nep-tra New Economics Papers
on Transition Economics
Issue of 2017‒11‒26
fifteen papers chosen by
J. David Brown
United States Census Bureau

  1. Artificial Administrative Boundaries: Evidence from China By Pei Li, Yi Lu, Tuan-Heww Sng
  2. Foreign Direct Investment and Urban Inequality: Evidence from Chinese Cities By Johansson, Anders C.; Liu, Dan; Zhen, Maosheng
  3. Effects of corporate sector restructuring on productivity growth and the role of foreign owned enterprises in China By Chan-Guk Huh
  4. Contribution of increased life expectancy to economic growth: evidence from CEE countries By Gindrute Kasnauskiene; Karol Michnevich
  5. Innovation in Russia: the territorial dimension By Crescenzi, Riccardo; Jaax, Alexander
  6. China’s evolving managed float: an exploration of the roles of the fix and broad dollar movements in explaining daily exchange rate changes By Clark, John
  7. Regional development under socialism: evidence from Yugoslavia By Kukić, Leonard
  8. Motivations for Public Service in Corrupt States: Evidence from Post-Soviet Russia By Jordan Gans-Morse; Alexander S. Kalgin; Andrei V. Klimenko; Andrei A. Yakovlev
  9. Regulations of Banks? Capital and Liquidity according to Basel III: Problems and Experience from Eastern Europe Countries By Natalia Konovalova
  10. The Fiscal Effectiveness of the Provision of Investment Incentives By Václav Vybíhal
  11. A tale of two indexes: predicting equity market downturns in China By Lleo, Sebastien; Ziemba, William T.
  12. Political Uncertainty and Innovation in China By Feng, Xunan; Johansson, Anders C.
  13. Lifespan dispersion in times of life expectancy fluctuation: the case of Central and Eastern Europe By Jose Manuel Aburto Flores; Alyson A. van Raalte
  14. Daily Price Limits and Destructive Market Behavior By Ting Chen; Zhenyu Gao; Jibao He; Wenxi Jiang; Wei Xiong
  15. Latvia Stumbling Towards Progressive Income Taxation: Episode II By Anna Pluta; Anna Zasova

  1. By: Pei Li, Yi Lu, Tuan-Heww Sng
    Abstract: What happens when subnational boundaries are badly drawn? We use China as a laboratory to investigate the rami cations. As Chinese provincial and long-standing socioeconomic boundaries are not fully aligned, counties of the same province may not share the same regional identity. Using Deng Xiaoping's eco-nomic liberalization campaign in 1991-92 to implement a difference-in-differences, we find that the annual growth differential between non-is located and dislocated counties increased by 3.1 percentage points after Deng's campaign galvanized the provinces to pursue economic expansion. We also uncover evidence of discrimination against the dislocated counties by the provincial authorities.
    Keywords: Artificial borders, Regional Favoritism, Decentralization, China
    JEL: D73 H11 H77 O43
    Date: 2017–09
  2. By: Johansson, Anders C. (Stockholm China Economic Research Institute); Liu, Dan (Shanghai University of Finance and Economics); Zhen, Maosheng (Shanghai University of Finance and Economics)
    Abstract: In this paper we examine the impact of foreign direct investment (FDI) on local urban wage inequality in China. We find that the within-city college premium is larger for cities characterized by a higher degree of FDI penetration. We then try to establish the causal impact of FDI penetration on city inequality using historical Christian influence as an instrumental variable. In addition, firm-level evidence shows that FDI has amplified both between-firm inequality and within-firm inequality. FDI firms do not only hire relatively more high-skilled workers but also provide relatively higher wages to high-skilled workers compared to domestic firms. Finally, an individual-level analysis shows that FDI has a spillover effect on low-skilled workers, but the magnitude of that effect is much smaller than the effect on high-skilled workers.
    Keywords: foreign direct investment; skill premium; inequality; China
    JEL: F21 I30 R11
    Date: 2017–11–15
  3. By: Chan-Guk Huh (Chungnam National University, International Trade Department)
    Abstract: This study analyzes productivity enhancing effects of privatizations as well as corporate sector restructuring involving foreign owned enterprises (FOE) in China using firm level data from 1998 to 2007 period. First, we examine key characteristics of firm level total factor productivities (TFPs) using a non-parametric multi-factor productivity approach and, then we decompose TFP growth by ownership categories using the dynamic Olley-Pakes method, paying special attention to the role of FOEs in this area. Second, this study measures spillover effects of FOEs on TFP of overall industries and finds that the FOE sector not to have had the backward spillover effects, which operate through sourcing of intermediate parts from local firms. However, this result is reversed when we re-examine the relationship using a truncated FOE group, which consists of firms that have been converted into FOEs from being local Chinese firms through foreign direct investments. This suggests that the lack of knowledge of local supply chain networks by original FOEs might have contributed to the earlier finding of an absence of the backward spillover effect of FOEs on local firms. In addition, this study finds shuffling of firms between the two categories of FOEs of HMT and FDI to have had measurable TFP enhancing effects.
