Radical versus Incremental Change: The Role of Capabilities, Competition, and Leaders
Karen L. Newman
WP No. 200
(March, 1998)
Abstract: abstract
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The Emergence of Market Practices in China's Economic Transition: Price Setting Practices in Shanghai's Industrial Firms
Douglas Guthrie
WP No. 199
(February, 1998)
Abstract: This study focuses on the ability for medium- and large-scale economic actors to set prices independent of state control in reform era China. Analysis of a random sample of firms in industrial Shanghai shows two significant findings. First, in support of theories of path dependence, a firm's position in the administrative hierarchy of the former command economy has a significant impact on the freedom the firm has to set prices; firms closer to the central government are significantly more likely to set pr-ices independent of state control. This finding offers a counter perspective to studies that have argued, based on a lack of gains in productivity, that reforms are not being enacted in the upper levels of China's industrial hierarchy. Second, firms are influenced by formal relationships with foreign joint venture partners, as those with joint venture partnerships are significantly more likely to set prices independent of state control. This finding offers empirical support for the idea that foreign investment has an on-the-ground impact on the decisions and practices of firms in China's transitional economy.
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The Application of Change Management Methods at Business Organization Operating in Hungary: Challenges in the Business and Cultural Environment and First Practical Experiences
Janos Feher; Martha Szigeti Bonifert
WP No. 198
(January, 1998)
Abstract: The aim of this paper is to review the business and cultural challenges of applying Western change management philosophies and practices and to report about relevant firm level experiences observed within the transition period toward a market economy. The authors identify trends in the actual macro and micro economic and cultural environment, necessitating, driving and/or restraining these behaviorally planned change programs. After introducing the challenges change administrators confront with when planning and implementing change programs, they report on how the change management approaches, strategies and tools found as valuable in other cultures - especially in North America and We-stem Europe - were applied by some foreign and indigenous organizations in a country pioneering recent changes in the CEE region in many respects. The authors group their general observations and hypothetical suggestions about the change management practices of companies they had practical experiences with around the following topics: the organizations' attitude toward managing constant change, the existence of practices pursued on different levels of change processes, and specific change strategies and tools applied for managing change. They suggest that practices like institutionalizing mechanisms for dealing with constant change, Introducing behaviorally based change management programs and using a v2Aety of specific tools for guiding change processes were characteristic more of the change administration of foreign/multinational companies. At the - wholly or partly Hungarian owned. Recently privatized and strategically redirected - companies the change interventions were less targeted to behavioral aspects. Change practices of the latter companies rather aimed at the change focus, and partly, also the related formal subsystems level. The authors suggest hypothetical explanations for the reluctance to use new change management principles and Identify possible patterns of failure in transplanting Western method.
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Organizational Changes in Russian Industrial Enterprises: Mutation of Decision-Making Structures and Transformation of Ownership
Igor B. Gurkov
WP No. 197
(January, 1998)
Abstract: The paper summarizes the results of 20 case studies in Russian domestically oriented industrial companies. Through interviews with corporate executives and surveys of employees we revealed the changes in decision-making authority and transformations in control structures. Five major types of control, currently prevailing in Russian industrial companies are identified, and their strengths and weakness for building consistent corporate strategies are outlined. The possession by top executives of blocking interests (25-30% of the stock) in their companies is considered to be a necessary pre-requisite for building a consistent adaptation strategy.
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Understanding and Managing Challenges to the Romanian Companies During Transition
Dan Candea; Rodica M. Candea
WP No. 196
(January, 1998)
Abstract: The paper starts by analyzing the major problems that occur during the transition period in Romania, both at the macroeconomic and at the macroeconomic level. We draw on information obtained from our consulting work, from direct contact with managers participating in educational and training programs, and from published data. In the course of analysis we advance and discuss two theses regarding the challenges facing Romanian companies during transition: (1) in the post- 1 989 Romania, the managerial deficiencies are more severe than the resource shortages, and (2) the restructuring of Romanian companies should be achieved by a process of human resource centered organizational change. The two theses lead us to propose a particular approach to deal with these challenges: focusing on people, as the most valuable resource of the organization, and properly handling the relationship between the strategy and the cultural dimension of the organization.
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Insider Lending and Economic Transition: The Structure, Function, and Performance Impact of Finance Companies in Chinese Business Groups
Lisa A. Keister
WP No. 195
(December, 1997)
Abstract: During the 1980s, China experienced dramatic real growth without the benefit of a well-developed financial system. China's experience during that decade provides an interesting contrast to evidence that real growth is strongly correlated with the development of an economy's formal financial system. Also during the 1980s, business groups were developing among Chinese firms. Many business groups, almost immediately after their formation, established finance companies, specialized firms that collected and redistributed funds within the group and also obtained funds through state banks on behalf of member firms. As such, the finance companies engaged in a type of "insider lending" that economic historians argue has aided firms in overcoming the challenges associated with poorly-developed formal financial markets in other developing economies. I examine the emergence, structure, and performance impact of insider lending arrangements in Chinese business groups using data on China's 40 largest business groups and their 535 member firms in 1988 and 1990. The analyses reveal that the presence and predominance of insider lending arrangements in the business groups positively affect the financial performance (profitability) and productivity (output per worker) of firms, particularly where markets have been slow to develop.
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Japanese Investment in Transitional Economies: Characteristics and Performance
Paul W. Beamish; Andrew Delios
WP No. 194
(October, 1998)
Abstract: This paper presents and analyzes comparative data on 2,343 foreign-owned organizations operating in the transitional economies of China, Viet Nam and the countries of Central and Eastern Europe (CEE). Specifically, it compares the extent, sectoral distribution, characteristics and performance of Japanese subsidiaries established in these three regions. Among the three, most Japanese investment has flowed to China where subsidiary performance was highest and where subsidiaries were concentrated in the manufacturing sector. Further, the employment levels of expatriate managers, and the propensity to engage in joint ventures, were higher in China and Viet Nam. The tighter linkages between domestic and foreign organizations, and the greater incidence of investment, provided more significant opportunities and scope for the transfer of organizational practices, and change, in domestic incumbents in China and Viet Nam than in the CEE.
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Building Successful Companies in Transition Economies
Ivan Perlaki
WP No. 193
(January, 1998)
Abstract: abstract
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Russian Cummunitarianism: An Invisible Fist in the Transformation Process of Russia
Charalambos Viachoutsicos
WP No. 192
(July, 1998)
Abstract: The Russian communitarian value system (rcvs) is a persistently enduring feature of Russian life. The roots of rcvs are found in the Kievan state, which arose, in the ninth century. The essential features of the rcvs are derived from deeply rooted institutions developed over a very long period of time in response to the particular constraints and opportunities of the adverse geographical, economic and political environment that prevailed since the very beginning of Russian history. The same adverse conditions, which made communitarianism essential to the viability of the village, made centralism essential to the survival of the state. Thus an apparently contradictory and unique combination of suppression of the individual on the one hand and considerable freedom of self-expression on the other evolved as a focal distinctive feature of Russian culture. It follows that the codes as well as the stubborn resilience of rcvs are invariably confusing to Westerners. The Soviet State basically thought in egalitarian communitarian terms. Although Soviet communism aimed to make a complete break with the past and to create a new society, it was not able to escape from the traditional rcvs. In fact, the Soviet system's leveling of society fostered a communitarian ethic on a national scale. However, in many important ways the Soviet system stifled the genuine aspects of rcvs and, through the suppressive mechanisms of the Communist Party, eroded its practices of grass root participation into powerless and fake rituals. The transformation of the Russian economy presently under way increasingly requires fundamental change. The paradox is that in order to ensure economic effectiveness and stability, change has to be grounded in enduring and constant factors. This paper defends the position that, the degree of transmutation of the rcvs to the new values and practices which Russia will be able to contain and to integrate, will be key to the strength and effectiveness of the ensuing system. Although the rcvs is only one of a number of factors that are focal to the complex process of transformation, if ignored, it can act as a potent barrier. Alternatively, whenever acknowledged, it can indeed act as a propeller for effective change. This paper is primarily intended for Western investors, managers and scholars who are involved in work in or with present day Russia. It will also be of interest to students of the relation between culture and management and of comparative management. While not aspiring to provide a complete overview of the sources of the rcvs, the paper aims to shed light on the roots of the system in Russian history, as well as on its influence on the present transformation process in Russia.
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Teaching the Dinosaurs Dance
Michal Cakrt
WP No. 191
(September, 1997)
Abstract: abstract
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Strategic Restructuring: Making Capitaism in Post-Communist Eastern Europe
Lawrence P. King
WP No. 190
(September, 1998)
Abstract: abstract
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Russia's Internal Border
Daniel Berkowitz; David N. DeJong
WP No. 189
(July, 1998)
Abstract: In integrated economies, inter-city price differences can be explained largely by transportation costs. This is not the case in Russia. Here, we argue that this is due to an internal border that separates a region we denote as the Red Belt from the rest of Russia. Regions within the Red Belt exhibit high degrees of price dispersion and thus seem isolated. Moreover, these regions have been relatively slow to adopt economic reforms, and have suffered relatively low growth rates. The impact of the border on price dispersion is shown to be comparable to the impact of the U.S.-Canadian border.
