nep-tra New Economics Papers
on Transition Economics
Issue of 2010‒08‒14
seventeen papers chosen by
J. David Brown
Heriot-Watt University

  1. Human Development in Eastern Europe and the CIS Since 1990 By Elizabeth Brainerd
  2. Misuse of Institutions: Lessons from Transition By Polishchuk, Leonid
  3. Foreign News and Spillovers in Emerging European Stock Markets By Evzen Kocenda; Jan Hanousek
  4. Exploiting Energy and Mineral Resources in Central Asia, Azerbaijan and Mongolia By Richard Pomfret
  5. Methodologies of Analyzing Inter-Regional Income Inequality and Their Applications to Russia By Konstantin Gluschenko
  7. Gender Unemployment Gaps: Evidence from the New EU Member States By Alena Bicakova
  8. How has the financial crisis affected the Eurozone Accession Outlook in Central and Eastern Europe? By John Lewis
  9. Analysing currency risk premia in the Czech Republic, Hungary, Poland and Slovakia By András Rezessy
  10. The VARying Effect of Foreign Shocks in Central and Eastern Europe By Rebeca Jimenez-Rodriguez; Amalia Morales-Zumaquero; Balazs Egert
  11. Catching-up and inflation in Europe: Balassa-Samuelson, Engel’s Law and other Culprits By Balazs Egert
  12. An Empirical Analysis of Income Convergence in the European Union By Laurent Cavenaile; David Dubois
  13. Youth Labour Markets in Europe and Central Asia By Niall O’Higgins
  14. Environmental Regulation and Competitiveness: Evidence from Romania By Guglielmo Caporale; Christophe Rault; Robert Sova; Anamaria Sova
  15. "Assessing the Returns to Education in Georgia" By Tamar Khitarishvili
  16. College Degree Supply and Occupational Allocation of Graduates the Case of the Czech Republic By Barbara Gebicka
  17. Does FDI spur innovation, productivity and knowledge sourcing by incumbent firms? Evidence from manufacturing industry in Estonia By Priit Vahter

  1. By: Elizabeth Brainerd (Brandeis University)
    Abstract: This paper examines changes in human development in Eastern Europe and the Commonwealth of Independent States (CIS) since 1990. Three main areas of human development in the region are discussed in detail: (i) changes in wage and income inequality; (ii) trends in mortality and life expectancy; and (iii) changes in political participation and empowerment. While all countries experienced declines in income, rising unemployment and increased inequality in the 1990s, by 2008 most countries had reached or surpassed their pre-transition levels of income per capita, and unemployment and inequality had declined or at least stabilized. Life expectancy declined sharply in the former Soviet Union in the 1990s and remains at low levels. In contrast, life expectancy across Eastern Europe has risen dramatically. Political trends have also diverged across the region, with most East European countries and the Baltics now considered to be reasonably well-functioning democracies, while a number of CIS countries have lost most of the gains in democratization achieved in the 1990s and turned toward authoritarianism.
    Keywords: wage inequality, mortality, gender, empowerment, transitional economies
    JEL: J10 J31 P36
    Date: 2010–07
  2. By: Polishchuk, Leonid
    Abstract: The paper explores a phenomenon often observed in transition economies, when newly established institutions are misused, i.e., applied or resorted to for reasons which have little in common with their intended or anticipated purpose. In such incidences institutions become sources of private gains and lose their value-creation role and capacity. We offer a typology of institutional misuse (illustrated by examples from Russian transition), discuss its consequences, and explore reasons why governments and societies fail to serve as institutions’ guardians. Implications misused institutions for economic and political reforms are analysed.
    Keywords: institutions, transition, capture, club goods
    Date: 2010
  3. By: Evzen Kocenda; Jan Hanousek
    Abstract: We analyze foreign news and spillovers in the emerging EU stock markets (the Czech Republic, Hungary, and Poland). We employ high-frequency five-minute intraday data on stock market index returns and four classes of EU and U.S. macroeconomic announcements during 2004–2007. We account for the difference of each announcement from its market expectation and we jointly model the volatility of the returns accounting for intraday movements and day-of-the-week effects. Our findings show that intraday interactions on the new EU markets are strongly determined by mature stock markets as well as the macroeconomic news originating thereby. We show that strong contemporaneous links across markets are present even after controlling for macroeconomic announcements. Finally, in terms of specific announcements, we are able to show the exact sources of macro news spillovers from the developed foreign markets to the three new EU markets under research.
