nep-tra New Economics Papers
on Transition Economics
Issue of 2010‒07‒17
eighteen papers chosen by
J. David Brown
Heriot-Watt University

  1. Spatial complementarity of FDI: example of transition countries By Oleksandr Shepotylo
  2. Production Efficiency versus Ownership: The Case of China By Shiu, Alice; Zelenyuk, Valentin
  3. The Puzzle of Migrant Labour Shortage and Rural Labour Surplus in China By John Knight; Deng Quheng; Li Shi
  4. China has reached the lewis turning point By Zhang, Xiaobo; Yang, Jin; Wang, Shenglin
  5. Shadow Economies All over the World: New Estimates for 162 Countries from 1999 to 2007 By Friedrich Schneider; Andreas Buehn; Claudio E. Montenegro
  6. The evolution of durable goods demand during China’s transition. An empirical analysis of household survey data from 1989 to 2006 By Andreas Beerli
  7. The Transmission of Shocks to the Chinese Economy in a Global Context: A Model-Based Approach By Jeannine Bailliu; Patrick Blagrave
  8. Three essays in applied empirical economics By Ebner, André
  9. Dynamic agricultural supply response under economic transformation By Yu, Bingxin; Liu, Fengwei; You, Liangzhi
  10. Country-level impact of global recession and China’s stimulus package By Diao, Xinshen; Zhang, Yumei; Chen, Kevin Z.
  11. The determinants of cross-border bank flows to emerging markets: new empirical evidence on the spread of financial crises By Sabine Herrmann; Dubravko Mihaljek
  12. Milk Market Integration between Hungary and Poland By Bakucs, Zoltan; Falkowski, Jan; FertÅ, Imre
  13. The State of Collective Bargaining and Worker Representation in Germany: The Erosion Continues By Addison, John T.; Bryson, Alex; Teixeira, Paulino; Pahnke, André; Bellmann, Lutz
  14. Positional spending and status seeking in rural China By Brown, Philip H.; Bulte, Erwin; Zhang, Xiaobo
  15. Nominal Uncertainty and Inflation: The Role of European Union Membership By Kyriakos C. Neanidis; Christos S. Savva
  16. Environmental Regulation and Competitiveness: Evidence from Romania By Caporale, Guglielmo Maria; Rault, Christophe; Sova, Robert; Sova, Ana Maria
  17. Choosing between foreign investment and subcontracting: Strategies of Italian firms in Romania By Tattara, Giuseppe
  18. The poverty reduction capacity of private and public transfers in transition By Paolo Verme

  1. By: Oleksandr Shepotylo (Kyiv School of Economics, Kyiv Economics Institute)
    Abstract: This paper investigates spatial determinants of FDI location. In particular, FDI in neighboring countries and foreign market potential are two variables it focuses on. The sample includes a panel of 27 transition countries in 1993-2007. The spatial links are found positive and economically large. Omitting spatial FDI leads to a serious misspecication of the model and biases estimation of the coecient of the foreign market potential variable, which is found to be a non-robust determinant of FDI location. As the analysis of sub-samples of the data indicates, the FDI complementarity is stronger for the CIS countries and for earlier period. The spatial complenmentarity is stronger for disaggregated data such as bilateral FDI flows and industry level data. I nd substantial heterogeneity of spatial FDI spillovers across indus- tries. Spillovers are large and positive for services sectors and non-sighicant or even negative for manufacturing sectors.
    Keywords: foreign direct investments, spatial econometrics, transition
    JEL: C21 F21 P33
    Date: 2010–06
  2. By: Shiu, Alice; Zelenyuk, Valentin
    Abstract: In this study, we explore the pattern of efficiency among enterprises in China’s 29 provinces across different ownership types in heavy and light industries and across different regions (coastal, central and western). We do so by performing a bootstrap-based analysis of group efficiencies (weighted and non-weighted), estimating and comparing densities of efficiency distributions, and conducting a bootstrapped truncated regression analysis. We find evidence of interesting differences in efficiency levels among various ownership groups, especially for foreign and local ownership, which have different patterns for light and heavy industries.
