, improvements reflect enhanced protection of intellectual property rights, a new framework for challenging regulations and increases in judicial independence. In Egypt, steady improvements have been seen in perceived political stability, corruption and the effectiveness of the courts. And in Latvia and Lithuania, improved scores reflect the strengthening of corporate governance in the areas of internal control, transparency and disclosure, and board structures. At the same time, governance scores have deteriorated significantly in a number of economies over the last six years, primarily reflecting increases in perceived informality and corruption (as seen, for instance, in Albania and Bosnia and Herzegovina) and declines in the perceived effectiveness of courts (as observed, for instance, in Poland). Several economies have also seen deteriorations in judicial independence, budgetary transparency and the enforcement of contracts.

Over the last year, many economies in the EBRD regions have announced measures aimed at increasing the uptake of renewable energy and improving energy efficiency in residential buildings and energy-intensive sectors. For example, Albania’s National Energy and Climate Plan, which was adopted in December 2021, is focused on reducing the country’s reliance on fossil-fuel imports and decarbonising emission-intensive sectors. In a similar vein, Croatia has adopted a new €133 million programme aimed at raising the energy efficiency of public buildings and apartment blocks, as well as a strategy to decarbonise the energy sector. Egypt, meanwhile, has earmarked US$ 324 billion for its National Climate Change Strategy, which was launched in May 2022. That strategy focuses on five key areas: improved governance frameworks, mitigation of and adaptation to climate change, a system for monitoring, reporting and verifying emissions, financing mechanisms for climate-related activities and incentives for green innovation.

In Türkiye, the country’s Capital Markets Board has developed guidelines on green and sustainable debt instruments, paving the way for new green financial instruments, while in Latvia the first sustainability-linked bond was issued in December 2021, raising €600 million.

Several countries have also announced measures to improve waste management and the treatment of water and wastewater. Croatia and Slovenia, for instance, have recently introduced new regulations in this area and announced significant investment in the modernisation of wastewater treatment and waste management facilities as part of their recovery and resilience plans. Jordan, meanwhile, signed a water-for-energy swap deal with Israel in November 2021, which will cover around 12 per cent of Jordan’s annual water needs and alleviate water scarcity.

At the same time, despite efforts to improve legislative frameworks for renewable energy in Bosnia and Herzegovina, the government of the Federation of Bosnia and Herzegovina has announced its intention to extend the operation of two large coal-fired thermal power plants in Tuzla and Kakanj, thereby failing to live up to its commitments as a member of the Energy Community.

Over the period 2016-22, green scores have improved in most economies in the EBRD regions. These improvements have been driven mainly by reduced GHG emissions from agriculture and the heating of buildings (notably in Bulgaria and North Macedonia), greater uptake of renewable energy, and increases in NDCs and intended NDCs. The most significant improvements have been observed in Bulgaria, Croatia, the Czech Republic, Estonia, Latvia, Lithuania, Montenegro, North Macedonia and Uzbekistan, driven by enhanced commitments in their intended NDCs, the inclusion of adaptation considerations in their NDCs, and progress in the area of “just transition”. Montenegro, for example, has improved its carbon-pricing mechanism, while vehicle emission standards have been tightened in Uzbekistan. At the same time, scores have declined in Jordan (on account of a failure to comply with the latest guidance on best practices for carbon-pricing mechanisms, as well as reductions in the size of maritime conservation areas) and Morocco (on account of reductions in the size of protected areas, deteriorating air quality and increases in fossil-fuel subsidies).

A number of economies in the EBRD regions have implemented reforms with the aim of improving employment conditions, supporting the development of human capital and increasing access to services and finance. Georgia, for instance, has announced further investment in technical vocational education and training in order to reduce the mismatch between supply and demand when it comes to skills. Türkiye has adopted a new law on the provision of financial incentives for vocational training with a view to increasing cooperation between the country’s vocational training system and local chambers of commerce. And Slovenia has adopted a resolution on a national adult education programme for the period 2022-30, focusing on the development of opportunities for lifelong learning and adult education.

