Romanian Financial System Reform
Anna Meyendorff; Anjan V. Thakor
WP No. 100
(November, 1997)
Abstract: Taking steps to reduce financial system fragility is important for sustained economic growth. This paper focuses on two questions: What are the key problems of the Romanian financial system? What specific action steps are needed to address these problems and achieve the desired financial reform? We conclude that the current financial system suffers from inadequate restructuring of and weak corporate governance in both enterprises and banks, a lack of appropriate credit culture, poor credit skills, legal and regulatory ambiguities, weak banking supervision, and missing markets and institutions. Major recommendations for reform include (1) implementing effective bank privatization, and removing impediments to foreign ownership; (2) improving the net worth positions and corporate governance structures of industrial firms; (3) focusing initial reform efforts on the banking sector, with subsequent development of capital markets; (4) setting up institutions to facilitate the creation of markets for insurance, mortgages, and other financial markets.
>> Download PDF
Proceedings of the Conference on Strategic Alliances in Transitional Economies
Cynthia Koch
WP No. 99
(May, 1997)
Abstract: abstract
>> Download PDF
Institutions, Strains and the Underground Economy
Daniel Daianu; Lucian Albu
WP No. 98
(November, 1997)
Abstract: The paper interprets the dynamics of the underground economy in a transforming environment by highlighting the role of institutions in enforcing the rules of the game and the phenomenon of strain. A basic idea is that the underground economy emerges as a means for the system to diffuse its internal strain; the underground economy operates as a homeostatic mechanism which helps the system survive temporarily -as in the case of a command economy-and affects the structure of output according to consumers' preferences. In the same vein can be judged the emergence of unofficial activities in an over regulated system be it market-based. Part one deals with the command economy and its specific institutions (rules of the game) as a glaring example of neglect of consumers' preferences and as a system developing endemic shortages. In such a system very intense strain emerges. Part two tries to explain strain during system transformation and its impact on the underground economy. In this case the magnitude of strain is related to dramatic changes in relative prices and the imbalance between exit and entry. Similarly relevant for explaining strain are the institutions in the making; still "soft" rules shape agents' behaviors and explain the resilience and the patterns of unofficial activities. Such is the case of reputation seen as an asset, and of the local standards of compliance with the legal framework. The last part applies empirical analysis, a model to the Romanian economy and speculates on the size of local unofficial activities.
>> Download PDF
Structure and Strain in Explaining Inter-Enterprise Arreas
Daniel Daianu
WP No. 97
(November, 1997)
Abstract: This study considers strain to be the main source of arrears; strain can be linked with the structure of the economy and the size of resource misallocation. The focus here is on the real side of the economy in explaining the growth of arrears and on exploring avenues for their reduction. Arrears "soften" markets and influence the system, apparently, in an ambivalent way: they seem to operate as a self-protecting device against the pressure for change (against the need to proceed with swift and fundamental reforms); at the same time, they can slow down dangerously the speed of restructuring and adjustment by relaxing financial discipline. Arrears preserve a soft-budget constraint syndrome. As temporary quasi-inside money, arrears in fact fuel inflation: they enable firms to raise prices and wages without fearing immediate consequences. Since they are only a temporary substitute for real money, arrears work to 'endogenize' money supply dynamics in a perverse way. The dimension of the arrears pro blem in the various post-command economies is linked, basically, with their capacity to adjust, which in turn depends on structure and the size of required structural change (adjustment). Exports are a possible side-effect of arrears and a constraining factor on these. The best one can hope in fighting inter-enterprise arrears is, essentially, to try to contain and reduce them. Containing arrears cannot be a one shot policy-drive; here one deals with a process that will eventually overlap with the evolving environment.
>> Download PDF
Resource Misallocation and Strain: Expanding Shocks in Post-Command Economies
Daniel Daianu
WP No. 96
(November, 1997)
Abstract: A fundamental tenet in economic theory - which was confirmed by reality - is that a command system allocates resources poorly because of the impossibility of economic calculation'. Therefore, once prices are freed and start to operate at quasi-equilibrium (market-clearing) levels, the hidden inefficiencies come into the open and a massive resource reallocation would have to take place - from low to high productivity areas. More precisely, the issue refers to the possible and probable intensity of resource reallocation in view of constraints such as: the balance between exit and entry in the labor market, the size of the budget deficit and the means for its non-inflationary financing, social and political stability, etc. This paper argues that the magnitude of the required resource reallocation - the imbalance between exit and entry - brings about tremendous strain in the system. It also submits that when the expansion of the private sector is slow, the foreign support is insufficient, the external (negative) shocks are powerful, and the underground economy is not effective enough in absorbing the labor shed by the official economy, the strain in the system can lead to its growing destabilization. By looking at post-command economies, mainly, this study makes an attempt to show why strain emerges within an economic system and what are implications for stabilization policy. A formalized expression of strain is suggested and illustrated for both closed and open economy cases. The distributional struggle, as a consequence of resource reallocation, is highlighted. Taken as an example it is argued that inter-enterprise arrears are a symptom of strain. The line of reasoning espoused herein can help in explaining shocks in post-command economies.
>> Download PDF
Czech Money Market: Emerging Links Among Interest Rates
Jan Hanousek; Evzen Kocenda
WP No. 95
(November, 1997)
Abstract: The goal of this paper is to assess the money market in the Czech Republic from 1993 to 1997. The specific interest is in interactions between short and long interest rates, and between exchange and interest rates. During the financial crisis of 1997 the prevailing links among monetary variables tended to gain strength. The mutual links among interest rates provide clear proof that during the crisis the money market had became more efficient than at any time before. This was possible partially because of emerged arbitrage opportunities. The linkages show that turbulence and uncertainty enabled interest rates to again become the price of money as well as to influence the exchange rate. The exchange rate was found to influence only short-term interest rates.
>> Download PDF
Jel Codes: E44, F31, G14
Keywords: market efficiency, VAR, interest rates, exchange rates, causality
Pre-Reform Industry and The State Monopsony in China
Louis Putterman; Xiao-Yuan Dong
WP No. 94
(October, 1997)
Abstract: This paper concerns employment and wage determination in the state industrial sector in China, focusing on the pre-reform era as a baseline. We argue that in that period, the sector faced an upward sloping supply curve of labor, and we provide statistical evidence for this proposition. We then present a two-sector model in which the Chinese state acts as a monopsonist maximizing industrial profits (investment) subject to an agricultural production constraint. Finally, we analyze two sets of data providing evidence of monopsonistic behavior, and discuss corroborating evidence in the extant literature and suggest implications for future research.
>> Download PDF
China's State-Owned Enterprises in the First Reform Decade: An Analysis of a Declining Monopsony
Xiao-Yuan Dong; Louis Putterman
WP No. 93
(October, 1997)
Abstract: We study the evolution of employment and wage outcomes in Chinese SOEs during the first decade of economic reforms, studying a panel of data for almost 1000 enterprises covering the years 1980-90. Despite the consensus on the persistence of labor redundancy in the SOE sector, we find that capital-intensity remained so extreme that workers' marginal products exceeded their full wages, just as in a classical monopsony outcome. Consistent with expectations about the reform process, we find that the degree of monopsony declined during the 1980s, although it was not eliminated, and that monopsony was weakest where the state sector's shares of industrial output and enterprises were lowest, and for smaller enterprises and enterprises managed by lower levels of government. Our analysis also supports Xu and Zhuang's finding that bonus payments increased enterprises' revenues by more than it did their costs.
>> Download PDF
Expatriate Management in the Czech Republic
Richard Peterson
WP No. 92
(September, 1997)
Abstract: abstract
>> Download PDF
China and the Ideal Economic Reform
Thomas G. Rawski
WP No. 91
(September, 1997)
Abstract: Economists studying socialist transition have established a paradigmatic view that emphasizes flexible prices, openness to international trade, minimal government intervention in market operations, and private ownership of productive resources. China's, the largest and best performing transition economy, deviates widely from this approach. This paper explores the conflict between standard prescriptions and Chinese reality. The author concludes that gradual reform is unavoidable, that partially reformed systems can generate huge growth spurts, that economists overstate the importance of ownership, and that the institutional structures of market systems are far more complex than most observers imagine.
>> Download PDF
China's State Enterprise Reform - An Overseas Perspective
Thomas G. Rawski
WP No. 90
(July, 1997)
Abstract: After briefly surveying the current circumstances of China' s state-owned industrial enterprises, this paper offers a series of policy recommendations organized around two objectives: raising the returns to capital and promoting the development of market-supporting institutions. The author argues that public ownership is not the central cause of weak performance in state enterprises, and that policy analysis should focus on raising returns to capital and building market-supporting institutions rather than on privatization.