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Jel Codes: P22, R12
Keywords: price dispersion, market integration
Does Market Structure Matter? New Evidence from Russia
Annette N. Brown; J. David Brown
WP No. 188
(June, 1998)
Abstract: abstract
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Jel Codes: L1, P2
Keywords: market structure, competition, concentration, structure conduct, performance, transition
Corporate Structure and Performance in Hungary
László Halpern; Gábor Kõrösi
WP No. 187
(June, 1998)
Abstract: All economies are heterogeneous. The behavior of the economic agents with different in important aspects. However, in a stable environment usually strong forces shape a typical behavior, thus many agents act similarly. On the one hand, the behavior of agents will be much less uniform in an unstable transitional environment. On the other hand, transition also meant very strong pressures and narrow constraints for Hungarian enterprises resulting in different but typical behavioral patterns. The objective of this paper is to investigate these patterns through the phases of the transition process. We analyze relevant segments of the economy and follow through behavioral changes. We investigate the behavior of both the newly created firms and the disappearing laroe former socialist corporations. We also analyze the behavior of foreign owned companies. Strong import competition and competition from de novo firms shaped the behavior of former oligopolists, and the response to these competitive pressures varied over groups of firms. We employ production functions for exploring differences among these groups of firms and the typical adjustment process of each group separately throughout the transition period until 1996. The estimated production functions indicate gradual improvement in efficiency and a shift from decreasing to increasing returns to scale. Market share can be explained by the degree of internal and external competition and by the efficiency of the firm. There is little apparent relationship between efficiency and profit or investment.
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Performance of Czech Companies by Ownership Structure
Andrew Weiss; Georgiy Nikitin
WP No. 186
(June, 1998)
Abstract: Our main Finding is that ownership concentration in the Czech Republic is associated with improvements in the performance of operating companies, but only if ownership is concentrated in hands other than investment funds. We assessed the effects of ownership structure on economic performance by measuring the relationship between changes in performance and the composition of ownership shares at the beginning of the period. Other studies measured the association between levels of performance and the composi6on of ownership. We used robust estimation techniques, in addition to OLS estimation, since we were able to strongly reject normality. Since the data comes from surveys and since accounting, standards during this period were far from uniform; it is not surprising that the data would be subject to large measurement errors. These measurement errors may have generated the results observed in other studies.
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Firm Performance in Bulgaria and Estonia: The effects of competitive pressure and disorganization
Jozef Konings
WP No. 185
(July, 1998)
Abstract: This paper is concerned with the analysis of firm performance, measured as total factor productivity, using a panel of over 1200 Bulgarian and 200 Estonian firms. The main empirical conclusions are (i) higher Financial and competitive pressure improves firm performance in Bulgaria; (ii) disorganization, measured by complexity of a sector, has a negative effect on productivity growth in Bulgaria; (iii) in Estonia there no evidence can be found that Financial pressure, competitive pressure nor disorganization has any effect on firm performance, suggesting that these factors only matter at the start of transition to a market economy.
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Jel Codes: G3, L2, O5
Keywords: financial pressure, competitive pressure, disorganization, firm performance
Investment and Wages during the Transition: Evidence from Slovene Firms
Janez Prasnikar
WP No. 184
(July, 1998)
Abstract: abstract
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Investment Portfolio under Soft Budget: Implications for Growth, Volatility and Savings
Chong-en Bai; Yijiang Wang
WP No. 183
(June, 1998)
Abstract: Consider an economy with a high risk and high return and a low risk and low return asset and risk-averse agents making intertemporal consumption and 'investment decisions. The agent will choose a savings rate to balance cur-rent and future consumption, and an investment portfolio to balance between return and risk. A Government program to insure the high risk and high return asset will lead to increased investment in the asset which in turn leads to higher total return, total risk and total savings in the economy, even if ex ante the program constitutes zero expected subsidy. The agent is worse off under such a program. These results reflect on the experiences of a number of Asian economies featured by interventionist government, hi savings, high growth and recent financial crisis.
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Accession and Real Exchange Movements: A Comparison
Evzen Kocenda
WP No. 182
(June, 1998)
Abstract: This paper analyzes disparities among normal and real exchange rate movements across the Central and European (CEE) countries from 1991 to 1997. The method of analyzing such processes Is to c whether the differentials of exchange rate changes converge or diverge over time. Currently ten CEE countries have formally applied for full membership in the European Union. The results support convergence in general but indicate a wide disparity in the degree of convergence. From the real exchange rate standpoint the paper identifies the best candidates to join the European Union in the first round of accession.
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Delegation and Delay in Bank Privatization
Lorand Ambrus-Lakatos; Ulrich Hege
WP No. 181
(July, 1998)
Abstract: The paper explains why bank privatization in transition economies is frequently delayed in comparison to privatizing non-financial firms. In the model, the government inherits a distressed bank with bad loans to a representative non-financial firm. The firm will only abstain from wasteful opportunistic behavior if there is a credible to signal that its future budget constraint will be hard. If the government takes over the state-owned bank directly or re-capitalizes and privatizes it immediately, then signaling leads to excessive liquidation. Delay in privatization allows delegating the signaling and can be beneficial because the signaling distortion can be shifted across "types". The analysis assumes a political constraint to sell the state-owned bank to a domestic investor (shallow pockets), but shows also that a Pareto improvement can typically be achieved if a buyer with a deep pocket can be found (foreign investor), Policy implications concerning timing and scope of bank privatization are discussed.
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Jel Codes: G21, P21, P34, P41, P43
Keywords: bad loans, delegated signing, delayed recapitalization
Financing Mechanisms and R and D Investment
Haizhou Huang; Chenggang Xu
WP No. 180
(July, 1998)
Abstract: This paper analyzes how financial institutions affect efficiency in Rand-D investments by providing a new contractual foundation for soft budget constraints. We show those inefficient elements (informational asymmetries and conflicts of interest among co-investors) in multi-investor financing can be used as, a commitment device to stop bad projects which are discovered ex post. In the case of single investors financing (such as internal financing). However, the commitment device does not exist. Our theory predicts that optimally many investors should finance an Rand-D project if there are high uncertainties. Otherwise, internal financial preferable. In addition, an institutional cost affects firm decisions and efficiency in RandD investments.
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Organizational Culture and Effectiveness: The Case of foreign Firms in Russia
Carl F. Fey; Daniel R. Denison
WP No. 179
(June, 1998)
Abstract: This paper extends the literature on organizational culture and effectiveness by examining a set of foreign-owned firms operating in Russia. Based on a large-scale empirical study of 179 firms and four in-depth case studies, this study examines the applicability of an American model of organizational culture and effectiveness in the Russian context. The results of the empirical study are presented first and are compared to results for a sample of firms in the USA. Next, four case studies are used to ground the empirical results and to identify other aspects of organizational culture in the Russian context which appear to be linked to effectiveness, but are not included in the model.
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Keywords: organizational culture, Russia, performance
Output and Unemployment Dynamics in Transition
Vivek H. Dehejia; Douglas W. Dwyer
WP No. 178
(January, 1998)
Abstract: In this paper, we present a simple but rigorous model of the dynamics of output and Unemployment in transition. We consider a worker-entrepreneur, who is 'locked in' to her current production technique, with a choice of continuing to work with it or search for a better technique. If she succeeds she jumps to the "cutting edge" frontier; if not she becomes unemployed and searches in the next period. We model a movement to a market economy as a discontinuous jump in the technological frontier and analyze the transitional dynamics. We are able to contrast the difference between a fully anticipated versus an unanticipated policy shock. After an unanticipated shock, output falls immediately and unemployment spikes, as agents search for better techniques. Output is higher in the new steady state, but is approached by dampening oscillations. The results become more interesting when the reform is fully anticipated Unemployment falls and output stagnates in anticipation of the reform. Suprisingly, output exhibits cycles before and after the reform. Therefore, announcing a reform in advance may have unintended negative consequences.
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Bureaucracies in the Russian Voucher Privatization
Guido Friebel
WP No. 177
(June, 1998)
Abstract: abstract
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Chronic Moderate Inflation in Transition: The Tale of Hungary
Janos Vincze
WP No. 176
(June, 1998)
Abstract: In this study I examine two aspects of Hungarian inflation. with some reference to other CEFE. The first is the political economy dimension, the second the mechanics of price making Concerning the former topic I argue that the balance of payment or mercantilistic motive has been the single most important determinant of Hungarian macroeconomic policy. With respect to the second I elaborate on two (interrelated) issues: I make the claim that the nominal exchange rate is in fact a nominal anchor to inflation in a certain sense, and I try to clarify the role of relative price changes. The outcome of the Investigation has important consequences on disinflation policies. The political economy thesis implies that without reducing foreign debt to comfortable levels disinflation will be awkward in either a fixed or a flexible exchange rate regime. To achieve price stability, at least initially, targeting the nominal exchange rate seems to be the most viable alternative, though this should be done in a manner different from the current system of preanounced crawling bands. Relative price developments should be taken into account when numerical parameters are rendered to the policy.
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Privatisation and Market Structure in a Transition Economy
John Bennett; James Maw
WP No. 175
(June, 1998)
Abstract: A model is developed in which an industry of N > I firms is privatized. The 'participation' method of privatization is used, whereby firms are sold for cash, but the state retains a proportionate share of ownership. In each firm the new private owner has the opportunity to make a reorganisational investment, before output Is produced. The investment is unobservable by the state, and therefore noncontractible. Thae Is Cournot competition In the product market. The welfare-maximizing retained ownership share for the state is analyzed; taking into account that potential buyers of firms may have limited access to finance.
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Ownership and Managerial competition: Employee, Customer, or Outside Ownership
Patrick Bolton; Chenggang Xu
WP No. 174
(June, 1998)
Abstract: It is widely accepted that only the protection of private property rights and competition by rival firms provides adequate Incentive to perform for managers and employees. However, it is not entirely clear how ownership interacts with competition. This paper centers on the question of ownership of firms and managerial competition and how these affect managers and employees' incentives to invest in human capital.
