Transformation Index BTI 2012: Regional Findings Post-Soviet Eurasia

By Verlag Bertelsmann Stiftung

Der politische und wirtschaftliche Entwicklungsstand eines Landes ist messbar: Im internationalen Vergleich lassen sich die Leistungen politischer Entscheidungsträger und die daraus resultierenden Transformationsprozesse gegenüberstellen.

Den Entwicklungsstand in 128 Entwicklungs- und Transformationsländern dokumentiert die Bertelsmann Stiftung alle zwei Jahre in ihrem Transformationsindex: Anhand ausführlicher Ländergutachten beleuchtet der Index die Wirkung von Reformstrategien auf dem Weg zu rechtsstaatlicher Demokratie und sozialer Marktwirtschaft. Er gibt damit Akteuren in Politik, Wirtschaft, Gesellschaft und Wissenschaft wichtige Hinweise und Impulse für ihre Arbeit.Der Untersuchungszeitraum des "Transformationsindex BTI 2012" reicht vom Frühjahr 2009 bis zum Frühjahr 2011.

Die sieben ergänzenden Materialbände "Regional Findings" beinhalten die ausführlichen englischsprachigen Regionalüberblicke und Langfassungen der Länderberichte zu den sieben untersuchten Regionen: Ostmittel- und Südosteuropa; Lateinamerika und Karibik; West- und Zentralafrika; Naher Osten und Nordafrika; Östliches und südliches Afrika; Postsowjetisches Eurasien; Asien und Ozeanien.

The peaceful transition of authoritarian regimes towards democracy and a market economy poses enormous challenges for citizens and politicians alike. Around the world, under widely differing conditions and with varying degrees of success, reform-oriented groups are struggling to democratize their countries and to strengthen the market economy. Good governance is the decisive factor for the success or failure of any transition process.

The Bertelsmann Stiftung's Transformation Index is published every two years. The global ranking measures and compares transition processes worldwide on the basis of detailed country reports. Comparing systematically the status of democracy and market economy on an international basis, the BTI also provides comprehensive data on the quality of political manage

• Language: English
• Publisher: Verlag Bertelsmann Stiftung
• Release date: Jun 27, 2012
• ISBN: 9783867934558

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Table of Contents

Title Page

Copyright Page

BTI 2012 | Regional Findings - Post-Soviet Eurasia

Political transformation

Economic transformation

Transformation management

Outlook

BTI 2012 | Armenia Country Report

Executive Summary

History and Characteristics of Transformation

Transformation Status

Transformation Management

Strategic Outlook

BTI 2012 | Azerbaijan Country Report

Executive Summary

History and Characteristics of Transformation

Transformation Status

Transformation Management

Strategic Outlook

BTI 2012 | Belarus Country Report

Executive Summary

History and Characteristics of Transformation

Transformation Status

Transformation Management

Strategic Outlook

BTI 2012 | Georgia Country Report

Executive Summary

History and Characteristics of Transformation

Transformation Status

Transformation Management

Strategic Outlook

BTI 2012 | Kazakhstan Country Report

Executive Summary

History and Characteristics of Transformation

Transformation Status

Transformation Management

Strategic Outlook

BTI 2012 | Kyrgyzstan Country Report

Executive Summary

History and Characteristics of Transformation

Transformation Status

Transformation Management

Strategic Outlook

BTI 2012 | Moldova Country Report

Executive Summary

History and Characteristics of Transformation

Transformation Status

Transformation Management

Strategic Outlook

BTI 2012 | Mongolia Country Report

Executive Summary

History and Characteristics of Transformation

Transformation Status

Transformation Management

Strategic Outlook

BTI 2012 | Russia Country Report

Executive Summary

History and Characteristics of Transformation

Transformation Status

Transformation Management

Strategic Outlook

BTI 2012 | Tajikistan Country Report

Executive Summary

History and Characteristics of Transformation

Transformation Status

Transformation Management

Strategic Outlook

BTI 2012 | Turkmenistan Country Report

Executive Summary

History and Characteristics of Transformation

Transformation Status

Transformation Management

Strategic Outlook

BTI 2012 | Ukraine Country Report

Executive Summary

History and Characteristics of Transformation

Transformation Status

Transformation Management

Strategic Outlook

BTI 2012 | Uzbekistan Country Report

Executive Summary

History and Characteristics of Transformation

Transformation Status

Transformation Management

Strategic Outlook

BTI 2012 | Regional Findings

Post-Soviet Eurasia

By Bernd Kuzmits

¹

An overview of development and transformation in Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Mongolia, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan

This report presents the regional findings of the Bertelsmann Stiftung’s Transformation Index (BTI) 2012 for Post-Soviet Eurasia. More on the BTI at http://www.bti-project.org.

Results from the BTI 2012 survey period confirm that political and social transformation in Post-Soviet Eurasia has largely stalled. In the democracy rankings, post-Soviet Eurasia comes in ahead of only the Middle East and North Africa. In the market economy rankings, the region scores ahead of only West and Central Africa and East and South Africa. Once again, post-Soviet Eurasia remains the only Transformation Index region in which no state has achieved a high level of transformation.

