Lecture 4

1. Lecture 4 Political and legal determinants of doing business in Central and East European countries

2. Learning objective • Political systems • Legal system • Institution and their key role of political and legal system • Systemic differences between CEE economies

3. Where to enter?

4. Political systemdefinitions • A political system is a complete set of institutions, interest groups(such as political parties, trade unions, lobby groups), the relationships between those institutions and the political norms and rulesthat govern their functions (constitution, election law). • A political system is composed of the members of a social organization (group) who are in power. • A political system is a concept in which theoretically regarded as a way of the government makes a policy and also to make them more organized in their administration.

5. Types of political system • Anarchy • Communism • Theocracy • Feudalism • Commonwealth • Monarchy • Democracy • Totalitarianism (Dictatorship)

6. Totalitarianism (Dictatorship) • One personor group of people has absolute power, often backed by the military, over the entire country and its people.  • It characterized by six key features: 1. An official ideology to which general adherence was demanded, the ideology intended to achieve a “perfect final stage of mankind”. 2. A single mass party, hierarchically organized, closely interwoven with the state bureaucracy and typically led by one man. 3.Monopolistic control of the armed forces. 4. A similar monopoly of the means of effective mass communication. 5.A system of terroristic police control. 6.Central control and direction of the entire economy.

7. Democracy • Democracy is a political system in which governments derived their legitimacy from their election by their citizens. • Democracy allows people to participate equally—either directly or through elected representatives—in the proposal, development, and creation of laws. • The rules are usually laid down in a constitution, and they determine how elections are organized; how the public vote is translated into seats in parliament; and how much power the elected officials or members of parliament attain. • Democracies however vary considerably in the way they translate the votes of the public into legislation, taxation and other government actions.

8. Three types of government system in Europe • Presidential system - the president is the head of state and the head of government (Cyprus) • Semi presidential system - the president and the prime minister share a number of competences (Frence, Lithuania, Portugal and Romania) • Parliamentary system - the president is a ceremonial figurehead who has few political competences Semi-presidential Parliamentary Parliamentary constitutional monarchy

9. Degree of self governance UnitaryDevolved FederacyFederation • Unitary - most of the competences lie with the central government and only minor or local issues are within the authority of regional governments. • Devolved states - devolved certain powers to regions. • Federacy – devolved power to some regions. • Federation – state and regions have equal competences (Austria, Belgium, Germany).

10. Parliamentary Chambers BicameralUnicameral • Bicameral or Unicameral • If the parliament has only one chamber, it is wholly directly elected in all cases. • If there are two chambers, the lower house is directly elected in all cases, while the upper house can be directly elected (e.g. the Senate of Poland); or indirectly elected, for example, by regional legislatures (e.g. the Federal Council of Austria); or non-elected, but representing certain interest groups (e.g. the National Council of Slovenia); or non-elected (though by and large appointed by elected officials) as a remnant of a non-democratic political system in earlier times (as in the House of Lords in the United Kingdom).

11. Political system in CEE countries CroatiaUnicameralparliamentaryunitaryPresidentPresident of theGov.

12. Democracy in CEE countriesCivil liberties and human rights • Most of CEE countries have quickly achieved consolidated democracy status. • Candidate states had to incorporate the protection of human rights into their legalsystems through the acquiscommunautaire prior to signing the accession agreement. Therefore,from the legal point of view, new Member States do not differ from old Member States. • The main difference between East and West within the EU lies in the type of most commonhuman rights violations. In new Member States, which are rarely the target lands of migration,the rights of migrants and asylum seekers are not the main issue. • Rather, discrimination is targeted at otherdisenfranchised groups, such as Roma, women and LGBTQ citizens and refugies. Violent incidents againstthese minorities have increased since the beginning of the recent financial crisis and are nowpart of a populist political discourse.