>> Download PDF
The Economic Determinants of the Internal Migration Flows in Russia During Transition
Annette N. Brown
WP No. 89
(July, 1997)
Abstract: I analyze the patterns of migration by testing the influence of traditional economic and amenity factors and of housing market reform on the direction of migration flows. I improve on the few previous studies of Russian migration during transition by analyzing gross flows rather than net flows in order to properly distinguish effects, and by analyzing a much wider set of factors. The results indicate that even early in transition, migration responds to average wages and prices. In particular, higher average wages and lower prices positively determine immigration. Higher average wages also positively determine outmigration. Apartment privatization significantly affects migration even after only the first year of the reform. Amenity and demographic factors generally influence migration as expected. Several checks confirm the robustness of these results.
>> Download PDF
Jel Codes: J61, P20, R23
Gender Wage Gaps in China's Labor Market: Size, Structure, Trends
Margaret Maurer-Fazio; Thomas G. Rawski; Wei Zhang
WP No. 88
(June, 1997)
Abstract: Chinese attitudes toward the treatment of men and women in the workplace reflect two divergent perspectives. The legacy of China's past includes a strong tendency to favor male over female workers, while over the last four decades China's government has vigorously propagated an ideology of gender equality. This paper applies econometric methods to a large body of data on average wages and the number and share of female employees to investigate disparities between men's and women's wages in China's urban, formal labor markets during the period 1988-1994. Our results demonstrate the presence of substantial, persistent, and large (relative to available international comparisons) gaps between men's and women's wages in the People's Republic of China during this period. We find no evidence of a tendency for the gap between male and female wages to decline. On the contrary, calculations based on the whole data set and on data for state and collective employers all indicate expanding inequality between men's and women's earnings.
>> Download PDF
Privatisation in Central and Eastern Europe
Saul Estrin
WP No. 87
(June, 1997)
Abstract: abstract
>> Download PDF
The Effect of Privatization on the Wealth Distribution in Russia
Michael Alexeev
WP No. 86
(February, 1997)
Abstract: This paper considers the Russian privatization process through the end of voucher privatization and examines how its deviation from the competitive sale standard was likely to affect wealth inequality. While empirical evaluation is all but impossible due to the dearth of reliable data, it is feasible to analyze the institutional features of Russian privatization in terms of their effect on redistribution of wealth. The attempt is made to consider distributional effects of privatization independently from the resolution of uncertainty about the value of privatized assets and from other market-oriented reforms such as liberalization of prices and foreign trade. (Privatization here is defined rather narrowly as the transfer of existing assets from government ownership to private hands.) The paper argues that there are at least two reasons to believe that Russian privatization might have systematically redistributed wealth and caused an increase in wealth inequality even compared to the informal distribution of property rights that existed prior to reforms. The first reason has to do with the rent-seeking nature of privatization, and the second relates to the differences in opportunities for various wealth groups to take advantage of privatization due to the differences in the composition of their wealth. The analysis of these two reasons and their implications constitutes the main contribution of the paper. The effect of wealth redistribution on economic growth in Russia is also discussed.
>> Download PDF
Jel Codes: D7, P2, P3
Keywords: privatization, wealth distribution, rent-seeking, transition, Russia
Was Privatization in Eastern Germany a Special Case? Some Lessons from the Treuhand
Uwe Siegmund
WP No. 85
(July, 1997)
Abstract: Eastern German privatization and restructuring of firms is seen as a special case because of the peculiarities of reunification and the large transfers from western Germany to finance it. Although this is right, the government faced the same problems as other countries in transition when privatizing and restructuring firms: It had to decide about the aims, methods and organization, the extent and the speed of privatization, it had to take into account politico-economic repercussions and traditions, and it had to find a general economic policy toward restructuring. I argue that eastern German privatization is only in a limited way a special case and therefore some lessons can be drawn for other transition countries.
>> Download PDF
Jel Codes: L33, P52
Keywords: privatization, restructuring, eastern germany
Start-ups and Transition
David J. Cooper; Daniel Berkowitz
WP No. 84
(July, 1997)
Abstract: How fast transition should occur and how fast privatization and/or entry should take place in formerly socialist economies has been widely debated by economists. The field evidence on start-ups is mixed, with fragmentary data indicating that the performance of start-ups varies widely across countries. The evidence suggests that two vastly different equilibria are emerging in transition economies: a high development equilibrium and a low development equilibrium. In the high development equilibrium start-ups supply higher quality goods than transforming SOES, aggregate supplies are ample and start-ups are a growth engine. This contrasts with the low development equilibrium in which start-ups provide lower quality goods and the overall supply of goods is lower. In this paper, we develop a dynamic model which explains how features of the transition can push an economy to either the high or low development equilibrium in the long run. We concentrate on the speed with which bureaucratic interference in the economy is eliminated and the speed with which entry by private firms occurs. Our central conclusion is that delayed entry by start-ups can substantially increase the likelihood of the high development outcome, especially when bureaucratic interference is persistent. Our result captures how this interference, while transitory, can have a negative long run impact and underlines the importance of government polices to encourage entrepreneurship, such as subsidies and tax breaks.
>> Download PDF
Keywords: adaptive learning, transition
Which Enterprises (Believe They) Have Soft budgets after Mass Privatization? Evidence from Mongolia
James Anderson; Georges Korsum; Peter Murrell
WP No. 83
(October, 1997)
Abstract: To ascertain the prevalence of soft budgets and to find causes of softness, we surveyed 251 privatized Mongolian enterprises, asking whether state aid was expected when financial difficulties arose. One quarter of the enterprises expected such soft-budget aid, a large proportion of which have central government ownership. We examine causes of soft budgets in addition to state ownership, but the state variable dominates. Results are robust when using either instrumental variables or bivariate probit to unmask unmeasured selection effects. Local government ownership has a much weaker effect than does central ownership.
>> Download PDF
Jel Codes: H20, H70, O53, P11, P21
Work Incentives and the Probability of Leaving Unemployment in the Slovak Republic
Martina Lubyova; Jan C. van Ours
WP No. 82
(July, 1997)
Abstract: The system of unemployment benefits and subsistence benefits in Slovakia has potentially large disincentive effects with respect to the outflow from unemployment to a job. Especially low educated unemployed and unemployed with young children are often faced with replacement ratios which are close to 100%. We investigate whether the potential effects have an actual meaning. Using data from subsequent labour force surveys we analyze the (hazard) rates at which unemployed workers find jobs. We find no evidence of disincentive effects of the Slovak unemployment system.
>> Download PDF
Determinants of Unemployment Duration in Russia
Mark C. Foley
WP No. 81
(September, 1997)
Abstract: Using information contained in a nationally representative, longitudinal survey of Russian citizens, this research analyzes the determinants of unemployment duration during the early stages of economic transition. A competing-risks, discrete-time waiting model augmented to incorporate unobserved heterogeneity, is employed to analyze whether there is evidence of duration dependence in unemployment, and the role of demographic characteristics, alternative income support, and local demand conditions in explaining unemployment duration for working age individuals. Married women are found to experience significantly longer unemployment spells before exiting to a job compared to married men. Older individuals can expect to be unemployed longer than comparable younger workers. Persons with higher education do not have significantly longer unemployment spells than those with secondary or even primary education. Having children has no effect on the duration of unemployment, however they do appear to motivate women to drop out of the labor force, significantly decreasing the time spent searching for work, Local labor market demand conditions have a significant effect on duration. Individuals in regions with higher unemployment rates, all else equal, have longer unemployment spells. With respect to the reason for the entering unemployment, persons laid off from their last job have shorter durations relative to quitters. Finally, there is evidence of duration dependence in the reemployment hazard in Russia, with a period of positive duration dependence in the first 7 months, followed by a declining hazard until approximately eighteen months. These results are robust to the introduction of unobserved heterogeneity.
>> Download PDF
The Many Faces of Information Disclosure
Arnoud W.A. Boot; Anjan V. Thakor
WP No. 80
(March, 1998)
Abstract: We examine the effects of a variety of mandatory information disclosure regimes on the expected revenues of issuing firms and on their endogenously-arising incentives for financial innovation. The main question we ask is: what kind of information and how much of it should firms be asked to disclose? The analysis uses a noisy rational expectations model in which some investors can choose to become informed at their own expense. Information disclosure then potentially affects the information-advantage of these investors vis-a-vis uninformed (liquidity) investors in the market, and hence their information-acquisition incentives. Thus, asking managers to disclose more information is not obviously desirable for the shareholders of issuing firms. Our main results are as follows. Mandating the disclosure of information about total firm value that would otherwise not have become available to any investor is always good for issuing firms. It increases their expected revenues and also strengthens financial innovation incentives. Mandating the disclosure of information about total firm value that would have been acquired anyway by informed investors but improves the quality of the information that uninformed investors have will benefit firms in emerging capital markets but hurt those in developed capital markets. In developed markets, the attention devoted to disclosure should thus shift from information that concerns total firm value to that which concerns the distribution of this value among claimants. Our conclusion is that disclosure requirements should be more stringent in less-developed capital markets, and that greater stringency in disclosure requirements on securities exchanges leads to a worsening of the borrower pool faced by banks. Our analysis also implies that competition among exchanges or securities regulators will not necessarily lead to a weakening of disclosure requirements.