The findings for the individual states within the region also remain largely unchanged. Uzbekistan, Tajikistan and Turkmenistan remain at the bottom of the region’s rankings in terms of both political and economic development. Uzbekistan slipped yet again in the rankings, with the current decline due largely to poor scores for the state of economic transformation. While Kyrgyzstan made some progress toward democratization during the survey period, the country is still in the process of transitioning from an authoritarian regime to a parliamentary system of government in the aftermath of President Kurmanbek Bakiyev’s ousting. This transition is complicated by ethnic tension, as well as rising tensions between north and south. As a result of these factors, progress toward democratization in Kyrgyzstan is likely to remain unstable.

In yet another sobering turn of events, Ukraine, Georgia and Armenia continued on their downward slide during this survey period. These three states were, not long ago, symbols of hope within the region. As recently as 2006, Ukraine achieved 37th place in the democracy ranking and 27th place in the market economy ranking. As of the most recent survey period, however, Ukraine’s overall scores on these two dimensions have fallen to 6.10 and 5.82 points respectively, a full point lower than in 2006, resulting in Ukraine’s drop to 60th place (out of 128 states) in both rankings. With the current results, Ukraine is no longer the region’s democratic front runner, having slipped behind Moldova, Mongolia and Georgia in the democracy rankings. Although Georgia’s results did improve slightly during this survey period, it must be noted that this improvement follows a significant decline in the quality of democracy there during the previous survey period. Finally, Armenia – which had, in 2008, attained third place in the region in terms of democracy status – continues as a moderate autocracy. This decline from defective democracy to moderate autocracy dates from 2008, when protests that followed Armenia’s 2008 presidential elections were violently repressed, and a state of national emergency was briefly declared. Although political tensions have eased somewhat during the current survey period, the litmus test – namely, the elections of 2012 and 2013 – still lies ahead.

In terms of transformation management, post-Soviet Eurasia registered a slight overall improvement in average scores in the 2012 Transformation Index. These improvements took place largely within the criteria of steering capacity and international cooperation. As during the previous survey period, the lowest BTI scores in the region were achieved in containment of corruption, with 11 of 13 states achieving at most four out often possible points.

Three states experienced a marked decline in transformation management – these include Georgia, which underwent the greatest decline, as well as Belarus and Ukraine. On the other hand, five states in the region were among the 15 BTI states to register the greatest overall improvement in scores for management during this survey period. However, these results should not be understood as the precursor to a new trend. First, these improvements took place largely among states whose standings were at the lower end of the ranking scale, with the improvements limited to the criteria of steering capacity and international cooperation. Second, in most of the five states that registered this improvement, the current government is not pursuing at least one of the two normative goals of the BTI – specifically, democracy under the rule of law and a market economy anchored in the principles of social justice. This is true for both Russia and Tajikistan. Meanwhile, the improvement in transformation management appears particularly fragile in Kyrgyzstan and in Moldavia, both of which remain politically divided and unable to hold successful presidential elections.

Political transformation

During the current survey period, states in the region once again made little progress toward democratization. Post-Soviet Eurasia remains the only BTI region in which all democracies are defective, albeit to varying degrees. This is in spite of the fact that most of the states in the region display an adequate level of stateness, an important prerequisite for a functioning democracy. Indeed, the average score for stateness within the region is higher than for any other of the 49 criteria; the criteria of stateness is also the only criteria for which some states in the region achieved a score of 10. Across BTI regions, only East-Central and Southeastern Europe and Latin America and the Caribbean achieved higher scores for stateness with respect to stability, secularization and legitimacy.

With the exception of Georgia and Kyrgyzstan, a state monopoly on force is assured throughout most of post-Soviet Eurasia. State identity is also well-established and accepted in the region, again with the exception of Georgia. Religious dogma has little or no influence on legal and political institutions. The only noticeable decline in stateness took place within the criteria of basic administrative structures, which declined, from an average of 7.00 points in the BTI 2010, to the current 6.62 points. In five states (Armenia, Belarus, Kyrgyzstan, Mongolia and Russia), scores for basic administrative structure declined by a full point, while the scores for the remaining eight states were unchanged.

Considered solely according to the criteria of stateness, therefore, the region would appear to be a bastion of stability and continuity. However, this seemingly rosy picture dims when the nature of the political systems in the region and their potential for democratization, are taken into account. First, authoritarian governments often display a high level of stateness. For the autocracies of the region, whose primary aim is to maintain their hold on power, the doctrine of security and stability that they have pursued with increasing repression over the past years is far more than a means to legitimate their authority – it is fundamental to survival. Second, any political liberalization in Central Asia could result in the rise of religious dogma and, with it, a decline in the importance of secularism as state doctrine in the post-Soviet states. However, should such a rise in religious dogma occur, it would not necessarily result in the seizure of power by fundamentalist movements, the scenario which is often invoked by the region’s autocrats to legitimize their rule – a strategy that meets with little resistance outside the region. Meanwhile, recent events have exposed the vulnerability of these supposedly stable autocratic regimes in the face of growing social and economic difficulties.

The majority of states in post-Soviet Eurasia are unlikely to undergo significant democratization without at least temporary political upheaval. In other words, democratization is often accompanied by a power vacuum. For example, although a new democratizing movement appears to have taken hold in Kyrgyzstan since the overthrow of President Bakiyev, the country remains divided as ever. As a result, Kyrgyzstan’s scores for stateness declined even as its scores for democratic quality of elections and the preservation of civil rights have improved. Finally, even as its scores for the key democratic criteria of rule of law and political participation are among the highest in the region, Georgia again obtains the lowest scores for stateness. Thus, although a temporary decline in stateness is unsurprising in times of political upheaval, this tends to delay the development of democratic processes and institutions. As long as power vacuums persist, conditions are likely to remain volatile.

