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
Equilibrium Exchange Rate in the Czech Republic: How Good is the Czech BEER?
Ian Babetskii; Balázs Égert
WP No. 781
(July, 2005)
Abstract:
This paper investigates the equilibrium exchange rate of the Czech koruna using the reduced form equation of the stock-flow approach advocated, for instance, by Faruqee (1995) and Alberola and others (1999). We investigate whether or not the observed real exchange rate of the Czech koruna is close to its equilibrium value over the period from 1993 to 2004. Our empirical approach is tantamount to the Behavioural Equilibrium Exchange Rate (BEER) popularised by MacDonald (1997) and Clark and MacDonald (1998) in that the Czech real exchange rate vis-à-vis the euro is regressed on the dual productivity differential and the net foreign assets position, based on which actual and total misalignment gures are derived in a time series context. In other words, we check the quality of the Czech BEER. We also study the impact of a possible initial undervaluation on the estimated equilibrium exchange rate. Employing monthly time series from 1993:M1 to 2004:M9 and applying several alternative cointegration techniques, we identify a period of an overvaluation in 1997 and in 1999, an increasing overvaluation till 2002, an undervaluation in 2003 and a correction towards equilibrium in the second half of 2004.
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Jel Codes: F31
Keywords: Equilibrium exchange rate; real exchange rate; behavioral equilibrium exchange rate; Czech koruna, transition economies; stock-flow approach; productivity
Non-Linear Exchange Rate Dynamics in Target Zones:A Bumpy Road Towards A Honeymoon Some Evidence from the ERM, ERM2 and Selected New EU Member States
Jesús Crespo-Cuaresma; Balázs Égert; Ronald MacDonald
WP No. 771
(May, 2005)
Abstract:
This study investigates exchange rate movements in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) and in the Exchange Rate Mechanism II (ERM-II) On the basis of Bessec (2003), we set up a three-regime self-exciting threshold autoregressive model (SETAR) with a non-stationary central band and explicit modelling of the conditional variance. This modelling framework is employed to model daily DM-based and median currency-based bilateral exchange rates of countries participating in the original ERM and also for exchange rates of the Czech Republic, Hungary, Poland and Slovakia from 1999 to 2004. Our results confirm the presence of strong non-linearities and asymmetries in the ERM period, which, however, seem to differ across countries and diminish during the last stage of the run-up to the euro.
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Jel Codes: F31, G15, O10
Keywords: target zone, ERM, non-linearity, SETAR
Testing for inflation convergence between the Euro Zone and its CEE partners
Imed Drine; Christophe Rault
WP No. 768
(April, 2005)
Abstract:
We investigate inflation convergence between the Euro Zone and its CEE partners using panel data methods that incorporate structural shifts. We find strong rejections of the unit root hypothesis, and therefore evidence of PPP, in the East-European countries for the 1995:1 to 2000:4 period.
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Jel Codes: C15, E31, F0, F31
Keywords: Purchasing power parity, inflation convergence, developing country, panel unit-root tests allowing structural breaks.
Foreign Investment, Corporate Ownership, and Development: Are Firms in Emerging Markets Catching Up to the World Standard?
Michal Skorepa; Jan Svejnar; Katherine Terrell
WP No. 734
(January, 2005)
Abstract: Economic development implies that the efficiency of firms in developing countries is approaching that of firms in advanced economies. We examine the extent of this convergence in the Czech Republic and Russia, economies that represent alternative models of implementing development policies, often referred to as the Washington Consensus, that have promoted privatization, competition and foreign investment. We also test hypotheses positing that only firms near the efficiency frontier benefit from these policies and catch up. Using 1992-2000 panel data on virtually all industrial firms in each country, we find that privatization to domestic owners did not markedly improve the efficiency of firms; domestic firms are not catching up to the (world) efficiency standard given by foreign-owned firms; and the distance of the Russian firms to the efficiency frontier is much larger than that of the Czech firms and continued to grow for most firms beyond 1997 while remaining constant in the Czech Republic. Domestic firms closer to the frontier are not more likely to catch up than firms further from the frontier although foreign firms do exhibit this behavior. Foreign-owned firms are increasingly displacing domestic firms in the top deciles of the overall distribution of efficiency, due in part to slower "learning" by domestic firms, higher efficiency of foreign startups, and foreigners' acquisitions of more efficient domestic firms. The two alternative implementations of the Washington Consensus policies have thus not enabled domestic firms to start catching up to the world standard.