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Intragovernment Procurement of Local Public Good: A Theory of Decentralization in Nondemocratic Government
Chong-en Bai; Yu Pan; Yijiang Wang
WP No. 173
(June, 1998)
Abstract: Local governments (LGs) are seen as producers of the local public good ('the good'). An authoritarian country is one in which the government decides if the good should be produced and how much to tax to finance it, as versus a democracy in which voters decide. This paper identifies conditions under which it is more efficient for a non-democratic government to delegate to the LGs the authority to 1) decide whether or not to produce the good and2) Collect tax to finance it if the good is produced. Two conditions are identified First, when the net benefit of producing the good is sufficiently small so that, compared with the benefit, inducing LGs effort under the centralized system is too costly (a moral hazard problem). Second, when the net benefit of the is higher in a locale with a higher production cost parameters, making it difficult for the center to induce the LGs to truthfully reveal the cost parameter (an adverse selection problem). These results are consistent with the experience of China in the past several decades, where "too small to be worth bothering" and "too diversified and complicated local conditions for the center to know" have been the two most prominent official arguments made by the communist government itself for decentralization
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Political Instability and Growth in Proprietary Economics
Jody Overland; Michael Spagat
WP No. 172
(August, 1998)
Abstract: Developing country leaders typically resemble proprietors more than benevolent social planners, i.e., they are powerful individuals pursuing their own interests while they remain in power. We model growth in a 'proprietary economy" facing each period an endogenous probability of 'political catastrophe" that would hurt foreign investors and extinguish the proprietor's wealth extraction ability. We develop a model in which domestic capital exhibits a bifurcation point determining economic growth or shrink,9,ge. With low initial domestic capital the proprietor plunders the country's resources and the economy shrinks, even when shrinkage is not socially optimal. With high initial domestic capital the economy grows faster than is socially optimal.
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Jel Codes: D9, H, O1
Keywords: political economy, growth, propreitary economy, bifurcation, and political catastrophe
Framework Issues in the Privatization Strategies of the Czech Republic, Hungary, and Poland
Morris Bornstein
WP No. 171
(June, 1998)
Abstract: Framework issues in privatization include the alternative of commercialization of state-owned enterprises without privatization, the scope and sequence of divestiture by branch of the economy, the organizational structure for privatization, the choice among standard and non-standard methods, and problems in the administration of privatization, such as valuation, transparency, and corruption. For each issue, the study analyzes major aspects and compares relevant experience of the Czech Republic, Hungary, and Poland.
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Privatization, Ownership Structure and Transparency: How to Measure a Real Involvement of State
Frantisek Turnovec
WP No. 170
(May, 1998)
Abstract: The paper suggests a methodology for evaluation of a direct and indirect property distribution and of a transparency of a property structure in an economy. The methodology is applied on the analysis of property structure of the banking sector in the Czech Republic.
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Jel Codes: C60, K11, L33
Keywords: control, direct distribution, indirect distribution, nipolent matrix, primary owners, secondary owners, transparency
Unemployment and the Social Safety Net During Transitions to a Market Economy: Evidence from the Czech and Slovak Republic
John C. Ham; Jan Svejnar; Katherine Terrell
WP No. 169
(June, 1998)
Abstract: abstract
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Voucher Privatization with Investment Funds: An Institutional Analysis
David Ellerman
WP No. 167
(March, 1998)
Abstract: abstract
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Value Priorities and Consumer Behavior in a Transitional Economy: The Case of South Africa
Steven M. Burgess; Jan-Benedict E.M. Steenkamp
WP No. 166
(August, 1998)
Abstract: We examine consumer value priorities in Africa's most important transitional economy, viz., The Republic of South Africa. To the best of our knowledge, this is the first extensive study of value priorities with a large, representative sample of consumers in a transitional economy. We study the structure of the value priorities, their antecedents, and their relations with optimum stimulation level, lifestyle interests, brand purchase behavior, and consumption of innovative products. A number of hypotheses concerning the effects of various value domains are developed, using Schwartz's (1992, 1994) value theory. Value priorities are measured with a new measurement instrument, the Portraits Questionnaire (Schwartz, Lehmann, and Roccas 1997). This instrument is specifically developed for use in generally less educated populations often found in less-advanced transitional economies. We find strong evidence on the validity of the structure of value priorities in South Africa and on the relation of the value priorities with other constructs. The results emphasize the importance of gender, age, and the ethnic cultural group or subculture to which the person belongs as antecedents of value priorities. Other relevant antecedents include household income, degree of urbanization, and being member of a religion or not. Systematic and predictable relations with optimum stimulation level are observed. Systematic effects of value priorities on lifestyle interests, brand switching behavior, and consumption of innovative financial products are also found. The results are generally consistent with our hypotheses. Little consumer research has been conducted in transitional economies, and even less with broad representative groups of consumers. That is unfortunate from a practical point of view as the economic importance of these countries is rapidly growing. Transitional economies are increasingly moving from a product(ion)-oriented focus to a market-oriented focus in which consumer desires become paramount. However, there is still a long way to go, one reason being that a consumer orientation is new to most transitional economies. In most transitional economies, the economic system was geared toward fulfilling the needs of the state and of a privileged minority of its population. The lack of knowledge and insight in consumer behavior in transitional economies is also unfortunate from an academic point of view. Transitional economies are undergoing rapid changes that are quite unique in history. This allows for a "natural experiment" in which the effects of radical changes in society on consumer behavior can be studied in a real world setting. Moreover, it is not at all clear that the concepts and theories developed for western countries are equally relevant and applicable to transitional economies. Cunningham and Green (1984, p. 9) argued that there is "a need for more fundamental research in international marketing in order to adapt established marketing concepts to the realities of the international marketing place." In similar vein, Monroe (1993) stated that: "In this age of globalization, we need to move beyond the relative security of our own backyards and investigate issues relative to consumption on an international basis." We attempt to contribute to recti@g this situation by studying value priorities of consumers in the most important African transitional economy, viz., the Republic of South Africa. South Africa entered this decade as the world's most isolated country; politically, economically, and socially. In the years since Mandela's election, the extensive web of international anti-Apartheid laws has been repealed and South Africa has become a full partner in the world economic and political system again. These external transitions hide the extent of internal change South Africa must undergo before the transition to a market-based economy can be said to be a true success. South Africa is essentially a two-tier society in that most Whites live and work in a modem economy while the majority of Black population often interact with that economy only superficially and experience a living standard comparable to the rest of Africa (United Nations 1996). These two worlds in which South Africans live are the legacy of an Apartheid state that effectively excluded 80% of the population from free economic and political participation. The ambitious reforms of the new South African government share a fundamental goal of using the full potential of South Africa's human capital to build a stable, free, and market-based economy. Economic reforms are beginning to spread ownership of companies more widely in an economy where 80% of Johannesburg Stock Exchange shares are owned by a handful of companies. Para-state companies in numerous industries are being privatized. There are clear parallels to the situation in Eastern Europe. In the former communist countries was also a clear distinction between the elite (i.e., Communist Party members) and the majority of the population. In Eastern Europe, economic and political freedom of the majority of the population was also severely restricted. Moreover, the concentration in South Africa of economic power in a few hands is in important respects similar to (pretransition) Eastern Europe. In this study, we will examine the value priorities of South African consumers, their antecedents, and their relevance for understanding key aspects of consumer behavior. Values underlie a large and important part of human cognition and behavior (Schwartz 1992). They transcend specific objects, in contrast to attitudes, which must be examined in relation to specific and carefully defined objects (Rokeach 1973). An examination of values provides both an overall picture of a central cognitive structure of the individual, as well as a means of linking central beliefs to specific attitudes. Values provide potentially powerful explanations of human behavior because they serve as standards of conduct, tend to be limited in number, universal across cultures, and temporally remarkably stable (Kamakura and Mazzon 1991, Rokeach 1973, Schwartz 1992). Consequently, it is not surprising that values have been found to be valuable in explaining a variety of attitudes and behaviors in the consumer context (see Burgess 1992, Homer and Kahle 1988, and Kamakura and Mazzon 1991 for overviews). In the following sections, we will first discuss the construct of personal values and its role in consumer behavior. Following a discussion of the research methodology, we present our empirical findings. We close with a discussion of the results, and provide suggestions for future research.
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Disorganization, Financial Squeeze, Barter
Daniel Kaufmann; Dalia Marin
WP No. 165
(July, 1998)
Abstract: abstract
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Finance and Investment in Transition: Czech Enterprises, 1993-1994
Ronald Anderson; Chantal Kegels
WP No. 164
(September, 1997)
Abstract: We use enterprise data to study the determinants of investment in Czech industry during the period from 1993 through 1994, a period when the transition toward a market economy was rapidly gaining momentum. We investigate accelerator type models modified to include financial variables intended to reflect the possibility of credit rationing. Overall, we find that finance is an important determinant of investment for firms in a transition economy. In particular we find that de novo private firms and firms privatized early invested heavily during 1993 and that they were financially constrained in 1993 and even more so in 1994. In contrast, state owned enterprises including those that were privatized in the course of 1994 invested relatively little in 1993 and were less financially constrained in 1994 than in 1993. This evidence is consistent with a pattern that state owned enterprises were placed under financial discipline relatively early in the Czech transition and that their financial access improved with the approach of their privatization.
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European Union Trade and Investment Flows U-Shaping Industrial Output in Central and Eastern Europe: Theory and Evidence
Alexander Repkine; Patrick P. Walsh
WP No. 163
(April, 1998)
Abstract: We undertake an analysis of the evolution of industrial output in Bulgaria, Hungary, Poland and Romania over the period 1989-1995. We theoretically and empirically model the growth dynamics of EU oriented output within sectors of industry, ex-post trade and market liberalization, as investment induced Schumpeterian waves of product innovation. Greater assess to the EU market and investors is estimated to have induced growth with increasing convexity over-time in all sectors of each country but particularly in traditionally larger sectors. This growth, unconstrained by the transition process, was in product categories that already exported to the EU before 1989. We estimate the growth dynamics of non-EU oriented output within sectors as unobservable deterministic sector and country specific heterogeneity. We demonstrate that the evolution of non-EU industrial output followed the pattern as that observed in CIS countries. The different shape in the industrial output of CEE compared to CIS countries is explained mainly by the evolution of traditionally EU oriented production that benefited greatly from increased access to the EU market and EU investors.