The region’s average scores for rule of law and political participation remain nearly as low as they were during the 2010 survey period (4.15 vs. 4.44 points). Within the region, scores for the individual states also remain largely unchanged. Average scores in the region are lowest for the existence of a stable and socially-rooted party system, performance of democratic institutions, and the prosecution of abuse of office. The standard deviation of scores is lowest for the criterion of prosecution of abuse of office, meaning that among all the BTI criteria the scores for this criterion are clustered most closely together. The highest scores achieved for prosecution of acts of corruption, nepotism, preferential treatment and embezzlement on the part of public officeholders is six points, which was attained by Georgia and Moldavia, both of which maintained their scores from the 2010 survey period.

Also worth mentioning is a slight improvement in the performance of democratic institutions and the extent to which democratic rules of the game are accepted as legitimate by the relevant actors. However, the stability of democratic institutions is nonetheless the lowest-performing criterion of democratic performance during the current survey period, with an average of 3.84 points (BTI 2010: 3.58). This low performance is due to the fact that the criterion measures the performance and acceptance of democratic institutions – a measure on which the autocracies perform poorly. Indeed, the improvement in the regional average is due almost entirely to Kyrgyzstan, which passed a constitutional referendum and held free and fair elections that resulted in a change of government, thus demonstrating the increased acceptance of democratic institutions by the political elite.

In addition to the state of political freedoms, civil rights and the separation of powers, the existence of free and fair elections is one of the key factors distinguishing democratic from autocratic states. Russia narrowly escaped being categorized among the authoritarian states in the region, because its elections barely met the standards of free and fair elections during the survey period. The same was true in the case of the regional elections held there in 2010, although at that time the BTI experts expressed significant reservations about this assessment, particularly with respect to the registration of opposition candidates and access to the media.

During this survey period, other states in the region also held elections, some of which had important political consequences. In April 2009, Moldova held parliamentary elections, which the opposition later charged were marred by obstruction and abuses of various sorts on the part of the victorious Communist Party. These accusations of electoral fraud were supported by international election observers. In June 2009, following weeks of occasionally violent protests, new and significantly more democratic elections were held. Although a new coalition government ultimately succeeded the Communists in power, it did not attain a parliamentary majority and was unable to elect a president, resulting in a political stalemate. A referendum calling for direct election of the resident also failed. New parliamentary elections were then held in November 2010 which were regarded internationally as free and comparatively fair. For example, the Communist opposition had better access to the media than they had allowed their opponents during the 2009 elections. However, while the governing Alliance for European Integration managed to extend its parliamentary majority, it still fell short of the votes needed to elect a president. As a result, the speaker of parliament carried out the duties of president on an interim basis.

Presidential elections were also held in Belarus in December 2010, at the end of the survey period. Here, too, the elections resulted in accusations of fraud. Demonstrations against the election were violently suppressed by the police, and many opposition leaders and their supporters were arrested and sentenced for their role in the protests – the arrests included some of the candidates who had stood against President Lukashenko in the elections. These events proved that the hints of liberalization that had preceded the elections were no more than a façade.

On the other hand, the sequence of events in Kyrgyzstan was reversed. There, protests caused massive unrest, after which elections took place, resulting in the April 2010 ousting of President Kurmanbek Bakiyev. That June, the interim government called a referendum for a hastily-drafted new constitution that shifted the country from a presidential to a parliamentary system. The tense atmosphere in the country led to wide-scale unrest and outbreaks of ethnic violence, especially around the towns of Osh and Jalabad in southern Kyrgyzstan. Approximately 450 people were killed in violent clashes between ethnic Uzbeks and Kyrgyz, culminating in organized attacks on the Uzbek population. An estimated 400,000 people – most of them Uzbeks – fled the region. Despite the unrest, both the referendum and the parliamentary elections of October 2010 were largely peaceful, contrary to the warnings of those who had argued to postpone the elections for fear of renewed outbreaks of violence. The OSCE’s election monitoring report found no significant shortcomings and praised the elections for offering a pluralistic field of parties and a highly competitive campaign, during which all parties had free and fair access to the media.

In Mongolia, however, parliamentary elections held in November 2009 cast a shadow over the assessment of democratic quality in that country. Although the elections were largely free and fair, there were nonetheless some reports of vote buying and other forms of fraud. Finally, Presidents Ilham Aliyev (Azerbaijan) and Emamoli Rahmon (Tajikistan) both called parliamentary elections the purpose of which was largely to maintain a façade of democracy.

In early 2010, in an uncommon turn of events for the region, Ukraine experienced a peaceful transfer of power. In these free and fair elections, Viktor Yanukovych emerged the victor over Yulia Tymoshenko, the icon of Ukraine’s orange revolution. However, in the regional vote that followed, in October 2010, Yanukovych and his party succeeded in using administrative means to manipulate the elections. Election commissions were stacked with party loyalists, and successful mayors were pressured to join Yanukovych’s party. In some larger metropolitan areas, the opposition was denied access to the ballot (for debatably spurious reasons), with the end result that Yanukovych’s party won the vote in the majority of regions – including the urban centers. In formerly orange western Ukraine, the ultra-nationalist all-Ukrainian Union Svoboda (Freedom) party garnered a substantial vote, gaining a presence in the city parliaments of Lviv and Ternopil.

