Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia
Joseph P. H. Fan; T.J. Wong
WP No. 400
(October, 2001)
Abstract: In emerging markets, the concentration of corporate ownership has created agency conflicts between controlling owners and minority shareholders. Conventional corporate control mechanisms such as boards of directors and takeovers are typically weak in containing the agency problem. This study examines whether external independent auditors could be employed as monitors and as bonding mechanisms to alleviate the agency conflict. Using a broad sample of firms from eight East Asian economies, we document that firms are more likely to employ Big Five auditors when they are more subject to the agency problem imbedded in their ultimate ownership structure. One possible reason that this documented relation between auditor choice and the agency problem is more evident than the inconsistent results using U.S. and U.K. data is that alternative governance mechanisms are limited in East Asia. In addition, among East Asian auditees subject to the agency problem, Big Five auditors charge a higher fee and set a lower audit modification threshold while non-Big Five auditors do not. Taken together, the evidence suggests that Big Five auditors in emerging markets do have a corporate governance role.
>> Download PDF
Keywords: corporate governance, auditor, ownership concentration, East Asia
Financial Conditions and Investment during the Transition: Evidence from Czech Firms
LubomÃr LÃzal; Jan Svejnar
WP No. 399
(October, 2001)
Abstract: In this paper, we examine net investment during the early stages of transition using micro data on the population of medium and large industrial firms in the Czech Republic during the 1992-95 period. We examine the relevance of alternative models of investment and test if investment behavior varies across categories of ownership and with the legal status of firms. Our analysis of depreciation leads us to the conclusion that replacement investment displays a similar pattern in many ownership-legal form categories of firms. Retained profit is found to be the major determinant of new investment and the estimate is statistically significant even when we use the most robust fixed effects estimates based on one-year differences. We find that enterprise profitability has a strong positive effect on investment in all types of firms except privately owned-limited liability companies and foreign owned and mixed ownership firms. These results are consistent with the financing-hierarchy and credit-rationng hypotheses which indicate that domestic firms cannot easily borrow investment funds externally and that net investment varies with retained profits. Firms take into account various stock measures of internal finance. In particular, a stock of cash, receivables, receivables overdue, payables, and payables overdue systematically affect net investment.
>> Download PDF
Jel Codes: D21, D92, E22, G32, P21
Keywords: investment, cash-flow, restructuring, ownership, legal status, transition to a market economy
Accessible Pareto-Improvements: Using Market Information to Reform Inefficiencies
Michael Mandler
WP No. 398
(May, 2001)
Abstract: We study Pareto improvements whose implementation requires knowledge of only market prices and traded quantities, not utility and demand functions. Quantity stabilizations (for example, the Lau, Qian, and Roland model of dual-track reform) give agents the right to repeat their earlier trades and hence require policymakers to know the quantities agents previously exchanged. While reasonable in some partial equilibrium contexts, such knowledge is implausible in general equilibrium. To diminish informational requirements further, we also consider price stabilizations, which hold constant the relative prices that consumers face. Although price stabilizations do not achieve first-best efficiency, they lead to Pareto-improvements and production efficiency. Moreover, the production efficiency advantage persists under price stabilization but not under quantity stabilization when some firms are not profit-maximizes; this difference can be critical in transition policies for planned economies. In addition to planning, we consider several other applications of quantity and price stabilization, both partial equilibrium and general equilibrium: removal of rent controls, deregulation of a cross-subsidizing public utility, and the entry of an autarkic economy into world trade. Not surprisingly, the most plausible candidates for quantity or price stabilization occur in partial equilibrium settings. Finally, we discuss some difficulties specific to general equilibrium models of transition economies. When the state completely rations trades under planning, it will usually need to operate at a deficit. Under reform, the state must raise revenue to close this deficit, and that will frequently prevent quantity stabilizations from achieving a Pareto improvement. But ex ante deficits do no pose a problem for price stabilization reform strategies.
>> Download PDF
Keywords: Pareto improvements, transition policy, dual-track reforms, international trade, rent control, deregulation
The Making of an Integrated National Grain Market in China
Wubiao Zhou
WP No. 397
(June, 2001)
Abstract: A market economy will not emerge from a redistributive economy automatically once the state abolishes a redistributive system. Because of the cognitive incompleteness of market actors in post-redistributive societies, and also because of the conflicts between the state and local interests and among local interests, selective state interventions are inevitable and necessary for a successful market transition. This paper examined the evolution of market pattern in the new market transition economies based on the emergence of an internal grain market under market reform in China. I found that local markets, tightly "protected" by local officials, tried to curtail long-distance trade beyond local territories and thus were not starting points of an internal market in China's national grain market. The approximate internal grain market at the beginning of the 21st century in China is the result of deliberate actions of the reform-oriented state.
>> Download PDF
Keywords: market reform, grain market, blockmodeling, selective intervention
Corruption and Resource Allocation: Evidence from China
Wei Li
WP No. 396
(June, 2001)
Abstract: Exploiting a unique data set containing transactions data from a panel of 769 Chinese state-owned enterprises between 1980 and 1989, this paper tests microeconomic implications of a pervasive form of corruption --official diversion of under-priced, in-plan goods to the market. Corruption has the predicted effects on resource allocation. Official under-pricing of in-plan goods, which lowers the marginal cost of diversion, increases the procurement of output into the plan for the purpose of diversion. Market competition introduced by allowing firms to sell directly to the market appears to reduce corruption and therefore lessen its distortions.
>> Download PDF
Jel Codes: L12, L51, P21
Keywords: corruption, resources allocation, China, dual-track system
Government Shareholding and the Value of China's Modern Firms
Lihui Tian
WP No. 395
(April, 2001)
Abstract: This paper documents the ultimate shareholding structures of 826 corporations listed on China's stock market and finds large equity holdings of the government. Using a panel data set, this paper further finds that corporate value decreases with an increased size of government shareholding when the government is a small shareholder. When the government equity holding is sufficiently large, corporate value increases with increased government shareholding. This U-shaped relationship between government shareholding and corporate value is interpreted by the aggregated impacts of the grabbing and helping hands of the government shareholder.
>> Download PDF
Jel Codes: G15, G32, G34, L33
Keywords: ownership structure, government shareholding, corporate governance
Labor Hoarding in Russia: Where Does it Come From?
Rouslan Koumakhov; Boris Najman
WP No. 394
(October, 2001)
Abstract: The paper focuses on the labor "hoarding" problem in Russian. We studied two forms of "hoarding": unpaid leaves and short-time work. Our research is based on the Russian Longitudinal Monitoring Survey (RLMS) database. The paper exploits individual panel data between 1994 and 1996. We show that unpaid leaves and short-time work do not represent a form of hidden unemployment. Both types of labor "hoarding" reflect the nature of employees' professional competencies. First, unpaid leaves concern primarily the employees with firm-specific knowledge, while short-time work affects strongly unskilled workers. Second, external mobility is mostly related to young people and unskilled blue-collar workers while employees with specific competencies do not change jobs so much. The paper insists on significant internal adjustments which are taking place through unpaid leaves and short-time work. This explains why there has been no massive unemployment in Russia until now. In conclusion, Russian labor market is characterized rather by internal flexibility than by labor "hoarding".
>> Download PDF
Jel Codes: C23, J2, P23
Keywords: labor market, internal adjustments, flexibility. Russia, skills
Ownership Structure, Corporate Governance, And Firm Value: Evidence from the East Asian Financial Crisis
Michael Lemmon; Karl Lins
WP No. 393
(April, 2001)
Abstract: We study the effect of ownership structure on firm value during the East Asian financial crisis that began in July 1997. The crisis represents a negative shock to the investment opportunities of firms in these markets that raises the incentives of controlling shareholders to expropriate minority shareholders. Moreover, the large separation between cash flow and control rights that often arise from the use of pyramidal ownership structures and cross-holdings in these markets suggests that insiders have both the incentive and the ability to engage in expropriation. Using data from over 800 firms in eight East Asian countries, we find evidence consistent with this view. Tobin's Q ratios of those firms in which minority shareholders are potentially most subject to expropriation decline twelve percent more than Q ratios in other firms during the crisis period. A similar result holds for stock returns - firms in which minority shareholders are most likely to experience expropriation underperform other firms by about nine percent per year during the crisis period. Further, during the pre-crisis period we find no evidence that firms with a separation between cash flow rights and control rights exhibit performance changes different from firms with no such separation. All of these results are robust to controls for country and industry effects, as well as proxies for differences in risk across firms and the strength of the country's legal institutions. The evidence indicates that corporate ownership structure plays an important role in determining the incentives of insiders to expropriate minority shareholders during the times of declining investment opportunities. Our results add to the literature that examines the link between ownership structure and firm performance and provide additional guidance to policymakers engaged in the ongoing debate about the proper role and design of corporate governance features and legal institutions in developing economies.
>> Download PDF
Marshall and Labour Demand in Russia: Going Back to Basics
Jozef Konings; Hartmut Lehmann
WP No. 392
(August, 2001)
Abstract: Using a unique enterprise-level data set, which covers the regions Moscow City, Chelyabinsk, Krasnoyarsk and Chuvashia and the three sectors manufacturing and mining, construction and trade and distribution, we estimate Russian labour demand equations for the year 1997. The most important conclusion that can be drawn is that labour demand is inelastic in international perspective if we estimate a labour demand equation for all regions and all sectors combined. So, Russian MLEs well into the transition still exhibit peculiar behaviour as far as wage employment trade-offs are concerned. We try to relate this inelastic labour demand to basic neoclassical theory by testing Marshall's rules of derived demand. Our results show that testing these rules seems a promising avenue for establishing some of the driving forces, which are behind labour demand in Russia.
>> Download PDF
Jel Codes: J20, J23, M51, P31
Keywords: labour demand, rules of derived demand, enterprise performance, transition to a market economy
Economic Transition and Elections in Poland
John E. Jackson; Jacek Klich; Krystyna Poznanska
WP No. 391
(June, 2001)
Abstract: Poland's economic and political transition, one of the most successful transitions, has depended very heavily on the job creation in new firms to replace the jobs lost in the formerly state-owned enterprises. This uses evidence from both survey and aggregate data to analyze four Polish elections during the transition. These analyses indicate that these de novo firms, the individuals they employ, and the residents in the local areas where they exist become an important constituency supporting pro-reform political parties and constraining the actions of parties less sympathetic to the reforms. The creation of this political constituency helps explain how countries can successfully pursue both economic and political reforms.
>> Download PDF
Keywords: Poland, economic and political transitions, voting and elections
Effects of Bank Insolvency and Strategic Uncertainty on Corporate Restructuring in Transition Economies
Christa Hainz
WP No. 390
(August, 2001)
Abstract: We study the influence of bank insolvency on corporate restructuring in a dynamic model of bank relationship. Using a poorly developed banking technology our model shows that bank insolvency can have a positive effect on firms' incentives to restructure. Due to the technology each firm faces strategic uncertainty on the restructuring decision of other firms. Restructuring has the positive externalities on restructuring incentives of other firms which may cause multiple equilibria where either all firms of a generation restructure or no firm restructures. Coordination problems can exist in each period. The optimal extent of coordination policy depends on the restructuring costs.
>> Download PDF
Jel Codes: G21, G34, O13, P31, P34
Journal Citation: Christa Hainz, "Effects of Bank Insolvency on Corporate Incentives in Transition Economies," Economics of Transition 13, 261–286, April 2005.
Keywords: transition economies, corporate finance, corporate governance
Mark-Up Pricing in Bulgarian Manufacturing
Rumen Dobrinsky; Boyko Nikolov; Nikolay Markov
WP No. 389
(June, 2001)
Abstract: The pricing policy of Bulgarian manufacturing firms is analysed in the paper in the context of the theory of the price-setting behaviour of firms endowed with market power, and more specifically, using the notion of mark-up pricing. Using some recent derivations in the literature, we estimate mark-up ratios for Bulgarian manufacturing sectors at the NACE 2-digit and NACE 3-digit levels. The estimated mark-ups are then tested against a set of variables measuring the degree of competitive pressure on a sectoral level.