    Keywords: Total Factor Productivity, FDI, China, privatization
    JEL: F21 F23
    Date: 2017–10
  4. By: Gindrute Kasnauskiene (Vilnius university); Karol Michnevich (Vilnius university)
    Abstract: Population ageing in a backdrop of growing average life expectancy can be seen in many advanced economies, but the rapid pace of these demographic changes in Central and Eastern Europe (CEE) makes it a pressing matter for the region. We investigate these two phenomenon and compare results with prior research to determine their separate and combined effect on output growth in a panel regression model using Eurostat data for the period 1996 to 2013. Our findings point to both life expectancy and population ageing exerting a statistically significant, overlapping effect on real output. The conclusions of our research demonstrate the utility of augmenting macroeconomic models with a demographics-sensitive component.
    Keywords: demographics, life expectancy, population ageing, economic growth, CEE countries
    JEL: E10 J10 J11
    Date: 2017–10
  5. By: Crescenzi, Riccardo; Jaax, Alexander
    Abstract: The debate on Russia’s innovation performance has paid little attention to the role of geography. This paper addresses this gap by integrating an evolutionary dimension in an ‘augmented’ regional knowledge production function framework to examine the territorial dynamics of knowledge creation in Russia. The empirical analysis identifies a strong link between regional R&D expenditure and patenting performance. However, R&D appears inadequately connected to regional human capital. Conversely, Multinational Enterprises (MNEs) play a fundamental role as ‘global knowledge pipelines’. The incorporation of historical variables reveals that the Russian case is a striking example of long-term pathdependency in regional patterns of knowledge generation. Endowment with Soviet-founded science cities remains a strong predictor of current patenting. However, current innovation drivers and policies also concur to enhance (or hinder) innovation performance in all regions. The alignment of regional innovation efforts, exposure to localised knowledge flows and injections of ‘foreign’ knowledge channelled by MNEs make path-renewal and pathcreation possible, opening new windows of locational opportunity.
    Keywords: innovation; R&D; evolutionary economic geography; regions; BRICS; Russia
    JEL: O32 O33 R11 R12
    Date: 2017–08–03
  6. By: Clark, John (Federal Reserve Bank of New York)
    Abstract: We investigate the drivers of daily changes in the exchange value of the Chinese currency (CNY) since early 2016, when a new regime was introduced for setting the fix—the midpoint of the CNY’s daily trading range against the U.S. dollar. Daily changes in the fix, which is announced just prior to the onset of onshore trading, are shown to be highly predictable and very responsive to the change in the CNY/USD rate during the previous day’s onshore trading session and to changes in dollar cross rates. While highly predictable, the fix is shown to have uneven predictive power for the subsequent evolution of the currency’s exchange value. Daily changes in the closing value of the exchange rate have centered on the changes implied by the fix to a much greater extent in months with higher intervention intensity, but less over the course of 2017, as intervention has waned. We document ways in which the short-run behavior of the CNY/USD exchange rate has evolved to more closely resemble behavior generally observed in freely floating currencies, even as the CNY continues to exhibit unusually low daily volatility. On days of broad dollar strengthening, the CNY is found to depreciate against the dollar but appreciate against the CFETS index, the authorities’ main reference basket; the CNY now typically appreciates less than half as much as previously, when the currency was being managed primarily against the dollar.
    Keywords: Chinese currency; Chinese yuan; CNY; exchange rate regime; currency policy; flexible exchange rate; intervention; financial development
    JEL: F3 F31 F33 G15 O16
    Date: 2017–11–01
  7. By: Kukić, Leonard
    Abstract: This paper analyses the patterns of regional growth and development in Yugoslavia, under the most decentralised socialist system that ever existed. My analysis reveals that despite government efforts to the contrary, socialist economic development in Yugoslavia resulted in divergence rather than in convergence between the constituent regions. I find that regional income divergence was caused by the failure of the less developed regions to converge towards the employment rates and total factor productivities of the more developed regions. I interpret these failures as symptoms of a single underlying problem: a capital intensity bias inherent to the governing objective of labour-managed firms. Socialist Yugoslavia moved from having one central plan, to having many mutually competitive plans. While on aggregate this may have created a net positive productivity outcome compared to other socialist economies, it created unique distortions. The decentralisation policies were implemented with the aim of enhancing regional cohesion and social stability. They led, however, to exactly opposite outcomes
    Keywords: economic growth; regional development; economic history: Yugoslavia; socialism
    JEL: N0
    Date: 2017–10
  8. By: Jordan Gans-Morse (Northwestern University); Alexander S. Kalgin (National Research University Higher School of Economics); Andrei V. Klimenko (National Research University Higher School of Economics); Andrei A. Yakovlev (National Research University Higher School of Economics)
    Abstract: Throughout much of the world, corruption in the civil service undermines state capacity, impedes economic development, and saps citizens’ morale. But while its pernicious effects are widely recognized, the roots of corruption remain poorly understood. Whereas most studies on corruption’s origins focus on the incentives bureaucrats face once in office, this study contributes to a line of recently emerging research that considers the role of self-selection of citizens with a propensity for corruption into bureaucracies where corruption is known to be widespread. Drawing on a survey and experimental games conducted with students at an elite university in Moscow, Russia, we compare the attitudinal, behavioral, and demographic traits of students seeking public sector employment to the traits of their peers seeking jobs in the private sector. Contrary to studies conducted in other high-corruption contexts, such as India, we find surprising evidence that students who prefer a public sector career display lss willingness to cheat or bribe in experimental games as well as higher levels of altruism. One interpretation of these findings is that corruption in Russia results from the transformation of bureaucrats’ behavior and attitudes after entering the civil service, rather than through a process of corrupt self-selection
    Keywords: corruption, Russia, motivation, civil service, experimental games.
