nep-tra New Economics Papers
on Transition Economics
Issue of 2006‒07‒09
25 papers chosen by
Tono Sanchez
Universitat de Valencia

  1. Entrepreneurship in China and Russia Compared By Simeon Djankov; Yingyi Qian; Gerard Roland; Ekaterina Zhuravskaya
  2. Exchange-rate effects on China’s trade: an interim report By Jaime Marquez; John W. Schindler
  3. EU-Enlargement and Beyond: A Simulation Study on EU and Russia Integration By Pekka Sulamaa; Mika Widgrén
  4. China's Innovation System and the Move Toward Harmonious Growth and Endogenous Innovation By Shulin Gu; Bengt-Åke Lundvall
  5. Ownership concentration in Russian industry By Sergei Guriev; Andrei Rachinsky
  6. How will China ' s saving-investment balance evolve ? By Kuijs, Louis
  7. The Role of FDI in Eastern Europe and New Independent States: New Channels for the Spillover Effect By Irina Tytell; Ksenia Yudaeva
  8. Who are Russia’s entrepreneurs? By Simeon Djankov; Edward Miguel; Yingyi Qian; Gerard Roland; Ekaterina Zhuravskaya
  9. Who Are China’s Entrepreneurs? By Simeon Djankov; Yingyi Qian; Gerard Roland; Ekaterina Zhuravskaya
  10. Non-wage benefits, costs of turnover, and labor attachment: evidence from Russian firms By Tuuli Juurikkala; Olga Lazareva
  11. Lobbying at the local level: social assets in Russian firms By Tuuli Juurikkala; Olga Lazareva
  12. European Parliament Electoral Turnout in Post-Communist Europe By Christine Fauvelle-Aymar; Mary Stegmaier
  13. Growth, Reform indicators and Policy complementarities By Macedo, Jorge Braga de; Martins, Joaquim Oliveira
  14. Dual Track Reforms: With and Without Losers By Jiahua Che; Giovanni Facchini
  15. Self Enforced Mechanisms of Corporate Governance: Evidence from Managerial Turnover in Russia By Andrei Rachinsky
  16. Entrepreneurship: First Results from Russia By Simeon Djankov; Edward Miguel; Yingyi Qian; Gerard Roland; Ekaterina Zhuravskaya
  17. Corporate Governance and Firms' Market Values: Time Series Evidence from Russia By Bernard S. Black; Inessa Love; Andrei Rachinsky
  18. How Do Trade in Intermediates and Geographical Forces Interact in Determining the Localisation of Industries in Central Eastern European Countries? By Gianfranco De Simone
  19. How Does EU Enlargement Affect Social Cohesion? By Wolfgang Keck; Peter Krause
  20. The Corporate Governance Role of the Media: Evidence from Russia By Alexander Dyck; Natalya Volchkova; Luigi Zingales
  21. Russian business groups: substitutes for missing institutions? By Andrei Shumilov; Natalya Volchkova
  22. Labor market competition, Transition, Russia, Labor tying. By Guido Friebel; Sergei Guriev
  23. Foreign Taleovers and Wages: Theory and Evidence from Hungary By Sándor Csengodi; Rolf Jungnickel; Dieter Urban
  24. Macroeconomic and financial stability challenges for acceding and candidate countries By Adalbert Winkler; Roland Beck
  25. State Capture: From Yeltsin to Putin By Evgeny Yakovlev; Ekaterina Zhuravskaya

  1. By: Simeon Djankov (The World Bank); Yingyi Qian (UC Berkeley and CEPR); Gerard Roland (UC Berkeley and CEPR); Ekaterina Zhuravskaya (New Economic School/CEFIR and CEPR)
    Abstract: We compare results from a pilot study on entrepreneurship in China and Russia. Compared to non-entrepreneurs, Russian and Chinese entrepreneurs have more entrepreneurs in their family and among childhood friends, value work more relative to leisure and have higher wealth ambitions. Russian entrepreneurs have a better educational background and their parents were more likely to have been members of the communist party but Chinese entrepreneurs are more risk-taking and greedy and have more entrepreneurs among their childhood friends.
