Employer Size Effects in Russia
Todd Idson
WP No. 300
(April, 2000)
Abstract: As early as 1911, Henry L. Moore documented that the wages of female textile workers in Italy were higher in larger establishments. In the last thirty years a large number of studies have demonstrated the presence of employer size-wage effects (at both the plant and firm level) in numerous different countries and across different time periods. This paper analyzes the labor market effects of employer size in Russia during the years 1994-98. Using the Russian Longitudinal Monitoring Survey, a four year nationally representative panel of the Russian population, I investigate the relationship between enterprise size and the characteristics of employees, wage levels and wage growth, on-the-job training, tenure and turnover. My findings indicate that employer size effects in Russia exhibit similar characteristics to those observed in the U.S. and a variety of other countries.
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Keywords: employer size, wages, wage growth, tenure, turnover
Information Complements, Substitutes, and Strategic Product Design
Geoffrey G. Parker; Marshall W. Van Alstyne
WP No. 299
(March, 2000)
Abstract: Competitive maneuvering in the information economy has raised a pressing question: how can firms raise profits by giving away products for free? This paper provides a possible answer and articulates a strategy space for information product design. Free strategic complements can raise a firm's own profits while free strategic substitutes can lower profits for competitors. We introduce a formal model of cross-market externalities based in textbook economics -- a mix of Katz and Shapiro network effects, price discrimination, and product differention -- that leads to novel strategies such as an eagerness to enter into Bertrand price competition. This combination helps to explain many recent firm strategies such as those of Microsoft, Netscape (AOL), Sun, Adobe, and ID. We also introduce the concept of a ''content-creator'' who adds value for end-consumers but may not be paid directly. Similar to the case of product dumping, this research implies that both firms and policy makers need to consider complex market interactions to grasp information product design and profit maximization. The model presented here argues for three simple and intuitive results. First, a firm can rationally invest in a product it intends to give away into perpetuity even in the absence of competition. The reason is that increased demand in a complementary goods market more than covers the cost of investment in the free goods market. Second, we identify distinct markets for content-providers and end-consumers and show that either can be a candidate for the free good. The decision on which market to charge rests on the relative elasticities as governed by their network externality effects. If the externality effect is sufficiently great, the market with the higher elasticity is the market to subsidize with the free good. It is also possible to charge both markets but to keep one price artificially low. Importantly, the modeling contribution is distinct from tying in the sense that consumers need never purchase both goods -- unlike razors and blades, the products are stand-alone goods. It also differs from multi-market price discrimination in the sense that the firm may extract no consumer surplus from one of the two market segments, implying that this market would have previously gone un-served. Third, a firm can use strategic product design to penetrate a market that becomes competitive post-entry. The threat of entry is credible even in cases where it never recovers its sunk costs directly. The model therefore helps to explain several interesting market behaviors such as free goods, upgrade paths, split versioning, and strategic information substitutes.
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Markets, Human Capital, and Inequality: Evidence from Rural China
Dwayne Benjamin; Loren Brandt; Paul Glewwe; Li Guo
WP No. 298
(January, 2000)
Abstract: Market reforms are generally credited with the rapid growth enjoyed by China's rural sector. This growth has not been without some cost, however, as inequality has also increased. Estimates suggest that the Gini rose from less than 0.20 to over 0.40 during this period. In this paper we go behind these numbers to explore the nature and causes of this inequality. To begin, we find that a considerable share of rural inequality is driven by local differences in household incomes, as opposed to regional income differences, that have been the focus of the previous literature. We then examine inter-household income differentials at the village level, exploring the links between education, market development, non-agricultural employment, and household income. To address these questions, we draw on a recently collected data set from Northeast China, that was collected by two of the authors in collaboration with Chinese colleagues in Hebei and Liaoning provinces in 1995. For purposes of comparison, we also draw on the Chinese Health and Nutrition Survey. We find that indeed, increasing rates of return to education and unevenly developed non-agricultural business opportunities contribute to the high levels of inequality in the countryside. Of most interest, however, is the implication that simultaneous improvements in educational attainment and off-farm market-development would allow more households to share in the rapid growth in rural China.
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Jel Codes: D3, O15, P00
Corporate Governance in the Asian Financial Crisis
Simon Johnson; Peter Boone; Alasdair Breach; Eric Friedman
WP No. 297
(November, 1999)
Abstract: The "Asian Crisis" of 1997-98 affected all the "emerging markets" open to capital flows. Measures of corporate governance, particularly the effectiveness of protection for minority shareholders, explain the extent of depreciation and stock market decline better than do standard macroeconomic measures. A possible explanation is that in countries with weak corporate governance, worse economic prospects result in more expropriation by managers and thus a larger fall in asset prices.
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Competition and Firm Performance: Lessons from Russia
J. David Brown; John S. Earle
WP No. 296
(March, 2000)
Abstract: The "big-bang" liberalization of the inefficient Russian economy in 1992 provides a fruitful setting for analyzing the impact of several dimensions of market competition and other factors on enterprise efficiency. We analyze 1992-1998 panel data on 14,961 enterprises covering 75 percent of industrial employment, emphasizing the varied sources, geographic scope, intensity, time path, and survival effects of competitive pressures. We find large, positive effects on TFP from competition in domestic product and local labor markets, and from imports and better transportation infrastructure, although the first effect appears only gradually. Non-state firms outperform state enterprises, even after correction for selection bias.
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Keywords: competition, firm exit, foreign trade, monopsony, privatization, Russia, and total factor productivity
Wage Determination in Russia: An Econometric Investigation
Peter J. Luke; Mark E. Schaffer
WP No. 295
(March, 2000)
Abstract: Using a firm level dataset from four regions of Russia covering 1996/97, an investigation was carried out into how the surplus created within the firm is divided between profits and wages. An efficient bargaining framework based on the work of Svejnar (1986) is employed which takes into account the alternative wage or outside option available to employees in the firm as well as the value added per employee. Statistical differences in the share of the surplus taken by employees employed in state, private and mixed forms of firms are found. In addition, the results prove sensitive to the presence of outliers and influential observations. A variety of diagnostic methods are employed to identify these influential observations and robust methods are employed to lessen the influence of them. Whereas in practice some of the diagnostic and robust methods utilised proved incapable of identifying or accommodating the gross outlier(s) in the data, the more successful methods included robust regression, Winsorising, the Hadi and Siminoff algorithm, Cook's Distance and Covratio.
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Jel Codes: C21, J30
Keywords: Russian labour markets, efficient bargaining, outliers, regression diagnostics, robust regression
Can Banks Promote Enterprise Restructuring?: Evidence From a Polish Bank's Experience
John P. Bonin; Bozena Leven
WP No. 294
(March, 2000)
Abstract: In this paper, we take a detailed look at one Polish bank's experiences with financial sector reforms focusing on a bank-led enterprise-restructuring plan that linked directly bank privatization and recapitalization to bad-debt workouts. Based on personal interviews and original statistical data, we evaluate the performance of Bank Depozytowo-Kredytowy (BDK) in promoting financial and operational restructuring of its clients. We found that BDK continued to provide soft lending to keep four old military-industrial companies afloat and actually increased its exposure to these companies during the program. The five success stories among BDK's clients were companies that had external agents other than the bank promoting and monitoring their operational restructuring. From our case study of BDK, we conclude that, while banks may play a role in financial restructuring of their clients, their ability to affect operational restructuring is quite limited. Moreover, state-owned banks are particularly vulnerable to incentive problems when dealing with large state-owned enterprises that may be too big or too political to fail.
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Keywords: financial restructuring, operational restructuring, Polish banking reform, bank conciliatory procedures
Why Do Governments Sell Privatised Companies Abroad?
Bernardo Bortolotti; Marcella Fantini; Carlo Scarpa
WP No. 293
(March, 2000)
Abstract: This paper provides an empirical analysis of Governments' decisions to sell privatised companies on both international and domestic markets in a sample of 392 privatisations in 42 countries. Political theories of privatisation find strong support in our analyses: market oriented Governments favour domestic investors in the allocation of shares. Furthermore, the need to penetrate foreign markets and to warrant better legal protection to shareholders also appear as relevant. Significant differences emerge in OECD and non-OECD countries. In wealthy economies stock market liquidity favours cross-listing, while in emerging countries Governments resort to cross-list in order to "import" liquidity and to develop domestic stock markets. Legal institutions also play a different role. In OECD countries, weak shareholder protection induces Governments to cross-list, in order to borrow the reputation and best practices of established exchanges. On the other hand, creditors' protection is more relevant in non-OECD countries, where weak legal protection of creditors reduces the scope of bank finance, forcing Governments to look for external finance abroad.
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Jel Codes: G15, G30, K22, L33
Keywords: privitisation, cross-listing, international financial markets, political economy, investor protection
Going Public in Poland: Case-by-Case Privatizations, Mass Privatization and Private Sector Initial Public Offerings
Wolfgang Aussenegg
WP No. 292
(December, 1999)
Abstract: This study compares the characteristics and the price behavior of case-by-case privatization initial public offerings, private sector initial public offerings and the mass privatization program in Poland over the first eight years after the reopening of the Warsaw Stock Exchange in April 1991. There is evidence that the Polish government is market-oriented in the sense of Perotti (1995), trying to build up reputation for its privatization policy over time by underpricing and selling a higher fraction at the initial offer. In the long-run private sector initial public offerings tend to underperform whereas case-by-case privatization initial public offerings experience neither an under- nor an overperformance. What is surprising in this context is the significantly negative long-run aftermarket performance of the certificates and shares of the mass privatization program.
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Jel Codes: G18, G32, G38
Keywords: Poland, privatization, initial public offerings, underpricing, long-run performance
Institutional Technology and the Chains of Trust: Capital Markets and Privatization in Russia and the Czech Republic
Bruce Kogut; Andrew Spicer
WP No. 291
(February, 2001)
Abstract: The introduction of mass privatization policies in Russia and the Czech Republic depended on the crea-tion of impersonal capital markets to finance the needs of privatized companies and to provide a secon-dary market for the trading of securities. Yet, mass privatization created the contradictory conditions of generating millions of poorly informed shareholders, with no efficient markets for the sale of the shares. The absence of financial markets created systematic pressures to move assets by illegal or non-transparent means to users who value them more. Privatization created the incentives to destroy the fi-nancial markets critical to its success. A comparative case analysis of post-privatization market forma-tion in both these countries demonstrates that the functional necessity for these markets does not engen-der their own creation. In the absence of institutional mechanisms of state regulation and trust, markets become arenas for political contests and economic manipulation. The irony of these policies is that a principal lesson has been that market reforms cannot create viable markets, only institutional formation can.
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Banking Crises and Bank Rescues: The Effect of Reputation
Jenny Corbett; Janet Mitchell
WP No. 290
(January, 2000)
Abstract: This paper focuses on bank rescue packages and on the behaviour of troubled banks in light of rescue offers. A puzzling feature of experience with banking crises is that in many cases policy authorities make offers of bank rescue, and banks are reluctant to accept these offers. We study situations in which regulators have decided to offer bank rescue plans, and we show that a combination of factors, including bankers' reputational concerns, can explain banks' potential reluctance to accept offers of recapitalisation.
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Keywords: banking crises, banking regulation, financial reform
Do Active Labor Market Policies Help Unemployed Workers to Find and Keep Regular Jobs?
Jan C. van Ours
WP No. 289
(February, 2000)
Abstract: This paper uses an administrative dataset to analyze to what extent active labor market policies in the Slovak Republic have been beneficial for unemployed workers. The focus is on two types of temporary subsidized jobs and on training. Short-term subsidized jobs seem to be the most efficient active labor market policy. Workers that are or have been on a short-term subsidized job have a higher job finding rate than other unemployed workers have and once they find a job they have a lower job separation rate than workers that have not been on a short-term subsidized job. Long-term subsidized jobs have a negative effect on the job finding rate and no effect on the job separation rate. The positive effect of training on the job finding rate of unemployed workers may have to do with reversed causality: some workers enter a training program only after they are promised a job. Training does not seem to affect the job separation rate.