    Keywords: Efficiency; Data envelopment analysis; Bootstrapping; Ownership; China
    JEL: C13 C15 D24 O4 O12
    Date: 2009–08–01
  3. By: John Knight; Deng Quheng; Li Shi
    Abstract: The paper examines the contentious issue of the extent of surplus labour that remains in China. China was an extreme example of a surplus labour economy, but the rapid economic growth during the period of economic reform requires a reassessment of whether the second stage of the Lewis model has been reached or is imminent. The literature is inconclusive. On the one hand, there are reports of migrant labour scarcity and rising migrant wages; on the other hand, estimates suggest that a considerable pool of relatively unskilled labour is still available in the rural sector. Yet the answer has far-reaching developmental and distributional implications. After reviewing the literature, the paper uses the 2002 and 2007 national household surveys of the Chinese Academy of Social Sciences to analyse and explain migrant wage behaviour, to predict the determinants of migration, and to examine the size and nature of the pool of potential rural-urban migrants. An attempt is also made to project the rural and urban labour force and migration forward to 2020, on the basis of the 2005 one per cent Population Survey. The paper concludes that for institutional reasons both phenomena are likely to coexist at present and for some time in the future.
    Keywords: China, Demographic transition, Labour market, Lewis turning point, Migrant wages, Migrant workers, Surplus labour
    JEL: J11 J31 J61 O11 O17
    Date: 2010
  4. By: Zhang, Xiaobo; Yang, Jin; Wang, Shenglin
    Abstract: In the past several years, labor shortages in China have become an issue. However, there is heated debate as to whether China has passed the Lewis turning point and moved from a period of unlimited supply to a new era of labor shortage. Most empirical studies on this topic focus on estimation of total labor supply and demand. Yet the poor quality of China’s labor statistics leaves the debate open. In this paper, China’s position along the Lewis continuum is examined though primary surveys of wage rates, which offer a more reliable statistic than employment data. Our results show a clear rising trend in real wage rates since 2003. The acceleration of real wages even in slack seasons indicates that the era of surplus labor is over. This finding has important policy implications for China’s future development.
    Keywords: dual economy, employment data, Labor market, Lewis model, Supply and demand, surplus labor, wage rates,
    Date: 2010
  5. By: Friedrich Schneider; Andreas Buehn; Claudio E. Montenegro
    Abstract: This paper presents estimations of the shadow economies for 162 countries, including developing Eastern European, Central Asian, and high-income countries over the period 1999 to 2006/2007. According to the estimations, the average size of the shadow economy (as a percentage of "official" gross domestic product) in 2006 in 98 developing countries is 38.7 percent; in 21 Eastern European and Central Asian (mostly transition) countries, it is 38.1 percent, and in 25 high-income countries, it is 18.7 percent. The authors find that the driving forces of the shadow economy are an increased burden of taxation (both direct and indirect), combined with labor market regulations and the quality of public goods and services, as well as the state of the “official” economy.
    Keywords: shadow economy of 162 countries, tax burden, quality of state institutions, regulation, MIMIC and other estimation methods.
    JEL: O17 O5 D78 H2 H11 H26
    Date: 2010–07
  6. By: Andreas Beerli
    Abstract: Durable goods ownership is commonly seen as a ‘defining gauge’ for the stage of development of a country. Its unprecedented economic growth and the rise of a strong and steadily growing class of consumers make China a formidable case study for the investigation of durable goods diffusion. Drawing on a household-panel with a survey period from 1989 to 2006, the empirical analysis of the driving forces behind the diffusion of durable goods shows that growth of disposable income was not equally important for all goods in their diffusion process. Rather it was the fall of individual preference thresholds (explained in part by falling durable prices) that proved to have a significant influence on the diffusion process of some goods. As it turned out, this tendency was significantly stronger in rural areas and could have counterbalanced, therefore, welfare patterns in terms of ownership contrary to the stable urban-rural gap in economic performance. Apart from changes in income and durable prices, it was found, that improvement of public services had particularly strong effects for urban poor and in rural areas. A forecast exercise up to 2030 revealed that growth in ownership rates is expected to be particularly strong for durable goods like refrigerators and cars for which households already show (or are about to do so in the case of cars) high sensitivity towards further increases in their disposable income. For other durables, like colour TVs, that are already well spread in the population there are signs of saturation with lower expected growth rates of ownership. Additionally, ownership rates are expected to pick up stronger in rural areas were households are less saturated and show higher income elasticities. As a comparison with figures from the literature demonstrates, actual and projected ownership rates depend, to some degree, also on the choice of the data set. The projections based on CHNS data could, therefore, build a reference to other commonly used data sets from the Chinese National Bureau of Statistics.