    Date: 2005–10
  2. By: Jaime Marquez; John W. Schindler
    Abstract: Though China's share of world trade is comparable to that of Japan, little is known about the response of China's trade to changes in exchange rates. The few estimates available suffer from two limitations. First, the data for trade prices are based on proxies for prices from other countries. Second, the estimation sample includes the period of China's transformation from a centrally-planned economy to a market-oriented system. To address these limitations, this paper develops an empirical model explaining the shares of China's exports and imports in world trade in terms of the real effective value of the renminbi. The specifications control for foreign direct investment and for the role of imports of parts to assemble merchandise exports. Parameter estimation uses disaggregated monthly trade data and excludes the period during which most of China's decentralization occurred. The estimation results suggest that a ten-percent real appreciation of the renminbi lowers the share of aggregate Chinese exports by a half of a percentage point. The same appreciation lowers the share of aggregate imports by about a tenth of a percentage point.
    Keywords: Foreign exchange rates - China ; Trade ; Econometric models
    Date: 2006
  3. By: Pekka Sulamaa; Mika Widgrén
    Abstract: This paper examines the economic effects of the opening of the Russian Federation. The analysis carried out in the paper is two-fold. First we simulate the impact of the eastern enlargement of the EU and, second, we analyse how deeper integration between the EU and Russia contributes to this. The analysis is carried out with GTAP computable general equilibrium model. We find that there is a trade-off between the two roads of European integration arrangements. Eastern enlargement seems, even in its very deep form, be beneficial for all EU regions without causing substantial welfare losses outside the Union. EU-Russia integration, on the other hand, has different impact. To be beneficial for Russia free trade between the EU and Russia requires improved productivity in the latter, which may be due to better institutions or increased FDI. This might make the negotiations of the agreement cumbersome and if agreed its implementation difficult.
    Keywords: Integration, Free Trade Agreement, GTAP, EU, Russia
    Date: 2004–12–16
  4. By: Shulin Gu; Bengt-Åke Lundvall
    Abstract: Observers around the world are impressed by the rapid growth of China’s economy. While outside observers tend to focus on the success story of unprecedented growth policy documents and recent domestic debates in China have pointed to the need for a shift in the growth trajectory with stronger emphasis on ‘endogenous innovation’ and ‘harmonious development’. This paper attempts to capture the current characteristics of China’s production and innovation system; how they were shaped by history and what major challenges they raise for the future. On the basis of the analysis the authors propose that it is possible to link together the two key concepts ‘endogenous innovation’ and ‘harmonious development’ by focusing innovation and development efforts in China on domestic needs, including social needs, rather than a one-sided focus on export-promotion and commodity production.
    Keywords: China; economic growth; R&D; innovation systems
    JEL: O32 O11
    Date: 2006
  5. By: Sergei Guriev (New Economic School/CEFIR and CERP); Andrei Rachinsky (CEFIR)
    Abstract: Using a unique dataset built for the World Bank’s Country Economic Memorandum, we find that a relatively small number of tycoons ('oligarchs') control a substantial share of Russia’s economy. Oligarchs seem to run their empires more efficiently than other Russian owners. While the relative weight of their firms in Russian economy is huge, they do not seem to be excessively large by the standards of the global economy where most of them are operating. However, a majority of the Russian population deems their property rights illegitimate, which creates a fundamental problem for building a democratic and prosperous Russia.
    Date: 2004–10
  6. By: Kuijs, Louis
    Abstract: This paper investigates how China ' s saving, investment, and saving-investment balance will evolve in the decades ahead. Household saving in China is relatively high compared with OECD countries. However, much of China ' s high economywide saving, and the difference between China and other countries, are due to unusually high enterprise and government saving. Moreover, cross-country empirical analysis shows that economywide saving and investment in China are higher than what would be expected, even adjusting for differences in economic structure. Combined, these findings suggest that much of China ' s high saving is the result of policies particular to China. Looking ahead, the econometric results suggest that purely on the basis of projected structural developments-including development, changes in economic structure, urbanization, and demographics-saving and investment would both decline only mildly in the coming two decades, with ambiguous impact on the current account surplus. However, the potential effect on saving, investment, and the saving-investment balance of several policy adjustments could be large. Several of these policies are identified and their likely impact assessed and quantified. This exercise suggests that rebalancing along these lines should reduce both saving and the current account surplus over time, although the surplus is unlikely to turn into a deficit soon.