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Keywords: unemployment, active labor market policy, duration models
Consumption Patterns of the New Elite in Zimbabwe
Russell Belk
WP No. 288
(February, 2000)
Abstract: Since Zimbabwean independence in 1980, a small percentage of the black population has become wealthy. This paper and a companion video explore the consumption patterns of members of this new black elite in post-colonial Zimbabwe. Given the violent war of independence and the avowedly socialist objectives of the new government, one expectation might be that the new black elite would seek to distinguish their lifestyles from those of the former colonialists. On the other hand, it could be argued that taking over the privileges of the former colonialists would be regarded as an authenticating mark of status for these black elites. And another possibility, in our increasingly global world, is that consumption referents may not come from Zimbabwe at all, but rather from media images of consumption in other parts of the world. This qualitative study finds that the consumption patterns of these nouveaux riches largely, but not entirely, emulate those of the former colonialists. In addition, informats clearly look to the West, particularly the U.S. and the U.K., for social comparisons. One negative effect of the enhanced economic status of the new elite in Zimbabwe is a tendency to eschew extended family support which is the traditional form of social security in much of Africa. Besides their increased wealth, for some, fundamentalist religion provides another rationale for neglecting extended family. Rising individualism and retreat to the nuclear family promote tension within the extended family and envy among others. Implications for understanding class structure and it implications in developing nations are addressed.
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Keywords: social class, economic development, new wealth, conspicuous consumption, family structure, emulation, lifestyle, cultural capital, postcolonialism, globalism, cosmopolitanism
Barter in Transition Economies: Competing Explanations Confront Ukranian Data
Dalia Marin; Daniel Kaufmann; Bogdan Gorochowskij
WP No. 287
(January, 2000)
Abstract: In this paper we survey the common explanations of barter in transition economies and expose them to detailed survey data on 165 barter deals in Ukraine in 1997. The evidence does not support the notion that soft budget constraints, lack of restructuring, or that the virtual economy are the driving forces behind barter. Further, tax avoidance is only weakly associated with the incidence of barter in Ukraine. We then explore an alternative explanation of barter as a mechanism to address transitional challenges where capital markets and economic institutions are poorly developed. First, barter helps to maintain production by creating a deal-specific collateral which softens the liquidity squeeze in the economy when credit enforcement is prohibitively costly. Second, barter helps to maintain production by preventing firms to be exploited by their input suppliers when suppliers' bargaining position is very strong due to high costs of switching suppliers. Thus, in the absence of trust and functioning capital markets barter is a self-enforcing response to imperfect input and financial markets in the former Soviet Union. The paper concludes by discussing potential long-term costs of barter arrangements, and by suggesting particular pitfalls of expansionary monetary policy in barter economies such as Ukraine and Russia.
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Keywords: financial crisis, trust, contract enforcement in transition, arrears, the virtual economy, imperfect capital markets
The Quest for Pension Reform: Poland's Security though Diversity
Marek Góra; Michael Rutkowski
WP No. 286
(January, 2000)
Abstract: All over the world, pension systems have financing difficulties that need to be addressed. There are three ways of dealing with pension systems problems, namely subsidisation, rationalisation and reforming. Opposite to the first two, the latter one means a deep change of system fundamentals. The new system is a way of income allocation over life cycle. The system is entirely based on individual accounts. Individuals have two accounts each. At the day of retirement amounts accumulated in each of the accounts are annualised. Pensions depend on two factors: (a) accumulated capital, and (b) age of retirement. Such old-age pension system provides its participants with high security thanks to diversification of risk between two markets, namely the labour market and the capital market, and full link between contributions and benefits. Minimum guarantee is financed by the state budget. The new system is less exposed to typical problems of that markets. Additionally, it is more resistant to political pressures. Additionally, the new system is expected to create the following externalities: change of savings structure in favour of long term savings, less incentive for early retirement, and less incentive for hiding income. The old Polish old-age system was terminated on 31 December 1998 - a new one called "Security through Diversity" was introduced on 1 January 1999. The new system covers people up to 50. The most important feature of the new system is its separation within social security. In particular, a separate contribution is paid for old-age. One part (5/8) of that contribution goes to a notional defined contribution 1st pillar individual account, the other part (3/8) goes to fully funded 2nd pillar individual account. Both elements of the system work along defined contribution regime. People between 30 and 50 have an option to pay entire contribution to 1st pillar individual account, people below 30 have their old age contributions automatically divided between the accounts.
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Keywords: old-age pensions, individual accounts, defined contribution, income allocation
Disorganization and Financial Collapse
Dalia Marin; Monika Schnitzer
WP No. 285
(October, 1999)
Abstract: Recently, Blanchard and Kremer (BK) argued that disorganization has led to the output decline in the former Soviet Union. In this paper we introduce liquidity and credit constraints into the BK model and show how these problems can alleviate the hold-up problem. We argue further that barter creates a hostage which allows to deal with disorganization when credit enforcement is prohibitively costly. The theory helps to explain how the three observed phenomena of output decline, inter-firm arrears and barter in transition economies are connected. Based on a survey of 165 barter deals in the Ukraine in 1997, we reproduce the BK result with firm level and deal specific data and we show that in addition to the input shortage the financial shortage and barter have each an important effect on output growth.
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Coordinating Changes in M-form and U-form Organizations
Yingyi Qian; Gerard Roland; Chenggang Xu
WP No. 284
(May, 1999)
Abstract: We introduce a method of modelling coordination inside an organization as a process of "attribute matching." Using this method, we compare organizational forms (U-form and M-form) in coordinating changes. In our model, organizational forms affect the information structure of an organization and thus the way to coordinate changes. Compared to the U-form, the M-form organization achieves better coordination but suffers from higher costs due to a lack of scale economies or a lack of what we call "attribute compatibility." The M-form has a distinctive advantage in carrying out experimentation which gives the organization more flexibility leading to more innovation and reform. We apply our theory to business firms, transition economies, and the organization of government (especially federalism). In the case of transition economies, our theory relates the initial conditions of organizational differences with reform strategies, especially the "big-bang" approach in Eastern Europe and the "experimental" approach in China.
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Keywords: organization, M-form, U-form, innovation, transition, organization of government, experimentation
Why Russian Workers Do Not Move: Attachment of Workers Through In-Kind Payments
Guido Friebel; Sergei Guriev
WP No. 283
(October, 1999)
Abstract: We relate the phenomena of sluggish interregional labour reallocation, in-kind compensation, and wage arrears in Russia to 'attachment' strategies of firms: being paid in non-monetary forms makes it hard for workers to raise the cash needed for quitting the region. Attachment may facilitate relation-specific investments, but it may also be used to exploit workers because it eliminates workers' outside options. We show that exploitation does not only happen if regional labour markets are monoposonistic. Even if there is some competition, all firms in a region may use attachment strategies. Here, workers are locked-in and do not receive any compensation for their forgone option to move. Data of the Russian Longitudinal Monitoring Survey (RLMS) support our theory. Workers who receive in-kind payments have 19% lower probability to move than workers who do receive their wages in cash.
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Lessons from Fiascos in Russian Corporate Governance
Michael A. Heller; Merritt B. Fox
WP No. 282
(October, 1999)
Abstract: "Bad corporate governance" is often invoked to explain poor enterprise performance, but the catch phrase is never precisely defined - neither its consequences for the real economy, nor its causes in particular countries has been adequately explained. This paper uses Russian enterprise examples to address these open questions in corporate governance theory. We define corporate governance by looking to the economic functions of the firm rather than to any particular set of national corporate laws. Firms exhibit good corporate governance when their managers maximize residuals and, in the case of investor-owned firms, make pro rata distributions to shareholders. First, using this definition, we develop a typology that shows the channels through which bad corporate governance can inflict damage on the real economy. The topology helps identify vulnerabilities to corporate governance problems that may appear in any country and it suggests a new way to tailor policy responses. Second, we explain the causes of poor corporate performance in Russia by looking to the particular conditions prevailing at privatization - untenable initial firm boundaries and insider allocation of firm shares - and the bargaining dynamics that followed. The focus on initial conditions helps expand a comparative corporate governance literature built on United States, Western European, and Japanese models. Lessons from Russian fiascos counsel caution as to "stakeholder" proposals - including labor or local communities in formal corporate governance - and generate testable hypotheses regarding potential losses from the multiple large block share ownerships typical of many U.S. firms, especially close corporations.
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Income Distribution and Price Controls: Targeting a Social Safety Net During Economic Transition
Michael Alexeev; James Leitzel
WP No. 281
(March, 1999)
Abstract: During the ongoing post-communist economic transitions, the relative well-being of many people is changing rapidly, and governments are not well positioned to accurately measure individual living standards. Under such circumstances, continued price controls over basic consumer goods within the state sector, and the associated queuing, can form a serviceable device for targeting poor people for subsidies. With a fixed-price state sector and free-price parallel markets, rich people might choose to avoid queues and shop in the free markets, while poor people would prefer to pay low nominal prices and queue in the state sector. The targeting of subsidies through queues, therefore, can be accomplished even if the government has no information on individual income or living standards. When the alternative to price controls is a poorly targeted explicit social safety net, the resource cost of queues might be more than compensated for by an improvement in the targeting of subsidies.
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Keywords: price controls, tax evasion, queue-rationing, economic transition, income distribution
Starting Positions, Reform Speed, and Economic Outcomes in Transitioning Economies
William Hallagan; Zhang Jun
WP No. 280
(January, 2000)
Abstract: At the end of the 1980s and beginning of the 1990s 26 countries in Eastern Europe, the former Soviet Union and Mongolia initiated market reform policies. During the 1980's the average annual growth in real GDP for these countries was about 2.9%, while for the period 1990-1997, the average growth rate was -5.7%. During the same period China was implementing a relatively slow and gradual policy of economic reform and their economy responded with very high real GDP growth. From these experiences it was commonly concluded that rapid economic reform led to (at least) a short-term economic decline and that the more gradual implementation of reforms is more appropriate for countries starting with a long legacy of central planning. However, the above statistics and analysis ignore some interesting variations among the 26 CEE/FSU/Mongolian economies. The reform experience within this sample varies considerably from the rapid implementation observed in Slovenia and Poland to the very slow reforms observed in Belarus and Ukraine. And the results have varied as well. Average real annual GDP growth (1990/1997) for Slovenia was 1.4%, for Poland 4.1% while for Belarus it was -6.1% and for Ukraine it was -13.1%. The World Bank has constructed indices of reform speed for these 26 transitioning economies and the relation between reform speed and economic growth rates, as shown in the above figure, is positive. The conclusion drawn is that these countries all started with unfavorable "starting positions", were about to suffer economic decline even with no change in economic policy, and those countries implementing more rapid market reforms suffered from less of a decline. One could point to the economic declines in Cuba and North Korea during this period as "control cases" of what would have happened if no economic reforms had been implemented.
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The Value of Prominent Directors
Yoshiro Miwa; J. Mark Ramseyer
WP No. 279
(October, 1999)
Abstract: Observers of modern transitional economies urge firms there to ignore stock markets. Stock markets simply will not work in such environments, they explain. Firms should instead rely on debt finance, particularly bank debt. Only then will they be able to keep principal-agent (i.e., investor-manager) slack to manageable levels. Turn-of-the-century Japanese firms faced problems that closely mirrored those in modern eastern Europe. Yet in Japan, the successful large firms did not rely on debt. Instead, they raised their funds through the stock market, and took a variety of steps to mitigate the principal-agent slack involved. As one of those steps, they recruited prominent investors to their boards. Using data on firms in the cotton-spinning industry (arguably the most important industrial sector in turn-of-the-century Japan), we explore why the firms recruited prominent directors. First, we note that firms with such directors had higher profits than others. In part, they probably had higher profits because such investors had an eye for firms that would likely succeed. In part too, however, they seem to have had higher profits because those investors brought basic management skills -- they knew how to monitor and when to intervene. Second, prominence held constant, we find that firms did not have higher profits by having directors affiliated with a bank or with other spinning firms. One might have thought directors with access to a bank or spinning technology would raise profits at a firm. In fact, they did not, for banks did not have the funds to lend, and the technolgy was freely available. Last, we explore whether the directors certified firm quality on behalf of other investors. Although firms with prominent directors apparently did have an advantage in the capital market, we conclude that quality certification was at most a by-product (if even that) of the monitoring and intervention these directors performed.
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The System Paradigm
János Kornai
WP No. 278
(April, 1998)
Abstract: The introduction explains the sense in which the concept of a paradigm, whose originator, T.S. Kuhn, was inspired by the history of the national sciences, is applied to the context of the social sciences. Here the new paradigm does not necessarily replace the old; several paradigms may function effectively side by side. The milestones in the development of the system paradigm have been the works of Marx, Mises, Hayek, Polányi, Schumpeter and Eucken. Although these make a heterogeneous list in terms of their philosophies and political positions, they share a 'system approach'. They deal not just with individual details of the economy but with the system as a whole, and not just with the economy but with the political, ideological and social dimensions, paying special heed to the interactions between each sphere. The great task for the system paradigm is to study the post-socialist transition. For this, it is indispensable; its explanatory power cannot be replaced by any other paradigm. On the other hand, those applying the system paradigm (like the exponents of other paradigms) are often gravely mistaken. The predictive force of the system paradigm is limited, which urges modesty upon those who employ it.