>> Download PDF
Foreign Speculators and Emerging Equity Markets
Geert Bekaert; Campbell R. Harvey
WP No. 79
(August, 1997)
Abstract: abstract
>> Download PDF
The Relationship Between Economic Factors and Equity Markets in Central Europe
Jan Hanousek; Randall K. Filer
WP No. 78
(June, 1997)
Abstract: This paper investigates the possibility that newly emerging equity markets in Central Europe exhibit semi-strong form efficiency such that no relationship exists between lagged values of changes in economic variables and changes in equity prices. We find that such efficiency is characteristic of the Czech Republic where several economic factors create contemporaneous changes in equity prices, but no lagged factors cause current-period changes in the stock market. In the other three Central European countries, Hungary, Poland, and Slovakia, markets do not appear to be efficient and lagged economic factors do affect equity prices. Finally, we show that the Czech equity market is closely integrated with the German market while movements in prices in Hungary and Poland more closely follow movements in the U.S. market. Overall, the results are consistent with the Czech market reflecting underlying fundamentals, while the other three markets exhibit speculative bubbles dominated by foreign capital.
>> Download PDF
Changes in Distribution and Welfare in Transition Economies: Market vs. Policy in the Czech Republic and Slovakia
Thesia I. Garner; Katherine Terrell
WP No. 77
(June, 1997)
Abstract: abstract
>> Download PDF
Chinese Enterprise Reform as a Market Process
Gary H. Jefferson; Thomas G. Rawski
WP No. 76
(July, 2000)
Abstract: The reform of China's enterprise system increasingly reflects the outcome of China's emerging property rights market. We distinguish between a centrally-directed reform strategy, with characteristics similar to those of a Pigouvian tax, and a market-driven reform process, which captures the essential features of a Coasian approach to social cost. The Coase Theorem postulates that eliminating transaction costs and attaching well specified property rights to public goods that generate externalities will allow uncoordinated economic agents to negotiate institutional arrangements that produce socially efficient allocation of resources. Extending Coase's reasoning to the case of socialist transition ' we argue that reforms that expand competition, move toward well-specified assignment of ownership rights to public enterprises, and reduce transaction costs will motivate the "ultimate" owners, including officials of national and sub-national government agencies, to reconfigure their assets or to combine their assets with those of other jurisdictions and/or private investors to create more efficient ownership arrangements. We review the extent to which China's reforms have established the conditions for an effective market in ownership rights to industrial property. We tabulate progress from 1 980 to present along the three major analytic dimensions inherent in Coase's analysis: competition, property rights, and transaction costs. We conclude that the sheer size and diversity of China's industrial economy will motivate a continuation of decentralized reform initiatives. To support this Coasian reform process, central and provincial governments need to expand initiatives to clarify property rights, particularly the right of alienation, reduce impediments to competition, and facilitate the reduction of transaction costs.
>> Download PDF
Keywords: China, ownership, property rights, Coarse theorem, transition, merger, transaction costs
Test of Permanent Income Hypothesis on Czech Voucher Privatization
Jan Hanousek; Zeda Tuma
WP No. 75
(January, 1997)
Abstract: This paper tests the permanent income hypothesis using the natural experiment of Czech voucher privatization. This' form of privatization moved state assets to individuals and represented an unexpected windfall gain for participants of the privatization scheme. Whether the windfall was consumed or saved provides a clear test of the permanent income hypothesis. Analysis based on data from a sample survey suggests that only a small number of transferred assets were cashed in and spent on consumption. This result supports the concept of the permanent income hypothesis.
>> Download PDF
Determinants of Performance of Manufacturing Firms in Seven European Transition Economies
Stijn Claessens; Simeon Djankov; Gerhard Pohl
WP No. 74
(February, 1997)
Abstract: We document the operational performance of (former and current) state enterprises over the 1992-1995 period for seven countries in Central and Eastern Europe (Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia) using large samples of firm level data and a consistent methodology. We find that @ in the Czech Republic, Hungary, Poland, and Slovakia have the highest factor productivity growth and firms in Bulgaria and Romania the lowest, with firms in Slovenia in between. We find three factors which help explain the variation in firm performance: initial conditions (firm size, sector, and level of productivity), status of privatization, and quality of bank lending. Firms in tobacco, furniture, and paper improve faster than firms in other sectors, while firms in the textile, lumber, petroleum refining, rubber and non electrical machinery sectors improve slower than other firms. Firms with a lower initial level of factor productivity display higher productivity growth than other firms, suggesting convergence of productivity. Productivity growth is most often negatively correlated with firm size. Productivity growth is positively related to privatization in all countries, with firms privatized for two years displaying the most change. Finally, bank financing appears to have been increasingly allocated to more productive firms in all countries except Bulgaria and Romania.
>> Download PDF
Restructuring of Large Firms in Slovakia
Simeon Djankov; Gerhard Pohl
WP No. 73
(March, 1997)
Abstract: This paper examines case study evidence of large Slovak firms chosen to represent a wide range of initial conditions, privatization techniques and success with restructuring. We document the ownership changes and restructuring actions of firms. We then re-examine several hypotheses about firm restructuring in the light of this new evidence. In particular, we show that the majority of large Slovak firms have successfully restructured in the absence of foreign investors and government-led restructuring programs. The study also throws some new queries on the effectiveness of different privatization methods in enhancing corporate governance and improving access to skills and capital. We find that privatization to insiders through management-employee buy-outs did not hamper firm restructuring as the new owners (old managers) invested heavily in new technology, laid off substantial part of their workforce, sought foreign partnerships, and were prepared to sell controlling stakes to outsiders in return for fresh financial resources. The evidence also suggests that the mass privatization program did not result in weak corporate governance since it was followed by a rapid consolidation of ownership. Our findings support the view that the main objective of privatization programs should be the speedy transformation of ownership, not the selection of perfect owners.
>> Download PDF
Law, Relationship, and Private Enforcement: Transactional Strategies of Russian Enterprise
Kathryn Hendley; Peter Murrell; Randi Ryterman
WP No. 72
(November, 1998)
Abstract: We examine how Russian enterprises do business with one another, focusing on the strategies used to obtain efficiency and predictability in their transactions. Using survey data, the paper analyzes the relative importance of relational contracting, self-enforcement, enterprise networks, private security firms, administrative institutions, and courts. Enterprise-to-enterprise negotiations are preferred, but courts are used when disputes resist resolution through negotiation. Consistently, little evidence suggests enterprises resort to private enforcement, indicating overstatement in the supposed connection between weakness in law and the mafia's rise. Legacies of the old administrative enforcement mechanisms are few, although enterprise networks from Soviet days remain resilient.
>> Download PDF
Jel Codes: K12, K40, L14, P50
Keywords: law, contracts, transactions, contract governance, Russia, Transition
Giving Credit Where Credit is Due: The Changing Role of Rural Financial Institutions in China
Albert Park; Loren Brandt; John Giles
WP No. 71
(March, 1997)
Abstract: abstract
>> Download PDF
Privatization Versus Competition: Changing Enterprise Behavior in Russia
John S. Earle; Saul Estrin
WP No. 70
(January, 1997)
Abstract: We investigate whether competitive forces and privatization have yet began to play an efficiency-enhancing role in Russia. We also explore the economic effects of harder budget constraints on enterprise behavior. The empirical work is based on a large enterprise panel of Russian firms 1990-94, representing around 10% of Russian manufacturing output. We conclude that privatization is having an impact on enterprise efficiency and restructuring but domestic market structure and harder budget constraints for the most part are not. Intriguingly, Russian firms are found to be sensitive to the degree of import penetration.