    Keywords: Economic Theory & Research,Investment and Investment Climate,Economic Investment & Savings,Non Bank Financial Institutions,Contractual Savings
    Date: 2006–07–01
  7. By: Irina Tytell (International Monetary Fund); Ksenia Yudaeva (New Economic School/CEFIR)
    Abstract: Policymakers around the world introduce special policies aimed at attracting foreign direct investments (FDI). They motivate their decision by the spillover effect, which FDI have on domestic companies. Empirical literature so far has failed to find any robust evidence of this effect. In this paper, we make an attempt to explain this finding. Using data from Poland, Romania, Russia, and Ukraine, we demonstrate that not all FDI have positive spillover effects on domestic firms. Spillovers are positive only in the case of export-oriented FDI and, more generally, are driven by the more productive foreign companies. Moreover, effects of FDI on domestic firms are not limited to knowledge spillovers: exposure to foreign technologies alters the form of their production functions. Specifically, foreign entry is associated with higher capital intensity and lower labor intensity of domestic firms in relatively more developed countries, such as Poland, while the opposite is the case in the less developed countries, such as Russia. These results are subject to threshold effects: benefits are more likely to materialize once a relatively large stock of foreign capital is accumulated. Absorptive capacity of domestic firms plays a crucial role in reaping the benefits of FDI. Both, knowledge spillovers and production function changes, occur predominantly in the more educated and the less corrupt regions.
    Date: 2005–12
  8. By: Simeon Djankov (The World Bank); Edward Miguel (UC Berkeley and NBER); Yingyi Qian (UC Berkeley and CEPR); Gerard Roland (UC Berkeley and CEPR); Ekaterina Zhuravskaya (New Economic School/CEFIR and CEPR)
    Abstract: Social scientists studying entrepreneurship have emphasized three distinct sets of variables: the institutional environment, sociological variables, and personal and psychological characteristics. We are conducting surveys in five large developing and transition economies to better understand entrepreneurship. In this short paper, using over 2,000 interviews from a pilot study in Russia, we find evidence that the three sets of variables matter: perceptions of the local institutional environment, social network effects and individual characteristics are all important in determining entrepreneurial behavior.
    JEL: M13 P12
    Date: 2005–10
  9. By: Simeon Djankov (The World Bank); Yingyi Qian (UC Berkeley and CEPR); Gerard Roland (UC Berkeley and CEPR); Ekaterina Zhuravskaya (New Economic School/CEFIR and CEPR)
    Abstract: Social scientists studying the determinants of entrepreneurship have emphasized three distinct perspectives: the role of institutions, the role of social networks and the role of personal characteristics. We conduct a survey from five large developing and transition economies to better understand entrepreneurship in view of these three perspectives. Using data from a pilot study with over 2,000 interviews in 7 cities across China, we find that compared to non entrepreneurs, entrepreneurs are much more likely to have family members who are entrepreneurs as well as childhood friends who became entrepreneurs, suggesting that social networks play an important role in entrepreneurship. Entrepreneurs also differ strongly from non entrepreneurs in their attitudes towards risk and their work-leisure preferences.
    Date: 2005–10
  10. By: Tuuli Juurikkala (Bank of Finland Institute for Economies in Transition); Olga Lazareva (CEFIR)
    Abstract: Just as in established market economies, many Russian firms provide non-wage benefits such as housing, medical care or day care to their employees. Interpreting this as a strategic choice of firms in an imperfect labor market, this paper examines unique survey data for 404 large and medium-size industrial establishments from 40 Russian regions. We find strong evidence that Russian industrial firms use social services to reduce the costs of labor turnover in the face of tight labor markets. The strongest effect is observed for blue-collar workers. We also find that the share of non-monetary compensation decreases with improved access to local social services.
