nep-tra New Economics Papers
on Transition Economics
Issue of 2009‒02‒22
twenty papers chosen by
J. David Brown
Heriot-Watt University

  1. Political Selection of Firms into Privatization Programs - Evidence from Romanian Comprehensive Data By Adam Szentpeteri; Almos Telegdy
  2. The Role of the Real Exchange Rate Adjustment in Expanding Service Employment in China By Xu, Yingfeng; Yan, Xiaoyi
  3. Access to Higher Education and Inequality: The Chinese Experiment By Belton Fleisher; Xiaojun Wang; Haizheng Li; Shi Li
  4. Further evidence on the Real Interest Rate Parity hypothesis in Central and Eastern European Countries: unit roots and nonlinearities By Juan Carlos Cuestas; Barry Harrison
  5. Bootstrap Panel Granger-Causality Between Government Budget and External Deficits for the EU By António Afonso; Christophe Rault
  6. Economic Freedom as a Driver for Growth in Transition By Pääkkönen, Jenni
  7. Source of Finance, Growth and Firm Size ? Evidence from China By Du, Jun; Girma, Sourafel
  8. Licensing Regulation and the Supervisory Structure of Private Pensions: International Experience and Implications for China By Yu-Wei Hu; Fiona Stewart
  9. Public Pension and Household Saving: Evidence from urban China By Jin Feng; Lixin He; Hiroshi Sato
  10. "The End of the Golden Age" - The Developments of the Venture Capital and Private Equity Industry in Central and Eastern Europe By Judit Karsai
  11. Minimum Wage: Labour Market Consequences in the Czech Republic By Kamila Fialová; Martina Mysíková
  12. Liberalisation of Natural Gas Market – EU Vision vs. Reality By Monika Slabá
  13. Do Economic, Financial and Institutional Developments Matter for Environmental Degradation? Evidence from Transitional Economies By Artur Tamazian; B. Bhaskara Rao
  14. Measuring China's Innovation System: National Specificities and International Comparisons By Martin Schaaper
  15. The Baltic States and Europe: Common Factors of Economic Activity By Ludmila Fadejeva; Aleksejs Melihovs
  16. Flat Tax Reform.The Baltics 2000 – 2007. By Helmuts Azacis; Max Gillman
  17. Cost Copmetitiveness of Chinese and Finnish Fabricated Metal Industries Chemical Indurties By Enjing Li; Paavo Suni; Yanyun Zhao
  18. The Role of the Intellectual Property Rights Regime for Foreign Investors in Post-Socialist Economies By Benedikt Schnellbächer; Johannes Stephan
  19. The Capitalisation of Area Payments into Farmland Rents: Theory and Evidence from the New EU Member States By Pavel Ciaian; d'Artis Kancs
  20. Time to death and health expenditure of the Czech health care system By Kateřina Pavloková

  1. By: Adam Szentpeteri (Central European University, Eotvos Lorand University); Almos Telegdy (Institute of Economics - Hungarian Academy of Sciences)
    Abstract: Exploiting a unique institutional feature of the early Romanian privatization setup, when a group of firms was explicitly barred from any privatization, we test how politicians select firms into privatization programs. Using a comprehensive dataset that includes all firms inherited from socialism, we estimate the relation between pre-privatization firm characteristics (the information known to politicians at the time of decision making) and the effect of privatization on employment, efficiency and wages. We argue that other objectives, such as revenue maximization or bribe collection were of secondary importance in the early Romanian privatization. Using the estimated coefficients, we simulate the effect of privatization on non-privatizable and privatizable firms, including in the latter group both privatized and not privatized enterprises. The simulations show that politicians expected the reduction of employment by 5.2 percent of the non-privatizable group, as a consequence of privatization. Contrary to this expectation, employment in the privatizable group was likely to grow by the same proportion. We do not find such discrepancies in the expected change in firm efficiency, as the simulated efficiency effect of privatization is large and positive for both groups of firms, and it is around 40 percent. The analysis does not support the hypothesis that wages played an important role in privatization decisions. These results do not change qualitatively if the privatizable group is disaggregated into privatized and not privatized groups. Our study suggests that employment concerns played the key role in selecting firms for privatization, even if efficiency gains had to be sacrificed.