>> Download PDF
Jel Codes: C23, D21, D24
Keywords: mark-up pricing, competetive pressure, enterprise restructuring and adjustment, Bulgaria
Globalization and Firms' Financing Choices: Evidence from Emerging Economies
Sergio Schmukler; Esteban Vesperoni
WP No. 388
(May, 2001)
Abstract: This paper studies the relation between firm's financing choices and financial globalization. Using an East Asian and Latin American firm-level panel for the 1980s and 1990s, we study how leverage ratios, debt maturity structure, and sources of financing change when economies are liberalized and when firms access international capital markets. We find that debt-equity ratios do not increase after financial liberalization. Debt maturity shortens for the average firm when countries undertake financial liberalization. However, domestic firms that actually participate in international capital markets extend their debt maturity. Financial liberalization has less effects on firms from countries with more developed domestic financial systems. Leverage ratios increase during crises.
>> Download PDF
Jel Codes: F1, G1, G3
Keywords: financing choices, financial structure, financial integration, financial globalization, international financial markets
The Distributional Impacts of Indonesia's Financial Crisis on Household Welfare: "A Rapid Response Methodology"
Jed Friedman; James Levinsohn
WP No. 387
(July, 2001)
Abstract: Analyzing the distributional impacts of economic crises is important and, unfortunately, an ever more pressing need. If policymakers are to intervene to help those most adversely impacted, then policymakers need to identify those who have been most harmed and the magnitude of that harm. Furthermore, policy responses to economic crises typically must be timely. In this paper, we develop a simple methodology to fill the order and we've applied our methodology to analyze the impact of the Indonesian economic crisis on household welfare there. Using only pre-crisis household information, we estimate the compensating variation for Indonesian households following the 1997 Asian currency crisis and then explore the results with flexible non-parametric methods. We find that virtually every household was severely impacted, although it was the urban poor that fared the worst. The ability of poor rural households to produce food mitigated the worst consequences of the high inflation. The distributional conseqences are the same whether we allow households to substitute towards relatively cheaper goods or not. However the geographic location of the household mattered even within urban or rural areas and household income categories. Additionally, households with young children may have suffered disproportionately adverse effects.
>> Download PDF
Keywords: Indonesia, currency crisis, welfare distribution, compensating variation, non-parametric regression
Corporate Financial Policies and Performance Prior to Currency Crises
Arturo Bris; Yrjö Koskinen; Vicente Pons
WP No. 386
(October, 2001)
Abstract: Using company level data from 17 countries that have suffered a currency crisis during the past decade, this paper documents that firms have increasing leverage and declining profitability prior to a crisis. After sorting companies into two groups based on their exchange rate beta, we show that companies that benefit from currency depreciations have higher leverage, lower earnings to revenue ratios and lower interest coverage ratios compared to firms that are harmed by currency depreciations. These results are consistent with the recent literature that puts the financial policies and performance of corporations as the central issue in currency crisis.
>> Download PDF
Jel Codes: F3, F4, G3
Keywords: currency crisis, corporate leverage, capital structure, profitability, exchange rates
Ownership and Productive Efficiency: Evidence from Estonia
Derek C. Jones; Niels Mygind
WP No. 385
(July, 2001)
Abstract: Privatization in Estonia has produced varied ownership configurations. This enables hypotheses on the productivity effects of different ownership forms to be tested. Findings are based on fixed effects production function models and are estimated using a large, random sample of firms. Depending on the particular specification (and relative to state ownership) we find that: i) private ownership is 13-22% more efficient; (ii) all types of private ownership are more productive, though managerial ownership has the biggest effects (21-32%) and ownership by domestic outsiders has the smallest impact (0-15%). The joint hypothesis that privatization coefficients are equal is rejected. Findings are robust with respect to choice of technology and the use of instrumental variable estimates. These results provide only partial support for the standard theory of privatization and stronger support for theorists who argue that some forms of insider ownership may constitute preferable forms of corporate goverance in some circumstances.
>> Download PDF
Jel Codes: G34, O12, P2
Institutional Determinants of Labor Reallocation in Transition
Tito Boeri; Katherine Terrell
WP No. 384
(June, 2001)
Abstract: Studying the transition means analyzing the interactions between institutions and structural change, a process we still know very little about. In this paper we show that the transition process has been very different in the countries of the Former Soviet Union (FSU) and those of Central and Eastern Europe (CEE) in terms of reallocation of labor from the old to the new sector, the extent of real wage decline and responsiveness of employment to output changes. We sift through the theoretical and empirical literature to find an explanation for these diverging adjustment trajectories and conclude that the difference can be explained in part by different policy models. The CEE countries adopted social policies that upheld wages at the bottom of the distribution and hence forced the unproductive old sector to restructure or collapse. The FSU countries allowed wages to free fall and hence did not force the hand of the old sector. Why these two models were adopted is the subject for political-economy research, however we speculate that it has to do with the relative appeal of joining the EU.
>> Download PDF
Jel Codes: I3, J0, P3
Keywords: transition economies, labor reallocation, institutions, wages
Deindustrialisation and Structural Change During the Post-Communist
Tomasz Mickiewicz; Anna Zalewska
WP No. 383
(July, 2001)
Abstract: The aim of this paper is to model the evolution of employment structure in post-communist economies in the broader context of deindustrialisation. The paper builds on the model of structural change developed by Rowthorn and Wells (1987). We show that the starting point of high industry sector share in total employment and its direct fall when productivity of sectors changes in favour of services can be explained in terms of this framework. Moreover, the model can also describe the phenomenon of a further expansion of the agriculture, observed in countries classified as "less consistent" in the reforms implementation. Hence, we distinguish two development paths, the efficient one, called "horizontal", and the inefficient one called "vertical". We illustrate it with empirical data, using alternative measures of structural change and patterns of structural evolutions during transition. Finally, we discuss the link between the EBRD indicators of reforms and structural change. We show that the "quality" of reforms, not the initial GDP level determines a country's development path.
>> Download PDF
Keywords: transition economics, employment structures, deindustrialization, convergence, liberalization
Markets and Growth
Stepan Jurajda; Janet Mitchell
WP No. 382
(July, 2001)
Abstract: This paper studies key markets (financial, labor, natural resource, and product) to assess how they are facilitating or constraining growth. First, we draw on the body of existing theoretical and empirical literature to discuss the links between markets and growth. Second, we present four stylized scenarios of the process of growth, which summarize market infrastructure and efficient factor reallocation in response to shocks appear to be among the most important growth determinants. We highlight the relative lack of research on the relationship between labor markets and growth, as opposed to the relationship between human capital production and growth. Finally, we combine suggestions of Topel (1999) and Pritchett (2000) to argue that country-specific markets should be a principal focus of future research on growth. This paper provides a framework for such studies.
>> Download PDF
Labor Market Discrimination During Post-Communist Transition: A Monopsony
Robert S. Chase
WP No. 381
(August, 2001)
Abstract: Conventional wisdom suggests that during communism, tastes for discrimination were suppressed. In partial explanation for ethnic tensions observed following central planning, economic liberalization allows those tastes to be expressed. This paper explores the feasibility of monopsony as an economic structure supportive of discrimination during transition, using Latvia's ethnic Russians as a case study. Measuring employment concentration and earnings differentials across regions, monopsony appears prevalent in the country. A monopsony explanation requires Russians to have lower labor supply elasticity than Latvians, a condition which estimates for participation probability confirm. Earnings decompositions show that though Russians are paid more than Latvians on average, given their human capital characteristics, they suffer earnings discrimination of between 5.5 and 7.3 percent. In addition, compared with Latvians the likelihood that Russians will be unemployed is greater, though Russians are less likely to register for unemployment services. This evidence suggests that lack of integrated, flexible labor markets in Latvia, and the monopsony which results, have supported labor market discrimination against Russians during transition.
>> Download PDF
Dollarization of Liabilities in Non-tradable Goods Sector
Frederic Chabellard
WP No. 380
(June, 2001)
Abstract: This paper questions the motivation of dollar indebtedness by firms of the non-tradable good sectors in a period of exchange rate pressure. Given the structure of banks' indebtedness and protection of banks' foreign lenders, a dollar denominated loan may allow firms to insure (partially) against the risk of an early liquidation of their projects if they turn out to be poor. Then it is shown that under dollarization of liabilities the government may be urged to soften monetary policy to induce a real appreciation that supports the domestic banking system. Therefore, it might be constrained in its ability to enforce an efficient regulatory policy.
>> Download PDF
Jel Codes: G28, G33
Keywords: Foreign currency debt; real and nominal exchange rates; soft budget
Lessons from the Russian Meltdown: The Economics of Soft Legal Constraints
Enrico C. Perotti
WP No. 379
(March, 2001)
Abstract: On August 17, 1998, Russia defaulted on its domestic public debt, declared a moratorium on the private banks' foreign liabilities, which was equivalent to an outright default, and abandoned its exchange rate regime. The depth of the Russian meltdown shocked the international markets, and precipitated a period of serious financial instability. It is important to understand the roots of such a crisis to learn about possible lessons on both issues of bank supervision and international stability. While the visible cause of the crisis was an unsustainable fiscal deficit couples with massive capital flight, the critical question concerns the origin of such circumstances. This paper argues that the structure of individual incentives in the Russian legal context, compounded by the exceptional support granted by international institutions to Russia, explains the cycle of nonpayment, capital flight and fiscal unbalances leading to the dramatic 1998 crisis. We offer an interpretative model of noncompliance, cash-stripping and rational collective nonpayment, which led to the fiscal and banking crisis and ultimately to a complete meltdown. In our view, the banking sector was already insolvent prior to the crisis, and contributed directly and indirectly to it. The last section of the paper puts forward a radical medium-term policy proposal for a stable banking and payment system for Russia. Russia needs to create a basic foundation for savings and intermediation by asset restrictions and market segmentation, crude but effective rules used in all underdeveloped systems to restrain asset stripping and opportunism. Concretely, we propose a cautious extension of deposit insurance away from the monopolistic Sberbank and towards a narrow banking layer. The proposal also proposes to restore charter value in the commercial banking sector.
>> Download PDF
Effective Tax Rates in Transition
Vlad Ivanenko
WP No. 378
(May, 2001)
Abstract: The paper addresses the question of effective tax rates for Russian economic sectors in transition. It presents a detailed account of fiscal environment for 1995 and compares statutory obligations with reported tax liabilities. The paper finds that taxation did not contribute to recession, as some observors believed at the time. It extends research by questioning the role that inflation played distorting revenue structure. When the costs of intermediate inputs are adjusted for inflation, many sectors have negative residual revenue, which is indicative of recession. Yet, modeling tax changes to correct the situation does not produce positive results, for the tax share in the cost structure of many sectors is small and cannot compensate for inflation
>> Download PDF
Jel Codes: H3, P2
Keywords: Taxation in transition, Russian fiscal system
Some Explanations for Changes in the Distribution of Household Income in
Thesia I. Garner; Katherine Terrell
WP No. 377
(May, 2001)
Abstract: This paper measures the change in overall net monetary income inequality during the first seven years of transition and considers the relative importance of two possible explanations for the increase in inequality: a) changes in the sources of household income, and b) changes in the household composition. Changes in the sources of household income reflect the role of the government and market during the transition period, while changes in household composition reflect social reactions to the changing economic environment. We find that the increase in inequality in labor income drove the large increase in inequality (i.e., the Gini index of household per capita income rose from 0.195 in 1988 to 0.263 in 1996). Changes in the distribution of pensions and other social payments mitigated the rise in earnings inequality, with the latter playing a more role in reducing changes overall income inequality over time. We show there are large shifts in the demographic composition of households over this period: far fewer households with children, far more households headed by pensioners, increases in the number of one-person households and decreases in large (five person) households. Although we find that these shifts in the demographic composition of households are increasing overall inequality, by increasing between group inequality, most of the change in inequality over time is accounted for by increase in within group inequality. We conclude that over the first seven years of the transition labor market forces are driving changes in overall inequality in Slovakia to a much greater extent than changes in the Government's social safety net or in individual's decisions about household formation.