13. Democracy in CEE today • Most of the Central and Eastern European Member States are now similar to Western European Member States in that they are considered free and democratic. • Freedom House has rated 8 out of 10 CEE countries28 as consolidated democracies over the past 10 years, while Bulgaria and Romania still remain semi-consolidated democracies whose transition process is yet to be completed. • However, in recent times, democracy in Slovakia and especially in Hungary and Poland again moved close to being considered as semi-consolidated after the recent economic crisis and subsequent political changes with potential limitations to democracy.

14. The case of Hungary (2010-2013) • The Hungarian so-called Media laws were adopted at the end of 2010 and echoed in the EUas a serious threat, not only for media freedom in Hungary but also as a violation of corevalues such as freedom of expression, independence of the judiciary and freedom of thepress. The European Commission criticized the newly established National Media and Infocommunications. In 2016 last independent Hungarian newspaper desapeared. • Political interference was also noted with respect to the replacement of the Governor of theHungarian Central Bank, Monetary council and the data protection authority director. TheCommission was also concerned with the Fourth Amendment to the Constitution, which banspolitical advertisement in commercial media, criminalises homelessness and provides a verynarrow interpretation of the family. • The Hungarian situation was even debated in the European Parliament on multiple occasions.30 The European Parliament also initiated an inquiry into certain articles of the new HungarianConstitution and other legislations, resulting in a resolution that called on all MemberStates and EU institutions to safeguard the democratic values of the Union.31 The Commissionhas also initiated infringement procedures against Hungary with regard to some provisions ofthe new Constitution, leading to a negative verdict by the European Court of Justice in 2013and subsequent revisions to the basic law.

15. The case of Poland,2015-2016 • In Poland, the governing party Justice and Low (PiS) does not have majority allowing change the constitution, many of its initiatives—including laws designed to control the media, limit civil liberties, politicize the civil service, and attack judicial independence are unconstitutional. But the government is engaged in a blatantly illegal effort to subjugate the Constitutional Tribunal. • Many international bodies (the Venice Commission, EurpeanCommision and European Parliamnet, United Nation) criticiezed changes in low and rules introduced by PiS in Poland. • The Venice Commission draft report said that “as long as the situation of constitutional crisis related to the Constitutional Tribunal remains unsettled and as long as the Constitutional Tribunal cannot carry out its work in an efficient manner, not only is the rule of law in danger, but so is democracy and human rights.” • The European Commission for Democracy through Law - better known as the Venice Commission as it meets in Venice - is the Council of Europe's advisory body on constitutional matters.The role of the Venice Commission is to provide legal advice to its member states and, in particular, to help states wishing to bring their legal and institutional structures into line with European standards and international experience in the fields of democracy, human rights and the rule of law.

16. The separation of power – the fundament of democracy CONSTITUTION Separation of power is the idea that a government functions best when its powers do not rest in a single authority but are divided among different branches. In Hungarian and Polish cases the parliament using the majority power, pass the legislations, which mixed executive, judicial and legislative responsibility and make little of judicial power

17. Party System in CEE • Every CEE Member State in the EU has a multi-party system. • There are great ideological variations across these party systems but they follow the usual left-right ideological division. • Apart from the Czech Republic and Bulgaria, bona fide Communist parties are rare, as they have been either discredited by their past roles or heavily defeated by their post-1989 political rivals. • With the exception of Estonia, the centre-left is strong and made up by completely new or reformed Communist successor parties. • The right side of the ideological spectrum is generally more crowded and more extensive as it spans from centre-right through populist to nationalist extremist parties. • Traditional liberal and single issue — e.g. Green — parties exist but their number and influence are relatively small.

