nep-tra New Economics Papers
on Transition Economics
Issue of 2006‒12‒04
fourteen papers chosen by

  1. How Law Affects Lending By Haselmann, Rainer; Pistor, Katharina; Vig, Vikrant
  2. Structural Effects of a Real Exchange Rate Revaluation in China: A CGE Assessment By Willenbockel, Dirk
  3. An Empirical Investigation around the Finance-Growth Puzzle in China with a particular focus on causality and efficiency considerations By Maswana, Jean-Claude
  4. On Privatisation and Restructuring By Schröder, Philipp J.H.
  5. How sustainable are current account deficits in selected transition economies? By Aristovnik, Aleksander
  6. The Evolution of Ukrainian Economy: New Trade Theory Evidence By Konchyn, Vadym
  7. Have banks filled the gap? Credit as a mechanism of corporate governance in a transition country: example of Poland By Slomka, Agnieszka
  8. Changes in the financing structure of the real economy in Poland - challenges for the banking sector By Pruski, Jerzy; Żochowski, Dawid
  9. Monetary Policy before Euro Adoption: Challenges for EU New Members By Filacek, Jan; Horvath, Roman; Skorepa, Michal
  10. The Distribution and Dispersion of Debt Burden Ratios Among Households in Poland and its Implications for Financial Stability By Dawid, Żochowski; Sławomir, Zajączkowski
  11. Economic Impact of Capital Flight from Russia and its Institutional Context: Why Capital Controls cannot be a Part of a Pro-Growth Policy (updated version). By Kadochnikov, Denis
  12. Entrepreneurship Policy in Estonia By Kuura, Arvi
  13. Financial Accelerator Effects in the Balance Sheets of Czech Firms By Horvath, Roman
  14. Romania: From the quantitative monetary aggregates to inflation targeting By Voicu, Ionut Cristian; Constantin, Floricel

  1. By: Haselmann, Rainer; Pistor, Katharina; Vig, Vikrant
    Abstract: A voluminous literature seeks to explore the relation between law and finance, but offers little insights into dynamic relation between legal change and behavioral outcomes or about the distributive effects of law on different market participants. The current paper disentangles the law-finance relation by using disaggregate data on banks’ lending patterns in 12 transition countries over a 8 year period. This allows us to control for country level heterogeneity and differentiate between different types of lenders. Employing a differences-in-differences methodology in an exclusive ”laboratory” setting as well as unique hand collected datasets on legal change as well as changes in bank ownership, we find that lending volume responds positively to legal change. However, not all legal change is equally effective. The introduction of a legal regime that enhances each lender’s individual prospects of enforcing her claims (collateral law) results in greater increases in lending volume than changes in bankruptcy law, the essence of which is to provide an orderly liquidation or reorganization process in the presence of multiple creditors. Finally, we find that banks that newly enter the market respond more strongly to legal change than do incumbents. In particular, foreign-owned banks extend their lending volume substantially more than domestic banks.
    Keywords: creditor rights; credit market development; bankruptcy; collateral law; bank lending
    JEL: G28 G21 F37 F34 G33
    Date: 2006–09
  2. By: Willenbockel, Dirk
    Abstract: The misalignment of the Chinese currency exposed by the rapid build-up of China’s foreign exchange reserves over the past few years has been the subject of considerable recent debate. Recent econometric studies suggest a Renminbi undervaluation on the order of 10 to 30%. The modest revaluation of July 2005 is widely perceived as insufficient to correct China’s balance-of-payments disequilibrium and has not silenced charges that China is engaging in persistent one-sided currency manipulation. Within China there are widespread concerns regarding the adverse employment effects of a major revaluation on labour-intensive export sectors, yet the likely magnitude of these effects remains a controversial issue. The paper aims to shed light on this question by simulating the structural effects of a real exchange rate revaluation that lowers the current account surplus-GDP by 4 percentage-points using a 17-sector computable general equilibrium model of the Chinese economy.
    Keywords: Renminbi undervaluation; real exchange rate misalignment; applied general equilibrium analysis
    JEL: F40 F17 C68
    Date: 2006–04
  3. By: Maswana, Jean-Claude
    Abstract: The paper explores a coherent perspective for understanding the multifaceted puzzle of China’s financial development. Specifically, it tests competing finance-growth nexus hypotheses using Granger causality tests in a VECM framework for China over the period 1980–2002. The empirical results support a complex set of bidirectional causality between the financial development proxies and economic growth variable. Additionally, bidirectional causality shows the Chinese financial system to be more driven by and closely aligned with real sector activities than exposed to speculative finance. Study findings have several policy implications. Notably, the development of financial institutions should not be emphasized unilaterally. Rather, attention should be given to the complementary and coordinated development of financial reforms and changes in other areas.