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Keywords: socialist system, capitalist system, systemic change, comparative economics
The Developmental Consequences of Foreign Direct Investment in the Transition from Socialism to Capitalism: The Performance of Foreign Owned Firms in Hungary
Lawrence P. King
WP No. 277
(July, 1999)
Abstract: Abstract: This article examines the debate between Neoliberals and Modernization theorists on the one hand and dependency and world systems theorists on the other about the developmental impact of foreign direct investment in post-communist society. I test six hypotheses derived from this debate with logistic regression on a 1996 large-n random sample survey of Hungarian firms to see if foreign owned firms perform better than their private domestic counterparts. I then supplement these findings with three more logistic regression models of performance tested on a 1997 large-n, random sample survey of Hungarian firms. Foreign owned firms are found to have superior performance to domestically owned private firms on 6 of these indicators. Furthermore, while foreign owned firms create less demand for local producers than domestically owned firms, this is not at a level which is statistically significant. These findings support the neoliberal/modernizationist position that foreign investment creates high performing firms - which advocates claim are capable of driving the modernization of the entire post-communist economy.
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Stability and Disorder: An Evolutionary Analysis of Russia's Virtual Economy
Clifford Gaddy; Barry W. Ickes
WP No. 276
(November, 1999)
Abstract: The hybrid system that the Russian transition has evolved into has been called the virtual economy. This paper analyzes the evolution of the virtual economy. We pay particular attention to the interaction of economic reform policies and the adaptive behavior of enterprise directors. We then analyze the implications of the virtual economy for Russia's stability and development, and place the evolution of the virtual economy into the larger international security context.
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Limiting Government Predation Through Anonymous Banking: A Theory with Evidence from China
David D. Li; Yingyi Qian; Yijiang Wang; Chong-en Bai
WP No. 275
(July, 1999)
Abstract: China's economic performance of the past two decades presents a puzzle for the economics of transition and development: Enormous private business incentives were unleashed that have fueled rapid economic growth despite the fact that China has had very weak "conventional institutions" (such as the rule of law and separation of powers) to constrain the government from arbitrary intrusion into economic activities. We argue that one mechanism that has limited the government's ability for predation and harassment is commitment through information decentralization, where the key institutiton is "anonymous banking," that is, a combination of the use of cash for transactions and the use of anonymous savings deposits. The government's incentive for such a mechanism comes form the increased quasi-fiscal revenues collected from the state banking system through "financial repression," a combination of controls on international capital flows with restrictions on domestic interest rates. The major features of China's economy concerning its fiscal decline, financial deepening, and the sectoral dual-track can be better understood using this analytical framework.
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Transition with Labour Supply
Tito Boeri
WP No. 274
(December, 1999)
Abstract: The literature on the economics of transition has devoted little, if any, attention to labour supply. We show in this paper that, properly accounting for labour supply adjustments permit to understand some of the most puzzling features of transition, such as the output fall, the strikingly low workers' mobility associated with dramatic changes in the structure of employment, the presence of many job leavers as opposed to job losers, the frequency of direct shifts of workers from one job to another without intervening unemployment spells, and the role played by flows to inactivity in the dis-employment process. Our models show that transitional unemployment involves significant locking-in effects at the micro-level, and unemployment persistence at the aggregate level. It also suggests that, rather than starting with generous non-employment benefits and the subsequently cutting them down, as generally prescribed by the Optimal Speed of Transition literature and actually done by most countries of the region, the right sequence should have been the other way round. The paper sheds some light on other design features of unemployment benefits, suitable for economies undergoing rapid structural change.
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Sectoral Restructuring and Labor Mobility: A Comparative Look at the Czech Republic
Vit Sorm; Katherine Terrell
WP No. 273
(November, 1999)
Abstract: Labor mobility is crucial for an efficient allocation of resources and the transition economies are often viewed as suffering from inadequate reallocation of labor. Using quarterly micro data for the 1994-1998 period, we provide a comparative analysis of the extent and determinants of labor mobility in the Czech Republic. We show there has been significant movement into the finance, trade, and tourism sectors and out of the agricultural and industrial sectors. Over half of the people who change jobs have changed sector of employment, and this restructuring has been carried out relatively efficiently in that it occurred with lower incidence and duration of unemployment than in the other transition economies. The demographic characteristics of different patterns of mobility are similar across these transition economies: we identify younger people in general and single men as individuals who more likely to change jobs or become unemployed. The more educated are experiencing more job stability and are more likely to be hired if unemployed or out of the labor force. Finally, we find in the Czech Republic, the flows between employment and unemployment are very responsive to demand conditions. Hence, we conclude that the Czech labor market is demonstrating flexibility and efficiency in the transition
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Jel Codes: C41, H53, J23
Returns to Human Capital under the Communist Wage Grid and During the Transition to a Market Economy
Daniel Münich; Jan Svejnar; Daniel Münich
WP No. 272
(October, 1999)
Abstract: Under communism, workers had their wages set according to a centrally-determined wage grid. In this paper we use new micro data on men to estimate returns to human capital under the communist wage grid and during the transition to a market economy. We use data from the Czech Republic because it is a leading transition economy in which the communist grid remained intact until the very end of the communist regime. We demonstrate that for decades the communist wage grid maintained extremely low rate of return on education, but that the return increased dramatically and equally in all ownership categories of firms during the transition. Our estimates also indicate that men's wage-experience profile was concave in both regimes and on average it did not change from the communist to the transition period. However, the de novo private firms display a more concave profile than SOEs and public administration. Contrary to earlier studies, we show that men's inter-industry wage structure changed substantially between 1989 and 1996.
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Barter in Russia: Liquidity Shortage versus Lack of Restructuring
Sophie Brana; Mathilde Maurel
WP No. 271
(June, 1999)
Abstract: The rapid growth of barter is one of the most surprising phenomena in Russia: As a percentage of industrial sales it steadily increased from 5% in 1992 to nearly 55% in 1998. Unknown in CEEC's transition countries, barter is only one aspect of the Russian economy's demonetisation [process, along with dollarisation, growing arrears, and the widespread use of veksels and offsets. Barter is often seen as the consequence of the lack of restructuring, but some authors argue that it is a mechanism used to avoid shutting down potentially viable firms, in a context of market imperfections. The implications differ depending on the analysis chosen: in the first case, an expansionary monetary policy might not be appropriate, while the contrary is true if the demonetisation process jeopardizes potentially good enterprises. This paper aims to assess this phenomenon in the Russian economy. The paper's main contribution to work in this field (reviewed and documented in section II) is to highlight two different rationales for barter. Before studying the latter more closely, section III uses official monthly data collected by the central bank of Russia, the Goskomstat, and the Russian Economic Barometer (REB), to emphasize the macro-economic features of barter in Russia, and, more specifically, the link between monetary policy and bartering activity. It appears that macroeconomic policy and macroeconomic indicators are unable to explain the whole process. In section IV, quarterly statistics for 1995 and 1996 taken from the REB survey of roughly 200 firms make it possible to implement a more qualitative survey. The conclusion is striking: barter is used by potentially viable firms as a way of avoiding closure, while at the same time financing increasing inventories and soft goods in the case of indebted firms who use barter transactions, bank credit and choose to accumulate arrers in order to avoid restructuring.
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Jel Codes: C22, C23, E5, P2
Keywords: barter, non-monetary transactions, virtual economy, Russia, transition
Tests of Financial Intermediation and Banking Reform in China
Albert Park; Kaja Sehrt
WP No. 270
(March, 1999)
Abstract: We develop tests of financial intermediation by national banking systems that exploit regional financial and economic data. Derived from a model of bank profit maximization, the tests are based on the expectation that in efficient systems, financial intermediation should not be overly influenced by policy variables; should be greater where projects are more profitable and require greater financing - typically in faster growing, richer, industrial areas; and should direct funds to the best projects regardless of where deposits originate. We apply these tests to Chinese provincial data from 1991-97 for all state banks, the Agricultural Bank of China, rural credit cooperatives, and other financial institutions. China implemented a series of widely publicized financial reforms in the mid-1990s designed to improve bank performance. However, descriptive and estimation results suggest that the importance of state bank policy lending (to support SOEs and finance agricultural procurement) has increased, not fallen, during the recent period, and lending does not respond to economic fundamentals. Only the group of smaller, less-regulated financial institutions appear commercially oriented. Despite reforms, significant barriers to efficient inter-regional financial intermediation remain.
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Russian Privatization and Corporate Governance: What Went Wrong?
Bernard Black; Reinier Kraakman; Anna Tarassova
WP No. 269
(May, 2000)
Abstract: In Russia and elsewhere, proponents of rapid, mass privatization of stateowned enterprises (ourselves among them) hoped that the profit incentives unleashed by privatization would soon revive faltering, centrally planned economies. The revival didn?t happen. We offer here some partial explanations. First, rapid mass privatization is likely to lead to massive selfdealing by managers and controlling shareholders unless (implausibly in the initial transition from central planning to markets) a country has a good infrastructure for controlling self-dealing. Russia accelerated the selfdealing process by selling control of its largest enterprises cheaply to crooks, who transferred their skimming talents to the enterprises they acquired, and used their wealth to further corrupt the government and block reforms that might constrain their actions. Second, profit incentives to restructure privatized businesses and create new ones can be swamped by the burden on business imposed by a combination of (among other things) a punitive tax system, official corruption, organized crime, and an unfriendly bureaucracy. Third, while self-dealing will still occur (though perhaps to a lesser extent) if state enterprises aren?t privatized, since self-dealing accompanies privatization, it politically discredits privatization as a reform strategy and can undercut longer-term reforms. A principal lesson: developing the institutions to control self-dealing is central to successful privatization of large firms.
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Are Russians Ready for Capitalism?
Susan J. Linz
WP No. 268
(September, 1999)
Abstract: Has popular support for the operation and outcomes of a market economy permeated the population outside of Moscow? Does the next generation of Russian policy makers and business leaders hold views consistent with a competitive market economy? Using the questionnaire employed by Shiller et al (1991), a survey of university students in Taganrog, Russian in the spring of 1999 takes a first step in answering these questions. The primary focus here is on whether there is evidence of popular support in Russia for: (1) private property/property rights, (2) prices adjusting to surplus and shortage conditions, (3) payment for services rendered or expenses incurred, (4) free enterprise, profit motive and rewards to successful business, (5) performance-based pay, and (6) taking a financial risk for future reward by investing in productive capacity. Probit regression results indicate significant differences between the opinions of Russian and American university students regarding market foundations and market outcomes. These survey results suggest that where significant differences emerge between Russians and Americans, the differences are likely to contribute to undermining the effective operation of a market economy in Russia. In some instances where significant differences between Russians and Americans emerge, these are driven by gender differences in Russia that are not matched in the U.S. In comparison to the 1990 survey results, there tends to be less support for market conditions and outcomes in the 1999 survey.
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Jel Codes: O57
Keywords: Russia, transition, opinion, market outcomes
Do Stock Markets Promote Economic Growth
Randall K. Filer; Jan Hanousek; Nauro F. Campos
WP No. 267
(September, 1999)
Abstract: One of the most enduring debates in economics is whether financial development causes economic growth or whether it is a consequence of increased economic activity. Little research into this question, however has used a true causality framework. This paper fills this lacuna by using Granger-causality tests to provide evidence of a positive and significant causal relationship going from stock market development to economic growth, particularly for less developed countries.
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Jel Codes: F36, G00, G14, O16
Keywords: stock market, financial development, economic growth, Granger causality
Objectivity, Proximity and Adaptability in Corporate Governance
Arnoud W.A. Boot; Jonathan R. Macey
WP No. 266
(September, 1999)
Abstract: Countries appear to differ considerably in the basic orientations of their corporate governance structures. We postulate the trade-off between objectivity and proximity as fundamental to the corporate governance debate. We stress the value of objectivity that comes with distance (e.g. the market oriented U.S. system), and the value of better information that comes with proximity (e.g. the more intrusive Continental European model). Our key result is that the optimal distance between management and monitor (board or shareholders) has a bang-bang solution: either one should capitalize on the better information that comes with proximity or one should seek to benefit optimally from the objectivity that comes with distance. We argue that this result points at an important link between the optimal corporate governance arrangement and industry structure. In this context, we also discuss the ways in which investors have "contracted around" the flaws in their own corporate governance systems, pointing at the adaptability of different arrangements.