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Skill Acquisition, Firm Creation and the Transition to Market
Zuzana Brixiová; Wenli Li; Tarik Yousef
WP No. 162
(October, 1999)
Abstract:
A substantial body of evidence suggests that skill shortages have characterized labor relocation during the transition from plan to market. Along with technological and aggregate demand changes, this pattern of human capital relocation has been associated with unemployment and income inequality. Using a search model, we examine the impact skill shortages on private sector development during the transition. We show how the unavailability of skilled labor inhibits firm creation, slows the recovery of output and gives rise to unemployment and income inequality. Although government subsidies for skill acquisition help raise labor income, they exacerbate overall income inequality.
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Jel Codes: J31, J4, P21
Keywords: Skill acquisition, firm creation, transition
Corruption in Transition
Susanto Basu; David D. Li
WP No. 161
(May, 1998)
Abstract: Countries making the transition to a market economy often experience an increase in corruption along with an increase in growth. This observation is puzzling in the context of current models, which emphasize the destructive nature of corruption. We present a model of corruption and reform which shows that under some circumstances, a particular gradualist reform strategy consisting of temporarily relaxing control of corruption provides a windfall to existing bureaucrats, thereby gaining their support for a reform effort that will ultimately reduce the distortions stemming from bureaucratic power. Thus, in the context of reform, a one-time surge of corruption can be a prelude to a permanently reduced level of corruption in the future, which provides the incentive for high current growth. We illustrate our point with examples from the recent Chinese reform.
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Jel Codes: D72, O12, P, P21
Tenures that Shook the World: Worker Turnover in Russia, Poland and Britain
Hartmut Lehmann; Jonathan Wadsworth
WP No. 160
(November, 1999)
Abstract: We study worker turnover in a transition economy to investigate to what extent the length of time a worker has been employed by a firm shapes the turnover process. Using data from the Polish labor Force Survey and The Russian Longitudinal Monitor Survey we compare the pattern of turnover with a Western economy, Britain. We show tenure profiles are higher and flatter in Russia than and steeper and lower in Poland than in Britain. The characteristics of workers hired in the state and private sectors do not look very different. State and private sector firms in Poland offer the same wages to new recruits, but new private sector jobs in Russia appear to offer wage premia relative to new state jobs. We argue that these observations are consistent with a framework where the value of seniority in jobs begun under the old order may be small and the value of a continued job match unsure, offset, in Poland at least, by insider resistance to layoffs.
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Does Market Structure Matter? New Evidence From Russia
Annette N. Brown; J. David Brown
WP No. 159
(June, 1998)
Abstract:
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Jel Codes: L1, P2
Keywords: market structure, concentration, competition, structure conduct performance, transition Russia
Non-Tech Abstract:
Structural Adjustment and Regional Long Term Unemployment in Poland
Hartmut Lehmann; John O'Flaherty; Patrick P. Walsh
WP No. 158
(June, 1997)
Abstract: On aspect of transition economics is the fact that large scale inter and intra sector adjustments in employment will have to take place in the transition period to a market economy. The required decline of agriculture and manufacturing and the rise in services induce large inter-sectoral employment adjustment. The restructuring of state and previously state owned firms will induce large intra-sectoral employment adjustment. This process has to be facilitated by a large re-allocation of workers from their initial state. Restructuring of this kind can be expected to create a lot of frictional unemployment, due to congestion in the labour market, and structural unemployment, due to individuals with redundant human capital been separated from pre-transidonal job security. In this paper we write down a structural and frictional model of unemployment resulting from structural adjustment in employment in the spirit of Aghion and Howitt (1998). The relationship between regional development and unemployment rates is not monotonic in Poland. Using Polish county level unemployment register data this papers shows that the dynamics of regional labour demand in Poland have determined unemployment in a systematic way by changing the magnitude and composition of the inflows and the regional probabilities of exit conditional on duration, gender, age, education and previous tenure. Restructuring in employment can be facilitated by the social security system by allowing workers to use unemployment as a temporary pit stop in periods of congestion created by the transition process. Restructuring can also act as a cleansing process that sheds inefficient and redundant human capital from employment with compounds in unemployment creating a long term structural component of unemployment. We show the stage of regional restructuring and development determines the levels and composition of individuals in short term and long term spells. Restructuring induces both larger throughputs and deeper structural. problems in unemployment. In the most advanced regions where congestion is lower unemployment is mainly structural in nature resulting from individuals having undertaken long spells in employment in the planned system .
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Baby Boom or Bust? Changing Fertility on Post-Communist Czech Republic and Slovakia
Robert S. Chase
WP No. 157
(April, 1998)
Abstract: Transition from a centrally planned to a market oriented economy alters the incentives individuals face as they make consumption and time allocation decisions. Families must reevaluate their fertility plans as a result of new wage structures, reduced government subsidies of the costs of raising children, and uncertainty from a changed economic environment. Using micro-data from 1984 and 1993 in the Czech Republic and Slovakia, this paper estimates a dynamic stock adjustment model, relating observed drops in fertility post-Communism to new wages, prices, and risks. Because transition will have affected only those born in the three years prior to the 1993 data, considering children under age three isolates these effects. Earnings influence total demand for children during Communism through substitution effects for women's earnings and income effects for men's. In all four data sets, earnings levels have little effect on fertility timing, though age and job uncertainty do effect the probability of having young children, particularly following Communism. Earnings changes across regime also impact fertility timing decisions, though the effects are different in the Czech Republic and Slovakia.
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Leading Radical Change in Transition Economies
Karen L. Newman
WP No. 156
(June, 1998)
Abstract: New managers in central and east European companies were faced with daunting challenges to manage their companies through the transition from central planning to competition and to change their companies radically so that their firms would be capable of competing effectively. Based on the analysis of six longitudinal company cases from the Czech Republic, I identify the key skills that new managers had to have and where they were able to obtain those skills. The seeds of current managerial expertise could often be found in experiences under central planning, despite the fact that central planning more generally rewarded behaviors that were counterproductive in market-based competition. Results are discussed in the context of leading radical organizational change.
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From Theory into Practice? Restructuring and Dynamism in Transition Economies
Wendy Carlin; Micheal Landesmann
WP No. 155
(June, 1998)
Abstract: abstract
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The Model of Reality: Assessment of Vietnamese SOE Reform--Implementation at the Firm Level
Edmund Malesky; Vu Thanh Hung; Vu Thi Dieu Anh; Nancy K. Napier
WP No. 154
(July, 1998)
Abstract: abstract
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Enterprise Restructuring in Russia's Transition Economy: Formal and Informal Mechanisms
Susan J. Linz; Gary Krueger
WP No. 152
(April, 1998)
Abstract: This paper examines the nature and scope of enterprise restructuring in Russia using two sources of firm-level data. The first involves a panel of over 2,000 civilian manufacturing firms in Moscow, Tver, Volgograd, Rostov, and Novosibirsk. The second involves data collected from a series of in-depth interviews conducted between 1994 and 1997 with top-level managers in 47 firms located in Moscow, Tver, Nizhny Novgorod, and Novosibirsk. The objective of the paper is threefold. First, we summarize the existing literature on enterprise restructuring, and evaluate the pros and cons of a number of restructuring measures that have been used in studies of privatized firms in Russia and other transition economies. Second, we apply two measures of enterprise restructuring to our data to investigate the extent of variation by industry, ownership structure, and location. Third, we examine in detail the question of whether barter enhances or impedes enterprise restructuring in Russia.
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Jel Codes: D21, G32, L2, P42
Keywords: transition, enterprise restructuring, barter, Russia
Labor Productivity in Transition: A Regional Analysis of Russian Industry
Susan J. Linz
WP No. 151
(May, 1998)
Abstract: This paper examines within-industry variation in labor productivity at the beginning of Russia's transition process in 1992, as well as regional variation in the percentage of firms that exhibit below industry average labor productivity. The main hypothesis is that industries and regions where a disproportionate share of firms exhibited below average labor productivity in 1992 will experience above average employment reductions between 1992 and 1995. In only 25 percent of the locales included in this analysis, however, does the predicted match emerge. Most of these locales are located in the Central region.
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Jel Codes: J21, O12, P31, P42
Keywords: labor productivity, transition, Russia
Tax Avoidance and the Allocation of Credit
Anna Meyendorff
WP No. 150
(May, 1998)
Abstract: This paper models the credit-seeking behavior of a firm when applying for a bank loan increases the probability of being monitored by the fiscal authorities. Using Russia as an example of an economy with poorly enforced tax payment, I find that if the probability of paying taxes increases as a result of applying for a bank loan, profit maximizing firms will be less likely to borrow at a given rate of interest. In addition, firms with less risky projects will be more likely to drop out of the borrower pool. Finally, the more profitable a firm has been in the past, as measured by the return to its existing investments, the less likely it will be to borrow from a bank to finance a new investment project. In an economy where alternative forms of external capital are few, this disincentive to borrow has significant consequences for the overall level and quality of investment in the economy
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Jel Codes: G21, G32, G38, P34
Commitment, Versatility and Balance: Determinants of Work Time Standards and Norms in a Multi-Country Study of Software Engineers
Leslie Perlow; Ron Fortgang
WP No. 149
(April, 1998)
Abstract: Corporate lawyers, investment bankers, engineers as well as many other types of knowledge workers in the US are expected to work seventy and eighty hour weeks routinely, with extra effort during particularly hectic times. Our research on software engineers working in China, India and Hungary indicates that such work hours are not inherent in the work. Rather work time standards and norms result from reciprocal interdependencies with three interconnected relationships: between employees and employer, employees and other employees and employees and their lives outside of work. The theoretical and practical implications of accounting for variations in work time standards and norms based on these three interconnected relationships are explored.