Table 1: State of political transformation

As a result of these events, Ukraine is the state within the region to lose the most ground in political transformation. In contrast to the decline experienced by Belarus, Ukraine’s decline is not immediately apparent in Table 1, because it continues to be categorized among the defective democracies in the BTI 2012. It must be noted, however, that while in the BTI 2010, Ukraine led the region on this dimension, in this survey period Ukraine’s democracy status declined by 0.9 points.

Not long after his victory in Ukraine’s presidential election, Viktor Yanukovych began to consolidate his power at the expense of democratic and pluralistic principles. Yanukovych’s current rule is directed at maintaining a balance between two influential local oligarchs, Rinat Akhmetov and Dmytro Firtash. The Ukrainian parliament is no longer locked in a stalemate. However, the recent constitutional amendment has once again increased the authority of the president, which has resulted in a weakening of the separation of powers in Ukraine. There is also little doubt that the conviction of Tymoshenko, along with members of her government, for abuse of office and embezzlement of state funds was politically motivated.

There has also been a noticeable decline in civil rights since Yanukovych’s election. Pressure on NGOs, particularly on human rights groups, continues to increase. In addition, national and, especially, electronic media are increasingly under the control of the president’s party allies, even more so since two television stations lost their broadcasting licenses in summer 2010.

At the other end of the spectrum, Kyrgyzstan moved up a category. In recent years, Kyrgyzstan has been alternating between authoritarian and democratizing trends, virtually in-step with the two-year cycle of the BTI. After having created Central Asia’s first parliamentary democracy, Kyrgyzstan is once again moving in the direction of increased democracy. While the bar here is admittedly rather low, the constitutional referendum of 2010 and the parliamentary elections that followed were regarded as more free and fair than any other election that had been held, to date, in central Asia. The BTI"s national experts for Kyrgyzstan also praised the participation of civil society in the constitutional processes. However, the lower scores for questions relating to stateness (monopoly on the use of force, state identity, and basic administrative structures) demonstrate that the parliamentary system needs to undergo further consolidation, and show that the democratizing trend in Kyrgyzstan is by no means stable.

For the current survey period, scores for the state of democracy in three other states shifted significantly. Belarus dropped a category, largely due to the events surrounding the election and related protests, as discussed above. Azerbaijan’s promotion to the category of moderate autocracy does not represent a significant change in scores, however, since the state hovers just above the minimum rating for a moderate autocracy. Rather, the shift in its classification from hard-line to moderate autocracy was due to a slight consolidation of the state’s monopoly on force that occurred after the BTI 2010 survey period.

By contrast, Moldova’s shift to the forefront of the region’s democracy rankings was due not to any one significant improvement, but rather to a number of small improvements on nearly all individual questions. These improvements coincide with the ascendancy of a younger generation of competent politicians and administrative experts in the Republic. The pro-European governing coalition headed by Vlad Filiat has continued to pursue with assurance and expertise the reforms instituted by their communist predecessors. The democracy ranking for Moldova particularly benefited from improvements in civil rights. However, during the current survey period, the country remained mired in a political stalemate. The constitutional crisis which began after the blocked presidential elections has yet to be resolved despite three parliamentary elections, several failed presidential elections in the parliament, and an abortive attempt at a constitutional referendum. Nonetheless, all the relevant political actors continued to pursue democratic solutions during the survey period.

Economic transformation

No state in the region has, as yet, achieved the status of a developed or functioning market economy within the Transformation Index (see Table 2). This is unlikely to change over the medium term, particularly given that the region’s top performers in economic transformation – Kazakhstan and Russia – remain well below the threshold to a functioning market economy. The majority of states in the region are now categorized as market economies with functional deficits, including Moldova, the only state to switch categories during the current survey period.

Table 2: State of economic transformation

Reflecting the impact of the global finance crisis since the Transformation Index 2010, the overall average scores for the state of economic transformation have again declined slightly, by 0.14 points. This decline is even more significant when compared to the BTI 2008 regional average of 0.32 points. The greatest decline took place on two criteria: first, in currency and price stability; and, second, in economic performance, where the decline was most significant. For these two criteria, the average score declined by more than one point when compared with the BTI 2008. Thus, the average regional score for currency and price stability, which encompasses issues of monetary and debt policy – both key indicators for the effects of the global finance crisis – sank from 7.23 points, during the BTI 2008 survey period, to 6.23 points during the current period. During the same four-year span, average economic performance in the region dropped from 6.92 to 5.69 points. All other criteria remained stable during the four years from the beginning of the last survey period through the end of the current one.

But for three key factors, the global finance crisis would likely have had even greater impact within the region. First, although the region’s banking systems are by no means particularly stable or highly developed, neither are they particularly well-integrated into the global banking system which, in this case, served to ameliorate the direct impact of the crisis. Second, Russia – the region’s economic anchor – drew on a budget surplus accumulated during the boom years to cushion the effects of the crisis. After a brief period of destabilization, this action also benefited the other states in the region that are heavily dependent on Russia (whether due to close economic ties or labor migration). Third, the rapid rise in global oil prices benefited the oil- and gas-producing countries of Azerbaijan, Kazakhstan, Russia and Turkmenistan. At the same time, Mongolia benefited from its copper and gold resources. In October 2009, in its most far-reaching investment agreement to date, the Mongolian government signed a contract with US-based Ivanhoe Mines and the Australian Rio Tinto Group covering gold and copper mining rights in Oyu Tolgoi, near the Chinese border.

