nep-tra New Economics Papers
on Transition Economics
Issue of 2008‒03‒01
eighteen papers chosen by
J. David Brown
Heriot-Watt University

  1. Foreign Direct Investment and Structural Reforms: Evidence from Eastern Europe and Latin America By Nauro F. Campos; Yuko Kinoshita
  2. Is Foreign Direct Investment Good for Growth? Evidence from Sectoral Analysis of China and Vietnam By Tam B. Vu; Byron Gangnes; Ilan Noy
  3. On Asymmetry of Exchange Rate Volatility in New EU Member and Candidate Countries By Stavarek, Daniel
  4. Foreign direct investment, access to finance, and innovation activity in Chinese enterprises By Sourafel Girma; Yundan Gong; Holger Görg
  5. The impact of capital flows on domestic investment in transition economies. By Elitza Mileva
  6. The European Union’s potential for strategic emissions trading in a post-Kyoto climate agreement By Johan Eyckmans and Cathrine Hagem
  7. Does poverty research in Russia follow the scientific method? By Lokshin, Michael
  8. Banking reform in China: Driven by international standards and Chinese specifics By Kudrna, Zdenek
  9. Limited partners' perceptions of the Central Eastern European venture capital and private equity market By Groh, Alexander P.; Liechtenstein, Heinrich; Canela, Miguel A.
  10. National Productive Structure and Innovative Dynamics: Finding the (Endogenous) Path to Convergence By Jorge Cerdeira; Luís Pina Rebelo
  11. Decomposing Financial Risks and Vulnerabilities in Eastern Europe By Andrea M. Maechler; Srobona Mitra; DeLisle Worrell
  12. Measuring Underground (Unobserved, Non-Observed, Unrecorded) Economies in Transition Countries: Can We Trust GDP? By Feige, Edgar L.; Urban, Ivica
  13. Benchmarking the Efficiency of Public Expenditure in the Russian Federation By David Hauner
  14. The Determinants of Stock Market Development in Emerging Economies: Is South Africa Different? By Charles Amo Yartey
  15. Baltic Tax Reform By Azacis, Helmuts; Gillman, Max
  16. Trade growth in a heterogeneous firm model: Evidence from South Eastern Europe By d'Artis Kancs
  17. Vulnerabilities in Emerging Southeastern Europe--How Much Cause for Concern? By Andrea M. Maechler; Bas Berend Bakker; Christoph Duenwald; Piritta Sorsa; Andrew Tiffin
  18. How does Vietnam ' s accession to the World Trade Organization change the spatial incidence of poverty? By Roland-Holst, David; Fujii, Tomoki

  1. By: Nauro F. Campos; Yuko Kinoshita
    Abstract: This paper investigates the role of structural reforms -financial reforms, trade liberalization, and privatization- as determinants of FDI inflows based on newly constructed dataset on structural reforms for 19 Latin American and 25 Eastern European countries between 1989 and 2004. Our main finding is a strong empirical relationship from reforms to FDI, in particular, from financial liberalization and privatization. These results are robust to different measures of reforms, split samples, and potential endogeneity and omitted variables biases.
    Keywords: Foreign direct investment , Central and Eastern Europe , Latin America , Trade liberalization , Privatization ,
    Date: 2008–01–31
  2. By: Tam B. Vu (College of Business and Economics, University of Hawaii at Hilo); Byron Gangnes (Department of Economics, University of Hawaii at Manoa); Ilan Noy (Department of Economics, University of Hawaii at Manoa)
    Abstract: We estimate the impact of FDI on growth using sectoral data for FDI inflows to China and Vietnam. Previous empirical studies, using either cross-country growth regressions or firm-level micro-econometric analysis, fail to reach a consensus. Our paper is the first to use sectoral FDI inflow data to evaluate the sector-specific impact of FDI on growth. Our results show that, for the two developing-transition economies we examine, FDI has a statistically-significant positive effect on economic growth operating directly and through its interaction with labor. Intriguingly, we find the effects seem to be very different across economic sectors, with almost all the beneficial impact limited to industrial sector. Other sectors appear to gain very little growth benefit from sector-specific FDI.
