The Impact on Structural Reforms on Employment Growth and Labour Productivity: Evidence from Bulgaria and Romania
Ralitza Dimova
WP No. 600
(August, 2003)
Abstract: Using firm-level data from Bulgaria and Romania, this paper addresses a lacuna in the transition literature, namely, the link of firm-level employment turnover with firm-level growth in labour productivity. The results suggest that while net job creation at the firm level was affected by privatization in Bulgaria, privatization in Romania did not have any effect on firm-level employment growth. Further, Olley-Pakes (1996) decomposition indicates that in Bulgaria, over time, resources moved from less productive firms to more productive firms in almost all industries, but that in Romania such a phenomenon was observed in less than half of the industries. At the same time, the Grilliches-Regev (1995) decomposition indicates that in both these countries mobility of labour across firms, i.e., the process of job creation and job destruction at the firm level, contributed more to productivity changes than did other firm-level characteristics and industry-level factors affecting productivity. Finally, we find that the rate of employment changes in Bulgarian firms has a significant impact on the country?s firm-level productivity changes. Regressions using Romania data, however, do not provide any support for this observation.
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Jel Codes: J63, L21, L25, L33
Keywords: job flows, employment growth, labour productivity, Bulgaria, Romania
TDoes Product Differentiation Explain The Increase in Exports of Transition Countries?
Yener Kandogan
WP No. 599
(July, 2003)
Abstract: The paper analyzes the increase in transition countries? exports to their non-traditional trade partners. It uses four different measures of product differentiation to find out the extent that the increase in product variety explains this phenomenon. It is found that opening up to new trade partners first increases the number of sectors in which trade occurs. This is followed by a brief period of specialization in some select sectors, and finally an increase in the number of varieties of products in these sectors. Lastly, the increase in product variety in CEEC has been much more substantial than in CIS.
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Jel Codes: F14, F15, P33
Keywords: Product Variety, Eastern Europe, Commonwealth of Independent States
Organizational Culture And Effectiveness:
Carl F. Fey; Daniel R. Denison
WP No. 598
(May, 2003)
Abstract: This paper examines the link between organizational culture and effectiveness for foreign-owned firms operating in Russia. Beginning with a model of organizational culture developed in the USA, the paper presents a multi-method analysis of culture and effectiveness in a transition economy. We argue that effectiveness in Russia relies more on adaptability and flexibility than in the USA. Furthermore, the legacy of the communist era forces firms in Russia to deal with a workforce with a unique time perspective and a unique set of sub-cultures that often undermine attempts at coordination and integration. We first explore these ideas using survey data on 179 foreign-owned firms operating in Russia and compare the results to those obtained for firms in the USA. We then present four case studies designed to ground the results in the Russian context, and to document cultural dynamics not captured by the model.
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Jel Codes: M12, M14
Keywords: Organizational Culture, Effectiveness, Russia, Transition Economies
Asymmetric Fluctuation Bands In ERM And ERM-II: Lessons From The Past And Future Challenges For EU Acceding
Balázs Égert; Rafal Kierzenkowski
WP No. 597
(July, 2003)
Abstract: The forthcoming EU enlargement raises a series of questions related to the new entrants? entry to Exchange Rate Mechanism II and their subsequent adoption of the single currency. In this paper, the issue of how to determine the central parity for the acceding countries with which to enter ERM-II is tackled. This is followed by a discussion of the asymmetric nature of the fluctuation bands around the central parity that could be deemed as compatible with the Maastricht criterion on exchange rate stability, i.e. +2.25%/-15% within the officially announced ±15% fluctuation margins. Then, practices of the European Monetary Institute/ECB and the European Commission are compared when assessing the criterion on exchange rate stability. With this as a background, hypothetical ERM-II is constructed for 4 acceding countries with flexible exchange rate regimes so as to assess ex post the sustainability of these countries? participation in ERM-II. Based on this, given ex post exchange rate variability and the limited intra-marginal intervention facilities ERM-II participant countries have at their disposal, the defence of the asymmetric band appears a tricky task even though the +2.25% limit on the weaker side of the band is rendered somewhat intangible by a 10-day moving average rule used by the EMI/ECB and further flexibility is given to the system in that a depreciation of more than 2.25% is not automatically viewed as a non-fulfilment of the criterion on exchange rate stability.
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Jel Codes: E31, F31, O11, P17
Keywords: exchange rate, exchange rate mechanism, ERM, EU enlargement, asymmetric band,
Mass Privatisation, Corporate Governance and Endogenous Ownership Structure
Irena Grosfeld; Iraj Hashi
WP No. 596
(July, 2003)
Abstract: We compare the change in ownership concentration in firms privatized through two different programs of mass privatization: the Czech voucher scheme and the Polish program of National Investment Funds. Despite important differences in ownership structure at the start of the process and in the quality of legal and regulatory environments, the emerging ownership patterns are remarkably similar: in the two groups of firms we observe high concentration and the emergence of industrial corporations and individuals as important dominant shareholders. Given the important evolution of ownership, we take ownership structure as endogenous and look at its determinants. We find in particular that ownership concentration depends on the degree of uncertainty in the firm's environment. In a more risky environment firms tend to have more dispersed ownership. We interpret this result in the light of the recent theories of the firm stressing the trade-off between managerial initiative and shareholder control.
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Jel Codes: G3, L2, P3, P5
Keywords: Corporate governance, privatization, transition, ownership structure
WTO Accession: What's In It For Russia?
Abdur Chowdhury
WP No. 595
(July, 2003)
Abstract: Prospects for Russia?s membership in the WTO now look better than any point since accession negotiations began almost a decade ago. Good progress with economic and legal reforms within Russia has left the country?s economy better prepared for membership. Nevertheless, the economy still suffers from various weaknesses including, but not limited to, pervasive subsidies for different sectors, lack of liberalization and foreign participation especially in the service sector, inefficiency in custom administration, lack of enforcement of intellectual property rights, etc. For all their sensitivity, the negotiations on the import tariff levels and access to the service sectors are the least of the problems. Much more difficult will be non-tariff barriers and the general trade-related legislative framework. Resolving the remaining weaknesses would be a complex process. However, given the importance of WTOrelated measures for the overall domestic structural reform, any delay in accession would be at least marginally negative for investor perceptions of country risk.
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Jel Codes: F1, P2
Keywords: Russia, WTO, tariff, reform
The Political-Economy of Argentina?s Debacle
Marcos A. Buscaglia
WP No. 594
(April, 2003)
Abstract: In this paper I argue that political-economy considerations ?and in particular the identity of the reformers- are central to understanding the Argentine crisis. During the 90´s the main political parties remained attached to populism, and no strong party emerged at the center of the political spectrum. This had two effects in the reform process. First, it severely deteriorated it (efficiency, corruption), reducing the support of the population. Second, when a series of shocks hit the economy the anti-reform camp tried to undo most reforms, and thus convey a message to the population about the ?right? model of the world.
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Jel Codes: E60, F31
Keywords: Argentina, Currency Crisis, Political Economy of Reform
While Labour Hoarding May Be Over, Insiders? Control Is Not
Kate Bishop; Tomasz Mickiewicz
WP No. 593
(July, 2003)
Abstract: This paper examines the determinants of employment changes using a panel of Polish large firms during the period 1996-2001. We investigate the impact of wages, output growth, investment, firm size and sectors upon employment, focusing on the asymmetry hypothesis. We find that investment plays an important role in enhancing employment growth. We also notice that employment dynamics is not affected by alternative wages and therefore appears consistent with the ?right to manage? model. Furthermore, unlike the early transition period, we can confirm that employment adjusts to positive sales growth, not just to decline as found in studies on earlier periods (K?ll?, 1998). This reflects that labour hoarding can no longer be a factor, which decreased employment elasticity in times of positive demand shocks. Interestingly, large state companies appear to cut employment in response to output growth, when one controls for investment. A result, which may be consistent with the insiders (employee) control model.
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Jel Codes: C23, J23, P31
Keywords: EMPLOYMENT, TRANSITION, ASSYMETRY, PRIVATISATION, INSIDERS
Globalization and Trust:
Ramon Casadesus-Masanell; Tarun Khanna
WP No. 592
(March, 2003)
Abstract: We study the effect of globalization on the stock of trust in organizations. We present a simple model of endogenous trust and show that contrary to centralized hierarchies (pure limited liability firms), decentralized organizational structures (cooperatives) foster the emergence of trust. We treat organizations as directly observable ?summary statistics? for underlying trust and ask what will be the fate of trust as the world becomes increasingly globalized. Because the cooperative is an intrinsically less efficient organizational form and globalization implies harsher competitive pressures, conventional wisdom suggests that the viability of cooperatives is in jeopardy. We show that this is not necessarily true. If the increase in competition is bundled with an increase in uncertainty and risk, the cooperative may become a more efficient organizational form. We conclude that globalization does not necessarily erode trust. The case of Mondragón Corporación Cooperativa is used to motivate assumptions and illustrate the results.
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Restructuring or Disintegration of the German Corporate Network:
Bruce Kogut; Gordon Walker
WP No. 591
(March, 2003)
Abstract: abstract
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Institutional Change and Firm Creation in East-Central Europe:
Gerald A. McDermott
WP No. 590
(February, 2003)
Abstract: A central debate about the transformation of post-communists countries is how the process of institution building impacts firm restructuring and creation. This debate has largely been dominated by approaches that emphasize either the depoliticization of institutional designs or the determining impact of pre-existing social structures. These views, however, have serious problems explaining one of the key comparative developments in East-Central Europe ? the strong economic growth in Poland and the demise of the Czech Republic in the 1990s. This paper explains these differences by offering an alternative, embedded politics approach that views firm and institutional creation as intertwined experiments. Czech attempts to implant a depoliticized model of reform impeded the necessary reorganization of socio-political networks, in which firms are embedded. Poland facilitated institutional experiments not only in the ways it promoted negotiated solutions to restructuring, but also in the ways it empowered sub-national governments. The study utilizes data on manufacturing networks, privatization, bankruptcy, and regional government reforms collected over the past six years.
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Keywords: Institutions, governance, restructuring, post communism, transitions
Legitimacy, Interest Group Pressures and Change in Emergent Institutions:
Witold J. Henisz; Bennet A. Zelner
WP No. 589
(May, 2003)
Abstract: We offer a simple model of policymaking emphasizing socialization and limits on human cognition to explicate mechanisms of change in emergent (as opposed to established) institutions. Emergent institutions are more susceptible to change, and their opponents may use frames or existing reference points to illustrate inconsistency with prevailing notions of legitimacy. Broader institutional structures and specific organizational characteristics moderate pressure for change. This perspective has novel implications for strategy and policy design.
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Institutions And The Vicious Circle Of Distrust In The Russian Household Deposit Market, 1992-1999
Andrew Spicer; William Pyle
WP No. 588
(February, 2003)
Abstract: In our analysis of the Russian household deposit market during the 1990s, we show how the initial conditions of market emergence contributed to a vicious circle in which private commercial banks progressively lost the trust of potential depositors. The roots of this destructive dynamic lay in the initial conditions of market emergence. Initial experiences of fraud and financial loss led Russian households to distrust that commercial banks would honor their contractual obligations. As distrust grew and became more ingrained, the competitive conditions in the deposit market changed in a way that further increased the gains to opportunism and decreased the returns to trust production. In a self-reinforcing process, fraud begat more fraud.
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Foreign Direct Investment and the Business Environment in
Jennifer Tobin; Susan Rose-Ackerman
WP No. 587
(June, 2003)
Abstract: Bilateral Investment Treaty?s effects on FDI and the domestic business environment remain unexplored despite the proliferation of treaties over the past several years. This paper asks whether BITs stimulate FDI flows to host countries, and if the treaties have any impact on the environment for domestic private investment. We find a weak relationship between BITs and FDI. However, for risky countries, BITs attract greater amounts of FDI. We also find a weak relationship between BITs and the domestic investment environment. Thus, while BITs may not alter the domestic investment environment, they also may not be fulfilling their primary objective.