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Jel Codes: C33, D20, G32, L20
Keywords: Efficiency, productivity, economic development, foreign direct investment, ownership, convergence, frontier, Czech Republic, Russia, Washington Consensus.
The Politics of Institutional Learning and Creation: Bank Crises and Supervision in East Central Europe
Gerald A. McDermott
WP No. 726
(November, 2004)
Abstract: This article examines the political conditions shaping the creation of new institutional capabilities. It analyzes bank sector reforms in the 1990s in three leading postcommunist democracies Hungary, Poland, and the Czech Republic. It shows how different political approaches to economic transformation can facilitate or hinder the ability of relevant public and private actors to experiment and learn their new roles. With its emphasis on insulating power and rapidly implementing self-enforcing economic incentives, the "depoliticization: approach creates few changes in bank behavior and, indeed impedes investment in new capabilities at the bank and supervisory levels. The "deliberative restructuring" approach fostered innovative, costeffective monitoring structures for recapitalization, a strong supervisory system, and a stable, expanding banking sector.
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Jel Codes: F02, G28, K23, P26, P48
Keywords: Institutional change, transition economies, bank crises, bank supervision, learning
Languages in the European Union: The Quest for Equality and its Cost
Jan Fidrmuc; Victor Ginsburgh
WP No. 715
(July, 2004)
Abstract: The European Union has recently expanded from 15 to 25 countries. In line with this enlargement, the list of official EU languages has grown from 11 to 20. Currently, the EU extends equal treatment to all member countries? official languages by providing translations for documents and interpreting services for meetings and sessions of the European Parliament. This, however, is costly, especially when recognizing that many Europeans speak one of the procedural languages of the EU, English, French or German, either as their native language or as a foreign language. We compute disenfranchisement rates that would result from using only the three procedural languages for all EU business, and marginal costs per disenfranchised person associated with providing translations and interpreting into the remaining 17 languages. The marginal costs are shown to vary substantially across the different languages, raising important questions about the economic efficiency of equal treatment for all languages. We argue that an efficient solution would be to decentralize the provision of translations.
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Jel Codes: D70, O52, Z13
Keywords: Languages, Disenfranchisement, European Union, Cost and benefit analysis
Consumers' Opinion of Inflation Bias Due to Quality Improvements
Jan Hanousek; Randall K. Filer
WP No. 681
(May, 2004)
Abstract: Measurement of quality changes has proven to be an especially difficult aspect of calculating unbiased rates of inflation. We propose a new methodology of capturing quality improvements based on consumer focus groups and apply this methodology in an environment where quality changes might be expected to be especially rapid and extensive, a post-communist transition economy. We find that the methodology indicates a substantial understatement of quality improvements during transition, and, therefore, a substantial overstatement of inflation resulting in a serious downward bias in growth rate estimates for post-communist economies. The move to free markets has apparently improved consumers= welfare more by improving what they can purchase than by increasing how much they can purchase. Overall, mismeasurement of quality changes may have understated Czech growth rates during the first decade after communism by as much as 5 percentage points per year.
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Jel Codes: C82, E31, P24
Keywords: Inflation Bias, Quality Change, Transition Economies, Czech Republic
Modelling Stock Returns in the G-7 and in Selected CEE Economies: A Non-linear GARCH Approach
Balázs Égert; Yosra Koubaa
WP No. 663
(February, 2004)
Abstract: This paper investigates conditional variance patterns in daily return series of stock market indices in the G-7 and 6 selected economies of Central and Eastern Europe. For this purpose, various linear and asymmetric GARCH models are employed. The analysis is conducted for Canada, France, Germany, Italy, Japan, the UK and the US for which the TSX, CAC-40, DAX-100, BCI, Nikkei-225, FTSE-100 and DJ-30 indices are respectively considered over the period 1987 to 2002. Furthermore, the official indices of Czech, Hungarian, Polish, Russian, Slovak and Slovene stock markets are also studied, i.e. the PX-50, BUX, WIGI, RFS, SAX-16 and SBI, respectively, over 1991/1995 to 2002. The estimation results reveal that the selected stock returns for the G-7 can be reasonably well modelled using linear specifications whereas the overwhelming majority of the stock indices from Central and Eastern Europe can be much better characterised using asymmetric models. In other words, stock markets of the transition economies exhibit much more asymmetry because negative shocks hit much harder these markets than positive news. It also turns out that these changes do not occur in a smooth manner but happen pretty brusquely. This corroborates the usual observation that emerging stock markets may collapse much more suddenly and recover more slowly than G-7 stock markets.