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Changes in Poland's Transfer Payments in the 1990's: The Fate of Pensioners
Bozena Leven
WP No. 148
(April, 1998)
Abstract: abstract
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Environmental Protection and Economic Development: The Case of the Huaihe River Basin Cleanup Plan
Robert Letovsky; Reza Ramazani; Debra Murphy
WP No. 147
(June, 1998)
Abstract: The case examines efforts by the Chinese government and local authorities to restore the Huiahe River, a 1,000 kilometer waterway which runs through four provinces in eastern China. The river basin, covering an area of some 270,000 square kilometers, is home to almost 150 million people and represents one of the most important areas of agricultural output in China. As a result of rapid economic development, the river has, over the past twenty years, become seriously polluted. This has had dire consequences for industries that depend on the river, notably agriculture and fishing. As well, the limited groundwater supplies in eastern China have meant that surface water has always been an important source of supply for residential and industrial uses. The pollution of the Huaihe has therefore had serious public health consequences. In mid-1995, the Chinese government formally adopted an ambitious plan to restore the water quality in the river. The case is based on material gathered from secondary sources, supplemented by interviews conducted with government officials and company managers in Beijing and Anhui province in China. The case begins with an overview of the impact of economic growth on the Chinese environment, and the steps which China has taken to address its growing environmental challenges. The case then focuses on the plan as proposed by the Chinese Research Academy of Environmental Sciences (CRAES). The case goes on to describe some of the early implementation measures taken as part of the plan, in particular the forced closure of hundreds of small factories that have sprung up along the banks of the river. The case outlines the various stakeholders affected by the plan and its ultimate success or failure. These include local residents and businesses, various Chinese government ministries, multilateral lending agencies and international suppliers of anti-pollution technologies. The ultimate success of the plan is, at the time of this writing, not known. Future issues and questions that will affect the plan's success are then described. These include resistance by some elements of the Chinese government concerned about foreign debts incurred to finance the cleanup plan; local officials who may not wish to sacrifice short-term economic growth for environmental protection; and businesses concerned about the financial burden of having to install new clean technologies.
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Chief Executive Compensation During Early Transition: Further Evidence from Bulgaria
Derek C. Jones; Takao Kato
WP No. 146
(June, 1998)
Abstract: By using new waves of a panel survey of Bulgarian firms with matching information for chief executives, evidence is presented on the determinants of chief executive compensation during 1992-1995. During that period, findings based on first difference models indicate that changes in CEO pay are positively related to changes in total assets whereas they are unrelated to changes in traditional measures of performance (such as profits, ROA, profit margin). More importantly, the most significant (statistically and economically) determinant of changes in CEO pay is consistently found to be the ownership structure of the firm. Specifically, CEOs in state owned firms receive additional pay worth almost 30,000 Leva (in real terms) more than CEOs in other firms, ceteris paribus. To achieve the equivalent amount of pay raise by increasing total assets would require raising the firm's total asset by more than 700 million Leva (in real terms). We compare our findings with those for other transitional economies (including work based on earlier waves of the Bulgarian panel) and studies of the managerial labor market in China and suggest that a key reason for our findings is the lack of financial discipline in Bulgarian state owned firms during 1992-1995.
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Women’s Unemployment During The Transition: Evidence From Czech And Slovak Micro Data
John C. Ham; Jan Svejnar; Katherine Terrell
WP No. 145
(May, 1998)
Abstract: We analyse women?s weekly probabilities of leaving unemployment in the Czech and Slovak Republics (CR and SR) to investigate three questions: a) Why are unemployment rates much lower in the CR than the SR? b) Does the unemployment compensation scheme (UCS) substantially lengthen unemployment spells? c) Why are women?s unemployment rates higher than men?s? We find that differences in the behaviour of the individuals, employers and institutions in the SR and CR (as measured by differences in coefficients) play a larger role in determining the CR?s shorter female unemployment spells than do differences in measured demand and demographic variables. The UCS has only a moderate effect on duration and its impact is greater in the CR. The difference between men?s and women?s spells (in each republic) are explained more by differences in coefficients than by differences in observed characteristics.
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Jel Codes: C41, H53, J23, J64, O15, P2
Keywords: Czech Republic, Slovak Republic, unemployment duration, unemployment policy
Investment Wages and Ownership During the Transition to a Market Economy: Evidence from Slovenian Firms
Janez Prasnikar; Jan Svejnar
WP No. 144
(November, 1998)
Abstract: abstract
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Jel Codes: C33, D92, J5, P2
Optimal Bankruptcy Laws Across Different Economic Systems
Elazar Berkovitch; Ronen Israel
WP No. 143
(March, 1998)
Abstract: abstract
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Industrial Policy and Poverty in Transition Economies: Two Steps Forward or One Step Back?
Susan J. Linz
WP No. 142
(March, 1998)
Abstract: abstract
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Collective Ownership and Privatization of China's Village Enterprises
Suwen Pan; Albert Park
WP No. 141
(April, 1998)
Abstract: abstract
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A Comparitive Look at Labor Mobility in the Czech Republic: Where Have all the Workers Gone?
Vit Storm; Katherine Terrell
WP No. 140
(May, 1999)
Abstract: abstract
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Jel Codes: C41, H53, J23
The Failure of Government-led Program of Corporate Reorganization in Romania
Simeon Djankov; Kosali Ilayperuma
WP No. 139
(September, 1997)
Abstract: We provide the first comprehensive cost-benefit analysis of government-led reorganization programs for financially distressed firms in transition economies. The study is based on empirical evidence on the programs in Albania, Arinenia, Bulgaria, FYR Macedonia, Romania, Kazakhstan, Kyrgyz Republic, and Uzbekistan, with a particular focus on the Romanian program which is the only completed program to date. Our results indicate that the reorganization program failed to deliver any tangible improvements in the operational performance of firms. We also show that firms included in the program were faced with softer budget constraints than their comparators outside the program. Finally, we show that the cost of the program equaled three years of salaries for all workers in reorganized firms. The use of this money as severance pay for workers may have eliminated the pressure for government support and made it easier to liquidate or privatize firms. These findings question the feasibility for creating workable reorganization programs under government auspices.
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Jel Codes: F13
Keywords: bankruptcy, transition economies, financial discipline
Ownership and Employment in Russian Industry: 1992-1995
Susan J. Linz
WP No. 138
(March, 1998)
Abstract: Using data collected from a panel of 6,205 civilian manufacturing firms located in the Central, Volga, North Caucasus, Northern and Western Siberian regions of Russia, this paper examines the hypotheses that in the first stage of the transition process (1) Russian industry exhibited a low labor elasticity, and (2) employment changes were highly correlated with ownership structure. The first section summarizes what we know about output and employment patterns in Russian industry between 1992 and 1995. In section two, characteristics of the panel are described. Section three describes the methodology employed to test the two hypotheses. Section four presents the empirical results. In particular, given the socialist production and employment patterns Russia inherited, the results from the panel data regressions indicate that manufacturing firms in Russia experienced an unsustainably low elasticity of labor in the first stage of the transition process. However, ownership structure tends not to be a major influence on employment change for these Russian firms. Section five offers concluding remarks.
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Jel Codes: C23, D21, J23, L60, P42
Keywords: Russian enterprises, transition, ownership, employment
Reform Without Losers: An Interpretation of China's Dual-Track Approach to Transition
Lawrence J. Lau; Yingyi Qian; Gerard Roland
WP No. 137
(November, 1997)
Abstract: We develop a simple model to analyze the "dual-track" approach to transition to a market economy as a mechanism for implementing efficient Pareto-improving economic reform, that is, reform achieving efficiency without creating losers. The approach, based on the continued enforcement of the existing plan while simultaneously liberalizing the market, can be understood as a method for making implicit lump sum transfers to compensate potential losers of the reform. The model highlights the critical role of enforcement of the plan and full liberalization of the market track. We examine how the dual-track approach has worked in product and labor markets in China's economic reform in practice.
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The Political Economy of Mass Privatization and the Risk of Expropriation
Klaus M. Schmidt
WP No. 136
(March, 1998)
Abstract: The privatization process in Eastern Europe is not irreversible. Future governments may want to (partially) expropriate successful private firms in order to subsidize unsuccessful ones. We use a simple median voter model to predict the policy of future governments. It is shown that there will be less expropriation the more shares were distributed for free to the population. Diversified mass privatization is better than insider privatization. Furthermore, people should be discouraged to sell their shares for cash. Finally, we show that some free distribution of shares may, induce more investment and increase expected profits and privatization revenues for the government.
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Jel Codes: D72, L33
Keywords: mass privatization, transition, expropriation, political economy
Radical Organizational Change: The Role of Starting Conditions, Competition, and Leaders
Karen L. Newman
WP No. 135
(January, 1998)
Abstract: I develop a theory of radical change using longitudinal cases from central Europe. Radical change is a process by which firms regain competitive advantage after it has been lost. Change depends upon the firm's resources and capabilities; its competition; and its leadership. New core values differentiate incremental and radical change.