At first glance, Belarus would appear surprisingly stable ( – 0.18 points), although it continues to be categorized as a poorly functioning market economy, alongside Turkmenistan, Tajikistan and Uzbekistan in the BTI 2012. In fact, serious solvency issues and severe inflation that arose in Belarus in spring 2011 have already resulted in lower ratings for price- and macro stability in the Transformation Index 2012. In fact, on these two criteria, Belarus and Uzbekistan received the poorest ratings within the region. Belarus scored even more poorly in the protection of private property and private companies. Also, a continued sharp decline after the end of the survey period will likely have a further residual effect on socioeconomic conditions and economic performance.

However, it is Armenia – once the region’s most advanced market economy – that experienced the most severe decline. In Armenia, the state of economic transformation declined from 6.82 points (2008) to 6.5 points (2010), and, finally, to 5.93 points in 2012. As a result, although it remains among the top three, Armenia is no longer the regional forerunner on this dimension. Armenia also experienced marked declines in macro stability and economic performance. In 2009, GDP collapsed, sinking 14.2 points. The economy recovered only slightly in 2010. In addition, while billions of euros in loans extended by the International Monetary Fund and Russia helped to prop up small and mid-sized business, these loans also served to increase Armenia’s government debt ratio from 13 percent of GDP (2008) to nearly 50 percent (2010).

Although economic performance in Armenia saw improvement during 2011, the global economic crisis exposed structural weaknesses in the country’s economy, including a reliance on Russian investment and on transfer payments sent home by Armenian migrant laborers working in Russia. Both of these sources of funds dwindled as a result of Russia’s economic crisis. Although these sources of funds are again on the rise, they do not represent a reliable source of growth for the Armenian economy. Moreover, Armenia’s capital market does not provide adequate credit funding to small- and mid-sized businesses. In addition, the country suffers from both inefficient tax administration and a low tax yield. Finally, Armenia will need to substantially consolidate its public budget in order to support the dram. Nonetheless, the national budget increased by nine percent in 2010, with most of the increase coming as a result of military spending.

The decline in Uzbekistan’s and Kyrgyzstan’s economic performance also reflects their dependence on transfer payments by migrant laborers working in Russia and Kazakhstan. However, this dependency is just one of the reasons Uzbekistan slipped to last place in the region in market-economic development. After all, Tajikistan – which was last in the region during the previous survey period – is equally dependent on transfer payments to maintain its GDP. In Uzbekistan, structural poverty has been exacerbated, in part, because already-rudimentary state benefits to pensioners and persons with disabilities have been cut even further. In an effort to reduce the money supply, the government implemented these cuts by issuing pension payments made, at least in part, through vouchers. However, these vouchers are not accepted by businesses in many areas – they are, in reality, worthless pieces of paper. Poverty and corruption have also further increased the reckless exploitation of natural resources – illustrated, for example, by the practice of illegal logging. Finally, ambitious government programs are putting local environmentalists under increasing pressure.

The global economic crisis also contributed to Ukraine’s decline in market economy scores. However, in Ukraine the difficulties arose because the domestic economy is highly integrated into the international economy. As a result, just a short time after the country joined the World Trade Organization, the effects of the global economic crisis had a severe impact on Ukraine. In order to protect its trade and payments balance, Ukraine elected to temporarily reinstate import duties.

Above all, however, the global finance crisis exposed the weaknesses of the Ukrainian banking system. Before the crisis, Ukrainian banks enjoyed a profitable business in foreign currency credit trade. It was only after investors and savings-account holders withdrew their funds en masse that the lack of equity capital in the banking system became apparent, a crisis exacerbated by the rapid devaluation of the hryvnia. What at first appeared an imminent systemic collapse was averted when the Central Bank issued emergency credits and assumed direct control of a number of banks. In effect, four banks were nationalized. Banks closed approximately one-fourth of their branch offices, dismissing approximately 16,000 employees. The credit system did not recover during the survey period.

As exemplified in Georgia, lack of economic diversification also entails significant risk. In Georgia, where exports have stagnated following the loss of the Russian market, the trade deficit has become structurally entrenched. In addition, the Georgian government has failed to bring inflation under control. As a result, Georgia remains highly vulnerable to impact from economic crises abroad. Although the reforms carried out earlier helped to ensure that the August 2008 war with Russia did not completely destabilize the Georgian economy, billions of euros in international aid were needed to keep the Georgian economy afloat. With this aid having come to an end in mid-2011, Georgia will soon be facing loan repayments. This, coupled with the high level of national debt, is a significant threat to Georgia’s macroeconomic stability. In addition, Georgia’s government appears to be losing ground in the battle against corruption, which had a negative effect on the educational sector during the survey period. In particular, increased financial autonomy provided to secondary schools has proven problematic, in part because the newly-created supervisory bodies have failed to exert adequate oversight. As a result, corruption is once again becoming a factor in important secondary and university examinations.

