The research, upon which the below working papers are based, was funded, in whole or in part, through a Grant provided by the United States Department of State's Program for the Study of Eastern Europe and the Independent States of the Former Soviet Union (Title VIII) and administered by the William Davidson Institute. The opinions, findings and conclusions or recommendations expressed herein are those of the Author(s) and do not necessarily reflect those of the Department of State or the William Davidson Institute.
Measuring Underground (Unobserved, Non-Observed, Unrecorded) Economies in Transition Countries: Can We Trust GDP?
Edgar L. Feige; Ivica Urban
WP No. 913
(March, 2008)
Abstract: This paper compiles alternative estimates of underground economies in twenty five transition countries during the transition decade and finds a disturbing lack of convergence between them, calling into question the reliability of GDP figures
(which in varying degrees now include non-transparent imputations for the “nonobserved economy”) as well as the macro model estimates of the unrecorded economy. A corollary of this finding is that substantive results from many studies
examining the consequences of the radical transition from planned to market economies must be viewed with considerable skepticism. Underground (unobserved, non-observed, unrecorded) economic activities play a major role in transition economies. Evaluations of the success and failure of the transition experience should be based on estimates of total economic activity (TEA) namely, recorded plus unrecorded economic activity. We examine the conceptual and empirical relationships between new National Income and Product Accounts (NIPA) methods for obtaining “exhaustive” measures of total economic activity and the two most popular macro-model approaches (electric consumption and currency ratio models) for estimating the size and growth of the unrecorded sector.
Our updated empirical results detailing the size and trajectory of unrecorded activities obtained from different estimation methods reveal a disturbing lack of convergence. Until these important differences are resolved, investigations of the relationship between economic reforms and economic outcomes during the
transition decade must be viewed with considerable caution. Given the shortcomings of conventional macro model estimates of the underground economy and the lack of transparency and consistency of NOE estimates, it is high time that the profession acknowledges how little we really know about underground economies and their causes and consequences.
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Jel Codes: E01, E26, H26, O11, O17, P24
Keywords: Underground, unrecorded, unobserved, non-observed, NOE, hidden, informal, shadow, GDP, national accounts, transition economies.
Privatization with Government Control: Evidence from the Russian Oil Sector
Daniel Berkowitz; Yadviga Semikolenova
WP No. 826
(February, 2006)
Abstract: Governments that privatize state industries often retain control over key distribution assets. While there are many examples of this form of partial privatization, to our knowledge there are no substantial quantitative studies of how governments use their control under these circumstances. In this paper we argue that the Russian government privatization of the oil sector during 1994-2003 is a useful case study because the federal government privatized oil production but retained monopoly control rights over the transport of crude onto world markets. Based on a simple analysis of the costs and benefits of control and ownership, we argue that that in these circumstances the federal government would use its control over transport capacity to provide privileged access to those companies over which it has influence. We find that in 2003 this is indeed the case and that this system detracted from economic efficiency. In particular, private and regionally owned companies had to be much more productive than companies over which the federal government (the state) had influence to receive comparable access to world markets; state-influence companies had preferential access to routes with more capacity; and, the allocation of route capacity was sensitive to transport costs only in the state-influence sector.
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Jel Codes: K23, L5, P20
Keywords: control, ownership, oil pipeline, Tobit
Evaluation of Mass Privatization in Bulgaria
Jeffrey Miller
WP No. 814
(March, 2006)
Abstract: The mass privatization program in Bulgaria was implemented in 1996-97. Following programs in countries like the Czech Republic, more sophisticated regulatory bodies were put into place to prevent the kind of abuses observed elsewhere. This study finds that Bulgaria avoided some of the extreme problems that manifested themselves in these other countries, but there were still serious problems of dilution. Dilution is similar in both mass privatization firms and nonmass privatization firms. Dilution is associated with positive performance, suggesting that more concentrated ownership has had some benefits. Even after a
number of years have passed, mass privatization firms have performed less well than firms privatized by other means.
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Jel Codes: G3, P3, P5
Keywords: Bulgaria, mass privatization, dilution
Original Sin, Good Works, & Property Right's in Russia: Evidence From a Survey Experiment
Tim Frye
WP No. 801
(September, 2005)
Abstract: Are property rights obtained through legally dubious means forever tainted with original sin or can rightholders make their ill-gotten gains legitimate by doing good works? This is a critical question for developing countries (and Russia in particular) where privatization is often opaque and businesspeople may receive property, but remain unwilling to use it productively due to concerns about the vulnerability of their rights to political challenge. Using a survey of 660 businesspeople conducted in Russia in February 2005, I find that the original sin of an illegal privatization is difficult to expunge. Businesspeople, however, can improve the perceived legitimacy of property rights by doing good works, such as investing in the firm and by providing public goods for the region. Finally, managers that provide public goods for their region are more likely to invest in their firms than those who did not. The finding that public goods providers invest at higher rates is at odds with standard economic logic, but fits well with the more political view of property rights developed here. These findings have implications for political economy and contemporary Russia.