Many EBRD economies have announced measures supporting the integration of Ukrainian refugees into their labour markets and education systems. In Bulgaria, for instance, specific amendments have been made to the country’s Employment Promotion Act. And all EU member states have implemented measures granting Ukrainian refugees access to healthcare, education and work, in line with the rights enjoyed by other residents. In Poland, around two-thirds of all working-age refugees had been successfully absorbed into the labour market by August 2022.

Several economies have introduced reforms aimed at increasing the economic inclusion of women. For instance, in June 2022 Egypt launched a new five-year programme targeting economic and social empowerment for women, which seeks to increase women’s employment opportunities and reduce gender-based violence across seven governorates. Meanwhile, the parliaments of Moldova and Ukraine have both ratified the Istanbul Convention on violence against women and domestic violence.

Over the period 2016-22, the most significant improvements in the area of inclusion have been seen in Albania, Jordan, Latvia and Montenegro. In Albania and Montenegro, increases in inclusion scores have been driven primarily by greater access to internet services and digital skills. In Latvia, they stem from improved access to training through employment and increases in financial inclusion. And in Jordan, they are due to new legislation aimed at improving opportunities for women and greater access to sanitation and the internet.

The most significant deteriorations over the period 2016-22 have been recorded in Kosovo, Lebanon, and the West Bank and Gaza. In Kosovo, this is mainly due to poor access to formal training opportunities at work and the high percentage of adults who are not in education, employment or training. In Lebanon, it reflects a decline in financial inclusion against the backdrop of the country’s deep economic and financial crisis. And in the West Bank and Gaza, it reflects new legislation allowing gender-based discrimination, as well as reductions in access to vital services.

Energy resilience scores have only changed very modestly over the last year, as many reforms in key sectors have been halted. The exception here is Ukraine, where a decline in the country’s score reflects the impact that the war has had on the operations of the state-owned gas company.

In light of the energy crisis faced by many economies in the EBRD regions, recent reform efforts have focused on improving energy security, while progress in other areas has slowed. In Armenia, the country’s Public Services Regulatory Commission set up an electronic trading platform for electricity in February 2022 with a view to facilitating free and open trade, while full liberalisation of the electricity market is planned for 2023. In Lebanon, the government approved a plan in March 2022 to restructure the electricity sector and address decade-long inefficiencies in the system. That plan includes the establishment of a regulatory authority for the electricity sector, increases in electricity prices and US$ 3.5 billion of investment in the sector. Parliamentary approval of that plan is currently pending.

In Montenegro, the government passed new legislation in January 2022 giving the national energy regulator greater powers to monitor the country’s electricity and gas markets and investigate potential abuse. In Ukraine, given the significant loss of energy production capacity on account of the war, the country’s authorities have accelerated the integration of their grid into the EU’s single electricity network (ENTSO-E) in order to gain independence from Russia and Belarus in terms of the supply of electricity.

In Poland, meanwhile, plans to liberalise household gas tariffs have been pushed back three years to 2027, as the government has introduced €4.4 billion in heating subsidies for the period from October 2022 to April 2023, in response to increases in energy prices. Similarly, the Lithuanian government has postponed its plans to liberalise the electricity market for customers consuming less than 1,000 kWh per year (which had been due to take place this year). In Hungary, meanwhile, the government has given a green light to the expansion of the Paks nuclear power plant, restarted the coal-fuelled power plant in Matra and banned exports of energy sources (including firewood).

Significant improvements in financial resilience have been observed in Georgia, Greece, Hungary and Tajikistan, driven mainly by increases in capital adequacy ratios (Georgia, Hungary and Tajikistan) and a reduction in NPLs (Greece and Tajikistan). At the same time, the Kyrgyz Republic and Ukraine have seen marked deteriorations in their financial resilience scores on account of rising NPLs, contractions in credit and falling capital adequacy ratios.

