often than firms elsewhere. Competition from goods smugglers is also perceived as a major competitive threat in Azerbaijan and Georgia, much more than in any other countries, confirming that informal and illegal activities in these countries are a major phenomenon.

_Predictability of changes in policies and legislation_ . Perceived predictability of the business environment determined by changes in economic and financial policies or changes in laws and regulations is an important aspect that affects business decisions, particularly investments and other long-term decisions. According to enterprises and in relation to predictability of economic and financial policies, the CIS-7 rank well across transitional economies with an average predictability higher than in both other CIS countries and non CIS countries. Within the CIS-7, there are however great differences with Azerbaijan and Uzbekistan being the most predictable environments and with Kyrgyzstan and Moldova being the least predictable. The situation is very much the same relatively to predictability of laws and regulations affecting businesses with Azerbaijan showing best predictability and Kyrgyzstan the lowest.

_Infrastructures_ . Some of the essential services for the functioning of firms are ranked very poorly in the CIS-7. On average, postal services are ranked as the worst service in all three groups of countries considered. Telephones and electricity also rank for all groups within the four worst services in a list of 14 services. As already remarked in previous sections, telephones density is extremely low in the CIS-7 (Pomfret 2003) and the cost of telephones calls per minute is higher than anywhere else (WBI<sup>15</sup> ). Electricity consumption per capita in the CIS-7 is only about twothirds than elsewhere in transition and increased only marginally between 1998 and 2000 while commercial energy use was only about one-third during the same period (WBI), both measures reflecting relatively lower income and output. Generally, much better ranked are roads and public works. WBI data show that the percentage of paved roads in the CIS-7 is rather high as compared to the average in other transitional economies with over 92% of roads paved although we do not have statistics on the general state and maintenance of roads.

# **Financial barriers**

_Sources of finance_ . According to enterprises interviewed in the BEEPS, among the sources of finance, banks contribute to a very small share of enterprises in the CIS-7 (only about 4.3% of enterprises reported to be financed by banks). This is a phenomenon that extends to all transitional economies but it is much more evident in CIS countries in general and in the CIS-7 in particular. As a main source of finance, firms use by far internal funds and retained earnings. In Armenia and Azerbaijan, a very large share is also constituted by finance from family and friends. In some countries, the state is also still a supplier of finance, particularly in Azerbaijan, Uzbekistan and Kyrgyzstan. State finance is on average a larger contribution in the CIS-7 than in the other transitional economies.

_Interest rates_ . Among the biggest obstacles to businesses in relation to banking, high interest rates is what most firms rank at the top in the BEEPS. In general, the problems faced by enterprises in relation to banking are the same across transitional economies but the CIS-7 stand out for having a larger proportion of enterprises declaring that there is a lack of access to long-term loans or lack of money to lend altogether as if these countries suffered from liquidity shortages. This shortage seems particularly acute in Azerbaijan and this may be associated with corruption of bank officials which is ranked as one of the major problem in this country. Real interest rates are higher in the CIS-7 than anywhere else in transition. In 2002, real interest rates were estimated at about

> 15 World Bank Indicators, see www.worldbank.org

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