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Keywords: corporate governance, comperitive systems, corporate finance, economic reform, convergence
When the Future is not what it used to be: Lessons from the Western European Experience to Forecasting Education and Training in Transition Economies
Daniel Münich; Nauro F. Campos; Gerard Hughes; Stepan Jurajda
WP No. 265
(September, 1999)
Abstract: In an era of rapid technological change, information exchange, and emergence of knowledge-intensive industries it is critical to be able to identify the future skill needs of the labour market. Growing unemployment in EU member states and pre-accession countries in Eastern Europe combined with technological changes which make the skills of a significant number of workers obsolescent each year demand adequate knowledge of medium- and long-term demand for specific skills. Some EU members states have developed employment forecasting methods to identify future skill requirements which take account of the sectoral, occupational, and educational and training factors which influence supply and demand in the labour market for skills. A number of countries in Eastern Europe which are preparing to join the EU are interested in developing employment forecasting models that would provide them with similar information relating to skills. Taking account of the requirements of the Single European Market and increasing international mobility, it is desirable that the pre-accession countries should develop models which, if possible, are comparable with existing methods of forecasting training and qualification needs in existing member states of the EU. This task requires regular medium-term forecasts which will extend the time horizon of decision makers beyond the current economic cycle, be applicable to the whole economy, allow speedy adjustment to changing circumstances, and which will take account of relevant factors such as investment plans, output and labour productivity forecasts, and technological change. The objective of this paper is to provide a summary of existing methods and data sets used to forecast education and training needs in four members of the European Union, in order to motivate similar work in three pre-accession countries. We first provide a detailed account of the different approaches to forecast education and training needs in France, Germany, Ireland and The Netherlands. For each of these countries, we consider the labour market data on which employment forecasts are based and the current methods in use, examine how data reliability and accuracy of forecasts are dealt with, and discuss the dissemination and usage of forecast information generated by those systems. We then look at the same range of issues for three pre-accession Central European countries (Czech Republic, Poland and Slovenia.) The paper concludes by suggesting a number of needed actions in preparation for developing an approach to forecasting education and training needs in the three pre-accession countries.
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Keywords: employment forecasting, education and training needs forecasting, labor market, transition
The Institutional Foundation of Foreign-Invested Enterprises (FIEs) in China
Yasheng Huang
WP No. 264
(September, 1999)
Abstract: Foreign-invested enterprises (FIEs) are now an important component of the Chinese economy. Since 1992, the growth of FIEs has been exponential. However our understanding of the institutional factors driving the FIE growth remains limited. This paper uses data from 39 industries in China for a period of three years (1995-1997) to explore the institutional foundation of the FIE growth. Our findings suggest that the debt obligations on the part of the SOEs and the local control of the SOEs promote the growth of FIEs and that some of the foreign direct investment (FDI) inflows result in acquisition of existing assets and shift asset controls from SOEs to FIEs.
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Jel Codes: F23, P26, P33
Keywords: foreign direct investment, economic transition, China
The Changing Corporate Governance Paradigm: Implications for Transition and Developing Countries
Erik Berglof; Ernst-Ludwig von Thadden
WP No. 263
(June, 1999)
Abstract: The rapidly growing literature studying the relationship between legal origin, investor protection, and finance has stimulated an important debate in academic circles. It has also generated a number of applied research projects and strong policy statements. This paper discusses the implications, in particular for developing and transition countries, from this literature. We conclude that its focus on the plight of small investors is too narrow when applied to these countries. We argue that this group is unlikely to play an important role in most developing and transition countries. External investors may still be crucial, but they are more likely to come in as strategic investors or creditors. The paper also proposes a broader paradigm including other stakeholders and mechanisms of governance in order to better understand the problems facing these countries and generate policy implications that compensate for the weaknesses of capital markets.
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Jel Codes: D23, G32, G38, K22, O17
Keywords: corporate governance, corporate law,economic transition, economic development
Law Enforcement and Transition
Gerard Roland; Thierry Verdier
WP No. 262
(May, 1999)
Abstract: We present a simple model to analyze law enforcement problems in transition economies. Law enforcement implies coordination problems and multiplicity of equilibria due to a law abidnce and a fiscal externality. We analyze two institutional mechanisms for solving the coordination problem. A first mechanism is what we call "dualism", follows the scenario of Chinese transition where the government keeps direct control over economic resources and where a liberalized non state sector follows market rules. The second mechanism we put forward is accession to the European Union. We show that accession to the European Union, even without external borrowing, provides a mechanism to eliminate the "bad" equilibrium, provided the "accesing" country is small enough relative to the European Union. Interestingly, we show that accession without conditionality is better than with conditionality because conditionality creates a coordination problem of its own that partly annihilates the positive effects of expected accession.
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Keywords: law enforcement, government collapse, mafia, EU accession, dual track liberalization
Decentralized Financing, Centralized Financing and the Dual Track System: Toward a New Theory of Soft Budget Constraints
Jiahua Che
WP No. 261
(June, 2000)
Abstract: I put forward a new theoretical framework to analyze the relationship between soft budget constraint syndrome and the economic performances of firms. It differs from the existing theoretical framework, à la Dewatripont and Maskin (1995), in the soft budget constraint literature. In this paper, soft budget constraint syndrome arises when firms that are expected to lose money are financed. The paper highlights a trade-off between hard and soft budget constraints. While soft budget constraints may compromise firms' incentives to improve performances, an all-out effort to harden budget constraints may put macro stability at risk, especially for economies suffering from allocative inefficiency. Based on this trade-off, the paper shows that a transition from centralized financing to decentralized financing in fact compromises firms' incentives to improve their performances, whereas a transition from centralized financing to a dual track system enhances efficiency. In the dual track system, budget constraints are soft in the centralized track but the macro stability of the economy is assured as a result. The macro stability enhances the disciplinary effect of hard budget constraints in the decentralized track, which in turn promotes firms' incentives to improve performances. The paper sheds light on a complementary relation between soft budget constraint syndrome in the state sector (i.e., the centralized track) and the remarkable growth of the non-state sector (i.e., the decentralized track) in China.
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Keywords: soft budget constraints, pecuniary externality, financial dual track, China's state sector and non-state sector
Missing Market in Labor Quality: The Role of Quality Markets in Transition
Gary H. Jefferson
WP No. 260
(July, 1999)
Abstract: This paper characterizes a key feature of the classic socialist economy and state-owned enterprise, namely that of missing markets in labor quality. Under the socialist regime in which students and workers were assigned to work units, the rights of managers to monitor and reward workers were limited. The exchange of labor services was based more on measures of quantity rather than quality. Workers who performed functions broadly consistent with that of their assigned occupations for the duration of the designated workweek received the standard wage. With the reassignment of property rights, this situation has changed. Students and workers have resumed control over the accumulation of their human capital the trade of skill and effort. Managers have acquired greater authority to monitor labor - to discriminate in setting wages and bonuses and to hire and fire - as well as stronger incentives to use this authority to raise efficiency and profits. The result is an emerging market in labor quality.A 1995 cross section of enterprise data spanning 10 ownership types is used to test the hypothesis of an emerging labor quality market. The results show that certain non-state forms of ownership, in which the rights of managers to monitor and reward skill and effort are presumed to be relatively well developed, encourage labor quality, most notably training, which raises productivity. The relative inability of state enterprises to monitor and reward high quality labor is likely to create an adverse selection problem in which the most skilled and motivated workers exit from the state sector, so as to cause a "hollowing" of skilled workers and weakened enterprise performance. The theoretical contribution of this paper is to generalize Coase's analysis of the critical role of property rights in creating resource markets to the creation and exchange of quality in all goods. Analytically, the conditions for a missing market in labor quality are equivalent to those for a missing market in pollution abatement and water quality. The analysis underscores the importance of property rights in creating the conditions for the accumulation and efficient exchange of human capital.
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Keywords: transition, markets in labor quality, adverse selection, Chinese enterprise reform
Do Corporate Global Environmental Standards in Emerging Markets Create Or Destroy Market Value
Glen Dowell; Stuart Hart; Bernard Yeung
WP No. 259
(June, 1999)
Abstract: Arguments can be made on both sides of the question of whether a stringent, global corporate environmental standard represents a competitive asset or liability for multinational enterprises (MNEs) investing in emerging and developing markets. This paper seeks to answer this question by analyzing the global environmental standards of a large sample of US-based MNEs in relation to their market performance. We find that firms adopting a single, stringent global environmental standard have higher market values, as measured by Tobin's q, than firms defaulting to less stringent, or poorly enforced host country standards. Thus, developing countries that use lax environmental regulations to attract foreign direct investment end up attracting poorer quality, and perhaps, less competitive firms. Our results also suggest that externalities are incorporated to a significant extent in firm valuation. We discuss plausible reasons for this observation.
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Keywords: corporate environmental policy, corporate performance, race to the bottom in foreign direct investment
Public Training and Outflows from Unemployment
Patrick A. Puhani
WP No. 258
(June, 1999)
Abstract: We analyse Polish active labour market policy (ALMP) training programmes from a macroeconomic (regional) point of view. The effects of training programmes on the outflows from unemployment and the effects of all ALMP programmes on the outflows from employment and the effects of all ALMP programmes on the outflows from employment (to identify displacement effects) are estimated. The variety of specifications presented is revealing. In contrast to other studies on Poland, we show that it can make a difference to the estimates whether current ALMP expenditure is excluded from the set of regressors to reduce the endogeneity problem, whether lagged dependent variables are included to take account of the dynamics, and whether fixed or random effects models are estimated. The empirical evidence gives some tentative support to the view that public training programmes can be used to reduce unemployment.
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Jel Codes: E24, J64
Keywords: training, evaluation, augmented matching function
Ownership Versus Environment: Why are Public Sector Firms Inefficient?
Ann P. Bartel; Ann E. Harrison
WP No. 257
(June, 1999)
Abstract: In this paper, we disentangle the sources of public sector inefficiency using 1981-1995 panel data on manufacturing firms in Indonesia. We consider two leading hypotheses: (1) public sector enterprises are inefficient due to agency-type problems or (2) public sector enterprises are inefficient because of the environment in which they operate, as measured by the soft budget constraint or barriers to competition. The two models are nested in a production function framework. The empirical results provide support for both models. Public sector enterprises shielded from import competition or with access to soft loans are significantly less efficient than their private sector counterparts. In addition, changes in ownership have large, independent effects on efficiency: in 1993, a full privatization is estimated to increase plant-level total factor productivity by 23 percentage points. Even without privatization, however, eliminating soft loans could raise total factor productivity by 8 to 9 percentage points.
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Keywords: privatization, public sector, Indonesia, soft budget constraint
Accounting for Growth in Post-Soviet Russia
Daniel Berkowitz; David N. DeJong
WP No. 256
(November, 1999)
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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Jel Codes: H21, H26, P51
Keywords: optimal taxation, tax evasion, organized crime
Revisiting Hungary's Bankruptcy Episode
John P. Bonin; Mark E. Schaffer
WP No. 255
(September, 1999)
Abstract: We take a retrospective look at Hungary's experiment with a particularly draconian bankruptcy law. For an eighteen-month period in 1992-93, the Hungarian bankruptcy code contained an unusual automatic trigger that required the managers of firms that held overdue debts of any size to any creditor to initiate reorganization or liquidation proceedings to avoid prosecution under the civil code. We analyze the impact of this "legislative shock therapy" on the economy during the period and examine its effects on resource reallocation and institution building. We argue that, although a key motivation for introducing the automatic trigger was to harden the budget constraints of firms, the empirical evidence suggests that hard budget constraints were already being imposed by banks and by other firms, and the effect of the automatic trigger was rather the exacerbation of a credit crunch and disruption of economic activity. We also suggest that other features of the Hungarian bankruptcy framework not connected to the automatic trigger provide the more important lessons. In particular, it is possible to introduce a bankruptcy track in a transition economy that can both transfer control of the firm from management to creditors and maintain the firm as a going concern while restructuring takes place.
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Jel Codes: G21, G30, P31, P34
Keywords: Hungary, bankruptcy, soft budgeet constraints, transition economies, trade credit, bad debt
FDI in Emerging Markets: A Home-Country View
Marina v.N Whitman
WP No. 254
(June, 1999)
Abstract: In the 1950s and 60s, the American view of foreign direct investment(FDI) in emerging markets, then called less-developed or developing countries, was that it was desirable for three reasons: as a vehicle for economic development and a partial substitute for foreign aid; to promote economic stability and democracy; and as part of the strategy to contain Communism. In the 1990's, the relationship between such investment and economic development is regarded as more uncertain, the Cold War is over, and many of the developing countries have emerged as serious players in global competition, thus altering the context in which such FDI is viewed. Over the 40-50 intervening years, the U.S. economy has shrunk as a proportion of the global total and has become much more open to foreign trade, thus increasing the exposure of American firms to the global economy and reducing their market power. At the same time, both the nature and the scale of FDI have changed substantially, and the general stance of emerging market countries toward such investment has moved from widespread hostility and suspicion to widespread efforts to attract it. For all these reasons, U.S. policies regarding FDI in emerging-market countries are far more affected by fears regarding its impact on our own economy than they used to be. Among the concerns are the effects on American jobs, wages, income distribution, trade and payments balances, the pace of RandD and innovation, the size of the domestic stock of capital, and the possibility of a global "race for the bottom" in environmental and labor-rights policies. Although most of these concerns are misplaced, such investment does create both winners and losers and thus can give rise to political and public controversy. Therefore, U.S. government policies toward FDI in emerging markets today are ambivalent. While some, including a number of initiatives in the GATT negotiations and the World Trade Organization, are supportive, others, including export controls, the Foreign Corrupt Practices Act, and certain types of import restrictions are either hostile to such investment or seek to limit it in various ways.
