nep-tra New Economics Papers
on Transition Economics
Issue of 2012‒03‒14
ten papers chosen by
J. David Brown
Heriot-Watt University

  1. The Five-Phases of Economic Development and Institutional Evolution in China and Japan By Masahiko Aoki
  2. Entrepreneurship in the transition region: an analysis based on the Life in Transition Survey By Elena Nikolova; Frantisek Ricka; Dora Simroth
  3. Channels of Interprovincial Consumption Risk Sharing in the People’s Republic of China By Julan Du; Qing He; Oliver M. Rui
  4. Monetary policy under alternative exchange rate regimes in Central and Eastern Europe By Ziegler, Christina
  5. The Current State of the Financial Sector and the Regulatory Framework in Asian Economies—The Case of the People’s Republic of China By Luo Ping
  6. Understanding the Pattern of Growth and Equity in the People’s Republic of China By Minquan Liu
  7. Governance Infrastructure and Location of Foreign Direct Investment in the People’s Republic of China By Jia He; Oliver M. Rui; Xiaolei Zha
  8. The Currency of the People’s Republic of China and Production Fragmentation By Nobuaki Yamashita
  9. GINI DP 23: Automatic Stabilizers, Economic Crisis and Income Distribution in Europe By Dolls, M.; Fuest, C.; Andreas Peichl
  10. Exchange Rate Pass-Through, Domestic Competition,and Inflation: Evidence from the 2005/08 Revaluationof the Renminbi By Raphael Anton Auer

  1. By: Masahiko Aoki (Asian Development Bank Institute (ADBI))
    Abstract: Based on the variable rate of gross domestic product per capita growth and its sources, this paper first identifies five phases of economic development that are common to China, Japan, and Korea : M (Malthusian), G (government-led), K (à la Kuznets), H (human capital based) and PD (post demographic-transition). But there are also marked differences in the onset, duration, and institutional forms of these phases across these economies. In order to understand these differences, this paper explores the agrarian origins of institutions in Qing China and Tokugawa Japan (and briefly ChosÅn Korea) and their path-dependent transformations over those phases. In doing so, the paper employs game-theoretic reasoning and interpretations of divergent institutional evolution between China and Japan, which also clarifies the simplicity of prevailing arguments that identify East Asian developmental and institutional features with authoritarianism, collectivism, kinship-dominance, Confucianism and the like. Finally, the paper examines the relevance of the foregoing developmental discussions to the institutional agendas faced by China and Japan in their respective emergent phase-transitions. In what way can China avoid the “middle income trapâ€? What institutional shortcomings become evident from the Fukushima catastrophe and how can they be overcome in an aging Japan?
    Keywords: phases of economic development, institutional forms, Institution, game-theoretic reasoning, path-dependent
    JEL: J11 N15 N35 N55 O15 O43 O53 P51
    Date: 2011–12
  2. By: Elena Nikolova (EBRD); Frantisek Ricka (EBRD); Dora Simroth (European School for Management and Technology)
    Abstract: Entrepreneurial activity is a key contributor to economic growth, innovation and the development of a market economy in transition countries. Data from the Life in Transition Survey reveal that financial sector development and access to credit are the most important drivers of entrepreneurship. Education is associated with a higher probability of trying to set up a business, but not with more entrepreneurial success. Women are less likely to attempt to set up a venture but no less likely to succeed than men once they try. Furthermore, entrepreneurial activity develops in clusters. An individual is more likely to try – and succeed – in setting up a business in a region that is already home to many entrepreneurs.
