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on Transition Economics |
| By: | Morris Sebastian |
| Abstract: | Both India and China began to reform in the early eighties, with the Indian reforms being very slow until 1991-92 after which they 'take-off' While there are many differences the crucial difference is that China adopted the same export led growth (ELG) policies of the successful East Asian economies - South Korea, Taiwan, Singapore, Hong Kong and Thailand, while Indian policies have been distinctly laissez-faire. Orthodoxy’s false understanding of ELG (the East Asian trade strategy), which was as far from laissez faire as can be imagined, is the root cause of the failure of other diversified economies in their pursuit of open door policies. Purposeful and massive under valuation of their currency was part of the East Asian strategy, which while making the ratio of exportables to importables close to their international prices, provided for simultaneous export growth and import substitution; something not possible in orthodoxy’s standard work horse -the 2x2x2 model of international trade. Simultaneous import substitution and export production is theoretically possible for economies with idle resources, with the introduction of third non-traded goods sector. ELG can therefore with compatible with little or no protectionism. This aspect of the East Asian trade (and development) strategy has been poorly understood even by the structuralists who otherwise (on the aspect of the state’s involvement) had demolished the liberal laissez-faire thesis. India's reforms have resulted in considerable discrimination against the manufacturing enterprises. Exports have grown far more slowly than was otherwise possible. The more equal distribution of income in China, and the differences in the macroeconomic policies explain most of the other observed performance differences between the two countries on aspects such as the inward flow of FDI, investment, savings, growth of particular industries. Some of he crucial dimensions of the macroeconomic policies consistent with ELG in the context of China are brought out. These are structural undervaluation of the currency, expansionary monetary policy and exchange rate targeting with only one way openness to the capital account, if at all. The character of FDI itself, which differs sharply between the two countries is related to the differences in the macro economic policies. The Chinese and the East Asian success extends the notion of 'late industrialisation' to one where external demand (along with domestic demand) is realised for the high speed expansion of manufacturing ELG. The supply side of the same strategy is build on exploiting ‘idle’ and underutilised labour which alone is capable of generating the vast gains from trade. Standard models gains from trade are incomparable small in relation. A significant part of the gains do accrue to the destination countries in the from of falling prices so that there are few political difficulties in the pursuit of ELG even by large countries like China. Thus ELG is more akin to a Lewisian process that employs previously underemployed labour for tradables goods production with rising (to high level) investment rates. India is more than ripe for ELG. It can ignore the lessons from the Chinese experience only at much cost to its growth. High growth in excess of 9% is possible with ELG since even with conservatism it is achieving 6+ %. This paper also argues that the mistaken pursuit of laissez-faire as being export led growth in India would only result in the further hollowing out of manufacturing. |
| Keywords: | India, China, Pure trade theory, multidimensional issues in trade, non-tradables, undervalued exchange rate, Export led growth, import substituion, open economy, development, late-industrialisation |
| Date: | 2005–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:iim:iimawp:2005-03-02&r=tra |
| By: | Gerald A. McDermott |
| Abstract: | This article examines the political conditions shaping the creation of new institutional capabilities. It analyzes bank sector reforms in the 1990s in three leading postcommunist democracies – Hungary, Poland, and the Czech Republic. It shows how different political approaches to economic transformation can facilitate or hinder the ability of relevant public and private actors to experiment and learn their new roles. With its emphasis on insulating power and rapidly implementing self-enforcing economic incentives, the “depoliticization” approach creates few changes in bank behavior and, indeed impedes investment in new capabilities at the bank and supervisory levels. The “deliberative restructuring” approach fostered innovative, costeffective monitoring structures for recapitalization, a strong supervisory system, and a stable, expanding banking sector. |
| Keywords: | Institutional change, transition economies, bank crises, bank supervision, learn |
| JEL: | G28 F02 P26 K23 |
| Date: | 2004–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2004-726&r=tra |
| By: | Phyllis Dininio; Robert W. Orttung |
| Abstract: | Corruption is one of the key problems facing the Russian state as it seeks to evolve out of its socialist past. Naturally, regional patterns of corruption exist across a country as large and diverse as the Russian Federation. To explain these variations, we analyze 2002 data from Transparency International and the Information for Democracy Foundation that provides the first effort to measure differences in incidence of corruption across 40 Russian regions. We find that corruption in Russia primarily is a structural problem, and not one related to its institutions. Within each region, the amount of corruption increases as the size of the regional economy grows, the per capita income decreases, and the population decreases. Russian policymakers can therefore work to reduce corruption by encouraging economic development outside of the key centers of Moscow and St. Petersburg. Because the data show that voter turnout also lowers corruption, policymakers can also fight corruption by fostering more political accountability in elections. |