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Trust in China: A Cross-Regional Analysis
Rongzhu Ke; Weiying Zhang
WP No. 586
(June, 2003)
Abstract: Using the cross-regional data, this paper shows that trust has a strong effect on uneven development of economy in China. As is discovered in many studies, it is found that trust affects the growth of economy, size distribution of enterprise, and FDI inflow and so on. We also find that cross-regional differences of trust in China are reflections of the regional diversities of education, marketization of economies, urbanization, population density and transportation facilities. Although not statistically significant, ?too many officials? may damage social trust. The paper demonstrates that trust cannot simply be taken as a cultural heritage. The paper also argues that sustainability of further economic development of China much depends on how fast China can build trust-facilitating institution, and that the most fundamental institution for trust is the property right.
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Keywords: Trust, Economic performance, Information Repeated game, Transaction
Family Control and the Rent-Seeking Society
Randall Morck; Bernard Yeung
WP No. 585
(February, 2003)
Abstract: The small number of very large family-controlled corporate groups in many countries combined with their long continuity of control and ability to act discretely give these organizations a comparative advantage in political rent-seeking. This advantage is a key part of a self-reinforcing system whereby oligarchic family corporate control, political rent seeking, and low general levels of trust combine to stymie growth.
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Wage Determination: Privatised, New Private And State Owned Companies. Empirical Evidence From Panel Data
Tomasz Mickiewicz; Kate Bishop
WP No. 584
(June, 2003)
Abstract: This paper examines the determinants of wage pressure in large companies, including ownership characteristics and the impact of regional labour markets. By using a panel of 329 Polish largest firms during the period 1997- 2001, we find evidence of rent sharing activities, however there is also asymmetry in quasi rent elasticity of wages. The wage setting mechanism seems to differ between new private companies, privatised companies, state firms and mixed ownership. In particular, wages in state firms are highly responsive to regional labour market conditions, while firms in other sectors are not. Rent sharing is visible in both the state sector and new private companies, yet several specific characteristics differ. On the other hand, quasi rent elasticity appears to be suppressed in privatised companies.
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Jel Codes: C23, D21, J21, L33, P31
Keywords: wages, quasi-rents, de novo firms, privatisation, unemployment
An Investigation of Firm-Level R and D
Gary H. Jefferson; Zhong Kaifeng
WP No. 583
(September, 2002)
Abstract: This paper uses a survey of 1,826 firms distributed over ten East Asian metropolitan areas ? Jakarta, Kuala Lumpur, Manila, Seoul, and five Chinese cities ? to investigate the sources of firm-level RandD capabilities. The analysis identifies the impact of 23 survey variables, classified by openness, human capital, RandD network, and institutional quality, on the efficiency of firm RandD operations and on overall firm performance. These firmlevel results are used to construct composite measures RandD capabilities for each of the 10 metropolitan economies. Using the firm samples, returns to RandD are also estimated for each of the metropolitan areas. Where cross economy comparisons are possible, as they are for Seoul and the five Chinese cities, we find a strong association between overall RandD productivity in these city economies and the composite measures of citywide RandD capabilities. In particular, high composite measures in Seoul and Shanghai are associated with high returns to RandD in those cities. The large productivitywage gaps in the Chinese cities appear to be attracting large and visible investment in RandD operations. Whether RandD wages rise to narrow this gap or investment and technology flows continue to sustain the gap will substantially affect the pattern of RandD operations within the Asian region.
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Jel Codes: F23
Keywords: Research and development, Technology transfer, East Asia
RandD and Technology Transfer:
Gary H. Jefferson; Albert G.Z. Hu; Guan Xiaojing; Qian Jinchang
WP No. 582
(February, 2003)
Abstract: The capacity of developing economies to narrow the gap in living standards with the OECD nations depends critically on their ability to imitate and innovate new technologies. Toward this end, developing economies have access to three avenues of technological advance: technology transfer, domestic RandD, and foreign direct investment. This paper examines the contributions of each of these avenues, as well as their interactions, to productivity and knowledge production within Chinese industry. Based on a large data set for China?s large and medium-size enterprises, the estimation results show that technology transfer ? whether domestic or foreign ? affects productivity only through its interactions with in-house RandD. Foreign direct investment does not appear to facilitate the adoption of market-mediated foreign technology transfer. Firms wishing to produce patentable knowledge do not benefit from technology transfer; patentable knowledge is created exclusively through in-house RandD operations.
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Jel Codes: F23
Keywords: Research and development, Technology transfer, China
Credit Market Disequilibrium in Poland: Can We Find What We Expect? Non-Stationarity and the ?Min?Condition
Christophe Hurlin; Rafal Kierzenkowski
WP No. 581
(June, 2003)
Abstract: This paper presents an empirical investigation of the disequilibrium hypothesis on the Polish loan market in the 1990s. Using data over this period of deep transition, we estimate a disequilibrium model with a standard maximum likelihood method. However, the estimates are highly counter-intuitive as regards the timing of the identified regimes. We show that the gap between the econometric evidence and the expected results may stem from the issue of stochastic non-stationarity in a disequilibrium setting based on the ?min? condition. We find that the omission of one non-stationary variable of the cointegrating space or the absence of a ?structural? cointegrating relationship in one or both regimes lead to a spurious configuration. In such a case, using, wrongly, the standard likelihood function, derived under the hypothesis of stationarity, may lead to non-convergent estimates of structural parameters and, as a consequence, to a fallacious regimes identification. Therefore, as the first approach to this issue, we estimate a disequilibrium model with stationary data. The empirical results are then robust and economically founded and correspond to the set and the timing of anticipated regimes.
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Jel Codes: C32, D50, E42, P00
Keywords: monetary standard and regimes, non-stationarity and cointegration, transition, Poland.
Does it Take a Lula to go to Davos? A Brief Overview of Brazilian Reforms, 1980-2000
Nauro F. Campos; Armando Castellar Pinheiro; Fabio Giambiagi; Maurício M. Moreira
WP No. 580
(October, 2002)
Abstract: What are the determinants of economic reform efforts? This paper tries to throw light on this question by examining recent reforms in Brazil, a country which followed a gradualist approach and was a late-starter among Latin American economies. We argue that these first generation reforms (trade liberalization, stabilization, privatization and the adoption of a new macro-policy framework) were driven by the drastic growth slowdown and redemocratization of the 1980s. We argue that their gradual and democratic implementation not only respond for their sustainability but also shows that the country is ready for a second generation of reforms focusing explicitly on institutional deficiencies.
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Jel Codes: H11, O11, O23, O40, O54
Keywords: Reform, Stabilization, Economic Policy, Growth, Brazil
Ceaseless Toil? Health and Labor Supply of the Elderly in Rural China
Dwayne Benjamin; Loren Brandt; Jia-Zhueng Fan
WP No. 579
(June, 2003)
Abstract: Deborah Davis-Friedmann (1991) described the ?retirement? pattern of the Chinese elderly in the prereform era as ?ceaseless toil?: lacking sufficient means of support, the elderly had to work their entire lives. In this paper we re-cast the metaphor of ceaseless toil in a labor supply model, where we highlight the role of age and deteriorating health. The empirical focus of our paper is (1) Documenting the labor supply patterns of elderly Chinese; and (2) Estimating the extent to which failing health drives retirement. We exploit the panel dimension of the 1991-93-97 waves of the China Health and Nutrition Survey, confronting a number of econometric issues, especially the possible contamination of age by cohort effects, and the measurement error of health. In the end, it appears that ?ceaseless toil? is also an accurate depiction of elderly Chinese work patterns since economic reform, but failing health only plays a small observable role in explaining declining labor supply over the life-cycle.
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Jel Codes: J14, J26, P36
Keywords: retirement, health and labor supply, social security, China
Shadow Economy, Rent-Seeking Activities and the Perils of Reinforcement of the Rule of Law
Ekaterina Vostroknutova
WP No. 578
(March, 2003)
Abstract: An economy is considered where a possibility to seek rents (a particular case of this activity is corruption) exists along with production. A producer is able to hide part of his output from both bribery and taxation. It is shown that the presence of a shadow sector has di?erent e?ects in economies with high and low rent-seeking. As expected, in the economy with low corruption the direct law enforcement is bene- ficial for growth, and reduces the shadow sector. However, in the highly corrupt economy, combating the shadow economy reduces output and increases corruption, while combating corruption reduces the shadow economy.
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Jel Codes: D72, H26, K42, O17
Keywords: corruption, rent-seeking, shadow economy, law enforcement, transition
No Pain, No Gain: Market Reform, Unemployment, and Politics in Bulgaria
Neven T. Valev
WP No. 577
(May, 2003)
Abstract: In 1997, a new center-right government came to power in Bulgaria with a mandate to accelerate market reforms. By the time of the next elections in 2001, 75 percent of GDP was produced in the private sector, compared to 45 percent in 1996. The government however lost the elections. This paper uses unique survey data to examine whether the high unemployment associated with market reform contributed to the election outcome. High unemployment did have an effect but it was small and does not explain the election loss. In fact, many in the population, including the unemployed, believed that high unemployment was the necessary price for future prosperity.
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Jel Codes: D72, E24, E61
Keywords: Market reform; Transition; Voting; Eastern Europe
Power Analysis of the Nice Treaty On the Future of European Integration
Yener Kandogan
WP No. 576
(June, 2003)
Abstract: I carry out a power analysis of changes in voting weights and rules in the Nice Treaty of the EU on the widening and deepening of European integration, by applying methods that use Shapley-Shubik and Banzhaf indices. Significant decrease in voting power of small countries makes widening of integration more acceptable to incumbent members due to small size of the applicants. Relative increase in the conciliatory power of smaller members, and relative increase in the independent power of bigger members make smaller members compromise more in the coalitions they form, and improve the position of large members for further deepening of the integration. Lastly, the fairness analysis reveals a more federalist face for the EU in the way votes are distributed in Nice.
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Jel Codes: D70, F15
Keywords: EU, Voting Power, Integration, Enlargement, Federalis
Non-Tech Abstract:
Democracy’s Spread: Elections And Sovereign Debt In Developing Countries
Steven Block; Burkhard N. Schrage; Paul M. Vaaler
WP No. 575
(May, 2003)
Abstract: We use partisan and opportunistic political business cycle (?PBC?) considerations to develop and test a framework for explaining election-period changes in credit spreads for developing country sovereign bonds. Pre-election bond spread trends are significantly linked both to the partisan orientation of incumbents facing election and to expectations of incumbent victory. Bond spreads for right-wing (leftwing) incumbents increase (decrease) as the likelihood of left-wing (right-wing) challenger victory increases. For right-wing incumbent partisan and opportunistic PBC effects bondholder risk perceptions are mutually reinforcing. For left-wing incumbents partisan PBC effects dominate bondholder risk perceptions compared to opportunistic PBC effects.
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Jel Codes: D72, F30, F34, G12, G14, G15, G29
Keywords: economics; elections; developing countries; sovereign bonds; spreads
Reintroducing Intergenerational Equilibrium: Key Concepts behind the New Polish Pension System
Marek Góra
WP No. 574
(June, 2003)
Abstract: Poland adopted a new pension system in 1999. This new pension system allows Poland to reduce pension expenditure (as a percent of GDP), instead of increasing it ? as is projected for the majority of other OECD countries. This paper presents the conceptual background of the new system design. The new system?s long-term objective is to ensure intergenerational equilibrium irrespective of the demographic situation. This requires stabilisation of the share of GDP allocated to the entire retired generation. Traditional pension systems aim, instead, at stabilisation of the share of GDP per retiree. The change in demographic structure observed over the past for a couple of decades and this historic attempt to stabilise the share of GDP per retiree led to severe fiscal problems and negative externalities for growth, as observed in numerous countries. Many countries have tried to reform their pension systems in different ways to try to resolve the issue of these ever-increasing costs. Although the Polish reform uses a number of techniques applied elsewhere, its design differs from the typical approaches ? and the lessons and results are promising for all OECD countries. This paper presents the theoretical and practical application of this alternative approach and as such, the key features of the new Polish pension system design.
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Jel Codes: D50, H55, H63
Keywords: pensions, equilibrium, GDP, pension debt servicing, income allocation,
Why Does FDI Go Where It Goes? New Evidence From The Transition Economies
Yuko Kinoshita; Nauro F. Campos
WP No. 573
(May, 2003)
Abstract: This paper examines the importance of agglomeration economies and institutions vis-à-vis initial conditions and factor endowments in explaining the locational choice of foreign investors. Using a unique panel data set for 25 transition economies between 1990 and 1998, we find that the main determinants are institutions, agglomeration and trade openness. We find important differences between the Eastern European and Baltic countries, on the one hand, and the former Soviet Union countries on the other: in the latter group, natural resources and infrastructure matter, while agglomeration matters only for the former group.