    Keywords: entrepreneurship, transition economies, Life in Transition Survey
    JEL: M13 P2 J24
    Date: 2012–02
  3. By: Julan Du (Asian Development Bank Institute (ADBI)); Qing He; Oliver M. Rui
    Abstract: This paper analyzes consumption risk sharing among provinces in the People’s Republic of China (PRC) during 1980–2007. The analysis finds that 9.4% of shocks to gross provincial product are smoothed by the interprovincial fiscal transfer system. This system also cushions a relatively large percentage of province-specific shocks in coastal areas. Using a variety of indicators, we explored nonfiscal channels of consumption risk sharing. We found that the migration of rural labor to urban areas and the remittance of migrant wages play an important role in promoting interprovincial consumption risk sharing in inland PRC provinces. In contrast, the extent of risk sharing through financial intermediation and capital markets is very limited. These factors have resulted in a low degree of risk sharing among provinces, especially during the last decade
    Keywords: consumption risk sharing, the People’s Republic of China, fiscal transfer system, interprovincial
    JEL: O16 O53 R11
    Date: 2011–12
  4. By: Ziegler, Christina
    Abstract: Monetary policy in CEE is an important determinant in the wage bargaining process, because trade unions have to predict inflation as one component of future real wages. This paper scrutinizes whether countries in CEE that officially announce an inflation target are tempted to act time-inconsistently and switch from the announced inflation target to an exchange rate target in order to sustain higher output via surprise inflation. If market participants discover the time-inconsistency, they will adjust their inflation expectations, which result in higher average rates of price increases. The time-inconsistent behavior in central bank interest rate setting is modeled by several Taylor rules. An empirical application provides evidence that some monetary authorities in CEE such as the Czech Republic and Slovakia have acted timeinconsistent and have focused on the exchange rate in periods of official inflation targeting, which might have contributed to higher average rates of inflation and welfare losses. Furthermore, uncertainty in wage determination process has risen due to a harder predictability of productivity and inflation as components of future nominal wages. --
    Keywords: monetary policy,Taylor rules,exchange rate regime,Central and Eastern Europe,inflation targeting
    JEL: E52 E58 F31 O52 P20
    Date: 2012
  5. By: Luo Ping (Asian Development Bank Institute (ADBI))
    Abstract: Reform of financial regulation is a priority on the international agenda. At the call of the Group of Twenty Finance Ministers and Central Bank Governors (G-20), a number of new international standards have been issued, most notably Basel III. As a member of the G-20, the Financial Stability Board (FSB), and the Basel Committee on Banking Supervision, the People’s Republic of China (PRC) is now on a faster track in adopting international standards. However, the key issue for the PRC—as well as many other emerging markets—is to how to keep focused on the domestic policy agenda while adopting the new global standards. Fortunately, the PRC’s financial system has proved resilient to the recent financial crisis. As a result, banks in the PRC find it quite easy to meet the new Basel III capital and liquidity standards. Basel III is only part of an effective regulatory framework. While phasing in Basel III, the PRC needs other prudential tools such as a new provision ratio, in addition to the provision coverage ratio. Activity restriction will be another effective tool with the potential to prevent banks from becoming too complicated for bankers to manage and for the regulator to supervise. As we work hard to improve the effectiveness of the regulatory system at both the global and national level, we should remind ourselves of the importance of keeping the balance between enhanced regulation and promoting financial innovation—without the pendulum swinging too far.
    Keywords: financial regulation, China, financial sector, banking supervision, regulatory framework
    JEL: E44 E52 E58 G18 G28
    Date: 2011–09
  6. By: Minquan Liu (Asian Development Bank Institute (ADBI))
    Abstract: There are likely to be many factors which have together shaped the current pattern of growth and equity in the People’s Republic of China (PRC). Among them are the foundations laid in the pre-1978 era, especially in respect of land-related institutional reforms and social sector investments. These factors successfully complemented the subsequent export and foreign direct investment promotion strategies the PRC followed in the post-1978 years. However, given the large size of the PRC, while these strategies have helped to kick-start its economic take-off, the long-run growth of the country cannot depend on it. It will be important for the PRC in the forthcoming decades to expand its own domestic demand and renew social sector investments. Among other things, it will need to improve on its current income distributions. In particular, as well as wage increases, it will be important for the PRC to expand its social protection programs. This will help not only to boost its domestic demand, but also, more importantly, to contribute to a renewal and expansion of its human capital accumulation. In the long run, there is nothing more important than this if the PRC is to continue on its growth track, to modernize, and to catch up with today’s developed nations. Superior pre-1978 human capital accumulations have helped the PRC to compete with and outperform other similarly positioned economies in the decades before; continued growth of the economy and continued improvements of the living standards of its people in the forthcoming decades will require vast amounts of new investment in human capital. And to this, increased investments by the government, whether through direct spending or increased levels of social protection, may well prove to be of special importance.