    Keywords: Non-wage benefits, labor turnover, labor attachment, Russia
    JEL: J32 J33 J42 J63 M52 P31
    Date: 2006–03
  11. By: Tuuli Juurikkala (Bank of Finland Institute for Economies in Transition); Olga Lazareva (CEFIR)
    Abstract: In the planned economy firms were made responsible for providing their workers with social services, such as housing, day care and medical care. In the transforming Russia of the 1990s, social assets were to be transferred from industrial enterprises to the public sector. The law on divestment provided little more than general principles. Thus, for a period of several years, property rights concerning a major part of social assets, most notably housing, were not properly defined, as transfer decisions were largely left to the local level players. Strikingly, the time when assets were divested varied considerably across firms. In this paper we utilize recent survey data from 404 medium and large industrial enterprises in 40 Russian regions and apply survival data analysis to explore the determinants of divestiture timing. Our results show that in municipalities with higher shares of own revenues in their budget and thus weaker fiscal incentives, firms used their social assets as leverage to extract budget assistance and other forms of preferential treatment from local authorities. We also find evidence that less competitive firms were using social assets to cushion themselves from product market competition. At the same time, we do not find any role for local labor market conditions in the divestment process.
    Date: 2006–02
  12. By: Christine Fauvelle-Aymar (LAEP - LAboratoire d'Economie Publique - [Université Panthéon-Sorbonne - Paris I]); Mary Stegmaier (University of Virgnia - Department of Economics - [University of Virginia])
    Abstract: The relatively low voter turnout rates in the June 2004 European Parliamentary elections in many of the post-communist states surprised observers. While the average turnout rate for these new-EU member states barely surpassed 30%, turnout exhibited much variance at the national and sub-national levels. In this article, we study the determinants of European Parliamentary election voter turnout rates in the post-communist countries at the regional level. Our central hypothesis is that regional turnout rates may be related to regional economic conditions and that in areas experiencing economic hardship, turnout will be lower. We also assess the extent that EU attitudes matter for turnout. A unique data set, compiled at the NUTS-3.
    Keywords: Economics of voting;participation;European Parliamentary election; post-communist countries.
    Date: 2006–07–05
  13. By: Macedo, Jorge Braga de; Martins, Joaquim Oliveira
    Abstract: This paper discusses the design of structural policies by relating second-best results and the complementarity of reforms. It computes a complementarity index based on structural reform indicators compiled by the EBRD for transition countries, assuming that the run-up to EU integration corresponds to a nearly complete policy cycle. Using econometric panel estimates, the level of reforms and changes in their complementarity are found to be positively related to output growth, corrected for endogeneity, and given initial conditions and the extent of macroeconomic stabilisation.
    Date: 2006
  14. By: Jiahua Che (Hong Kong University of Science Technology and William Davidson Institute); Giovanni Facchini (University of Illinois and University of Milan)
    Abstract: The dual track approach to market liberalization has been widely recognized as the key to the success of the Chinese economic reform. In this paper we study the effectiveness of this strategy in economic environments where the status quo government control is incomplete. We show that in a dynamic context intertemporal arbitrage will emerge, potentially resulting in efficiency losses and/or adverse distributional effects. Only when the status quo involves both price and quantity interventions by the government can dual track liberalization maintain its appeal. Our analysis thus suggests some caution as for the broader applicability of this reform mechanism.
    Keywords: Dual Track Liberalization, Intertemporal Arbitrage, Pareto Improving Reforms, China
    JEL: H2 P2 F1
    Date: 2005
  15. By: Andrei Rachinsky (New Economic School/CEFIR)
    Abstract: Managerial entrenchment, an undeveloped market for top managerial labor force and the absence of clear market signals could prevent owners from firing management for poor performance. Top managerial turnover could improve firms’ performance by introducing new human capital and providing good incentives for a new manager if the previous CEO has been fired for poor performance. We evaluate the effectiveness of selfenforced corporate governance mechanisms by determining the causes of top management turnover and estimating consequences of management turnover on the subsequent corporate performance. We track all turnovers of CEO’s in the 110 largest Russian companies during a five year period (from 1997 to 2001) and classify each case of turnover according to the new position of the prior CEO and the origin of the new director.