Many countries have continued to implement reforms in the banking sector, taking steps to support the development of capital markets and digital payments. In Montenegro, for example, new laws were introduced in early 2022 aligning the country’s regulatory and supervisory requirements with Basel III standards and the EU’s regulatory framework. Those new regulations introduce higher capital requirements for banks, mandatory board supervision and stricter classification criteria for NPLs. Further efforts have also been made to modernise the country’s payment systems. In Serbia, a new Law on Capital Markets was adopted in December 2021, aligning the country’s legal framework with EU legislation. And in Estonia, new legislation was adopted in March 2022 with a view to tightening up the licensing rules for virtual asset providers, increasing capital requirements and aligning other customer information requirements with those applicable to traditional payment service providers. Those tighter regulations are aimed at reducing the risk of financial crime and improving customer protection.

In Azerbaijan, measures to stimulate the development of capital markets were introduced in May 2022, scrapping income tax on dividends and interest income from publicly traded shares and bonds. Meanwhile, the country’s central bank has developed new guidelines for QR code payments in an effort to improve the affordability of payment services. Similarly, the National Bank of Kazakhstan introduced an instant payment system in June 2022, which enables interbank transfers to be made at any time using mobile phones or QR codes.

In Mongolia, however, implementation of the banking sector reform that was launched in 2021 (which requires systemically important commercial banks to become publicly traded) has been slower than anticipated. In February 2022, the country’s largest bank, Golomt Bank, was given the go-ahead to become an open joint-stock company by the Bank of Mongolia. However, in light of the difficult economic environment, IPOs of commercial banks are currently on hold until asset quality reviews have been completed.

In Lebanon, losses in the country’s financial sector are estimated to have exceeded US$ 70 billion against the backdrop of a widespread economic crisis. The government’s proposal to fill that large gap by bailing in shareholders of commercial banks continues to face opposition from the national banking association, which is calling on the government to foot the bill. Amendments to the country’s Bank Secrecy Law, which were passed in July 2022 with a view to facilitating the investigation of financial crimes, have been deemed to be insufficient, while depositors continue to find it difficult to access their hard-currency savings.

Over the period 2016-22, marked improvements in energy resilience have been observed in Croatia, Estonia, Ukraine and Uzbekistan. In Croatia, higher scores reflect the diversification of gas supplies, while Ukraine has undertaken various reforms in the gas sector, including the unbundling of the state-owned gas company, Naftogaz. In Uzbekistan, those increased scores reflect continued efforts to improve the regulatory environment, as well as the unbundling of the power sector in 2019. At the same time, deteriorations have been observed in Bosnia and Herzegovina, the Kyrgyz Republic and Moldova, where necessary reforms in the energy sector have been delayed.

Significant increases in financial resilience scores over the period 2016-22 have been observed in Croatia, Egypt, Georgia, Hungary and Ukraine. Those improvements mainly reflect the upgrading of capital market infrastructure, increases in capital adequacy ratios, declines in foreign currency-denominated loans, marked reductions in NPLs, increased activity by non-bank financial institutions, and improvements to the legal and regulatory frameworks governing the banking sector. In Lebanon, however, financial resilience has weakened on account of lower levels of liquidity in the financial system, greater market concentration, a sharp increase in NPLs, and the reversal of earlier reforms to regulatory frameworks and banking supervision.

Several countries have sought to improve their transport infrastructure. Bulgaria, for example, has adopted a strategic plan to develop its transport infrastructure by 2030. That plan includes the establishment of intermodal links in Sofia and northern Bulgaria, a feasibility study for a port terminal in Vidin on the Danube river, and further modernisation of railway links with ports. Similarly, the Czech Republic has scaled up public investment in its railway network, with plans to modernise 35 railway stations and 120 km of railway track by the end of 2022, further electrifying the network and improving safety.