| Keywords: | Corruption, Russia |
| JEL: | D73 |
| Date: | 2004–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2004-727&r=tra |
| By: | DELIA IONASCU; KLAUS E. MEYER; SAUL ESTRIN |
| Abstract: | The concept of ‘distance’ has been used by international business scholars to explain variations in international business strategies and operations across countries. The more distant a host country is from the organizational centre of a multinational enterprise (MNE), the more it has to manage cultural, regulatory and cognitive differences, and to develop appropriate entry strategies, organizational forms, and internal procedures to accommodate these differences. Scholarly research has focused on the concept of psychic distance, which has been narrowed down in empirical work to indices based on Hofstede’s work on culture. However, these measures capture only very partially the dimensions of distance of concern to international business. In this paper, we show how the broader theoretical concept of institutional distance, which incorporates normative, regulatory and cognitive aspects, affects entry strategies. Specifically, our theoretical arguments suggest that the impact of distance varies with different aspects of the concept of institutional distance, and that this impact interacts with both the investor’s experience and with the relative importance of the pertinent operation for the investing MNE. Using a unique dataset of foreign direct investment in emerging economies that incorporates multi-host as well as multi-home countries, we find empirical support for our propositions, and provide an explanation for apparently inconsistent results in the previous literature. |
| Date: | 2004–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2004-728&r=tra |
| By: | Josef C. Brada; Ali M. Kutan; Taner M. Yigit |
| Abstract: | This paper examines the effect of transition and of political instability on FDI flows to the transition economies of Central Europe, the Baltics and the Balkans. We find that FDI to transition economies unaffected by conflict and political instability exceed those that would be expected for comparable West European countries. Success with stabilization and reform tends to increase FDI inflows. In the case of Balkan counties, conflict and instability have reduced FDI inflows below what one would expect for comparable West European countries, and reform and stabilization failures have further reduced FDI to the region. Thus the economic costs of instability in the Balkans have been quite high. |
| Keywords: | foreign direct investment, transition, political instability, political risk |
| JEL: | F21 F23 P52 |
| Date: | 2004–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2004-729&r=tra |
| By: | Bruno Merlevede; Koen Schoors |
| Abstract: | Our main interest is the impact of the choice of the speed of economic reform on economic growth. We estimate a system of 3 equations where economic growth, economic reform and FDI are jointly determined. We find that new reforms affect economic growth negatively but attract FDI, whereas the level of past reform leads to higher growth. This means that the immediate adjustment cost of new reforms is counterbalanced by an immediate increase in FDI inflows and higher growth in the future through a higher level of past reform. Reform reversals contribute to lower growth. We use the model to simulate the impact of big bang reform and gradualist reform on economic growth. This is only meaningful in the presence of reform reversals, which requires aggregate uncertainty about the appropriate reform path. Using the coefficients from the empirical model we find that even relatively small ex ante reversal probabilities suffice to tilt the balance in favour of gradualism. This could be reinforced by the shortsightedness of policymakers, but may be moderated by voter myopia. |
| Keywords: | policy reform, gradualism, big bang, FDI, economic growth |
| JEL: | O57 P21 P26 P27 |
| Date: | 2004–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2004-730&r=tra |
| By: | Aghassi Mkrtchyan |
| Abstract: | The impact of macroeconomic management (monetary policy) and administrative price adjustments on price variability in a low inflation economy characterized by relatively frequent administrative price adjustments is examined. Fluctuations of market determined prices, prices of agricultural goods in particular, are linked to the lack of synchronization between administrative price changes and monetary policy. If monetary policy does not account for expected changes in administrative prices, demand in “free” goods markets will shift causing fluctuation of prices for agricultural goods, because the supply of these goods is highly inelastic in Armenia. The findings contribute to a better understanding of agricultural price variability during 1998-2002. The impact of macroeconomic policy and structural adjustments on income distribution and rural poverty incidence are also examined. This research has immediate policy implications since Armenia will undergo major upward price adjustments for goods and services with regulated prices, which may have a negative impact on income distribution if aggregate demand management is unchanged. |