    Date: 2005–10
  16. By: Simeon Djankov (The World Bank); Edward Miguel (UC Berkeley and NBER); Yingyi Qian (UC Berkeley); Gerard Roland (UC Berkeley and CEPR); Ekaterina Zhuravskaya (New Economic School/CEFIR and CEPR)
    Abstract: We study the determinants of the decision to become an entrepreneur in 7 Russian cities. Using data on 400 entrepreneurs and 440 non-entrepreneurs, we find considerable variation in the proportion of entrepreneurs, ranging from 6% of adult population in Nizhny Novgorod, to 16% in Perm and 18% in Taganrog. We find evidence that social network effects play a large role in determining entrepreneurial behavior: those individuals whose relatives and childhood friends are entrepreneurs are more likely to be entrepreneurs. Individual characteristics including academic success and educational background, performance on a test of cognitive ability, personal confidence, greed, and willingness to take risks are also important determinants of entrepreneurship in Russia, echoing the claims of Schumpeter. Certain aspects of the institutional environment play a role, but are secondary to individual characteristics.
    Date: 2004–08
  17. By: Bernard S. Black (University of Texas at Austin); Inessa Love (The World Bank); Andrei Rachinsky (New Economic School/CEFIR)
    Abstract: There is increasing evidence that broad measures of firm-level corporate governance predict higher share prices. However, almost all prior work relies on cross-sectional data. This work leaves open the possibility that endogeneity or omitted firm-level variables explain the observed correlations. We address the second possibility by offering time-series evidence from Russia for 1999-present, exploiting a number of available governance indices. We find an economically important and statistically strong correlation between governance and market value in OLS with firm clusters and in firm random effects and firm fixed effects regressions. We also find significant differences in the predictive power of different indices, and in the components of these indices. How one measures governance matters.
    Keywords: Russia, corporate governance, corporate governance index, law and finance, firm valuation, disclosure, emerging markets
    JEL: G32 G34
    Date: 2005–11
  18. By: Gianfranco De Simone (University of Milan and Centro Studi Luca D'Agliano)
    Abstract: Growing inflows of FDI and the increasing integration Central Eastern European Countries’ firms in International Production Networks set by EU-15 principals have brought to a rise in trade in parts and components. As a consequence, new patterns of localisation of industrial activities in CEECs have been observed. I put forward a general equilibrium model of trade and production which tries to explain cross-country variations of sectoral output on the basis of home market effect, trade in middle products, comparative advantages and market potential. Results coming from the empirical estimation allow me to draw some considerations about the driving forces behind the localisation over the second half of the 1990s of the four sectors in which most of the CEECs’ trade in intermediates with EU-15 is concentrated. I also argue that the proposed framework can be employed to test for the effectiveness of alternative trade theories.
    Keywords: Trade in Parts and Components, International Production Networks, Market Potential, Industry Localisation, Home Market Effect
    JEL: F10 F12 F14 F15
    Date: 2005
  19. By: Wolfgang Keck; Peter Krause
    Abstract: The enlargement of the European Union in May 2004 by ten new member states bear increasing challenges in creating social cohesion among its citizens and regions. Social cohesion is understood here in a broad sense as a coalescence of European societies in such a way that living conditions and quality of life of its citizens converge. This paper's empirical focus is on the two core life domains that are currently taking center stage in EU policy debates: (1) employment and working conditions and (2) economic resources and social exclusion. The analyses show that the 15 former member states are converging in terms of lliving and work-ing conditions and the situation has improved in all of these countries during the 1990s. With the enlargement the situation becomes more diverse in the enlarged EU. In particular the post-socialist countries have to make great efforts to catch up with their EU counterparts. We can identify three emerging clusters of countries that share empirically very similar living stan-dards. The first, wealthy cluster consists of the old northern European member states. The second, intermediary country group contains the most well-off accession countries and the old Mediterranean member countries with a lower living standard. The third, less developed clus-ter embraces new member states that were former post-communist countries.
    Date: 2006
  20. By: Alexander Dyck (University of Toronto); Natalya Volchkova (New Economic School/CEFIR); Luigi Zingales (Harvard University, NBER, and CEPR)
    Abstract: We study the effect of media coverage on corporate governance outcomes by focusing on Russia in the period 1999-2002. Russia provides a setting with multiple examples of corporate governance abuses, where traditional corporate governance mechanisms are ineffective, and where we can identify an exogenous source of news coverage arising from the presence of an investment fund, the Hermitage fund, that tried to shame companies by exposing their abuses in the international media. We find that the probability that a corporate governance abuse is reversed is affected by the coverage of the news in the Anglo-American press. The result is not due to the endogeneity of news reporting since this result holds even when we instrument media coverage with the presence of the Hermitage fund among its shareholders and the “natural” newsworthiness of the company involved. We confirm this evidence with a case study.