    Keywords: Durable consumption in China, ownership analysis and forecast, household panel data
    JEL: C53 D12 E21 O16 Q56
    Date: 2010–07
  7. By: Jeannine Bailliu; Patrick Blagrave
    Abstract: To better understand the dynamics of the Chinese economy and its interaction with the global economy, the authors incorporate China into an existing model for the G-3 economies (i.e., the United States, the euro area, and Japan), paying particular attention to modelling the exchange rate and monetary policy in China. Their findings suggest that the Chinese economy adjusts more slowly to shocks, compared to the large advanced economies, because monetary policy is less effective and the real exchange rate more persistent. In addition, the authors’ model underscores the importance of spillovers from China to the G-3 economies, and vice versa, thus highlighting the need to analyze the Chinese economy in a global context.
    Keywords: Economic models; International topics; Business fluctuations and cycles; Exchange rate regimes
    JEL: E32 E52 F41
    Date: 2010
  8. By: Ebner, André
    Abstract: Each of the three chapters of this thesis is related to a specific aspect of financing and concerns, respectively, governments, corporations, and households. The first chapter studies the determinants of euro-denominated Central and Eastern European (CEE) government bond spreads that reflect the financing costs incurred by these countries. The second chapter turns to the corporate sector and analyses whether corporate debt markets in the euro area are converging. In this way we assess whether corporations face similar financing conditions with respect to bank loan and bond interest rates. Chapter 3 investigates households’ withdrawing of home equity to access their housing wealth as an additional source of finance. The three chapters of this thesis are self-contained and can be read independently of each other.
    Keywords: government bond spreads; loan and bond market integration; home equity withdrawal
    Date: 2010–01–25
  9. By: Yu, Bingxin; Liu, Fengwei; You, Liangzhi
    Abstract: China has experienced dramatic economic transformation and is facing the challenge of ensuring steady agricultural growth. This study examines the crop sector by estimating the supply response for major crops in Henan province from 1998 to 2007. We use a Nerlovian adjustment adaptive expectation model. The estimation uses dynamic Generalized Method of Moments (GMM) panel estimation based on pooled data across 108 counties. We estimate acreage and yield response functions and derive the supply response elasticities. This research links supply response to exogenous factors (weather, irrigation, government policy, capital investment, and infrastructure) and endogenous factors (prices). The significant feature of the model specification used in the study is that it addresses the endogeneity problem by capturing different responses to own- and cross-prices. Empirical results illustrate that there is still great potential to increase crop production through improvement of investment priorities and proper government policy. We confirm that farmers respond to price by both reallocating land and more intensively applying non-land inputs to boost yield. Investment in rural infrastructure, human capacity, and technology are highlighted as major drivers for yield increase. Policy incentives such as taxes and subsidies prove to be effective in encouraging grain production.
    Keywords: acreage and yield response, dynamic panel model, Generalized Method of Moments (GMM), supply elasticity,