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Keywords: foreign direct investment, emerging markets, merging economies, developing countries, multinationals, globalization
The Asian Financial Crisis: What Happened, and What is to be done
Jeffrey D. Sachs; Wing Thye Woo
WP No. 253
(January, 1999)
Abstract: We identify the Asian financial crisis to be the result of the instabilities of short-term capital flows, inadequate prudential supervision in the financial markets of the developing countries, mistaken commitments to the fixed exchange rate regime, lack of international coordination in the regulation of international financial markets, absence of an international mechanism for the orderly working out of international debt, and inappropriate "rescue" packages imposed by the IMF. We recommend 30 policy reforms to make the international economy more resilient to financial turmoil, and to reduce the costs of such turmoil. We conclude that there is little particularly 'Asian' about the Asian financial crisis. Even though official Washington, led by the IMF, proclaimed the crisis to be one of Asian capitalism, the more generic character of the crisis became all too clear during 1998, as the crisis spread to Russia, South Africa, and Brazil. Rather than an Asian crisis, the world is experiencing a type of global crisis that reflects the rapid arrival of global capitalism, in a world economy not yet used to the integration of the advanced and developing countries. Because we see no justification for the monopoly position of the IMF as the sole international institution on monetary affairs, we advocate the formation of regional monetary bodies to provide mutual support in the event of a financial crisis hitting one or another member country. We also advocate that an international bankruptcy system be established in order to accelerate an orderly workout of international debts when a developing country falls into an extreme indebtedness crisis. Existing key international organisations like the IMF have performed poorly, and they must be reformed to render them more transparent in their operations, and more democratic in their governance. Developing countries must have a greater role in designing future rescue packages extended to financially distressed countries so that rescue packages will no longer be biased toward the interests of the creditor countries. The new global financial architecture should have generalised floating of currencies as its mainstay. The bad debts of the financial and corporate sectors in Pacific Asia to be quickly resolved by the infusion of public money, and the takeover of some large domestic banks by foreign banks. Furthermore, the revival of the corporate sectors in Asia requires international creditors to write-down the value of their loans, and to convert part of their loans into equity participation. There is a serious mismatch in Pacific Asia, particularly in most of southeast Asia, between investment in physical hardware - factories and machinery - and investment in the social software - scientific research centers, administrative and judiciary systems, and growth of civil society. In a world of growing international competitiveness, when foreign direct investors are courted not just by Asia but Central Europe and Latin America, the concerns over governance are bound to grow, and to weigh increasingly heavily on the unreformed countries of Asia. The long-term competitiveness of Asia rests as much on "getting its institutions right" as on "getting the prices right."
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Organizational Culture and Effectiveness: The case of Foreign Firms in Russia
Carl F. Fey; Daniel R. Denison
WP No. 252
(September, 1999)
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 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: asset partitioning, legal entities, creditors, role of law
Consumer Behavior Research in Emerging Consumer Markets: The Case of the Optimum Stimulation Level in South Africa
Jan-Benedict E.M. Steenkamp; Steven M. Burgess
WP No. 251
(September, 1999)
Abstract: More than two-thirds of the world's consumers live in emerging consumer markets and transitional economies (ECMs). A fuller understanding of consumer behavior and further advancement of consumer research as an academic discipline require that the validity of theories and models of consumer behavior developed in the Western cultural context be examined in ECMs as well. In this paper, we examine the measurement invariance and nomological relations involving OSL in one of Africa's most important ECMs - South Africa. Our research setting presents an especially stringent context for testing consumer behavior theories. Many respondents are challenged severely economically and educationally, many have probably never had a job and some are illiterate. Nevertheless, the results provide evidence on the cross-cultural generalizability of OSL and exploratory consumer behavior theory. We found a high degree of stability in the OSL structure across these four major ethnic groups in South Africa. Meaningful and theoretically predictable nomological relations are obtained with values, sociodemographics, and exploratory consumer behavior. Suggestions for future research on OSL and for consumer behavior research in general in ECMs are discussed.
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Property Rights Formation and the Organizatoin of Exchange and Production in Rural China
Matthew A. Tuner; Loren Brandt
WP No. 250
(July, 1998)
Abstract: Most exchange of farm land in rural china is conducted by local governments rather than by decentralized land markets. We investigate the forces determining the reallocation behavior of village governments, and hence the formation of the right "security of tenure". We also examine the relationship between administrative reallocations and market reallocation. Thes amounts to an examination of the choice between centralized and decentralized organization of agricultural production.
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Keywords: Property Rights, Collective Choice, Chinese Agriculture
Impacts of the Indonesian Economic Crisis: Price Changes and the Poor
James Levinsohn; Steven Berry; Jed Friedman
WP No. 249
(June, 1999)
Abstract: The recent financial crisis in Indonesia has resulted in dramatic price increases. Using very recent data, we investigate whether these price increases have impacted the cost-of-living of poor households in a disproportionately harsh way. We find that the poor have indeed been hit hardest. Just how hard the poor have been hit, though, depends crucially on where the household lives, whether the household is in a rural or urban area, and just how the cost-of-living index is computed. What is clear is that the notion that the very poor are so poor as to be insulated from international shocks is simply wrong. Rather, in the Indonesian case, the very poor appear the most vulnerable.
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Keywords: Indonesian economic crisis, international economy, the poor
Internal Barriers in the Transition of Enterprises from Central Plan to Market
Charalambos Vlachoutsicos
WP No. 248
(July, 1999)
Abstract: While a number of transition countries have been able to make significant progress with macroeconomic stabilization, little is being done to understand and to address the horrendous difficulties and barriers that attend the process of transition at the level of the enterprise. Not knowing what to change and what to leave in place -either because of its intrinsic value or because of its impenetrable and unyielding nature- exacerbates the complexity of the challenge. The purpose of this paper is to present the insights revealed by our study on the barriers obstructing the transition of enterprises from central plan to market. Stakeholders' fears and institutional uncertainty seem to be the major impediments to the transition of enterprises from central plan to market. It is the fears of "being independent and self responsible, not having the protecting 'umbrella' of the state", of ignorance of markets, of "too many fast changes", of "losing one's own job", of "increased unemployment" and most importantly the fear of "losing power and status". These fears are all derived from a deep suspicion of the consequences of any change. Thus workers fear the loss of job and of the enterprise umbrella, managers fear the loss of power and status and boards fear financial losses and loss of ownership. The insights gained apply to most transition countries. Differences from country to country are a matter of degree. The degree of effectiveness and stability of the market economy to which the system is transforming will greatly depend on the degree of transmutation of local, social value systems to the new values and practices, which market oriented systems will be able to contain and integrate. Efforts to introduce management techniques suited to a market economy will almost certainly fail, unless the techniques chosen from the arsenal of contemporary market oriented management methods, complement and build upon local traditional managerial values. Successful transition might hinge more upon overcoming internal barriers of enterprises, than upon any other single factor of this complex and arduous process. Local as well as western managers and investors should spend time and efforts to understand the concealed logic of the barriers encountered during the implementation of each change. They should address the fears of individual stakeholders (employees, potential partners, clients, suppliers and public officials) with whom they are dealing. They should be mindful of how deeply certain attitudes may be ingrained and should not overlook the value of experience, existing skills and the prevailing managerial behavior that can be usefully built upon; they should expect to work hard and long at change before it really occurs.
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Keywords: barriers, transition, enterprise, communitarianism, resistance
Spillovers from Multinationals in Developing Countries: the Mechanisms at Work
Richard E. Caves
WP No. 247
(June, 1999)
Abstract: Most research suggests that spillovers commonly benefit the productivity of LDCs' local firms from market contacts with foreign subsidiaries, but little attention has gone to where those spillovers might be large, where nonexistent. In Particular, LDC local firms can be constrained away from frontier effectiveness in at least four ways. Each constraint has different implications for the nature and extent of spillovers from foreign subsidiaries. The analysis also yields predictions how spillovers will vary with differences in the situations of subsidiaries and local competitors, and with elements of the structures of industries in which they operate. Limited empirical evidence supports the predictions and the general approach to refining our expectations about the prevalence and nature of spillovers.
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Keywords: multinational enterprise, spillovers, managerial capability, community based standards
Dynamism and Inertia on the Russian Labour Market: A Model of Segmentation
Thierry Verdier; Irena Grosfeld; Claudia Senik-Leygonie; Stanislav Kolenikov; Elena Paltseva
WP No. 246
(April, 1999)
Abstract: This paper proposes an explanation of the puzzling coexistence of elements of inertia and dynamism on the Russian labour market using a segmentation model. Risk averse workers are differentiated according to their productivity. They face a trade-off between wages and access to social services provided by the firm. The most productive workers leave their initial firm, contract on the spot labour market, and concentrate in the best performing firms. The model provides a possible interpretation of wage arrears which can be viewed as an element of an implicit contract between firms and less productive workers. We test some of the predictions of the model using a panel dataset containing 13,410 firms, for 1993 - 1997.
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Jel Codes: C23, D82, J00, L2, P52
Keywords: transition, labour market, wage arrears, Russia
Lessons from Bank Privatization in Central Europe
John P. Bonin; Paul Wachtel
WP No. 245
(May, 1999)
Abstract: In the three fast track, Central European transition countries, Hungary, Poland and the Czech Republic, bank restructuring and privatization involved different approaches and met with a variety of outcomes. Hence, these experiences in otherwise similar transition economies provide important lessons for bank privatization in other transition countries and in developing economies. If an independent market-oriented banking sector is the overriding goal, three fundamental conclusions emerge. First, bank restructuring and privatization must be sequenced carefully to create the appropriate incentives for lending on a commercial basis only in the future. Second, privatization requires a credible transfer of proper corporate culture is most easily established by attracting a strategic investor, preferably a foreign financial institution.
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Jel Codes: G21, P34, P52
Keywords: bank privatization, bad loans, bank restructuring, financial sector reform, transition economies
Nominal-Real Tradeoffs and the Effects of Monetary Policy: the Romanian Experience
Christian Popa
WP No. 244
(December, 1998)
Abstract: Due to the persistence of relatively soft budget constraints and poor government credibility, the survival strategy of Romanian state-sector firms means eschewing profit maximization in the short run in favor of insider utility maximization. This takes the form of attempts at both reducing layoffs and minimizing real wage losses on the background of substantial adjustment in real output. Nominal adjustment (especially pricing and arrears) is favored over riskier and more costly real adjustment, since firms are risk-averse in the longer run. From an operational viewpoint, the representative firm's objective becomes that of maximizing liquidity flows subject to constraints regarding labor hoarding systemic limits to debt default and spontaneous restructuring. Empirical evidence supports the idea of an inflation-output tradeoff (in terms of variations around trends) where increases in expected inflation and/or expected gross nominal arrears have a significant negative impact on real industrial output, while unexpected inflation (and defaulted debt) exhibits positive but insignificant coefficients. The tradeoff persists even when controlling for demand-side factors. Monetary variables do not appear to cause this tradeoff, but rather seem to be mediating it. Persistence is also much more pronounced in inflation than it is in real output. Monetary policy measures then tend to have an asymmetric impact: they are likely to affect the nominal side more than the real one; monetary aggregates tend to have a sharp short-run impact compared to the stronger and longer-lasting effects induced with a lag by changes in interest rates; required reserves, because of their lesser political visibility, have for a long period been a more effective instrument of monetary policy management compared to refinancing rates, when the central bank's independence was ambiguous. Finally, in the context of a specific credit channel fueled both by commercial bank loans and by differential access to defaulted debt, short-term credit to the state sector exhibits adverse selection features compared to loans extended to private-sector firms, with the latter being in the position of net creditor due to the predominance of hard budget constraints. Firm immunity (given by size, political sensitiveness of the respective industry, importance as regional employer, etc.) to punitive interventions either on the part of government authorities or creditors seems to play a large role in the proliferation of financial indiscipline as a repeated game, with large, poorly efficient firms initiating arrears growth and other firms following either voluntarily (due to cost-of-credit differences) or involuntarily (because of a liquidity squeeze). Interestingly, arrears are not perfect substitutes for credit, while both M2 and nongovernment credit appear to accommodate increases in gross arrears. The transmission of monetary policy via a credit channel is also interesting in the post-1996 context of central bank deposit taking meant to sterilize excess liquidity due to relatively high capital inflows. The policy conclusions point to the limited effectiveness of monetary policy in macrostabilization of structuural reforms, privatization, financial discipline and improvements in corporate governance are absent or slow; the need for austere monetary policy in sustaining these measures; and the danger of expansionary policy aimed at growth and/or employment objectives. Institutional reforms at the central bank level (improvements in the independece of the monetary authority, stating price stability as the paramount objective of monetary policy, instituting multi-annual inflation targets in the context of a consistent macro policy mix, etc) are also examined.