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Jel Codes: C33, F21, O16, O23, P27
Keywords: foreign direct investment, transition economies
Private Savings In Transition Economies: Are There Terms Of Trade Shocks?
Abdur R. Chowdhury
WP No. 572
(May, 2003)
Abstract: The paper examines the impact of terms of trade shocks on private savings in the transition economies after accounting for the effect of other determinants. Economic agents in the transition economies are subject to tight credit constraints which are more pronounced during bad state of nature. Thus, adverse shocks to commodity prices in the world market can force them to reduce savings by a larger amount than they would otherwise have. Empirical analysis using a dynamic panel model and data from twenty one transition economies confirm that most of the determinants of savings identified in the literature also apply to the transition economies. Favorable movements in both the permanent and transitory components of the terms of trade have a significant positive impact on private savings with transitory movements having a larger impact than the permanent component. This reflects the lack of access to foreign borrowing that many of the transition economies have faced during the last decade. Although the impact of terms of trade shocks are found to be asymmetric, the magnitude of the impact appears to be small. The results are robust for alternative estimators, determinants, and country groupings.
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Jel Codes: E21, F10, P33
Keywords: transition, private savings, terms of trade
On the long-run determinants of real exchange
Imed Drine; Christophe Rault
WP No. 571
(May, 2003)
Abstract: The main goal of this paper is to tackle the empirical issues of the real exchange rate litterature by applying recently developed panel cointegration techniques to a structural long-run real exchange rate equation. We consider here a sample of 45 developing countries, divided into three groups according to geographical criteria: Africa, Latin America and Asia. Our investigations confirm that having a reference to assess the degree of distortion of real exchange rate is not as simple as it can be thought with the PPP concept. The real exchange rate is e?ectively at the centre of an economic spiral and its value depends on the economic specificities of each country. In other words, we don?t have a fixed and general norm but, for each economy, the real exchange rate trajectory depends on its development level, on the way economic policy is conducted, and on its position on the international market.
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Jel Codes: C15, E31, F0, F31
Keywords: Real exchange rate, Developing country
A Re-Examination Of The Purchasing Power Parity Using Non-Stationary Dynamic Panel Methods : A Comparative Approach For Developing And Developed Countries
Imed Drine; Christophe Rault
WP No. 570
(April, 2003)
Abstract: The aim of this paper is to apply recent advances in the econometrics of non-stationary dynamic panel methods to examine the robustness of the PPP concept for a sample of 73 developed and developing countries. Our investigations indicate that the strong PPP is verified for OECD and MENA countries. However in Africa, Asia, Latin America and the PECO, PPP does not seem relevant to characterize the long-run behavior of the real exchange rate. A widening of our analysis field shows that the nature of the exchange rate regime doesn?t condition the validity of the PPP and that the PPP is more easily accepted in countries with high inflation than with low one.
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Jel Codes: C15, E31, F0, F31
Keywords: Purchasing power parity, real exchange rate, developed country, developing country, panel unit-root and cointegration tests.
How Important is Ownership in a Market with Level Playing Field? The Indian Banking Sector Revisited
Sumon Kumar Bhaumik; Ralitza Dimova
WP No. 569
(May, 2003)
Abstract: It has long been argued that private ownership of firms leads to better firm performance. However, theory as well as empirical evidence suggest that factors like agency problems may not allow privately owned firms to operate more efficiently or perform better that state owned firms. At the same time, it has been argued that competition and hard budget constraints can induce state owned firms to operate efficiently. In India, banking sector reforms were initiated in 1992-93, leading to entry and other forms of deregulation, and a level playing field for all banks. Data for 1995-96 through 2000-01 suggest that by 1999- 00 ownership was no longer a significant determinant of performance; induced by competition, public sector banks were able to eliminate the performance/efficiency gap that existed between them and domestic private sector and foreign banks.
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Jel Codes: D21, G21, G28, L32, L33
Journal Citation: "How Important is Ownership in a Market with Level Playing Field? The Indian Banking Sector Revisited." Journal of Comparative Economics. 2004.
Keywords: banking sector reforms, performance, competition, ownership, convergence
On Types of Trade,Adjustment of Labor and Welfare Gains During Asymmetric Liberalizations
Yener Kandogan
WP No. 568
(June, 2003)
Abstract: This paper modifies the two-industry, two-country Heckscher-Ohlin model with intermediate goods to decompose trade into its horizontal and vertical intra-industry, as well as inter-industry parts. Acknowledging that liberalization affects each type of trade differently, and that changes in each imply labor adjustment of different magnitudes, the paper analyzes the effects of widely observed asymmetries in liberalization policies. The paper concludes with the implications of the model for the liberalization between the East and the West through the Europe Agreements.
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Jel Codes: F11, F15
Keywords: Trade types, Adjustment, Asymmetric Liberalization, Europe Agreements
Technological Progress Through Trade Liberalization in Transition Countries
Yener Kandogan
WP No. 567
(June, 2003)
Abstract: Trade liberalization increases competitive pressures on domestic firms, and thus creates incentives for reducing costs of production through technological progress. Through this channel, backward countries get a chance to narrow their technological gap with more advanced countries. In this paper, the case of transition countries is analyzed. A simple model of oligopolistic firms? strategic decision on RandD is developed to motivate the empirical analysis. The results suggest that some initial conditions such as size of the initial technological gap, and initial openness to international trade, as well as the stage of the market reforms, in particular, rate of liberalization and structure of domestic markets are important factors in narrowing the technology gap.
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Jel Codes: F14, O33
Keywords: Technology gap; Trade Liberalization; Transition; Market reforms
Intra-industry Trade of Transition Countries: Trends and Determinants
Yener Kandogan
WP No. 566
(June, 2003)
Abstract: This paper analyzes trends in different components of trade of transition countries. To explain the cross-country differences, the paper points out the important distinction between the determinants of inter-industry trade and intra-industry trade (IIT), and horizontal and vertical IIT. Using varieties of gravity models, it is shown that variables from Increasing Returns Trade Theory, such as scale economies, similarity of income levels, and number of varieties produced play important roles in IIT, especially in horizontal IIT, whereas factors such as comparative advantage, dissimilarity in income levels, and having more developed trade partners of Heckscher-Ohlin Trade Theory are crucial in determining inter-industry trade and vertical IIT to a lesser degree.
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Jel Codes: F14, P2
Keywords: Vertical and horizontal intra-industry trade, transition countries, gravity models
Local Protectionism and Regional Specialization: Evidence from China?s Industries
Chong-en Bai; Zhigang Tao; Yingjuan Du; Sarah Y. Tong
WP No. 565
(June, 2003)
Abstract: This paper uses a dynamic panel estimation method to investigate the determinants of regional specialization in China?s industries, paying particular attention to local protectionism. Less geographic concentration is found in industries where the past tax-plus-profit margins and the shares of state ownership are high, re- flecting stronger local government protection of these industries. The evidence also supports the scale-economies theory of regional specialization. Finally, the overall time trend of regional specialization of China?s industries is found to have reversed an early drop in the mid 1980s, and registered a significant increase in the later years.
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Jel Codes: F1, P2, R12
Keywords: local protectionism, regional specialization, scale economy, external economy.
Corporate Governance and Market Valuation in China
Chong-en Bai; Qiao Liu; Joe Lu; Frank Song; Junxi Zhang
WP No. 564
(June, 2003)
Abstract: This paper studies the relationship between the governance mechanisms and the market valuation of publicly listed firms in China empirically. We construct measures for corporate governance mechanisms and measures of market valuation for all publicly listed firms on the two stock markets in China by using data from the firm?s annual reports. We then investigate how the market-valuation variables are affected by the corporate governance variables while controlling for a number of factors commonly considered in market valuation analysis. A corporate governance index is also constructed to summarize the information contained in the corporate governance variables. The index is found to have statistically and economically significant effect on market valuation. The analysis indicates that investors pay a significant premium for well-governed firms in China, benefiting firms that improve their governance mechanisms.
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Jel Codes: G32, G34
Keywords: Corporate governance mechanisms, market valuation, corporate governance index, corporate governance premium
Revenue Sharing and Control Rights in Team Production: Theories and Evidence from Joint Ventures.*
Chong-en Bai; Zhigang Tao; Changqi Wu
WP No. 563
(June, 2003)
Abstract: This paper presents a model of the joint venture that is grounded in the stylized facts we found from a sample of 200 joint venture contracts. The model incorporates the revenue-sharing contract into the incomplete contract frameworks of Grossman-Hart-Moore Property Rights Theory and the Transaction Cost Theory of the firm, and emphasizes the impact of expropriation. Joint control can be optimal as well as unilateral control. Our econometric analysis of the revenue-sharing and control arrangements o?ers strong support to our Property-Rights-Theory motivated model with self investment but rejects that with cooperative investment. The Transaction-Cost-Theory motivated model leaves some important empirical findings unexplained. Our findings also reject some of the existing theories of joint ownership.
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Jel Codes: D23, L14, L23
Keywords: Joint Ventures, Control Right, Revenue-Sharing Contracts, Expropriation,
Financial Dependence, Stock Market Liberalizations, and Growth
Nandini Gupta; Kathy Yuan
WP No. 562
(June, 2003)
Abstract: Stock market liberalizations provide a natural experiment to test for the causal relation between financial development and economic growth. We test this relation by investigating whether liberalizations facilitate growth through the particular mechanism of reducing capital market imperfections that drive a wedge between the external and internal cost of capital to firms. Using panel data on a large sample of emerging markets, we find no evidence of a uniform shift across all sectors in average industry growth following liberalization. Instead, consistent with the hypothesis that liberalizations lower the incremental cost of external capital, it appears that industries that depend more on external finance experience significantly higher growth following liberalization. We also find that growth occurs through the creation of new establishments, which is more likely to require external funds, rather than through an expansion in the average size of existing establishments, which firms are more likely to finance with internal cash. These results are robust to alternative hypotheses, country and industry specific controls, other economic reforms, world business cycle e ects, and contemporaneous macroeconomic shocks.
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Growth and Regional Inequality in China During the Reform Era
Derek C. Jones; Cheng Li; Ann L. Owen
WP No. 561
(June, 2003)
Abstract: Chinese city-level data indicate that differences in growth rates are far more severe than indicated in previous studies which typically use data at higher levels of aggregation. We estimate growth equations using city-level data and find that the policy of awarding a special economic zone status enhances growth substantially, increasing annual growth rates by 5.5 percentage points. Annual growth rates of open coastal cities are, on average, 3 percentage points higher. Our qualitative results on the role of policy and the effects of FDI are similar to those of earlier studies that have employed provincial-level data; but, quantitatively, our results are substantially different. We also provide evidence of an indirect role of policy in the growth process through its ability to attract growth-enhancing foreign direct investment.
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Jel Codes: O10, O40, O53
Keywords: growth, regional inequality, China
Choice of Ownership Structure and Firm Performance: Evidence from Estonia
Derek C. Jones; Panu Kalmi; Niels Mygind
WP No. 560
(May, 2003)
Abstract: In this paper we use rich panel data for a representative sample of Estonian enterprises to analyse diverse issues related to the determinants of ownership structures and ownership changes after privatisation. A key focus is to determine whether ownership changes are related to economic efficiency. While employee owned firms are found to be much more prone than other firms to switch ownership categories, often ?employee owned? firms remain ?insider-owned? as ownership passes from current employees to managers and former employees. Logit analyses of the determinants of ownership structures and ownership changes provides mixed support for several hypotheses. As predicted: (i) wealth and resource constraints play a crucial role in the determination of ownership, with foreigners buying firms with the highest equity levels and insiders buying firms with the lowest equity valuations; (ii) risk aversion explains subsequent ownership changes, especially away from employee ownership; (iii) allocation of ownership depends on the pre-privatisation origin and location of the firm, and these factors also influence subsequent ownership changes. Finally we compare our findings with those achieved by using more conventional approaches to analyze efficiency that use very similar data. Reassuringly the evidence presented in this paper is consistent with the view that efficiency considerations drive ownership changes (while earlier analysis for Estonia and for many other transition economies has identified the impact of ownership on economic performance.) However, the findings in this paper also establish that there are important influences besides economic efficiency that affect enterprise ownership and ownership changes.
