7 The value of CPI still remains below the average for EU-15 and the gap has slightly increased. The fact the average for CEEC-8 countries has also fallen behind does not change an overall assessment of the magnitude of the challenge faced by Bulgaria in improving regulatory environment to minimize the potential for rent seeking.

The same conclusions boiling down to “huge improvement but a challenge ahead” can be drawn from the analysis based on diagnostic tools developed by the World Bank. Although better governance implies lower corruption, the two are different as the former also includes the supply of public goods and services and their quality. Tools designed to assess the quality of governance are much more elaborate than Transparency International’s rankings covering separately six dimensions of governance and drawing on a much larger pool of expert assessments. Table 3 reports values of three rather than all six governance indicators. Dimensions of governance included are political stability, government effectiveness and regulatory quality.<sup>3</sup> A single aggregate index of governance is a simple average of the values of these three governance indicators. Their values range between –2.5 (the worst case) and +2.5 (the best case).

In 1996-98 Bulgaria together with Romania were scored well below CEEC-8 economies and below the average for SEE-4 countries on political stability and government effectiveness dimensions. The regulatory quality was one of the highest among SEE economies in 1998 but offset by low government effectiveness. In terms of aggregate index, Bulgaria was on a par with Romania in 1998, well above SEE-4 economies rather dramatically below Poland the overall worst performer among CEEC-8 countries.

**Table 3:** _Selected indicators of the quality of governance in 1998-2002_

||**Polit**|**ical Stab**|**ility**|**Governm**|**ent Effec**|**tiveness**|**Regu**|**latory Qu**|**ality**|**Aggre**|**gate (ave**|**rage)**|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
||**1998**|**2000**|**2002**|**1998**|**2000**|**2002**|**1998**|**2000**|**2002**|**1998**|**2000**|**2002**|
|Bulgaria|0.39|0.30|0.56|-0.97|-0.13|-0.06|0.47|0.21|0.62|-0.04|0.13|0.37|
|Croatia|0.61|0.37|0.56|0.29|0.16|0.19|0.34|0.30|0.19|0.41|0.28|0.31|
|Romania|0.20|0.01|0.42|-0.63|-0.58|-0.33|0.30|-0.27|0.04|-0.04|-0.28|0.04|
|CEEC-8:best|andwors|e perform|ers||||||||||
|Estonia|0.84|0.79|0.98|0.42|1.02|0.78|1.06|1.30|1.35|0.77|1.04|1.04|
|Poland|0.85|0.83|0.71|0.86|0.39|0.61|0.83|0.60|0.67|0.84|0.61|0.67|
|SEE-4<br>|||||||||||||
|Average<sup>**a/**</sup><br>|-0.52<br>|-0.47<br>|-0.46<br>|-0.67<br>|-0.77<br>|-0.62<br>|-0.87<br>|-0.51<br>|-0.43<br>|-0.72|-0.63|-0.57|

Note:<sup>**a/**</sup> SEE-4 include Albania, Bosnia and Herzegovina, Moldova and Serbia and Montenegro. Source: derived from data available at <u>www.worldbank.org/wbi/governance/gov_data.htm</u> and discussed in Kaufman, Kraay and Mastruzzi (2003).

Since 1998 the improvement in the quality of governance in Bulgaria has been very significant in all dimensions. The value of aggregate index of 0.37 in 2002 was much higher than of any other SEE country including Croatia and Romania. It was, however, still well below the quality of governance in CEEC-8 countries in 2002. It is not clear whether the ‘governance’ gap vis-à-vis CEEC-8 has been falling over the last two years, as there a re no data available for 2003 and 2004. Yet, considering the fall in the perceived level of corruption as reported by Transparency International, one would expect at least continuation of trends observed in 1998-2002.

An examination of recent progress in structural reforms suggests that developments over 2002-04 could be characterized as acceleration rather than a mere continuation of trends in 1998-02. This is a general conclusion that can be derived from the EBRD transition indicators pertaining to structural, second-

> 3 There are two arguments to focus solely on these indicators: First, these indicators are critical dimensions of business climate. Political stability impacts investment decisions and in extreme situations of its absence may disrupt economic activities. The quality of regulation is of little relevance unless supported by the government capacity to enforce regulations. Second, three other indicators pertinent to such dimensions of governance as the rule of law, control of corruption, and voice and accountability are not taken into account do not yield extra information. For all transition economies, they are strongly correlated with the selected three indicators, with the values of correlation coefficients equal or above 0.9.