    Date: 2007–07–01
  3. By: Stavarek, Daniel
    Abstract: In this paper, we examine the exchange rate volatility in selected new EU Member States (Czech Republic, Hungary, Poland, Slovakia) and candidate countries (Croatia, Romania, Turkey) using TARCH model and daily data from the period May 2004 – December 2006. Besides the volatility estimation, the paper analyzes the asymmetric effects. The results suggest that some symptoms of asymmetry were found in all exchange rates except for CZK/EUR. However, the most distinct effects are evident in Slovakia and Turkey where the appreciation of the national currency and the appreciation-side deviation from the target exchange rate contribute significantly to the increase in the exchange rate volatility.
    Keywords: asymmetry; European Union; exchange rate volatility; TARCH models
    JEL: G15 F31
    Date: 2007
  4. By: Sourafel Girma; Yundan Gong; Holger Görg
    Abstract: This paper investigates the link between inward FDI and innovation activity in China, using a very comprehensive and recent firm level database. We pay particular attention to the impact of domestic access to finance. Our results show that firms with foreign capital participation or those with good access to domestic bank loans innovate more than others do. We also find that inward FDI at the sectoral level is positively associated with domestic innovative activity only if firms engage in own R&D or if they have good access to domestic finance. However, access to finance only plays a role for private or collectively owned firms, less so for state-owned enterprises. Furthermore, we distinguish the effect of sector level inward FDI into technology transfer and FDI affecting domestic credit opportunities and find that the latter is of very little significance for SOEs and is also independent of their access to finance. By contrast, it is an important channel through which FDI affects the innovation of domestic private and collectively owned enterprises.
    Keywords: FDI, finance, China
    JEL: O31 F23 G32
    Date: 2008–02
  5. By: Elitza Mileva (Fordham University, Economics Department, 441 East Fordham Road, Bronx, New York 10458, USA.)
    Abstract: During the 1990s most transition economies undertook a series of market reforms, including opening their capital accounts. This paper uses static and dynamic panel techniques to assess the effect of FDI, foreign loans and portfolio flows on domestic investment. In this partial adjustment setup, capital flows can have contemporaneous and long-term effects on investment. For countries with less developed financial markets and weaker institutions, our estimates for the FDI coefficient are larger than one, suggesting FDI stimulates investment in other sectors of the economy (“spillover” effects). Over the longer term, each dollar of FDI generates at least one additional dollar of local investment. In transition countries with stronger governance indicators, long-term loans raise domestic investment and FDI produces small spillover effects in the long run. Limited portfolio flows into the transition economies have no effect on capital formation in either group. JEL Classification: F21, F30, P33.
    Keywords: Transition economies, capital inflows, domestic investmet, international financial integration.
    Date: 2008–02
  6. By: Johan Eyckmans and Cathrine Hagem (Statistics Norway)
    Abstract: The literature suggests that Russia and Ukraine may become large sellers of greenhouse gas emissions permits under the Kyoto Protocol and might exploit their market power to maximize trading profits. The EU countries taken together will probably be net buyers of permits. For any given global target for emission, participation by developing countries with low-cost abatement options would benefit the net buyers of permits because the market price for carbon permits would go down. We explore how the EU could benefit from a broader participation through specific bilateral agreements with developing countries in the post-Kyoto period. The bilateral agreement involves a minimum permit sales requirement which is compensated by a financial transfer from EU to the developing country. Such bilateral agreement enables the EU to act strategically in the permit market on behalf of its member states, although firms in each member state are assumed to be price takers in the permit market. In a numerical simulation we show that an appropriately designed bilateral agreement between the EU and China can cut EU’s total compliance cost by one third.