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Jel Codes: C52, G10, P52
Keywords: volatility modelling, conditional variance, non-linearity, asymmetric GARCH, G-7, transition economies
Who Is in Favor of Enlargement? Determinants of Support for EU Membership in the Candidate Countries’ Referenda
Orla Doyle; Jan Fidrmuc
WP No. 660
(February, 2004)
Abstract: We analyze support for EU membership as expressed in voting patterns in the candidate countries' referenda on EU membership, using regional referendum results and individual survey data on voting intentions. We find that favorable individual and regional characteristics are positively correlated with support for accession and voter participation. In contrast, those who should benefit from future EU transfers are less likely to vote and/or support EU membership. We argue that voters in the candidate countries assign greater weight on future benefits from liberalization and integration than on potential gains through redistribution.
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Jel Codes: J61, P26, P33, Z13
Keywords: Voting, referendum, EU enlargement, integration
European Integration, Productivity Growth
Taner M. Yigit; Ali M. Kutan
WP No. 657
(February, 2004)
Abstract: This paper derives a stochastic endogenous growth model that investigates the impact of European Union integration on convergence and productivity growth. We deviate from the general strand of literature by not only deriving a theoretical model for the effects of integration on the rate of economic growth, but also by using more appropriate estimation techniques. The outcome of a series of panel and structural break tests examining the accession process of five recent members to the Union generally show improved rates of productivity growth and convergence to EU standards. We then draw from the experience of these recent members to derive implications for the first-round EU candidate countries. Subsequent tests on the first-round candidate countries find a high level of heterogeneity in growth rates, and a fast-paced convergence to EU standards.
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Jel Codes: O4, O52, P2
Keywords: European integration, growth, transition economies, convergence
Financial Integration, Exchange Rate Regimes in CEECs, And Joining the EMU: Just Do It...
Mathilde Maurel
WP No. 650
(February, 2004)
Abstract: Candidate countries of central and eastern Europe (CEECs) are suppose to join the EU in 2004, June, which imply that they will face important challenges in the conduct of macroeconomic policy, in order to be able to enter the ERM-II system and eventually enter the EMU (European Monetary Union). Abandoning an independent monetary policy might entail significant costs for countries, which have succeeded in recovering and are in a process of catching-up. However those costs have probably been exaggerated, and their estimation biased by the traditional optimal currency area criteria. The main criticism against a too strong emphasis on the latter rests on two arguments. The first one is that assessing the trade-off for joining the EMU does not deliver the same conclusion ex ante and ex post. Meanwhile, the degree of financial integration will likely increase dramatically, which in turns will decrease the opportunity cost of loosing the monetary policy for absorbing country specific shocks. In a world of capital mobility, the room left for an independent monetary policy is very narrow, maybe close to zero in small, emerging countries, more vulnerable to speculative attacks than countries in the core. The second argument is more empirical. While the link between the exchange rate regime and the fundamentals is rather weak, the political agenda of joining the EU and subsequently the EMU seems to explain the choice of the exchange rate regime.
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Jel Codes: F15, F41
Keywords: exchange rate arrangements, accession to the EMU, EU enlargement, international capital
Corporate Investments, Liquidity and Bank Financing: Empirical Evidence from an Emerging Market
Arun Khanna
WP No. 649
(February, 2004)
Abstract: A number of studies in the prior literature have found a link between cash flow and firm investment [Hubbard (1998) and cites therein]. Findings of most of these studies have the caveat that cash flow could simply be capturing expectations of future profitability because the empirical proxy (typically a version of average Q or market to book ratio) for marginal Q is imperfect. This study removes this caveat while retaining the Fazarri, Hubbard and Petersen's (1988) a-priori sorting of firms into liquidity constrained and non-liquidity constrained regression framework. This study focuses on inventory investments of two sets of Indian manufacturing firms: issuers and non-issuers of short-term arm's length debt during 1996-97, a time period of robust economic growth and simultaneously an inward shift in the supply of bank loans instituted by the Reserve Bank of India (RBI). Non-issuer firms have significantly higher investment-liquidity sensitivities vis-à-vis issuer firms for inventory investments in 1996-97. Issuer and non-issuer firms investing less than their internal funds have no differences in liquidity coefficients while firms investing more than their internal funds do. Issuer and non-issuer firms that do not face an increase in the cost of external debt (ergo not an increase in inferred external and internal cost of funds wedge) have no differences in liquidity coefficients while the two set of firms that face an increase do. Differences in investment-liquidity sensitivities between the two set of firms arise from their differences in bank dependence and hypotheses including pure bank dependence, priority lending and loans above banks' rule for estimating a firm's debt capacity find empirical support. Bank characteristics based hypotheses including single banking relationship and weak banks with below Basle capital standards cannot explain differences in liquidity constraints. Alternative explanations including agency problems, the flypaper effect, over-investment, legal regimes of parent companies and crony capitalism do not find empirical support. Debt overhang hypothesis is supported by the data.