    Keywords: Privatization, Government objectives, Firm behavior, Romania
    JEL: L33 P26
    Date: 2008–12
  2. By: Xu, Yingfeng (University of Alberta, Department of Economics); Yan, Xiaoyi (Department of Human Resources and Social Development Canada)
    Abstract: It is widely accepted that China needs to shift from its past mode of export-led growth and start to rely more on domestic demand. What role could the real appreciation of the Chinese yuan play in this regard? We attempt to quantify the impact on the structure of the Chinese economy of the real appreciation of the Chinese yuan. We argue that the potential of the service sector to generate income and jobs may be significantly under-estimated by official statistics, as a result of the under-estimation of household consumption of services. While there is no evidence of large under-valuation for the Chinese yuan, we do find that a real appreciation in the order of 20% would bring the Chinese price level in line with the world average level, after the Balassa-Samuelson effect is factored in. In turn, such a real appreciation could increase the service share of employment by 7%.
    Keywords: China; real exchange rate; service sector
    JEL: E01 E21 F31 O53
    Date: 2009–02–10
  3. By: Belton Fleisher (Department of Economics, Ohio State University); Xiaojun Wang (Department of Economics, University of Hawaii at Manoa); Haizheng Li (School of Economics, Georgia Institute of Technology); Shi Li (School of Economics and Business, Beijing Normal University)
    Abstract: We apply a semi-parametric latent variable model to estimate selection and sorting effects on the evolution of private returns to schooling for college graduates during China’s reform between 1988 and 2002. We find that there were substantial sorting gains under the traditional system, but they have decreased drastically and are negligible in the most recent data. We take this as evidence of growing influence of private financial constraints on decisions to attend college as tuition costs have risen and the relative importance of government subsidies has declined. The main policy implication of our results is that labor and education reform without concomitant capital market reform and government support for the financially disadvantaged exacerbates increases in inequality inherent in elimination of the traditional "wage-grid."
    Keywords: Return to schooling, selection bias, sorting gains, heterogeneity, financial constraints, comparative advantage, China
    JEL: J31 J24 O15
    Date: 2009–02
  4. By: Juan Carlos Cuestas; Barry Harrison
    Abstract: This paper analyses the empirical fulfilment of the Real Interest Rate Parity (RIRP) theory for a pool of Central and Eastern European Countries. To do so, we apply the recently developed Ng and Perron (2001) unit root tests, that are corrected versions of existing unit root tests and the Kapetanios et al. (2003) unit root test which generalises the alternative hypothesis to the globally stationary smooth transition autoregression model. Our results point to the existence of evidence in favour of the empirical fulfilment of the RIRP, in particular, when taking into account the possibility of nonlinearities in the real interest rate differential.
    Keywords: Real Interest Rate parity, Unit Roots, nonlinearities, Central and East Europe.
    JEL: C32 F15
    Date: 2009–01
  5. By: António Afonso; Christophe Rault
    Abstract: We investigate the existence of Granger-causality between current account and government budget balances over the period 1970-2007, for different EU and OECD country groupings. We use a panel-data approach based on SUR systems and Wald tests with country specific bootstrap critical values. Our results show a causal relation from budget deficits to current account deficits for several EU countries: Bulgaria, Czech Republic, Estonia, Finland, France, Italy, Hungary, Lithuania, Poland, and Slovakia, along the lines of the so-called twin-deficit relationship. Considering the effective real exchange rate in the SUR system does not substantially alter the results.
    Keywords: panel causality tests; budget deficit; external imbalance; real exchange rates; EU; OECD.
    JEL: C23 E62 F32 H62
    Date: 2009–01
  6. By: Pääkkönen, Jenni (BOFIT)
    Abstract: This paper reviews the political economy view of economic growth in post-communist economies making the transition to free markets, focusing on the role of economic policy and institutions. We test the hypothesis that better institutions, measured in terms of economic freedom, contribute to growth. The empirical results from the cross-section of transition economies confirm this hypothesis. The paper concludes that non-linearities are present in the growth model and that differences arise depending on how economic well-being is defined.