>> Download PDF
Jel Codes: D73, P00
Keywords: privatization, competition, economic transition
Russian Managers under Storm: Explicit Reality and Implicit Leadership Theories (A Pilot Exploration)
Igor B. Gurkov
WP No. 69
(October, 1998)
Abstract: This paper reports the results of a exploratory study on leadership and strategies in Russian companies under the present conditions of economic turmoil. The study revealed three clusters on inter-dependencies between external variables (company performance) and implicit variables (mental models and patterns): There are three main clusters of inter-dependencies: 1.The intensity of critique on boss and subordinates is related to dissatisfaction with a manager's own qualities and abilities. This signifies that as a manager improves his abilities (or at least asserts himself in self-improvement) he will be less willing to tolerate both incapable boss and incapable subordinates. 2.The positive performance dynamics weakens the critique on subordinates, but has no direct impact on the critique of boss. The critique of a boss doesn't depend on economic position, competitiveness level or even the current possibilities of the top management to retrace changes in a volatile economic environment. It means that we deal here in a deeper level of implicit leadership theory. 3.The main impetus for managerial re-training is not the dissatisfaction by managers of their own abilities or their boss' weaknesses, but rather the dissatisfaction by subordinates and awareness of negative performance dynamics of their own company. This signifies that the drift of "would-be-managers" towards the highest responsibility areas is limited. We discuss these findings and identify the promising next directions of research.
>> Download PDF
The Political Economy of Central-Local Relations in China: Inflation and Investment Controls During the reform Era
Yasheng Huang
WP No. 68
(January, 1997)
Abstract: Inflation control is deeply political because it has distributional implications. This paper studies the characteristics of the Chinese political system and their impact on controlling inflation demand--the state-sectoral investment component of the aggregate demand. The paper first shows (1) the connections between inflation demand and investment and (2) the divergence in inflation preferences between central and local authorities. Five investment hypotheses are proposed to link two bureaucratic variables of local officials--integration and stability--with preference divergence and monitoring. Preference divergence and monitoring, by theoretical conjectures, are linked with local investment behavior. Evidence from panel data suggests strongly and consistently that integration and instability reduce investment shirking and hence inflation demand. The cross-sectional evidence on provinces is then reconciled with China's aggregate inflation performance and the paper suggests that China's relatively good macroeconomic performance is due to the strength of its political institutions.
>> Download PDF
Between Two Coordination Failures: Automotive Industrial Policy in China with a Comparison to Korea
Yasheng Huang
WP No. 67
(January, 1997)
Abstract: For twelve years now, China has attempted to develop and to consolidate its automotive industry through an industrial policy approach closely modeled on that of Korean government in the 1970s. While the growth of the automotive industry has been impressive, government's consolidation attempt has been a failure. This article argues and uses the example of Korea to show that success of automotive industrial policy (AIP) requires two necessary components. One is to overcome a coordination failure on the part of the firms to invest at a socially optimal level. This is the familiar form of market failure and is known as Coordination Failure I (CFI) in this article. The other is to overcome a coordination failure on the part of the firms to restrain entry into the automotive sector, This is known as Coordination Failure 2 (CF2). CF2 is more costly to overcome than CFI in political terms and this asymmetric cost structure explains much of automotive developments in China.
>> Download PDF
Red Executives: Are They Winners or Losers in Russia's Economic Reforms?
Susan J. Linz
WP No. 66
(January, 1997)
Abstract: Based on panel data collected from more than 2,000 firms in Moscow, Rostov, Volgograd and Novosibirsk between 1992 and 1995, red executives are evaluated in terms of their ability to maintain or expand production and/or employment, as well as their ability to maintain their position. With respect to production and employment, red executives more often than not are losers. With respect to job security, red executives are winners. Whether red executives are winners or losers does not depend significantly on ownership structure or location. It does vary significantly by industry and firm size.
>> Download PDF
On the Sequencing of Privatization in Transition Economies
Gautam Ahuja; Sumit K. Majumdar
WP No. 65
(April, 1997)
Abstract: This paper presents an empirical criterion for establishing privatization priorities for state owned enterprises. The approach uses firm performance as the basis for deciding the sequence in which firms are privatized. Sequencing is relevant because the order in which a group of state enterprises are taken up for privatization has efficiency implications, and an appropriate sequence based on efficiency considerations can be beneficial. Privatizing inefficient enterprises before efficient ones is a superior sequence as compared to one which reverses this order, and the size of the firms to be privatized is an important contingency. An improvement index is constructed for individual firms, and the index makes possible a comparison of multiple firms, thus, facilitating the construction of a priority schedule. This approach is demonstrated using a sample of Indian service sector firms, and the approach can aid policy-makers in transition economies as they undertake the privatization of state-owned enterprises.
>> Download PDF
Jel Codes: L22, L23, O53, P21
Foreign Ownership and Profitability: Property Rights, Strategic Control and Corporate Performance in Indian Industry
Pradeep K. Chhibber; Sumit K. Majumdar
WP No. 64
(April, 1997)
Abstract: This study examines the influence of foreign ownership on the performance of fmtis operating in India. Foreign ownership is categorized according to the control exercisable at different levels of ownership. These categories are, in turn, determined by the institutional structure of the Indian environment which helps define define the property rights accruing at different levels of ownership. Firms' performance is measured as return on sales and return on assets. The results show that, after controlling for a variety of fin-n and environment-specific factors, only when property rights devolve to foreign owners, at ownership levels providing unambiguous control at 51 percent, do firms in which there is foreign ownership display relatively superior performance. Implications for managers of foreign firms contemplating investments, either de-novo or augmenting already-existing stakes, in India and for policy are also discussed.
>> Download PDF
Keywords: foreign ownership, multinational firms, strategic control, profitability, Indian industry
How Taxing is Corruption on International Investors?
Shang-Jin Wei
WP No. 63
(February, 1997)
Abstract: This paper studies the effect of corruption on foreign direct investment. The sample covers bilateral investment from fourteen source countries to forty-five host countries during 1990-91. There are three central findings. (1) A rise in either the tax rate on multinational firms or the corruption level in a host country reduces inward foreign direct investment (FDI). An increase in the corruption level from that of Singapore to that of Mexico is equivalent to raising the tax rate by over twenty percentage points. (2) There is no support for the hypothesis that corruption has a smaller effect on FDI into East Asian host countries. (3) American 'investors are averse to corruption in host countries, but not necessarily more so than average OECD investors, in spite of the U.S. Foreign Corrupt Practices Act of 1977. On the other hand, there is some weak support for the hypothesis that Japanese investors may be somewhat less sensitive to corruption. Neither American nor Japanese investors treat corruption in East Asia any differently from that in other parts of the world. There are other interesting and sensible findings. For example, consistent with theories that emphasize the importance of networks in trade and investment, sharing a common linguistic tie between the source and host countries and geographic proximity between the two are associated with a sizable increase in the bilateral FDI flow.
>> Download PDF
Jel Codes: F02, F23
What Can We Learn from the Experience of Transitional Economies with Labour Market Policies?
Tito Boeri
WP No. 62
(January, 1997)
Abstract: Several lessons can be drawn from the natural experiments of central and eastern European countries with labour market policies. Two of them are particularly relevant also for OECD countries. First, it is not wise to reduce the duration of unemployment benefits when the length of unemployment spells are on the rise, unless unemployment is still low and there is the administrative capacity to implement active labour market policies on a wide scale or there are income support schemes of the last resort in place and an administration capable of cost-effectively enforcing work-tests for those falling off unemployment benefit compensation rolls. The second and perhaps more positive lesson in the light of the above is that it is possible to transform institutions and create an efficient policy delivery mechanism within a short time span.
>> Download PDF
Economic Transition, Strategy and the Evolution of Management Accounting Practices: The Case of India
Shannon W. Anderson; William N. Lanen
WP No. 61
(April, 1997)
Abstract: Liberalization of the Indian economy in 1991 increased the intensity of international competition and changed the internal information needs of Indian managers. This paper explores the evolution of a broad range of management accounting practices in 14 firms using a contingency theory framework. Differences in management accounting practices in 1996 are examined in relation to firms experience in and exposure to world markets prior to liberalization and as a function of contemporaneous differences in competitive strategy. We find evidence of changes associated with shifts in the external environment.
>> Download PDF
Keywords: international management accounting, contingency research, trade liberalization, transitional economies
Enterprise Investment During the Transition: Evidence from Czech Panel Data
Lubomír Lízal; Jan Svejnar
WP No. 60
(May, 1997)
Abstract: We analyze investment behavior of the population of medium and large industrial firms located in the Czech Republic in 1992-95. We examine the relevance of alternative models of investment and test if investment behavior varies across ownership-legal form categories of firms. By using a large panel of quarterly observations, we eliminate biases introduced by data aggregation and selectivity, reduce measurement error, take into account heterogeneity across firms and over time, and control for the significant seasonal variation in investment. The data indicate that foreign owned companies invest the most and cooperatives the least. Contrary to earlier survey findings, our large data set does not support the hypothesis that private firms invest more than state owned ones. Our econometric tests suggest that, except for cooperatives and smaller private firms, the behavior of firms is better approximated by the neoclassical/accelerator model than cash flow or financing constraint theories. The data also fit quite precisely a dynamic structural model of investment for a profit maximizing firm.
