nep-tra New Economics Papers
on Transition Economics
Issue of 2016‒07‒23
thirteen papers chosen by
J. David Brown
United States Census Bureau

  1. Firm Entry and Regional Growth Disparities: the Effect of SOEs in China By Kjetil Storesletten; Gueorgui Kambourov; Loren Brandt
  2. Public Employment Effects over the Business Cycle: the Czech Case By Vedunka Kopecna
  3. Self-employment of the young and the old: exploring effects of the crisis in Croatia By Valerija Botric; Iva Tomic
  4. What We Learn from China's Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending By Tao Zha; Jue Ren; Kaiji Chen
  5. Drivers of Growth in Russia By Markus Brueckner; Birgit Hansl
  6. Take-off, Persistence and Sustainability: The Demographic Factor in Chinese Growth By Fang Cai and Yang Lu
  7. Recasting the Iron Rice Bowl: The Reform of China's State Owned Enterprises By Daniel Berkowitz
  8. Understanding Recent Trends in Income Inequality in the People’s Republic of China By Zhuang, Juzhong; Li, Shi
  9. Forecasting China's Economic Growth and Inflation By Higgins, Patrick C.; Zha, Tao; Zhong, Karen
  10. Asymmetric Exchange Rate Exposure of Stock Returns: Empirical Evidence from Chinese Industries By Cuestas, Juan Carlos; Tang, Bo
  11. Basic Characteristics of Bonds and their Dynamics on the Croatian Secondary Market By Bojan Tomic; Andrijana Sesar
  12. The China-Russia trade relationship and its impact on Europe By Alicia García-Herrero; Jianwei Xu
  13. The effect of the New Silk Road railways on aggregate trade volumes between China and Europe By Li, Yuan; Bolton, Kierstin; Westphal, Theo

  1. By: Kjetil Storesletten (University of Oslo); Gueorgui Kambourov (University of Toronto); Loren Brandt (University of Toronto)
    Abstract: We study the effect of a large SOE (State-Owned Enterprises) sector on economic growth and document that localities (prefectures) in China with a large SOE sector in 1995 experienced a smaller economic growth than those with a small SOE sector in 1995. We show that one important mechanism through which the size of the SOE sector affects economic growth is the effect on firm entry in the non-SOE sector. In prefectures with a high SOE output share, non-SOE firm entry is small and the entrants have low TFP, labor productivity, and level of capital. We also infer the capital and output wedges that firms in the non-SOE and the SOE sector are facing in 1995 and 2004. We conclude that these wedges alone cannot account for the documented facts on non-SOE firm entry and that the analysis needs to incorporate a feature that would operate as a start-up cost (or an entry wedge). We build a heterogeneous firm model with endogenous entry to help understand the non-SOE entry patterns in the cross section in 1995. Then, we use the model to analyze the effect of a number of changes in the economic environment in China between 1995 and 2004.
    Date: 2016
  2. By: Vedunka Kopecna (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: The paper contributes to understanding the effects stemming from the public sector employment changes in the Czech Republic and their impacts on the labor market through the lens of a New Keynesian dynamic stochastic general equilibrium model with search and matching frictions. The size of the public sector has been generally expanding over the last decade contrary to many other European countries with the exception of the years 2011 - 2012 when the economic crisis became more evident even in the otherwise financially stable Czech Republic. We model the labor market dynamics across the business cycle and examine the impacts of the varying number of public workers on the labor market variables as private employment, unemployment rate and market tightness as well as on the overall economic growth. We aim at determining whether a portion of unemployment can be explained by either the increased public hiring or shrinking of the number of public employees in the last decade. As the results suggest, in re cessionary times the expansion of the public sector managed to keep the unemployment rate from attaining higher values. However, the following turnover of government size development threw the labor market into a deeper crisis than it would have been if the public sector size had remained unaltered.
    Keywords: search and matching frictions, DSGE, labor market, public employment
    JEL: E37 J21 J45 J48 J64
    Date: 2016–07
  3. By: Valerija Botric (The Institute of Economics, Zagreb); Iva Tomic (The Institute of Economics, Zagreb)
    Abstract: The economic and financial crisis that erupted in Europe in 2008 hit some groups of the population harder than others. Young population was among those that experienced the largest increase in unemployment, whereas many of those belonging to the older working-age group, after experiencing a loss of their jobs, were unable to return to employment. Hence, one of the options for both of these groups was to seek self-employment solutions. This paper focuses precisely on transitions into self-employment of these two end-groups among the working-age population in a country that experienced one of the longest and largest setbacks during the recent recession – Croatia. The main goal of the paper is to establish differences in transition to self-employment of the young and the old before and during the crisis by distinguishing between two types of transitions: (i) out of unemployment or “necessity self-employment” and (ii) out of employment or “opportunity self-employment”. The data source used for the analysis is EU LFS. Main results suggest that necessity self-employment is dominant for both groups, and especially so for the old, whereas opportunity self-employment is slightly more pronounced in the case of the young population. However, both necessity and opportunity self-employment have decreased in the crisis period. Decomposition analyses – Fairlie and Blinder-Oaxaca – indicate that the gap between the old and the young has increased in the case of necessity self-employment while it decreased for opportunity self-employment between the two observed periods. Further examination of the characteristics of unemployed youth that became self-employed or employed during the crisis reveals that the only common characteristics that increase both the probability of self-employment as well as the probability of employment are the share of working adults and the share of children within a household.