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Jel Codes: K11, O17, P14, P16
Keywords: Property Rights, Transition, Rule of Law, Privatization
Fiscal Reform and its Firm-Level Effects in
John Anderson
WP No. 800
(August, 2005)
Abstract: This paper reports the first empirical evidence that fiscal reform efforts in transition countries have positive effects. Using the EBRD BEEPS I and II data, reported in 1999 and 2002, rigorous econometric models are estimated showing that the share of bribes paid to tax collectors is reduced in countries with more extensive fiscal reforms. This effect controls for selection bias in the likelihood that firms are required to make unofficial payments to tax authorities. On the basis of this evidence, we now have some confidence in the success of fiscal reform efforts. In addition, we have insight regarding what forms of fiscal reform may be more successful as the share of revenues generated from direct taxes (both personal and corporate) has an impact on tax bribes.
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Jel Codes: C21, H25, O23, O52
Keywords: Fiscal reform, Bribery, Transition economies, Eastern Europe, Central Asia
Estimating the Size and Growth of Unrecorded Economic Activity in Transition Countries: A Re-evaluation of Electric Consumption Method Estimates and their Implications
Edgar L. Feige; Ivica Urban
WP No. 636
(December, 2003)
Abstract: It is widely acknowledged that underground (unrecorded) economic activities play a major role in transition economies. Evaluations of the success and failure of the transition experience should therefore be based on total economic activity [TEA], namely, the sum of recorded and unrecorded economic activity. Substantive conclusions concerning the effects of unrecorded activities on the transition process as well as investigations of the causes and consequences of unrecorded activities have to date, relied extensively on estimates of unrecorded income based on variants of the electric consumption method [ECM] during the first half of the transition process. We first attempt to replicate these estimates employing improved data series. We then go on to extend and update alternative versions of the ECM estimates of unrecorded income for twenty five transition countries for the period 1989-2001. These new estimates enable us to examine the sensitivity of the results to alternative specifying assumptions, particularly, initial conditions. We find that our updated ECM estimates of the size of the unrecorded sector are not only highly sensitive to initial conditions, but they produce negative estimates of unrecorded income for many transition countries. Our findings are also compared to the new national accounting procedures that attempt to estimate exhaustive measures of the 'non-observed economy.' Our disturbing results call into question many of the substantive conclusions reached by other scholars who relied on earlier ECM estimates to draw inferences about the transition process as well as the causes and consequences of underground economies in transition.
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Jel Codes: D78, H2, H26, O17, O40, O5, P20
Do Market Pressures Induce Economic Efficiency: The Case of Slovenian
Peter F. Orazem; Milan Vodopivec
WP No. 621
(October, 2003)
Abstract: The Slovenian transition represents a slow but steady liberalization of constraints on competition. Using a unique longitudinal data set on all manufacturing firms in Slovenia over the period 1994-2001, this study analyzes how firm efficiency changed in response to changing competitive pressures, holding constant firm attributes. Results show that the period was one of atypically rapid growth of total factor productivity (TFP) relative to levels in OECD countries, and that the rise in firm efficiency occurs across almost all industries and firm types: large or small; state or private; domestic or foreign-owned. Changes in firm ownership type have no impact on firm efficiency. Rather, competitive pressures that sort out inefficient firms of all types and retain the most efficient, coupled with the entry of new private firms that are at least as efficient as surviving firms, prove to be the major source of TFP gains. Market competition from new entrants, foreign-owned firms, and international trade also raise TFP in the industry. Results strongly confirm that market competition fosters efficiency.
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Jel Codes: L1, P27
Keywords: Efficiency, Competition, Growth, Total Factor Productivity, Slovenia
Children at Risk: Infant and Child Health in Central Asia
Cynthia Buckley
WP No. 523
(January, 2003)
Abstract: Using Demographic and Health Surveys, government statistics, and field observations I examine trends in infant and child health in Uzbekistan, Kazakstan and the Kyrgyz Republic. Health indicators (anemia and marked low weight for age) for the population under the age of 3 are examined nationally, regionally and by ethnic groups. Findings indicate the risk of compromised child health varies by ethnicity, but the effect is dramatically lessened by the introduction of household and maternal controls such as parental education, residence, and mother?s health status. Findings highlight the social costs of transition, illustrate the importance of maternal health across the region, and assist in the identification of groups at highest risk for poor child health within individual countries.
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Jel Codes: I0, J1, N3, P2
Keywords: Child Health, Central Asia, Transitionary Economies, Anemia, Stunting, Maternal Health