nep-tra New Economics Papers
on Transition Economics
Issue of 2007‒08‒27
seventeen papers chosen by
J. David Brown
Heriot-Watt University

  1. Who Wants to Revise Privatization and Why? Evidence from 28 Post-Communist Countries By Irina Denisova; Markus Eller; Timothy Frye; Ekaterina Zhuravskaya
  2. Application of the Input-Output Decomposition Technique to China's Regional Economies By Meng, Bo; Chao, Qu
  3. Making the transition from imitation to innovation: An enquiry into the technological capabilities of China's firms By Wendy Dobson; A. E. Safarian
  4. Macro Regime and Economic Growth in China By Yuwen Dai
  5. Composite Leading Indicators and Growth Cycles in Major OECD Non-Member Economies and recently new OECD Members Countries By Ronny Nilsson
  6. Strengthening China ' s technological capability By Yusuf, Shahid; Nabeshima, Kaoru
  7. The Willingness to Migrate in the CEECs. Evidence from the Czech Republic By Jan Fidrmuc; Peter Huber
  8. Fiscal Decentralization, Chinese Style: Good for Health Outcomes? By Uchimura, Hiroko; Jütting, Johannes
  9. North Korea’s External Economic Relations By Stephan Haggard; Marcus Noland
  10. A Tale of Two Countries: Openness and Growth in China and India By Chee Kian Leong
  12. THE STATE AND THE PRIVATE SECTOR IN VIETNAM By Hakkala, Katariina; Kokko , Ari
  13. Financial reforms in China and India: A comparative analysis By Wendy Dobson
  14. Two Views on Institutional Development: The Grand Transition vs the Primacy of Institutions By Martin Paldam; Erich Gundlach
  16. A Dynamic Growth Model for Flows of Foreign Direct Investment By Yi-Hui Chiang; Yiming Li; Chih-Young Hung

  1. By: Irina Denisova (CEFIR); Markus Eller (CEFIR); Timothy Frye (Columbia University and the Harriman Institute); Ekaterina Zhuravskaya (New Economic School/CEFIR and CEPR)
    Abstract: Using a survey of 28,000 individuals, we study the level of support for the revision of privatization in 28 post-communist countries. We identify factors influencing support for revising privatization and explore whether the respondents hold this view due to a preference for state property or a concern for the fairness of privatization. We find that human capital poorly suited for market economy with private ownership and a lack of privately owned assets increase support for revising privatization with the primary reason being the preference for state over private property. Economic hardships during transition and work in the state sector also increase support for revising privatization, but mainly due to the perceived unfairness of privatization. The effects of human capital and assets on support for revising privatization do not depend on the institutional environment. In contrast, good governance amplifies the impact of transition experiences on attitudes toward revising privatization. For example, respondents moving from work for wages to self-employment are more likely to oppose revising privatization in countries with more accountable governments and more extensive privatization. In countries with low inequality, individuals with positive and negative transition experiences differ in their preferences toward state and private property, but this difference is much smaller in countries with high inequality.
    Keywords: privatization, revision, nationalization, property
    Date: 2007–08
  2. By: Meng, Bo; Chao, Qu
    Abstract: Structural decomposition techniques based on input-output table have become a widely used tool for analyzing long term economic growth. However, due to limitations of data, such techniques have never been applied to China's regional economies. Fortunately, in 2003, China's Interregional Input-Output Table for 1987 and Multi-regional Input-Output Table for 1997 were published, making decomposition analysis of China's regional economies possible. This paper first estimates the interregional input-output table in constant price by using an alternative approach: the Grid-Search method, and then applies the standard input-output decomposition technique to China's regional economies for 1987-97. Based on the decomposition results, the contributions to output growth of different factors are summarized at the regional and industrial level. Furthermore, interdependence between China's regional economies is measured and explained by aggregating the decomposition factors into the intraregional multiplier-related effect, the feedback-related effect, and the spillover-related effect. Finally, the performance of China's industrial and regional development policies implemented in the 1990s is briefly discussed based on the analytical results of the paper.