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Jel Codes: G3, J5, P2, P3
Keywords: Privatisation, ownership change, employee ownership, transition economies, Estonia
Explaining Postcommunist Economic Performance
Lawrence P. King
WP No. 559
(May, 2003)
Abstract: This article critiques neoliberal transition theory from a neoclassical sociological perspective. Neoliberals argue that postcommunist economic failure is the result of inadequate adherence to neoliberal precepts. This paper argues that the neoliberal policy package of ?Shock Therapy? (consisting of the radical transition to a market economy through rapid and extensive price and trade liberalization, stringent monetary and fiscal stabilization, and the implementation of a mass privatization program) creates severe supply-and-demand shocks for enterprises, inducing firm failure. This leads to a fiscal crisis for the state, and an erosion of its capacity and bureaucratic character. This in turn reacts back on the enterprise sector, since the state can no longer support the institutions necessary for the effective functioning of capitalist economies. The neoliberal theory is tested against a neoclassical sociological theory by examining the experience of 12 postcommunist countries and two reform Asian communist countries.
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Jel Codes: O1, O5, P2
Keywords: postcommunist performance, state capacity, liberalization, privatization
Tax Structures and FDI The Deterrent Effects of Complexity and Uncertainty
Shannon Mudd; Neven T. Valev
WP No. 558
(May, 2003)
Abstract: In this study we examine the connection between the varied experiences of the transition countries in attracting FDI and their diverse experiences in transforming their tax structures to be consistent with a market economy. In particular, we study whether complexity and uncertainty in their tax laws have deterred foreign direct investment by increasing transaction costs, the compliance burden and the unpredictability of tax liabilities. Our results indicate that complexity and uncertainty, in the sense of multiple tax rates, indeterminate language in the tax law, and inconsistent changes in the tax laws have a significant negative effect on inward foreign direct investment.
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Jel Codes: F21, F23, H25
Keywords: public finance, taxation, FDI, transition, uncertainty
Provincial Protectionism
Konstantin Sonin
WP No. 557
(May, 2003)
Abstract: In a federal state, political leaders of constituent units might protect their enterprises from the federal center (e.g., allowing them not to pay federal taxes). The effectiveness of such protection depends crucially on the ability of local authorities to extract rents from enterprises. They can easily do so, if there is a small number of enterprises with large employment, and local monopolies can be effectively sustained. They cannot do it so easily if regional industry is competitive, political opposition is strong, and the federal center has enough means to enforce payment of taxes. We build a simple model to argue that it is the industrial structure of constituent units that determines political relations between them and the federal center. The theory is supported by the recent experience of Russia, China, and Argentina.
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Jel Codes: H77, P2, P33
Keywords: federalism, political economics, transition
Nominal and Real Convergence in Estonia: The Balassa-Samuelson (dis)connection
Balázs Égert
WP No. 556
(April, 2003)
Abstract: The objective of the paper is to analyse the nominal and real convergence process in Estonia drawing on the Balassa-Samuelson (B-S) framework. A 15-sectoral breakdown for GDP and a 5-digit level CPI data disaggregation with over 260 items is used for the period 1993:Q1 to 2002:Q1 to show that the productivity differential is related to the GDP-deflator relative price of non-tradable goods in the long-run. Furthermore, the role of regulated prices in the CPI basket is also investigated: we show that excluding regulated prices makes it possible to detect a robust relationship between productivity and the relative price of market services in CPI. The B-S effect could have possibly contributed to CPI by a yearly average of 2% to 3% over the sample period, with 1% to 4% at the beginning of the period and 0,5% to 1% in 2000 and 2001. The potential long-run impact of the B-S effect in Estonia is estimated to amount to 1%-2% . The analysis of the influence of the B-S effect on the inflation differential and the real appreciation of the exchange rate against Finland, Sweden, Germany and the UK shows that whereas the inflation differential attributable to the B-S effect seems to be higher in the early 1990s, it explains better the real appreciation, which has occurred in recent years.
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Keywords: convergence, transition, Balassa-Samuelson effect, productivity, relative prices, tradable goods, regulated prices, real exchange rate
Banks-Firms Nexus under the Currency Board: Empirical Evidence from Bulgaria
Nikolay Nenovsky; Evgeni Peev; Todor Yalamov
WP No. 555
(April, 2003)
Abstract: This study analyses bank lending in the larger context of bank-firm relations within the Bulgarian specificity of currency board. It focuses on the ?intersection? of credit supply and demand on the side of banks and firms simultaneously. We suggest both traditional and new hypotheses corresponding to the specific conditions of the Bulgarian ownership change, transitional corruption and other institutional and political factors. The model is based on a survey on Bulgarian banks and a unique database on firms. The study found that the dynamics and structure of credit is affected mainly by the features of the institutional environment, whereas the ?resource? and traditional factors became secondary. During the period 1998 ? 2001, there is separation of the banking sector activity from the activity of the real sector in Bulgaria. In the new conditions of currency board, the dual sector of enterprises and the specific institutional environment continue their existence. Despite its disciplining effect the currency board by itself is not sufficiently effective to overcome the remaining ?institutional obstacles, associated mainly with the inefficiency of the judicial system, corruption, state capture, uncertain property rights, etc.
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Jel Codes: E5, G2, L1, P2
Keywords: corporate governance, bank lending, currency board, corruption, transition economy
Corporate Stability and Economic Growth
Art Durnev; E. Han Kim
WP No. 554
(April, 2003)
Abstract: Newly released data on corporate governance and disclosure practices reveal wide within-country variation, with the variation increasing as legal environment gets less investor friendly. This paper examines why firms practice high-quality governance when law does not require it; firm attributes that are related to the quality of governance; how the attributes interact with legal environment; and the relation between firm valuation and corporate governance. A simple model, in which a controlling shareholder trades off private benefits of diversion against costs that vary across countries and time, identifies three relevant firm attributes: investment opportunities, external financing, and ownership structure. Using firm-level governance and transparency data on 859 firms in 27 countries, we find that firms with greater growth opportunities, greater needs for external financing, and more concentrated cash flow rights practice higher-quality governance and disclose more. Moreover, firms that score higher in governance and transparency rankings are valued higher in the stock market. Equally important, all these relations are stronger in countries that are less investor friendly, demonstrating that firms do adapt to poor legal environments to establish efficient governance practices.
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Jel Codes: G32, K23
Keywords: Corporate Governance, Investment Opportunities, External Financing, Ownership, Legal Environment, Valuation
Corporate Stability and Economic Growth
Kathy S. He; Randall Morck; Bernard Yeung
WP No. 553
(April, 2003)
Abstract: Greater instability in a country's list of top corporations is associated with faster economic growth. This faster growth is primarily due to faster growth in total factor productivity in industrialized countries, and faster capital accumulation in developing countries. These findings are consistent with the view that economic growth is more closely tied to the rise of new large firms than to the prosperity of established large firms. Although a stable list of leading corporations is highly correlated with government size, it is unrelated to other possible policy goals, such as (successful) income equalization and avoiding economic crises, it is related to other political factors. However, the list of top firms is more stable in countries with fewer rights for creditors in bankruptcy and with bank-based rather than stock market-based financial systems. These findings appear to oppugn arguments of the form ?What?s good for General Motors is good for America?. We propose that political rent-seeking by large established firms underlies increased corporate stability.
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So Many Rocket Scientists, So Few Marketing Clerks: Occupational Mobility in Times of Rapid Technological Change
Nauro F. Campos; Aurelijus Dabusinskas
WP No. 552
(March, 2003)
Abstract: The transition from centrally planned to market economy involves a process of massive occupational change that has been largely neglected in the literature. This paper investigates this process using data from the 1995 Estonian Labour Force Survey. We find that between 35 and 50 percent of wage earners changed occupations from 1989 to 1995 and that job tenure is a consistently important determinant of occupational mobility. Our results also show the speed with which the market mechanism takes root: the returns to current and alternative occupations play, over these few years, increasingly important roles in explaining occupational change.
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Jel Codes: C41, H53, J23, J62, J63, J64
Keywords: Mobility, Human Capital, Transition Economies
Determinants of Interregional Mobility in Russia: Evidence from Panel Data
Yuri Andrienko; Sergei Guriev
WP No. 551
(February, 2003)
Abstract: The paper studies determinants of internal migration in Russia. Using panel data on gross region-to-region migration flows in 1992-99, we estimate the effect of economic, political and social factors. Although overall migration is rather low, it turns out that its intensity does depend on economic factors even controlling for fixed effects for each origin-destination pair. People move from poorer and job scarce regions with worse public good provision to ones that are richer and more prospering both in terms of employment prospects and public goods. Migration is however constrained by the lack of liquidity; for the poorest regions, an increase in income raises rather than decreases outmigration. Our estimates imply that up to a third of Russian regions are locked in poverty traps.
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Jel Codes: J61, P23, P36, R23
Keywords: internal migration, liquidity constraints, gravity model, Russia's transition
Gross Job Flows in Ukraine: Size, Ownership and Trade Effects
Jozef Konings; Olga Kupets; Hartmut Lehmann
WP No. 550
(March, 2003)
Abstract: This paper documents and analyses gross job flows and their determinants in Ukraine using a data set of more than 2200 Ukrainian firms operating in manufacturing and non-manufacturing for the years 1998-2000. Job destruction dominates job creation in both 1999 and 2000. Another clear-cut result of our analysis is the strong positive effect of new private firms on net employment growth. We also find an inverse relationship between job reallocation and size for both manufacturing and non-manufacturing, while only in the latter sector is employment growth inversely related with size. The main focus of the paper is the effect of trade flows on employment adjustment in manufacturing. Our results show that both employment growth and job reallocation at the firm and two-digit sector level are affected by strong exposure to import competition and product market competition in export markets. These effects are more pronounced when we consider trade flows to the world at large and to the EU than when the analysis is based on trade flows to the CIS.
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Jel Codes: E24, F14, J63, P23
Keywords: Job Creation, Job Destruction, Ukraine, Private firms, Trade
Technology Transfer through FDI in Top-10 Transition Countries: How Important are Direct Effects, Horizontal and Vertical Spillovers?
Joze P. Damijan; Mark Knell; Boris Majcen; Matija Rojec
WP No. 549
(February, 2003)
Abstract: The paper exploits a large set of more than 8,000 firms for ten advanced transition countries in order to uncover the importance of different channels of technology transfer through FDI and its impact on productivity growth of local firms. In addition to direct effects, we also distinguish between intra-industry (horizontal) and inter-industry (vertical) spillovers from foreign owned firms to local firms. After correcting for foreign investment selection bias and controlling for endogeneity of input demand (using a dynamic system GMM approach), direct FDI effects were found to provide by far the most important productivity effect for local firms in transition countries. Direct effects of FDI are found to provide on average an impact on firm?s productivity that is larger by factor 50 than the impact of backward linkages and by factor 500 larger than the impact of horizontal spillovers.
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Jel Codes: D24, F14
Keywords: Foreign direct investments, technology transfer, spillovers, transition economies
Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages
Beata K. Smarzynska
WP No. 548
(March, 2003)
Abstract: Many countries aim to attract foreign direct investment (FDI) by offering ever more generous incentive packages and justifying their actions with the expected knowledge externalities to be generated by foreign affiliates. Despite being hugely important to public policy, there is little conclusive evidence to support this claim. This study examines firm-level data from Lithuania in an effort to further our understanding of this issue. The empirical results are consistent with positive productivity spillovers from FDI taking place through contacts between foreign affiliates and their local suppliers in upstream sectors, but there is no indication of spillovers occurring within the same industry. The data indicate that local firms benefit from the operation of foreign affiliates both in their own region and in other parts of the country, albeit the evidence of the latter outcome is weaker. A larger effect is associated with domestic-market- rather than export-oriented foreign companies. There is no difference, however, between the impact of fully-owned foreign firms and those with joint domestic and foreign ownership.