    Keywords: Financial development; economic growth; China; Granger causality
    JEL: O16
    Date: 2006–01–27
  4. By: Schröder, Philipp J.H.
    Abstract: This essay deals with the issues of privatisation and restructuring in transition economies. The topics are addressed in both a descriptive and empirical manner. The centre of the analysis is the interrelation of privatisation, the resulting ownership form and the expected and actual effect on restructuring behaviour of firms. The essay identifies a slow progress in privatisation, paired with an overweight of insider owners. Furthermore substantial evidence on slow restructuring is collected. Overmanning and excessive social assets prevail in the privatised firms - in part regardless of the new ownership structure. Finally, the link to the government’s fiscal situation is drawn, the costs of restructuring to the government budget are identified. In presenting such account of the privatisation and restructuring situation, the essay provides a basis for formal explanations of slow privatisation and sluggish restructuring.
    Keywords: Privatization; Restructuring; Transition; Central adn Eastern Europe
    JEL: P2 P31 P26 L33
    Date: 2000
  5. By: Aristovnik, Aleksander
    Abstract: The article examines the issue of ‘current account sustainability’ in seventeen transition economies. For this purpose, two accounting frameworks (Milesi-Ferreti and Razin, 1996; Reisen, 1998) based on certain strict assumptions are employed. The results show that if the observed level of foreign direct investment (FDI) flows is kept in the medium run almost all countries could optimally have a higher level of external deficit, with the exception of countries such as Baltic States, Hungary, Macedonia, Moldova and Romania. Accordingly, the maintenance of relatively large FDI inflows (especially greenfield investments) to national economies is a key priority in securing future external sustainability. In the end, the results indicate that current account deficits of transition economies that exceed 5 percent of GDP generally involve problems of their external sustainability.
    Keywords: transition economies; current account deficits; sustainability; FDI
    JEL: F32 F47
    Date: 2006–03–26
  6. By: Konchyn, Vadym
    Abstract: As the experience of European transition countries shows, the opening-up of their economic systems for international competition and FDIs, deepening economic liberalization and integration, and on this basis, the realization of real convergence within the integration block lead to the increased role of New Trade Theory in explaining their international economic relations. The processes of Ukraine's economic liberalization and approximation of its level of economic development to that of the EU-members should stipulate for transition of Ukrainian economy onto the dimension which explains industrial and trade relations through the prism of the New Trade Theory postulates coupled with Traditional Trade Theory principles. This article explores the position of Ukraine in the intra-industry trade with its main trade partners and problems of measuring the homogeneity degree of Ukraine’s trade structure and the trade structures of its trade partners as well as its potential reciprocal demand within the regional EU and SEA integration blocks. The empirical analysis reveals that inasmuch as consumer preferences in Ukraine differ from those of its two SEA-partners (Russia and Kazakhstan), their disposition to intensify intra-regional trade relations with Ukraine in the future would be reduced. The SEA countries would rather prefer to expand their integrated export potential (for example, by forming big oligopolistic financial and industrial groups in the mining, metallurgy, heavy engineering, aircraft and space industries on the basis of intra-regional mergers and acquisitions, thus enjoying external economies of scale) and satisfy their individual importing wishes on the markets of third countries in compliance with the postulates of the Traditional Trade Theory. Nevertheless, it is believed that intra-industry trade of Ukraine would develop optimally under deepening of its industrial and trade relations with advanced industrial countries, which have objectively reached the highest level of international specialization and product differentiation. In view of the optimization of their reciprocal demand, advanced industrial countries would try to pull the Ukrainian economy towards European economic area in order to realize their trade and investment interests. FDIs turned Ukraine into an increasingly export-oriented economy due to homogenous products. At the same time, the influence of FDIs on Ukrainian imports of differentiated goods tends to decrease significantly. This means that there still is no effect of increasing complementarity between imports and FDIs, which – under condition of transition – is responsible for structural market changes, saturation of domestic market with differentiated products and as a result for development of intra-industry trade.