    JEL: D73 H83
    Date: 2017
  9. By: Natalia Konovalova (RISEBA University)
    Abstract: Abstract Transition towards regulation of banking activity based on Basel III requirements was caused by consequences of global financial and economic crisis 2007 ? 2009 that endangered the financial system stability in many countries. The banks were forced to form a large volume of accumulations to cover bad debts and could not deal with absorption of losses. It means that the system of banking regulation and supervision existing at that time did not fully reflect the banking sector risks during the periods of economic and financial shocks. The purpose of the study is to identify the influence of Basel III nonmonetary regulation methods on the banking system stability and economic growth. The study has been carried out based on financial accounting of banks in countries of East Europe. The article gives an assessment of banking activity regulation based on the implementation of Basel III requirements, which have become a response of supervisory bodies to the prevention of crisis events. It was reflected in the toughening of requirements for the capital and liquidity, which in turn required the revision of banking activity management methods. Results of the research. Bank regulation based on Basel III requirements may have both positive and adverse aspects and consequences. Positive: Growing requirements for the capital and liquidity will increase the borrowing power and solvency of banks and, therewith, the sustainability of the entire banking sector. Banking system and economy in general will be more resistant to financial shocks. Regulation based on Basel III will also contribute to reduction in systemic risk and prevention of systemic crises in future. Negative: Increase in the capital of banks as well as improvement of its structure and quality will lead to growing expenditures of banks, which in turn can entail growth in credit rates and reduction of banking activity. As a result, economic growth will slow. Reduction of banking activity will have adverse impact on profitability of banking business.
    Keywords: Key words: Capital adequacy, Bank?s liquidity, Capital safety margin, Financial leverage, Economic growth, Economic stability
    JEL: G21
    Date: 2017–10
  10. By: Václav Vybíhal (University of Ss Cyril and Methodius in Trnava, Faculty of Social Sciences, Department of Public Administration)
    Abstract: Foreign direct investments undoubtedly have a significant impact on the national economy. They contribute to economic growth, to reducing the unemployment rate and they also positively affect other macroeconomic indicators. Foreign companies bring with them not only foreign capital that they invest in the host country, but also new technology, modern and more effective production and management methods, classic standards of business conduct, new jobs as well as opportunities for domestic suppliers.Host countries then attempt to attract foreign investors via active policies through investment incentives and various preferential conditions for investing. Investment incentives for foreign investors are thus among the important public spending programs. Basic investment incentives in countries with transitive economies within the European Union include income tax credits, respectively tax holidays, the transfer of land for a subsidized price, one-time financial support for the creation of new jobs and financial support for retraining employees. The provision of investment incentives means not only an increase on the expenditure side of the public budget or a decrease of the income side of the public budget (due to tax credits), but it usually leads ? as our research demonstrated ? to a start of the influx of revenue sources for public budgets, already in the short or medium term horizon. The aim of the research was to develop a methodology for measuring the fiscal effectiveness of provided investment incentives in the process of their implementation, to determine what the effects are on the income side of the national budget, and for this purpose construct an indicator of fiscal effectiveness whose functional and explanatory power would need to be tested in practice among the recipients of investment incentives.The fiscal effectiveness of investment incentives was constructed as the share of outputs (in the form of revenues from taxes, social and health insurance, fees, savings on the expenditure side of the budget) on a unit of inputs (income tax credit, financial support for a created job, subsidy to cover the costs of employee retraining, administrative costs of collecting taxes, subsidies on the technical equipment of an area on which production is to be located, subsidy on the price of land). With regard for business plans, fiscal effectiveness was assessed for a period of 5 years from the approval and receipt of the investment incentive in a set of industrial enterprises in the Czech Republic. The research also covered results that were attained in Slovakia.