>> Download PDF
Competition and Enterprise Performance in Transition Economies: Evidence
Wendy Carlin; Mark Schaffer; Steven Fries; Paul Seabright
WP No. 376
(May, 2001)
Abstract: This paper uses a survey of 3,300 firms in 25 transition countries to shed light on the factors that influence restructuring by firms and their subsequent performance as measured by growth in sales and in sales per employee over a three-year period. We begin by surveying what a decade of transition has taught us about the factors that determine how firms respond to the new market environment. We go on to analyse the impact on performance of ownership, soft budget constraints, the general business environment and a range of measures of the intensity of competition as perceived by a firm. We find that competition has an important and non-monotonic effect on the growth of sales and of labour productivity: some degree of perceived market power is associated with higher sales growth, but competitive pressure is also important. Similar competition effects are found upon firms' decisions to develop and improve their products, but market power has an unambiguously negative impact on purely defensive (cost-reducing) restructuring activity. New firms have grown relatively fast, but among old firms ownership per se has no significant relationship to performance (though state-owned firms have engaged in significantly less development of new products). Soft budget constraints have a broadly negative and the business environment a broadly positive impact on restructuring and performance.
>> Download PDF
Jel Codes: L1, L33, P0
Keywords: competition.restructuring,privatization,soft budget constraints, business environment
Why More is Actually Less: New Interpretations of China's Labor-Intensive FDI
Yasheng Huang
WP No. 375
(May, 2001)
Abstract: The fact that China is the second largest recipient of FDI in the world has been heralded by economists and government officials alike as one of the crowning achievements of Chinese economy. This paper questions this perspective. The paper focuses on FDI from ethnically Chinese economies (ECEs), which has financed China's labor-intensive industries and its export growth. First, the paper shows that the conventional wisdom about why China attracts so much labor-intensive FDI is flawed. Second, the paper offers what might be called an institutional foundation argument to explain the phenomenon of China's labor-intensive FDI. Labor-intensive FDI, according to this argument, is fundamentally driven by a political pecking order of firms in China that systematically disadvantages indigenous private firms both financially and legally. Labor-intensive FDI rises to alleviate the liquidity constraints afflicting Chinese private firms as efficient private entrepreneurs have no choice but to cede their claims o in future cashflows to raise financing for their businesses.
>> Download PDF
Keywords: FDI, capitol market, transitional economies
Economic Fragmentation and FDI in China
Yasheng Huang
WP No. 374
(May, 2001)
Abstract: China is one of the most popular investment destinations in the world. This paper argues that FDI inflows into China are in fact driven by some fundamental inefficiencies in the Chinese economy. Specifically, one of the inefficiencies has to do with a high level of fragmentation of both goods and asset markets. This fragmentation increases demand for FDI both because market fragmentation makes indigenous Chinese firms uncompetitive and because market fragmentation creates more investment opportunities for the mobile foreign capital. This paper is a chapter from a larger book-length research project, tentatively entitled, Selling China: The Institutional Foundation of Foreign Direct Investment During the Reform Era.
>> Download PDF
Keywords: FDI, capital market, transitional economies
Earnings Disparities in the Czech Republic: Evidence of the Past Decade
Jiri Vecernik
WP No. 373
(May, 2001)
Abstract: Wage and income surveys covering the period 1989-1999 are used to display changes in inequality of earnings and main factors of disparities. In the first part, increasing differences in the Czech Republic and the decreasing weight of demographic characteristics in wage structure are observed. In the second part, available evidence on cross-national comparison is gathered in order to demonstrate the increasing similarity of the Czech wage structure with that in Western countries. We document that the introduction of a market economy has led to an increase in earnings disparities more similar to those in the West; the "communist" demographic determination of earnings is being replaced to a great extent by "capitalist" market characteristics; and ownership disparities, instead of political privileges, have come to the fore. Thus, the overall earnings structure underwent systemic changes and approaches the Western pattern.
>> Download PDF
Jel Codes: J31
Keywords: earnings disparities, returns to education, gender gap, transition in the Czech Republic
Economic Reform, Democracy and Growth During Post-Communist Transition
Jan Fidrmuc
WP No. 372
(March, 2001)
Abstract: This paper explores interactions between growth, economic liberalization and democratization during transition. The results can be summarized as follows: (1) Liberalization has a strong positive effect on growth during transition (also when controlling for endogeneity of liberalization in growth). (2) Democracy facilitates economic liberalization. (3) Because of its effect on liberalization, democracy has a positive overall effect on growth. Nevertheless, the marginal effect of democracy (after controlling for progress in economic liberalization) is negative during early transition. (4) The progress in democratization in turn depends on past economic performance in a surprising manner-the relationship between past growth and subsequent democracy appears negative. (5) Economic performance is an important determinant of electoral outcomes and, in particular, of support for reforms.
>> Download PDF
Jel Codes: E63, O11, P26, P27
Keywords: Democracy, LIberalization, Economic Performance and Elections
Do Multinational Enterprises Substitute Parent Jobs for Foreign Ones? Evidence
Jozef Konings; Alan Murphey
WP No. 371
(April, 2001)
Abstract: This paper analyzes the demand for labor by home multinational enterprises (MNEs) in Europe. To this end we use a unique firm level panel data set of more than 1,200 European multinational enterprises and their subsidiaries that are located in either the European Union, Central and Eastern Europe or both. We investigate whether employment in the MNEs' subsidiaries are substitutes for home employment or in other words we investigate whether European MNEs can easily relocate employment between the parent and their daughter(s). Our main findings can be summarized as follows: (i) We find evidence for substitution effects between parent and foreign employment. A decline of 10% in MNE affiliate's wage costs is associated with a decline in parent employment of between 1.5% and 2% on average. (ii) This effect is mainly driven by firms that operate in the manufacturing sector. Moreover, the substitution effects mainly take place between EU parents and their affiliates located within the EU, rather than affiliates located in Central and Eastern Europe. (iii) We also report results for the non-manufacturing firms, where we find no substitution effects between parents and daughters in the service sectors, while we do find positive substitution effects between parents and their affiliates in Central and Eastern Europe for the firms operating in the wholesale trade and construction sectors. Our results suggest that on average the competition from low wage countries in Central and Eastern Europe did not contribute to a relocation of domestic jobs to Central and Eastern Europe. Substitution effects do take place, however, they mainly occur between parent firms and their affiliates that are located in the European Union.
>> Download PDF
Jel Codes: F23, J23
Keywords: relocation, multinational enterprises, labor demand
From Needs to the Market: Changing Inequality of Household Income in the Czech Transition
Jiri Vecernik
WP No. 370
(April, 2001)
Abstract: Statistical income surveys are used to document systemic changes in distribution and redistribution of household income and its determinants over the period 1988-1996. First, the growing difficulties facing income surveys under the democratic regime are considered. Secondly, the substantive meaning of various income indicators and their relation to the social and economic situation is discussed. Next, growing disparities in income after 1989 and the shift away from demographic factors (numbers of active earners and children, age) to socio-economic factors (education, branch, occupation) are displayed. The fourth part documents the increased redistribution of income achieved through taxes and social benefits. The fifth part compares the Czech case with Western countries in order to evaluate the extent to which income distribution has adjusted to the market economy. The conclusion offers a summary of main findings and discusses some additional resources of family welfare during the transition period.
>> Download PDF
Jel Codes: I30, J30
Keywords: Household income, income inequality, Czech Republic, redistribution, market adjustment
Competition and Corporate Governance: Substitutes or Compliments? Evidence from the Warsaw Stock Exchange
Irena Grosfeld; Thierry Tressel
WP No. 369
(March, 2001)
Abstract: In this paper we analyse the impact of product market competition and ownership structure on corporate performance. We focus on the firms listed on the Warsaw Stock Exchange, which are either privatised or newly created firms. First, we study the separate effects of competition and ownership concentration on firm level productivity growth. Next, we investigate their interaction: are they substitutes or complements? We take care of the crucial problem of potential endogeneity of explanatory variables by using GMM estimators proposed by Arellano and Bond (1991). We also control for several types of selection bias that could affect the productivity levels. Moreover, we control for industry fixed effects affecting the rate of growth of productivity. Our results show that product market competition has a positive and significant impact on performance. Concerning the effect of ownership concentration, we find a U-shaped relationship with performance. Firms with relatively dispersed ownership (no shareholder with more than 20 per cent of voting shares) and firms, in which one shareholder has more than 50 per cent of voting shares, have higher productivity growth than firms with an intermediate level of ownership concentration. This correlation between concentration of ownership and productivity growth is not explained by the type of the controlling shareholder. Finally, product market competition and good governance tend to reinforce each other rather than to be substitutes. Competition has no significant effect on performance for the firms with 'poor' governance; on the contrary, it has a significant positive effect in the case of firms with 'good' corporate governance.
>> Download PDF
Jel Codes: D24, G32, L1, P2
Multinational Corporations as Catalyst for Industrial Development: The Case of Poland
Carlo Altomonte; Laura Resmini
WP No. 368
(February, 2001)
Abstract: In a recent model Markusen and Venables (1999) describe the conditions under which foreign direct investments (FDI) can act as a catalyst for local industrial development. We apply this framework to the case of Poland, allowing for the entry of multinationals in both intermediates and consumption goods industry. We check these assumptions against empirical evidence, exploring agglomeration patterns of multinational and domestic firms at the regional level, and constructing an econometric model able to measure the interactions between the two classes of firms. We find evidence going in the direction of both direct spill-overs and backward and forward linkages between domestic and multinational firms.
>> Download PDF
Jel Codes: F12, F15, F21, P20
Keywords: economic geography, FDI, transition economies
A Multi-Task Theory of the State Enterprise Reform
David D. Li; Yijiang Wang; Chong-en Bai; Zhigang Tao
WP No. 367
(March, 2001)
Abstract: During transition, maintaining employment and providing a social safety net to the unemployed are important to social stability, which in turn is crucial for the productivity of the whole economy. Because independent institutions for social safety are lacking and firms with strong profit incentives have little incentives to promote social stability due to its public good nature, state-owned enterprises (SOEs) are needed to continue their role in providing social welfare. Charged with the multi-tasks of efficient production as well as social welfare provision, SOEs continue to be given low profit incentives and consequently, their financial performance continues to be poor.
>> Download PDF
Jel Codes: D21, J23, L20, P20, P23, P31
Keywords: Dual track reform, multi task, social stability, unemployment
Confidence Building in Emerging Stock Markets
Enrico C. Perotti; Luc Laeven; Pieter van Oijen
WP No. 366
(December, 2000)
Abstract: Investor confidence is a major determinant of financial integration for emerging markets and their stock prices. We investigate whether privatization also has a significant effect on emerging stock market development through the resolution of policy risk. We argue that a sustained privatization program represents a major test of political commitment to market oriented reforms and to safer private property rights. The evidence suggests that progress in privatization gradually leads to increased confidence as measured by perceived policy risk. Moreover, increased confidence has a strong effect on local market development and excess returns. We conclude that, while liberalization is a necessary condition for market development, the resolution of policy risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies.
>> Download PDF
Incentive Contracting versus Ownership Reforms: Evidence from China's Township and Village Enterprises
Chun Chang; Brian McCall; Yijiang Wang
WP No. 365
(November, 2000)
Abstract: We use a unique data set to study the implications of introducing managerial incentives and, in addition to incentives, better defined ownership for a firm's financial performance. The data set traces the ten-year history of 80 Chinese rural enterprises, known as township and village enterprises. During this period, these originally (mostly) community owned, local government controlled socialist collective firms were first allowed to introduce managerial incentive contracts and then to change to ownership forms of more clearly defined income and control rights. The study finds that introducing managerial incentives had a positive but statistically insignificant effect on these firms' performance measured by accounting return on assets or return on equity. It also finds that the performance is significantly better under ownership forms of better-defined rights than under community ownership even when the latter is supplemented with managerial incentive contracts. The findings shed lights on some important theoretical and policy issues.
>> Download PDF
Individual Pay and Outside Options: Evidence from the Polish Labour Force
Fiona Duffy; Patrick P. Walsh
WP No. 364
(March, 2000)
Abstract: Using Polish Labour Force Survey data, we examine whether competition for labour has induced individual pay to depend on outside options, availability and quality of jobs. Exploiting the lack of inter-regional job and worker flows we estimate the elasticity of individual pay, amongst a rich set of individual characteristics, to be approximately -0.1 for local unemployment (job shortages) and + 0.1 for local job reallocation (restructuring). Variations in local labour market conditions explain approximately 50 per cent of the differences in expected individual earnings across regions, while differences in inherited human capital and occupation structures explain the rest.