    Keywords: Input-Output, Decomposition, Economic growth, China’s regional economies, China, Local economy, Imput-output tables
    JEL: C67 C82 O40 R15
    Date: 2007–04
  3. By: Wendy Dobson; A. E. Safarian (Rotman School of Management, University of Toronto)
    Abstract: We examine evidence on whether and how the Chinese economy will make the transition from imitation and labor intensive production to innovation as the source of sustained long term growth. We note the risk of obstacles to innovation such as outdated institutions and incentive systems that cause the “disequilibrium trap” in which growth slows down. We review existing literatures that focus on macroeconomic indicators, institutions and the behavior of firms and which suggests that China can make the transition, but progress depends on addressing significant institutional weaknesses including the weak legal system, continued reliance on imitation and on international rather than domestic supply chains, and partial linkages between the growing public science and technology base and industry. Much depends on the behavior of firms. We study such behavior in our results of a firm-level survey. Interviews with privately-owned SME producers in five industries designated as “high tech” shed light on how they are learning by examining three main inputs to their innovation processes: learning with respect to organizational, marketing, sourcing or production processes; education and skills development; and changes in the quantity and types of R&D. Most of the firms are less than 20 years old and focus on the domestic product market, adapting and learning as a result of intense competitive pressures, demanding customers, interaction with research institutes and the use of international linkages, foreign acquisitions or foreign partners.
    Keywords: China. Technological capabilities of firms. Catchup. Transition to innovation economy.
    Date: 2007–08
  4. By: Yuwen Dai
    Abstract: In this paper, we investigate the relationship between Chinese macroeconomic policy and economic growth, and examine how the choice of macroeconomic regime affects economic performance in China. An open-economy model is developed for this purpose. It is a three-sector “almost small" open-economy macroeconomic model, with asset markets and forward-looking agents. This open-economy model is then adopted to analyse the implications of both domestic and external growth shocks to the Chinese economy under two alternative macroeconomic policy regimes. These policy regimes have two extreme assumptions on the exchange rate, with differing degrees of financial capital mobility. The simulation results show that greater flexibility in the exchange rate regime allows the central bank to conduct independent monetary policy in the Chinese economy, the benefit from which increases as financial capital becomes more internationally mobile. Most growth shocks cause an expansion in the real GDP level, and there is a deflation in the price level and depreciation in the real exchange rate when the economy operates a floating exchange rate regime with high financial capital mobility. Overall, the expansionary effects in this macroeconomic environment will be beneficial to the Chinese economy.
    Keywords: Macroeconomics, Economic Growth, Monetary Policy, Exchange Rate, Capital Mobility, Chinese Economy, Computable General Equilibrium (CGE) Modelling
    Date: 2007–06
  5. By: Ronny Nilsson
    Abstract: The OECD developed a System of Composite Leading Indicators (CLIs) for its Member Countries in the early 1980?s based on the ?growth cycle? approach and up to 2006 the Organisation compiled composite leading indicators for 23 of the 30 Member countries. Country coverage has now been expanded to include recently new OECD member countries (Korea, New Zealand1, Czech Republic, Hungary, Poland and Slovak Republic) and the major six OECD non-member economies (Brazil, China, India, Indonesia, Russian Federation and South Africa) monitored by the organization in the OECD System of Composite Leading Indicators. The expansion of the OECD System of Composite Leading Indicators to include the new CLIs for the six recently new OECD member countries has implications for the calculation of the OECD total area and the OECD Europe area aggregates. In addition, the inclusion of the new CLIs for all of above twelve countries opens the possibility to calculate new area aggregates such as Major Asian economies, Eastern Europe including or excluding the Russian Federation and a World proxy to give information on the overall global development. The importance of such new regional or area aggregates is of course very much dependent on the existence of different cyclical patterns between these new aggregates and the established ones. However, the calculation of a World proxy aggregate is important in itself in so far that it will represent global development better than the OECD total area aggregate. <BR>L'OCDE a développé un système d'indicateurs composites avancés (CLIs) pour ses pays membres au début des années 80 basé sur l'approche du cycle de croissance. Jusqu'en 2006, l'Organisation a compilé ces indicateurs composites avancés pour 23 de ses 30 pays membres. La couverture géographique s?est agrandie et tient compte maintenant des pays nouvellement membres de l'Organisation (la Corée, la Nouvelle Zélande, la République tchèque, la Hongrie, la Pologne et la République slovaque). Les six principales économies non membres de l'OCDE (le Brésil, la Chine, l'Inde, l'Indonésie, la Fédération de Russie et l'Afrique du Sud) ont été également introduites dans le système des indicateurs composites avancés de l'OCDE. L'ouverture des six nouveaux pays membres au système des indicateurs composites avancés de l'OCDE a eu des implications quant au calcul des agrégats de la zone OCDE total et de la zone OCDE Europe. De plus, l'inclusion de ces indicateurs composites avancés pour les 12 nouveaux pays su mentionnés ouvre la possibilité au calcul de nouveaux agrégats tels que l'Asie des 5 grands, l?Europe de l'Est avec ou sans la Fédération de Russie et une zone monde approximatif qui donnerait une information sur le développement global total. L'importance de tels nouveaux agrégats régionaux ou totaux dépend beaucoup de l'existence de schémas cycliques différents entre ces nouveaux agrégats et ceux déjà établis. Cependant, le calcul d'un agrégat monde approximatif est très important en soit car il représentera mieux le développement global que ne le faisait l'agrégat de la zone OCDE total.