    Date: 2004–10
  21. By: Andrei Shumilov (CEFIR); Natalya Volchkova (New Economic School/CEFIR)
    Abstract: Numerous evidence demonstrate that firms affiliated with business groups in emerging markets outperform their independent counterparts. One of the proposed explanations for such a phenomenon is the more advanced groups’ internal markets structure compared to the rest of the economy. In this paper we test the hypothesis that internal capital markets within Russian business groups overcome the liquidity constraints problem widely spread outside groups. Our findings indicate that even if the groups’ internal capital markets do exist in Russian business groups, their efficiency is rather doubtful and the access to external financing by firms affiliated with the groups is constrained.
    Date: 2004–12
  22. By: Guido Friebel (University of Toulouse (EHESS and IDEI), CEPR, IZA); Sergei Guriev (New Economic School/CEFIR and CEPR)
    Abstract: We show that earnings manipulation destroys incentives within the corporate hierarchy. In the model, top management has incentives to over-report earnings. An insider, for instance, a division manager may gain evidence about over-reporting. We show that the division manager is more likely to have evidence, when the performance of her own division is low. Top management wants to prevent information leakage to the outside world. Hence, when the division manager threatens to blow the whistle, top management pays her a bribe. As this occurs when division output is low, the wedge between payments in high and low states of nature decreases. Earnings manipulation therefore undermines incentives to exert effort and destroys value. We show that earnings manipulation is more likely to occur in flatter hierarchies; we also discuss implications of the auditing and whistle-blowing regulations of the Sarbanes-Oxley Act.
    Keywords: agency costs, Sarbanes-Oxley Act, whistleblowing, flat hierarchies
    JEL: D23 G30 M40 M52
    Date: 2004–06
  23. By: Sándor Csengodi (Corvinus University of Budapest); Rolf Jungnickel (HWWA); Dieter Urban (Johannes Gutenberg - University Mainz)
    Abstract: This study discriminates FDI technology spillover from learning effects. Whenever learning takes time, our model predicts that foreign investors deduct the economic value of learning from wages of inexperienced workers and add it to experienced ones to prevent them from moving to local competitors. Hence, the national wage bill is unaffected by foreign takeovers. In contrast to learning, technology spillover effects occur whenever a worker with MNE experience contributes more to local firms’ than to MNEs’ productivity. In this case, experienced MNE workers are hired by local firms and the host country obtains a welfare gain. We investigate empirically wages, productivity, and worker turnover during the course of foreign takeovers on employee-employer matched data of Hungary and find evidence consistent with learning, but not with FDI technology spillovers.
    Keywords: FDI, foreign takeover, cross-border M&A, wage regression, employee-employer matched data, propensity score matching, FDI technology spillover
    JEL: F2 J3
    Date: 2005
  24. By: Adalbert Winkler (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Roland Beck (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: This paper – based on a report by a Task Force established by the International Relations Committee (IRC) of the European System of Central Banks (ESCB) – reviews macroeconomic and financial stability challenges for acceding (Bulgaria and Romania) and candidate countries (Croatia and Turkey). In an environment characterised by strong growth and capital inflows, the main macroeconomic challenges relate to the recent pick-up of inflation and the large and widening current account deficits. Moreover, rapid credit growth has been a recent feature of financial development in all countries and thus constitutes the main financial stability challenge. In general, monetary authorities have responded to these challenges by tightening monetary conditions and prudential standards, with concrete measures also reflecting the different monetary and exchange rate regimes in the region. The paper also highlights four specific features of financial development in the countries under review, namely the dominance of banks in financial intermediation, the strong participation of foreign-owned banks, the widespread use of foreign currencies and the strengthening of supervisory frameworks. JEL Classification: E65, G21, G38, O16, P27.
    Keywords: South-East Europe, macroeconomic performance, credit growth, financial stability.
    Date: 2006–07
  25. By: Evgeny Yakovlev (CEFIR); Ekaterina Zhuravskaya (New Economic School/CEFIR and CEPR)
    Date: 2005–10

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