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Keywords: Liquidity Constraints, Inventories, Bank Financing, Agency Problems,Flypaper Effect, Capital Investments and India.
Financial Constraints in Investment - Foreign Versus Domestic Firms.
Tomasz Mickiewicz; Kate Bishop; Urmas Varblane
WP No. 648
(February, 2004)
Abstract: Using data from Estonian manufacturing firms during the period 1995-1999 we apply panel data techniques, in particular the Arellano-Bond (1991) method to investigate the investment behaviour. We employ the model of optimal capital accumulation in the presence of convex adjustment costs. We find that the domestic companies seem to be more financial constrained than those with the presence of foreign investors. Furthermore we find that smaller firms are more constrained than their larger counterparts.
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Jel Codes: C23, F23, G32, P31
Keywords: Investment, Cash Flow, Foreign Ownership, Firm Size, Estonia
Legal Minimum Wages and the Wages of Formal and Informal Sector Workers in Costa Rica
T.H. Gindling; Katherine Terrell
WP No. 647
(February, 2004)
Abstract: The classic dual economy models of developing countries hold minimum wages (among other institutions) accountable for persistent dualism. They note that applying or enforcing minimum wage laws in only one sector of the economy will create wage differentials which will not be eroded with labor mobility to the high wage sector. In this paper we use 12 years of micro data on thousands workers living in Costa Rica to test whether legal minimum wages have a differential impact on the wages of workers in the formal sector vs. informal sector, defined in various ways in accordance with the dual development models. The evidence from Costa Rica is contrary to the assumptions of these models. We find that increases in minimum wages not only raise the wages of workers in the urban formal sector (large urban enterprises) who are covered by minimum wage law, but they also increase the wages of all other workers covered by minimum wage legislation in what are traditionally regarded as informal sectors and where the legislation is often considered not to be enforced.
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Jel Codes: J23, J31, J38
Keywords: dual economy, informal sector, minimum wages, wages, Costa Rica, Latin America
The Monetary Approach to Exchange Rates in the CEECs
Jesús Crespo-Cuaresma; Jarko Fidrmuc; Ronald MacDonald
WP No. 642
(January, 2004)
Abstract: A panel data set for six Central and Eastern European countries (the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia) is used to estimate the monetary exchange rate model with panel cointegration methods, including the Pooled Mean Group estimator, the Fully Modified Least Square estimator and the Dynamic Least Square estimator. The monetary model is able to convincingly explain the long-run dynamics of exchange rates in CEECs, particularly when this is supplemented by a Balassa-Samuelson effect. We then use our long-run monetary estimates to compute equilibrium exchange rates. Finally, we discuss the implications for the accession of selected countries to the European Economic and Monetary Union.
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Jel Codes: C33, F31, F36
Keywords: Exchange rates, monetary model, panel unit root tests, panel cointegration, EMU.
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
The Allocation and Monitoring Role of Capital Markets: Theory and International Evidence
Solomon Tadesse
WP No. 624
(October, 2003)
Abstract: Capital markets perform two distinct functions: provision of capital and facilitation of good governance through information production and monitoring. I argue that the governance function has more impact on the efficiency with which resources are utilized within the firm. Based on industry level data across thirty-eight countries, I present evidence suggesting a positive relation between market-based governance and improvements in industry efficiency. The measures of governance are also positively correlated with productivity improvements and growth in real output. Furthermore, while governance affects efficiency, the capital provision services induce technological change. The evidence underscores the role of capital markets as a conduit of socially valuable governance services as distinct from capital provision.