    Keywords: finance, intra-day data, macroeconomic news, European emerging stock markets,volatility
    JEL: C52 F36 G15 P59
    Date: 2010–05–01
  4. By: Richard Pomfret (School of Economics, University of Adelaide)
    Abstract: Recent literature has focussed on institutional degradation and revenue volatility as major sources of a resource curse. Formerly centrally planned countries may be especially vulnerable due to their mutating institutions and macropolicy inexperience. This paper examines these issues through case studies of six former Soviet republics and Mongolia. The principal focus is on the methods of involving foreign partners in exploration and exploitation of natural resources and, to a lesser extent, on the use of revenues during resource booms. The consequences of alternative resource ownership patterns are difficult to model due to path dependency and the significance of the conjuncture of circumstances. Kazakhstan in the 1990s was a prime example of rent-seeking institutional degradation, but an exceptionally positive conjuncture in the 2000s (soaring oil prices, large oil and gas discoveries, and new pipelines) triggered institutional and policy evolution. Uzbekistan, by contrast, had less resource-rent-driven institutional degradation in the 1990s, but stagnated in the 2000s. Turkmenistan and Mongolia highlight the missed opportunities from not involving foreign partners, while Azerbaijan and the Kyrgyz Republic illustrate the less predictable outcomes following quick deals with foreign investors. Institutions matter, but the case studies suggest more complex relationships than revealed by simple correlations between indicators of institutional quality or of ownership patterns.
    Keywords: oil, gas, minerals, Central Asia, resource curse
    JEL: Q32 P35 O13
    Date: 2010–07
  5. By: Konstantin Gluschenko
    Abstract: This paper provides an overview of methodologies used to analyze inter-regional income inequality,and a critical survey of empirical studies that deal with Russian regions. It discusses implications of the growth theory regarding dynamics of inter-economy income inequality. Methodologies for empirically analyzing income inequality are classified as the cross-section approach, time series approach, and distribution dynamics approach. Specific methodologies are described within the framework of this classification, touching upon the subject of their applicability fields. The survey of studies on income inequality among Russian regions summarizes more than 30 papers grouped according to main approaches used for the analyses.
    Keywords: spatial inequality, convergence, economic growth, beta-convergence, distribution dynamics, income mobility, Russian regions.
    JEL: C20 D31 O15 O18 O41 P25 R11 R15
    Date: 2010–04–01
  6. By: Guglielmo Caporale; Christophe Rault; Robert Sova; Anamaria Sova
    Abstract: The transition process in Central and Eastern Europe was associated with growing environmental awareness. This paper analyses the determinants of Pollution Abatement and Control Expenditure (PACE) at plant level in the case of Romania using survey data and a Multilevel Regression Model (MRM). Our findings suggest that, although Romania has improved its environmental performance, formal and informal regulation are still only partially developed due to the difficulties of economic transition, and heterogeneity across regions remains considerable.
    Keywords: Pollution Abatement and Control Expenditure, Transition Economy, Multilevel Regression Model (MRM)
    JEL: Q52 C29 C40
    Date: 2010–06–01
  7. By: Alena Bicakova
    Abstract: Using EU LFS data, we analyze gender unemployment gaps in eight new EU member states – the Czech Republic, Hungary, Slovakia, Poland, the three Baltic states and Slovenia – over the last decade. While there are substantial unemployment gaps in the four central European countries and, more recently, also in Slovenia, there is no statistical difference between female and male unemployment rates in the three Baltic states. The estimated cost of having children, in terms of the higher probability of unemployment and lower unemployment to employment transition rate, is the highest in countries with the longest and most substantial drop in the labor force participation of women after childbirth. We show that country differences in family leave policies can explain much of the cross-country variation in the gender unemployment gaps.