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Keywords: radical organizational change, emerging market economies
To Restructure or Not to Restructure: Informal Activities and Enterprise Behavior in Transition
Clifford Gaddy; Barry W. Ickes
WP No. 134
(February, 1998)
Abstract: We analyze the process of restructuring in Russia. The Russian economy is bifurcating as some enterprises restructure and reduce the distance to the market, while other enterprises exploit relationship capital to survive without restructuring. Survival in this environment depends on initial conditions and on investment in relations with officials. Enterprises can produce cash and non-cash goods, and this choice effects the survival possibilities in subsequent periods. Implications of the theory, with special reference to monetary policy, barter, intergovernmental fiscal relations, and Financial Industrial Groups, are discussed.
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Management 101: Behavior of Firms in Transition Economies
Josef C. Brada
WP No. 133
(March, 1998)
Abstract: This paper uses published case studies of firms in the Czech Republic, Hungary and Poland to examine how firms are reacting to the pressures of transition. Most firms made short run adjustments to output and input use; fewer firms began to make strategic adjustments. The paper examines how short-run responses influence the ability to implement long-run strategies for survival and growth and identifies common elements in the long-run behavior of firms that appear to be successful. Among these elements are the strengthening of the marketing function, the reorganization of internal decision making and information systems, investments in human resources and creation of effective mechanisms of corporate governance. The willingness to shed labor and the ability to make large investments in capital and technology are, rather surprisingly, less common features of successful restructuring.
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Interfirm Relationships and Informal Credit in Vietnam
John McMillan; Christopher Woodruff
WP No. 132
(February, 1998)
Abstract: abstract
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Will Restructuring Hungarian Companies Innovate? An Investigation Based on Joseph Berliners's Soviet Industry
John P. Bonin; Istvan Abel
WP No. 131
(March, 1998)
Abstract: Based on insights from Joseph Berliner's work on innovation in the Soviet centrally planned economy and its reform variants, we analyze process innovation (technological development) and product development in restructuring Hungarian companies from 1992 to 1995. Using data from a survey questionnaire responded to by 325 Hungarian companies, we conclude that decision-makers recognize the increasing uncertainty in their business environment and respond to it by taking more aggressive strategies. However, Hungarian companies practice product imitation rather than product development as only about a third of the new products introduced are new to either Hungarian or global markets. Furthermore, although technological development is recognized as important, only about a third of the respondents indicate any improvement in the company's technology and, of these, only about a quarter report that the change resulted in an up-to-date technology. Berliner identifies public ownership as a major impediment to innovation and considers the invisible foot of market competition to be a significant incentive for innovation. From cross tabulations of responses to various questions probing a company's implementation of new production processes, we find that foreign-owned companies are more likely to be involved in such activity and, of all companies engaged in this process innovation, state-owned companies find it less profitable than do companies of other ownership types. Regarding research and product development, we find that state-owned companies spend significantly less on applied research than do foreign-owned firms. Measuring exposure to external market competition by export intensity in a sub-sample of the companies, we find that a company with higher export intensity is more likely to introduce minor technological improvements. Although ownership type is not a significant determinant of export intensity, state-owned companies tend to adjust their product lines in foreign markets to compete with other Hungarian companies. Global market competition promotes minor technological development and makes state-owned companies more conscious of product development while public ownership deters process innovation in Hungary. Hence, in transition economies, the imitation stage comes first as restructuring companies try to catch up to world class standards in both technologies and products; however preventing foreign participation in the privatization process is likely to impede innovation and stall company restructuring.
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Jel Codes: D21, J31, L21
Changing Incentives of the Chinese Bureaucracy
David D. Li
WP No. 130
(January, 1998)
Abstract: It has been increasingly recognized that the Chinese goverm-nent's newly acquired enthusiasm for economic development is a major factor explaining the relative success of China's transition from socialism. This paper argues that the changed behavior of the Chinese government is an outcome of a series of reforms of the bureaucracy. The bureaucracy was transformed from inside through a massive mandatory retirement program and a drive for administrative/fiscal decentralization. It was also changed from outside since many bureaucrats can quit government positions and join businesses. China's unique approach to reform bureaucracy without explicit political liberalization is predetermined by its initial conditions of transition.
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Jel Codes: H10, H70, P16, P26, P30, P51, P52
Keywords: reform of the bureaucracy, bereaucratic behvior, government in transition
Restructuring Investment in Transition: A Model of the Enterprise Decision
Richard E. Ericson
WP No. 129
(January, 1998)
Abstract: This paper outlines a simple neoclassical model of the investment decision of the firm in the volatile environment of the post-Soviet transition. Conditions favoring and limiting investment in fundamental restructuring are explored, where successful restructuring leads to a substantial increase in expected profitability. In particular, the impact of the availability of alternative uses for investment resources, the degree of uncertainty and volatility in the economic environment, and the cost of capital as affected by credit constraints and investment subsidy policies is modeled and analyzed. It is shown that subsidizing investment in the presence of significant outside opportunities for the use of those funds, particularly when such opportunities are lost with successful restructuring, can be counterproductive, delaying that restructuring. The paper also explores the interaction of restructuring investment with investment in capacity, and shows that shrinking capacity can be an optimal alternative to restructuring investment in an unfavorable environment, while successful restructuring is optimally exploited by expanding capacity. Finally, there is an "unrestructured," low capacity trap, with investment effort largely directed toward outside activities. These results highlight some of the reasons for the limited amount of restructuring investment in Russia and many of the other former Soviet Republics.
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Job Rights in Russian Firms: Endangered or Extinct Institution?
Susan J. Linz
WP No. 128
(January, 1998)
Abstract: Did the Soviet institution of job rights, guaranteed employment despite individual or firm performance, survive the initial stages of transition in the Russian economy? This paper employs survey data collected in 1992 and 1995 to evaluate the extent to which job rights continued to influence the behavior of firms and households three years after Russia inititated its reform program. Using a variety of measures, the results indicate that, while job rights might have been an endangered institution in 1995, the institution does not appear to have been rendered extinct.
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Jel Codes: J4, P3
Keywords: job rights, employment, Russian transition economy
Accounting for Growth in Post-Soviet Russia
Daniel Berkowitz; David N. DeJong
WP No. 127
(January, 1998)
Abstract: In pursuit of its transition from a command to a market economy, post-Soviet Russia has witnessed enormous regional differences in economic growth rates. Moreover, the economic reforms implemented under this transition, while initiated at the federal level, have also differed markedly across regions, as regional governments have had considerable discretion over the implementation of reform policies in their jurisdictions. We exploit these differences in analyzing whether regional differences in reform policies can account for regional differences in growth rates, and conclude that to a considerable degree, they can. Most notably, we find that local-government privatization initiatives and regional-government initiatives to gain control over their capital stock (e.g. plants, equipment, machinery and social infrastructure) exhibit close correspondence with the formation of new legal enterprises, which in turn exhibits close correspondence with economic growth.
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From Federalism, Chinese Style to Privatization, Chinese style
Yuanzheng Cao; Yingyi Qian; Barry R. Weingast
WP No. 126
(December, 1997)
Abstract: In 1994 China began a profound reform of its state-owned enterprises. We first describe and characterize this progress in two areas: privatization of small state-owned enterprises at the county level and mass layoffs of excess state workers at the city level. Local governments have initiated these reforms, which are proceeding in economically and politically sensible ways. We then argue that privatization, Chinese style, rests on an adequate economic and political foundation - federalism, Chinese style. We suggest a range of incentives that propel local governments toward SOE reform, including their harder budget constraints and increased competition from the non-state sector. In this sense, federalism, Chinese style, has induced privatization, Chinese style.
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Keywords: privatization, restructuring, federalism, local governments, China
Market Discipline in Conglomerate Banks: Is an Internal Allocation of Cost of Capital Necessary as Incentive Device
Arnoud W.A. Boot; Anjolein Schmeits
WP No. 125
(November, 1997)
Abstract: This paper analyzes the optimal conglomeration of bank activities. We show that the effectiveness of market discipline for stand-alone activities (divisions) is of crucial importance for the potential benefits of conglomeration. We find that effective market discipline reduces the potential benefits of conglomeration. With ineffective market discipline of stand-alone activities conglomeration would further undermine market discipline, but may nevertheless be beneficial. In particular, when rents are not too high the diversification benefits of conglomeration may dominate the negative incentive effects. A more competitive environment therefore may induce conglomeration. We also show that introducing internal cost of allocation schemes may create 'internal' market discipline that complements the weak external market discipline of the conglomerate. In this context we show that these schemes should respond to actual risk choices, rather than be limited to anticipated risk choices.
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Financial Discipline in the Enterprise Sector in Transition Countries: How Does China Compare?
Mark E. Schaffer; Shumei Gao
WP No. 124
(February, 1998)
Abstract: This paper makes some selective comparisons of the empirical evidence relating to financial discipline and soft budget constraints in the enterprise sector in China and the transition countries of Central and Eastern Europe and the former Soviet Union (CEEFSU). The paper finds that: (1) in both CEEFSU countries and China, budgetary subsidies have fallen as prices have been liberalized, and the budgetary subsidies which remain are not clear evidence of soft budget constraints; (2) firms in both CEEFSU countries and China typically impose hard budget constraints on each other; levels of trade credit in China were roughly constant in 1994-96, implying inflows have approximately equaled outflows, i.e. inter-enterprise debts are being paid; the level of total trade credit observed in China, at about 20-25% of GDP, is similar to that observed not only in CEEFSU countries but also in developed Western economies; (3) in a comparison of bank financing of Chinese and Hungarian firms, Chinese banks were providing poorly-performing firms with new financing, whereas in Hungary, banks were reducing their exposure to bad firms; and (4) tax arrears in CEEFSU economies have emerged as a major source of soft budget constraints in recent years, but enterprise-level data for China show that as of the early 1990s, tax arrears were not an important source of financing for loss-making Chinese firms.