    Keywords: growth; institutions; human capital
    JEL: O17 O40 O57
    Date: 2009–02–12
  7. By: Du, Jun; Girma, Sourafel
    Abstract: Using a comprehensive firm-level dataset spanning the period 1998-2005, this paper provides a thorough investigation of the relationship between firm size, total factor productivity growth and financial structure in China, controlling for the endogeneity of the latter. Generally, it finds financing source matters for firms of different size, and the extent to which financing source matters for firm growth is greater for small firms than big firms. Self-raised finance appears to be most effective in promoting small firms to grow, and bank loan seems to be more supportive to big firms. The relationship between size, finance and growth also depends on ownership. In addition, there exist strong complementarities between formal and informal finance, as well as between indigenous and foreign finance.
    Keywords: China, finance, firm size, growth
    Date: 2009
  8. By: Yu-Wei Hu; Fiona Stewart
    Abstract: China currently has a highly diversified structure of pension regulation and supervision. In this paper we first review the legal framework of private pension fund regulation and supervision in other economies, including Australia, Chile, Hong Kong China, Poland, Turkey, the United Kingdom and the United States. Then, based on international practices and experiences identified, and taking into account China‘s unique situation, we examine potential ways to improve the current private pension regulatory and supervisory structure in the country.<P>Réglementation des agréments et structure de contrôle des pensions privées : Pratiques à l’échelle internationale et implications pour la Chine<BR>La structure actuelle de réglementation et de contrôle des pensions en Chine est très hétérogène. Le présent rapport examine, dans un premier temps, le cadre juridique de la réglementation et du contrôle des pensions privées dans d'autres pays, comme l'Australie, le Chili, Hong Kong-Chine, la Pologne, la Turquie, le Royaume-Uni et les États-Unis. Ensuite, en s'appuyant sur les pratiques recensées à l'échelle internationale et sur la situation particulière de la Chine, il étudie les possibilités d'amélioration de la structure de réglementation et de contrôle des pensions privées actuellement en vigueur dans le pays.
    Keywords: private pensions, pension privée, licensing, China, plans de pensions professionnelles, enterprise annuity, Chine, pension regulation, réglementation des pensions, supervisory structure, structure de contrôle, agrément
    JEL: G23 I32
    Date: 2009–01
  9. By: Jin Feng; Lixin He; Hiroshi Sato
    Abstract: We relate household saving to pension reform, to explain the high household saving rates in urban China from a new perspective. We use the exogenous-policy induced-variation in pension wealth to explicitly estimate the impact of pension wealth on household saving, and obtain a significant offset effect of pension wealth on household saving. Our estimations show that pension reform boosted the household saving rate in 1999 by about 6 percentage points for cohort aged 25-29 and by about 3 percentage points for cohort aged 50-59. Our results also indicate that declining pension wealth reduces expenditure on education and health more than on other consumption items.
    Keywords: pension reform, pension wealth, household saving rate, urban China
    JEL: E21 H55 P43
    Date: 2009–02
  10. By: Judit Karsai (Institute of Economics - Hungarian Academy of Sciences)
    Abstract: The current downturn in the American and Western European economies, combined with increasing regulatory pressure on private equity throughout the developed world, made emerging markets an attractive destination for private equity. As part of the emerging markets, Central and Eastern Europe's (CEE) private equity industry was an accidental beneficiary of this development. The attractiveness of the CEE markets was also boosted by the fact that value added resulted from the organic growth of the companies, rather than from leverage utilisation. As a result of the crisis in autumn 2008, the growth financed by loans itself became a synonym of the risk. Consequently the CEE countries as parts of emerging markets were handicapped, irrespective of the already applied greatest cautiousness of investors and the relatively deteriorated availability and higher interest rates of provided loans in the region. Since the majority of high volume capital raised recently by private equity funds in the CEE region still expected to be invested, it is not likely that the cutback of private equity financing in the CEE countries will be as radical as it was in the developed markets. The Golden Age of the private equity investments in the CEE region, however, ended in the autumn of 2008. The paper forecasts the future developments of the private equity industry in the CEE region, based on a detailed analysis of the five years' tendencies. The paper reviews within an international surrounding the changes in the volume and structure of raised regional funds, as well as the actual investment trends by the related countries and sectors. The study provides several examples for the applied individual corporate level investments strategies of private equity investors in the CEE region. The chosen exit routes and returns received by regional private equity investors are also illustrated with actual examples. The final part of the analysis speculates on the future effects of the global financial crisis and recession on the private equity industry of the CEE region.