    Keywords: emissions permits; post-Kyoto climate agreement; strategic permit trading
    JEL: D43 Q54
    Date: 2008–02
  7. By: Lokshin, Michael
    Abstract: This paper presents the first critical review of literature on poverty published in Russia between 1992 and 2006. Using a dataset of about 250 publications in Russian scientific journals, the authors assess whether the poverty research in Russia satisfies the general criteria of a scientific publication and if such studies could provide reliable guidance to the Russian government as it maps out its anti-poverty policies. The findings indicate that only a small proportion of papers on poverty published in Russia in 1992-2006 follow the universally-recognized principles of the scientific method. The utility of policy advice based on such research is questionable. The authors also suggest steps that could, in their view, improve the quality of poverty research in Russia.
    Keywords: Tertiary Education,Population Policies,Poverty Monitoring & Analysis,Science Education,Scientific Research & Science Parks
    Date: 2008–02–01
  8. By: Kudrna, Zdenek
    Abstract: This paper reviews the progress of banking reforms in China over the last five years. The stated goal of reform is to “transform major banks into internationally competitive joint‐stock commercial banks with appropriate corporate governance structures, adequate capital, stringent internal controls, safe and sound business operations, quality services as well as desirable profitability.” The reform strategy relies on three pillars – extensive publicly financed bailouts, implementation of the international best practices in bank governance and regulation and listing of major banks at the Hong Kong stock exchange. This strategy has been successful in stabilizing the three major banks. However, our review of academic and commercial research indicates that there is no evidence that the stabilization is sustainable. Prudential indicators of the largest banks are comparable to international averages, but this is an outcome of large bail outs and ongoing credit boom rather than fundamental change in banker’s incentives. Reforms of bank governance and regulatory framework need more time to proliferate throughout the banking and regulatory hierarchies. However, time alone would not solve the problem as the reform design retains important departures from international standards. These standards are implemented in a selective manner; those aspects that help to concentrate key powers in the center are implemented rather vigorously, whereas principles that require independence of banks’ boards and regulators are ignored. Thus the largest Chinese banks remain under the firm state control and can be used as development policy tools for the better or the worse.
    Keywords: China; banks; reform; international standards
    JEL: G28 G21 P34
    Date: 2007–10
  9. By: Groh, Alexander P. (Montpellier Business School); Liechtenstein, Heinrich (IESE Business School); Canela, Miguel A. (University of Barcelona)
    Abstract: Growth expectations and institutional settings in Central Eastern Europe are assumed to be favorable for the establishment of a vibrant Venture Capital and Private Equity market. Despite this, there is a lack of risk capital. We examine the obstacles to institutional investments in the region through a questionnaire addressed to (potential) Limited Partners world-wide. The respondents provide information about their perceptions of the region. The protection of property rights is the dominant concern, followed by social criteria, such as the belief in the management quality of local people, and the lacking size and liquidity of the Central Eastern European capital markets. However, Limited Partners regard the growth expectations as attractive, and those with exposure in Central Eastern Europe are satisfied with the historical risk and return ratio, they have a good knowledge of the region, are attracted by other emerging regions, and they appreciate the region's entrepreneurial opportunities and the local General Partners. Overall, the region is ranked very favorable compared to other emerging regions, and especially with respect to its economic and entrepreneurial activity.
    Keywords: Venture Capital; Private Equity; International Asset Allocation; Institutional Investors;
    JEL: G23 G24
    Date: 2008–01–13
  10. By: Jorge Cerdeira (Faculdade de Economia - Universidade do Porto); Luís Pina Rebelo (Faculdade de Economia e Gestão - Universidade Católica Portuguesa (Porto) and Faculdade de Economia - Universidade do Porto)
    Abstract: We extend the model presented in Barro and Sala-i-Martin (1997) by allowing for two types of economies - more developed and in transition to European Union integration - to both imitate and innovate varieties of intermediate goods. Besides depending on research and development expenditures, we also allow for the stochastic nature of innovation by making it also dependent on a random component. We do this by Monte Carlo simulation, using a Box-Muller process, and solve a three differential equation model by using numerical methods. Two situations are presented: a leading economy with greater institutions and more labour than the transition economy versus a situation where an institutional advance is given to the transition economy.