    Keywords: New Trade Theory; Multinational Corporations; Intra-industry Trade; Internal Increasing Returns to Scale; Trade Structures Homogeneity; Potential Reciprocal Demand; Cross-Border Mergers & Acquisitions; Foreign Direct Investment; Investment and Trade Openness; Single Economic Area; European Union
    JEL: F15 P27 F14 F12
    Date: 2006–10–26
  7. By: Slomka, Agnieszka
    Abstract: Poland, as any other transition country, suffers from inefficient corporate governance as firms have difficulties with obtaining external financing. This paper aims to examine whether bank’s involvement in corporate control reduces information asymmetries, and hence lessens firm’s financial constraints – phenomenon frequently measured by investment-cash flow sensitivity. In the sample of all non-financial companies listed during 1999-2002 on the Polish stock exchange firms with a close relationship with banks are almost as much financially constrained as firms without such ties. However, the former group relies more heavily on bank loans than on internal capital in their investment activities. In contrast, firms without a close relationship with banks finance to larger extent their investment with internal capital than with credit. It may be interpreted that bank loans are more important source of financing for firms with bank ties than for firms without bank ties.
    Keywords: corporate control and governance; firm financing; relationship banking; emerging markets
    JEL: G32
    Date: 2005–04–04
  8. By: Pruski, Jerzy; Żochowski, Dawid
    Abstract: Significant changes have occurred in the Polish banking sector over the last ten years. In the mid-1990s, due to low market entry requirements, many small private commercial banks, which were frequently established by foreign banks seeking to enter the Polish market, operated alongside state banks. A wave of privatisation occurred in the banking sector, which was followed by a period of consolidation and restructuring. These processes, coupled with a simultaneous increase in foreign investor participation, enhanced management quality and banks’ efficiency, primarily with regard to risk management. The changes, which took place in the Polish banking sector in the second half of the 1990s, improved access to loans for corporates and households alike. As a result, lending grew rapidly. The increase was, on average, more pronounced in the household sector than in the corporate one, which brought the composition of bank loans to the private sector closer to what exists in the European Union. This convergence has accelerated over the last five years. The purpose of this paper is to present the phenomena which influenced the evolution of debt structure of the real economy sector in Poland as well as to discuss related future challenges.
    Keywords: Banking Sector in Poland; Economic Transformation; Credit growth; Lending policy
    JEL: G2 O16 O52
    Date: 2005–08–20
  9. By: Filacek, Jan; Horvath, Roman; Skorepa, Michal
    Abstract: This article analyzes the main issues for monetary policy in new EU member states before their euro adoption. These are typically rooted in the challenge of fulfilling concurrently of the Maastricht inflation and exchange rate criterion, as these countries are experiencing equilibrium real exchange rate appreciation. In this article we first distinguish between the wording, written interpretation and “revealed” interpretation of the inflation and exchange rate criteria. Then we discuss the options for monetary policy in the period of fulfilment of these criteria in terms of its transparency, its continuity with the previous monetary policy regime, the choice of central parity for the ERM II, the setting of the fluctuation bandwidth, the probability of fulfilment of both criteria and the impact on economic stability.
    Keywords: monetary policy; euro adoption; ERM II; EU
    JEL: E58 F42 F33 E52
    Date: 2006–09–25
  10. By: Dawid, Żochowski; Sławomir, Zajączkowski
    Abstract: Debt burden ratio as measured on the aggregate level does not give an adequate assessment of the ability of the household sector to repay its debt. The low level of financial deepening in Poland is primarily reflected in a low percentage of households that have been granted a loan. Therefore, the average debt burden for households, which have any debt outstandings could be much higher than the one measured on the aggregate level. If the debt is concentrated among groups of households with lower incomes, it can threat the financial stability in case of FX or interest rate shocks. Using the data from Polish Households Budget Survey we first define three different measures of debt burden and calculate its dispersion in time and distribution among income groups. We find that (1) the total debt service burden and loan service burden ratios are on lower levels than in other European countries and recently have not risen substantially, (2) the mortgage debt service burden ratio has been rapidly increasing in the last four years especially in lower income groups of households reaching in 2004 the 3/4 of the level noted in EU-15. In comparison with EU it seems that the level of indebtedness of house- holds in Poland is on a secure level. However, we notice that the secure level of debt burden ratio is on a lower level in emerging market countries than in wealthier countries because of the higher share of basic living costs in total consumption expenditure. Therefore, the increasing levels of mortgage debt service ratios in lower-income groups could pose a potential threat to the financial stability in case of FX or interest rate shock.