>> Download PDF
Keywords: property rights, ownership, multi-task, local government, China
Institutional Environment, Community Government, and Corporate Governance: Understanding China's Township-Village Enterprises
Jiahua Che; Yingyi Qian
WP No. 59
(January, 1998)
Abstract: We study China's township-village enterprises (TVES) from an organizational perspective with a focus on governance. Unlike most previous studies, we interpret the firm boundaries of TVEs at the community level rather than the enterprise level. From this perspective, we analyze the central role that community governments play in TVE governance as an organizational response to the imperfect institutional environment of both state and market. Specifically, we show that the community government's involvement in TVEs helps overcome the problems of state predation and under-financing of private enterprises. We also explain why TVE governance leads to harder budget constraints than state-owned enterprises.
>> Download PDF
Keywords: institutions, corporate governance, community, township-village enterprises, China
From the Grabbing Hand to the Helping Hand
Jiahua Che
WP No. 58
(June, 2000)
Abstract: I present a study of ownership of firms under government rent seeking. Using its control of regulated inputs, a government agency extracts rents from a manager who undertakes an investment. Such a government rent seeking activity leads to a typical hold-up problem. Government ownership is shown to serve as a second best commitment mechanism through which the government agency will restrain itself from the rent seeking activity and even offer the manager support and favor such as tax breaks and subsidies. This mechanism works at a cost as government ownership compromises ex post managerial incentives and creates distortion in resource allocation. Nevertheless, under some fairly general conditions, government ownership Pareto dominates private ownership. The analysis corresponds to a host of stylized empirical observations concerning local government-owned firms during China's transition to a market economy. Based on this analysis, I suggest that local government owned firms will be transformed to private ownership as China's input markets become more liberalized.
>> Download PDF
Keywords: corruption, bribery, government ownership, China's non-state sector
Politics and Entrepreneurship in Transition Economies
Simon Johnson; Daniel Kaufmann; Andrei Shleifer
WP No. 57
(June, 1997)
Abstract: abstract
>> Download PDF
Taxes and Government Incentives: Eastern Europe vs. China
Roger H. Gorden; David D. Li
WP No. 56
(April, 1997)
Abstract: Local officials in China have strongly supported new non-state firms, yet other officials in transition countries have often strongly hindered them. We argue that a likely cause of these sharp differences in behavior is differences in the source of government revenue. Local revenue in China came from profits and other taxes on new entrants, while elsewhere in transition countries tax revenue came disproportionately from the old state enterprises. All these officials can easily draw on public funds for personal use. As a result, local Chinese officials have a personal interest in encouraging the development of new firms, while other officials have a financial interest in suppressing new firms. To induce officials to be supportive of new firms, the model suggests raising the effective tax rate on these firms. Surprisingly, past work has ignored the role of the tax system in influencing the incentives faced by government officials.
>> Download PDF
Jel Codes: D78, H3, P51
Keywords: transition economies, government incentives, principal-agent models, taxes and economic behavior
Corruption and Reform
Susanto Basu; David D. Li
WP No. 55
(June, 1996)
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 is optimal. This strategy consists of temporarily relaxing control of corruption in order to provide a windfall to existing bureaucrats, thereby gaining their support for a reform effort that will ultimately reduce the distortions stemming from bureaucratic power. Thus, 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.
>> Download PDF
Jel Codes: D72, O12, P, P21
Keywords: corruption, transition, reform, property rights
Decentralization and the Macroeconomic Consequences of Commitment to State-Owned Firms
Loren Brandt; Xiaodong Zhu
WP No. 54
(June, 1997)
Abstract: abstract
>> Download PDF
Competitive Shocks and Industrial Structure: The Case of Polish Manufacturing
Pankaj Ghemawatt; Robert E. Kennedy
WP No. 53
(May, 1997)
Abstract: A large number of countries have recently experienced competitive shocks: sudden increases in the role that market forces play in determining the evolution of various industries. In this paper, we study the implications of Poland's competitive shock for three elements of the structure of that country's manufacturing sector: entry, concentration, and foreign presence. Our analysis underlines the importance of explicitly identifying the specific distortions built into initial (pre-shock) industrial structure and lags in their adjustment to more competitive conditions.
>> Download PDF
Jel Codes: L16, L6, O12
Keywords: eastern europe, poland, transition, indsustry structure
Insecure Property rights and Government Ownership of Firms
Jiahua Che; Yingyi Qian
WP No. 52
(March, 1997)
Abstract: China's remarkable economic growth occurred despite (1) the lack of rule of law to secure property rights against state encroachment; and (2) government ownership of most new and successful non-state firms. We develop a theory of ownership under state predation that incorporates these two considerations. In our theory, "private ownership" leads to excessive revenue hiding and "state ownership" fails to provide incentives for managers and local governments in a credible way. In contrast, "local government ownership" integrates local government activities and business activities together, which may not only provide incentives for local governments, but also involves less revenue hiding from the local government and less predation from the state. Furthermore, ownership diversity across localities and within a locality is possible. Our theory is consistent with empirical evidence from China. We thus interpret local government ownership as an organizational response to imperfect state institutions.
>> Download PDF
Incentives, Scale Economies, and Organizational Form
Eric Maskin; Yingyi Quan; Chenggang Xu
WP No. 51
(May, 1997)
Abstract: We model organization as the command-and-communication network of managers erected on top of technology (which is modeled as a collection of plants). In our framework, the role of a manager is to deal with shocks that affect the plants that he oversees directly or indirectly. Organizational form is then an instrument for (a) economizing on managerial costs, and (b) providing managerial incentives. We show that two particular organizational forms, the M-form (multidivisional form) and the U-form (unitary form), are the optimal structures when shocks are sufficiently "big." We argue however that, under certain empirical assumptions, the M-form is likely to be strictly preferable once incentives are taken into account. We conclude by showing that the empirical hypotheses on which this comparison rests are satisfied for Chinese data.
>> Download PDF
Keywords: organizational reform, scale economies, incentives, yardstick competition, China
End of the Tunnel? The Effects of Financial Stabilization in Russia
Barry W. Ickes; Peter Murrell; Randi Ryterman
WP No. 50
(March, 1997)
Abstract: abstract
>> Download PDF
The Evolution of Bank Credit Qulity in Transition: Theory and Evidence from Romania
Enrico C. Perotti; Octavian Carare
WP No. 49
(October, 1996)
Abstract: The paper develops a simple theoretical framework of financial discipline during the stabilization of a transition economy, from which it derives an empirical measure to assess whether the banking sector has started to act as a source of financial discipline, or just as a temporary buffer for enterprise losses. The model suggests that in the presence of active bank monitoring the correlation between bank lending and arrears should be decreasing over time, while it would increase if banks rolled over bad loans in the expectation of a bailout. We run the test on balance sheet data from a sample of Romanian state-owned enterprises over 1991-1994. We find evidence that, contrary to the findings of Pinto and van Wijnbergen for Poland, credit criteria used by Romanian banks show few signs of improvement. Most worrisome is the stability of the relation between bank credit and financial arrears, which seems to increase in strength over the period and remains very significant both statistically and in terms of economic impact. Bank credit appears negatively correlated with profitability; however, there is evidence that this is the result of better firms reducing their demand for credit as real rates rise. Reassuringly, credit to these firms depend positively on their receivables, while bank arrears have a insignificant impact. However, firm size was a significant determinant till 1993 and trade arrears become a strong determinant of credit in 1994. Banks appear to particularly soft towards the worse performing firms, particularly towards larger and more insolvent enterprises. There is evidence of a structural policy shift in 1993-1994 with banks refinancing trade arrears, perhaps following IMF pressure against further central bank bailouts of such arrears. Overall, the evidence suggests a largely passive attitude of banks towards the worse borrowers and only limited reallocation of credit to better users.
>> Download PDF
Where Do the Leaders Trade?
Jan Hanousek; Libor Nemecek
WP No. 48
(May, 1997)
Abstract: In the present paper we concentrate on the interaction and sharing of the information between the organized markets in the Czech Republic. Moreover, the interesting principal-agent problem between the Prague Stock Exchange (PSE) and RMS (over the counter system) is studied to identify the leaders and followers in the information transmission process. The analysis shows that new information penetrates through the main market of the PSE, and that RMS dominates on the segments with lower liquidity. The leading position of the PSE was confirmed via VAR models. Basically, a shock on the PSE affected all segments of both markets, while a shock to any segment of the RMS had an effect (if any) only on the corresponding segment of the PSE. Because of missing links between some market segments, we conclude that the PSE-RMS do not behave as one integrated market yet.