>> Download PDF
Investment, Credit Rationing and the Soft Budget Constraint: Evidence from Czech Panel Data
LubomÃr LÃzal; Jan Svejnar
WP No. 363
(February, 2001)
Abstract: Strategic restructuring of firms through investment is key to a transition from plan to market. Using data on industrial firms in the Czech Republic during 1992-98, we find that (a) foreign owned companies invest the most and cooperatives the least, (b) private firms do not invest more than state-owned ones and (c) cooperatives and small firms are credit rationed. Given the large volume of non-performing bank loans to firms and the high rate of investment of large state owned and private firms, our findings also suggest that these firms operate under a soft budget constraint. Estimates of a dynamic model, together with the support for the neoclassical model, suggest that firms started to behave consistently with profit-maximization.
>> Download PDF
Jel Codes: D21, D92, E22, G32, P21
Keywords: Investment, restructuring, credit rationing, soft budget constraint, ownership, legal status, transition to a market economy
A Network Perspective on Inter-Organizational Transfer of R and D Capabilities: A Study of International Joint Ventures in Chinese Automobile Industry
Zheng Zhao; Jaideep Anand; Will Mitchell
WP No. 362
(February, 2001)
Abstract: Multinational enterprises' transfer of RandD capabilities to their international joint ventures in the less developed countries has been an emerging phenomenon. The purpose of this study is to understand the transfer of RandD capabilities between organizations embedded in drastically different organizational contexts using a network perspective. We identified different networks involved in the RandD capability transfer process from the perspectives of source organization, recipient organization and the interface between them, and analyzed the impact of different attributes of these networks on the effectiveness of RandD capability transfer, based on the notion that RandD capabilities are largely collective knowledge.
>> Download PDF
Keywords: RandD capabilities, networks, international knowledge transfer, joint
Network Restructuring and Firm Creation in East-Central Europe: A Public-Private Venture
Gerald A. McDermott
WP No. 361
(December, 2000)
Abstract: The transformation of East-Central Europe deepens the debate about firm creation in a unique way: how do approaches to institutional creation impact the creation of firms? This paper theoretically and empirically explores this question by offering an alternative, embedded politics approach to explain the sharp contrasts in policy and SME manufacturing growth in the Czech Republic (CR) and Poland. Whereas Polish policies of gradual privatization and state intervention into restructuring led to significant growth in new firms, Czech policies of rapid, mass privatization produced stagnation. I argue that institutional experiments based on public actors becoming financial partners and conflict mediators enhance the ability of network actors to learn and monitor one another, and thus experiment with new forms of organization. Poland facilitated such institutional experiments not only in the ways it approached the creation of market institutions, but also in the ways it decentralized power and resources to local and regional political actors. The study utilizes data on manufacturing networks, privatization, bankruptcy, and regional government reforms collected over the past six years.
>> Download PDF
Keywords: Networks, institutions, entrepreneurship
Responses of Private and Public Schools to Voucher Funding: The Czech and Hungarian Experience
Randall K. Filer; Daniel Münich
WP No. 360
(October, 2000)
Abstract: A state monopoly in schooling followed the collapse of communism in Central Europe. The centrally planned system was abandoned. Systems comparable with educational voucher scheme, also known as school choice system, were introduced in the Czech Republic and Hungary in the early 1990s. The newly established system of school financing allocates public funds according to the number of students enrolled in a school. Accredited non-state schools, private and religious, are also eligible for public subsidies. The scope and the form of these reforms represent a unique opportunity to test conflicting hypotheses of proponents and opponents of the voucher scheme. In this empirical analysis, we test fundamental theoretical predictions of the voucher model. Specifically, we test: i) whether non-state schools are established at locations where the supply of educational opportunities provided by state schools is low or of low quality, ii) whether state and non-state schools in such a system respond to changes in demand for education, and iii) whether state schools respond to competition from non-state schools. We use detailed school level data on the whole population of schools and data on regional conditions. In our econometric model we estimate education value added, instead of relying on absolute quality of school graduates. We find that non-state schools emerge at locations with excess demand and lower quality state schools. We also find that greater competition from non-state schools creates incentives for state schools with the result that state schools slightly improve the quality of educational inputs used and significantly improve their output, quality of graduates. As concerns the technical schools, we find that non-state schools react to regional labor market conditions in terms of technical branch premium and unemployment rate. We do not find such reactions to market signals by state schools. We introduce this analysis with a review of non-state schools' development in the Czech Republic and Hungary during the 1990s.
>> Download PDF
Jel Codes: H52, I22, J24
Keywords: Educational finance, government expenditures and education, occupational choice, labor productivity
Labor Market Uncertainty and Private Sector Labor Supply in Russia
Steven Stillman
WP No. 359
(November, 2000)
Abstract: The development of a vibrant private sector has been one of the key failures of the transitional period in Russia. This paper develops a theoretical and empirical model of individual labor supply behavior under uncertainty, and estimates this model using data from the Russian Longitudinal Monitoring Survey for the years 1994 - 1996 and 1998. As hypothesized, a decrease in private sector earnings variability is estimated to increase the likelihood of private sector employment for individuals with constrained consumption smoothing ability. Evidence of ex-ante intra-household risk sharing is also found with individuals reducing their exposure to uncertainty by diversifying the portfolio of jobs held by their household.
>> Download PDF
Jel Codes: C35, D10, J23, P36
Keywords: Private sector, labor supply, Russia, uncertainty, intra-household
Russian Roulette- Expenditure Inequality and Instability in Russia, 1994-1998
Brando Jovanovic
WP No. 358
(September, 2000)
Abstract: This paper uses the second phase of the Russian Longitudinal Monitoring Survey to investigate the changes in expenditure inequality and instability in Russia between the autumn of 1994 and the autumn of 1998. The expenditure distribution is stable in spite of the economic and political turmoil Russia is going through. However, that does not imply much economic stability. Households' expenditure fluctuated considerably, with over 60 percent of the population's expenditure either more than doubling or falling to less than half their previous levels. Only about 10 percent of all households experienced an expenditure shock of less than 10 percent. The measured level of expenditure mobility is very high. This raises the question whether the observed mobility is in fact the expenditure instability. Distinguishing between the two is crucial for policy makers. While the mobility is often viewed as favorable, the high instability may affect the incentives of Russians to support the economic reforms, acquire human capital, and undertake entrepreneurial activities.
>> Download PDF
Keywords: expenditure, enequality, mobility, transition, Russia
Dealing with the Bad Loans of the Chinese Banks
John P. Bonin; Yiping Huang
WP No. 357
(January, 2001)
Abstract: Chinese banks suffer from serious financial fragility manifested by high proportions of non-performing loans and low capital-adequacy ratios. A key policy introduced recently by the Chinese government to reduce financial risks is the establishment of four asset management companies (AMCs) for dealing with bad loans. Drawing on the experiences of the Resolution Trust Corporation in the United States and bank restructuring in the Central European transition economies, we argue that the original AMC design will not be successful in resolving the existing non-performing loans (NPLs) nor will it prevent the creation of new bad loans. We recommend a modification of the current proposal that redefines the relationships between the parent banks and the AMCs by transferring the deposits of problem enterprises along with their NPLs from parent banks to AMCs.
>> Download PDF
Jel Codes: G21, P34
Keywords: bad loans, stae-owned banks, asset management companies, China
Retail Banking in Hungary: A Foreign Affair?
John P. Bonin; Istvan Abel
WP No. 356
(December, 2000)
Abstract: Over the last decade, Hungary has experienced more foreign bank entry than any country in world, starting with foreign greenfield operations and then followed by the privatization of four of its largest banks to strategic foreign owners. Currently about two thirds of all banking assets in Hungary are foreign owned; the only major bank without a foreign owner is Országos Takarékpénztár és Kereskedelmi Bank (OTP). During a decade in which lending to households declined in real terms until recently and household deposits remained relatively steady at around 20% of GDP, OTP lost its monopoly in retail banking to foreign-owned banks. By the end of the decade, OTP held shares of just over 50% in both household deposit and credit markets. In the last half of the decade, foreign banks increased substantially their market shares and currently hold more than 40% of all household deposits and about 40% of all loans to households. In this paper, we identify the important role played by foreign greenfield operations in intermediation within the household sector, especially from 1997. We provide evidence that, once they take control of formerly state-owned banks, strategic foreign investors move aggressively into retail banking. As the decade came to a close, retail banking was a growth industry in Hungary and foreign-owned banks were actively participating in both markets. Foreign entry provided healthy competition to OTP and prodded this widely held domestically controlled bank to develop new products and better services for Hungarian households. Over the last half of the decade, bank cards have been introduced to Hungarian households and transactions using these cards have grown by a factor of more than five. Over half of the population uses bank cards twice a month on average, almost exclusively for cash withdrawals from their current accounts. By investing heavily in information technology and using its extensive branch network, OTP has become the market leader in this new, growing business with more than 40% of all ATMs and bank cards issued in Hungary and more than 70% of all bank card transactions. Our analysis of OTP's behavior indicates that domestically controlled banks with local expertise may have a significant role to play in retail banking in small, open transition (or emerging) economies.
>> Download PDF
Jel Codes: F3, G1, P2
Keywords: hungarian banking, retail banking in emerging markets, foreign bank entry
Optimal Speed of Transition: Micro Evidence from the Czech Republic
Stepan Jurajda; Katherine Terrell
WP No. 355
(December, 2000)
Abstract: We consider the growing theoretical literature on the optimum speed of transition (OST) and explore its validity using micro data from a transition economy. First, we ask whether the OST theories focus on the empirically most important job and worker reallocation flows. Second, we examine the relationship between these flows suggested by the theory. The empirical evidence from the Czech Republic appears to match the theory's prescriptions. It underscores the main policy implication of the Aghion and Blanchard (1994) model that early support for private job creation is the recipe for a successful transition.
>> Download PDF
Political Instability and Growth in Dictatorships
Jody Overland; Kenneth L. Simons; Michael Spagat
WP No. 354
(November, 2000)
Abstract: We model growth in dictatorships facing each period an endogenous probability of ``political catastrophe'' that would extinguish the regime's wealth extraction ability. Domestic capital exhibits a bifurcation point determining economic growth or shrinkage. With low initial domestic capital the dictator plunders the country's resources and the economy shrinks. With high initial domestic capital the economy eventually grows faster than is socially optimal.
>> Download PDF
Jel Codes: D9, H, O1
Keywords: dictatorship, growth, political economy, bifurcation
Disintegration and Trade
Jarko Fidrmuc; Jan Fidrmuc
WP No. 353
(November, 2000)
Abstract: The gravity model of trade is utilized to assess the impact of disintegration on trade. The analysis is based on three recent disintegration episodes involving the former Soviet Union, Yugoslavia and Czechoslovakia. The results point to a very strong home bias around the time of disintegration, with intra-union trade exceeding normal trade approximately 43 times in the former Soviet Union and Czechoslovakia, and 24 times in the former Yugoslavia. Disintegration was followed by a sharp fall in trade intensity. Nevertheless, there is a considerable hysteresis in economic relations, with trade flows among the former constituent Republics still between two and 30 times greater than normal trade in 1998.
>> Download PDF
Jel Codes: F13, F15, F41
Keywords: Gravity model, international trade, disintigration
Social Capital and Entrepreneurial Performance in Russia: A Panel Study
Bat Batjargal
WP No. 352
(December, 2000)
Abstract: Drawing on the social embeddedness perspective, this paper examines the impact of entrepreneurs' social capital on their firm performance in post-Soviet Russia. Based on face-to-face interviews with 75 Russian entrepreneurs in 1995, and the follow-up study in 1999, the study contrasts the effects of structural embeddedness, relational embeddedness and resource embeddedness on firm performance. The main finding is that relational embeddedness and resource embeddedness have direct positive impacts on sales growth, profit margin and return on assets in contrast to structural embeddedness that has no impact on performance. The research implies that further research should focus on finding out what dimensions of social capital affect what performance indicators and how they affect. The practical implication is that entrepreneurs should recruit more resource-rich weak ties into their personal networks.