    Date: 2006–12–11
  6. By: Yusuf, Shahid; Nabeshima, Kaoru
    Abstract: China is increasing its outlay on research and development and seeking to build an innovation system that will deliver quick results not just in absorbing technology b ut also in pushing the technological envelope. China ' s spending on R & D rose from 1.1 percent of GDP in 2000 to 1.3 percent of GDP in 2005. On a purchasing power parity basis, China ' s research outlay was among the world ' s highest, far greater than that of Brazil, India, or Mexico. Chinese firms are active in the fields of biotechnology, pharmaceuticals, alternative energy sources, and nanotechnology. This surge in spending has been parallel by a sharp increase in patent applications in China, with the bulk of the patents registered in the areas of electronics, information technology, and telecoms. However, of the almost 50,000 patents granted in China, nearly two-thirds were to nonresidents. This paper considers two questions that are especially important for China. First, how might China go about accelerating technology development? Second, what measures could most cost-effectively deliver the desired outcomes? It concludes that although the level of financing for R & D is certainly important, technological advance is closely keyed to absorptive capacity which is a function of the volume and quality of talent and the depth as well as the heterogeneity of research experience. It is also a function of how companies maximize the commercial benefits of research and development, and the coordination of research with production and marketing.
    Keywords: Technology Industry,Tertiary Education,E-Business,ICT Policy and Strategies,Agricultural Knowledge & Information Systems
    Date: 2007–08–01
  7. By: Jan Fidrmuc; Peter Huber (WIFO)
    Abstract: Given the low levels of migration in the CEECs found in the literature, this paper raises the issue of who is willing to migrate in these countries. Using data on the willingness to migrate in the Czech Republic we show that variables measuring regional labour market conditions and amenities contribute little to explaining willingness to migrate, but that personal and household characteristics are more important. The least willing to migrate are the family-house owners, the less educated and the elderly as well as persons residing in regions with above-average unemployment rates. Improving the efficiency of the housing market and focusing on the problems of peripheral regions should thus be primary foci of a policy aimed at improving labour-market adjustment through migration. These policies are, however, unlikely to yield rapid returns, since the willingness to migrate of all subgroups analysed (except for the less educated) reacts only weakly to regional labour market incentives and amenities.
    Keywords: Willingness to Migrate, Regional Labour Market Adjustment
    Date: 2007–01–16
  8. By: Uchimura, Hiroko; Jütting, Johannes
    Abstract: This study analyzes the effect of fiscal decentralization on health outcomes in China using a panel data set with nationwide county-level data. We find that counties in more fiscal decentralized provinces have lower infant mortality rates compared to those counties in which the provincial government retains the main spending authority, if certain conditions are met. Spending responsibilities at the local level need to be matched with county government’s own fiscal capacity. For those local governments that have only limited revenues, their ability to spend on local public goods such as health care depends crucially upon intergovernmental transfers. The findings of this study thereby support the common assertion that fiscal decentralization can indeed lead to more efficient production of local public goods, but also highlights the necessary conditions to make this happen.
    Keywords: Fiscal decentralization, Health outcomes, China, Fiscal policy, Decentralization, Local government, Public health
    JEL: H75 I18
    Date: 2007–07
  9. By: Stephan Haggard (University of California, San Diego Graduate School of International Relations and Pacific Studies); Marcus Noland (Peterson Institute for International Economics)
    Abstract: North Korea’s international transactions have grown since the 1990s famine period. Illicit transactions appear to account for a declining share of trade. Direct investment is rising, but the county remains significantly dependent on aid to finance imports. Interdependence with South Korea and China is rising, but the nature of integration with these two partners is very different: China’s interaction with North Korea appears to be increasingly on market-oriented terms, while South Korea’s involvement has a growing noncommercial or aid component. These patterns have implications for North Korea’s development, the effectiveness of UN sanctions, and its bargaining behavior in nuclear negotiations.