    Keywords: Gender Unemployment Gap; Labor Force Participation; Family Leave Policies
    JEL: J13 J71
    Date: 2010–05
  8. By: John Lewis
    Abstract: This paper analyses how the financial crisis has affected task of meeting the Maastricht Criteria for the eight Central and Eastern European Countries which have yet to join the euro. It identifies the channels by which the crisis has fed through to deficits, debt, interest rates and inflation and seeks to provide numerical estimates of these factors. Deficits have worsened, but for most countries the problem is still primarily structural rather than cyclical. Debts have risen, but only in the cases of Latvia and Poland has the crisis changed the outlook for meeting the criterion. Inflation has fallen, particularly in the Baltic states on account of large output gap declines. The depth of the recession is likely to depress inflation rates for several years. Lastly, the interest rate criterion is more challenging because of the rise in spreads since the crisis.
    Keywords: New Member States; Convergence Criteria; Euro Adoption; Financial Crisis
    JEL: E61 E66
    Date: 2010–07
  9. By: András Rezessy (Joint Research Centre of the European Commission)
    Abstract: The paper estimates currency risk premia for the Czech Republic, Hungary, Poland and Slovakia. Three different approaches are applied: a constant premium approach based on rational expectations, while time-varying premia are estimated with a method using financial market analysts’ surveys and also with a Kalman filter technique. A novelty in this paper is a crosscheck based on the three different approaches applied and also making use of implied and historical volatilities. The results highlight the importance of such a crosscheck: in the case of the Czech and the Slovak koruna and the Polish zloty this exercise reveals severe problems with the results, which otherwise would not have been discovered. On the other hand, the estimation methods produce convincing results for the Hungarian forint. The estimated Hungarian premium series reflect the major events that intuitively may have shaped currency risk in the country. A possible reason for these findings is a high signal-to-noise ratio in the case of Hungary where the risk premium has been large and exhibited substantial shifts through time. Finally, the strong comovement of the premium series obtained with the Kalman-filter and the survey data for the Hungarian forint also indicates that the survey expectations are largely in line with both the riskpremium- extended UIP and the rational expectations hypothesis, which is theoretically important as the UIP relates exchange rate expectations to the interest rate differential.
    Keywords: risk premium, exchange rate, Kalman filter, survey data
    JEL: C30 C42 F31 G15
    Date: 2010
  10. By: Rebeca Jimenez-Rodriguez; Amalia Morales-Zumaquero; Balazs Egert
    Abstract: This paper investigates the impact of international shocks – interest rate, commodity price and industrial production shocks – on key macroeconomic variables in ten Central and Eastern European (CEE) countries by using near-VAR models and monthly data from the early 1990s to 2009. In contrast to previous work, the empirical analysis takes explicit account of the possibility of (multiple) structural breaks in the underlying time series. We establish strong evidence of structural breaks, particularly along the years 2007 and 2008, suggesting the very relevant impact of the recent global crisis on CEE economies. Moreover, our results suggest that the way how countries react to world commodity price shocks is related to the underlying economic structure and the credibility of the monetary policy. We also find that some countries like Slovakia and Slovenia – already euro area members – react stronger to foreign industrial production shocks than other countries and that the responses to such shocks are strongly correlated for selected CEE countries. Nevertheless, our results also shed light on substantial differences in responses to foreign interest rate shocks that originate from the US or the euro area.
    Keywords: monetary policy; foreign shocks; multiple structural breaks; near-VAR model; CEE economies.
    JEL: E43 E50 E52 C22 O52
    Date: 2010–05–01
  11. By: Balazs Egert
    Abstract: This study analyses the impact of economic catching-up on annual inflation rates in the European Union with a special focus on the new member countries of Central and Eastern Europe. Using an array of estimation methods, we show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, we find that the initial price level and regulated prices strongly affect inflation outcomes in a nonlinear manner and that the extension of Engel’s Law may hold during periods of very fast growth. We interpret these results as a sign that price level convergence comes from goods, market and non-makret service prices. Furthermore, we find that the Phillips curve flattens with a decline in the inflation rate, that inflation is more persistant and that commodity prices have a stronger effect on inflation in a higher inflation environment.
    Keywords: European Union, inflation, Balassa-Samuelson, real convergence,catching up, Bayesian model average, non-linearity.