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Jel Codes: F23
Keywords: spillovers, foreign direct investment, technology transfer
Re-employment Probabilities and Wage Offer Function for Russian Labor Market
Natalia Smirnova
WP No. 547
(February, 2003)
Abstract: This research addresses labor market transformation in Russia. It elaborates on the theory of job search and focuses on the following issues: (1) evaluation of the re-employment probabilities (hazard rates) for different socio-economic groups; and (2) estimation of wage offer distribution for the transforming labor market. We use data from Phase II of the Russia Longitudinal Monitoring Survey (RLMS) to estimate the employment and wage offer functions for Russian workers who found a job after having been unemployed. We take into account the effectiveness of search strategies used and correct for truncation in wage offers. The binomial logit-OLS estimation method with sample selection bias correction on pooled data from Rounds 5-9 of RLMS is used. The factors considered are sex, education, experience, sector of employment and search methods? success rate, which are hypothesized to capture the main determinants of job search behavior. The results show that individual characteristics, as well as the search method used, play a decisive role in the re-employment prospects of the unemployed. The private sector employment level is estimated to have the most powerful positive effect on the wage offer function. Russian women are less likely than men to find a job after being unemployed, and wage offers for women are estimated to be lower than for men.
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Jel Codes: J64, P23
Keywords: Russia, Transition, Job Search, Wage Offer Function, Hazard Rates
Democratization's Risk Premium: Partisan and Opportunistic Political Business Cycle Effects on Sovereign Ratings in Developing Countries
Steven Block; Burkhard N. Schrage; Paul M. Vaaler
WP No. 546
(February, 2003)
Abstract: We use partisan and opportunistic political business cycle (?PBC?) considerations to develop a framework for explaining election-period decisions by credit rating agencies (?agencies?) publishing developing country sovereign risk-ratings (?ratings?). We test six hypotheses derived from the framework with 482 agency ratings for 19 countries holding 39 presidential elections from 1987-2000. We find that ratings are linked to the partisan orientation of incumbents facing election and to expectations of incumbent victory. Consistent with the framework, rating effects are sometimes greater for right-wing compared to left-wing incumbents, perhaps, because partisan PBC considerations with right-wing (left-wing) incumbents reinforce (counteract) opportunistic PBC considerations.
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Jel Codes: D72, F30, F34, G12, G14, G15, G29
Keywords: economics, elections, developing countries, ratings
Structural Reforms and Competitiveness: Will Europe Overtake America?
Jan Svejnar
WP No. 545
(February, 2003)
Abstract: abstract
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Why the Rich May Favor Poor Protection of Property Rights
Konstantin Sonin
WP No. 544
(December, 2002)
Abstract: In unequal societies, the rich might benefit from shaping economic institutions into their favor. This paper analyzes the dynamics of institutional subversion focusing on one particular institution, public protection of property rights. If this institution is imperfect, agents have incentives to invest in private protection of property rights. With economies of scale in private protection, rich agents have a significant advantage: they could expropriate other agents using their private protection capacities. Ability to maintain private protection system makes the rich natural opponents of full protection of property rights provided by the state. Such an environment does not allow grass-roots demand to drive development of new market-friendly institutions (such as public protection of property rights). The economy as a whole is stuck in a ?bad? long-run equilibrium with low growth rate, high inequality, and wide-spread rent-seeking. The Russian ?oligarchs? of 1990s, a handful of politically powerful agents that controlled large stakes of newly privatized property, we re the major motivation for this paper.
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Jel Codes: O1, P14, P26
Keywords: economic institutions, property rights, political economy, inequality
Reinvested Earnings Bias, The ?Five Percent? Rule and the Interpretation of the Balance of Payments ? With an Application to Transition Economies
Josef C. Brada; Vladimír Tomsík
WP No. 543
(February, 2003)
Abstract: We show that the imputation of reinvested profits of the subsidiaries of foreign firms as a debit item on a host country's balance of payments account tends to overstate the current account deficit. We also show that, because of the workings of the FDI financial life cycle, this phenomenon is most evident for countries that have recently received large inflows of capital. The transition economies of East Europe certainly fall among such countries, and we show that, for the Czech Republic and Hungary, this imputation has a large effect on their reported current account balance. We verify the working of the FDI financial life cycle using two different panels of developed, developing and transition economies.
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Jel Codes: F21, F23, F34
Keywords: balance of payments, financial crisis, foreign direct investment, transition economies
The Impact of Ownership Reform in Chinese Industry, 1995-2001
Gary H. Jefferson; Su Jian; Jiang Yuan; Yu Xinhua
WP No. 542
(February, 2003)
Abstract: During the 1980s, the restructuring of Chinese industry was driven principally by the entry of new enterprises into the enterprise system and by the restructuring of managerial incentives. In 1993, China?s leadership formally inaugurated the shareholding experiment. This paper examines the impact on eight performance measures of the conversion of both state- and collective-owned enterprises to shareholding enterprises. The analysis distinguishes between the direct effect of conversion and the induced effect, involving the attraction of non-state investment, which reduces the proportion of state assets and state control rights. We find evidence for SOEs that both conversion and a decline in the share of state-owned assets motivate rising productivity and RandD intensity. While rising proportions of non-state assets motive lower employment and rising wages, the initial conversion effect is associated with higher employment and lower wages. These latter impacts may result from agreements with workers as part of the conversion process. The SOE conversion process exhibits selection bias in which SOEs with high rates of capital productivity and profitability, high tax burdens, and comparatively low wages and smaller labor forces are more likely to be selected for conversion. No similar selection bias is evident in the collective sector.
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Defensive and Strategic Restructuring of Firms during the Transition to a Market Economy
Polona Domadenik; Janez Prasnikar; Jan Svejnar
WP No. 541
(February, 2003)
Abstract: We develop a theoretical framework and provide empirical estimates of the extent of several forms of restructuring in 130 privatized firms in a model transition economy (Slovenia) during the 1996-1998 period. In view of the institutional developments in the transition economies, we divide restructuring into defensive (related to short-term cutting costs) and strategic (focused on increasing revenues through investment). Using predictions from the theoretical framework, we estimate a firm-level labor demand equation to test defensive restructuring and an augmented investment equation to assess strategic restructuring. The labor demand estimates point to relatively slow defensive restructuring, while the investment model estimates indicate the presence of credit rationing and bargaining in most types of soft investment. We do not find support for the hypothesis that firms treat expenditures on employee training as investment, but there is evidence that they behave similarly as those from developed countries in that they display features of profit maximizing behavior.
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Keywords: Strategic restructuring, defensive restructuring, firms on transition, employment, investment, employee ownership and control
Tenuous Financial Stability
Neven T. Valev; John A. Carlson
WP No. 540
(February, 2003)
Abstract: Many countries fix their exchange rate in order to bring financial stability. Usually, inflation declines and output expands but contractual agreements retain their short time frame, investment is sluggish, and economic growth slows down a few years later. This outcome is often attributed to persistent doubts on the part of agents in the commitment and ability of the government to maintain the peg. Yet direct evidence for credibility is difficult to obtain. Unique survey data from Bulgaria reveal that expectations of devaluation were indeed very much present three, four, and five years after that country achieved financial stability under a currency board regime.
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Jel Codes: E63, O11
Keywords: Credibility, Currency boards, Stabilization programs
Non-monetary Trade and Differential Access to Credit in the Russian Transition
Vlad Ivanenko
WP No. 539
(February, 2003)
Abstract: The unusual rise and fall of non-monetary trade (NMT) in the Russian transition has been a subject of heated debates. Yet, this phenomenon is often viewed as a peculiarity that one cannot explain by economic considerations alone. In this paper we show that the resort to NMT was a rational, albeit spontaneous, reaction of industrial enterprises to the outflow of liquidity, which in turn was precipitated by the combination of persistent budgetary deficit and strict monetary policy. The IMF pledge to stand by if the government became insolvent made this policy credible. Several mechanisms contributed to the development of credit rationing of enterprises. First, the abandonment of implicit guarantees on loans extended to enterprises by the Central Bank of Russia prompted commercial banks to shift credit to other groups of borrowers. Second, when the Federal Government moved to finance its budgetary deficit through open-market operations, it crowded out commercial credit. Third, public money was transferred predominantly to households who partially lent it back to the government. Fourth, the policy of low exchange rate kept the balance of payment close to zero, which prevented the monetary base from growing. The default of August 1998 constituted a clear structural break. It prompted modifications in monetary and fiscal policies. The collapse of the market for state securities led to widespread bank failures. The CBR abandoned its policy of non-intervention in fiscal affairs and cleared debts that the governments and enterprises accumulated. In addition, money supply expanded because increased inflows of foreign currency were incompletely sterilized. The combination of a lesser government presence at credit markets, clearance of debts, and increase in money supply injected liquidity in domestic producers and they abandoned NMT. Statistical evidence supports the claim that NMT was caused by credit rationing experienced by enterprises. A GLS model with four explanatory variables (and dummies accounting for a structural break of August 1998) explains more than 90% of monthly changes in NMT for the period of February 1992 ? December 2001. The collapse of the market for government loans appears to be the most significant event accountable for the structural break.
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Jel Codes: E63, P2
Keywords: Non-monetary trade, structural break, Russian transition
International Price-Fixing Cartels and Developing Countries: A Discussion of Effects and Policy Remedies
Margaret Levenstein; Valerie Suslow; Lynda Oswald
WP No. 538
(February, 2003)
Abstract: The U.S. Department of Justice, the European Commission, and the Organization for Economic Cooperation and Development have all recently voiced concern about international price- fixing cartels. The U.S. and European Union have increased prosecution of international cartels in the past decade, but very few developing countries have made similar enforcement efforts. If these cartels have significant effects on developing country consumers and producers, the lack of antitrust prosecutions by developing countries against these cartels is an important problem. Geographically limited prosecut ions may not provide sufficient disincentives to deter collusion that has worldwide benefits for colluding firms. Ongoing prosecutions of international cartels by industrialized countries may open up markets for entry by developing country producers, but these efforts may be undermined if cartels create durable barriers to entry. Western governments are also susceptible to manipulation by domestic producers using tariff barriers and anti- dumping duties to protect the home market, both during and after the price- fixing conspiracy. Thus, developing countries may need to develop their own antitrust laws and enforcement capabilities to help deter international cartel activity. A recent ruling of the Second Circuit Court of Appeals also opens up the possibility that developing country consumers may be able to exact remedies in U.S. courts. In this paper we examine the possible effects of private international cartels on developing countries by looking in detail at three recent cartel cases, as well as at a broader cross- section of forty- two recently prosecuted international cartels. We discuss the indirect effects on developing country producers, either as competitors or co- conspirators, as well the direct effects of cartels on developing country consumers. By combining trade data with a sample of US and European prosecutions of international cartels in the 1990s, we are able to make a first attempt at quantifying the order of magnitude of the consequences of these cartels on developing countries as consumers. In 1997, the latest year for which we have trade data, developing countries imported $54.7 billion of goods from a sub - sample of 19 industries that had seen a price- fixing conspiracy during the 1990s. These imports represented 5.2% of total imports and 1.2% of GDP in developing countries.
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Jel Codes: L13, L41, L65, O14, O24
Keywords: International cartels, market access, competition policy
Foreign banks in Bulgaria, 1875-2002
Kenneth Koford; Adrian E. Tschoegl
WP No. 537
(January, 2003)
Abstract: We use the analogy of ecological succession as our conceptual framework. We apply this analogy to the history of foreign banks in Bulgaria and argue that the current predominance of foreign banks is unlikely to be permanent, even without government action. Foreign banks have entered Bulgaria several times?before World War I, again after that war, and after the fall of Communism in the early 1990s. The same source countries and even some of the same banks that were present before World War II or even World War I, reappear in the 1990s. Government concern with retaining control over credit limited the foreigners? role in the banking system. However, since 1997 the government has privatized almost all the major banks with the result that foreign banks now control over 80 per cent of the banking system?s assets.