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Jel Codes: E51, P22, P31
Keywords: asymetric impact of monetary policy, inflation-output tradeoff, persistence, soft budget constraints, transition, transmission of channels
Privatization, Political Risk and Stock Market Development in Emerging Economies
Enrico C. Perotti; Pieter van Oijen
WP No. 243
(March, 1999)
Abstract: This paper investigates whether privatization in emerging economies has a significant indirect effect on local stock market development through the resolution of political risk. We argue that a sustained privatization is correlated with improvements in perceived political risk. These gains tend to be gradual over the privatization period and are significantly larger in privatizing countries than in nonprivatizing countries, suggesting that the resolution of such risk is endogenous to the privatization process. Our analysis shows further that changes in political risk in general tend to have a strong effect on local stock market development and excess returns in emerging economies, suggesting that political risk is a priced factor. We conclude that the resolution of political risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies.
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Investment Financing in Russian Financial-Industrial Groups
Enrico C. Perotti; Stanislav Gelfer
WP No. 242
(October, 1998)
Abstract: We study whether Russian Financial-Industrial Groups facilitate access by Russian firms to investment finance. We compare firms which are members of official Financial Industrial Groups and/or are owned by a large Russian bank with a control set of large firms categorized by dispersed ownership or/and management and employee control. We find that investment is sensitive to internal finance for the second set of firms but not for the first. This is consistent with extensive reallocation of resources within the groups to overcome capital constraints. One interpretation is that group firms have an internal capital market which facilitate access to finance. We test this view against the alternative ossibility that financial reallocation hide opportunistic value transfer across firms. Specifically, we assess the quality of the investment process in group and non group firms by regressing individual firms' absolute and relative investment on our measure of Tobin's Q. The result supports the notion that group firm allocate capital better than independent firms. We then distinguish between bank-led groups, which are more hierarchical, and industry-centered groups which may be more defensive arrangements. While investment is not significantly correlated with cash flow in industry-led group firms (unlike in independent firms), there is a negative significant correlation for bank-led firms, suggesting a more extensive financial reallocation and the use of profitable firms as cash-cows. Most intriguingly, the greater sensitivity of group firms' investment to Q is entirely attributed to firms in bank-led groups, where the controlling bank may have a stronger profit motive and authority to reallocate resources.
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Keywords: corporate groups, financial constraints, investment, Russia, corporate governance, financial transition
Can Governments Mandate Hard Budget Constraints? Bank Lending and Financial Isolation in Romania
Octavian Carare; Constantijn Claessens; Enrico C. Perotti
WP No. 241
(January, 1999)
Abstract: This paper examines the empirical evidence on the impact of reforms in the financial sector in Romania in the period 1993-1995. The methodological framework of the paper is based on a theoretical model of intertemporal bank lending in a transition country with uncertain prospects for stabilization (Carare and Perotti, 1997). The model identifies an empirical test to measure whether the banking sector has started to act as a source of financial discipline, or just as a temporary buffer for enterprise losses. The idea is to test whether the correlation between bank lending and arrears is decreasing over time. We also seek to assess the structure and impact of the program of financial isolation initiated by the government in 1994 to impose tighter budget constraints on a set of insolvent state-owned firms. We use both a logit specification and a structural test to analyze the determinants of the selection of firm included in the program. Our results indicate that after the early stage of collective bailouts ended in early 1993, banks at first acted as channel to support insolvent firms. The evidence suggests also that by 1995, when the financial isolation program started, financial policies became more discriminative. While the criteria for the overall credit allocation appear to have improved, there are signs that support was shifted to a selected group of enterprises, perhaps in part through the program itself. However, only once more recent data becomes available it would be possible to investigate whether there has been a change in the initial discipline imposed on the financially isolated firms as a result of the program.
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Keywords: restructuring, financial restructuring, bank lending in transition
Democratic Institutions and Economic Reform: the Polish Case
John E. Jackson; Jacek Klich; Krystyna Poznanska
WP No. 240
(April, 1998)
Abstract: Analysis of the economic transformation of the Polish economy and of the 1993 elections for Parliament suggest that it is possible to proceed with pro-market and democratic reforms simultaneously. As demonstrated by the Polish case, the key to this process is the rate at which new enterprises are created. These enterprises, not the privatization of existing ones, are responsible for the creation of a private economy. This evolving new economy based on firm creation and growth creates a pro-reform constituency in the regions where it is occurring. This constituency provides strong support for pro-reform parties. The Polish case also illustrates how electoral rules and their interaction with the evolution of pro-reform constituencies affect the representation of pro-reform interests. The Polish case offers important lessons about the reform process and about the way scholars conceptualize political-economic processes.
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Keywords: political economy, transition economies, Poland, entrepreneurism
A Longitudinal Study of IJV Performance in Eastern Europe
Keith D. Brouthers; Gary Bamossy
WP No. 239
(June, 1999)
Abstract: Why do some international joint ventures (IJV) succeed while others fail? Scholars suggest that cultural differences and trust influence IJV success. Others maintain that ownership and control structures explain performance differences. Still others imply that learning and governmental actions create these differences. We use a longitudinal methodology to examine the impact of all these factors on IJV performance for a sample of Eastern/Western European IJVs. We found that culture, trust, learning, ownership, control and governments all contribute to the success or failure of IJVs.
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Keywords: joint venture, performance, trust, culture, learning, key stakeholder, onwnership, control
Firm Creation and Economic Transitions
John E. Jackson; Jacek Klich; Krystyna Poznanska
WP No. 238
(July, 1998)
Abstract: Virtually all industrial countries are experiencing some form of transformation in their economies, from the dramatic move from centrally planned to market economies in East-central Europe, to the rebuilding of the economies in the so-called Rust Belt of the USA, to the efforts by Asian countries to return to their recent high growth levels. The analysis builds on the work of Schumpeter, Hannan and Freeman, and Kornai to develop a picture of an economy as an evolutionary process in which the creation, survival and growth of firms is the key to continued growth. This entrepreneurial activity is vital to successful transformations at critical points when the existing enterprises are not well suited to market conditions - what Schumpeter refers to as creative destruction. This paper uses detailed data on the transitions in the Polish and Michigan economies to present evidence to support these propositions. Showing that the successful transformation of two economies with obvious historical differences both depended upon the creation of new firms rather than on the restructuring of existing firms shows that entrepreneurial activity is a universal necessity.
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Analysis of Entrepreneurial Attitudes in Poland
John E. Jackson; Aleksander S. Marcinkowski
WP No. 237
(March, 1997)
Abstract: It is increasingly apparent that widespread entrepreneurial activity is central to economic growth and to any market economy. A high level of this activity depends upon the willingness of individuals to start new firms, to work for new firms, and to encourage those who do both. This study compares the attitudes of citizens in three very different countries- the U.S., Poland, and Ukraine- towards entrepreneurs and entrepreneurial activity. Questions ask about a range of attitudes related to these themes and responses are compared across the three countries. In this comparison, Polish citizens closely resemble U.S. respondents in their willingness to undertake entrepreneurial activity and to provide support and encouragement for entrepreneurs. Ukrainians provide the least support for these activities. The second half of the paper reports the results of statistical analyses relating attitudes towards individual and local economic characteristics. Differences in attitudes are rooted in local economic and cultural differences, such as the structure of the regional economy, as well as to individual differences, such as age and education. The paper concludes with some thoughts about how these attitudinal differences relate to the degree of success in each country in coping with the need for economic transitions.
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Investment and Finance in De Novo Private Firms: Empiracal Results from the Czech Republic, Hungary and Poland
Andrzej Bratkowski; Irena Grosfeld; Jacek Rostowski
WP No. 236
(April, 1999)
Abstract: In this paper we use a survey of 281 Czech, Hungarian and Polish newly established small private firms in order to shed some light on the constrains these firms face in the credit market. The results of our survey show that imperfections in capital markets in Central European economies do not seem to actually inhibit the growth of Central European transition economies studied, but they provide quite a large amount of financing and do so from a remarkably early stage of the existence of firms. Financial intermediation works reasonably well as far as de novo private firms in the three Central European transition economies studied, but they provide quite a large amount of financing and do so from a remarkably early stage of the existence of firms. Financial intermediation works reasonably well as far as de novo private firms are concerned: loss-making de novo firms have a lower probability of getting credit than profitable ones. Banks protect themselves against the risk of a deteriorating pool of borrowers by requiring collateral for their loans. We do not find convincing evidence concerning the existence of adverse selection. Loss-making firms are not ready to pay higher interest rates than profitable firms and are not more likely to ask for credit than profitable firms.
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Jel Codes: D8, P2, P34
Keywords: transition, credit marker, investment, financial constraints, start-ups
Does a Soft Macroeconomic Environment Induce Restructuring on the Microeconomic Level during the Transition Period? Evidence from Investment Behavior of Czech Enterprises
Lubomír Lízal
WP No. 235
(June, 1999)
Abstract: The paper analyzes investment behavior of industrial enterprises in the period immediately following price and foreign trade liberalization in the Czech Republic. It also focuses on the effect of "soft" macroeconomic environment on the microeconomic decisions. A dynamic investment function with symmetric adjustment cost function based on the Euler equation has been estimated. The derived and estimated investment function accounts for export sales in order to determine whether firms evaluate production for domestic and foreign markets differently, i.e, use the advantage of an undervalued currency. The estimation was conducted on two-year firm-level panel data from 1992 and 1993. The first major result of the empirical analysis suggests that there is no evidence that firms treat domestic sales and exports differently in the context of the adjustment cost function. The second remarkable finding contradicts the common view that firms in the transitional environment have short-term horizons. Both these findings could be interpreted as strong evidence against the idea of economic policy helping firms within a temporary soft macroeconomic environment. No evidence was found against the applicability of the constant returns to scale assumption on the Cobb-Douglas production function within the analyzed framework.
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Jel Codes: D21, D24, D92, E22, E61, F19, G31, P21
Keywords: investment, enterprises, adjustment costs, tansition, soft budgeting
Banking Reform in China: Gradually Strengthening Pillar or Fragile Reed?
John P. Bonin
WP No. 234
(June, 1999)
Abstract: Two decades of policy lending created a large bad debt burden in the loan portfolios of the four large state-owned specialty banks that together dominate all aspects of banking in China. The government has recognized the need to restructure these insolvent banks by setting up bad debt agencies with a narrow purpose to work out or sell bad debt. This reform does not sever the link between the bank and the client so that soft lending will continue. Drawing on the experiences of fast track transition economies, we make two emendations to the Chinese banking reform program. First, establish hospital banks to take both the bad loans and the undesirable clients. In working to restructure some of these SOEs, the hospital banks will develop the skills of investment bankers and venture capitalists. Second, begin the gradual divestiture of the state form the large banks by selling small blocks of shares on the domestic market and using stock options to create proper incentives for bank management. \ This reform package would jump start the stalled development of capital markets in China and strengthen its dominant banking sector.
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Jel Codes: G21, P34, P52
Keywords: bad loans, banking reform, Chinese banking, policy lending, banking in transition economies
Theories of Soft Budget Constraints and the Analysis of Banking Crises
Janet Mitchell
WP No. 233
(March, 1999)
Abstract: This paper proposes a new taxonomy for classifying models of soft budget constraints which allows identification of two classes of models. Distinguishing between these classes of models is useful, as they yield SBCs in differing circumstances and have differing theoretical and policy implications. The taxonomy is used to motivate an area of economic theory in which SBC models can yield novel insights: the analysis of banking crises. A model is presented in which SBCs arising from creditor passivity have implications for the question of the appropriate policy for dealing with bad debts on troubled banks' balance sheets. The paper also compares the implications of the two classes of SBC models for the analysis of banking crises.