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Jel Codes: E44, G14, G3, G34, O16
Keywords: Corporate Governance, Information Aggregation, Monitoring, Economic
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
Compensating Differentials in Emerging Labor and Housing
Mark C. Berger; Glenn C. Blomquist; Klara Sabirianova Peter
WP No. 620
(October, 2003)
Abstract: The existence of compensating differentials in Russian labor and housing markets is examined using data from the Russian Longitudinal Monitoring Survey (RLMS) augmented by city and regional-specific characteristics from other sources. While Russia is undergoing transition to a market economy, we find ample evidence that compensating differentials for location-specific amenities exist in the labor and housing markets. Our estimated wage and housing value equations suggest that workers are compensated for differences in climate, environmental conditions, ethnic conflicts, crime rates, and health conditions, after controlling for worker characteristics, occupation, industry, and economic conditions, and various housing characteristics. Moreover, we find evidence that these compensating differentials exist even after controlling for the regional pay differences (?regional coefficients?) used by the Russian government to compensate workers for living in regions that are designated as less desirable. We rank 953 Russian cities by quality of life as measured by a group of eleven amenities. Sizable variation in the estimated quality of life across cities exists. The highest ranked cities tend to be in relatively warm areas and areas in the western, European part of the country. In addition, our quality of life index is positively correlated with net migration into a region, suggesting workers are attracted to amenity-rich locations. Overall, we find that sufficient market equilibrium exists and a model of compensating differentials with controls for disequilibrium yields useful information about values of location-specific amenities and quality of life in this large transition economy.
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Jel Codes: D5, H4, J3, J6, P2, P3, Q2, R1, R2
Keywords: compensating differentials, equilibrium, hedonic, quality of life, amenities,
Culture Rules: The Foundations of the Rule of Law and Other Norms of Governance
Amir N. Licht; Chanan Goldschmidt; Shalom H. Schwartz
WP No. 605
(July, 2003)
Abstract: This study presents evidence about relations between national culture and social institutions. We operationalize culture with data on cultural dimensions for over 50 nations adopted from cross-cultural psychology and generate testable hypotheses about three basic social norms of governance: the rule of law, corruption, and accountability. These norms correlate systematically and strongly with national scores on cultural dimensions and also differ across cultural regions of the world. Regressions indicate that quantitative measures of national culture are alone remarkably predictive of governance, that economic inequality and British heritage add to predictive power, but that economic development and other factors add little. The results suggest a framework for understanding the relations between fundamental institutions of social order as well as policy implications for reform programs in transition economies.
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Jel Codes: K00, O10, O19, P20, P26, P50, Z13
Keywords: Rule of Law, Corruption, Accountability, Culture, Governance, Economic Inequality, Economic Development
Asymmetric Fluctuation Bands In ERM And ERM-II: Lessons From The Past And Future Challenges For EU Acceding
Balázs Égert; Rafal Kierzenkowski
WP No. 597
(July, 2003)
Abstract: The forthcoming EU enlargement raises a series of questions related to the new entrants? entry to Exchange Rate Mechanism II and their subsequent adoption of the single currency. In this paper, the issue of how to determine the central parity for the acceding countries with which to enter ERM-II is tackled. This is followed by a discussion of the asymmetric nature of the fluctuation bands around the central parity that could be deemed as compatible with the Maastricht criterion on exchange rate stability, i.e. +2.25%/-15% within the officially announced ±15% fluctuation margins. Then, practices of the European Monetary Institute/ECB and the European Commission are compared when assessing the criterion on exchange rate stability. With this as a background, hypothetical ERM-II is constructed for 4 acceding countries with flexible exchange rate regimes so as to assess ex post the sustainability of these countries? participation in ERM-II. Based on this, given ex post exchange rate variability and the limited intra-marginal intervention facilities ERM-II participant countries have at their disposal, the defence of the asymmetric band appears a tricky task even though the +2.25% limit on the weaker side of the band is rendered somewhat intangible by a 10-day moving average rule used by the EMI/ECB and further flexibility is given to the system in that a depreciation of more than 2.25% is not automatically viewed as a non-fulfilment of the criterion on exchange rate stability.
