Just as the global economic system faces its biggest test since the Great Depression, the European Bank for Reconstruction and Development has produced stark new analysis revealing how support for democracy and the market economy fluctuated dramatically as a result of the economic crisis.

The EBRD’s report – “Crisis and Transition: The People’s Perspective” -- explores the reasons behind an especially sharp drop in commitment to the principles of democracy and markets in the new member states of the European Union and a surprising upswing in some other countries.

This Transition Report 2011 analyses a wealth of data contained in a survey of some 39,000 people, primarily from emerging Europe.

The third in a trilogy of annual Transition Reports assessing the impact of the crisis on the region where the EBRD invests, the TR 2011 also explores why the crisis affected ordinary households far more than in Western countries (link to Chapter 2) and analyses the factors that support the development of a successful entrepreneurship in the transition region (link to Chapter 4).

Building on the data, the Transition Report concludes that attitudes to democracy and the free market can be explained partly by the experiences of individual groups during the crisis (link to Chapter 3).

People became less supportive of democracy if the recent crisis hit them hard relative to their memories of past crises. The findings of the report suggest that markets and democracy lost support in the more advanced transition countries because they experienced deeper downturns in this crisis than in earlier recessions in the early and mid 1990s. By comparison, the most recent crisis was generally milder in CIS countries than the output decline that followed the collapse of communism.

The report also finds compelling evidence to suggest that the crisis made people “turn against what they had”. Those who lived in more market-oriented and democratic societies and were affected by the crisis became less likely to choose democracy and markets over other systems.

On the other hand support for democracy and markets actually rose -- in some cases quite sharply -- in some of the less advanced economies especially in the former Soviet Union.

The report says: “This is particularly true of crisis-hit people in the CIS countries who perceived a high degree of corruption. It may be that for those individuals, the crisis diminished any sympathy they may have had for state-led systems.”

The findings of the Transition Report emerge from analysis of data in the EBRD’s second Life in Transition Survey (LITS) survey, a comprehensive review of attitudes of people across the EBRD region. The first survey was conducted in 2006 and a follow-up was published in 2011, covering emerging Europe as well as a number of western comparator countries.

According to the latest survey, Turkey, Montenegro, Mongolia, Uzbekistan, Albania and Tajikistan remained among the countries with the highest levels of democracy support in the region.

In the new survey, they were joined by Georgia, Kazakhstan, Belarus as well as Armenia, the country that saw the biggest change in democracy support levels in the past four years, showing a 28 point increase that brought it up from the 26^th position in the region to 2^nd, just behind the 2010 regional leader, Tajikistan.

Among the more advanced transition countries, the backing for democracy dropped off particularly sharply in Slovakia, Slovenia and Hungary, with the Slovak support decreasing by over 20 percentage points.

The Transition Report also highlights the impact of the crisis on households in the transition region, pointing out that ordinary people were hit far harder by the downswing than their counterparts in western Europe.

A sharper reduction in consumption in the EBRD region can be traced to more severe shocks such as job losses as well as the less effective safety nets that were available in emerging Europe to cope with such personal set backs.

But the report also homes in on the impact of bank borrowing, especially linked to debts taken out before the crisis which may have left some households across the transition region vulnerable.

It notes that while mortgages supported consumption during the crisis in the West, they had the opposite effect in the transition region, with this trend linked primarily to the take up of foreign exchange denominated mortgages in countries that experienced significant currency depreciation.

The chapter in the report on the factors that support entrepreneurship finds that women are less likely to attempt to set up a business but no less likely to succeed than men once they try. It concludes that this may argue for policies targeted at encouraging potential female entrepreneurs.

Please also see sections of the report which include individual assessments for the countries where the EBRD invests.