>> Download PDF
Keywords: social capital, firm performance, Russia
Entrepreneurial Versatility, Resources and Firm Performance in Russia: A Panel Study
Bat Batjargal
WP No. 351
(December, 2000)
Abstract: Drawing on the Upper-Echelons Perspective and Resource-Based View of the firm this paper explores effects of human-based resources of entrepreneurs, viz., social capital, human capital and entrepreneurial versatility, on firm performance in the context of a large transition economy - the Russian Federation. The empirical data is comprised of the face-to-face interviews with 75 Russian entrepreneurs in 1995 and the follow-up interviews with 56 original respondents in 1999. The finding suggests that entrepreneurial versatility have stronger positive impacts on firm performance in comparison to general human-based
>> Download PDF
Keywords: entrepreneurial versatility, resources, firm performance, Russia
The Dynamics of Entrepreneurial Networks in a Transitional Economy: The Case of Russia
Bat Batjargal
WP No. 350
(December, 2000)
Abstract: The dynamics of personal networks of entrepreneurs in Russia are explored in this paper. Drawing on the social embeddedness perspective and social network theory, I examine the impacts of initial network range, previous occupational status of entrepreneurs and firm performance on the changes in structural, relational and resource dimensions of entrepreneurial social capital over time. The face-to-face interviews with 75 Russian entrepreneurs in 1995 and the follow-up study in 1999 comprise the empirical data of the paper. The dynamics of social capital are determined by the initial network range and firm performance: the better the initial network and firm performance the less the likelihood of increase in various elements of entrepreneurs' social capital.
>> Download PDF
Keywords: dynamics, entrepreneurial networks, Russia
RandD and Technology Spillovers via FDI: Innovation and Absorptive Capacity
Yuko Kinoshita
WP No. 349
(November, 2000)
Abstract: Two faces of RandD (innovation and learning) and technology spillovers from FDI (foreign direct investment) on a firm's productivity growth are examined in this paper. Using firm-level panel data on Czech manufacturing firms between 1995 and 1998, I find that: (i) the learning effect of RandD is far more important than the innovative effect in explaining the productivity growth of a firm, (ii) there is no evidence of technology spillovers to local firms from having a foreign joint venture partner, (iii) positive spillovers from FDI are found in electrical machinery and radio and TV sectors, which are also active investors in innovative RandD.
>> Download PDF
Microeconomic Aspects of Economic Growth in Eastern Europe and the Former Soviet Union, 1950-2000
Sergei Guriev; Barry W. Ickes
WP No. 348
(November, 2000)
Abstract: The theme of this paper is the microeconomics of economic growth in Central and Eastern Europe (CEE) and the Newly Independent States (NIS) over the period 1950-2000. The key structural change in this region is the end of the socialist regime in 1989 and 1992, and the subsequent attempt at transition to a market economy. We begin the paper with an examination of the key legacies from the socialist period. We then examine the key microeconomic actors in transition economies: households, enterprises, and government officials. Although there are many common processes at work, differences in economic performance tend to coincide with the geographical divide. Legacies play an important part. We also argue that differences in openness also plays an important role in generating different outcomes. These factors, combined with defects in the political and legal system, have given rise to a vicious circle of resistance to reform in the NIS.
>> Download PDF
Effective versus Statutory Taxation: Measuring Effective Tax Administration in Transition Economies
Mark E. Schaffer; Gerard Turley
WP No. 347
(November, 2000)
Abstract: Wide differences between effective or realised average tax rates and tax yields that would result if statutory tax rates were strictly applied indicate tax compliance and collection problems. Due to the greater politicisation of tax systems in transition economies (TEs), we would expect the shortfalls in effective tax yields for TEs to be larger than a benchmark for the mature market economies where tax systems are well established, the administrative capacity is stronger and tax arrears are tolerated less frequently. The methodology involves calculating an effective/statutory (E/S) tax ratio. Initial results indicate that the leading TEs have E/S ratios similar to the EU average. We find a positive correlation between progress in transition and effective tax administration, as measured by our E/S ratio. For slow reformers, the effectiveness of tax collection appears to vary with the extent of state control. Those TEs that have maintained the apparatus of the state have done well in tax collection compared to those countries where there is evidence of state decay. This raises a number of broad policy issues relating to the speed of transition, the interaction of politics and economic reforms, the capacity of the state to govern and the need for market institutions to develop.
>> Download PDF
Jel Codes: H2, H32, H87, P5
Keywords: statutory taxation, average tax rate, tax collection, effective administration, transition economies
Objectives and Constraints of Entrepreneurs: Evidence from Small and Medium Size Enterprises in Russia and Bulgaria
Francesca Pissarides; Miroslav Singer; Jan Svejnar
WP No. 346
(October, 2000)
Abstract: We analyze the principal objectives and constraints of small and medium enterprises (SMEs), using data from a survey of 437 owners and top managers (CEOs) of SMEs in Russia and Bulgaria. The CEOs display similar views and identify a small number of specific constraints as being the most important ones. The constraint on external financing is a particularly serious one and the SMEs use internal finance as a fall-back option. Our econometric analysis indicates that characteristics of the entrepreneur, firm and the firm's environment are important but varying determinants of which constraints are identified as the most important ones. Our results also suggest that the nature of disruption of production and of the financial constraints after the fall of central planning was more ubiquitous and all-encompassing in Russia than in Bulgaria.
>> Download PDF
Jel Codes: D2, G3, L2, L5, P2
Corruption and Anticorruption in the Czech Republic
LubomÃr LÃzal; Evzen Kocenda
WP No. 345
(October, 2000)
Abstract: It is widely acknowledged that corruption has negative impact on economy and society. Transition process in the Central and Eastern Europe (CEE) uncovered dormant possibilities for corruption that consequently required appropriate steps to be taken against. We attempted to document the state of corruption in the Czech Republic and the measures introduced to fight it. We covered sectors of society and economy according to their importance in the prevention of a corruption and a consequential hazard to the society. We also described the governmental concept of anti-corruption measures and outlined achievements and failures of such a program. The overall impression favors persistent presence of corruption within the society and economy in the Czech Republic. The state of corruption in the country, measured by the Corruption Perception Index, presents a serious problem since the index does not improve as transition process advances. Numerous comparative studies, however, suggest that corruption is more prominent feature in a number of other transition countries. We believe that the institutional framework to prevent and fight corruption appears to be improving.
>> Download PDF
Jel Codes: H50, I20, K42, O17, P27, Z13
Keywords: corruption, intitutions, transition, hidden economy, administration
The Effects of Foreign Direct Investment on Domestic Firms: Evidence from Firm Level Panel Data in Emerging Economies
Jozef Konings
WP No. 344
(October, 2000)
Abstract: This paper uses firm level panel data to investigate empirically the effects of foreign direct investment (FDI) on the productivity performance of domestic firms in three emerging economies of Central and Eastern Europe-Bulgaria, Romania and Poland. To this end, a unique firm level panel data set is used with detailed information on foreign ownership at the firm level. Two main questions are addressed: 1) Do foreign firms perform better than their domestic counterparts? 2) Do foreign firms generate spillovers to domestic firms?
>> Download PDF
Jel Codes: D24, F14, O52, P31
Keywords: foreign investment, spillovers, emerging countries, panel data
On the Identification of Relative Wage Rigidity Dynamics
Patrick A. Puhani
WP No. 343
(October, 2000)
Abstract: We present a new and simple empirical methodology to identify relative wage rigidity dynamics. The methodology is applied to data from the Polish Labour Force Survey for the period 1994 to 1998. We estimate ceteris paribus changes in relative wage and unemployment differentials for various labour market defining characteristics. A simultaneous increase in the relative wage and the unemployment likelihood is defined as relative wage rigidity dynamic for a labour market characteristic. We find that the Polish wage structure generated hardly any rigidities between 1994 and 1998 nor did it reduce possibly existing rigidities during that period.
>> Download PDF
Jel Codes: J31, J64, P20
Keywords: wages, unemployment, rigidities, identification, Poland
The Determinants of Foreign Direct Investment in Transition Economies
Alan A. Bevan; Saul Estrin
WP No. 342
(October, 2000)
Abstract: Using a panel dataset containing information on FDI flows from market to transition economies, we establish the determinants of FDI inflows to Central and Eastern Europe: country risk, unit labour costs, host market size and gravity factors. In turn, we find country risk to be influenced by private sector development, industrial development, the government balance, reserves and corruption. By introducing structural shift dummy variables for key announcements of progress in EU accession we show that announcements have impacted directly upon FDI receipts but have not influenced country credit ratings. The Agenda 2000 announcement by the European Commission induced a bifurcation between the 'first wave' transition countries and the remainder of our sample. The underlying dynamics of the process illustrate that increases in FDI improve country credit ratings with a lag, hence increasing future FDI receipts. Consequently we suggest that the accession progress has the potential to induce virtuous cycles for the frontrunners but may have serious consequences for the accession laggards.
>> Download PDF
Jel Codes: C33, F2, P27
Keywords: foreign direct investment, EU accession, transition economies
The Global Spread of Stock Exchange, 1980-1998
Klaus Weber; Gerald F. Davis
WP No. 341
(October, 2000)
Abstract: Nations opened local stock exchanges at a rapid pace during the late 1980s and 1990s, creating a channel for investment capital from wealthy industrial nations to "emerging markets" as well as a mechanism for institutional change in local economies. This study examines the local and global processes by which exchanges spread, examining all nations "at risk" during the 1980s and 1990s. We find that local factors influencing the creation of stock exchanges included the size of the economy (overall and relative to population size); the legacy of colonialism; and a recent transition to multi-party democracy. Global factors associated with creating exchanges included levels of prior investment by multinationals; IMF "structural adjustment" aid; centrality in trade flows; and regional "contagion." In contrast to prior work in financial economics, we find no evidence for the influence of legal tradition, and contrary to the implications of dependency theory, we find no sign that foreign capital penetration affects the creation of exchanges. We also find no consistent evidence for the influence of stock exchanges on inequality or human development at the national level, above and beyond their effect on economic and population growth. The results indicate that globalization is usefully construed as a process analogous to institutional diffusion at the organization level.
>> Download PDF
Keywords: globalization, contagion, financial markets
The Costs and Benefits of Euro-sation in Central-Eastern Europe Before or Instead of EMU Membership
D. Mario Nuti
WP No. 340
(October, 2000)
Abstract: Countries unable or unwilling to join a Monetary Union can partly replicate membership effects through either a Currency Board or formal replacement of the domestic currency by the currency of the Union. Schemes of this kind have been introduced recently in Transition Economies. The net balance of costs and benefits involved, for the country and the common currency area, are shown to be an empirical question, depending on a number of conditions and primarily on the degree of monetary, real, and institutional convergence already achieved beforehand. Positive net advantages may derive from dollar/Euro-isation but should not be taken for granted.
>> Download PDF
Keywords: Euro, monetary union, dollarisation, exchange rate regimes, convergence, transition
Debt Overhang and Barter in Russia
Sergei Guriev; Igor Makarov; Mathilde Maurel
WP No. 339
(September, 2000)
Abstract: In this paper we study, both theoretically and empirically, the relationship between barter and the indebtedness of Russian firms. We build a model in which a firm uses barter to protect its working capital against outside creditors even when barter involves high transaction costs. The main innovation of our work is to allow renegotiation between the firm and its creditors. If the creditors are rational, they often agree to postpone debt payments in order to avoid destroying the firm's working capital. It turns out, however, that even if the firm cannot ensure it will not divert cash ex post, the outcome of renegotiation still provides ex ante incentives to use barter. We show that the greater the debt overhang, the more likely the use of barter, and although the possibility of debt restructuring reduces barter, it does not eliminate it altogether. We also discuss the role of the government bond market and weak bankruptcy legislation. The firm-level evidence is consistent with the model's predictions.