    Date: 2010
  10. By: Diao, Xinshen; Zhang, Yumei; Chen, Kevin Z.
    Abstract: A dynamic computable general equilibrium model is developed to assess the impact of the recent global recession and the Chinese government’s stimulus package on China’s economic growth. The model is first used to capture the actual sector-level economic growth in 2008 and the possible economic performance in 2009 without the intervention of the Chinese government through its stimulus package. Under this global recession scenario, the GDP growth rate in 2009 falls to 2.9 percent mainly as a result of the sharp drop in exports of manufactured goods, while the agricultural sector is more crisis-resilient. Because export-oriented manufacturing sectors are often import-intensive, the weakened economy is accompanied by a reduction in Chinese firms’ import demand for materials, intermediates, and capital goods. The model also shows that without government intervention, the negative effect of a one-year shock on the Chinese economy would last for many years. Also, over the next five to six years, China is unlikely to replicate its strong economic performance of the past two decades. China’s stimulus package is modeled through increased investment financed by government resources. With additional demand on investment goods, growth in the investment-related production sector is stimulated. Through the cross-sector linkages in a general equilibrium model, the demand for other noncapital goods increases, thus stimulating growth in these sectors. As production of more industrialized sectors starts to grow, so will households’ income and consumption, providing market opportunities for those agricultural and service sectors that mainly produce for the domestic market. Under the stimulus scenario, the Chinese economy is expected to grow 8–10 percent in 2009 and the succeeding years. The growth engine in this case differs from that before 2008: growth is led by domestic demand, while trade still falls significantly in 2009 (instead of the double-digit growth before 2008). Domestic demand-driven stimulus growth creates jobs, and hence it increases income for both urban and rural households. The model is also used to measure the overall gains of the stimulus package by comparing GDP between the two scenarios. Without considering the productivity-enhancing role of public investment as part of the stimulus package (which is important for long-term growth but unlikely to happen in the short run), the cumulative difference of the GDP between the two scenarios over the next seven years is about RMB76 trillion, which is about three times more than the GDP in 2007.
    Keywords: China stimulus package, Development strategies, general equilibrium modeling, global financial crisis,
    Date: 2010
  11. By: Sabine Herrmann; Dubravko Mihaljek
    Abstract: This paper studies the nature of spillover effects in bank lending flows from advanced to the emerging market economies and identifies specific channels through which such effects occur. Based on a gravity model we examine a panel data set on cross-border bank flows from 17 advanced to 28 emerging market economies in Asia, Latin America and central and eastern Europe from 1993 to 2008. The empirical analysis suggests that global as well as country specific factors are significant determinants of cross-border bank flows. Greater global risk aversion and expected financial market volatility seem to have been the most important factors behind the decrease in cross-border bank flows during the crisis of 2007-08. The decrease in cross-border loans to central and eastern Europe was more limited compared to Asia and Latin America, in large measure because of the higher degree of financial and monetary integration in Europe, and relatively sound banking systems in the region. These results are robust to various specification, sub-samples and econometric methodologies.
    Keywords: gravity model, cross-border bank flows, financial crises, emerging market economies, spillover effects, panel data
    Date: 2010–07
  12. By: Bakucs, Zoltan; Falkowski, Jan; FertÅ, Imre
    Abstract: In this paper we test the retail milk price integration between two countries, Poland and Hungary. Conventional linear cointegration methods do not reveal any relationship between the two prices, therefore we apply Gonzalo and Pitakaris (2006) method to test the linear cointegration null against the threshold cointegration with an exogenous threshold variable alternative hypothesis. Our results show, that the Hungarian Forint â Polish Zloty exchange rate is econometrically an appropriate threshold variable, the linearity null is rejected, and the two alternative regimes may be characterised with different long-run equilibrium relationships. Corresponding trade data however questions the economic appropriateness of the selected threshold variable. Further research is needed to analyse the actual effective milk trade flows between the two countries, subject to exchange rate variations.
    Keywords: horizontal integration, milk market, threshold cointegration, Food Security and Poverty,
    Date: 2010–03–29
  13. By: Addison, John T. (University of South Carolina); Bryson, Alex (National Institute of Economic and Social Research); Teixeira, Paulino (University of Coimbra); Pahnke, André (IAB, Nürnberg); Bellmann, Lutz (IAB, Nürnberg)
    Abstract: This paper investigates trends in collective bargaining and worker representation in Germany from 2000 to 2008. It seeks to update and widen earlier analyses pointing to a decline in collective bargaining, while providing more information on the dual system as a whole. Using data from the IAB Employment Panel and the German Employment Register, we report evidence of a systematic and continuing erosion of the dual system. Not unnaturally the decline is led by developments in western Germany. Arguably, the path of erosion will continue until rough and ready convergence is reached with eastern Germany. Expressed differently, if the process of decentralization underpinning these developments once was ‘regulated’ it no longer appears to be so.