Two other states, however, made significant progress toward a market economy during the current survey period – Moldova and Tajikistan. While Tajikistan remains the poorest state in post-Soviet Asia in terms of per-capita income, it is no longer at the bottom of the regional rankings in progress toward a market economy. Although Tajikistan finds itself in a challenging position, thanks in part to massive international support it has nevertheless managed to overcome the legacy of the 1992 – 1997 civil war. Since 2000, its economy has grown at an average annual rate of 8.6 percent. In Tajikistan, the economic crisis was also a crisis related to transfer payments. Nonetheless, even in the face of this crisis, the Tajik government has managed to maintain its policy of consolidation, as demanded by international financial institutions. Unfortunately, most of the economic growth in Georgia has benefited a narrow and highly-networked elite, the vast majority of whom display little regard for democratic and market-economy reforms.

Even as it has attempted to broaden the benefits of economic growth, the Georgian government has instituted a number of counter-productive policies. For example, according the World Bank, the public participation campaign for the Rogun dam, which Tajikistan plans to build without assistance from abroad, ultimately fueled a decline in consumption during 2010. Many Tajik citizens eagerly took part in the national project, only to later realize they had overestimated their financial resources. As a result, international financial institutions have since urged the Tajik government to abandon this form of financing. In addition to obtaining support from multi-lateral funders such as the World Bank and the Asian Development Bank, Tajikistan is increasingly turning to China and Iran for assistance financing economic development and infrastructural projects. Although conditions for private entrepreneurs have improved somewhat, wide-spread corruption remains a significant obstacle.

As was the case for political transformation, Moldova made slight gains in a number of questions relating to economic transformation. Taken together, these gains added up to a net gain of 0.5 points – the largest improvement in the region for this dimension. It remains to be seen whether these early steps toward reform can be maintained and what effect they will achieve. The reforms include changes to laws on competition, new banking control measures, and measures intended to protect private property – including measures to combat product piracy.

Although the decline in investment and in remittances from abroad also had a severe impact on the economy of Moldavia, the government succeeded in stabilizing other important macroeconomic parameters. The inflation rate has slowed, and national bank reserves were used to maintain relative currency stability without placing the economy in a stranglehold. In addition, the new government is cooperating with international financial organizations and has, with some success, managed to implement an unpopular economic austerity program. Moldavia also made further gains in equality of opportunity and in environmental awareness, although much work remains on these issues.

Transformation management

One of the unique elements of the Transformation Index is its incorporation of criteria of difficulty, in which the contextual preconditions for transformation management are compared with actual management performance. Barring unusual events, this degree of difficulty typically varies little or not at all. In fact, only two major shifts took place during the current survey period. In both cases, these entailed a shift of two points when compared to the BTI 2010 and, in both cases, the shifts related to the intensity of conflict. In Georgia, the intensity of conflict declined after the brief August 2008 war with Russia. In Kyrgyzstan, by contrast, the intensity of conflict increased due to the violent ethnic conflicts of June 2010. Tajikistan continues to exhibit the region’s highest level of difficulty in the BTI 2012. When compared to other BTI regions, transformation management in post-Soviet Eurasia is particularly hindered by the absence of traditions of civil society.

Table 3: Quality of transformation management

Transformation management values have seen only a slight overall improvement in the regional average (+0.11 points over the BTI 2010). Scores in most of the criteria remained virtually unchanged. The only truly notable improvement has been in the area of steering capability and international cooperation. Once again, the criterion of international cooperation obtained the highest transformation management scores by far, with an average of 5.67 points. Containing corruption continues to receive the lowest score, with an average of 3.46 points. The standard deviation is lowest for this criterion, at 0.953, meaning that all of the states score equally poorly on this criterion.

Mongolia is the only state that has achieved successful transformation management, albeit with some weaknesses. However, in the BTI 2012, Mongolia’s scores saw a slight decline in steering capacity and international cooperation, although the score for the latter remains high. The national experts did note that political elites in Mongolia at times neglect such long-term priorities as combating poverty in favor of promoting their own short-term interests, a fact that at times also hinders effective use of external support.

Just two years ago, Georgia was continued to be ranked in the category of successful management with weakness. In the BTI 2012, however, it has fallen to the category of management with moderate success. The national experts particularly criticized the government’s decreased ability to set and maintain strategic priorities; also criticized was the use of natural resources in the state. The Georgian government made a number of strategic mistakes leading up to the August 2008 war with Russia. Since that time, a number of high-profile but meaningless projects, as well as the strategic failures of political elites, have affected transformation management scores. In addition, Georgia is now making less effort to contain corruption. Tax and police inspectors are once again turning to practices that were common before the Rose Revolution, such as demanding bribes from shop owners and retailers.

Belarus, where transformation management is essentially non-existent, also dropped one category. For nearly all criteria, the already-low scores declined in the BTI 2012. The brutal treatment meted out to the opposition after the December 2010 presidential elections demonstrated that the signs of liberalization prior to the election – exemplified by the more freely conducted election – were a mere ploy on the part of Lukaschenko to uphold his autocratic rule. In addition, the regime is no longer able to maintain its policy of market socialism, a policy which is highly subsidized by and dependent upon Russia. Currently, Belarus is teetering on the brink of bankruptcy. In summer 2011, the regime demonstrated a typical show of force against the wave of public protest that swept across the state.