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Jel Codes: G21, L13, N34
Keywords: International-banking, Bulgaria, Foreign-Banks, transition, succession
Healthy Organizations and the Link to Peaceful Societies: Strategies for Implementing Organizational Change
Jeannette Jackson; Maria Coolican
WP No. 536
(June, 2002)
Abstract: When designing and implementing an organizational change process, we are intentionally and oftentimes significantly impacting the lives of the human beings who make up the organization. Individuals who work in organizations spend a majority of their time, usually at least five days each week, in an organizational setting or framework. If the organization is structured in a way that recognizes the needs of the employees; has a code of behavior?oftentimes referred to as the organizational values? that is civil and caring; uses the code of behavior to give developmental feedback to employees; and, creates opportunities for a variety of networks between people, the environment is very likely to be conducive for things such as positive conflict resolution and healthy organizational growth. If people are expected to behave respectfully and in a civil fashion, and if the organization intentionally promotes such behavior, the continuous, daily reinforcement of ?a respectful way of working together? will often spill out into behavior outside of the organization. If we hope to change the world, it means we have to consider how to positively impact the thinking and the behavior of people at all ages. Families, schools, religious organizations, social groups and business organizations all have the potential of contributing to a more peaceful society by creating ?rules of the game? that require respectful, civil and peaceful behaviors of their members.
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Keywords: organizational behavior, leadership, leadership development, management, human resources, organizational development, change, values
Workplace Violence and Security: Are there Lessons for Peacemaking?
Frances E. Zollers; Elletta Sangrey Callahan
WP No. 535
(January, 2003)
Abstract: Workplace violence has captured the attention of commentators, employers, and the public at large. Although statistically the incidents of workplace homicide and assault are decreasing, public awareness of the problem has heightened, largely through media reports of violent incidents. Employers are exhorted to address the problem of workplace violence and are offered a variety of programs and processes to prevent its occurrence. Many techniques, however, conflict with values that are critical to achieving sustainable peace. We focus on types of workplace violence that are triggered by organizational factors. From among the plethora of recommendations, we identify those responses that are most and least consistent with positive peace. We find that processes that promote privacy, transparency, and employee rights hold the most promise for peacemaking. We submit that such structures and processes can be transportable beyond the workplace to promote peace locally, nationally, and globally.
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Jel Codes: K39
Keywords: workplace violence, employee rights, sustainable peace, and corporate governance
700 Families to Feed:
Tara J. Radin
WP No. 534
(January, 2003)
Abstract: When Howard Lutnick, CEO of Cantor Fitzgerald, was first interviewed after September 11, 2001, a tragedy that devastated his firm and stole the life of his brother, Lutnick stated that he now had ?700 families to feed.? The view that he expressed was that his firm was responsible to the families of the wage earners lost in the tragedy, even though the firm was not responsible for the events that had occurred. Such assumed corporate responsibility, consistent with a stakeholder-based approach to management, is often considered to conflict with the law. The purpose of this Article is to demonstrate that stakeholder management does not inherently conflict with the law. In fact, principles of stakeholder thinking coincide with our moral intuitions, reflect many demonstrated best business practices, and promote profit-generation as envisioned and advocated by the law. This Article explores the nature of stakeholder relationships and their impact on business enterprises. The interconnected experiences of individuals and organizations in the wake of the events of September 11, while exemplary and perhaps more pronounced, are not isolated. The purpose of this Article is to draw upon such experiences in order to move beyond the traditional hub-and-spoke model of the firm, and to integrate past and present examples in a more dynamic, stakeholder-based model of corporate citizenship that bridges the gap between stakeholder thinking and the law and is both descriptive and normative.
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Keywords: World Trade Center, Peace, Stakeholder thinking, Stakeholder theory,
Governing for Genuine Profit
Michael J. O'Hara
WP No. 533
(January, 2003)
Abstract: Business corporations seek profit. That is, after subtracting cost, they maximize net revenue. Spillovers (both costs and benefits) involve trade-offs governing boards should make. Spillovers, especially when coupled with clumsy applications of discounted present value, distort a business' perception of profit. Today, businesses are buffeted by the old risks of recession and the new risks of terrorism. If modern society is to survive, then the seeds of terrorism and their fruit of tremendous loss must be contained. Accordingly, governing boards must propel businesses towards a paradigm of genuine profit. Governing boards must insist that their businesses prospect for positive feedback loops and implement a sustainable profit stream. In short, governing boards must insist that business be entrepreneurial.
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Jel Codes: D81, G34, K22, L21, M14
Keywords: Uncertainty, Corporate Governance, Corporate Law, Managerial Discretion, Social Responsibility
Adapting Corporate Governance for Sustainable Peace
Timothy L. Fort; Cindy A. Schipani
WP No. 532
(January, 2003)
Abstract: In previous work, we argued that there is a link between corporate governance and the reduction of violence. In this manuscript, we further explore that link with a focus on how corporations can work toward the goal of reduction of violence in the societies in which they operate. Here, we pose the question of how well suited various corporate governance regimes are to face these complexities, and how they can do so in ways that are consistent with their fundamental principles. We focus on the corporate governance regimes of the United States, Germany and Japan. A common denominator of the political entities addressed is a commitment to a political regime of democracy. Section I outlines our thesis that corporations are in a position to make contributions to peace in society because of shifting political balances of power. It elaborates with the idea that our contemporary world has shifted from traditional balance of power conceptions in terms of the near universal embrace of parliamentary democracy requiring some reformulated description of the optimal relations among democracy, peace, and globalization. This section establishes the general parameters of the argument that democracy and peace are linked and that there are serious charges that globalization works against democracy and thereby threatens the sustainability of peace. Section II analyzes comparative models of corporate governance and considers the extent to which contemporary corporate governance models look to peace and workplace security as aims they should achieve. Concluding remarks follow in Section III.
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Keywords: corporate governance, comparative law, business ethics, peace, democracy, globalization
Groundings of Voice in Employee Rights
Dana Muir
WP No. 531
(January, 2003)
Abstract: abstract
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Gender Voice and Correlations with Peace
Terry Morehead Dworkin; Cindy A. Schipani
WP No. 530
(January, 2003)
Abstract: The statistics regarding violence in today?s society are staggering. A newly released study published by the World Health Organization, making headlines in the Wall Street Journal (Oct. 3, 2002) reports that ?Violence Took 1.6 Million Lives in 2000.? Notably, this report considers only the data obtained from the seventy countries that report such statistics to the World Health Organization. It does not include reports from many countries whose violence is also high, such as Burundi, Rwanda, Iraq, Liberia and Afghanistan. This manuscript seeks to address some of these issues of violence by considering issues of gender. We pose the question whether there may be some correlation between violence and the lack meaningful involvement of women in the economy. If the countries that appear more violent are also countries where women are systematically excluded from business opportunities, perhaps one way to curb some of the societal violence would be to improve the opportunities for women in the economy. Multi-national corporations can play an important role in increasing these opportunities. As has been argued elsewhere, a reduction in poverty promotes stability and leads to a more peaceful society. Studies show that in developing countries, involving women in the economy as wage earners can reduce poverty. As the locus of production shifts away from the home, an initial decline in employment opportunities may occur. However, this eventually disappears and both women and men benefit.
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Keywords: corporate governance, gender, comparative law, discrimination, peace, globalization
The Organizational Model for Workplace Security
Thomas K. Capozzoli
WP No. 529
(January, 2003)
Abstract: The definition of workplace violence is a ?any act of harassment (including sexual harassment), intimidation, threat, rape or homicide that takes place at a victim?s place of employment.? When the statistics for workplace violence are looked at, it is easily understood why workplace security is rapidly becoming a problem for many organizations. The situation that provokes workplace violence does not necessarily have to start in the workplace or and the act of violence does not necessarily have to happen in the workplace for organizations to be concerned. Many organizations are just learning that violence can occur anywhere at anytime and they must be prepared to cope with the situation. This means they must take a look at their preparedness and decide what they need to do to not only increase preparedness but also to understand what procedures they do day to day that might affect a potentially violent situation. Organizations need to ask tough questions as to their hiring procedures, termination procedures, and security procedures. In today?s society, this increases from the aspect of global terrorism and how well are they prepared for the potential of a terrorist attack. Security in the workplace will continue to be a concern but by following specific procedures and processes the risk of a situation happening can be significantly reduced.
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Keywords: workplace violence, workplace security, organizational security, domestic violence, spillover violence, workplace threats, violence prevention, employee violence
Nationbuilding 101: Property, Liberty, and Corporate Governance
O. Lee Reed
WP No. 528
(January, 2003)
Abstract: Nationbuilders in less developed countries need to understand how Western legal systems with "property" at their center have materially accounted for Western prosperity and liberty, but legal definitions of property are so abstruse that explication of this vital concept is made difficult. This paper finds an historical definitional essence to property in the right to exclude and maintains that liberty and property both share this essential meaning. The problems of corporate governance are then placed in the context of the exclusionary concept of property/liberty.
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Keywords: property, property rights, development and property, liberty, and corporate governance
On Virtue and Peace: Creating a Workplace Where People Can Flourish
Caryn L. Beck-Dudley; Steven H. Hanks
WP No. 527
(January, 2003)
Abstract: Nationbuilders in less developed countries need to understand how Western legal systems with "property" at their center have materially accounted for Western prosperity and liberty, but legal definitions of property are so abstruse that explication of this vital concept is made difficult. This paper finds an historical definitional essence to property in the right to exclude and maintains that liberty and property both share this essential meaning. The problems of corporate governance are then placed in the context of the exclusionary concept of property/liberty.
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Novartis and the United Nations Global Compact Initiative
Lee A. Tavis
WP No. 526
(December, 2002)
Abstract: The spirit of the Global Compact found fertile ground and has become an integral part of Novartis corporate strategy since the enterprise was formed by the merger of the two large Swiss pharmaceutical companies, Sandoz and Ciba, in 1996. Following a four-year concentration on economic consolidation and performance, Daniel Vasella (Chairman and CEO) signed the Global Compact. Together, productivity-based economic performance and a proactive approach to the expectations of society are envisioned as the key to long-term corporate success in the rapidly integrating global economic, political, and social environment of today?s large multinational corporation. This paper outlines the Novartis strategy and its implementation including the coalescing role of the Global Compact in the drive for sustainable corporate development. Following a review of extending corporate strategy to incorporate social concerns into the economic business model, the process of implementing the strategy will be assessed. In part three, specific examples of this strategic positioning will be outlined.
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Keywords: Novartis, Pharmaceutical Industry, UN Global Compact, Gleevec, Novartis Institute for Tropical Diseases
Why Transition Paths Differ: Russian and Chinese Enterprise Performance Compared
Sumon Kumar Bhaumik; Saul Estrin
WP No. 525
(January, 2003)
Abstract: We use enterprise data to analyse and compare the determinants of enterprise performance in China and Russia. We find that in China, enterprise growth and efficiency is associated with rapid increases in factor inputs including management, as well as TFP, but not greatly associated with ownership or institutional factors. In contrast, sales growth in Russia is not associated with improvements in factor quantity (except for labor) or quality; TFP is not influenced by competition and privatization to outsiders does not enhance company performance relative to insider ownership. The main determinants of TFP are instead demand and institutional factors at a regional level.
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Jel Codes: D23, L22, O12, P31
Keywords: informal enterprise performance, privatization in Russia and China, total factor productivity
Official Regulations and the Shadow Economy: A Labour Market Approach
Maxim Bouev
WP No. 524
(December, 2002)
Abstract: This work revisits the role of regulations in emergence o f the shadow economy. In particular, it supplements the previous theoretical research that mainly ignored the fact that the decision to ?go underground? is essentially a result of both employers and employees interacting in the labour market. We adapt a job search approach (see, e.g. Acemoglu 2001) to model a transitional economy with an informal sector. We apply and develop the idea first documented inter alia by Loayaza (1996) that there are two types of regulations that influence the size of the informal labour market through two different channels. Red tape and bureaucratic extortion (bribing) make starting a new business officially a not very attractive option and can lead new firms to the informal sector. On the other hand, taxes and redundancy pay make official firms offer lower wages which drives potential employees away into underground jobs. Depending on various combinations of policy parameters equilibria with different share of the informal economy are possible. The paper draws conclusions regarding the role of unemployment benefits in reducing the size of the informal economy. Policy implications are offered.
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Jel Codes: H26, J41, J42, J64, O17
Keywords: informal economy, labour markets, corruption, regulations, search models
Children at Risk: Infant and Child Health in Central Asia
Cynthia Buckley
WP No. 523
(January, 2003)
Abstract: Using Demographic and Health Surveys, government statistics, and field observations I examine trends in infant and child health in Uzbekistan, Kazakstan and the Kyrgyz Republic. Health indicators (anemia and marked low weight for age) for the population under the age of 3 are examined nationally, regionally and by ethnic groups. Findings indicate the risk of compromised child health varies by ethnicity, but the effect is dramatically lessened by the introduction of household and maternal controls such as parental education, residence, and mother?s health status. Findings highlight the social costs of transition, illustrate the importance of maternal health across the region, and assist in the identification of groups at highest risk for poor child health within individual countries.