    Keywords: erosion of the dual system, collective bargaining/works council coverage, eastern and western Germany, institutional transitions, permanent stayers, newly-founded firms, closing/failing firms
    JEL: J50 J53
    Date: 2010–06
  14. By: Brown, Philip H.; Bulte, Erwin; Zhang, Xiaobo
    Abstract: Focusing on a remote area in rural China, we use a panel census of households in 26 villages to show that socially observable spending has risen sharply in recent years. We demonstrate that such spending by households is highly sensitive to social spending by other villagers. This suggests that social spending is either positional in nature (that is, motivated by status concerns) or subject to herding behavior. We also document systematic relations between social spending and changes in higher order terms of the income distribution. In particular, and consistent with theories of rank-based status seeking, we find the poor increase spending on gifts as the income distribution tightens so that local competition for status intensifies. In addition families of unmarried men (who face grim marriage prospects given China’s high sex ratios, especially in poor areas) intensify their competition for status by increasing their spending on weddings. The welfare implications of spending in order to “keep up with the Joneses” are potentially large, particularly for poor households.
    Keywords: Positional spending, Poverty, Rural-urban linkages, status,
    Date: 2010
  15. By: Kyriakos C. Neanidis; Christos S. Savva
    Abstract: Using a GARCH model we provide evidence that higher inflation uncertainty leads to higher inflation in the new European Union (EU) member states and candidate countries only prior to EU accession. During EU accession and entry inflation uncertainty has no effect on mean inflation. This result supports the consideration of policy regime shifts in assessing the nominal uncertainty-average inflation relationship.
    Date: 2010
  16. By: Caporale, Guglielmo Maria (Brunel University); Rault, Christophe (University of Orléans); Sova, Robert (CREST & University of Paris 1 Panthéon-Sorbonne); Sova, Ana Maria (CREST & University of Paris 1 Panthéon-Sorbonne)
    Abstract: According to the pollution haven hypotheses differences in environmental regulation affect trade flows and plant location. Specifically, environmental stringency should decrease exports and increase imports of "dirty" goods. This paper estimates a gravity model to establish whether the implementation of more stringent regulations in Romania has indeed affected its competitiveness and decreased exports towards its European trading partners. Our findings do not provide empirical support to the pollution haven hypothesis, i.e. environmental stringency is not found to affect significantly total trade, or its components (pollution intensive trade and pollution intensive trade related to non-resource-based trade).
    Keywords: environmental stringency, competiveness, gravity model
    JEL: F14 Q28
    Date: 2010–06
  17. By: Tattara, Giuseppe
    Abstract: Vertical disintegration in most industries and the globalization of markets has led to significant changes in the pattern of international division of labour among manufacturing firms. At the same time increased competition from low cost producers, exchange rate constraints, the opening up of CEE countries have had huge consequences for the Italian industrial system. This paper deals with the Veneto footwear, furniture and refrigeraion industries and examines the effects of foreign direct investments and subcontracting in Romania. The reorganization of the division of labour, in the most dynamic suppliers induced a change in the “nature of subcontracting”, upgrading along the ladder of the value chain as more and more operations are offshored.
    Keywords: Foreign direct investment; International subcontracting;
    JEL: D23 F16 F23
    Date: 2010–06–28
  18. By: Paolo Verme (University of Torino)
    Abstract: The transitional economies of the Former Soviet Union (FSU) have enjoyed an extraordinary period of growth and poverty reduction between 2000 and 2007 and this occurred in concomitance with significant increases in private and public transfers to households. The paper assesses the relative importance of these transfers for welfare and poverty in Moldova, the poorest country in Europe. A longitudinal analysis based on panel data reveals that private transfers and social insurance transfers are effective in improving welfare and reducing poverty whereas social assistance transfers have little or no effect. Social insurance and social assistance seem to have swapped roles. Social insurance is most relevant for lifting people out of poverty while social assistance - if anything - has a small role in protecting the non-poor from falling into poverty. We also find that the different types of transfers do not crowd-out each other and that social insurance may in fact reinforce the capacity of private transfers to reduce poverty. Such findings have several policy implications for the near future: a) Poor households in FSU transitional economies remain highly vulnerable to shocks in public and private transfers; b) the 2008-2009 recession is likely to expose this vulnerability and result in a surge in poverty larger than expected and c) the social assistance systems remain in great need of pro-poor reforms and cannot currently provide an adequate protection from economic shocks.
    Keywords: Private transfers, social insurance, social assistance, transitional economies.
    JEL: H5 I3 O1 P2
    Date: 2010

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