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Jel Codes: G21, G30, P31, P34
Keywords: soft budget constraint, transition economies, China, trade credit, bad debt, tax arrears
Economic Community
Brent Chrite; David Hudson
WP No. 123
(February, 1998)
Abstract: This is an exploratory paper aimed at analyzing some of the many environmental and organizational influences that impact the competitiveness of business enterprises within the Southern African Development Community'. Specifically, we present results from a survey of managers in small, medium and large organizations within three member nations of SADC, South Africa, Zimbabwe and Namibia. The results of the surveys are presented in the context of existing dynamics and forces of emerging markets in general and of the Southern African business environment in particular. We then attempt to develop a framework through which this data and future research efforts can be considered in an effort to better understand the competitive issues, threats and opportunities facing public and private organizations in this region of the world. The data will be considered from the following perspectives: macroeconomic policies, the role of the public sector, the evolution of private enterprise in the region and the globalization of the world marketplace. The survey results reflect feedback from managers in ninety-three business enterprises located in Namibia, South Africa and Zimbabwe, obtained during the summer of 1997 by members of the African Business Development Corps . We interviewed managers from both multinational organizations as well as indigenous companies within these three countries. Additional data for this paper was gathered through a review of the literature on emerging market enterprises as well as from our involvement with public and private businesses throughout sub-Saharan Africa over the last four years.
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A model of the Informal Economy in Transition Economies
Simon Commander; Andrei Tolstopiatenko
WP No. 122
(November, 1997)
Abstract: The informal economy has burgeoned in many transition economies but particularly in those of the Former Soviet Union. While this variation has commonly been related to the prevalent tax regimes and the degree of transparency in the legal and commercial system, the causality is far from obvious and other factors -- such as the importance of non-monetary compensation or social benefits -- seem to be important. This paper sets up a model of a formal and informal sector where multiple job-holding is feasible. The informal sector can choose to employ part time labour or full time workers; the latter will be subject to payroll taxation. The informal sector in this model makes its decisions contingent on the behavior of the formal sector and parameters, such as tax rates and the probability of being caught evading taxes. The model allows us to retrieve the ratio of the types of employment in each sector and their associated levels. With the closed form, a set of simulations are run that indicate the effect of shocks to demand and/or financing of social benefits on labour allocation. The distribution of employment across full and part time employment is very sensitive to the scale of subsidy given to benefits, as well as the tax regime and incidence.
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Jel Codes: J23, J32, O11, P31
Local Labour Market Dynamics in the Czech and Slovak Republics
Peter Huber; Andreas Worgotter
WP No. 121
(November, 1997)
Abstract: This paper addresses the issue whether the differences in national unemployment rates between the Czech and Slovak Republics are in part associated with different responses of regional labor markets. We attempt to assess the relative importance of regional and national shocks in explaining regional unemployment rates in the two countries, by applying a simple VAR model on monthly unemployment rate data. We find that in average Czech regional labor markets are subject to smaller region specific shocks than Slovak regional labor markets. In particular over the period of one year region specific shocks are significantly less important in the Czech Republic than in the Slovak Republic. In Czech regions national shocks tend to be more persistent, while in the Slovak Republic regional shocks have higher persistence. These findings seem to suggest that due to the geography of the country labor markets in the Slovak Republic are regionally more segregated than in the Czech Republic.
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Russian Communitarianism: An Invisible Fist in the Transformation Process of Russia
Charalambos Vlachoutsicos
WP No. 120
(January, 1998)
Abstract: abstract
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Institutional Upheaval and Company Transformation in Emerging Market Economies
Karen L. Newman
WP No. 119
(March, 1998)
Abstract: Company transformation in central Europe is qualitatively different from that observed in the West because of upheaval in the institutional environment. Case data from and= in the Czech Republic suggest that institutional upheaval slows the pace and progress of company transformation because it exacerbates structural inertia effects; eliminates templates for organizing; and promotes strategic confusion. At the same time, inter-organizational and interpersonal relationships facilitate company transformation during institutional upheaval.
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Keywords: organizational transformation, institutional theory, emerging market economies
Industrial Decline and Labor Reallocation in Romania
John S. Earle
WP No. 118
(October, 1997)
Abstract: This paper employs matched labor force survey data to investigate the magnitude and determinants of the labor market flows associated with the decline of industrial employment in Romania from 1993 to 1995. The data show not only a large decline in aggregate industry employment, but also a decline in each of the disaggregated two-digit sectors. Nonetheless, there are substantial gross flows in both directions, although with significant heterogeneity across sectors. Workers leaving jobs in industry have a variety of different destinations: jobs in other industrial sectors, in agriculture, and in services, as well as unemployment and non-participation in the labor force; the data show all of these paths to be significant. Multinomial logit estimates indicate that the probability of paths is affected by both individual and firm characteristics. Among other results, university and general high school education tend to raise the probability of job-to-job flows, particularly from industrial jobs to other industrial jobs and to service sectors, but not to agriculture. Workers with primary and vocational education have the highest probability of becoming unemployed and the lowest probability of finding new jobs in services (less than a third the probability for those with university education). Compared with workers in state-owned companies, workers from the private sector, especially from enterprises of mixed ownership have a greater probability of exiting their industry, as well as higher probabilities of finding jobs in services. The largest outflows, however, concern workers from industrial cooperatives, most of whom became unemployed. The data present a mixed picture of social dislocation and improved reallocation.
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Notes for an Essay on the Soft Budget Constraint
Lorand Ambrus-Lakatos
WP No. 117
(June, 1997)
Abstract: abstract
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Labour Demand During Transition in Hungary
Gábor Kõrösi
WP No. 116
(August, 1998)
Abstract: Transition from socialist to market economy brought drastic changes on the Hungarian labour market. Employment fell by 1.6m, i.e., by more than 25% during the past decade, while unemployment jumped from practically nil to over 14% within four years. This paper describes the changes in corporate labour demand resulting in this drop in aggregate employment, and gives an empirical analysis of the corporate labour demand during the transition period, based on a panel of medium-sized and large Hungarian firms.
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Jel Codes: C23, D21, J23
Keywords: labour demand, firm in transition economy
Enterprise Performance and Managers' Profiles
Simeon Djankov; Stijn Claessens
WP No. 115
(December, 1997)
Abstract: We study the effect of changes in management and the use of equity incentives on firm performance and market valuation using a cross-section of 706 Czech firms over the 1993-97 period. As these firms have exogenously determined ownership structures, we avoid the simultaneity problem often present in studies for transition economies where either existing managers become owners or new owners replace existing managers. And, as there were few managers in the Czech Republic with market-economy skills, we avoid the selection problem often present in studies for market economies where new managers may be better suited than existing managers to manage the firm. Controlling also for initial conditions and sector-specific effects, we find that several measures of enterprise performance are positively related with the entry of new managers, particularly if those managers were selected by private owners (rather than by the government). Equity holdings by managers appear to have no effect on corporate performance. The results suggest that changes in human capital are more important in bringing about improvements in corporate performance than equity incentives.
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Employment and Wages in Enterprises Under Communism and in Transition: Evidence from Central Europe and Russia
Swati Basu; Saul Estrin; Jan Svejnar
WP No. 114
(May, 2000)
Abstract: This paper presents a comparative analysis of employment and wage behavior of firms in the Czech Republic, Slovakia, Poland, Hungary and Russia during the late 1980s to the early 1990s. The four main findings are: 1) There is evidence of some (not excessive) labor hoarding before the transition and it disappeared shortly thereafter; 2) The estimated elasticities of demand grew over the transition, starting from zero in Russia, the Czech Republic and Slovakia and from sizeable levels in Hungary and Poland. By the end of the period, the elasticities for the four East European countries were quite similar and those for Russia had not changed significantly; 3) Once other factors are controlled for, there is no significant difference in the employment behavior among firms by ownership or legal status. However, Czech, Slovak and Polish private firms did pay higher wages than state-owned firms immediately after the start of the transition; 4) A closer examination in the Czech Republic of state-owned enterprises (SOEs) and newly established firms indicates that SOEs had lower elasticities of employment and allowed less rent sharing than the newly established firms.
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Keywords: Russia, central Europe, employment, wages
Preliminary Evidence on Active Labor Programs' Impacts in Hungary and Poland
Christopher J. O'Leary
WP No. 113
(October, 1997)
Abstract: abstract
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Jobs from Active Labour Market Policies and Their Effects on Slovak Unemployment
Martina Lubyova; Jan C. van Ours
WP No. 112
(September, 1997)
Abstract: The system of active labour market policies (ALMP) in the Slovak Republic consists to a large extent of the creation of socially purposeful and publicly useful jobs. These jobs are intended for unemployed workers to get them out of unemployment, give them additional work experience and get them to find a regular job more easily. So far, the effects of these types of jobs on the labour market position of unemployed workers have hardly been investigated. This paper makes attempt to measure these effects. We use data from various administrative files to describe the outflow from unemployment into regular jobs and into ALMP-jobs, and the outflow from ALMP-jobs to regular jobs. We investigate to what extent it is beneficial for unemployed workers who want a regular job to accept a temporary ALW-job. We conclude that those workers who have a better position when it comes to finding regular jobs are also in a better position to find SPJ or PUJ. The jobs created by active labour market policies are complementary to the regular labour market rather than compensating for bad labour market characteristics.