18. Belonging to a political party • There was a rapid decrease in party membership in Eastern Europe in the early 1990s, once people were no longer required to become members of the Communist — or any other — Party. It should be recalled that party membership has declined in the past decades throughout Europe

19. Voters turnout in elections 1989-2013 in CEE countries Citizen participation patterns show more noticeable differences between East and West. Participationin Parliamentary elections was high immediately after the regime change acrossthe region, with levels similar to those in the West.40 The average voter turnout duringthe entire 25-year period is about 65 %, but there is a clear declining trend shownby average voter turnout dropping to 55 % in the last five years. The reasons are: (1), the sense of ‘living history’ made people turn out much more at the ballot-box at the beginning. (2) with the consolidation of political and party systems, voters couldfeel that their votes were not so important or even did not count. (3) a general disillusionment with the often scandal-ridden ruling political elite and in general thenew style of politics, as well as the very incomplete materialization of expectations about highliving standards, prosperous economy and generous Welfare State, also made people turnawayfrompolitics.

20. Voters turnout – main tendencies • Local elections, participation is lower than in national elections (51 %). Nonetheless, after some initial decrease, it stabilized at between 40% and 60 % as early as the mid-1990s. • Turnout at European Parliamentary elections is extremely low. The average is about 31.5 %. This is much lower than the Western European average which, despite a declining tendency since 1979 is still around 50%. • The relatively low turnout in the 2014 EP elections also demonstrates a tendency of decreasing participation and highlights the problems of the legitimacy of the EU among many of the Member States. The reasons for this lack of interest are partly similar to those cited in the case of Western Europe: a ‘democratic deficit’ in the EU institutional structure, difficulties in identifying with European political issues and European politicians and the near absence of linkage between the activities of the EU Parliament and the everyday lives of citizens.

21. Political system in CEE – main characteristicHigh volatility • Between 1990 and 2014, the eleven post-communist countries which are all members of the EU now, altogether had 144 cabinets, which means that roughly every second country has had a change of cabinets each year since 1990. • The same apply to the parties. The frequent failure of parties and coalitions in government and the recent economic crisis triggered again more electoral instability and more division of political supply among parties.

22. Legal Systems • What it is? • Rules of the game on how a country’s laws are enacted and enforced. • The legal systems are generally based on one of three basic systems:  • civil law,  • common law, and  • religious law – or combinations of these. • However, the legal system of each country is shaped by its unique history and so incorporates individual variations.

23. Dates to Roman times in the fifth century B.C. The Napoleonic Code of 1804 drew on the Roman legal system and is the basis for continental European law today. Code law is also known as civil law. Rules and statutes constitute a legal code Defines all obligations, responsibilities, and privileges Civil Law

24. Civil law A legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgments. Civil law (or civilian law) is a legal system originating in Western Europe, intellectualized within the framework of late Roman law, and whose most prevalent feature is that its core principles are codified into a referable system which serves as the primary source of law.  Scholars of comparative law and economists usually subdivide civil law into four distinct groups: French civil law: in France, the Benelux countries, Italy, Romania, Spain and former colonies of those countries; German civil law: in Germany, Austria, Switzerland, Estonia, Latvia,former Yugoslav republics, Greece, Portugal and its former colonies, Turkey, Japan, South Korea and the Republic of China; Scandinavian civil law: in Denmark, Norway and Sweden. As historically integrated in the Scandinavian cultural sphere, Finland and Iceland also inherited the system. Chinese law: a mixture of civil law and socialist law in use in the People's Republic of China.

25. Tradition Nation’s legal history Precedent Past cases before the courts Usage How laws are applied Common Law

26. Common low • A legal tradition that is shaped by precedents and traditions from previous judicial decisions. • Common law and equity are systems of law whose sources are the decisions in cases by judges. Alongside, every system will have a legislature that passes new laws and statutes. The relationships between statutes and judicial decisions can be complex. In some jurisdictions, such statutes may overrule judicial decisions or codify the topic covered by several contradictory or ambiguous decisions. 

27. Theocratic (religious) Law Legal tradition based on religious teachings Islamic law Jewish law Hindu law

28. Religiouslow • Religious law refers to the notion of a religious system or document being used as a legal source, though the methodology used varies. • The main kinds of religious law are Sharia in Islam, Halakha in Judaism, and canon law in some Christian groups. 

29. In the European Union, the Court of Justice takes an approach mixing civil law (based on the treaties) with an attachment to the importance of case law.