    Keywords: transitions, self-employment, young, old, decomposition, crisis, Croatia
    JEL: J60 J21
    Date: 2016–06
  4. By: Tao Zha (Federal Reserve Bank of Atlanta); Jue Ren (Emory University); Kaiji Chen (Emory University)
    Abstract: We argue that China's rising shadow banking was inextricably linked to potential \emph{balance-sheet} risks in the banking system. We substantiate this argument with three didactic findings: (1) commercial banks in general were prone to engage in channeling \emph{risky} entrusted loans; (2) shadow banking through entrusted lending masked small banks' exposure to balance-sheet risks; and (3) two well-intended regulations and institutional asymmetry between large and small banks combined to give small banks an incentive to exploit regulatory arbitrage by bringing off-balance-sheet risks into the balance sheet. We reveal these findings by constructing a comprehensive transaction-based loan dataset, providing robust empirical evidence, and developing a theoretical framework to explain the linkages between monetary policy, shadow banking, and traditional banking (the banking system) in China
    Date: 2016
  5. By: Markus Brueckner; Birgit Hansl
    Abstract: Between the end of the 1990s and the first decade of the 2000s Russia experienced significant growth in GDP per capita that was driven by transitional convergence, structural reforms, and improvements in the terms of trade. Reforms to the structure of the economy boosted growth by over 2 percentage points per annum with improvements in telecommunication infrastructure, financial development, and a reduction in the GDP share of government consumption being the most important structural reforms. The paper discusses Russia's growth performance relative to comparator countries: countries in the European and Central Asia regions, advanced natural resource exporting countries and the BRICS countries. Economic growth was significantly lifted in advanced natural resource exporting countries due to the international commodity price boom, for example, in Russia improvements in the terms of trade lifted growth by over 1 percentage point per annum. In the group of advanced natural resource exporting countries and BRICS countries, Russia is at the forefront in terms of growth benefits arising from structural reforms.
    Date: 2016–07
  6. By: Fang Cai and Yang Lu
    Abstract: With the reduction of the working-age population and the increase of the population dependency ratio as the main indicators of the diminishing demographic dividend, China's potential growth rate is decreasing. Our results suggest that the demographic dividend contributed to nearly one fourth of the economic growth in China in the past three decades, while total factor productive growth explains another third and capital accumulation explaining the remaining growth (nearly half). China's potential growth rate will continue to slow—it was nearly 10 per cent during 1980–2010 but 6.65 per cent on average during 2016–2020—because of the diminishing demographic dividend, but reform measures are conductive to clearing the institutional barriers to the supply of factors and productivity, buffering the potential growth rate. The aggregate reform dividend could reach to 1–2 per cent on average during 2016–2050.
    Keywords: population, demography, China, intergenerational, economy policy
    Date: 2016–07–01
  7. By: Daniel Berkowitz
    Abstract: Following the enactment of reforms in the mid-1990s China'’s state owned enterprises(SOEs) became more profitable. Using theoretical insights from Azmat, Manning andVan Reenen (2012) and Karabarbounis and Neiman (2014) and econometric methodsin De Loecker and Warzynski (2012) this paper fi…nds that SOE restructuring wasnevertheless limited. This is because SOE profi…tability gains in part re‡flect that theywere under less political pressure to hire excess labor and also their cost of capital felland their capital-labor elasticity of substitution generally exceeded unity. Moreover,SOE productivity lagged foreign and private firms.
    Date: 2016–01
  8. By: Zhuang, Juzhong (Asian Development Bank); Li, Shi (Beijing Normal University)
    Abstract: This paper examines underlying factors that could explain the decline in income inequality in the People’s Republic of China (PRC) since 2008 and inquires whether the decline indicates that the PRC’s income inequality has peaked following the Kuznets hypothesis. The paper first identifies four key drivers of rising income inequality in the PRC since the mid-1980s: rising skill premium, declining share of labor income, increasing spatial inequality, and widening inequality in the distribution of wealth. It then provides evidence that the reversal of these drivers, with the exception of wealth inequality, could partly explain the decline in income inequality since 2008. The paper argues that since part of the reversal of these drivers is policy induced, it is important that the policy actions continue for income inequality to decline further. The paper further argues that a critical factor underlying the Kuznets hypothesis is that taxation and transfers play a bigger role in income redistribution as a country becomes more developed, while their role is still limited in the PRC, the future path of the country’s income inequality may not be one directional; and reducing income inequality significantly may require personal income tax and transfers to play a greater role over time.