    Keywords: pattern of growth, equity and growth, Income Distribution
    JEL: O15 O53 F14 N35
    Date: 2011–12
  7. By: Jia He (Asian Development Bank Institute (ADBI)); Oliver M. Rui; Xiaolei Zha
    Abstract: Standard neoclassical theory predicts that capital should flow from rich to poor countries. However, Lucas (1990) points out that these capital flows are actually very modest, and nowhere near the levels predicted by theory. The People’s Republic of China (PRC) now receives more foreign capital in the form of foreign direct investment (FDI) than any other country, but statistics indicate that this inward FDI flows unequally to different regions. In this study, using hand-collected data on FDI for more than 200 cities, we examine whether the Lucas paradox of capital exists within the PRC. We adopt the dynamic panel data generalized method of moments (GMM) framework to avoid the potential endogeneity issue. Using both provincial- and city-level data, the empirical results show that FDI flows to the PRC, as proxied by total gross domestic product (GDP) and per capita GDP, favor rich regions over poor regions. We also find that regional economic growth has no significant impact on FDI. These findings support the existence of the Lucas paradox in the PRC. We demonstrate that this paradox is not driven by government policy and explore possible explanations for its existence.
    Keywords: Governance infrastructure, the PRC, FDI flows, location
    JEL: F21
    Date: 2011–11
  8. By: Nobuaki Yamashita (Asian Development Bank Institute (ADBI))
    Abstract: This paper examines how an appreciation of the currency of the People’s Republic of China (PRC)—renminbi—affects the country’s exports in the context of production fragmentation, using a panel data set of the PRC’s trade for 1992/93–2008/09. It constructs two exchange rates for renminbi : one is a bilateral real exchange rate and the other is a real effective exchange rate against East Asian component suppliers. It is found that appreciation of the renminbi would somewhat offset a reduction in the volume of the PRC’s exports induced by lower importing costs of components. Hence, evidence casts further doubts on the efficacy of further unilateral reform of the renminbi exchange rate regime on correcting trade imbalances.
    Keywords: exchange rate, renminbi, production fragmentation, the PRC
    JEL: F14 F23 F31
    Date: 2011–11
  9. By: Dolls, M.; Fuest, C.; Andreas Peichl (Institute for the Study of Labor (IZA))
    Abstract: This paper investigates to what extent the tax and transfer systems in Europe protect households at different income levels against losses in current income caused by economic downturns like the present financial crisis. We use a multi country micro simulation model to analyse how shocks on market income and employment are mitigated by taxes and transfers. We find that the aggregate redistributive effect of the tax and transfer systems increases in response to the shocks. But the extent to which households are protected differs across income levels and countries. In particular, there is little stabilization of disposable income for low income groups in Eastern and Southern European countries.
    Date: 2011–12
  10. By: Raphael Anton Auer
    Abstract: This paper quantifies the effect of the government-controlled appreciation of the Chinese renminbi (RMB) vis-à-vis the USD from 2005 to 2008 on the prices charged by US producers. As the RMB during that time was pegged to a basket of currencies, the empirical strategy must account for the fact that the currencies included in the basket may have directly affected US prices. Thus, the pre-2005 period is used to filter out the effects of other exchange rates on import and producer prices. Additionally, utilizing the remainder of the sample, the pure effect of an RMB appreciation on US import prices and, in turn, the effect of RMB-induced US import price fluctuations on US producer prices is established. In a panel spanning the period from 1994 to 2010 and including 417 manufacturing sectors, the main finding emerging from this empirical strategy is that import prices pass into producer prices at an average rate of 0.7. This finding supports the view that the markets for domestic and imported manufactured goods are well integrated. Consequently, even if the exchange rate affects import prices only to a small extent, it may have a substantial impact on inflation, as it exerts a sizeable impact on the competitive environment of domestic producers and the prices that they charge.
    Keywords: Price Complementarities, Exchange Rate Pass Through, China, Inflation, Markups
    JEL: F11 F12 F14 F15 F16 F40 E31 L16
    Date: 2012

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