>> Download PDF
Keywords: barter, demonetisation, debt overhang, renegotiations
Firm Performance and the Political Economy of Corporate Governance: Survey Evidence for Bulgaria, Hungary, Slovakia and Slovenia
Patrick P. Walsh; Ciara Whelan
WP No. 338
(July, 2000)
Abstract: Using survey data for 220 traditional manufacturing firms over 7 years of transition and 4 CEE countries, we find firms that produced for the EU market under planning consistently outperform those that produced for the CMEA market. Within the previously CMEA market, the best firms were selected to outside privatisation and outperformed insider/state owned firms. Outside privatisation was resisted in EU oriented firms and ownership was found to have no effect on performance. We argue that insider/state ownership in previously CMEA and EU markets builds up political support for the market system during its initial stages, ensuring its long-term success.
>> Download PDF
Jel Codes: P52
Keywords: firm performance, political economy, privatisation and demand shocks
Investment and Instability
Nauro F. Campos; Jeffrey B. Nugent
WP No. 337
(May, 2000)
Abstract: Although recent research has repeatedly found a negative association between investment and political instability, the existence and direction of causality between these two variables has not yet been investigated. This paper empirically tests for a causal and negative long-run relationship between political instability to investment. It finds that there is a robust causal relation from instability to investment, and that it is positive. In other words, an increase in political instability Granger causes an increase in investment. We identify three different theories that can explain this result.
>> Download PDF
Jel Codes: D72, E23, O40
Keywords: political instability, aggragate investment, Granger causality
The Evolution of the Insurance Sector in Central and Eastern Europe and the Former Soviet Union
Robert B.K. Pye
WP No. 336
(August, 2000)
Abstract: This paper provides a detailed profile of the development of the insurance industry between 1989-98 in the countries of Central and Eastern Europe (CEE) and the New Independent States (NIS) of the former Soviet Union. In doing so, the author utilizes various sources of data to describe the nature of the insurance market in the region. On an individual host country basis, attention is given to data on premium income with respect to both life and non-life coverage, an analysis of average annual growth rates, as well as insurance density and penetration rates by type of coverage. The paper also addresses a number of issues pertaining to the competitive environment, including the legal conditions for insurance operators, a profile of the key players, and the role of foreign insurers operating within the region. The paper concludes by identifying the three main trends of the insurance industry in the region, the associated policy implications of each, as well as the need for future research.
>> Download PDF
Institutional Technology and the Chains of Trust: Capital Markets and Privatization in Russia and the Czech Republic
Bruce Kogut; Andrew Spicer
WP No. 335
(August, 2000)
Abstract: The introduction of mass privatization policies in Russia and the Czech Republic depended on the creation of impersonal capital markets to finance the needs of privatized companies and to provide a secondary 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. Privatization created the incentives to destroy the financial markets critical to its success. A comparative case analysis of post-privatization market formation in both these countries demonstrates that the functional necessity for these markets does not engender 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.
>> Download PDF
The Evolution of Market Integration in Russia
Daniel Berkowitz; David N. DeJong
WP No. 334
(August, 2000)
Abstract: We use a statistical model of commodity trade to measure the extent of integration between regional commodity markets within Russia. Monthly time-series data on regional commodity prices spanning 1994 through 1999 indicate substantial temporal fluctuations in integration over this period: an initial period of widespread integration gradually gave way to a period of disconnectedness in 1995 through 1997, which seems to have subsided by mid-1998. These temporal fluctuations exhibit strong statistical relationships with a host of aggregate variables; most notably, internal integration exhibits a strong negative relationship with international trade.
>> Download PDF
Jel Codes: P22, R1
Keywords: internal borders, temporal fluctuations
Efficiency and Market Share in Hungarian Corporate Sector
László Halpern; Gábor Kõrösi
WP No. 333
(July, 2000)
Abstract: One of the major tasks facing a transition economy is to create the competitive environment of a properly functioning market economy. It is widely believed that competition has a positive effect on efficiency, but the theoretical and empirical support is quite scarce. The objective of this paper is to investigate the link between competition and efficiency for the Hungarian corporate sector during various phases of the transition process. We employ frontier production functions for exploring differences among groups of firms, and for identifying the typical adjustment process of each group separately throughout the transition period until 1997. Groups are defined according to industries, size, and ownership. The estimated production functions indicate a gradual improvement in efficiency and a shift from decreasing to increasing returns to scale due to a growing share of small firms entering higher returns regimes. Market share can be explained by the degree of internal and external competition and by the efficiency of the firm. Transitional recession in 1990-1 was followed by a fast consolidation period, with rapidly increasing firm level efficiency and improving returns to scale. This consolidation period ended in 1994-5, after that mean firm level efficiency only changed slowly. Massive investments largely increased the market share of the better performing firms and sectors, resulting in rapid economic growth. However, this economic growth may become vulnerable if productive efficiency fails to improve faster.
>> Download PDF
Jel Codes: C23, D21, D24
Keywords: firm in transition economy, production functions, efficiency
Search-Money-and-Barter Models of Financial Stabilization
S.I. Boyarchenko; S.Z. Levendorskii
WP No. 332
(July, 2000)
Abstract: A macroeconomic model based on search-theoretical foundations is built to show that in an economy with structural deficiencies of the Russian Virtual Economy, money substitutes appear as a result of optimizing behavior of agents. Moreover, the volume of money substitutes is typically large, and it is impossible to reduce their volume significantly by using standard instruments as an increase of the money supply or decreasing the tax level. The result obtains for an economy, where there are large natural monopolies and widespread informal networks.
>> Download PDF
Worker Training in a Restructuring Economy: Evidence from the Russian Transition
Mark C. Berger; John S. Earle; Michal Skorepa
WP No. 331
(August, 2000)
Abstract: We use 1994-1998 data from the Russian Longitudinal Monitoring Survey (RLMS) to measure the incidence and determinants of several types of worker training and to estimate the effects of training on workers' interindustry, interfirm, and occupational mobility, their labor force transitions, and their wage growth in Russia compared to the U.S. We hypothesize that the shock of economic liberalization in Russia may raise the benefits of training, particularly retraining for new jobs, but uncertainty concerning the revaluation of skills may raise the costs, with an overall ambiguous effect on the amount of training undertaken. The RLMS indicates a lower rate of formal training than studies have found for the U.S., suggesting that the second effect dominates. Previous schooling is estimated to affect the probability of training positively, but the relationship is much stronger for additional training in the same field than for retraining for new fields, consistent with the hypothesis that schooling and training are complementary but become more substitutable in a restructuring environment. Foreign ownership of the firm also positively affects the probability of undertaking training, providing evidence of active restructuring by foreigner investors. Additional training in workers' current fields is estimated to reduce mobility and earnings, suggesting inertial programs from the pre-transition era. Retraining in new fields increases all types of worker mobility and has higher returns than those typically observed for training in the U.S., but it also raises the variance of earnings and the probability of employment, consistent with a search view of such retraining. Given the large returns to retraining, the efforts of Russian workers to learn new skills may increase as uncertainty is resolved and restructuring proceeds.
>> Download PDF
Keywords: training, retraining, on-the-job training, mobility, labor market, transition
Economic Development in Palanpur 1957-1993: A Sort of Growth
Peter Lanjouw
WP No. 330
(August, 2000)
Abstract: This paper asks why 30 years of economic development in the small north Indian village of Palanpur has been less positive than one might have hoped. While per capita incomes have risen and poverty has declined, progress has been painfully slow. Moreover there has been veritable stagnation in educational outcomes, and the village remains economically and socially stratified. Technological change in agriculture and non-farm diversification have been the main forces of economic growth during this period, but population growth has prevented per capita incomes from rising markedly. In addition, high and persistent levels of inequality in Palanpur have resulted in the capture of village-level collective institutions and the diversion of public programs. The village credit and tenancy markets have also evolved in response to the changing external economic environment. We suggest that over time the poor have become less able to participate in these markets.
>> Download PDF
Keywords: North India, rural developmemt, green revolution, poverty, inequality, social development
Trust, Organizational Controls, Knowledge Acquisition from the Foreign Parents, and Performance in Vietnamese International Joint Ventures
Marjorie A. Lyles; Le dang Doanh; Jeffrey Q. Barden
WP No. 329
(June, 2000)
Abstract: Successful adaptation in strategic alliances "calls for a delicate balance between the twin virtues of reliability and flexibility" [Parkhe 1998]. On one hand, the joint venture must be flexible enough to respond to the uncertainties of competitive business environments because it is not feasible to plan for every possible contingency. Yet, on the other hand, unfettered flexibility invites dysfunctional behavior, such as opportunism and complacency. This delicate balance accompanies a parallel balance between trust and control of the joint venture. The primary goal of this study is to empirically examine this relationship in the context of Vietnamese international joint ventures (IJVs) by building on the model of knowledge acquisition and performance in IJVs established by Lyles and Salk [1996]. This study makes three major contributions to the literature. First it confirms several findings of the original Lyles and Salk study [1996]. Second, we strengthen Lyles and Salk's original model by incorporating multiple measures of both interorganizational trust and control as independent variables. Finally, this study represents one of the first in-depth examinations of business in the emerging Vietnamese economy.
>> Download PDF
Comparative Advertising in the Global Marketplace: The Effects of Cultural Orientation on Communication
Zeynep Gurhan-Canli; Durairaj Maheswaran
WP No. 328
(August, 2000)
Abstract: This research examined the efficacy of one type of communication strategy, comparative advertising, in communicating product superiority to consumers across different cultures. In individualist cultures such as the United States, comparative advertising that highlights the superiority of the target brand is seen as more effective. However, in collectivist cultures such as Thailand, comparative advertising that highlights the similarity between brands is more likely to be effective. In addition, comparative advertising was more believable for unfamiliar brands in individualist cultures whereas comparison for familiar brands was more believable in collectivist cultures.
>> Download PDF
Post-Privatization Enterprise Restructuring
Morris Bornstein
WP No. 327
(July, 2000)
Abstract: Post-privatization restructuring of former state-owned enterprises (FSOEs) encompasses both shorter-run "defensive" actions and longer-run "strategic" measures. Restructuring involves changes in corporate governance, organizational structure, management, labor, capital, technology, output, and sales. Various performance indicators may measure the results of restructuring, but care is required in the selection and interpretation of indicators. In the restructuring of FSOEs foreign strategic investors have many advantages over domestic investors. The study includes examples from experience in the Czech Republic, Hungary, and Poland.
>> Download PDF
Jel Codes: F23, G34, L33, P31
Keywords: privatization, corporate governance, enterprise restructuring, performance indicators, foreign direct investment
Who is Afraid of Political Instability?
Nauro F. Campos; Jeffrey B. Nugent
WP No. 326
(July, 2000)
Abstract: An unstable macroeconomic environment is often regarded as detrimental to economic growth. Among the sources contributing to such instability, the literature has assigned most of the blame to political issues. This paper empirically tests for a causal and negative long-term relation between political instability and economic growth, but finds no evidence of such a relationship. Sensitivity analysis indicates that there is a contemporaneous negative relationship and that, in the long run and ignoring institutional factors, the Sub-Saharan Africa group plays the determining role in steering this relationship into causal and negative.
>> Download PDF
Jel Codes: D72, E23, O40
Keywords: economic growth, political instability
Business Groups, the Financial Market and Modernization
Raja Kali
WP No. 325
(June, 2000)
Abstract: Business groups are an important aspect of the industrial organization of many developing countries. This paper develops a theory suggesting that they may be organizations that facilitate modernization in the presence of financial market constraints. An important function of the stock market is the diversification of risk that comes with specialized, productive technology. But in the face of serious information problems a well functioning stock market may fail to emerge, relegating the economy to a low productivity-poverty trap. Bilateral links between a firm and a group of others may be a more cost-effective way to achieve risk-sharing. Such business groups may be feasible when a full-fledged stock market is not. As modernization takes place, either because information problems become less severe or more firms enter the economy, business groups actually expand in size before being abruptly rendered obsolete by the stock market. This is consistent with empirical results from a number of emerging economies.