    Keywords: stochastic innovation; transition economies; growth; technology; diffusion; convergence
    JEL: O40 O30 O11
    Date: 2008–02
  11. By: Andrea M. Maechler; Srobona Mitra; DeLisle Worrell
    Abstract: This paper assesses how various types of financial risk such as credit risk, market risk, and liquidity risk affect banking stability in the ten countries that joined the European Union most recently, and eight neighboring countries. It also examines how the quality of supervisory standards may have mitigated the vulnerabilities arising from these risk factors. Using panel data, the study finds substantial variation in the impacts of financial risks, the macroeconomic environment, and supervisory standards on banks' risk profile across different country clusters. Credit quality is of general concern especially in circumstances where credit growth is accelerating.
    Keywords: Working Paper , Financial risk , Europe , Bank soundness , Bank supervision , Economic models ,
    Date: 2007–10–29
  12. By: Feige, Edgar L.; Urban, Ivica
    Abstract: Abstract This paper compiles alternative estimates of underground economies in twenty five transition countries during the transition decade and finds a disturbing lack of convergence between them, calling into question the reliability of GDP figures (which in varying degrees now include non-transparent imputations for the “non-observed economy”) as well as the macro model estimates of the unrecorded economy. A corollary of this finding is that substantive results from many studies examining the consequences of the radical transition from planned to market economies must be viewed with considerable skepticism. Underground (unobserved, non-observed, unrecorded) economic activities play a major role in transition economies. Evaluations of the success and failure of the transition experience should be based on estimates of total economic activity (TEA) namely, recorded plus unrecorded economic activity. We examine the conceptual and empirical relationships between new National Income and Product Accounts (NIPA) methods for obtaining “exhaustive” measures of total economic activity and the two most popular macro-model approaches (electric consumption and currency ratio models) for estimating the size and growth of the unrecorded sector. Our updated empirical results detailing the size and trajectory of unrecorded activities obtained from different estimation methods reveal a disturbing lack of convergence. Until these important differences are resolved, investigations of the relationship between economic reforms and economic outcomes during the transition decade must be viewed with considerable caution. Given the shortcomings of conventional macro model estimates of the underground economy and the lack of transparency and consistency of NOE estimates, it is high time that the profession acknowledges how little we really know about underground economies and their causes and consequences.
    Keywords: Key words: Underground; unrecorded; unobserved; non-observed; NOE; hidden; informal; shadow; GDP; national accounts; transition economies.
    JEL: O11 P24 E26 E01
    Date: 2007–11
  13. By: David Hauner
    Abstract: This paper benchmarks the efficiency of public expenditure in the social sectors in the Russian Federation relative to other countries and among the country's regions. It finds that there is substantial room for efficiency gains, particularly in health care and social protection, although less so in education. An econometric analysis of efficiency differences between the regions suggests that they are positively related to per capita income and the quality of governance and democratic control, while they are negatively related to the share of federal transfers in the respective region's government revenue and the level of spending relative to gross regional product.
    Keywords: Working Paper , Government expenditures , Russian Federation , Public sector , Productivity , Governance , Fiscal analysis ,
    Date: 2007–10–29
  14. By: Charles Amo Yartey
    Abstract: This paper examines the institutional and macroeconomic determinants of stock market development using a panel data of 42 emerging economies for the period 1990 to 2004. The paper finds that macroeconomic factors such as income level, gross domestic investment, banking sector development, private capital flows, and stock market liquidity are important determinants of stock market development in emerging market countries. The results also show that political risk, law and order, and bureaucratic quality are important determinants of stock market development because they enhance the viability of external finance. This result suggests that the resolution of political risk can be an important factor in the development of emerging stock markets. The analysis also shows the factors identified above as determining stock market development in emerging economies can also explain the development of the stock market in South Africa.