>> Download PDF
Keywords: comovements of financial markets, emerging markets, Granger causality, integration of emerging markets
Firms' Heterogeneity in Transition: Evidence from a Polish Data Set
Irena Grosfeld; Jean-Francois Nivet
WP No. 47
(May, 1997)
Abstract: abstract
>> Download PDF
Strategic Creditor Passivity, Regulation, and Bank Bailouts
Janet Mitchell
WP No. 46
(May, 1997)
Abstract: This paper analyzes two interrelated aspects of banking crises: the choices that banks make between actively pursuing satisfaction of their claims in default versus passively rolling over loans; and choices by regulators to "punish" passive and insolvent banks versus rescuing them. Because a bank's actions may signal its poor financial condition or because a bank may wish to gamble for resurrection, a bank with financial problems may choose to passively roll over its bad loans rather than to initiate bankruptcy against a defaulter. Regulators can play a crucial role in preventing creditor passivity, through their ex ante choice of monitoring capability and through their ex post choice of policy for insolvent or passive banks. Increasing the degree of monitoring, together with the threat of ex post punishment for passive behavior, can lower the level of passivity. Yet, if too many banks are discovered to be passive or insolvent, a situation labeled "too many-to-fail" (TMTF) may arise, whereby it is less costly to rescue banks than to close large numbers of banks or to fire the bank managers. Banks may implicitly collude through their choice of actions in order to trigger TMTF. One result of the analysis is that attempts by the regulator to offer rescue in order to induce insolvent banks to use bankruptcy against their defaulters and to reveal their insolvency may fail if ex ante monitoring capability is too weak or if the recapitalization accompanying rescue is not sufficiently generous. Rescue and recapitalization may thus need to be repeated in the future. Another principal result is that the regulator may react to the possibility of banks' triggering TNTFF by "softening," either ex ante by lowering monitoring capacity or, ex post by rescuing insolvent and passive banks. The threat of TMTF may thus make it impossible for the regulator to implement tough banking regulation.
>> Download PDF
Decentralizing in Transition Economies: A Tragedy of the Commons?
Daniel Berkowitz; Wei Li
WP No. 45
(September, 1997)
Abstract: China began its gradual economic reform in the late 1970s; Russia initiated radical reform in the early 1990s. During the course of reform, China has enjoyed rapid growth while Russia has contracted. This paper argues that an important explanation for the striking performance difference in China and Russia is that, during the course of reform, Chinese local governments have gained much more clearly defined tax rights than their counterparts in Russia. When tax rights are sharply defined, a local government has the exclusive right to tax enterprises located within its territory. These rights become fuzzier as the number of agencies which independently tax enterprises increases. The implications of these differences in government tax rights are analyzed using a model of a local economy which predicts that: 1) investment is higher when tax rights are more clearly defined- 2) local tax collections and local provision of public goods and infrastructure are higher when tax rights are more sharply defined; 3) the effective tax rate for investors increases as tax rights become fuzzier; 4) tax evasion is higher when tax rights are fuzzier. It is argued that these four points capture important differences in the performance of local Chinese and Russian economies. The model also predicts that capital mobility tends to encourage local and regional governments to limit cross-border capital flows. This prediction is consistent with local and regional government policies observed in both China and Russia.
>> Download PDF
Jel Codes: H77, P35
The Information Content of Stock Markets: Why do Emerging Markets have Synchronous Stock Price Movements?
Randall Morck; Bernard Yeung; Wayne Wu
WP No. 44
(February, 1999)
Abstract: abstract
>> Download PDF
Agency in Project Screening and Termination Decisions: Why Is Good Money Thrown After Bad?
Chong-en Bai; Yijiang Wang
WP No. 43
(May, 1997)
Abstract: We construct an agency model in which the planner (agent) makes project starting and termination decisions on behalf of the state (principal) to reflect the practice of socialist economies. The model shows that asymmetric information between the state and the planner regarding the quality of projects started leads to the persistence of unprofitable projects. Since in the model it is assumed that the state's objective is to maximize economic profit and the state has full power to dictate and enforce the optimal contract, the finding of the model has the implication that hardening budget constraints in socialist economies is difficult even under an "ideal" setting when these economies are free of social considerations and political frictions.
>> Download PDF
Jel Codes: D82, P51
Keywords: ex post inefficiency, agency, project screening (and termination), information
Channels of Redistribution: Inequality and Poverty in the Russian Transition
Simon Commander; Andrei Tolstopiatenko; Ruslan Yemtsov
WP No. 42
(May, 1997)
Abstract: abstract
>> Download PDF
Labour Market Characteristics and Profitability: Econometric analysis of Hungarian Exporting Firms, 1986-1995
László Halpern; Gábor Kõrösi
WP No. 41
(May, 1997)
Abstract: Labour market and financial information is combined to explore the effect of the quality of labour employed on the profitability of the firm. The quality of labour is measured as the portion of wage differentials that cannot be explained by the human capital model. Profitability of Hungarian exporting firms can be explained by economic factors during transition. Beside the quality of labour export share, wage and bank costs, payables, receivables, foreign ownership,. inventories, amortisation and equity became significant explanatory variables. Sectors proved to be insignificant explanation for profit differences. Changing effects of monopolist competition and of the size of the firm reflect turbulent institutional environment for firms.
>> Download PDF
Jel Codes: C23, D21, D42, J31
Keywords: firms in transition economy, labour, monopoly, profit
The Tragedy of the Anticommons: Property in the Transiton from Marx to Markets
Michael A. Heller
WP No. 40
(February, 1997)
Abstract: Why are many storefronts in Moscow empty while street kiosks in front are full of goods? This article develops a theory of anticommons property to help explain the puzzle of empty storefronts and full kiosks. Anticommons property can be understood as the mirror image of commons property. By definition, in a commons, multiple owners are each endowed with the privilege to use a given resource, and no one has the right to exclude another. When too many owners have such privileges of use, the resource is prone to overuse -- a tragedy of the commons. In an anticommons, by my definition, multiple owners are each endowed with the fight to exclude others from a scarce resource, and no one has an effective privilege of use. When there are too many owners holding rights of exclusion, the resource is prone to underuse -- a tragedy of the anticommons. Anticommons property may appear whenever new property rights are being defined. For example in Moscow, multiple owners have been endowed initially with competing rights in each storefront, so no owner holds a useable bundle of rights and the store remains empty. Once an anticommons has emerged, collecting rights into private property bundles can be brutal and slow. This article explores the dynamics of anticommons property in transition economies, formalizes the empirical material in a property theory framework, and then shows how the idea of anticommons property can be a useful new tool for understanding a range of property puzzles. The difficulties of overcoming a tragedy of the anticommons suggest that property theofists n-fight pay more attention to the content of property bundles, rather than focusing just on the clarity of rights.
>> Download PDF
Privatization and Managerial Efficiency
Olivier Debande; Guido Friebel
WP No. 39
(May, 1997)
Abstract: We investigate the privatization decision of a government whose objectives are to preserve jobs and to stabilize its budget. The firm considered needs restructuring, i.e. some funds must be provided and the manager must undertake an effort to reorganize the firm. If the productivity of the manager is unknown to the government, privatization involves a trade-off between better managerial incentives and a loss of control: productive managers restructure since they receive the profits of the firm, but unproductive managers shirk and deviate the funds to unproductive uses. This gives rise to a soft budget constraint, and the preservation of employment may become more expensive to the government than in state ownership.
>> Download PDF
Disorganization
Olivier Blanchard; Michael Kremer
WP No. 38
(January, 1997)
Abstract: Under central planning, many firms relied on a single supplier for critical inputs. Transition has led to decentralized bargaining between suppliers and buyers. Under incomplete contracts or asymmetric information, bargaining may inefficiently break down, and, if chains of production link many specialized producers, output will decline sharply. Mechanisms that mitigate these problems in the West, such as reputation, can only play a limited role in transition. The empirical evidence suggests that output has fallen furthest for the goods with the most complex production process, and that disorganization has been more important in the former Soviet Union than in Central Europe.
>> Download PDF
Transition and the Output Fall
Gerard Roland; Thierry Verdier
WP No. 37
(March, 1997)
Abstract: We present a model to explain why in transition economies of Central and Eastern Europe an important output fall has been associated to price liberalization. Its key ingredients are search frictions and Williamsonian relation-specific investment implying that new investments are made only after having found a new long ten-n partner. When all firms search for new partners, output may fall because of three effects: a) disruption of previous production links, b) a fall in investment, C) capital depreciation due to the absence of replacement investment. We show that forms of gradual liberalization like the Chinese "dual-track" price liberalization may avoid or reduce the transitory output fall.