>> Download PDF
Jel Codes: L00, O14, O16, O17, P0
Keywords: technology choice, diversification, business groups, stockmarket
Restructuring with What Success? A Case Study of Russian Firms
Susan J. Linz
WP No. 324
(July, 2000)
Abstract: This case study of enterprise restructuring utilizes data collected from thirty-two former state-owned firms in Taganrog, Russia, in the summer and fall of 1999. These data are used to construct three composite measures of enterprise restructuring. When defined broadly to include several dimensions of the restructuring process, the "restructuring threshold" is achieved by half of the privatized firms participating in the project. The firms achieving this threshold are distributed across all industries included in the sample. Regardless of the composite measure used, more than one-third of the former state-owned firms participating in this project attained the "active" restructuring designation. The results indicate that (1) production assortment changes appear to be ongoing among those firms engaged in restructuring activities, (2) employment changes appear to involve a mixed strategy with regard to timely wage payments, workforce size, and the benefits package; and (3) outsider ownership is more prevalent among the group of firms designated as restructuring than among those firms that failed to achieve the "restructuring threshold." To put into perspective the economic and business environment in which these former state-owned firms operate, a comparison is made to a group of de novo firms that were surveyed under the auspices of the same project.
>> Download PDF
Jel Codes: L2, L33, P2, P42
Keywords: Russia, enterprise restructuring, privitization
Priorities and Sequencing in Privatization: Theory and Evidence from the Czech Republic
Nandini Gupta; John C. Ham; Jan Svejnar
WP No. 323
(May, 2000)
Abstract: While privatization of state-owned enterprises has been one of the most important aspects of economic transition from a centrally planned to a market system, no transition economy has privatized all its firms simultaneously. This raises the issue of whether governments strategically privatize firms. In this paper we examine theoretically and empirically the determinants of the sequencing of privatization. First, we develop new and adapt existing theoretical models in order to obtain testable predictions about factors that may affect the sequencing of privatization. In doing so, we characterize potentially competing government objectives as (i) maximizing sales revenue from privatization or public goodwill from transferring shares of firms to voters, (ii) increasing economic efficiency, and (iii) reducing political costs due to layoffs. Next, we use an enterprise-level data set from the Czech Republic to test the competing theoretical predictions about which firm characteristics affect the sequencing of privatization. We find strong evidence that more profitable firms were sold first. This suggests that the government sequenced the sale of firms in a way that is consistent with our theories of sale revenue maximization and/or maximizing public goodwill from subsidized share transfers to citizens. Our results are also consistent with Shleifer and Vishny's (1994) prescription for increasing efficiency when there are political costs to employment losses caused by privatization. We also find that the Glaeser-Scheinkman (1996) recommendations for increasing efficiency by privatizing first firms subject to large informational shocks are consistent with our results. Finally, our findings are inconsistent with the government pursuing a static Pareto efficiency objective. In addition to enhancing the general understanding of privatization, our evidence suggests that many empirical studies of the effects of privatization on firm performance may suffer from selection bias since privatized firms are likely to have observable and unobservable characteristics that make them more profitable than firms that remain under state ownership.
>> Download PDF
Liquidity, Volatility, and Equity Trading Costs Across Countries and Over Time
Ian Domowitz; Jack Glen; Ananth Madhavan
WP No. 322
(March, 2000)
Abstract: Actual investment performance reflects the underlying strategy of the portfolio manager and the execution costs incurred in realizing those objectives. Execution costs, especially in illiquid markets, can dramatically reduce the notional return to an investment strategy. This paper examines the interactions between cost, liquidity, and volatility, and analyzes their determinants using panel-data for 42 countries from September 1996 to December 1998. We document wide variation in trading costs across countries; emerging markets in particular have significantly higher trading costs even after correcting for factors affecting costs such as market capitalization and volatility. We analyze the inter-relationships between turnover, equity trading costs, and volatility, and investigate the impact of these variables on equity returns. In particular, we show that increased volatility, acting through costs, reduces a portfolio's expected return. However, higher volatility reduces turnover also, mitigating the actual impact of higher costs on returns. Further, turnover is inversely related to trading costs, providing a possible explanation for the increase in turnover in recent years. The results demonstrate that the composition of global efficient portfolios can change dramatically when cost and turnover are taken into account.
>> Download PDF
Keywords: privatization, government priorities, auctions, revenue maximization, probit analysis, selection bias.
Equilibrium Wage Arrears: Institutional Lock-In of Contractual Failure in Russia
John S. Earle; Michal Skorepa
WP No. 321
(October, 2000)
Abstract: We present a model of managerial choice of wage delays that implies a possibility of multiple equilibria in the level of arrears. Positive feedback arises because each employer's wage arrears choice has externalities for other employers by affecting worker quit, effort and protest behavior and the probability of legal penalties. We study the case of three equilibria, distinguishing two that are stable - the "punctual payment equilibrium" and the "late payment equilibrium" - and one unstable "critical mass equilibrium," a threshold of arrears in the local labor market beyond which even profitable firms may adopt the practice. Our econometric analysis of linked employer-employee data for Russia provides evidence that workers' responses to wage delays are attenuated by local labor market arrears, that the wage arrears reaction function exhibits positive feedback, and that the theoretical conditions for multiple equilibria under symmetric local labor market competition are satisfied empirically in 1995 and 1998. Simulation results imply clustering of regions around two stable levels of arrears, with the late payment equilibrium characterized by six months overdue wages for a typical worker in 1995 and nine months in 1998.
>> Download PDF
Rethinking Marketing Programs for Emerging Markets
Niraj Dawar; Amitava Chattopadhyay
WP No. 320
(June, 2000)
Abstract: We point to a fundamental inconsistency in the emerging market strategies of multinational firms. On the one hand, they seek billions of new consumers in the emerging markets of China, India, Indonesia, and Latin America; on the other, their marketing programs are scarcely adapted for these markets. The result is low market penetration, low market shares, and poor profitability. These multinationals are trapped by their own devices in gilded cages, serving the affluent few and ignoring the potential of billions of new consumers that attracted them in the first place. In this paper, we propose that, in order to attract billions of new consumers, the marketing programs of multinationals need to be rethought from the ground up. We identify three key factors that characterize emerging markets: (1) low incomes, (2) variability in consumers and infrastructure, and (3) the relative cheapness of labor, which is often substituted for capital. We draw on numerous case studies from around the world to illustrate how to incorporate these realities into marketing programs. We conclude with a discussion of the implications of such an approach for the multinational's core strategic assumptions.
>> Download PDF
Keywords: marketing, emerging market consumers, consumer behavior, multinationals
Public Finance and Low Equilibria in Transition Economies; The Role of Institutions
Daniel Daianu; Radu Vranceanu
WP No. 319
(June, 2000)
Abstract: This paper develops two stylised models of the transitional economy that challenge to some extent, the conventional approach to policy-reforms. In the first model, the absence of market-oriented institutions is responsible for the occurrence of a non-cooperative equilibrium, where the amount of public services provided by the state is too low, which, in turn, adversely affects the global performance of the productive sector. In the second model, the government, which aims to maximise tax receipts, will choose a taxation level that pushes too many firms out of the market; hence the global supply falls below its optimal level. In both models, strain and disruptions specific to transitional systems lead to abnormal responses of the real sector to standard policy measures. Efficient economic policies should explicitly take into account the institutional deficit.
>> Download PDF
Keywords: institution building, transition, policy reform, strain
Some Econometric Evidence on the Effectiveness of Active Labour Market Programmes in East Germany
Martin Eichler; Michael Lechner
WP No. 318
(June, 2000)
Abstract: In this paper we summarise our previous results on the effectiveness of different kinds of labour market training programmes as well as employment programmes in East Germany after unification. All the studies use the microeconometric evaluation approach and are based on different types of matching estimators. We find some positive earnings effect for on-the-job training and also some positive employment effects for employment programmes. No such effects appear for public sector sponsored (off-the-job) training programmes. Generally, the scope of such analysis is very much hampered by the insufficient quality and quantity of the data available for East Germany. Although in particular the results for public sector sponsored training programmes raise serious doubts about the effectiveness of these programmes, any definite policy conclusion from this and other studies about active labour market policy in East Germany would probably be premature.
>> Download PDF
Keywords: East German labor markets, treatment effects, training, panel data, matching
A Model of Russia's "Virtual Economy"
R.E Ericson; B.W Ickes
WP No. 317
(May, 2000)
Abstract: The Russian Economy has evolved into a hybrid form, a partially monetized quasi-market system that has been called the virtual economy. In the virtual economy, barter and non-monetary transactions play a key role in transferring value from the productive activities to the loss-making sectors of the economy. We show how this transfer takes place, and how it can be consistent with the incentives of economic agents. We analyze a simple partial-equilibrium model of the virtual economy, and show how it might prove an obstacle to industrial restructuring and hence marketizing transition.
>> Download PDF
Financial Institutions, Financial Contagion, and Financial Crises
Haizhou Huang; Chenggang Xu
WP No. 316
(March, 2000)
Abstract: Financial crises are endogenized through corporate and interbank market institutions. Financial crises can emanate from financial institutions which determine the nature of equilibrium in the interbank market. Single-bank financing leads to a pooling equilibrium whereby all illiquid banks are treated in the same manner in the interbank market. With private information about one's own solvency, the best illiquid banks will not borrow but rather will liquidate some premature assets. The withdrawals of the best banks from the interbank market will generate negative externalities in the market. Consequently, the quality of the interbank market will decline - which will make the more solvent but illiquid banks withdraw from the market - and thus the quality of the market will be further deteriorated and more banks will withdraw from the market, until interbank market collapses. However, multi-bank financing leads to a separating equilibrium whereby solvent and insolvent banks are distinguishable in the interbank market. As a result, bank runs are limited to illiquid and insolvent banks, and idiosyncratic shocks never trigger a bank run contagion.
>> Download PDF
Privatization versus regulation in developing economies: The case of West African banks
Jean Paul Azam; Bruno Biais; Magueye Dia
WP No. 315
(February, 2000)
Abstract: This paper builds on the case of West African banks to propose an analysis of the issues raised by government interference, privatization to foreign investors and regulation, in developing countries. In the late 80s, there was a severe crisis in the West African banking system, partly due to government interference. The restructuring of the banking system entailed privatization and foreign share ownership. During the 90s, both foreign ownership and the proportion of bad loans went down. We offer an interpretation of these stylized facts within the framework of a simple model where non benevolent governments are prone to political interference, as long as it does not generate too large expected social costs, and learn to refrain from interference after severe crises. Privatization to foreign investors seeking high return and high risk does not always ensure efficiency of the banking system, while regulation by independent agencies can be more effective. Further confrontation of the theory to the data is provided by panel regressions on profits, bad loans and ownership, ran across the seven countries of the West African Economic and Monetary Union from 1990 to 1997.
>> Download PDF
Is Life More Risky in the Open? Household Risk-Coping and the Opening of China's Labor Markets
John Giles
WP No. 314
(April, 2000)
Abstract: This paper looks at the effect of access to off-farm employment opportunities on household exposure to unexpected shocks originating in the agricultural economy. Farm households with improved access to both migrant and local labor markets are better able to cope with shocks to agricultural production. The risk-coping benefits of improved access to off-farm markets are not shared evenly within or across villages. Wealthier households show a more pronounced reduction in exposure to shocks, including less variable income and consumption, and a reduced impact of production shocks on expenditures related to the education of children.
>> Download PDF
Networks, Migration and Investment: Insiders and Outsiders in Tirupur's Production Cluster
Abhijit Banerjee; Kaivan Munshi
WP No. 313
(March, 2000)
Abstract: This paper studies the effects of social network based lending. This is a pervasive phenomenon in most of the developing world. Access to such network capital has an obvious influence on investment. It also influences the pattern of migration since, ceteris paribus, migrants would prefer to be in locations where they have access to their community's lending network. We show that under reasonable conditions such lending will generate a rather specific pattern of migration and investment. In particular, migrants to locations where they do not have access to their community's lending networks will tend to have higher ability than the traditional residents of that location, but will invest less relative to their ability. Under some conditions this generates the possibility that migrants have higher ability but invest less in absolute terms than the local people. We test this implication using data from the knitted garment industry in the South Indian town of Tirupur. Comparing the growth rate of output (which, we argue, proxies well for ability) with investment between garment firms owned by migrants to Tirupur and local people, we find that local people have slower output growth but invest substantially more at all levels of experience. We also find a positive correlation between investment and growth within any single community, consistent with the view that capital access does not vary within each group.