30. THE EUROPEAN COURT OF JUSTICE (ECJ) • the highest court of the European Union • ultimate say in matters of Community Law • established under the ECSC Treaty in 1952 by the Treaty of Paris for the European Coal and Steel Community • based in Luxembourg • assisted by a lower court - the COURT OF FIRST INSTANCE The Court of Justice of the European Communities, Luxembourg

31. What does the European Court of Justice do? • interpreting the law (preliminary rulings) – national courts of EU countries are required to ensure EU law is properly applied, but courts in different countries might interpret it differently. If a national court is in doubt about the interpretation or validity of an EU law, it can ask the Court for clarification. • enforcing the law (infringement proceedings) – this type of case is taken against a national government for failing to comply with EU law. Can be started by the European Commission or another EU country. If the country is found to be at fault, it must put things right at once, or risk a second case being brought, which may result in a fine. • annulling EU legal acts (actions for annulment) – if an EU act is believed to violate EU treaties or fundamental rights, the Court can be asked to annul it – by an EU government, the Council of the EU, the European Commission or (in some cases) theEuropean Parliament.Private individuals can also ask the Court to annul an EU act that directly concerns them. • ensuring the EU takes action (actions for failure to act) – the Parliament, Council and Commission must make certain decisions under certain circumstances. If they don't, EU governments, other EU institutions or (under certain conditions) individuals or companies can complain to the Court. • sanctioning EU institutions (actions for damages) – any person or company who has had their interests harmed as a result of the action or inaction of the EU or its staff can take action against them through the Court.

32. Numbers of laws and decrees passed annually in CEE countries, 1990-2010 The main problem of someCEEcountries’ low is the quality!!!!

33. Institutions – key factor of political, low, and economic system • An institution is any structure or mechanism of social order and cooperation governing the behavior or set of individuals within a given human community. • Institutions are identified with a social purpose, transcending individual human lives and intention by mediating the rules that govern cooperative human behavior.

34. Formal Institutions • Formal Institutions – lows, regulations and rules that are set by authorized bodies. • On the national level usually it is government or delegated specific bodies (local councils, or supra-national bodies like European Union or EBC).

35. Informal Institutions • Rules that are not formalized but exist in norms and values. • These concern what behaviors are morally right and wrong, and what is important and what is not within the society. • They create a pressure on individuals behaviors.

36. Institutions as three Pillars of international business (by W.R. Scott) • Regulatory pillars – coercive power of the state, corresponds to formal institutions. • Normative pillars – the mechanism through which norms influence individual and firm behavior. • Cognitive pillars – the internationalized taken- for-granted values and believes that guide individual and firm behavior (ratings and ranks, GDP growth rate, exchange rate).

37. What do Institutions do? • The key role of Institutions is to reduce uncertainty. • Uncertainty increases transaction costs, which are defined as the costs associated with economic transactions. • Institutional frameworks can reduce the potential for opportunistic behavior by explicitly establishing rules. • Institutions are not static; they evolve over time. Institutional transition, defined as ‘fundamental and comprehensive change introduced to the formal and informal rules of the game that affect organizations as players’, are common, especially in emerging economies

38. The Trust inInstitutioninSelectedCountries, 2012

39. Bribes, Global Corruption Barometer, 2014 Medical & health Police Judiciary Land service

40. CEE – Doing Business • Doing Business Index Economies are ranked on their ease of doing business, from 1 – 183. A high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm. This index averages the country's percentile rankings on 10 topics(starting business, construction permits, getting electricity, getting credit, registering property, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency) made up of a variety of indicators, giving equal weight to each topic.

41. Doing Business in CEE countries - 2016

42. Ease of Doing Business RankNumber of procedures to set up a businessprogress 2004-2016

43. Ease of Doing Business RankTime (days) required to set up a business http://data.worldbank.org/indicator/IC.BUS.EASE.XQ

44. The tax rate (% of profit)

45. Paying taxes, hours per year

46. Thank you !