    Keywords: Venture Capital, Private Equity, Central Eastern Europe (CEE), International Asset Allocation, Institutional Investors, Merger & Acquisition, Corporate Restructuring
    JEL: G23 G24 G34 M13
    Date: 2009–01
  11. By: Kamila Fialová (Komerční Banka, Prague; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Martina Mysíková (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Institute of Sociology of the Academy of Sciences, Prague)
    Abstract: This paper aims to quantify the impact of the minimum wage on labour market performance in the Czech Republic. Using regional data for 1995-2004, it estimates the effect of the minimum wage adjusted for regional wage differential on the regional unemployment. Consequently, using detail individual data from 2004/2005, we analyze the annual hikes in the minimum wage that allow us to estimate employment probabilities for workers with wage level at, or close to, the new minimum wage. The aim is to reveal whether the most endangered groups of workers exhibited significantly different employment probabilities. Our results reveal that the minimum wage has had a significant impact on increasing regional unemployment and reducing the employment probabilities of low-paid workers.
    Keywords: minimum wage, employment probability, unemployment
    JEL: E24 J38 J64
    Date: 2009–02
  12. By: Monika Slabá (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: In the article, I focus on the goal of creating a single competitive European natural gas market. After a brief discourse on the debate between theoretical and practical economists on the best mode to liberalise the energy sector, I lay out the vision of the European Union for gas market liberalisation and its outcome. With the help of a case study from the Czech Republic, I explain that the competencies of the European Union to reach its goals in a sufficient way are limited and, moreover, that EU reforms may even create unintended, negative side effects, which in some cases deliver less benefits than costs. The cause is the basic features – or the “nature” - of the gas market and the different institutional settings of each member state within which liberalisation has been implemented. The third package of legislation introduced by the European Commission in September 2007 should boost the single competitive market. Proposed provisions influence legal andregulatory rules and have an impact on market structure; however, none of these provisions have the power to change the key characteristics of the gas market, which remain the real source of the problem, namely the lack of self-sufficiency of the EU with regard to sources of natural gas and the oligopoly nature of important gas producers out of reach of EU legislation. The impossibility to change these key characteristics of the gas market indicates that a more important challenge than the third package will be active foreign policy of the EU, aimed either at opening markets beyond the EU border or at protecting fragile competition.
    Keywords: gas sector, liberalisation, unbundling, market structure, market performance, European Union, Czech Republic
    JEL: G34 L1 L43 L95
    Date: 2009–02
  13. By: Artur Tamazian; B. Bhaskara Rao
    Abstract: Several studies have examined the relationship between environmental degradation and economic growth. However, most of them did not take into account financial developments and institutional quality. Moreover, Stern (2004) noted that there are important econometric weaknesses in the earlier studies, such as endogeneity, heteroscedasticity, omitted variables, etc. The purpose of this paper is to fill this gap in the literature by investigating the linkage between not only economic development and environmental quality but also financial development and institutional quality. We employ the standard reduced-form modelling approach to control for country-specific unobserved heterogeneity and GMM estimation to control for endogeneity. Our study considers 24 transition economies and panel data for 1993-2004. Our results support the EKC hypothesis while confirming the importance of both institutional quality and financial development for environmental performance. We also found that financial liberalization may be harmful for environmental quality if it is not accomplished in a strong institutional framework.
    Keywords: Environmental Degradation, Economic Development, Financial Development, Institutional Quality, EKC.