Ukraine, where the decline in transformation management scores is second only to Belarus, now barely holds its place within the category of management with moderate success. To a great extent, this decline is caused by the fact that the relevant political actors continue to exacerbate conflict between the political camps, as well as between different regions within the country – a problem that is particularly evident in Viktor Yanukovych’s treatment of members of the preceding government.

Two states, however, did advance one category in this dimension during the survey period. Kyrgyzstan has now joined the ranks of states whose transformation management displays moderate success. Much of Kyrgyzstan improvement during the BTI 2012 survey period can be attributed to Kyrgyzstan’s intensive effort to incorporate civil society in the drafting of the new constitution, which was later adopted by referendum in October 2010. Even though Melis Myrzakmatov, the mayor of Osh, is an influential opponent of the new government, the influence of anti-democratic actors has in fact declined. The other minor improvements can for now only be regarded as temporary, particularly because the stability of Kyrgyzstan’s political, economic and social development – and the cohesiveness between the northern and southern parts of the country – is by no means assured. The new system of governance will face its next major test during the presidential elections set for late 2011.

Meanwhile, Tajikistan, the state with the highest level of difficulty, has shown signs of transformation management during the current survey period. With massive support from international donors, the Tajik government has adopted, at least in part, some reforms and is beginning the laborious process of implementing them. These developments represent an improvement over the previous survey period. These gains must be seen in light of the fact that Tajikistan was categorized as a failed state during the civil war (1992-1997) and in the period that followed. It must be noted, however, that the Tajik government is actively thwarting any effort to come to terms with the events of the civil war. Moreover, in past years the government has taken concerted action against groups in regions which lost the civil war. While over the short term these actions might potentially benefit the state’s steering capability, they no doubt also solidify the antagonism of the local population.

In addition, five states in the region are among the 15 states to register the greatest improvement in transformation management scores among the 128 BTI states during this survey period: Moldavia, Kyrgyzstan, Russia, Tajikistan and Armenia.

The Moldavia registered the greatest improvement in the region; its increase from 4.49 in the BTI 2010 to the current 5.39 points brings the state from 79th place to 52nd place, overall, in the management ranking. In nearly every transformation management question, Moldavia scored at least a full point higher during the current survey period than in 2010. The current governing coalition has performed better in terms of steering capability and resource management than had been expected when it came to power, with many observers having originally believed the coalition was nothing more than a conglomeration of parties united only in their opposition to communist rule.

In the current survey period, Moldavia also rated highly on the criterion of consensus building, which includes questions relating to consensus on goals, conflict management, and the incorporation of civil society. Indeed, in this criterion, Moldova’s scores improved by 1.6 points. This improvement reflected agreement among competing political camps regarding key development goals – in particular, orientation toward the European Union and its associated reforms. Likewise, conflict management was comparatively successful, with the ruling coalition choosing to advance market reforms launched by its predecessor, rather than choosing to take a hard line against all policies enacted by the vanquished government (as happened in Ukraine). In addition, the new government made a concerted effort to incorporate civil society into the political process – a milestone in the political culture of Moldavia.

Kyrgyzstan’s scores for transformation management improved by 0.68 points since the BTI 2010. Russia and Tajikistan also posted significant improvements (0.55 points each), although the starting point of each in the rankings was quite low. In Russia, the government made efficient use of state funds to proactively steer the country past the economic crisis. Indeed, among the major political actors, there was overall consensus regarding strategic priorities and goals. However, the regime is not actively promoting a transformation toward democracy under the rule of law.

While at first glance Armenia’s improvement in transformation management might appear to contradict the country’s significant decline in transformation toward a market economy, any contradiction is explained when the management scores from the BTI 2008 and BTI 2010 survey periods are taken into account. It may well be that the country’s on-going highly confrontational political stalemate explains the persistence of the past sharp decline in transformation management. However, in the face of the global economic crisis, it appears that Armenia’s political culture is becoming less confrontational.

Outlook

Overall, post-Soviet Eurasia has seen little change within the surveyed dimensions of the BTI. While there have been a few improvements, these are by no means widespread enough to be considered a trend. Nonetheless, beneath the surface, a number of states in the region appear poised for change. The rulers of the autocracies and highly-defective democracies – which constitute the majority of states in the region – have grown increasingly anxious in the wake of the rebellions in the Arab states. Economic crisis, a labor market with few opportunities for a growing population, increasing food prices, and bureaucratic harassment of small business owners – all wide-spread in the Eurasian region – have already proven fertile soil for the Arab rebellions.

Poor, landlocked countries that are lacking in natural resources – Tajikistan, Kyrgyzstan, and Moldavia – will remain susceptible to crisis and vulnerable to abrupt economic downturns. The rulers of these countries will have little room to maneuver. The sustainability and the success transformation management in these states will have only a limited effect on their ability to steer things. Moreover, democratization in the region, particularly in central Asia, can only succeed if it is tolerated by the region’s most autocratic and influential regimes, whose primary interest lies in maintaining stability. In this respect, the two most influential states are China and Russia. Even though Russia is scheduled for elections to the State Duma in 2012, neither China nor Russia are likely to undergo substantial shifts in their own development, or in their strategic interests vis-à-vis other states in the region. Also, the Kremlin sets the course for Belarus which, as a result of its massive debt and President Lukashenko’s violent repression of mass election protests, is now completely dependent upon Russia.