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Jel Codes: E31, F31, O11, P17
Keywords: exchange rate, exchange rate mechanism, ERM, EU enlargement, asymmetric band,
Power Analysis of the Nice Treaty On the Future of European Integration
Yener Kandogan
WP No. 576
(June, 2003)
Abstract: I carry out a power analysis of changes in voting weights and rules in the Nice Treaty of the EU on the widening and deepening of European integration, by applying methods that use Shapley-Shubik and Banzhaf indices. Significant decrease in voting power of small countries makes widening of integration more acceptable to incumbent members due to small size of the applicants. Relative increase in the conciliatory power of smaller members, and relative increase in the independent power of bigger members make smaller members compromise more in the coalitions they form, and improve the position of large members for further deepening of the integration. Lastly, the fairness analysis reveals a more federalist face for the EU in the way votes are distributed in Nice.
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Jel Codes: D70, F15
Keywords: EU, Voting Power, Integration, Enlargement, Federalis
Non-Tech Abstract:
Reintroducing Intergenerational Equilibrium: Key Concepts behind the New Polish Pension System
Marek Góra
WP No. 574
(June, 2003)
Abstract: Poland adopted a new pension system in 1999. This new pension system allows Poland to reduce pension expenditure (as a percent of GDP), instead of increasing it ? as is projected for the majority of other OECD countries. This paper presents the conceptual background of the new system design. The new system?s long-term objective is to ensure intergenerational equilibrium irrespective of the demographic situation. This requires stabilisation of the share of GDP allocated to the entire retired generation. Traditional pension systems aim, instead, at stabilisation of the share of GDP per retiree. The change in demographic structure observed over the past for a couple of decades and this historic attempt to stabilise the share of GDP per retiree led to severe fiscal problems and negative externalities for growth, as observed in numerous countries. Many countries have tried to reform their pension systems in different ways to try to resolve the issue of these ever-increasing costs. Although the Polish reform uses a number of techniques applied elsewhere, its design differs from the typical approaches ? and the lessons and results are promising for all OECD countries. This paper presents the theoretical and practical application of this alternative approach and as such, the key features of the new Polish pension system design.
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Jel Codes: D50, H55, H63
Keywords: pensions, equilibrium, GDP, pension debt servicing, income allocation,
Growth and Regional Inequality in China During the Reform Era
Derek C. Jones; Cheng Li; Ann L. Owen
WP No. 561
(June, 2003)
Abstract: Chinese city-level data indicate that differences in growth rates are far more severe than indicated in previous studies which typically use data at higher levels of aggregation. We estimate growth equations using city-level data and find that the policy of awarding a special economic zone status enhances growth substantially, increasing annual growth rates by 5.5 percentage points. Annual growth rates of open coastal cities are, on average, 3 percentage points higher. Our qualitative results on the role of policy and the effects of FDI are similar to those of earlier studies that have employed provincial-level data; but, quantitatively, our results are substantially different. We also provide evidence of an indirect role of policy in the growth process through its ability to attract growth-enhancing foreign direct investment.
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Jel Codes: O10, O40, O53
Keywords: growth, regional inequality, China
Choice of Ownership Structure and Firm Performance: Evidence from Estonia
Derek C. Jones; Panu Kalmi; Niels Mygind
WP No. 560
(May, 2003)
Abstract: In this paper we use rich panel data for a representative sample of Estonian enterprises to analyse diverse issues related to the determinants of ownership structures and ownership changes after privatisation. A key focus is to determine whether ownership changes are related to economic efficiency. While employee owned firms are found to be much more prone than other firms to switch ownership categories, often ?employee owned? firms remain ?insider-owned? as ownership passes from current employees to managers and former employees. Logit analyses of the determinants of ownership structures and ownership changes provides mixed support for several hypotheses. As predicted: (i) wealth and resource constraints play a crucial role in the determination of ownership, with foreigners buying firms with the highest equity levels and insiders buying firms with the lowest equity valuations; (ii) risk aversion explains subsequent ownership changes, especially away from employee ownership; (iii) allocation of ownership depends on the pre-privatisation origin and location of the firm, and these factors also influence subsequent ownership changes. Finally we compare our findings with those achieved by using more conventional approaches to analyze efficiency that use very similar data. Reassuringly the evidence presented in this paper is consistent with the view that efficiency considerations drive ownership changes (while earlier analysis for Estonia and for many other transition economies has identified the impact of ownership on economic performance.) However, the findings in this paper also establish that there are important influences besides economic efficiency that affect enterprise ownership and ownership changes.
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Jel Codes: G3, J5, P2, P3
Keywords: Privatisation, ownership change, employee ownership, transition economies, Estonia
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