    JEL: O13 P28 Q53 Q56
    Date: 2009–02–02
  14. By: Martin Schaaper
    Abstract: This working paper provides input to the OECD Review of Innovation Policy for China (OECD, 2008), which was released in September 2008. Science and technology (S&T) have been pinpointed by the Chinese State Council as a key driving force for sustainable economic growth and the transformation of China into an innovation-oriented nation on the basis of the development of a national innovation system with strong indigenous innovation capacity. One of the targets set in the National Guidelines for the Medium- and Long-term Plan for Science and Technology Development (2006-20) is to raise the ratio of R&D to GDP to 2% by 2010 and to 2.5% or more by 2020. This is an extremely ambitious target, as it implies the need for R&D expenditure to increase by at least 10-15% annually.<P>Évaluation du système d'innovation de la Chine : Spécificités nationales et comparaisons internationales<BR>Ce document de travail est une contribution à la Revue de l’OCDE sur les politiques d’innovation pour la Chine (OCDE, 2008) qui a été publiée en septembre. La science et la technologie (S-T) ont été identifiées par le Conseil d’État chinois comme étant des ressorts essentiels pour l’instauration d’une croissance économique durable et la transformation de la Chine en un pays orienté vers l’innovation grâce à la mise en oeuvre d’un système national d’innovation doté d’une solide capacité d’innovation propre. Les lignes directrices nationales pour les programmes à moyen et long termes de développement de la science et de la technologie (2006-2020) ont notamment pour objectif de porter la R-D à 2 % du PIB d’ici 2010 et à 2,5 % ou plus d’ici 2020. Il s’agit là d’un objectif extrêmement ambitieux qui suppose que les dépenses de R-D augmentent d’au moins 10 à 15 % par an de manière continue.
    Date: 2009–01–15
  15. By: Ludmila Fadejeva; Aleksejs Melihovs
    Abstract: This paper aims at characterising fluctuations of economic activity that are common for the Baltic States, CEE countries, euro area countries and Russia. The real standardised GDP quarterly growth is chosen as an indicator of economic development of the countries. Three methods are employed: static factor analysis, dynamic factor model and dynamic correlation. Special attention is given to the analysis of Latvian economy. The results of the study show that the Baltic economies are similar in economic development and share a common factor. After 2000, the real standardised GDP growth in the Baltic States became more correlated with the GDP growth of the main euro area countries indicating growing synchronisation of economic development between these country groups. The role of the main final demand components (exports, consumption and investment) in explaining common fluctuations in the real standardised GDP growth in the Baltic States is evaluated by analysing common factors for each component and dynamic correlation between components for each country.
    Keywords: business cycle synchronisation, dynamic factor model, dynamic correlation
    JEL: E32 F20 C10
    Date: 2008–05–05
  16. By: Helmuts Azacis (Cardiff Business School); Max Gillman (Cardiff Business School, Institute of Economics - Hungarian Academy of Sciences)
    Abstract: The paper presents an endogenous growth economy with a representation of the tax rate system in the Baltic countries. Assuming that government spending is a given fraction of output, the papershows how a flat tax system balanced between labor and corporate tax rates can be second best optimal. It then computes how actual Baltic tax reforms from 2000 to 2007 affect the growth rate and welfare, including transition dynamics. Comparing the actual reform effects to hypothetical tax experiments, it results that equal flat tax rates on personal and corporate income would have increased welfare in all three Baltic countries by 24% more on average than the actual reforms. This shows how equal, balanced, flat rate taxes can be optimal in both theory and practice. Further, movement towards a more equal balance between labor and capital tax rates, through changing just one tax rate, achieved almost as high or higher utility gains as in actual law for all three countries under both open and closed economy cases. This shows benefits of moving towards the optimum.