| Keywords: | Inflation, price variability, regulated prices |
| JEL: | E31 E61 |
| Date: | 2004–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2004-731&r=tra |
| By: | Nikolay Nenovsky; Yorgos Rizopoulos |
| Abstract: | The paper explores the possibilities to measure the institutional change in the monetary field. A political economy theoretical framework is built up, where the change of the monetary regime is analyzed as the outcome of the debtors - creditors interactions. In this perspective, the value of some traditional monetary variables during the period before and after the introduction of the Currency Board in Bulgaria, in 1997, reveals the main actors' evolving relative positions. |
| Keywords: | institutional change, monetary regime, Currency Board, transition, Bulgar |
| JEL: | E42 E52 O10 P30 |
| Date: | 2004–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2004-732&r=tra |
| By: | Scott Gehlbach; Konstantin Sonin |
| Abstract: | We initiate examination of the political boundaries of the firm by exploring the phenomenon of “businessman candidates”: business owners and managers who bypass conventional means of political influence to run for public office themselves. We argue that in-house production of political influence will be more likely in institutional environments where candidates find it difficult to make binding campaign promises. When campaign promises are binding, then a businessman may always pay a professional politician to run on the platform that political competition would otherwise compel the businessman to adopt. In contrast, when commitment to a campaign platform is impossible, then candidate identity matters for the policies that will be adopted ex post, implying that a businessman may choose to run for office if the stakes are sufficiently large. We illustrate our arguments through discussion of gubernatorial elections in postcommunist Russia, where businessmen frequently run for public office, institutions to encourage elected officials to keep their campaign promises are weak, and competition for rents is intense. |
| Keywords: | Businessman candidates, elections, citizen candidates, institutions, political economy |
| JEL: | D72 P16 P26 N40 |
| Date: | 2004–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2004-733&r=tra |
| By: | Klara Sabirianova; Jan Svejnar; Katherine Terrell |
| Abstract: | Economic development implies that the efficiency of firms in developing countries is approaching that of firms in advanced economies. We examine the extent of this convergence in the Czech Republic and Russia, economies that represent alternative models of implementing development policies, often referred to as the Washington Consensus, that have promoted privatization, competition and foreign investment. We also test hypotheses positing that only firms near the efficiency frontier benefit from these policies and catch up. Using 1992-2000 panel data on virtually all industrial firms in each country, we find that privatization to domestic owners did not markedly improve the efficiency of firms; domestic firms are not catching up to the (world) efficiency standard given by foreign-owned firms; and the distance of the Russian firms to the efficiency frontier is much larger than that of the Czech firms and continued to grow for most firms beyond 1997 while remaining constant in the Czech Republic. Domestic firms closer to the frontier are not more likely to catch up than firms further from the frontier although foreign firms do exhibit this behavior. Foreign-owned firms are increasingly displacing domestic firms in the top deciles of the overall distribution of efficiency, due in part to slower “learning” by domestic firms, higher efficiency of foreign startups, and foreigners’ acquisitions of more efficient domestic firms. The two alternative implementations of the Washington Consensus policies have thus not enabled domestic firms to start catching up to the world standard. |
| Keywords: | efficiency, productivity, economic development, foreign direct investment, ownership, convergence, frontier, Czech Republic, Russia, Washington Consensus. |
| JEL: | C33 D20 G32 L20 |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-734&r=tra |
| By: | Georgy Egorov; Konstantin Sonin |
| Abstract: | The possibility of treason by a close associate has been a nightmare of most dictators throughout history. Better informed viziers are also better able to discriminate among potential plotters, and this makes them more risky subordinates for the dictator. To avoid this, dictators, especially which are weak and vulnerable, sacri.ce the competence of their agents, hiring mediocre but loyal subordinates. One reason why democracies generally witness more talented people in the government is the dictator.s inability to commit to the optimal (less than the capital) punishment for those who unsuccessfully plotted to remove him from power. Furthermore, any use of incentive schemes by a dictator is limited by the fact that rewards are conditional on dictator.s own willingness to keep his promises, while punishments are conditional on dictator.s own survival. We model a principalagent game between a dictator and his (probably, few) viziers both in static and dynamic perspectives. The dynamic model allows us to focus on the succession problem the insecure dictators face. |
| Keywords: | dictatorship, formal political theory, principal-agent theory, institutions |
| JEL: | D72 P16 |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-735&r=tra |
