Delay in reform and weak economic indicators in Serbia are for the most part considered to be due to the delay in institutional and legal reforms.
Numerous polls and research suggest that political and judicial institutions in
14 Serbia, as well as market institutions, are not completely erected, which is reflected in the enforcement of outdated laws (outdated in terms of not being harmonized with international standards, e.g. bankruptcy law, red tape in starting up companies, problems in real estate registers, accounting standards, etc.); in certain areas, legal regulations do not even exist (investment funds, housing credit insurance), over-regulation and state interference, which increase the costs of economic entities, inconsistency in certain regulations (the absence of horizontal and vertical agreement, e.g. between laws and regulations in the Republic of Serbia and at the level of the state union of SCG), and arbitrary enforcement of laws.
Applying various methodologies international financial institutions monitor and assess the quality of institutional and legal development. Thus, the European Bank for Reconstruction and Development monitors the quality of law and the level of enforcement of law in the area of company/commercial law and finance related regulations. The EBRD’s assessments indicate that SCG, compared to other countries, lags in the reform of legal and market institutions. With regard to company law and its enforcement, Serbia and Montenegro scored 3+ in 2001 and 3 in 2002, and with regard to finance-related regulations and their enforcement 3- in 2001 and 2- in 2002. Croatia, Bulgaria, Macedonia and Romania rank better, while Albania and B&H are behind Serbia and Montenegro.
Of course, indicators for the Czech Republic, Poland, Hungary and Slovakia are far better. SCG has a considerable delay in the area of finance. Therefore SCG had better indicators of company/commercial law and of finance-related regulations in 2001 than in 20021, which, to be honest, applies to the majority of other countries, and not only to SCG. EBRD indicators2 of legal transition were developed as a measure of quality (extensiveness3), i.e. the level to which commercial and financial laws are close to international standards, and as the measures of the extent of enforcement of the law (effectiveness4).
For 2003, EBRD developed indicators which measure progress in institutional/legal transition in a new way. Unlike the previously mentioned ones,
1 Worsening refers to information which legal regulations give to economic entities. This information is more comprehensive after a certain period of time, when the enforcement of legal regulations shows all possible qualitative shortcomings (the contents of the law), as well as shortcomings with regard to enforcement (the relation between normative and actual enforcement).
2 Besides transitional indicators, transition reports in 1995 have introduced indicators of legal transition. The indicators of legal transition developed by the European Bank for Reconstruction and Development are based on the subjective perceptions of 165 legal and other experts from 27 countries in transition with regard to the quality and efficiency of law. For the methodology for the creation of indicators of legal transition see Transition Reports, EBRD, 2002, p 39 and Law in Transition – Ten Years of Legal Transition. EBRD 2002, pp 15-17. For the methodology of creating indicators for the business environment and the success of companies, see Transition Report, EBRD 2002, pp 24-29.
3 Extensiveness or so-called indicator of quality of law is an approximation of law to international legal standards.
4 Effectiveness specifies the extent of implementation and enforcement of law. The introduction of these indicators made possible the analysis of the impact of legal reforms on investment incentives.
the new indicators are of a sectoral character and measure the level of harmonization of regulations with international standards and the efficiency of law in terms of consequences of its enforcement in specific legal areas. These indicators are focused on the following: security for claims, bankruptcy, capital market and corporative governance, concessions and regulatory framework for telecommunications, while the 2003 report deals with the security for claims. In this area, Serbia and Montenegro, together with B&H, fall within the category of non-reformed countries, although Serbia has enacted new legislation, but it has not been enforced yet. Also a low score goes for the enforcement of law points to those factors and restrictions which obstruct the enforcement of regulations governing the security for claims.
The institutional environment in SCG is assessed in other studies, such as the Index of Economic Freedom of Heritage Foundation, which assesses institutional environment with regard to economic freedom. Namely, economic freedom5 is assessed on the basis of protection of property rights (functioning of the judiciary, possibilities of expropriations, intellectual property protection), the level of government intervention in the economy (state ownership, state spending), fiscal burden, regulation (administrative procedures, licenses), monetary policy, trade policy, the control of prices and wages, banking and finance, informal market and capital flows and foreign investments. According to these criteria, SCG ranked 149 among 161 states included, with the score 4.25, being behind Slovenia, Croatia, B&H, Albania, Hungary, Bulgaria and Romania.
The score 4.25 puts SCG in the group of economically unfree countries, i.e.
countries whose institutions do not uphold the market economy.
To the indicators of institutional development we should add so called governance indicators6, i.e. indicators of the government’s efficiency, which assess democracy, political stability, efficiency of state administration, quality of law, the rule of law and control of corruption. For the sake of comparison with CEE countries and with former SFRY Republics, we will mention a few indicators. The score 29.4 given to the quality of law in SCG is twice as low compared to CEE countries (63.2), a conclusion that cannot be drawn from EBRD’s report. Such a low score for legal regulations is the result of the high level of government intervention in the economy which has been maintained. The weakest component of governance in SCG, according to this research, is the rule of law, with score 16, which is nearly three times lower compared with Eastern European countries, i.e. five times lower than the index of states - candidates for accession to the EU.
The rule of law is one of the most important prerequisites for a market economy. One segment of the rule of law in Serbia is closely related to constitutional reform, i.e. to the adoption of the new Constitution of Serbia and democratic institutions based thereon. However, this is only one dimension of the rule of law. The quality of law, especially the quality of economy-related law (i.e.
5 Economic freedoms are assessed on the basis of 50 factors classified in 10 groups of equal relevance.
6 Kaufmann D, Kraay A and Mastruzu M (2003), Governance Matters III: Governance Indicators, World Bank.
16 company and financial laws), their enforcement and building of institutions for enforcement thereof is a key point of economic reforms. The rule of law can be basically identified with the enforcement of quality law and presented with different components such as efficiency of the judicial system, level of corruption, the risk of nationalization, probability for a contract not to be protected , etc.