    Keywords: tax reform, endogenous growth, transitional dynamics, flat taxes
    JEL: E13 H20 O11 O14
    Date: 2008–12
  17. By: Enjing Li; Paavo Suni; Yanyun Zhao
    Abstract: ABSTRACT : This study focuses on the labour cost competitiveness of fabricated metal industry in China and Finland in particular, using the corresponding German, the US and Estonian industries as a point of comparison in the early 2000s. This study deepens the analysis of the earlier study of the cost competitiveness of the manufacturing industries in the same group of countries. Separate studies focusing on the labour cost competitiveness are carried out in a parallel manner on the paper and pulp and metal industries. The results of these three sector studies deepen the knowledge about the change of competitiveness and its level. Large unit labour cost differences in a common currency were obviously a key factor behind exceptionally rapidly changing international production and trade structures in the late 1990s and early 2000s. The Chinese fabricated metal industry grew by about 22 per cent per year in 2000-2007 as the average annual growth of the value added of world manufacturing volume was only 3 per cent in 2000-2006. Nominal wages as such do not imply good international competitiveness. Chinese wages are, however, low even if their low labour productivity is taken into account and costs per unit of production are compared in a common currency. The relative levels of the Chinese unit labour costs vis-à-vis Germany, using the unit value ratios (UVR) to make the production volumes comparable, were estimated to be about 2 per cent in the fabricated metal industry. The ratio has even declined in early 2000s and has stayed relatively stable after that till 2007. Improving labour productivity in China had compensated for the effects of rapidly rising wages and an appreciating Renminbi. The outlook of the fabricated metal industry is clouded by the difficult global financial crisis, which strongly restricts export possibilities and dampens also the domestic markets of industry. On the other hand the stimulus packages of the government target especially the key demand sectors of the fabricated metal industry.
    Keywords: competitiveness, unit value ratio, UVR, fabricated metal industry, NACE 28
    Date: 2008–12–31
  18. By: Benedikt Schnellbächer; Johannes Stephan
    Abstract: We integrate international business theory on foreign direct investment (FDI) with institutional theory on intellectual property rights (IPR) to explain characteristics and behaviour of foreign investment subsidiaries in Central East Europe, a region with an IPR regime-gap vis-à-vis West European countries. We start from the premise that FDI may play a crucial role for technological catch-up development in Central East Europe via technology and knowledge transfer. By use of a unique dataset generated at the IWH in collaboration with a European consortium in the framework of an EU-project, we assess the role played by the IPR regimes in a selection of CEE countries as a factor for corporate governance and control of foreign invested subsidiaries, for their own technological activity, their trade relationships, and networking partners for technological activity. As a specific novelty to the literature, we assess the in influence of the strength of IPR regimes on corporate control of subsidiaries and conclude that IPR-sensitive foreign investments tend to have lower functional autonomy, tend to cooperate more intensively within their transnational network and yet are still technologically more active than less IPR-sensitive subsidiaries. In terms of economic policy, this leads to the conclusion that the FDI will have a larger developmental impact if the IPR regime in the host economy is sufficiently strict.
    Keywords: Foreign Direct Investment, Intellectual Property Rights, Technology Transfer, Corporate Governance and Control, R&D and Innovation
    JEL: F21 F23 O31 O34
    Date: 2009–02
  19. By: Pavel Ciaian; d'Artis Kancs
    Abstract: This study investigates the impact of the SAPS (Simplified Area Payment Scheme) on rental land values in seven New EU Member States (NMS). Using the FADN farm level panel data with 20,930 observations from 2004 and 2005 we are able to control for unobserved heterogeneity, simultaneity, and omitted variable bias, which often distort the incidence measures. According to our results, the SAPS has a positive and statistically significant impact on land rents in the NMS. However, the effect is smaller than theoretically predicted. Land rents capture only 0.19 of the marginal Euro of the SAPS. Taking into account the level of land renting in the NMS, around 10 percent of the total value of SAPS payments benefit non-farming land owners through higher farmland rental prices. Because the share of rented land is higher for corporate than for individual farms, family farms will likely benefit more from the SAPS than corporate farms.
    Keywords: Area payments, land capitalisation, land market.
    JEL: Q11 Q12 Q15 Q18 P32
    Date: 2009–02–04
  20. By: Kateřina Pavloková (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: Growing concern about future sustainability of public budgets in the context of population ageing has given rise to a large debate on the role of age in the context of health care expenditure. Growing evidence on the so called death related costs hypothesis arguing that the positive relationship between age of the cohort and related health care expenditure is the result of growing probability of death changes in an important manner the results of the projections. The aim of this paper is to explore the importance of the death related costs hypothesis in the Czech health expenditure data and the impact of the hypothesis on the projection of the financial sustainability of the Czech health care system.
    Keywords: health care, last year of life, financial sustainability
    JEL: H51
    Date: 2009–02

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