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Jel Codes: I0, J1, N3, P2
Keywords: Child Health, Central Asia, Transitionary Economies, Anemia, Stunting, Maternal Health
Wages and International Rent Sharing in Multinational Firms
John W. Budd; Jozef Konings; Matthew J. Slaughter
WP No. 522
(July, 2002)
Abstract: We use a unique firm-level panel data set of multinational parents and their foreign affiliates to analyze whether profits are shared across borders within multinational firms. Using both fixed-effects and generalized method-of-moments estimators, affiliate wage levels are estimated to respond to both affiliate and parent profitability. The elasticity of affiliate wages to parent profits per worker is approximately 0.03, which can explain over 20 percent of the observed variation in affiliate wages. These results reveal a previously ignored aspect of labor-market rent sharing. They also reveal an important micro-level linkage with potential macro-level implications. International rent sharing can transmit economic conditions across national borders, and can thereby provide an implicit cross-country risk-sharing mechanism.
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Jel Codes: F23, J30
Keywords: Wages, Profit Sharing, Multinational Firms
Gross Job Flows in Ukraine: Size, Ownership and Trade Effects
Jozef Konings; Olga Kupets; Hartmut Lehmann
WP No. 521
(December, 2002)
Abstract: This paper documents and analyses gross job flows and their determinants in Ukraine using a unique data set of more than 2200 Ukrainian firms operating in both the manufacturing and the non-manufacturing sector for the years 1998-2000. There are several important findings in the paper. Job destruction is dominating job creation in both 1999 and 2000. In connection with other evidence we infer from this that Ukraine is only at the beginning of the restructuring process. The most clear-cut result of our analysis is the strong positive effect of new private firms on net employment growth, a finding established for other transition economies as well. At the same time, we do not find differences in the employment growth of state-owned and privatised firms. Apart from ownership effects we also find, at the firm level, an inverse correlation of size and net employment growth and of size and job reallocation. Finally, we establish that strong foreign trade links force firms to shed labour more aggressively and to engage in more restructuring when trade is directed to and originating from Western economies. This disciplining function is absent when the trade flows are confined to CIS countries.
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Jel Codes: E24, F14, J63, P23
Keywords: Job Creation, Job Destruction, Ukraine, Private firms, Trade
Entrepreneurial Networking in China and Russia: Comparative Analysis and Implications for Western Executives
Bat Batjargal
WP No. 520
(December, 2002)
Abstract: In this article, I compare personal networks of Chinese and Russian entrepreneurs in terms of network structure, relationships and resources accessed in networks. The Chinese data is composed of longitudinal phone interviews with 94 Internet entrepreneurs in Beijing, and the Russian data is comprised of longitudinal face-to-face interviews with 75 entrepreneurs in Moscow, Ekaterinburg and Petrozavodsk. Implications for Western executives are discussed.
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Keywords: entrepreneurs, networks, China, Russia
Agriculture and Income Distribution in Rural Vietnam under Economic Reforms: A Tale of Two Regions
Loren Brandt; Dwayne Benjamin
WP No. 519
(March, 2002)
Abstract: This paper exploits the panel dimension of the Vietnam Living Standards Survey (VLSS) in order to analyze the main changes occurring in agriculture in Vietnam over the period 1993- 1998. This period was marked by a continuation of the reforms that began in 1988 with the implementation of Resolution 10, Vietnam?s own version of the Chinese Household Responsibility System. We focus on the impact of two main policy changes: first, the increase in the rice export quota and the significant increase in the price of rice, especially in the south; second, liberalization of the fertilizer market and the sharp drop in the price of fertilizer. To this end, we document changes in the empirically observable ?institutional environment,? exploring changes in rice and other crop prices as well as fertilizer prices. With this as background, we explore changes in r ice production, consumption and marketing, and their links to changes in prices and incomes. We also estimate the degree to which these increases can be ?explained? by increased use of inputs like fertilizer, cropping intensity, and increased yields. Finally, we investigate the distributional impacts of these changes, including a detailed examination of the linkages between rice marketing and income distribution using nonparametric econometric techniques. We find that the agricultural reforms had a largely beneficial impact on the well being of rural households throughout Vietnam, but that farmers in the south gained most, consistent with expectations given the policy changes. More generally, our conclusions suggest that market reforms can have a significant impact on incentives, without adverse consequences for income distribution.
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Jel Codes: P3, Q12, Q17, Q18
Keywords: economic reforms in Vietnam, trade liberalization, agricultural productivity, welfare distribution
Property Rights, Labour Markets, and Efficiency in a Transition Economy: The Case of Rural China
Loren Brandt; Dwayne Benjamin
WP No. 518
(March, 2002)
Abstract: This paper investigates the consequences of imperfect and uneven factor market development for farm efficiency in rural China during transition. In particular, we estimate the extent to which an inverse relationship in farm productivity can be attributed to the administrative (instead of market) allocation of land, and the extent of unevenly developed non-agricultural opportunities. Using a recently collected household survey, we show that a considerable amount of inefficiency exists in the countryside, especially in the employment of labour. Our results show that this inefficiency is alleviated by the development of external labour markets, and that in the context of the current imperfect market environment, administrative reallocations help improve on the margin both efficiency and equity. They do not go far enough, however, which raises important questions about constraints on rental activity, the link between admin istrative reallocation and decentralized land exchange, and property rights formation more generally.
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Jel Codes: D23, J43, O12, Q15
Keywords: Rural institutions, property rights, labour markets, transition economies, farm efficiency
Bank Discrimination in Transition Economies: Ideology, Information or Incentives?
Loren Brandt; Hongbin Li
WP No. 517
(October, 2002)
Abstract: We study bank discrimination against private firms in transition countries. Theoretically, we show that banks may discriminate for non-profit reasons, but this discrimination diminishes with a bank?s incentives and human capital. Employing matching bank-firm data from China, we empirically examine the extent, sources and consequences of discrimination. Our unique survey design allows us to disentangle sample truncation, omitted variable bias, and endogeneity issues. Our empirical findings confirm the theoretical predictions. We also find that as a result of discrimination, private firms resort to more expensive trade credits.
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Jel Codes: G14, G21, P26, P34
Keywords: Bank discrimination, privatization, economic transition
Ex-ante Evaluation of Conditional Cash Transfer Programs: The Case of Bolsa Escola
François Bourguignon; Francisco H.G. Ferreira; Phillippe G. Leite
WP No. 516
(September, 2002)
Abstract: Cash transfers targeted to poor people, but conditional on some behavior on their part, such as school attendance or regular visits to health care facilities, are being adopted in a growing number of developing countries. Even where ex-post impact evaluations have been conducted, a number of policy-relevant counterfactual questions have remained unanswered. These are questions about the potential impact of changes in program design, such as benefit levels or the choice of the means-test, on both the current welfare and the behavioral response of household members. This paper proposes a method to simulate the effects of those alternative program designs on welfare and behavior, based on micro-econometrically estimated models of household behavior. In an application to Brazil?s recently introduced federal Bolsa Escola program, we find a surprisingly strong effect of the conditionality on school attendance, but a muted impact of the transfers on the reduction of current poverty and inequality levels.
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Jel Codes: I38, J13, J22, J24
Keywords: Conditional Transfers, Demand for Schooling, Child Labor
Missed Expectations: The Argentine Convertibility
Sebastian Galiani; Daniel Heymann; Mariano Tommasi
WP No. 515
(November, 2002)
Abstract: This paper studies the process that led to the Argentine crisis. The crisis is understood as a major disappointment of previous expectations, indicated by widespread insolvencies and abrupt declines in consumption. The analysis concentrates on the sequence of public and private decisions, and the varying perceptions and policy incentives that motivated them. In the nineties Argentina searched for a new growth trend. During much of the period, the behavior of agents seemed to be based on the anticipation that current and future incomes could sustain a value of domestic spending much higher than in the past. The government was motivated to reinforce those expectations, for signaling and political economy reasons. The convertibility monetary regime not only provided a very visible nominal anchor, but also operated as a basic framework for financial contracts, mostly denominated in dollars. Dollar contracting implicitly presumed that the dollar value of incomes would support the servicing of debts. Despite precautionary measures, the reliance on the sustainability of the real exchange rate increased over time. In the late nineties exports stopped rising and the foreign supply of credit tightened. Facing these contraints, the economy contracted and the solvency of the government was put into question. The financial system was vulnerable both in the event of devaluation and that of a (large) deflation-cum-adjustment. As was implicit in its design and management, convertibility proved to have very large exit costs.
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Jel Codes: E0, E32, E50
Keywords: Economic Crisis, Contracts, Convertibility and Wealth Perceptions
Job Reallocation and Productivity Growth under Alternative Economic Systems and Policies: Evidence from the Soviet Transition
J. David Brown; John S. Earle
WP No. 514
(November, 2002)
Abstract: How do economic policies and institutions affect job reallocation processes and their consequences for productivity growth? This paper studies the extreme case of economic system change and alternative transitional policies in the former Soviet Republics of Russia and Ukraine. Exploiting annual manufacturing census data from 1985 to 2000, we find that Soviet Russia displayed job flow behavior quite different from market economies, with very low rates of job reallocation that bore little relationship to relative productivity across firms and sectors. Since liberalization began, the pace, heterogeneity, and productivity effects of job flows have increased substantially. The increases occurred more quickly in rapidly reforming Russia than in ?gradualist? Ukraine, as did the estimated effects of privatization and competitive pressures from product and labor markets on excess job reallocation and on the productivity-enhancing effects of job flows.
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Jel Codes: E24, J63, O47, P23
Keywords: job reallocation, productivity, transition, Russia, Ukraine
Cross-Border Trading as a Mechanism for Capital Flight: ADRs and the Argentine Crisis
Sebastian Auguste; Kathryn M.E. Dominguez; Herman Kamil; Linda L. Tesar
WP No. 513
(November, 2002)
Abstract: This paper examines the surprising performance of the Argentine stock market in the midst of the country?s most recent financial crisis and the role played by ADRs in Argentine capital flight. Although Argentine investors were subject to capital controls, they were able to purchase stocks with associated ADRs for pesos in Argentina, convert them into ADRs, re-sell them in New York for dollars and deposit the dollar proceeds in U.S. bank accounts. In the paper we show that: (1) ADR discounts went as high as 60% (indicating that Argentine investors were willing to pay significant amounts in order to legally move their funds abroad), (2) the market anticipated (correctly) a 40% devaluation, (3) local market factors in Argentina became more important in pricing peso denominated stocks with associated ADRs, while the same stocks in New York were mainly priced based on global factors, (4) capital outflow using the ADR market was substantial (our estimate is between $835 million and $3.4 billion).
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Jel Codes: F32, F36, G12, G15
Keywords: Argentina, Financial Crises, Capital Controls, ADRs
Embracing the Market: Entry into Self-Employment in Transitional China, 1978-1996
Xiaogang Wu
WP No. 512
(September, 2002)
Abstract: This paper introduces labor market transition as an intervening process by which the macro institutional transition to a market economy alters social stratification outcome. Rather than directly addressing income distribution, it examines the pattern of workers? entry into self-employment in reform-era China (1978-1996), focusing on rural-urban differences and the temporal trend. Analyses of data from a national representative survey in China show that education, party membership and cadre status all deter urban workers? entry into self-employment, while education promotes rural workers? entry into self-employment. As marketization proceeds, the rate of entry into self-employment increases in both rural and urban China, but urban workers are increasingly more likely to take advantages of the new market opportunities. In urban China, college graduates and cadres are still less likely to be involved in self-employment, but they are becoming more likely to do so in the later phase of reform. The diversity of transition scenarios is attributed to rural-urban differences in labor market structures.