| By: | Neven T. Valev |
| Abstract: | Bulgaria has operated a currency board since 1997. It is expected to join the EU in 2007 and the EMU thereafter. This paper uses survey data to analyze public attitudes toward adoption of the euro in advance of EMU membership. Bulgarians are equally split in support for and opposition to euroization. The reasons to support euroization include the eliminated risk of currency devaluation and the perception that the euro is already widely used in the economy. The opposition derives from people’s attachment to the national currency and from concerns about the conversion costs involved in a switch to the euro. |
| Keywords: | Euroization; Dollarization; Euro; Survey Data; Bulgaria; Currency Boards |
| JEL: | P2 F3 |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-736&r=tra |
| By: | Koen Schoors; Konstantin Sonin |
| Abstract: | Creditors are often passive because they are reluctant to show bad debts on their own balance sheets. We propose a simple general equilibrium model to study the externality effect of creditor passivity. The model yields rich insights in the phenomenon of creditor passivity, both in transition and developed market economies. Policy implications are deduced. The model also explains in what respect banks differ from enterprises and what this implies for policy. Commonly observed phenomenons in the banking sector, such as deposit insurance, lender of last resort facilities, government coordination to work out bad loans and special bank closure provisions, are interpreted in our framework. |
| Keywords: | creditor passivity, bankruptcy, arrears, bad loans, bank closure |
| JEL: | G21 G28 G33 P5 |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-737&r=tra |
| By: | Steve Murray; Yordan Staykov,; Valentin Katzerov |
| Abstract: | Bulgaria is moving toward a food processing and marketing system which resembles that of Western Europe and the U.S. Large grocery chains from Germany, Austrai and Turkey are building supermarkets and hypermarkets in Bulgaria’s larger cities. However, income in Bulgaria remains much lower than in Western Europe and most Bulgarian consumers cannot afford to shop in the new stores yet. Neighborhood markets, which serve average Bulgarians, are expanding their product selections and remain the primary shopping venue. Food processing plants in Bulgaria are being upgraded to meet EU standards. Farmers are getting more efficient as land is consolidated. On the whole, the agriculture and agribusiness sectors in Bulgaria are improving. |
| Keywords: | Bulgaria, food marketing, transition |
| JEL: | O52 P23 Q13 |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-738&r=tra |
| By: | Elizabeth Brainerd; David M. Cutler |
| Abstract: | Male life expectancy at birth fell by over six years in Russia between 1989 and 1994. Many other countries of the former Soviet Union saw similar declines, and female life expectancy fell as well. Using cross-country and Russian household survey data, we assess six possible explanations for this upsurge in mortality. Most find little support in the data: the deterioration of the health care system, changes in diet and obesity, and material deprivation fail to explain the increase in mortality rates. The two factors that do appear to be important are alcohol consumption, especially as it relates to external causes of death (homicide, suicide, and accidents) and stress associated with a poor outlook for the future. However, a large residual remains to be explained. |
| Keywords: | health, mortality, Russia, Eastern Europe |
| JEL: | I12 J10 P36 |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-740&r=tra |
| By: | Laura Nyantung Beny |
| Abstract: | Despite the longstanding insider trading debate, there is little empirical research on insider trading laws, especially in a comparative context. The article attempts to fill that gap. I find that countries with more prohibitive insider trading laws have more diffuse equity ownership, more accurate stock prices, and more liquid stock markets. These findings are generally robust to controlling for measures of disclosure and enforceability and suggest that formal insider trading laws (especially their deterrent components) matter to stock market development. The article suggests further avenues of empirical research on the specific mechanisms through which insider trading laws might matter and the political economy of their adoption. |
| Keywords: | Insider trading law, Market efficiency, Ownership structure, Law and finance, Comparative capital markets |
| JEL: | K22 G14 G15 G18 G32 |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-741&r=tra |
| By: | Vladimir Atanasov; Conrad S. Ciccotello; Stanley B. Gyoshev |
| Abstract: | This paper documents that law affects finance in emerging markets through the methods used by controlling shareholders to “tunnel” wealth out of the firm. We find that Bulgarian securities law enabled financial tunneling via dilution and freeze-out tender offers. During the period 1999- 2001, about two-thirds of the 1,040 firms on the Bulgarian Stock Exchange were delisted. Freeze-out tender offers for minority shares averaged about 25% of the shares’ intrinsic value. Bulgarian securities law changes in 2002 made financial tunneling more costly for controlling shareholders. Subsequent increases in stock market valuations and liquidity suggest that controlling shareholders have shifted from financial tunneling to less value-destroying methods, such as transfer pricing, to extract wealth from firms. |
| Keywords: | Tunneling, freeze-out, controlling shareholders, appraisal rights, preemptive rights |