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Unemployment Benefits and Incentives in Hungary: New Evidance
Joachim Wolff
WP No. 111
(October, 1997)
Abstract: This paper analyses the Hungarian unemployment insurance (Ul) benefit reform of 1993, which led to the creation of a less generous benefit system. We investigate a sample of unemployment spells which are drawn from the Hungarian Ul register directly before and after the reform came into force. The focus of the microeconometric duration analysis lies in the interaction of the exit behavior of unemployed people with the Ul system. As exit states we consider employment, subsidised employment, training and (early) retirement. Our results are in support of the hypothesis that the benefit reform increased, significantly, the transition rates from unemployment to all the labour market schemes. In particular, aged people responded to the benefit reform with a substantial rise in their transition rates to (early) retirement. A specific characteristic of our inflow cohort has to be taken into account for the analysis of the employment hazards. A large proportion of our sample represents workers who are likely to be on recall. Their job hazards are extremely sensible to seasonal labour demand fluctuations. We identify these workers and concentrate the analysis of the benefit reform on those workers who are not on recall. They represent workers who most likely were made redundant due to the restructuring of the Hungarian economy. The benefit reforms only slightly increased their speed of return to work. Furthermore, the transition rates to employment are found inelastic to the replacement rate with the exception of women who are below 30 years of age.
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Long-Term Unemployment, Unemployment Benefits and Social Assistance: The Polish Experience
Marek Góra; Christoph M. Schmidt
WP No. 110
(April, 1997)
Abstract: This paper provides a comprehensive account of the regulations governing the systems of unemployment support and social assistance in post-transition Poland. To provide a solid foundation for a discussion of these issues, the paper extensively characterizes the Polish force in terms of the incidence and duration of unemployment. A final aspect of our empirical analysis concerns the question of what are the main sources of personal income for labor force participants, unemployed workers and long-term unemployed workers. In conclusion, we argue for a reform of the Polish system of income support that separates the objectives of employment growth and poverty alleviation, and that improves upon the implementation of support schemes.
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Jel Codes: J64, J65
Keywords: transition economies, unemployment structure, unemployment insurance
Markets for Communist Human Capital: Returns to Education and Experience in the Czech Republic and Slovakia
Robert S. Chase
WP No. 109
(October, 1997)
Abstract: This research examines differences in earnings structure between Communist and post-Communist Czech Republic and Slovakia using four sets of similar micro-data. It presents hypotheses about how earnings dispersion, returns to education, and returns to experience will change across regimes and tests those hypotheses using earnings equations. From fairly low levels during Communism, e.g., 2.4 percent for Czech men in 1984, the return to education increased quite dramatically during transition, e.g., to 5.2 percent for Czech men in 1993. Returns to experience fell. Though women have higher returns to education in general, returns for men increased more across regime change. Those with academic secondary education experienced a particularly large earnings increase. In the Czech Republic, where transition occurred more rapidly and deeply, earnings structure changes appear larger than in Slovakia.
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Returns to Mobility in the transition to a Market Economy
Tito Boeri; Christopher Flinn
WP No. 108
(November, 1997)
Abstract: In spite of the ongoing dramatic changes in the structure of employment, transitional economies display rather low mobility across sectors, occupations and firms of different ownership. We characterise this low mobility of central and eastern European labour markets by computing mobility measures for transition matrices, the latter estimated on the basis of matched records across LFS waves. As low mobility can be explained by high costs of shifting jobs compared to the vbenefits one can get from the job change as well as by segmentation in the allocation of job offers, we develop an econometric model enabling to characterise intertemporal changes in probabilities of dismissal, remunerations and offer arrival rates on the basis of information only on observed transitions. This model is seminally implemented on matched data across various waves of the Polish LFS. Although our results are highly pre6liminary, they point to significant segmentation in the allocation of job offers, more stability in public sector versus private sector jobs, and little, if any, rewards to tenure and age in the private sector. Were these findings supported in further work, they could support explanations for low mobility in transitional ecnomies, which are based on informational failures, notably that fact that job offers do not reach those who are most prone to take up jobs, and on the fact that changing jobs and moving from public to private enterprises is costly especially for those with relatively long tenures and work records.
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Worker-Firm Matching and Unemployment in Transition to a Market Economy: (Why) Were the Czechs More Successful than Others?
Daniel Münich; Jan Svejnar; Katherine Terrell
WP No. 107
(January, 1998)
Abstract: Using panel district level data from the Czech and Slovak Republic in the 1990s, we find that the exceptionally low unemployment rate in the Czech Republic as compared to Slovakia and the other CEE economies has been brought about principally by the following phenomena in the Czech Republic: (1) a rapid increase in vacancies along with unemployment, resulting in a relatively balanced unemployment-vacancy situation at the aggregate as well as district level, (2) a major part played by vacancies and the newly unemployed in the outflow from unemployment, (3) a matching process with strongly increasing returns to scale throughout (rather than only in parts of) the transition period, and (4) ability to keep the long term unemployed at relatively low levels. Since until 1996 the Czech economy registered overall economic growth that was similar to that of the neighboring high unemployment economies (e.g., Hungary, Poland and Slovakia), the interesting question, to be addressed in future research, is whether the Czech Republic's favorable vacancy situation, coupled with its strong matching process, was brought about by a relatively high level of initial economic activity (better initial conditions) or a relatively delayed restructuring of firms.
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Job Creation, Job Destruction and Growth of Newly Established, Privatized and State-Owned Enterprises in Transition Economies: Survey Evidence from Bulgaria, Hungary and Romania
Valentijn Bilsen; Jozef Konings
WP No. 106
(November, 1997)
Abstract: This paper reports new and unique firm level survey evidence to investigate the micro economic nature of the growth process and structural change in three transition countries, Romania, Bulgaria and Hungary. In particular we investigate gross job creation and destruction in newly established private (de novo) firms and "traditional" ones, being state owned and privatized firms and find that the de novo private firms are the most dynamic ones in terms of job creation. In addition, we find that job reallocation in the early years of transition occurs predominantly between sectors, while later on in the transition more within sector job reallocation is observed. After controlling for size and life cycle effects we find that de novo private firms consistently outperform the state owned and privatized enterprises. In addition, we find that state owned enterprises are not significantly different in their employment behavior from privatized firms. We find mixed effects of competition on employment growth. They vary according to sector and country. Finally, we find evidence that suggests efficiency wage payments are important for employment growth in Hungary, but not in Romania and Bulgaria.
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Jel Codes: J6, L0, O5
Keywords: job creation and destruction, ownership, growth
Getting Behind the East-West [German] Wage Differential: Theory and Evidence
Michael C. Burda; Christoph M. Schmidt
WP No. 105
(May, 1997)
Abstract: Labor markets are the most important mediator of German unification and wages are a central indicator of its progress. Starting from the observation that a wage differential between two workers can arise either because workers have different endowments of human capital characteristics or remuneration to these characteristics differ, we apply an Oaxaca-style decomposition to the post-unification waves of the GSOEP to analyze the extent and causes of the East-West German wage differential. We derive an empirical specification allowing us to assess directly whether (i) the initial wage disadvantage of East German workers is increasing in "age at unification" and (ii) subsequent wage growth is increasing in the time remaining in the labor force. Furthermore, we derive and estimate a measure of East-West wage convergence that accounts for both differences in human capital endowments and interference generated by the aging process.
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Jel Codes: J31, J61
Keywords: German unification, wage differentials, convergence
The Birth of the "Wage Curve" in Hungary, 1989-1995
Gábor Kertesi; János Köllo
WP No. 104
(October, 1997)
Abstract: The paper investigates linkages between regional unemployment and regional wages in Hungary. The evolution of a 'wage curve' is followed from 1989 to 1995 using surveys of employees, employers and unemployed job seekers. Cross-section earnings functions are estimated to measure the impact of unemployment on wages. Data on enterprise performance, capital inflows and labour mobility are used to evaluate the scope for change.
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Grime and Punishment: Employment, Wages and Wage Arrears in the Russian Federation
Hartmut Lehmann; Jonathan Wadsworth; Alessandro Acquisti
WP No. 103
(October, 1997)
Abstract: abstract
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Social Networks in Transition
Lorena Barberia; Simon Johnson; Daniel Kaufmann
WP No. 102
(October, 1997)
Abstract: Inter-household transfers in Russia, Ukraine, and Latvia to provide an important supplement to individual incomes. These transfers are as high as in many developing countries. Transfers are from richer to poorer, from older to younger, and to femaleheaded households. We find no evidence that Russia has lower transfers than Ukraine, which has had relatively little reform. The high level of inter-household transfers may help explain why there has been so little social protest in Russia despite the large fall in measured real wages.
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Depreciation and Russian Corporate Finance: A Pragmatic Approach to Surviving thr Transition
Susan J. Linz
WP No. 101
(November, 1997)
Abstract: Are Russian firms being allowed to clean the slate with respect to the Soviet legacy of obsolete capital stock? If estimates of capital productivity and firm-level efficiency in Soviet industry are correct, enterprise managers in Russia's emerging market economy will lobby for high depreciation rates in order to write off as quickly as possible the obsolete capital stock which they inherited. Policy makers, seeking to maintain or expand tax revenues to finance the transition, may resist pressure to allow market forces to value capital and continue to set depreciation rates similar to those in the former Soviet economy. This paper utilizes firm-level data in 1992 and 1995 to investigate the extent to which depreciation rates vary across industries and regions by the size of the firm's capital stock, the intensity of capital use, the size of the firm's workforce, the firm's ownership structure, and whether or not the firm exports any portion of its output. The results indicate that in both 1992 and 1995, state-owned firms reported significantly higher average depreciation rates, and thus faced a lower tax burden, ceteris panibus, than joint ventures, leased firms, joint stock companies, and privately-owned firms. While pragmatic from the policy maker's perspective of maintaining a broad tax base, this result highlights the disproportionate burden imposed on the "engines of transition." Moreover, while economic rationale might explain the higher depreciation rates for exporting firms in 1992, economic rationale is unsatisfactory in explaining why firms in the Central region, particularly those located in Moscow, reported higher depreciation rates in 1995.
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Jel Codes: G32, P42, P52
Keywords: depreciation, transition, Russia, corporate finance