    JEL: E43 E50 E52 C22 G21 O52
    Date: 2010–06–01
  12. By: Laurent Cavenaile; David Dubois
    Abstract: In this paper, we investigate the convergence process within the European Union (27 countries). More particularly, we study the convergence process of the new entrants from Central and Eastern Europe and of the 15 Western countries between 1990 and 2007. Applying a panel approach to the convergence equation derived by Mankiw et al. (1992) from the Solow model, we highlight the existence of heterogeneity in the European Union and show that new entrants and former members of the European Union can be seen as belonging to significantly differ ent groups of convergence. The existence of heterogeneity in the European Union or the Eurozone might affect their stability as the recent Greece’s sovereign debt crisis illustrates it.
    Date: 2010
  13. By: Niall O’Higgins
    Abstract: This paper looks at developments in and around the transition of young people from education to work in the ECA region in recent years. The purpose of the paper is to aid understanding of the current situation and to suggest areas where action is most needed and is likely to be most effective. The first section considers developments in the general economic context of relevance to young people. Section 2 goes onto consider the current situation of (and trends in) factors affecting young people’s entry into work. Section 3 assesses policies affecting youth employment and unemployment and section concludes identifying key issues and areas where action is needed and where it is likely to be effective. [IZA DP No. 5094]
    Keywords: youth labour markets, Europe and Central Asia, active labour market policies, vocational education and training, joblessness
    Date: 2010
  14. By: Guglielmo Caporale; Christophe Rault; Robert Sova; Anamaria Sova
    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: 2010–06–01
  15. By: Tamar Khitarishvili
    Abstract: The economic returns to education in transition countries have been extensively evaluated in the literature. The present study contributes to this literature by estimating the returns to education in Georgia during the last transition period 2000-04. We find very low returns to education in Georgia and little evidence of an increasing trend in the returns. This picture contrasts with somewhat higher rates of return to education in the mid-1990s in Georgia and the recent estimates from other transition countries. A further analysis of the shifts in the supply and demand for education sheds light on possible causes. In particular, on the supply side, the decline in the quality of education in the 1990s has negated the improvements in the provision of skills needed by market economies during this period. On the demand side, the expansion of the Georgian economy has taken place in the direction of fields such as public administration and education that employ a highly educated workforce but do not remunerate well. Yet it would be a mistake to conclude that education is not a valuable asset in Georgia. The role of education is largely manifested in its impact on the employability of individuals, an issue that has been overlooked in the transition literature. Once this impact is taken into account, education is shown to play an increasingly important role in influencing the earnings of the working population in Georgia. The paper uses the ordinary least squares approach, instrumental variables approach, and sample selection correction, taking into account conditional and unconditional marginal effects of education on earnings.
    Keywords: Returns to Education; Human Capital; Sample Selection; Instrumental Variables; Transitional Economies; Georgia
    JEL: I21 J24 P2
    Date: 2010–08
  16. By: Barbara Gebicka
    Abstract: Public funding drives much of the recent growth of college degree supply in Europe, but few indicators are available to assess its optimal level. In this paper, I investigate an indicator of college skills usage - the fraction of college graduates employed in "college" occupations. Gottschalk and Hansen (2003) propose to iden- tify "college" occupations based on within-occupation college wage premia; I build on their strategy to study the local-labor-market relationship between the share of college graduates in the population and the use of college skills. Empirical results based on worker-level data from Czech NUTS-4 districts suggest a positive rela- tionship, thus supporting the presence of an endogenous influence of the number of skilled workers on the demand for them.
    Keywords: Occupational allocation; demand for skills; productivity spillovers
    JEL: J20 J24
    Date: 2010–03
  17. By: Priit Vahter
    Abstract: Does FDI affect productivity growth, innovation, and knowledge sourcing activities of domestic firms? This study employs detailed firm-level panel-data from Estonia’s manufacturing sector to investigate different channels through which FDI can affect domestic firms. I use instrumental variables approach to identify the effects. I find no evidence of an effect of FDI entry on local incumbents’ TFP and labour productivityg rowth in the short term. The effect on productivity does not depend on the local firms’ distance to the productivity frontier. However, there are positive spillovers on process innovation. The results show significant positive correlation between the entry of FDI in a sector and the more direct measures of spillovers in subsequent periods. This is consistent with the view that FDI inflow to a sector intensifies knowledge flows to domestic firms.
    Keywords: foreign direct investment, productivity, innovation, learning
    JEL: F21 F23 O31 O33
    Date: 2010–04–01

This nep-tra issue is ©2010 by J. David Brown. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.