| JEL: | G34 K22 |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-742&r=tra |
| By: | Daniel Daianu; Laurian Lungu |
| Abstract: | The paper examines the inflation targeting regime in the context of transition economies. Recent years have witnessed an increasing number of central banks in these countries moving towards the implementation of inflation targeting regimes. However, the success of such a regime depends largely on the degree to which certain general requirements are met. As experience in a number of transition economies has shown so far, targeting inflation is not an easy task. The ongoing restructuring process in these economies makes the inflation forecasting process more difficult and introduces an additional source of uncertainty in the system. By unequivocally choosing inflation as a nominal anchor the central banks could face potential dilemmas if, for example, exchange rate appreciated too much under the pressure of massive capital inflows. The paper presents the broad framework in which inflation targeting could operate efficiently and attempts to assess the extent to which such a regime, when applied to transition economies, could fit into this framework. |
| Keywords: | Inflation Targeting, Eastern Europe |
| JEL: | E52 E60 |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-743&r=tra |
| By: | Sumon Bhaumik; Saul Estrin |
| Abstract: | We use enterprise data to analyse and contrast the determinants of enterprise performance in China and Russia. We find that in China, enterprise growth and efficiency is associated with rapid increases in factor inputs, but not correlated with ownership or institutional factors. However, in Russia, enterprise growth is not associated with increases in factor quantity (except for labor) or quality. The main determinants of company performance are instead demand and institutional factors at a regional level. We explore possible interpretations of these results, including the impact of institutional and managerial quality. |
| Keywords: | enterprise performance; privatization in Russia and China. |
| JEL: | D23 L22 O12 P31 |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-744&r=tra |
| By: | Christa Hainz |
| Abstract: | The number of firm bankruptcies is surprisingly low in economies with poor institutions. We study a model of bank-firm relationship and show that the bank’s decision to liquidate bad firms has two opposing effects. First, the bank receives a payoff if a firm is liquidated. Second, it loses the rent from incumbent customers that is due to its informational advantage. We show that institutions must improve significantly in order to yield a stable equilibrium in which the optimal number of firms is liquidated. There is also a range where improving institutions may decrease the number of bad firms liquidated. |
| Keywords: | Credit markets, institutions, bank competition, information sharing, bankruptcy, relationship banking. |
| JEL: | G21 G33 K10 |
| Date: | 2005–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-745&r=tra |
| By: | Lihui Tian; Saul Estrin |
| Abstract: | The role of government shareholding in corporate performance is central to an understanding of China’s newly privatized large firms. In this paper, we analyze shareholders as agents that can both harm and benefit companies. We examine the ownership structure of 826 listed corporations and find that government shareholding is surprisingly large. Its effect on corporate value is found to be negative, but non-monotonic. Up to a certain threshold, corporate value decreases as government shareholding stakes increase, but beyond this corporate value begins to increase. We interpret this in terms of ownership concentration and the advantages of government partiality. |
| Keywords: | government shareholding, corporate governance, China. |
| JEL: | G32 G34 G15 L33 |
| Date: | 2005–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-750&r=tra |
| By: | BAT BATJARGAL |
| Abstract: | This article examines effects of dyadic ties and interpersonal trust on referrals and investment decisions of venture capitalists in the Chinese and Russian contexts. The study uses the postulate of transitivity of social network theory as a conceptual framework. The findings reveal that referee-venture capitalist tie, referee-entrepreneur tie, and interpersonal trust between referee and venture capitalist have positive effects on referrals and investment decisions of venture capitalists. The institutional, social and cultural differences between China and Russia have minimal effects on referrals. Interpersonal trust has positive effects on investment decisions in Russia. |
| Keywords: | Transitivity, triads, referral, venture capital, China, Russi |
| JEL: | G24 D85 M13 P27 |
| Date: | 2005–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-752&r=tra |
| By: | BAT BATJARGAL |
| Abstract: | This article examines the contingent value of entrepreneurs' networks to survival likelihood of Internet ventures, and the dynamics of entrepreneurs' networks over time. The empirical data are composed of the longitudinal surveys of 94 Internet ventures in Beijing, China. The study found the positive and the negative contingent effects of structural holes on the survival likelihood of new firms. The study found that networking skills of entrepreneurs are associated positively with the changes in networks over time. Improved social skills lead to greater firm legitimacy. |
| Keywords: | Structural holes, human capital, Internet, entrepreneurship, China |
| JEL: | M13 D85 L14 L25 P27 |
| Date: | 2005–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-753&r=tra |