>> Download PDF
Restructuring an Industry During Transition
Richard E. Ericson
WP No. 36
(July, 1996)
Abstract: abstract
>> Download PDF
Optimal Restructuring Under a Political Constraint: A General Equilibrium Approach
Vivek H. Dehejia
WP No. 35
(January, 1997)
Abstract: This paper considers the generalized second-best analytics of optimal restructuring under a political constraint, building on the modeling approach in Dehejia (1997). It is shown that the second-best optimum entails administering the terms of trade shock fully at the initiation of the reform, just as in shock therapy, but that this must be supplemented with interventions in domestic factor markets. The effects of these interventions are to speed up the exit of the politically affected factor, labour, and of retarding the exit of the other factor, capital, both of which serve to prop up the wages of workers in the declining sector and hence address the political constraint. The results are in the spirit of the neoclassical theory of distortions and welfare: the optimal intervention targets the affected margin directly, in consonance with the "targetting" principle of Bhagwati-Ramaswami-Johnson.
>> Download PDF
Jel Codes: F11, F13
Keywords: general equilibrium, gradualism, political economy, second-best theory, shock therapy, structural adjustment, transitional economies
The East-West Joint Venture: BC Torsion Case Study
Sonia Ferencikova; Vern Terpstra
WP No. 34
(December, 1998)
Abstract: abstract
>> Download PDF
Transition in Russia: It's Happening
Daniel Berkowitz; David N. DeJong; Steven Husted
WP No. 33
(February, 1997)
Abstract: Working with 110 pairs of time series of state and market commodity prices in Russia, we search for signs of transition in Russia from a command to a market economy. Beginning with inter-city comparisons of state and market prices, we find that differences in the levels of these prices have gradually diminished following the 1992 Big Bang, that market/state price ratios have become increasingly uniform across cities, and that the volatility of innovations to these ratios has decreased dramatically. Further, we find widespread evidence within cities that state and market prices are co-integrated, and that market prices are causally prior to state prices, in the sense of Granger (1969). Finally, we find widespread evidence of co-integration and causality between state and market prices across cities. These findings suggest that, despite obstacles posed by resistant local governments, mafia activity and poor infrastructure, Russia's efforts to implement economic reforms have generated tangible results: the transition to a market economy appears to be well underway.
>> Download PDF
Jel Codes: C10, P21, P23, Q11
Keywords: market integration, causality, co-integration
What Can North Korea Learn from China's Market Reforms?
John McMillan
WP No. 32
(July, 1996)
Abstract: abstract
>> Download PDF
Towards a Model of China as a Partially Reformed Developing Economy Under a Semifederalist Government
Yijiang Wang; Chun Chang
WP No. 31
(March, 1997)
Abstract: Based on the survey of the literature on China's recent reform experience, this paper proposes to see China as a four sector economy under a semifederalist government. The four sectors are the agriculture, the state industry, the semistate rural industry and the private industry. The four sectors are divided and grouped under the jurisdiction of the increasingly more autonomous local governments. The economy faces the challenges that, first, as a development problem, agriculture labor needs to be allocated to the industry. Second, as a reform problem, the efficiency of state-owned enterprises needs to be improved and the ownership in township and village enterprises needs to be restructured. Third, government power needs to be structured to ensure a check-and-balance between the central and the local governments to offer protection to property rights. China's experience suggests a model of development featured by multiple types of organizations under a modified nondemocratic government.
>> Download PDF
Convergence in Output in Transition Economies Central and Eastern Europe, 1970-1995
Saul Estrin; Geovanni Urga
WP No. 30
(February, 1997)
Abstract: In this paper we use unit roots/cointegration analysis and time varying parameters procedure to test for a common growth path in the ex-communist block, both pre- and post-reform. We test whether there has been convergence within the block and between the block as a group and the West. Surprisingly, there is little evidence of convergence within the communist block, which brings into question the effectiveness of policies to reduce differentials in income per capita across the region under the communists. There is also little evidence of convergence with respect to the West, either 1970-1990 or under the early years of reform are included, 1970-1995.
>> Download PDF
Jel Codes: C15, C22, C23, O40
Keywords: growth models, transition economies, unit roots, time series test, kalman filter
The Czech Crown's Volatility Under Modified Exchange Regimes
Evzen Kocenda
WP No. 29
(March, 1997)
Abstract: abstract
>> Download PDF
Keywords: exchange rates, currency basket, GARCH, volatility, fluctuation band
Ownership and Institutions: Evidence in Rural China
Hehui Jin; Yingyi Qian
WP No. 28
(January, 1997)
Abstract: We study the relationship between ownership of firms and institutional environment by examining China's rural non-farm sector, which consists of both private enterprises and community government-run enterprises (known as township-village enterprises, or TVES). Our results showed that all the variables related to the legacy of planning favors TVE ownership, and all the variables related to market-oriented reforms and market development encourage private ownership. We also found that TVEs help increase the revenue shares of state and community governments, as well as rural nonfarm employment and income. However, their effect on rural income is insignificant given the level of nonfarm employment.
>> Download PDF
East-West Joint Ventures in a Transitional Economy: The Case of Slovakia
Sonia Ferencikova
WP No. 27
(March, 1997)
Abstract: This article is a contribution to the discussion about the effects of FDI on the transitional economies. The paper is a result of the examination of a number of joint ventures in the Slovak Republic since 1993. The author shows the positive and the negative impacts of FDI on the Slovak economy in four joint venture case studies (Whirlpool, Volkswagen, BC Torsion, Samsung-Calex). In the conclusion she underlines many positive effects of the FDI on the individual firms, but at the same time she stresses the limited external effects on the Slovak economy.
>> Download PDF
Behavior of a Slovenia Firm in Transition
Janez Prasnikar
WP No. 26
(February, 1997)
Abstract: abstract
>> Download PDF
Cultural Encounters and Claims to Expertise in Post-Communist Capitalism
Michael D. Kennedy
WP No. 25
(February, 1997)
Abstract: What are the mutual implications of cultural politics and technical assistance? While culture is certainly obvious to anyone who has participated in the encounter that technical assistance implies, its implication is not well understood, especially if we can expand culture beyond styles of dress and something that East Europeans have and Western experts don't. Instead, if we can think also about the stories and symbols of transition culture itself, we can rethink the engagement between Western experts and East European entrepreneurs and managers as a peculiar kind of cultural encounter laced with presumptions and power. This is effectively investigated by examining contending and complimentary claims to expertise among those differently located in the process of transition and technical assistance. This paper focuses on claims made in in depth interviews with 27 indigenous managers, expatriate managers, American interns and local fellows in the William Davidson Institute 1995 research projects. The significance of cultural know-how and language, the distribution of business competence in general and in specific tasks, and the articulation of these assessments with the power relations implied in transition culture and center-periphery relations are the main substantive foci of the paper. The paper concludes with a series of questions for those who would design technical assistance. For more information on the methodology and the Davidson Institute, see the appendix beginning on page 37.
>> Download PDF
ZVU a.s. Investment Funds on the Board of Directors of and Engineering Giant
Tory Wolff
WP No. 24
(September, 1995)
Abstract: abstract
>> Download PDF
The Role of Investment Funds in the Czech Republic
Dusan Triska
WP No. 23
(June, 1996)
Abstract: abstract
>> Download PDF
The Czech Investment Fund Industry: Development and Behaviour
Richard Podpiera
WP No. 22
(May, 1996)
Abstract: abstract
>> Download PDF
Restructuring of Czech Firms: An Example of Gama, a.s.
Antonio Bulin
WP No. 21
(June, 1996)
Abstract: The process of massive privatization of Czech firms created a completely new situation for Czech managers and developed a new institution of corporate owners. This case uses the example of Gama, a.s. - joint stock company, one of a few successful firms operating since restructuring and turnaround, to discuss the process of privatization, the impact of the Prague Stock Exchange and regulation there for changes in the ownership structure. The role and process of the so-called "third wave" of privatization is also discussed together with the opinions of major players. Gama, a.s., a former branch of the industrial group Koh-i-noor, became a leader in this group and started the restructuring process there. Managers decided to develop a strategic alliance with a strong financial partner in order to support their ideas of restructuring the industry. A two-step process followed-a turnaround of their own firm and the acquisition of daughter companies through cooperation with investors. The rule of thumb seems to be similar to the lesson of the famous Czech opera "The Bartered Bride": competent and informed people win.