    Keywords: Emerging markets , South Africa , Stock markets , Income , Investment , Savings , Banking sector ,
    Date: 2008–02–04
  15. By: Azacis, Helmuts (Cardiff Business School); Gillman, Max (Cardiff Business School)
    Abstract: The paper presents an endogenous growth economy with a representation of the tax rate system in the Baltic countries, and the constraint that government spending is a given fraction of output. It shows how a flat tax system is second best optimal. It then computes how specific changes in tax policy since the 2000 Baltic tax reforms affect the growth rate and welfare, including transition dynamics. Conducting alternative tax experiments, it shows that a flat tax increases welfare more in Latvia than actual recent tax changes. This shows how flat rate taxes can be optimal in both theory and practice. Simply lowering personal and social security taxes is better in Estonia and Lithuania compared to recent tax changes, which results because labour income is taxed relatively more heavily than corporate income, as compared to Latvia.
    Keywords: tax reforms; endogenous growth; transitional dynamics; flat taxes
    JEL: E13 H20 O11 O14
    Date: 2008–02
  16. By: d'Artis Kancs (London School of Economics and Catholic University of Leuven)
    Abstract: In 2007 a Free Trade Area (BFTA) will be created in the Balkans. In this paper we study the potential impact of BFTA on trade growth in the SEE. Given that welfare impacts associated with trade growth depend on the growth channels, more goods and varieties exported or at higher price or higher volume of goods and varieties are exported, in this paper we investigate the structure of integration-induced export growth in the Balkans. The empirical implementation of our analysis is complicated by the fact that firm-level trade data is not available for the SEE economies. In order to cope with this data paucity, we adopt a heterogeneous firm framework, which allows us to decompose the aggregate trade growth in two parts: the intensive margin of trade and the extensive margin of trade using only aggregate trade data. The empirical findings of our study suggest that the BFTA would primarily trigger trade growth through a growing number of exported goods (the extensive margin of trade).Thus, the actual welfare gains from trade growth in the Balkans might be larger than predicted by previous trade studies. We also found that a variable trade cost reduction would lead to higher export growth rates compared to a fixed trade cost reduction. These results allow us to draw detailed policy conclusions.
    Keywords: Balkans, export growth, regional integration, trade costs
    JEL: F12 F14 R12 R23
    Date: 2007–12
  17. By: Andrea M. Maechler; Bas Berend Bakker; Christoph Duenwald; Piritta Sorsa; Andrew Tiffin
    Abstract: While large inflows of capital into Southeastern Europe (SEE) have raised incomes, this has increased vulnerability to financial risks, which, if realized, can lead to costly adjustments. Traditional vulnerability indicators in SEE have reached levels that in other countries have not been sustainable, and sectoral analysis shows rising imbalances and raises questions about efficient use of the inflows. While factors related to EU integration mitigate these vulnerabilities, weaker institutions reduce these benefits in SEE compared to more advanced European emerging markets. To insure against setbacks to income convergence, SEE policymakers should take measures to reverse the buildup of vulnerabilities.
    Keywords: Working Paper , Economic indicators , Europe , Capital inflows , Emerging markets , Adjustment process , Crisis prevention ,
    Date: 2007–10–15
  18. By: Roland-Holst, David; Fujii, Tomoki
    Abstract: Trade policies can promote aggregate efficiency, but the ensuing structural adjustments generally create both winners and losers. From an incomes perspective, trade liberalization can raise gross domestic product per capita, but rates of emergence from poverty depend on individual household characteristics of economic participation and asset holding. To fully realize the growth potential of trade, while limiting the risk of rising inequality, policies need to better account for microeconomic heterogeneity. One approach to this is geographic targeting that shifts resources to poor areas. This study combines an integrated microsimulation-computable general equilibrium model with small area estimation to evaluate the spatial incidence of Vietnam ' s accession to the World Trade Organization. Provincial-level poverty reduction after full liberalization was heterogeneous, ranging from 2.2 percent to 14.3 percent. Full liberalization will benefit the poor on a national basis, but the northwestern area of Vietnam is likely to lag behind. Furthermore, poverty can be shown to increase under comparable scenarios.
    Keywords: Rural Poverty Reduction,Population Policies,Economic Theory & Research,Achieving Shared Growth
    Date: 2008–02–01

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