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Unemployment Risk, Precautionary Savings, and Moonlighting in Russia
Alessandra Guariglia; Byung-Yeon Kim
WP No. 232
(June, 1999)
Abstract: Using a panel of 3,039 Russian households over the period 1994-96, this paper tests the precautionary savings hypothesis and investigates whether multiple job holding attenuates the need for precautionary savings. A measure of earnings variability based on the subjective probability of primary job loss of household heads is used as a proxy for risk. We find that risk strongly affects savings, although this effect is limited to those households whose head holds only one job. These findings are robust to different measures of savings and model specifications, and highlight the role of moonlighting as a self-insurance mechanism that individuals can use to smooth consumption in the presence of fluctuating earnings.
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Jel Codes: C23, D12, D91, E21, P20
Keywords: precautionary savings, earnings variability, moonlighting
Investing in Turbulent Times: The Investment Behavior of Polish Firms in the Transition
Josef C. Brada; Arthur King; Chia-Ying Ma
WP No. 231
(April, 1999)
Abstract: We examine the investment behavior of a sample of Polish industrial firms over the period 1991-1993 by means of a model that views investment flows as part of the firm's effort to adjust its assets and liabilities so as to maximize the returns to the firm. We argue that the application of neo-classical models of investment is only appropriate in cases where net investment is positive. If firms are seeking to reduce their capital stock, then the major constraints are not financial but rather set by the level of depreciation. This paper examines the adjustments undertaken by Polish firms and shows that firms that did make positive net investments in this period were influenced by their capital intensity, profitability and by their cost of and returns to financial assets. The explanatory power of the model is relatively high when compared to previous studies of the investment behavior of firms in transition economies.
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The End of Moderate Inflation in Three Transition Economies?
Josef C. Brada; Ali Kutan
WP No. 230
(April, 1999)
Abstract: Although the rate of inflation has declined in the more advanced transition economies such as the Czech Republic, Poland, and Hungary, it continues at moderate rates that are sufficiently high by regional standards to pose economic problems for these countries. In this paper, we examine the reasons for the persistence of this moderate inflation including passive fiscal policies, inappropriate exchange rate policies, and weak mechanisms for the transmission of monetary policy. We also use econometric methods to determine the causes of inflation. The persistence of inflationary expectations and the nominal exchange rate are found to play a much more significant role in the persistence of inflation than do monetary policy and nominal wage growth. These findings suggest that the role of monetary policy in halting inflation is limited at best.
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Back to the Future: The Growth Prospects of Transition Economies Reconsidered
Nauro F. Campos
WP No. 229
(April, 1999)
Abstract: There are two strands in the empirical literature on economic growth in transition economies. One focuses on the impact of reforms, while the other emphasizes sustainability issues and the growth prospects these economies face. The most common strategy, in the latter, has been to use coefficients from growth regressions, on large samples of developing countries, and impose them on transition economies' data to obtain projected growth rates. We refer to it as the BLR approach (because it uses specifications from Barro, and Levine and Renalt). We claim that the reported growth rates are suspiciously similar, painting an overly optimistic picture and yielding few policy lessons. We re-estimate the BLR equations for data on transition economies themselves and find that government expenditures have been positively associated and human capital has been negatively associated with output growth. These results contrast sharply with the assumptions and findings from the BLR approach, questioning its might and challenging our understanding of the transition process in its key dimension.
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Jel Codes: E23, O40, P20, P52
Keywords: transition economies, economic growth, growth prospects
The Enterprise Isolation Program in Russia
Simeon Djankov
WP No. 228
(April, 1999)
Abstract: We provide comprehensive analysis of the isolation program for financially distressed firms in Romania. The results indicate that the isolation program did not deliver any tangible improvements in operational performance, nor did it enhance the process of privatization or liquidation of large loss-making enterprises. Firms included in the program faced softer budget constraints than their comparators outside the program, and few management changes in poorly performing firms took place. These findings question the feasibility of creating successful programs for enterprise restructuring under government auspices.
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Jel Codes: G33, G34
Keywords: isolation program, financial distress
Ownership Concentration and Corporate Performance in the Czech Republic
Stijn Claessens; Simeon Djankov
WP No. 227
(April, 1999)
Abstract: The relationship between ownership structure and corporate performance has been the subject of intense research in both transition and market economies. The Czech Republic's mass-privatization program provides an unique opportunity to investigate this relationship. It changed the ownership of firms in a short period of time, and firm characteristics had only a limited influence on the resulting ownership structure. For a cross-section of 706 Czech firms over the period 1992 through 1997, we find that the more concentrated ownership, the higher firm profitability and labor productivity. These findings are weakly robust to the inclusion of control variables for the type of ownership, or to a correction for the endogeneity of ownership concentration.
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Unemployment Benefit Entitlement and Training Effects in Poland during Transition
Patrick A. Puhani
WP No. 226
(March, 1999)
Abstract: We analyse the unemployment benefit regime change that occurred in Poland in December 1991 using data from the Polish Labour Force Survey. Before December 1991, the entitlement period to unemployment benefits was unlimited. Thereafter, it was reduced to 12 months (with a few exceptions). Using the difference-in-differences approach within a hazard rate framework, we find that the regime change did not have a significant effect on the duration of unemployment. The results thus give credence to the view that the unlimited entitlement period of the old unemployment benefit regime was not the main culprit for the long durations of unemployment in Poland, although the generous eligibility criteria may have contributed to the increase in the incidence of registered unemployment at the beginning of the transition process. In addition, we analyse the information on training programmes given in the Supplement to the Polish Labour Force Survey of August 1994. For the analysed period 1990-1994, we do not find any significant effects of public training programmes on the duration of unemployment.
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Jel Codes: J64, J65, J68
Keywords: unemployment benefit entitlement effects, training, evaluation, Poland
Transition at Whirlpool-Tatramat: Case Studies
Sonia Ferencikova; Hans Brechbuhl
WP No. 225
(March, 1999)
Abstract: These cases are about the origin and the development of the operations of the joint venture Whirlpool-Tatramat established between the Slovak washing machine producer, Tatramat and the European subsidiary of Whirlpool Corporation, Whirlpool Europe B.V. in 1992 in the former Czechoslovakia. The first case, entitled "How to Enter Emerging Markets in Central and Eastern Europe" is designed to evaluate the impact of the fall of the Iron Curtain on the business climate for foreign companies in this region as well as on the opportunities for local companies. The case study is also used to gain an understanding of why and how firms choose an alliance partner through an analysis of Whirlpool's and Tatramat's needs and intentions. It describes the situation in both Whirlpool Europe and in Tatramat at the beginning of the 1990's. These two companies faced many problems and challenges at that time because of obstacles in their internal situations and changes in their external operational environment. After looking for the right partner and the right form of cooperation, and after evaluating all possibilities, they decided to negotiate with each other to find the right form of strategic alliance. This case can be used in courses dealing with the entry of companies on emerging markets of Central and Eastern Europe (e.g. World Economy, Corporate Strategy, International Business, Doing Business in Central and Eastern Europe, etc.) The second case, entitled "Management Aspects of the Operations within an Emerging Market" is focused on two issues: how to manage successfully the transition of a small local post-socialist company into an integrated and efficient part of Whirlpool's global network and how to market goods produced locally, as well as merchandise obtained from the global network, in a small local market. The case describes the operations of the joint venture Whirlpool-Tatramat, the initial struggles with production volume and quality, downsizing, building a local supplier network, a drop in demand, and the gradual process of the ownership change to eventually become Whirlpool's wholly-owned subsidiary and the final involvement of the company into Whirlpool's global network. This case can be used in courses dealing with special aspects of international expansion (e.g. International Management, doing Business in Central and Eastern Europe, etc.).
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Measuring Progress in Transition and Towards EU Accession: A Comparison of Manufacturing Firms in Poland, Romania, and Spain
Wendy Carlin; Saul Estrin; Mark Schaffer
WP No. 224
(March, 1999)
Abstract: This paper provides new evidence on progress in transition and the "readiness" of enterprises for accession for the EU using a detailed survey administered to approximately 200 manufacturing firms in each of Poland, Romania, and Spain. A major innovation is the use of a market economy and member country of the EU - Spain - as a benchmark against which to measure progress in transition. The paper finds that new private firms (firms established as private ab initio) in both Poland and Romania are growing the fastest, but on measures of integration and investment, it is Polish ab initio private firms and privatized firms that look most similar to the Spanish. Polish state-owned firms, and Romanian state-owned, privatized and (to a lesser extent) ab initio private firms more often lag behind. With respect to compliance with EU directives, Poland tends to lag behind Spain but lie significantly ahead of Romania. Levels of awareness of and compliance with directives did not vary with ownership type amongst the Eastern European firms. Progress in transition at the country level seems to be consistent with improvements in compliance with the major components of the acquis.
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Product Market Competition in Transition Economies: Increasing Varieties and Consumer Loyalty.
Mitsutoshi Adachi
WP No. 223
(March, 1999)
Abstract: The collapse of communism brought about previously inexistent product market competition in transition economies. This paper analyzes such rivalry with a focus on some specific features of these markets. While inviting foreign multinationals is always beneficial for local consumers, cost reduction at the local producers (i.e., former SOE's) is necessary to realize the full-fledged benefits of such entry. Inefficient production by the former SOE's is particularly detrimental when the cost difference vis-à-vis foreign entrants is above a threshold level, because the more efficient entrants exploit their cost advantages to raise prices instead of pricing aggressively for market share. This in turn reduces the appeal of opening domestic markets to international trade to promote competition.
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Jel Codes: L13, P21, P31
Keywords: product market competition, foreign entry, former SOE's, inefficiency
Opaque Markets and Rapid Growth: the Superiority of Bank-Centered Financial Systems for Developing Nations
Rodney Wallace
WP No. 222
(July, 1999)
Abstract: This paper analyzes the relationship between private investment incentives and the speed at which information regarding investment becomes public. In a developed country context, public information plays a limited role in creating investment incentives. However, in an environment of rapid economic development, firms only have a strong incentive to invest if information only becomes public after a long lag. Thus, the public disclosure that is an integral part of effective stock markets inhibits investment in developing countries despite not being problematic in developed nations. On the other hand, bank-centered financial systems limit the amount of public information and are therefore better suited to developing countries.
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Technology Spillovers through Foreign Direct Investment
Yuko Kinoshita
WP No. 221
(January, 1999)
Abstract: I study the effects of technology spillovers ("catch-up") and a firm's investment in skills (training) on the firm's productivity when FDI (foreign direct investment) is a carrier of new technology. Using a 1992 firm-level survey data in China, I test the investment equation proposed by Parente and Prescott (JPE, April 1994). I find: (1) The catch-up effect and a firm's training both significantly raise a firm's TFP (total factor productivity) growth, just as Parente and Prescott hypothesized, (2) Chinese local firms are more likely to train skilled workers than foreign firms, which accelerated technology spillovers they received from foreign firms, (3) Foreign joint ventures did not significantly raise local firms' TFP growth, (4) Foreign-owned firms in China are unlikely to train local workers. Instead, they import intermediate inputs from their home countries.
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Managerial, Expertise and Team-Centered Forms of Organizing: A cross-cultural Exploration of Interdependencies in Engineering Work
Leslie Perlow
WP No. 220
(January, 1999)
Abstract: Based on field research on software engineers with similar tasks in China, India, and Hungary, this study documents variation in forms of reciprocal interdependence - the back and forth exchange of work inputs between engineers and managers in completing a joint task. It further shows that the form of reciprocal interdependence that evolves is shaped by and continually shaping elements of the social context - the perceived rewards shared values, and temporal norms. To create sustainable change in any component of the resulting system of organizing work, composed of both the form of reciprocal interdependence and elements of the social context, requires the whole system to adjust. Hence, recognizing the existence of this system helps to identify why change is so difficult to make.
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Household Structure and Labor Demand in Agriculture: Testing for Separability in Rural China
Audra J. Bowlus; Terry Sicular
WP No. 219
(January, 1999)
Abstract: Economic reforms in China have brought rapid growth in nonagricultural employment in rural areas and a substantial shift in the structure of rural employment. These changes have led researchers to question the conventional view of rural China as a labor surplus economy with poorly functioning factor markets. We contribute to this debate by testing for separability between the labor demand and supply decisions of households in a typical rural county in northern China. Our test, which makes use of unique panel data that enables us to control for time-invariant unobservable household characteristics, yields the following results: (1) separability is rejected across a variety of specifications, indicating that factor markets in the early 1990s remained underdeveloped; (2) the conventional view of surplus labor oversimplifies the situation as we find that, while same localities have a labor surplus, others may face labor shortages; and (3) separability does hold in areas where substantial employment opportunities exist at the township level, suggesting the need for employment opportunities that transcend village borders so as to create competitive pressures on villages and promote the inter-village movement of resources.