    Keywords: North Korea, sanctions, political economy, aid, transitional economies
    JEL: F5 P3 F14
    Date: 2007–08
  10. By: Chee Kian Leong
    Abstract: The policy by China and India to open their markets to international trade has been touted as the reason for their phenomenal growth. This paper investigates the impact of opening up the China and Indian economy on economic growth in these countries using new panel data sets for both the national economies and the regional economies of China. The policy change to a more liberalized economy is explicitly identified using instrumental variables. The results provide support that export growth does have a positive and statistically significant effect on economic growth in these countries. However, the growth rates of these countries are export and FDI inelastic, in the sense that a one percentage point increase in growth rate of export or FDI will have a less than one percentage point increase in economic growth rate of these countries. In the case of the Chinese regions, the presence of export processing zones may exert positive effect on the regional growth rate but the increase in regional growth is even more export inelastic than at the national level. The results dispel the popular view that adopting a policy of more openness in the economy has a “multiplier” effect on economic growth. Of the two phases of liberalization in both countries, the second stage is statistically significant. One possible reason is that the scale of liberalization is greater in the second phase. Additionally, increasing the number of SEZs has very negligible effect on economic growth. Taken together, these results suggest that what contributes to greater growth is a greater scale of liberalization, rather than increasing the number of SEZs.
    Date: 2007–06
  11. By: RIVERA RIVERA, Edward Bernard Bastiaan
    Abstract: Exploring the relationship evidenced by literature between FDI and trade, a non-parametric approach has been developed in order to create an index that reflects the nations' capacity to generate imports and exports from FDI inflows and outflows. Thus, a ranking (FDI-Trade Index Ranking) has been elaborated on which the G7 and the BRIC countries are analyzed. The results indicate that China, India, Japan and Russia are the benchmark nations – countries internationally classified as the “big movers” of the new structure of global trade.
    Keywords: Foreign Direct Investment; Internationalization Strategy; Productivity
    JEL: F21
    Date: 2007–05–10
  12. By: Hakkala, Katariina (Research Institute of Industrial Economics); Kokko , Ari (European Institute of Japanese Studies)
    Abstract: In recent years, the Vietnamese government has emphasized its commitment to create a fair business environment for both the state and non-state sectors in its medium and long-term economic development programs. This paper examines the development of the private sector in Vietnam, focusing in particular on the relationship between the state and the private sector. The first part of the paper reviews the trends in private sector development, the second part discusses obstacles for private sector development, with focus on the role of state-owned enterprises, and the third part discusses future challenges and suggests some policy reforms on the basis of the lessons from the first two decades of economics reforms in Vietnam, as well as international experiences. The paper also considers the pattern of new firm establishment, including the impact of foreign investment on the domestic private sector.
    Keywords: Vietnam; economic reforms; private sector development; SOEs
    JEL: H20 L50 P31
    Date: 2007–06–01
  13. By: Wendy Dobson (International Tax Program, Rotman School of Management, University of Toronto)
    Abstract: This paper surveys financial reforms in the world’s two most populous and rapidly-growing economies. The contribution of financial systems to long term growth through the efficient mobilization and allocation of scarce capital is well documented in the literature. India’s financial system is popularly perceived to be better developed than China’s, yet they share two significant weaknesses: under-developed corporate bond markets and bank-dominated financial systems. High levels of state ownership of banks are associated with misdirected lending and high costs of intermediation. The paper examines the institutional frameworks that determine incentives in these sectors and marshals empirical evidence that historical decisions and insufficient market reform suggest performance problems persist. These problems will become more evident when growth slows; indeed a crisis may be necessary to force change since prevailing high economic growth rates in spite of the weaknesses undermine the case for deeper reforms.