In June 2022, Albania and Kosovo announced the construction of a railway link between Pristina and Durres. This comes in the context of increased cooperation between the two economies, with other measures (such as the development of joint action plans for streamlining business procedures) having been announced in late 2021. In Serbia, a high-speed railway line linking Belgrade to Novi Sad was opened in March 2022. This railway link, which was supported by China’s Belt and Road Initiative, is the first stretch of a new railway line connecting Belgrade to Budapest. In Montenegro, the first section of the new Bar-Boljare highway, which will run from the coast to the Serbian border, was completed in July 2022.

In November 2021, Turkmenistan formally applied for membership of the World Trade Organization; it is also set to join the International North-South Transport Corridor, which links India, Iran, Azerbaijan, Russia, Central Asia and Europe.

Several countries have also made improvements to their digital infrastructure. Uzbekistan, for example, has announced around US$ 2.5 billion of investment in digital infrastructure projects as part of the Digital Uzbekistan 2030 strategy, which was launched in 2020. Similarly, Georgia is planning to roll out fibre broadband to 1,000 rural settlements, benefiting more than 13 per cent of the country’s population. In June 2022, the Georgian government also authorised the launch of satellite internet services, which are set to increase internet penetration in other hard-to-reach areas.

Over the period 2016-22, the largest increases in integration scores have been seen in Egypt, Greece, Montenegro and Uzbekistan, driven by improvements in mobile and fixed broadband coverage and increases in trade volumes (as well as improvements to logistical services in the case of Montenegro and Uzbekistan). Greece’s higher score also reflects a rise in non-FDI capital inflows and new regional trade agreements. The most significant deteriorations have been observed in Jordan, the Kyrgyz Republic and Latvia. In Jordan, conditions for international trade and direct investment have worsened, as have logistical services. In the Kyrgyz Republic, FDI inflows and trade volumes have both declined. And in Latvia, the timeliness and traceability of shipping have deteriorated, while losses associated with shipping have increased.

In contrast, the opposite can be observed for the green economy and, to a lesser extent, inclusion. In these areas, economies that were lagging behind in 2016 have made less progress on average, resulting in greater divergence – especially between greener and less green economies (see Chart 5.2).

Differences in the degree of convergence can, in part, be explained by differences in the strength of citizens’ desire for the relevant reforms. While the desire for greater competitiveness, integration and economic resilience appears to be universal, views differ when it comes to the green economy and inclusion, with tolerance of pollution, risks stemming from climate change and inequality of opportunity varying greatly across societies. This point is explored in more detail in a later section, which looks at views expressed in representative surveys of households around the world.

Since the start of the pandemic, convergence has largely stalled in all areas (see Chart 5.6). Scores have stopped increasing faster in economies with lower initial scores, as structural changes in those economies have been more strongly impacted by the Covid-19 crisis. The last couple of years have also seen considerable divergence in the area of green reform, with less-green economies falling further behind peers with more environmentally friendly policies.

Where possible, preferences are inferred from questions that involve some form of trade-off between different desirable features of economic development. For example, in order to assess the strength of citizens’ environmental preferences, respondents are asked to choose between the following two statements: “Protecting the environment should be given priority, even if it causes slower economic growth and some loss of jobs” and “Economic growth and creating jobs should be the top priority, even if the environment suffers to some extent”. This kind of formulation, which involves a potential trade-off between the environment and job creation, divides opinions more strongly than a simple question on whether, for instance, more should be done to tackle climate change.

For each key quality of a sustainable market economy, the strength of citizens’ preferences is measured using an index constructed from World Values Survey questions. Each index is on a scale of 0 to 1, where 0 and 1 are, respectively, the lowest and highest levels globally.