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Competing Strategies of FDI and Technology Transfer to China: American and Japanese Firms
W. Mark Fruin; Penelope Prime
WP No. 218
(January, 1999)
Abstract: This is a report based on four field site visits of Sino-foreign joint ventures in China. Two American and two Japanese joint ventures in electronics and auto parts were visited in the Shanghai area in December 1997. The joint ventures were Shanghai Raychem, Shanghai Fleetguard, Shanghai Mitsubishi Elevator, and Shanghai Koito. Although the sample size is extremely small, it does appear as if there are notable differences in how American and Japanese firms transfer technology to China and in their motivations for doing so. Further fieldwork-based research to capture and clarify these differences is recommended.
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Returns to Mobility in the Transition to a Market Economy
Tito Boeri; Christopher Flinn
WP No. 217
(January, 1999)
Abstract: In spite of ongoing dramatic changes in labor market structure, transitional economies display rather low worker flows across sectors and occupations. Such low mobility can be explained by low returns to job changes as well as by market segmentation in the allocation of job offers. We develop an econometric model which enables us to characterize intertemporal changes in probabilities of dismissal, remuneration, and offer arrival rates on the basis of information on observed transitions and wage payments. The model is estimated using data from the Polish Labor Force Survey. Our results indicate a significant degree of segmentation in the allocation of job offers and more stability in public sector versus private sector jobs. Our model can also be used for policy experiments. In particular, we infer that reductions of 10 per cent in the generosity of unemployment benefits will not significantly boost outflows from the unemployment state. These findings support explanations for low mobility in transitional economies, which are based on informational failures, and high costs of moving from public to private enterprises for those with high levels of job tenure and labor market experience in the public sector.
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Jel Codes: J62, J63, J64
Keywords: worker flows, returns to mobility, market segmentation
Labor Market Policies and Unemployment in the Czech Republic
Katherine Terrell; Vit Sorm
WP No. 216
(November, 1998)
Abstract: We analyze the impact of the active labor market policies (ALMPS) and the unemployment compensation system (UCS) on unemployment duration's of different groups in the Czech population by estimating hazard functions with new macroeconomic data. We conclude these programs were effective in improving the functioning of the labor market. The UCS system has allowed the unemployed to search for jobs but has not unduly prolonged unemployment spells. This first analysis of the effectiveness of ALMPs on unemployment duration's shows that job brokering shortened spells of the groups that tended to have longer unemployment duration's: women, Romans, handicapped, less educated, and those with an unemployment history. Overall our results suggest that the UCS and the ALMPs increased the social acceptability of the painful economic transition.
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Jel Codes: C41, H53, J23, J64, O15, P2
Active Labor Market Policies in Poland: Human Capital Enhancement, Stigmatization or Benefit Churning?
Jochen Kluve; Hartmut Lehmann; Christoph M. Schmidt
WP No. 215
(December, 1998)
Abstract: This paper provides micro-econometric evidence on the effectiveness of Active Labor Market Policies (ALMP) in Poland. We sketch the theoretical framework of matching estimators as a substitute for randomization in labor market programs. Using retrospective data from the 18th wave of the Polish Labor Force Survey we implement a conditional difference-indifferences matching estimator of treatment effects. Treatment and control groups are matched over individual observable characteristics and pre-treatment labor market histories to minimize bias from unobserved heterogeneity. We also require that observations on controls be from the same regional labor market and from an identical phase of the transition cycle. Considering as the outcome a multinomial variable of labor market status, our first important finding suggests that training of men and women has a positive effect on the employment probability. For men public works and intervention works have negative treatment effects, while participat in in intervention works does not affect women's employment probabilities. We attribute the negative treatment effects for men to benefit churning rather than to stigmatization of intervention and public works participants.
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Jel Codes: C41, J68
Does the Slovenian Public Work Program Increase Participants' Chances to Find a Job?
Milan Vodopivec
WP No. 214
(January, 1998)
Abstract: This paper analyzes the effects of Slovenian public works on employability of the participants during 1992-1996. It shows that immediately upon the completion, the program helps the participants to find a job, but in the longer run, the positive effect is dissipated and the impact becomes negative. Some of the exits to employment upon the completion of the program can be attributed to converting public jobs positions to permanent ones, and the longer term negative impact on finding a job could be related to stigmatization of the participants. The study also shows that public works reduce I the exit rate to inactivity.
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Jel Codes: J24, J64, J68
Effects of Active Labor Market Programs on the Transition Rate from Unemployment into Regular Jobs in the Slovak Republic
Martina Lubyova; Jan C. van Ours
WP No. 213
(December, 1998)
Abstract: The system of active labor market policies (ALMP) in the Slovak Republic consists to a large extent of the creation of socially purposeful and publicly useful jobs and of retraining of unemployed workers. So far, the effects of these types of active labor market policies have hardly been analyzed. This paper uses a unique administrative data from 20 Slovak districts to analyze to what extent it is beneficial for unemployed workers who want a regular job to accept a temporary ALMP-job or enter a retraining program. We find that indeed it is beneficial for workers to do so.
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Jel Codes: C41, J64
The Marketing System in Bulgarian Livestock Production--The Present State and Evolutionary Processes During the Period of Economic Transition
Yordan Staykov
WP No. 212
(October, 1998)
Abstract: abstract
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Bankruptcy Experience in Hungary and the Czech Republic
Janet Mitchell
WP No. 211
(October, 1998)
Abstract: abstract
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Values, Optimum Stimulation and Brand Loyalty: New Scales in New Populations
Steven M. Burgess; Mari Harris
WP No. 210
(September, 1998)
Abstract: The new emphasis on relationships in marketing has spurred a resurgence of interest in brand loyalty and the positive effect of brand loyalty on company profitability and long-term survival have been well-documented in recent years. Recent research has begun to identify new types and sources of affect that might comprise and distinguish loyalty responses, especially from a phenomenological perspective. This article focuses on exploratory consumer behavior (ECB), an often-neglected influence on brand loyalty that has received almost no attention in the brand loyalty literature. Risk-taking in product and retail outlet choice innovative shopping behavior, variety and novelty-seeking, browsing and recreational shopping and curiosity-motivated information processing are among the many consumer behaviors thought to have strong exploratory components. The tendency to engage in ECB has been operationalized most often using instruments designed to measure optimum stimulation level (OSL) (Baumgartner and Steenkamp, 1996; Steenkamp and Baumgartner, 1992). Although values and OSL have been the focus of large and important research streams, the role of values in ECB has not been explored. South Africa is an important transition economy receiving much interest from international investors. It is important as a market and as an entry point to sub-Saharan Africa and the Indian Ocean Rim. The current research employed two new instruments, Steenkamp and Baumgartner's new shortened Change Seeker Index (CSI) and Schwartz' new Portraits Questionnaire (PQ), in a study of the optimum stimulation level (OSL) and value priorities of a nationally-representative sample of 3493 South Africans. Schwartz' theory concerning the structure and content of values has received much interest in the psychology literature during the decade. The theory proposes ten motivational value types that are distinguished by the motivational goal each value type each expresses. These four value types are further thought to aggregate into four higher-order values. The nature of Schwartz' value structure is such that the inter-relationships of the value types can be represented with a circular structure in which those value types most negativciy correlated will appear on opposite sides of the circle and value types most similar will appear adjacent to one another. When one relates a concept such as OSL to the motivational value types, one would expect a sinusoid curve to emerge. In particular, one would expect high OSL consumers to place more priority on openness-to-change values and less priority on conservation values. Moreover, the theory would predict opposite value priorities for low OSL consumers. The results indicate that high and low OSL consumers exhibit value differences consistent with Schwartz' theory about the content and structure of values and the predicted sinusoid pattern between value priorities and OSL emerged. The association between values and brand loyalty exhibited three general sinusoid patterns. Comparative sample partitions based on value priorities and OSLs suggest that values may be sensitive to a wider range of motivations that underlie differences in exploratory product acquisition, shopping behavior and brand loyalty. The results suggest that value priorities and OSL are important influences on brand loyalty behavior.
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Keywords: values, OSL, brand loyalty
Inherited Wealth, Corporate Control and Economic Growth
Randall Morck; David A. Strangeland; Bernard Yeung
WP No. 209
(September, 1998)
Abstract: Countries in which billionaire heirs' wealth is large relative to G.D.P. grow more slowly; show signs of more political rent seeking, and spend less on innovation than do other countries at similar levels of development. In contrast, countries in which self-made entrepreneur billionaire wealth is large relative to G.D.P. grow more rapidly and show fewer signs of rent seeking. We argue that this is consistent with wealthy entrenched families having objectives other than creating public shareholder value. Also, the control pyramids through which they are entrenched give wealthy families preferential access to capital and enhanced lobbying power. These entrenched families also have vested interests in preserving the value of existing capital. To investigate these arguments, we explore firm-level Canadian data. Heir-controlled Canadian firms show low industry adjusted financial performance, labor capital ratios, and RandD spending relative to other firms the same ages and sizes. We argue that concentrated, inherited corporate control impedes growth, and dub this "the Canadian disease". Further research is needed to determine the international incidence of this condition. Finally, heir-controlled Canadian firms' share prices fell relative to those of comparable firms on the news that the Canada-U.S. free trade agreement would be ratified. A key provision of that treaty is capital market openness. Under the treaty, heir-controlled Canadian firms' labor capital ratios rose, while the incidence of heir-control fell. We suggest that openness, especially of capital markets, may mitigate the ill effects of concentrated inherited control. If so, capital market openness matters for reasons not captured by standard international trade and finance models.
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A Cultural Analysis of Homosocial Reproduction and Contesting Claims to Competence in Transitional Firms
Michael D. Kennedy
WP No. 208
(July, 1998)
Abstract: Drawing on 56 in-depth interviews with American business advisors and East Europe-an managers, entrepreneurs and consultants, I argue that homosocial reproduction -- the promotion of management according to social identification with those above them -- is based on a new cultural formation called 'transition culture". This formation is based on the assimilation of local cultural elements into a conglomeration of global business practices, on the one hand, and the identification of a l@ socialist culture to be expunged, on the other. The relationship of East European cultures to transition culture is, however, unstable. Within this formation, East Europeans must demonstrate their membership with the acquisition of specific skill sets associated with the emergent culture, and treat Fast European differences, like language, as a minor hurdle easily transcended. Sometimes, however, East European distinctions are elevated. This occurs, for instance, when the promise of transition is not met, as when Westerners fail to learn as much about the local conditions as east Europeans have learned about global business practices. Transition culture is also challenged by how to incorporate the significance of connections in transition economics. Finally, transition culture is exploded when East Europeans can claim superior expertise to multinational corporations for whom they work. A post-transition cultural formation should therefore be imagined.
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From Survival to Success: The Journey of Corporate Transformation at Haier
Arthur Yeung; Kenneth DeWoskin
WP No. 207
(July, 1998)
Abstract: abstract
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Why Do People Work if They Are Not Paid? An Example from Eastern Europe
Irina L. Zinovieva
WP No. 206
(May, 1998)
Abstract: The phenomenon of non-paid work on a massive scale is discussed. Research is done in a textile firm in Eastern Europe, which withheld payment for the performed work for more than a half a year. The following questions were studied: (a) what are the perceptions of work and work results in this highly unusual situation, (b) what kind of other incentives are available to substitute for lack of payment, (c) how do people explain their behavior under such circumstances. Results show that lack of payment is not a barrier for a high level of effort spent in work, relatively good performance, and organizational commitment. The reasons lye mainly in a high level of need for sense, i.e. tendency to search for the meaning of one's actions and the meaning of life, as well as in perceptions of the work situation as opportunities to satisfy higher order (Maslow type of) needs (self-actualization, esteem from others, and belongingness).
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Firm Ownership and Work Motivation in Bulgaria and Hungary: An Empirical Study of the Transition in the Mid-1990's
Robert A. Roe; Irina L. Zinovieva; Elizabeth Dienes; Loren A. ten Horn
WP No. 205
(May, 1998)
Abstract: abstract
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Human Resource Management in the Restructuring of Chinese Joint Ventures
Nandini Lynton
WP No. 204
(April, 1998)
Abstract: abstract
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Emergent Compensation Strategies in Post-Socialist Poland: Understanding the Cognitive Underpinnings of Management Practices in a Transition Economy
Marc Weintein
WP No. 203
(March, 1998)
Abstract: abstract
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Corporate Transformation and Organizational Learning: The People's Republic of China
Meinolf Dierkes; Zhang Xinhua
WP No. 202
(January, 1998)
Abstract: abstract
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Foreign Direct Investment as a Factor of Change: The Case of Slovakia
Sonia Ferencikova
WP No. 201
(February, 1998)
Abstract: abstract
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