>> Download PDF
YSE Funds A Story of Czech Investment Funds
Michal Otradovec
WP No. 20
(November, 1995)
Abstract: abstract
>> Download PDF
The First Investment Company
Jaroslov Jirasek
WP No. 19
(September, 1995)
Abstract: abstract
>> Download PDF
PPF a.s. The First Private Investment Fund
Michal Otradovec
WP No. 18
(November, 1995)
Abstract: abstract
>> Download PDF
Pilferers or Paladins? Russia's Managers in Transition
Susan J. Linz; Gary Krueger
WP No. 17
(November, 1996)
Abstract: abstract
>> Download PDF
Banks in Transition--Investment Opportunities in Central Europe and Russia
Anna Meyendorff; Amy Moored
WP No. 16
(January, 1997)
Abstract: abstract
>> Download PDF
Marketing in Transition Economies
Transcript WDI Conference
WP No. 15
(December, 1996)
Abstract: abstract
>> Download PDF
Pensions in the Former Soviet Bloc: Problems and Solutions
Jan Svejnar
WP No. 14
(November, 1996)
Abstract: abstract
>> Download PDF
Enterprise Restructuring and Performance in the Transition
Lubomír Lízal; Miroslav Singer; Jan Svejnar
WP No. 13
(December, 1996)
Abstract: abstract
>> Download PDF
Marketing Issues and Challenges in Transitional Economies
Rajeev Barra
WP No. 12
(October, 1996)
Abstract: Drawing both on the literature as well as field research on companies operating in transitional economies, this paper describes the ways in which marketing environments in transitional economies are typically different from those in more developed countries, as well as recent trends in these environments. Managerial implications concerning appropriate marketing strategies and tactics are then drawn both for multinationals operating in transitional economy markets as well as local companies. The paper concludes with some suggestions for further research.
>> Download PDF
Worker Trust and System Vulnerability in the Transition from Socialism to Capitalism
Andrew Schotter
WP No. 11
(August, 1996)
Abstract: abstract
>> Download PDF
Russian Firms in Transition: Champions, Challengers, and Chaff
Susan J. Linz
WP No. 10
(July, 1996)
Abstract: This paper proposes a composite measure to evaluate a firm's survival potential. The composite measure is applied to 51 Russian firms located in Moscow, Volgograd, Rostov and Taganrog, utilizing data collected in 1995 from in-depth interviews with top-level managers of manufacturing, trade, and other organizations. Using a straight scale with equal weights for each element of the composite measure, the survey results suggest that more than three years after the initiation of the transition from plan to market in Russia, champions number fewer than one-in-fifty, challengers may account for less than 10%, and firms unlikely to survive the transition process, the chaff, represent 80-85%. Utilizing unequal weights, that is, weighting current profitability, export experience, foreign investment, .monopoly power, and future financial and production strategies twice as much as the other elements in the composite measure, generates the outcome where 5 firms meet the criteria for champion (10%), 18 firms are challengers (35%), and 28 are chaff (55%). These results are somewhat more optimistic than estimates reported at the beginning of the Russian transition process that only one-in-ten firms would avoid bankruptcy.
>> Download PDF
Jel Codes: L1, L2, P42
Keywords: transition, competetive position, success criteria
Corporate Debt Crisis and Bankruptcy Law During the Transition: The Case of China
David D. Li; Shan Li
WP No. 9
(December, 1995)
Abstract: In the journey of post-socialist transition, many enterprises have accumulated large amount of debts and in deep financial distress. There axe many existing options that can be used to China's state owned enterprises (SOE's) axe facing a debt crisis. Over 80% of state enterprises have debt/asset ratios higher than 90% and a large proportion of state enterprises are running deficits and are defaulting debt services. The debt crisis not only causes distortions in investment behavior but also hampers the process of China's further enterprise and banking reforms. In this paper, we -not only analyze the causes of the debt crisis but also argue that resolving the debt crisis requires fundamental changes in enterprise control structure. Simple accounting transactions axe not enough. Based on this analysis, we propose a reorganization-oriented bankruptcy procedure, which combines elements of the Aghion-Hart-Moore (1992) procedure with special
>> Download PDF
A Theory of Ambiguous Property Rights in Transition Economies: The Case of the Chinese Non-State Sector
David D. Li
WP No. 8
(June, 1996)
Abstract: Can ambiguous property rights sometimes be efficient? Ambiguous property rights arises when owners' rights axe not guaranteed before hand. Instead, owners have to fight for actual control, ex pos. We show that China's highly successful non-state sector is a major example of ambiguous property rights. We then propose a theory of ambiguous property rights, which argues that ambiguous property rights arise due to an imperfect market environment. We argue that the immature market environment in China makes ambiguous property rights often more efficient than unambiguously defined private property rights.
>> Download PDF
Jel Codes: D23, O12, P21
The Foreign Economic Contract Law of China: Case and Analysis
Dong-lai Li
WP No. 7
(June, 1993)
Abstract: The Foreign Economic Contract Law of China is an especially important example of contract law in a transition economy because it governs all the contracts between Chinese and Foreigners. The purpose of this research is to summarize all known FECL cases that are available to June, 1993. Following an overview of China's contract especially FECL, the cases located through the search are summarized and analyzed by illustrating a wide range of dispute resolution processes including negotiation, mediation, arbitration, the administrative process and litigation in order to indicate that business planning and negotiation are no less important in China than elsewhere.
>> Download PDF
The Czech Republic's Commercial Bank: Komercni Banka
Edward A. Snyder; Roger C. Kormendi
WP No. 6
(December, 1996)
Abstract: Important elements of the transactional structure that created and partially privatized Komercni Banka, the Czech Republic's largest commercial bank, include antecedent actions that determined the bank's management and established its commercial loan portfolio, a decision against splitting the bank's operations into smaller organizational units, the reliance on voucher privatization, and limited post-privatization financial support. The main feature, however, is the government's decision to retain control and majority ownership of Komer6nf. Our analysis of the bank's subsequent credit allocations yields evidence of the government's preference for a deliberate rather than a quick move toward market-driven decision-making. The opportunity to privatize a strong bank and harden enterprise-level budget constraints quickly was foregone, or at least postponed, in favor of creating a protected bank that would deal more leniently with Komercni's politically-vested commercial clients.
>> Download PDF
Jel Codes: G21, L21, P34
Bank Privatization in Post-Communist Russia: The Case of Zhilsotsbank
Jeffrey Abarbanell; Anna Meyendorff
WP No. 5
(December, 1996)
Abstract: abstract
>> Download PDF
Jel Codes: G21, L21, P34
Bank Privatization in Poland: The Case of Bank Slaki
Jeffert Aberbanellv; John P. Bonin
WP No. 4
(April, 1997)
Abstract: The privatization of Bank Slaski, one of nine regional commercial banks in Poland, illustrates the benefits of attracting a strategic foreign investor in the process. Internationale Nederlanden Group has contributed substantially to the upgrading of Bank Slaski's credit lending practices, information systems, product and service offerings, and brokerage house operations. However, the prolonged ownership of a core-investor stake by the Polish Treasury slowed progress toward improving performance and created complications for governance. Furthermore, the Polish government's reaction to this privatization and its subsequent preoccupation with precluding a strong presence of foreign banks retarded the development of a dynamic and efficient banking sector in Poland.
>> Download PDF
Jel Codes: G21, L21, P34
Bank Privatization in Hungary and the Magyar Kulkereskedelmi Bank Transaction
Roger C. Kormendi; Karen Schnatterly
WP No. 3
(May, 1996)
Abstract: abstract
>> Download PDF
Transactional Structures of Bank Privatization in Central Europe and Russia
Anna Meyendorff; Edward A. Snyder
WP No. 2
(April, 1997)
Abstract: In pursuing bank privatization, governments in Central Europe and Russia faced a common set of policy issues including how to break up the monobank system, deal with troubled loans, transfer equity to the private sector, and attract capital to the banks. For each bank undergoing privatization, the government's approach to such issues determines its transactional structure. We develop this conceptual framework and assess the findings from three studies of major commercial banks undergoing privatization. The varied transactional structures used in these privatizations appear to have had significant effects on each bank's microstructure, and to influence bank strategy and post-privatization performance.
>> Download PDF
Jel Codes: G21, L21, P34
Band Privatization in Transition Economies
Roger C. Kormendi; Edward A. Snyder
WP No. 1
(May, 1996)
Abstract: This paper offers a unified framework for assessing bank privatization that is based on the principles of modern economics, finance, accounting and banking, the validity of which is supported by extensive experience. This framework serves as a foundation for analyzing the cases. It accommodates the central reality that "each case is different" and that progress in bank privatization will be on a case-by-case basis, yet also develops common principles that bear on successful bank privatization. Thus, the framework allows analysts and policy makers to decompose any given bank privatization into case-specific fasctors and the general factors. The case-specific factors are those that are unique to the specific bank in question and that provide the context for applying the unified framework. The general factors are those issues and considerations that can be applied in a unified framework based on modern scientific finance and economics to virtually any case.
>> Download PDF