    Keywords: comparative analysis; financial systems; China and India
    JEL: P O16 G20
    Date: 2007
  14. By: Martin Paldam; Erich Gundlach
    Abstract: The Grand Transition (GT) view claims that economic development is causal to institutional development, and that many institutional changes can be understood as transitions occurring at roughly the same level (zones) of development. The Primacy of Institutions (PoI) view claims that economic development is a consequence of an exogenous selection of institutions. Our survey of the empirical evidence and our own estimates reveal that it is easy to find convincing evidence supporting either of the two views. Property rights do affect development as suggested by the PoI. However, democracy is mainly an effect of development as suggested by the GT. We conclude that the empirical results are far too mixed to allow for a robust assessment that one of the two views is true and the other false. This finding implies that focusing on institutional development is unlikely to be successful as the key strategy for the economic development of poor countries.
    Keywords: Grand transition, primacy of institutions, democracy, corruption, development
    Date: 2007–06
  15. By: Kokko , Ari (European Institute of Japanese Studies); Mitlid, Kerstin (Central Bank of Sweden); Wallgren, Arvid (Center for Business and Policy Studies)
    Abstract: The main macroeconomic challenges at the early stages of Vietnam¡¯s economic reforms were related to stability and growth. The main achievements of Doi Moi are also related to the success in meeting these two challenges: Vietnam has managed to combine high growth with reasonable price stability since the early 1990s. However, meeting these challenges has become more difficult over time as new challenges have emerged. In the mid-1990s, economic structure and external balance entered the policy debate. In the late 1990s, the Asian crisis created further problems. In recent years, issues related to social and regional development gaps and investment quality have become important policy objectives. At the same time, it is clear that the instruments for economic policy making have changed. While the challenges of the early 1990s could be handled with various direct interventions like credit ceilings and quantitative trade restrictions, indirect instruments for macroeconomic management are gradually becoming more important. For instance, the choice of exchange rate regime is becoming much more important than in the past. This paper summarizes Vietnam¡¯s macroeconomic development, and illustrates some of the alternative approaches to macroeconomic management in an increasingly internationalized and deregulated environment by recounting some experiences from Swedish macroeconomic management during the past three decades.
    Keywords: Vietnam; internationalization; macroeconomic management; growth; stability
    JEL: E60 F40 O11
    Date: 2007–06–01
  16. By: Yi-Hui Chiang; Yiming Li; Chih-Young Hung
    Abstract: In this work, we for the first time study the dynamic flows of the foreign direct investment (FDI) with a dynamic growth theory. We define the FDI flow as a process which transmits throughout a given social system by way of diverse communication channels. In model formulation, seven assumptions are thus proposed and the foreign capital policy of the host country is considered as an external influence; in addition, the investment policy of the investing country is modeled as an internal influence. Classification of influences is mainly according to the operational strategy as well as the consideration of economical/financial factors. The dynamic model of FDI flow is a differential equation which is solved numerically and verified with collected realistic data. Application of the developed model to explore, taking the electronics industry in Taiwan as an example, Taiwanese direct investment (TDI) in China (i.e. FDI flows from Taiwan to China) since 2001 is conducted. Our preliminary results successfully account for the dynamics of FDI flow for different amount of TDI outflows. It is found that the internal influence dominates the growth of TDI flow from Taiwan to China during 2001-2006.
    Keywords: Foreign direct investment, dynamic flow theory, growth model, and numerical simulation
    Date: 2007–06
  17. By: Forsberg, Le Thanh (European Institute of Japanese Studies); Kokko, Ari (European Institute of Japanese Studies)
    Abstract: Although it remains a one-party state, Vietnam has become one of the most popular host countries for multilateral and bilateral aid donors during the past decade. Vietnam¡¯s popularity is largely explained by the fact that it perceived as a good aid recipient, and it has often been identified as a ¡°best practice¡± example of how a government can manage external aid and own its development agenda. The purpose of this paper is to discuss the roots of Vietnam¡¯s strong ownership and to examine how the relations between the state and the donor community have influenced Vietnamese development planning. The first part of the paper highlights the uneven relation with the Soviet Union during the 1970s and 1980s as an explanation for the present ambitions to avoid dependence on foreign partners. The second part outlines the institutional setup for development planning that was created to match the existing institutions for central planning during the 1990s. The third part discusses the ongoing changes in the role of the state and in the institutional setup for development planning. The process of change is illustrated using the Comprehensive Poverty Reduction and Growth Strategy as an example. The paper concludes that donors have contributed both directly and indirectly to the changes in the Vietnamese model of economic planning, and that the donor community has to some extent taken on the roles played by civil society and a political opposition in parliamentary democracies.
    Keywords: Vietnam; development planning; ODA
    JEL: O19 O21 P21
    Date: 2007–06–01

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