    Keywords: income inequality; Kuznets hypothesis; the PRC economy
    JEL: D31 D63 N35
    Date: 2016–07–06
  9. By: Higgins, Patrick C. (Federal Reserve Bank of Atlanta); Zha, Tao (Federal Reserve Bank of Atlanta); Zhong, Karen (Shanghai Jiaotong University)
    Abstract: Although macroeconomic forecasting forms an integral part of the policymaking process, there has been a serious lack of rigorous and systematic research in the evaluation of out-of-sample model-based forecasts of China's real gross domestic product (GDP) growth and consumer price index inflation. This paper fills this research gap by providing a replicable forecasting model that beats a host of other competing models when measured by root mean square errors, especially over long-run forecast horizons. The model is shown to be capable of predicting turning points and usable for policy analysis under different scenarios. It predicts that China's future GDP growth will be of an L-shape rather than a U-shape.
    Keywords: out of sample; policy projections; scenario analysis; probability bands; density forecasts; random walk; Bayesian priors
    JEL: C53 E10 E40
    Date: 2016–07–01
  10. By: Cuestas, Juan Carlos (Department of Economics, University of Sheffield); Tang, Bo (Department of Economics, University of Sheffield)
    Abstract: This study explores the asymmetric exchange rate exposure of stock returns building upon the capital asset pricing model (CAPM) framework, using monthly returns of Chinese industry indices. In accordance with the existing literature, industry returns are subject to lagged exposure effects, but the asymmetries vary across industries, which could be due to the discrepancies of trade balance and ownership of certain industries. Furthermore, the dynamic multipliers depict that industry returns quickly respond to changes in the exchange rate and correct the disequilibrium within a short time, making the long run exposure to be symmetric or very small. The remaining shocks are mainly explained by the return of market portfolios. This implies that the ongoing restrictions on the RMB daily trading band do indeed protect the Chinese stock market against the effects of currency movements.
    Keywords: Asymmetric exchange rate exposure, stock returns, Chinese industries, NARDL
    JEL: C58 F3 G15
    Date: 2016–04–08
  11. By: Bojan Tomic; Andrijana Sesar
    Abstract: In light of recent announcements of the Ministry of Finance about the emission of the so-called national bonds, this paper deals with the problems related to bonds as the most widely accepted financial instrument on the Croatian secondary market. Although the meaning of the bond as a debt security financial instrument is probably clear to everyone, trading and utilization of all the advantage this financial instrument offers is still insufficiently developed. Moreover, since bonds appear to be a possible alternative to bank deposits, it is necessary to determine the basic concepts of the difference in the calculation of yield between these two potential investments. Considering these facts, the contribution of this paper is aimed at taking a closer look and simplifying the overall understanding of this significant financial instrument. On top of that, the purpose of this paper is to raise the awareness of the broader public with respect to understanding of the basic characteristics of bonds, their advantages and disadvantages and ultimately to elaborate in detail the investment possibilities offered by bonds, as one of the most popular debt security financial instrument in Croatia. The first chapter describes the general problems related to bonds, their basic characteristics and current divisions. The paper then elaborates current dynamics of bonds in the secondary capital market in the Republic of Croatia, providing a comparative presentation of purchase and sale trade channels in the secondary market. The final chapter shows a practical example of price and yield calculation until maturity of the bond issued by the Ministry of Finance of RoC, being traded on Zagreb Stock Exchange.
    Date: 2016–01
  12. By: Alicia García-Herrero; Jianwei Xu
    Abstract: See also the event "China-Russia relations and their impact on Europe" held on 21 June 2016. EU countries are complementary to Russia on the Chinese market. However, Chinese exports are increasingly relevant substitutes for EU exports on the Russian market. This means that an increase in China-Russia economic cooperation should have a negative impact on European exports. The authors simulate a scenario in which trade tariffs between Russia and China are eliminated, which is found to reduce EU exports to Russia. Finally, a more granular approach to the question analyses which sectors in Europe will be more affected by the increasing economic links between China and Russia, and finds that electronic machinery, equipment and machinery, and nuclear reactors will be particularly affected. Such findings obviously show quickly China is moving up the ladder in terms of export structure and how strategically important it is for Europe to continue upgrading its industry to compete at the highest level of that ladder.
    Date: 2016–07
  13. By: Li, Yuan; Bolton, Kierstin; Westphal, Theo
    Abstract: "One Belt, One Road" is an extensive and complex initiative whose potential effect and influence are still currently pending for answers. This paper addresses the following research question: What is the effect of the New Silk Road intercontinental railways on the trade between China and its trading partners in Central Asia and Europe? We focus on nine railway lines connecting Europe and China, which started operations between 2011 and 2015. The countries´ trade patterns with railway connections to China are then compared to the countries without railway connections to China. We find the intercontinental railways have a positive effect on China´s exports to its trading partners in Central Asia and Europe, especially concerning exports of manufactured goods, machinery and transport equipment, and miscellaneous manufactured articles. Moreover, the intercontinental railways have a positive effect on China´s imports of food and live animals from its trading partners.
    Keywords: One Belt,One Road,trade,transportation cost,weapons of the rich,everyday forms of policy influence
    JEL: F02 F14 R4
    Date: 2016

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