The index for competitiveness measures the extent to which individuals favour increased private ownership of business and industry (as opposed to state ownership) and prioritise rapid economic growth over other aims. Preferences in terms of integration are assessed using questions about how connected individuals feel to their country and the wider world in comparison with their immediate locality (their village or district). To assess preferences regarding resilience, the analysis uses questions that assess the extent to which economic stability is prioritised over other objectives (such as fighting crime and the promotion of a more humane society). Preferences in terms of inclusion are measured using questions that assess individuals’ desire for greater income inequality (as opposed to the incentivisation of personal effort) and attitudes towards gender equality. Preferences as regards governance are measured as the inverse of the extent to which individuals desire a strong leader who can bypass parliament and elections. For further details, see Box 5.2.

When it comes to reducing pollution at the expense of economic growth, preferences vary considerably across economies. At a global level, support for such environmental action has risen over time, with around 56 per cent of respondents now in favour. At the same time, this remains a minority opinion in a number of economies, including Japan (34 per cent according to the latest survey), Egypt (37 per cent) and Poland (47 per cent), with support for environmental action declining over time in some cases (see Chart 5.8). In Sweden, in contrast, more than 80 per cent of respondents are in favour of protecting the environment at the expense of economic growth.5

While citizens typically express support for all six key qualities of a sustainable market economy, the extent of this support varies considerably across economies and qualities (see Chart 5.9). For example, average support for integration is higher in the EBRD regions than in advanced or emerging-market comparators. Indeed, accession to the EU has been a strong anchor for economic reforms in emerging Europe, as discussed in the Transition Report 2013,6 while trade integration and FDI have been at the heart of emerging Europe’s economic convergence model.7 In contrast, support for green reforms is considerably weaker in the EBRD regions than in advanced-economy comparators.

Substantial variation in the strength of preferences can also be observed within the EBRD regions. In Poland, for instance, support for good governance is particularly strong, while desire for green reforms is relatively weak (see Chart 5.10). In contrast, desire for good governance is relatively weak in Azerbaijan. To some extent, these differences in preferences reflect and reinforce differences between the “social contracts” in individual economies.

This analysis suggests that the relationship between progress on reforms and citizens’ stated preferences is strongest in the areas of economic integration and inclusion, with a significant association also being observed for competitiveness (see Chart 5.12). The link between preferences and reforms is weakest when it comes to the green economy and resilience. However, there is no meaningful alignment between changes in ATQ scores since 2016 and average stated preferences, except in the area of resilience: in economies where survey respondents place greater emphasis on economic stability, resilience-oriented reforms have progressed faster.

The causal link between preferences and reforms could plausibly run in both directions simultaneously. Successful reforms could, for example, strengthen people’s support for economic integration or inclusion. And at the same time, the strength of citizens’ preferences could encourage policymakers to undertake reforms in the relevant areas.

However, a threat to the independence of the judiciary may prompt people to express stronger support for good governance, creating a negative relationship between reforms and preferences. There are many other reasons why the relationship between citizens’ preferences and progress on reforms might be somewhat weak – from imperfections in the measurement of preferences using household surveys to the short-term nature of political cycles and the presence of special interests that distort the incentives faced by elected officials.8

To analyse this, a dummy variable indicating the existence of free media has been calculated, using annual data on countries’ media freedom and internet censorship taken from the V-Dem Institute at the University of Gothenburg. On the basis of those data, the sample of countries has been split into two groups: those where the internet and the media are largely free from censorship; and those where the media and/or the internet lack freedom.11 Preferences in respect of various qualities of a sustainable market economy have then been interacted with that indicator variable, in order to see how media freedom affects the relationship between preferences and reforms.

The relationship between citizens’ average preferences and progress on reforms is more than twice as strong where economies have free media (see Chart 5.12), and that difference is statistically significant. ATQ scores and citizens’ preferences are also aligned with the ways in which the various countries have responded to rising food and energy prices in 2022 – which is the focus of the next section of this chapter.

Many EBRD economies are highly dependent on gas, which accounts for an average of around 30 per cent of total energy consumption in the EBRD regions (and more than half of all energy consumption in Egypt and a number of other economies). What is more, many economies source most of their gas from Russia (with Russia accounting for more than 90 per cent of total gas imports in Serbia and the Slovak Republic in 2021).