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Jel Codes: J23, J4, J40
Keywords: Market, Rural China, Self-employment, Transition, and Urban China
Opening the Capital Account of Transition Economies: How Much and How Fast
Daniel Daianu; Radu Vranceanu
WP No. 511
(September, 2002)
Abstract: In the late eighties, many developing countries followed the example of the most advanced countries and opened their capital account (K.A.) in an attempt to reap new gains from increased integration with the world economy. By 2000, after the wave of financial and currency crises that hurt the global economy in the last decade, enthusiasm about K.A. liberalization has much faded. Firstly, the relationship between development and capital account liberalization did not come out to be as solid as initially expected; secondly, greater capital mobility has brought about increased global financial instability. New thinking in international economics calls for proper sequencing in opening the K.A.: liberalization should proceed in step with progress in macroeconomic stability, structural reform and creation of a sound internal financial system. In this paper, we analyze to what extent and at what pace should transition economies carry out the K.A. liberalization process.
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Jel Codes: F21, F32, F36, P33
Keywords: capital mobility, capital outflows, financial instability, transition
Bridging "the Great Divide": Countering Financial Repression in Transition
Patrick Conway
WP No. 510
(May, 2002)
Abstract: The large and widening gap between economic performance in Eastern European transition economies and those of the former Soviet Union has been dubbed ?the Great Divide? by Berglof and Bolton (2002). This paper provides a rationale for the gap based upon the concept of financial repression. The magnified effects of transition to the market can be attributed to the government manipulation of financial markets in these countries, with the divide defined by the length of time that governments relied upon financial-market manipulation to finance government fiscal policy. Policies undertaken to assist in financing government expenditures caused financial repression and financial fragmentation, to use the terms introduced by McKinnon (1973). After an introductory section, I introduce a theoretical model of real and financial sectors in transition. The dynamic path to equilibrium from transition is derived. It is shown to have a tendency toward output contraction and hyperinflation when government policies promote financial repression. In the third section this hypothesis is examined with macroeconomic data from Ukraine for the period 1992 - 2001. These data are consistent with the hypothesis, although other factors (e.g., recession in trading partners) are also shown to be important.
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Jel Codes: E21, E44, H11, O16
Keywords: Transition Economies, Financial Repression, Inflation, Real balances
Change the Regime ? Change the Money: Bulgarian Banknotes, 1885-2001
Adrian E. Tschoegl
WP No. 509
(May, 2002)
Abstract: The money we use has symbols and images on it that communicate information. One part of this are pictorial and symbolic elements that draw attention to aspects of the country that issuer is proud of and that convey the message that it wishes to convey. As one would expect, as regimes change, so do the banknotes. Bulgaria has a rich history of change having gone from being a (nominally) Ottoman principality to an independent Kingdom, an agrarian socialist state, a quasi-fascist Monarchy, a People?s Republic, and most recently, a Parliamentary Republic.
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Jel Codes: N00, P39, Z10
Keywords: banknotes, design, Bulgaria
Differential Rewards to, and Contributions of, Education in Urban China?s Segmented Labor Markets
Margaret Maurer-Fazio; Ngan Dinh
WP No. 508
(June, 2002)
Abstract: Education?s role in determining worker incomes in China?s rapidly changing urban labor markets is investigated in this paper. Using worker data from a 1999-2000 urban enterprise survey, we examine the effects of education on the current earnings of continuously-employed urban workers, migrants, and laid off but subsequently re-employed workers, as well as on the most recent earnings of laid-off (but not subsequently re-employed) workers. We also decompose the earnings differentials between each of these groups of workers and then assess the contribution of education to explanations of the differentials. The empirical results demonstrate that educational attainment remains an important explanator of earnings differentials between institutionally-differentiated groups of workers in China?s urban labor markets. An interesting hierarchy of returns to education has developed. The education of migrants is generally poorly rewarded. The moderate returns to educational investments of the continuously-employed urban residents rank next. Re-employed urban residents experience the highest rewards to their education, especially those who used a competitive means to find their post-layoff employment. When we assess the earning differentials between groups using the continuously-employed urban residents as the basis of comparison, differences in educational attainments alone contribute between 16 and 52 percent of the explanation of the total inter-group wage gaps.
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Jel Codes: J20, J22, J31, J64, J71, O15, O53, P23, P36
Keywords: wages, China, unemployment, discrimination, transitional economies, employment determination, labor
Balassa-Samuelson Effect in Transition Economies: The Case of Slovenia
Bostjan Jazbec
WP No. 507
(October, 2002)
Abstract: Paper presents a first-hand examination of the Balassa-Samuelson effect in Slovenia. Different measures of real exchange rate are presented in order to provide arguments for the Balassa-Samuelson effect estimation using external real exchange rate measure. It is argued that on average one percent increase in productivity differential between labor productivities in industry and services appreciated external real exchange rate by almost 1.5 percent in the period from 1993:1 to 2001:2. At the same time, one percent increase in productivity differential caused about 1.7 percent increase in CPI. The results are in line with other studies on real exchange rate behavior in transition economies.
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Jel Codes: F31, F41, P22, P24
Keywords: transition economies, real exchange rate, Balassa-Samuelson effect
Explaining Gender Differences in Unemployment with Micro Data on Flows in Post-Communist Economies
Jana Stefanová Lauerová; Katherine Terrell
WP No. 506
(September, 2002)
Abstract: Post-communist labor markets provide an interesting laboratory since unemployment rates grew from zero to double digits and gender differences began to vary greatly across these countries. We provide the first systematic analysis of the determinants of the gender unemployment gap in the Czech Republic using a method that decomposes unemployment rates into transition probabilities (flows) between labor market states, which we calculate using Labor Force Survey data. We extend the analysis to other post-communist economies by evaluating the flows available from existing studies with the decomposition framework. We further examine the flows in the Czech Republic by estimating gender-specific multinomial logit models to learn which factors (demographic, regional, cyclical) other than gender and marital status affect unemployment. We find that women?s lower probability of exiting unemployment for a job explains the lion?s share of the gender gap in the unemployment rates in the Czech Republic and the other post-communist countries for which studies exist. This is also the principal factor explaining married women?s higher unemployment rates compared to married men in the Czech Republic. On the other hand, single men and women?s rates are higher than married men and women?s because they are twice as likely to lose/leave a job for unemployment. We find that age and education are systematically important in explaining flows of both men and women in all these economies, as it is in the more developed industrial economies. The less educated are more likely to be laid off or quit and less likely to find a job. Whereas younger individuals are more likely to be laid off or quit, they are also more likely to find a job.
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Jel Codes: C23, J48, J64, P20
Keywords: Unemployment, Gender, Transition Probabilities, Flow Analysis, Post-communist economies, Czech Republic
Bank Performance in Transition Economies
Steven Fries; Damien Neven; Paul Seabright
WP No. 505
(September, 2002)
Abstract: This paper examines the performance of 515 banks in 16 transition economies for the years 1994 ? 99 based on their public financial accounts. We first examine lending behaviour and probability distribution of bank profitability to determine whether these banks exhibit behaviour and performance associated with excessive risk-taking. While we do not find evidence of excessive risk taking on average where there is significant progress in banking and related enterprise reforms, there may be a minority of poorly capitalised banks that do take excessive risks, particularly where progress in reform is less advanced. The paper then estimates cost and revenue functions based on a model of banks as multi-product firms. The results indicate that banks' performance differs significantly depending on the reform environment, as well as the competitive conditions, in which they operate. Banks with high market shares have higher costs and achieve lower margins on their loan and deposit activities. Where there has been significant progress in banking and related enterprise reforms, banks are making comfortable margins on loans and appear to be offering competitive margins on deposits, though they are still achieving overall negative returns on equity. By contrast, when substantial reforms have not been undertaken, banks have been sustaining high negative returns on loans, largely at the expense of depositors; in effect they have been able to appropriate much of the tax that inflation levies on nominal deposits, and have been using this revenue to prop up their weak loan portfolios. Overall interest margins are declining over time but are substantially higher in low reform environments. The results indicate that an appropriate policy and regulatory framework may be a necessary condition for significant progress to be made.
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Jel Codes: G2, L1, L8, P2
Keywords: banking, cost functions, revenue functions, transition
Does the Balassa-Samuelson Hypothesis Hold for Asian Countries? An Empirical Analysis using Panel Data Cointegration Tests
Imed Drine; Christophe Rault
WP No. 504
(August, 2002)
Abstract: This paper tests empirically the Balassa-Samuelson (BS) hypothesis using annual data for 6 Asian countries. We apply new panel data cointegration techniques recently developed by Pedroni (2000) and we compare the results with those obtained with conventional Johansen (1995)?s time series cointegration tests. Whereas, standard time series approach turns out to be able to put in evidence a significant long-run relationship between real exchange rate and productivity differential; this relationship is strongly rejected for all countries using recent advances in the econometrics of non-stationary dynamic panel methods. Closer examinations of the three key components of the BS hypothesis enable us to identify clearly the causes of this empirical failure. We find that the absence of a positive long-run relationship between productivity differential and relative prices is the reason for this rejection.
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Jel Codes: C15, E31, F0, F31
Keywords: Real Exchange Rate, Balassa-Samuelson hypothesis, Asian countries, Panel unit-root and cointegration tests
Job Growth in Early Transition: Comparing Two Paths
Stepan Jurajda; Katherine Terrell
WP No. 503
(August, 2002)
Abstract: Small start-up firms are the engine of job creation in early transition and yet little is known about the characteristics of this new sector. We seek to identify patterns of job growth in this sector in terms of niches left from central planning and ask about differences in job creation across two different transition economies: Estonia, which experienced rapid destruction of the pre-existing firms, and the Czech Republic, which reduced the old sector gradually. We find job growth within industries to be quantitatively more important than job growth due to across-industry reallocation. Furthermore, the industrial composition of startups is strikingly similar in the two countries. We offer convergence to "western" industry firm-size distributions as an explanation. We also find regularities in wage evolution across new and old firms, including small differences in job quality across the two transition paths.
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Jel Codes: J2, O1, O4, P2, P5
Keywords: Job growth, job creation, job destruction, new sector, transition economies, Czech Republic, Estonia
Job Creation, Destruction and Transition in Poland, 1988-1998: Panel Evidence
John E. Jackson; Bogdan Mach
WP No. 502
(June, 2002)
Abstract: Longitudinal data from interviews with Poles of working age conducted in 1988, 1993 and 1998 present a detailed view of the transition from a state dominated to a market economy. Job loss in state firms and job creation in new private firms are the dominant employment change, other than retirements from the labor force. In the Polish case, a significant proportion of this movement over the 1988 to 1998 period involves a period of unemployment or exit from the labor force before obtaining a private sector job. A second feature of the Polish transition is considerable job competition between workers leaving the state sector and those who were out of the labor force at the beginning of the transition. The likelihood of moving to the private sector was higher for the better educated and for residents of regions with a robust de novo economy, suggesting that the supply of jobs in the private sector combined with higher levels of human capital lead to faster and smoother transitions. Lastly, wage differences between the state sector and the de novo sector appear to have little association with mobility, suggesting that movement is not strongly related to the opportunity to find a higher paying job.
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Keywords: Transition Economics, Labor Mobility, Poland
Competition, Innovation and Growth in Transition: Exploring the Interactions between Policies
Philippe Aghion; Wendy Carlin; Mark Schaffer
WP No. 501
(March, 2002)
Abstract: Transition has entailed the introduction of policies to stimulate product market competition, to establish effective corporate governance and to harden enterprise budget constraints. How do these policies interact? Are they substitute policy instruments or does one policy reinforce the effect of another? Although early endogenous growth models predicted a negative relationship between competition and innovation, Aghion, Dewatripont and Rey (1999) showed that this could be reversed if agency considerations were introduced. In their model competition acts as an incentive mechanism to reduce managerial slack, which produces the additional prediction that competition and corporate governance are substitutable. But in a profit-maximizing framework in which incumbent firms innovate to escape competition, there will be complementarity between increased product market competition and governance and between competition and hard budget constraints (Aghion and Howitt 2002). We use the EBRD-World Bank Enterprise survey of over 3,000 firms in 25 transition countries to test for interaction effects between policies. We find that competition and hard budget constraints are complementary. We also find that competitive pressure (a) enhances the performance of old firms, which is suggestive of a role if agency effects and hence of policy substitutability and (b) enhances the performance of new firms, which is consistent with complementarity. Finally, the evidence points to the prevalence of financing constraints facing new firms.
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Jel Codes: G32, L10, O31, P20
Keywords: transition, innovation, competition, corporate governance, hard budget constraints, policy interactions, enterprise survey