>> Download PDF
Computational Analysis of the Impact on India of the Uruguay Round and the Forthcoming WTO Trade Negotiations
Rajesh Chadha; Drusilla K. Brown; Alan V. Deardorff; Robert M. Stern
WP No. 312
(May, 2000)
Abstract: The Indian economy has experienced a major transformation during the decade of the 1990s. Apart from the impact of various unilateral economic reforms undertaken since 1991, the economy also had to reorient itself to the changing multilateral trade discipline within the newly written GATT-WTO framework. The unilateral trade policy measures have encompassed exchange-rate policy, foreign investment, external borrowing, import licensing, custom tariffs, and export subsidies. The multilateral aspect of India's trade policy refers to India's WTO commitments regarding trade in goods and services, trade-related investment measures, and intellectual property rights. The present study analyzes the economic effects on India and other major trading countries/regions of the Uruguay Round (UR) trade liberalization and the liberalization that might be undertaken in a new WTO negotiating round. India's welfare gain is expected ot be 1.1% ($4.7 billion over its 2005 GDP) when the UR scenarios get fully implemented. The additional welfare gain is an estimated 2.7% ($11.4 billion) when the assumed future WTO round of multilateral trade liberalization is achieved. Resources would be allocated in India to the labor-intensive sectors such as textiles, clothing, leather and leather products, and food, beverages, and tobacco. These sectors would also experience growth in output and exports. Real returns to both labor and capital would increase in the economy. The scale effect (percent change in output per firm) is positive for all the ten sectors of manufacturing, indicating that Indian firms become more efficient than before. Finally, even if India undertakes unilateral trade liberalization of the order indicated in the WTO multilateral scenarios, it would still benefit, although less so than with multilateral liberalization.
>> Download PDF
Subsidized Jobs for Unemployed Workers in Slovakia
Jan C. van Ours
WP No. 311
(May, 2000)
Abstract: This paper uses an administrative dataset from the Slovak Republic on durations of individual unemployment spells. The focus of the analysis is on the effect of the duration of temporary subsidized jobs on the job finding rate of unemployed workers. It appears that the duration of the temporary jobs is an important determinant of the speed by which unemployed workers find regular jobs. In this sense shorter temporary jobs are more effective than long temporary jobs. The main reason for this is probably that temporary jobs with a long duration induce workers in the first period on the temporary job to search less intensive for a regular job than temporary jobs with a short duration do.
>> Download PDF
Keywords: unemployment, active labor market policy, temporal subsidized jobs, duration models
Determinants of Managerial Pay in the Czech Republic
Tor Eriksson; Jaromir Gottvald; Pavel Mrazek
WP No. 310
(May, 2000)
Abstract: The purpose of this paper is to examine the determinants of the variation in Czech managers' pay levels. Among the questions we attempt to answer are: Are the managers in state-owned firms compensated differently than those in private owned firms? How much of the difference in pay is explained by differences in individual characteristics and job levels? What is the importance of the regional location or the industry affiliation of the firms for managerial pay differentials? We use data from a cross-section of Czech managers in 1998 and estimate earnings equations augmented with a host of explanatory variables related to firm and job characteristics.
>> Download PDF
Jel Codes: J33, J44, P23
Keywords: managerial compensation, transition economy
The Great Human Capital Reallocation: An Empirical Analysis of Occupational Mobility in Transitional Russia
Michal Skorepa
WP No. 309
(October, 2000)
Abstract: This paper employs the Russian Longitudinal Monitoring Survey, a nationwide panel, to inquire into the magnitude, determinants, and consequences of occupational moility in Russia from 1985 to 1998. We show that the restructuring process leads to a higher rate of occupational reallocation. Structural changes account for the substantial part of the increase in gross occupational flows. A model built in the paper outlines the major explanatory factors of increased mobility during transition. The empirical analysis demonstrates that the destruction of existing jobs and occupations and the creation of new opportunities are important explanations for increased occupational mobility in transitional Russia. The econometric results also indicate that the local outside opportunities and the scales of structural change largely determine the probability of occupational switching.
>> Download PDF
Economic Development, Legality, and the Transplant Effect
Daniel Berkowitz; Katharina Pistor; Jean-Francois Richard
WP No. 308
(February, 2000)
Abstract: We analyze the determinants of effective legal institutions (legality) using data from 49 countries. We show that the way the law was initially transplanted and received is a more important determinant than the supply of law from a particular legal family. Countries that have developed legal orders internally, adapted the transplanted law, and/or had a population that was already familiar with basic principles of the transplanted law have more effective legality than countries that received foreign law without any similar pre-dispositions. The transplanting process has a strong indirect effect on economic development via its impact on legality.
>> Download PDF
Jel Codes: K00, O1, O57
Keywords: transplant versus origin, receptive, unreceptive, direct and indirect transplants, legality
Community Participation, Teacher Effort, and Educational Outcome: The Case of El Salvador's EDUCO Program
Yasuyuki Sawada
WP No. 307
(November, 1999)
Abstract: Based on a principal-agent model, this paper investigates the organizational structure that made the El Salvador's primary school decentralization program (EDUCO program) successful. First, we employ the "augmented" reduced form educational production function by incorporating parents and community involvement as a major organizational input. We observe consistently positive and statistically significant EDUCO participation effects on standardized test scores. Then we estimated teacher compensation function, teacher effort functions, and input demand functions by utilizing the theoretical implications of a principal (parental association)-agent (teacher) framework. While the EDUCO school teachers receive piece rate, depending on their performance, wage payment is relatively fixed in the traditional schools. Empirical results indicate that the slope of wage equation is positively affected by the degree of community participation. This finding can be interpreted as the optimal intensity of incentive. Hence, teacher's effort level in the traditional schools is consistently lower than that in the EDUCO schools, indicating a moral hazard problem. Community participation through parental group's classroom visits seems to enhance the teacher effort level and thus increases students' academic performance indirectly. Parental associations can affect not only teacher effort and their performance by imposing an appropriate incentive scheme but also school-level inputs by decentralized school management. Our empirical results support the view that decentralization of education system should involve delegation of school administration and teacher management to the community group.
>> Download PDF
Jel Codes: D82, I2, O12, O54
Keywords: economic analysis of social sector reform, the optimal intensity of incentive condition, moral hazard, education production function, fixed effects instrumental variable estimation
Gender Wage Gap and Segregation in Late Transition
Stepan Jurajda
WP No. 306
(May, 2000)
Abstract: Transition countries hoping to join the European Union are in the process of introducing western-type anti-discrimination policies aimed at reducing the gender wage gap. The efficacy of these policies depends on the relative size of the gap'' elements they target; therefore, it is important to quantify these parts. In this paper, large matched employer-employee data sets from the Czech Republic and Slovakia are used to provide such detailed gender wage gap decomposition. The results, based on 1998 data, suggest that various forms of workplace segregation are related to about one third of the overall pay difference between genders in both countries. In the non-public sector, however, almost two thirds of the total gap remains attributable to the individual's sex, suggesting much of the gap is due to violations of the equal pay policy.
>> Download PDF
The Gender Pay Gap in the Transition from Communism: Some Empirical Evidence
Andrew Newell; Barry Reilly
WP No. 305
(May, 2000)
Abstract: This short paper investigates the path through the 1990s of the gender pay gap in a number of former communist countries of Eastern Europe and the Soviet Union. The main findings are that the gender pay gap has not exhibited, in general, an upward tendency over the transitional period to which available data relate. Most of the gender pay gap is ascribed to the 'unexplained' component using conventional decompositions and this may be partly attributable to the proxy measure for labour force experience used in this study. Quantile regression analysis indicates that, in all but one country, the ceteris paribus gender pay gap rises as we move up the wage distribution.
>> Download PDF
Jel Codes: J13, J16, J70, P23
Keywords: gender, transition, wage distributions, pay gaps, quantile regression
Post-Unification Wage Growth in East Germany
Jennifer Hunt
WP No. 304
(November, 1998)
Abstract: Following monetary union with west Germany in June 1990 the median real monthly wage of prime age east German workers rose by 83% in six years. I use the German Socio-Economic Panel data to investigate the determinants of this wage growth and some of its implications. For the 1990-1991 period I find that the biggest gainers were low-wage workers generally, and women and the less educated specifically. In the 1991-1996 period the biggest gainers were women and the better educated. Job changing rates were high: a majority of workers had changed jobs by 1996. The return to job changing, particularly changing to a job in the west, was high in 1990-1991 but fell greatly in the later period, so that overall only 18% of wage growth was due to job changing within the east, and 7% to east-west job changing.
>> Download PDF
How Does Privatization Affect Workers? The Case of the Russian Mass Privatization Program
Elizabeth Brainerd
WP No. 303
(May, 2000)
Abstract: This paper explores the effect of mass privatization and the development of a new private sector in Russia on the wage and skill distributions in the private and state sectors of the economy. Two questions this paper seeks to answer are: (1) Does wage-setting behavior in privatized firms resemble that of state or private sector firms? And (2) Do rewards to skills differ between the state and private sectors? Analysis of two household surveys conducted over the 1990s indicates that there is a positive premium to work in private sector firms over state enterprises and privatized state enterprises, and that this differential is reduced but not eliminated by controlling for differences in firm and worker characteristics and in hours worked across sectors. Evidence also indicates that newly privatized state enterprises pay higher wages than state enterprises in some years, even though the distribution of skills and returns to skills in the two sectors appear to be quite similar throughout the period. Higher wages in privatized firms likely reflects rent-sharing between workers and managers rather than increased efficiency due to privatization, although the evidence is inconclusive on this point.
>> Download PDF
Jel Codes: J31, P23, P31
Keywords: privatization, wages, Russian labor market
Liability for Past Environmental Contamination and Privatization
Dietrich Earnhart
WP No. 302
(March, 2000)
Abstract: This paper examines the role of liability for past environmental contamination in the privatization processes of Central and Eastern Europe. The theoretical section establishes a link between a risk-averse investor's amount of information regarding the extent of past environmental contamination (and its cleanup costs) and the investor's willingness to pay for a particular enterprise, i.e., bid. As the investor obtains a more precise estimate of the uncertain cleanup costs, the investor faces less risk; therefore, the investor's risk premium falls and the investor's bid rises. This link generates four hypotheses regarding a privatization agency's responses to the investor's knowledge of cleanup costs. The empirical section of this paper proposes to test these hypotheses with forthcoming analysis using data from the Czech Republic.
>> Download PDF
Jel Codes: D80, K32, Q24, Q25
Keywords: liability, privatization, risk, environmental contamination
Varieties, Jobs and EU Enlargement
Tito Boeri; Joaquim Oliveira Martins
WP No. 301
(May, 2000)
Abstract: Two key factors that have so far allowed fast growing economies of central and eastern Europe to cope with their external constraint have been I) the presence of relatively low unit labour costs and ii)the initial undervaluation of the exchange rate. The accession to the EU will inevitably reduce both sources of competitiveness of eastern European exports: real wages are likely to catch-up western European levels and current EU members are pushing these countries to enforce labour market and social regulations that will increase labour costs; moreover, stability of the exchange rate will be a precondition for the negotiations over the accession to proceed. Small open economies can grow faster than their neighbours without running into a balance of payment crises if they succeed in increasing the number of differentiated goods produced domestically. The multiplication of the number of varieties in these countries after trade liberalisation is an unambiguous sign that consumers coming from the empty shelves of the pre-transition era have a strong taste for varieties, and hence that new varieties can create their own demand. But the increase in the number of varieties will involve a furthering of the worker reallocation process as production is still largely concentrated in homogenous good and scale-intensive industries and enterprise density is significantly lower than in western Europe. This paper will start by reviewing the changing profile and orientation of trade in transitional economies of central and eastern Europe. Next, developments in enterprise density and the performance of greenfield vs. state and privatised firms will be reviewed in an attempt to assess barriers to the entry and growth of small business. Finally, numerical simulations of a model will be developed which enables to assess the likely impact on employment, unemployment and gross worker flows of reductions in start-up costs.
>> Download PDF
Jel Codes: F12, L11, P21
Keywords: transition economies, product variety, trade specialisation