Ukraine and Russia are also major exporters of agricultural commodities. In 2019, for example, they accounted for a combined total of almost 70 per cent of global exports of sunflower oil and almost 30 per cent of global wheat exports. In addition, Belarus and Russia are key exporters of fertilisers (as well as fertiliser ingredients such as ammonia and potash), and the highly gas-intensive nature of fertiliser production means that there is a strong pass-through from gas prices to fertiliser prices. As a result, the prices of wheat, corn, soybeans and other agricultural commodities have risen sharply. However, they remain below the historical peaks of 2008 and the 1970s in inflation-adjusted terms.

Some economies in the EBRD regions are highly dependent on wheat imports from Russia and Ukraine. For instance, Armenia and Georgia import over 70 per cent of the wheat that they consume, and Russia and Ukraine account for more than 80 per cent of their total wheat imports. Economies in the SEMED region also tend to be major importers of wheat, as the scarcity of water limits the scope for expanding local production.

The varied nature of those policy responses reflects the multitude of objectives that such policy measures seek to pursue (as summarised in Table 5.2), with those objectives spanning four different qualities of a sustainable market economy: green, inclusive, resilient and well-governed.

First and foremost, policy measures seek to help the people who are most in need – typically low-income households (thereby making them inclusive). The overall fiscal cost of such measures is partly a reflection of how well they are targeted, with economies that face more binding fiscal constraints potentially choosing to prioritise a reduced fiscal cost in order to ensure resilience. Policymakers may also seek to limit any externalities that are caused by fuel and food subsidies (such as increases in energy consumption and associated GHG emissions), in line with green-economy objectives. Measures also differ in terms of both the ease with which they can be communicated to the wider population and their likely reception by voters (which is a question of good governance). The importance of measures’ political appeal may also vary from economy to economy. Lastly, some measures are easier to implement, while others require greater administrative capacity.

As a result of that multiplicity of goals and aims, there are complex trade-offs between different policy objectives. In addition, higher levels of administrative capacity tend to be required in order to implement more effective policies (see Chart 5.14). These various trade-offs are discussed in greater detail above.

Such subsidies are usually justified by the fact that lower-income households spend larger percentages of their income on food and energy. These measures are relatively easy to implement and communicate (and typically well received by countries’ populations). Consequently, the inclusion and governance columns in Table 5.2 show high scores (1). In contrast, subsidising energy prices encourages overconsumption, making per-unit subsidies environmentally unfriendly (so the corresponding score in the externalities column in Table 5.2 is 0). Moreover, while the poor do benefit, pay-outs accrue primarily to better-off customers who consume more energy and food, making subsidies poorly targeted and fiscally costly. In other words, such measures may score highly in terms of inclusion and governance, but poorly in terms of their green credentials or resilience.

In fact, energy subsidies were common even before this latest increase in commodity prices, although they have fallen over time in many economies (see Chart 5.16). In 2021, explicit subsidies (when prices do not cover production costs) were estimated to exceed 4 per cent of GDP in many economies in Central Asia and the EEC region. Estimates of implicit subsidies, which take into account underpricing of environmental damage, stand at 20 to 25 per cent of GDP. Thus, the fiscal cost of energy subsidies can be substantial, particularly in the context of high energy prices.13

Price controls on food and/or energy are also fairly common in the EBRD regions (but much less so in advanced economies). For instance, Slovenia capped fuel prices for a month as of 15 March 2022, while Hungary has capped the prices of various food staples, as well as fuel prices. Price controls are easy to communicate and implement, but they encourage higher energy usage and food waste. They often result in shortages – partly as a result of incentives to buy more and store the goods, and partly as a result of lack of interest on the part of sellers. Whether they help low-income households depends on whether low-income households are able to get hold of price-capped goods in the first place.