Armenia, Georgia and Ukraine are all similarly mired in dependency and thus have minimal scope for taking independent action. In Armenia, the embattled political camps are headed toward an upcoming election that has the potential to become highly conflictual. In Georgia, President Mikheil Saakashvili is attempting to compensate for Georgia’s poor economic prospects by positioning the state as a transit corridor for natural gas shipments – a strategy that provides no more than a flimsy foundation for greater national independence. Moreover, Saakashvili’s occasionally brutal and domineering actions served to damage his credibility among his western supporters. In Ukraine, President Yanukovych’s focus is on consolidating his power and crushing the political opposition. At the same time, the guidelines of the International Monetary Fund could help institute structural reforms and bring a halt to the brain drain – but only if the government agrees to cooperate.

The autocratic rulers of Azerbaijan, Kazakhstan and Turkmenistan, whose wealth of natural resources provide them with greater scope for action, are faced with more existential questions. Can these rulers subvert the pressure to reform, for example by allowing their citizens greater economic and political freedom, and by taking sustained and effective action against corruption? The events surrounding the April 2011 re-election of Kazakh President Nursultan Nazarbayev might be regarded as an example of such strategic uncertainty on the part of the regime. Initially, Nazarbayev appeared intent on avoiding elections, seeking instead to ensure his re-acclamation by referendum. Later, however, Nazarbayev decided to hold an election, but opted to move up its date in a move intended to undercut the chance of facing a true opposition. Indeed, of the three official opposition candidates, two made what was clearly only a pro forma effort. Although the OSCE was critical of the elections, Nazarbayev proclaimed his lopsided victory an expression of national unity. Within Kazakhstan, local commentators celebrated the election as a move toward democracy. The question of finding a successor to the 71-year-old Nazarbayev – a issue which will have important consequences for the region – was merely postponed.

However, the loudest rumblings are being heard in the state that is last in the region in the Status and Management indices: Uzbekistan, which since 1991 has been ruled by President Islam Karimov. The potential for violent political upheaval and long-lasting instability is particularly high in Uzbekistan, where the problems cited above – a labor market that offers few opportunities for a growing population, increasing food prices, political and religious oppression, and harassment by corrupt and incompetent officials of state – are endemic. A growing number of highly educated young people who have gained experience abroad are being frustrated in their demands that the state provide new political and economic opportunities. As a result, the regime’s official ideology, which promotes Uzbekistan as an island of stability in a sea of chaos, is increasingly under siege. Moreover, the issue of a presidential successor is even more acute here than in Kazakhstan, and could well spark the formation of political resistance – a resistance with the potential to spread throughout the region.

BTI 2012 | Armenia Country Report

Key Indicators

Sources: The World Bank, World Development Indicators 2011 | UNDP, Human Development Report 2011. Footnotes: (1) Average annual growth rate. (2) Gender Inequality Index (GII). (3) Percentage of population living on less than $2 a day.

Executive Summary

Hindered by the lingering effects of the country’s 2008 post-election crisis, the Armenian government continues to struggle to overcome a daunting set of challenges, including a pronounced lack of legitimacy, a deeply polarized population, and general mistrust and unpopularity among the majority of the population. The past two years were also marked by a serious economic crisis, as declining remittances and reduced investment triggered new fiscal and budgetary pressure.

On a broader level, despite the country’s democratic shortcomings, the political crisis alone was not sufficient to pose a significant threat of governmental change. As the government sought to move beyond the post-election crisis of 2008, the opposition was unable to harness public discontent and failed to offer any real political alternative. In this way, Armenian politics throughout the past two years could largely be characterized as a stalemate, with a deadlock between the authorities and the opposition in which neither side emerged as the clear winner.

Beyond the political stalemate, however, the government’s lack of legitimacy and popular support undermined its capacity to manage the impact of economic crisis. Related obstacles to economic reform during this period were seen in the country’s widening disparities in wealth and income, the negative effects of entrenched corruption, and the barriers to market reform from powerful commodity-based cartels or semi-monopolies, commonly referred to as oligarchic groups.

However, even in the face of these related political and economic challenges, there has been some notable progress in reform. The Armenian government has demonstrated a seemingly more substantial level of commitment to deepening reform and a new sense of political will, driven by recognition of the necessity for political and economic reform. Key questions remain, however, as it is not yet assured that this new reform drive will be sufficient to overcome the country’s structural economic problems or strong enough to tackle entrenched corruption and the powerful vested interests rooted in the incestuous relationship between business and politics. The public has shown similar doubts as to the value of the Armenian government’s new sense of political will, which may prove to be too little, too late for effective reforms.

History and Characteristics of Transformation

With the sudden collapse of the Soviet Union, Armenia, like most of the former Soviet states, was ill-prepared for the onset of abrupt independence. After seven decades of Soviet rule, Armenia struggled to create the institutions necessary for statehood and sovereignty, and to adapt to the demands associated with introducing new political and economic reforms. From the onset of independence, Armenia faced additional challenges, ranging from an ongoing war with neighboring Azerbaijan that led to a blockade of the country’s eastern and western energy, trade and transport links, to the devastating impact of a severe earthquake.

Against that backdrop, Armenia’s political and economic transformation was largely defined by the specific circumstances of the time, which greatly impacted the trajectory of reform. More specifically, these factors