    Keywords: Foreign direct investment, investment incentives, fiscal effectiveness, industrial enterprises
    JEL: L38 G39 H20
    Date: 2017–10
  11. By: Lleo, Sebastien; Ziemba, William T.
    Abstract: Predicting stock market crashes is a focus of interest for both researchers and practitioners. Several prediction models have been developed, mostly for use on mature financial markets. In this paper, we investigate whether traditional crash predictors, the price-to-earnings ratio, the Cyclically Adjusted Price-to-Earnings ratio and the Bond-Stock Earnings Yield Differential model, predicts crashes for the Shanghai Stock Exchange Composite Index and the Shenzhen Stock Exchange Composite Index
    Keywords: equity markets; crashes; China; BSEYD; CAPE
    JEL: G10 G12 G14 G15
    Date: 2017–08–01
  12. By: Feng, Xunan (Southwestern University of Finance and Economics); Johansson, Anders C. (Stockholm China Economic Research Institute)
    Abstract: We hypothesize that political uncertainty has an adverse effect on investments in activities related to innovation. Combining two hand-collected data sets on changes in local government officials and research and development (R&D) activity at the firm level in China, we examine how political turnover influences investments in R&D. We find that a change in local political leaders is associated with a significant decrease in R&D activity. This result is robust to various robustness tests. The decrease is larger when the new political leader is promoted from outside the city in question. Moreover, the decrease is significantly larger for privately controlled firms, firms operating in regions characterized by weak economic institutions, and firms within R&D-intensive industries. Our findings suggest that political uncertainty constitutes an important channel through which the local political process influences activities related to innovation.
    Keywords: Innovation; R&D expenditures; Political turnover; Political uncertainty; Local officials; China
    JEL: G18 G32 G38 O30 O31 O32
    Date: 2017–11–15
  13. By: Jose Manuel Aburto Flores (Max Planck Institute for Demographic Research, Rostock, Germany); Alyson A. van Raalte (Max Planck Institute for Demographic Research, Rostock, Germany)
    Abstract: Central and Eastern Europe have experienced considerable instability in mortality since the 1960s. Long periods of stagnating life expectancy were followed by rapid increases in life expectancy and in some cases even more rapid declines before more recent periods of improvement. These trends have been well documented but to date, no study has comprehensively explored trends in lifespan variation. We improve such analyses by incorporating life disparity as a health indicator alongside life expectancy. We analyzed how lifespan variation has changed since the 1960s for 12 countries from the region and determined the ages which have contributed the most to the observed variability in age at death. Furthermore, we quantified the effect of mortality related to alcohol consumption on life disparity since 1994. Our results showed that life disparity was high and strongly fluctuating over the time period. Life expectancy and life disparity moved independently from one another, particularly during periods of life expectancy stagnation. Fluctuations in mortality were, to a large extent, directly or partially attributable to changes in alcohol consumption. These trends run counter to the common patterns observed in most developed countries and contribute to the life expectancy-disparity discussion by showing that expansion/compression levels do not necessarily mean lower/higher life expectancy or mortality deterioration/improvements.
    Keywords: Belarus, Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Russian Federation, Slovakia, Slovenia, Ukraine, age at death, alcoholism, causes of death, differential mortality, inequality, life expectancy
    JEL: J1 Z0
    Date: 2017–11
  14. By: Ting Chen; Zhenyu Gao; Jibao He; Wenxi Jiang; Wei Xiong
    Abstract: We use account-level data from the Shenzhen Stock Exchange to show that daily price limits, a widely adopted market stabilization mechanism, may lead to unintended, destructive market behavior: large investors tend to buy on the day when a stock hits the 10% upper price limit and then sell on the next day; and their net buying on the limit-hitting day predicts stronger long-run price reversal. We also analyze a sample of special treatment (ST) stocks, which face tighter 5% daily price limits, and provide a causal validation from comparing market dynamics before and after they are assigned the ST status.
    JEL: G12 G28
    Date: 2017–11
  15. By: Anna Pluta (Baltic International Centre for Economic Policy Studies (BICEPS)); Anna Zasova (Baltic International Centre for Economic Policy Studies (BICEPS))
    Abstract: In August 2017, the Latvian parliament adopted a major tax reform package that will come into force in January 2018. This reform was a long-awaited step from the Latvian authorities to make the personal income tax more progressive. Some of the elements of the adopted reform, e.g. the changes in the basic tax allowance are estimated to help reducing the tax wedge on low wages and help addressing the problem of high income inequality. At the same time, the way the newly introduced progressive tax rate is designed will effectively lead to a reduction in the tax burden on labor and will hardly introduce any progressivity to the system.
    Date: 2017–11

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