Some countries have scaled up means-tested support programmes targeting low-income households. In Poland, for instance, a special allowance for households is expected to provide a maximum of €106 per person per year, depending on income levels, the type of heating and the number of people in the household. The Kyrgyz Republic, meanwhile, has announced handouts of flour and a 50 per cent discount on electricity bills (subject to a cap) for low-income households.

Such means-tested measures are relatively well targeted, which lowers the overall fiscal cost of support programmes. They may also avoid excessive energy usage, depending on their design. For instance, giving a household a voucher (rather than a discount on the price per unit) does not alter the price that the consumer has to pay for an additional unit of electricity or heating. However, reaching out to those households most in need requires a relatively high level of administrative capacity. Strong communication may also be required to ensure that the narrower targeting of benefits does not undermine their political appeal.

Support for alternative energy sources, if well designed, can be highly effective as a longer-term measure complementing policies that have an immediate impact. For instance, several economies in the EBRD regions, including Estonia, have increased their emphasis on nuclear energy. It is worth noting that alternative energy sources are not necessarily green, with several economies (including Bosnia and Herzegovina and Greece) considering postponing shifts away from coal.

Several countries have supported firms directly through state aid or preferential loans. Azerbaijan, for instance, has given subsidised loans to large grain importers, Georgia has issued subsidised loans to farmers, and Kazakhstan has introduced fertiliser and pesticide subsidies for agricultural producers. Meanwhile, temporary restrictions have, at various points in time, been placed on food exports in Hungary, Kazakhstan, the Kyrgyz Republic and a number of other economies. Such restrictions have a tendency to multiply, with a negative effect on food security as economies become vulnerable to idiosyncratic shocks (for instance, if a particular crop has a poor harvest). They have been more prevalent in the EBRD regions than in comparator economies.

The relationship between the quality of policy responses and ATQ scores is strongest in the area of inclusion (see Chart 5.18), but there is a degree of alignment in the other areas as well. The fact that the characteristics of policy measures are aligned with ATQ scores is, in part, a reflection of the fact that at least a third of policy responses have involved modifying and expanding existing schemes and initiatives (such as means-tested support programmes or subsidies).

In the past, episodes of rising fuel and energy prices have often been followed by disruptive social unrest. Indeed, past food price shocks were one of the factors that contributed to the Arab Spring, while recent protests in Kazakhstan were triggered by a sharp increase in liquefied gas prices following the lifting of a government-enforced price cap. More generally, food and fuel price inflation is an important predictor of mass protests, riots and political violence, even after taking into account demographics and growth – particularly in poorer economies, where food and fuel account for a larger share of total household spending and where governments may have less fiscal space to dampen price shocks.14

Historically, political – rather than economic – factors have tended to account for the bulk of social unrest, but unrest that is triggered by economic factors is generally costlier. According to the Mass Mobilization database, almost three-quarters of all social unrest is motivated by political factors (such as demands to improve political processes or remove a politician from public office). However, the economic impact of social unrest tends to be more severe when it is caused by socio-economic factors (such as inflation), rather than political factors.15

Moreover, social unrest often occurs repeatedly in the same economies over time and it can be contagious. The risk of a country experiencing social unrest quadruples if it has already experienced such an episode in the previous six months. Moreover, it doubles if a neighbouring country has experienced social unrest.16 Past turmoil – both domestically and in neighbouring countries – is by far the most important predictor of future unrest, proving to be about 10 times more informative than economic or social factors such as inflation, GDP growth or access to basic services.17

Social unrest has become more common in the last decade or so – prior to the Covid-19 pandemic, at least. In late 2019, widespread unrest in South America and the Middle East drove the number of social unrest events to its highest level in three decades, according to the Reported Social Unrest Index, a monthly measure of social unrest based on press coverage in 130 economies (see Chart 5.1.1).18 Numbers of protests remained high thereafter, despite restrictions on mass gatherings on account of the pandemic.