    Keywords: Financial stability; debt burden; sebt service burden; haousehold indebtedness
    JEL: G21 G0 E58
    Date: 2006–07–31
  11. By: Kadochnikov, Denis
    Abstract: The research presented in this paper is undertaken in response to the debate on capital flight from Russia. This debate usually involves discussion of its determinants but misses the question of its ultimate effects on the economy. Lack of understanding of the economic nature of capital flight and of its institutional context leads to numerous calls for a policy response, such as stricter capital controls, which are not grounded in any theory or empirical studies, but at the same time are not opposed on theoretical grounds, with only ideological or technical arguments employed at the very best. The purpose of the paper is to examine capital flight from Russia within the institutional environment in which it occurs and to establish whether this capital flight has detrimental effect on the economy. New Institutional Economics approach is adopted to argue that in Russia’s case capital flight might be considered not just a consequence, as some researchers have argued earlier, but also an optimal solution to the institutional deficiencies with its economic role being neutral. To support the validity of this claim modified Granger non-causality test is used to determine whether capital flight dynamics have a causal effect on that of the interest rate differential and vice versa, that is to test whether price mechanism is not working. Rethinking the nature and the economic impact of capital flight allows postulating that within the existing institutional context the observed capital flight is a normal economic process which per se does not require any policy response and restricting capital flight by imposing capital controls cannot be an element of a pro-growth policy, as it would instead lead to boom-burst sort of growth.
    Keywords: Russia; Capital Flight; New Institutional Economics.
    JEL: F21 G18
    Date: 2005–06
  12. By: Kuura, Arvi
    Abstract: The main task of this article is to explore the entrepreneurship policy in Estonia. The idea proceeds from the book by Lundström and Stevenson (2001), in which the authors describe, analyse and discuss the development of entrepreneurship policy in ten economies — six EU Member States and four members of APEC. In some respects, this article strives to be a “missing chapter” in the aforementioned book concerning entrepreneurship policy in Estonia. It should be considered as an attempt to apply their approach to a country without a long history in SME development. The article starts with an overview of the theoretical background and goes on to examine entrepreneurship policy (or even economic policy) in Estonia. Examination of SME / entrepreneurship policy documents shows that Estonia is moving towards entrepreneurship policy, but with certain minor reservations. The current Estonian entrepreneurship policy may be regarded as a combination of an extension to SME policy and a holistic policy, the trend of development is towards the latter. The “old” (effective in 2002–2006) policy was almost SME policy and has been mentioned as a basis in the new (for 2007–2013) policy document, which is being prepared now. The policy structures followed the vertical model in the period 1996–2000 (and also earlier), but now Estonia is moving towards a horizontal or multi-ministerial model.
    Keywords: Entrepreneurship; Entrepreneurship Policy
    JEL: L53
    Date: 2006–02
  13. By: Horvath, Roman
    Abstract: The paper examines a financial accelerator mechanism in analyzing determinants of corporate interest rates. Using a panel of the financial statements of 448 Czech firms from 1996–2002, we find that balance sheet indicators matter interest rates paid by firms. Market access is particularly important in this regard. The strength of corporate balance sheets seem to vary with firm size. There is also evidence that monetary policy has a stronger effect on smaller than on larger firms. On the other hand, we find no asymmetry in the monetary policy effects over the business cycle.
    Keywords: balance sheet channel; financial accelerator; interest rates; monetary policy transmission
    JEL: G32 E52
    Date: 2006–11–14
  14. By: Voicu, Ionut Cristian; Constantin, Floricel
    Abstract: For Romania, the shift from monetary targeting toward inflation targeting was done under the influences of following events: - The existing pressure coming from refinancing the public debt and from the necessity to remain in certain boundary with the budgetary deficit. - NBR assigned monetary control and liquidity management functions on the mechanism of minimum required reserves. - Romanian strategy was deeply hurt by the low development of its financial markets, and the low level of monetization. - A precondition of potential success in the case of inflation targeting was fulfilled - the improvement of taxes collection and the reduction of money laundry. - The important amounts of quantitative increases in Foreign Direct Investment (yearly Euro 4 billion), and also in the rest of M2’s components, forced the necessity of a new strategy based mainly on non-monetary aggregates
    Keywords: monetary policy; inflation targeting; Romania; monetary aggregates
    JEL: E58
    Date: 2006–06

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