Foreign presence and efficiency in transition economies

This paper presents empirical evidence on the role of foreign presence in the performance of domestic manufacturing firms in five Central and Eastern European countries. Data Envelopment Analysis (DEA) was used to estimate a frontier for each sector with similar technology common for five transition countries in the sample − Bulgaria, Estonia, Hungary, Poland and Romania. Following Simar and Wilson (J Econom 136(1):31–64, 2007), this study applies a truncated regression and bootstrap technique in a second stage post-DEA analysis. Some evidence is found to support the hypothesis that foreign presence has an overall positive spillover effects on the performance of domestic firms.     

Firm-level determinants of tax evasion in transition economies

Business tax evasion is an important issue for governments. Yet the factors that determine business tax evasion have not been sufficiently examined in the literature in general, and in transition contexts in particular. To address this gap, this study uses the WB/EBRD Business Environment and Enterprise Performance Survey (BEEPS) database with a sample of over 12,692 firms from 26 transition economies. Applying various modelling strategies, we argue that tax evasion is a function of firm-level and institutional-level variables. We contribute to the literature by providing robust evidence showing that the perceived tax burden has a positive impact on tax evasion. We also find that the tax evasive behaviour of firms is positively influenced by low trust in government and in the judicial system as well as by higher perceptions of corruption and higher compliance costs. We find that smaller firms, individual businesses and firms in sectors that are less visible to the tax administration are more likely to get involved in evasive behaviour. Overall, institutional factors play an important role in determining firms’ tax evasion behaviour in transition economies. This finding has important policy implications.     

Does Skill Content Explain Total Trade and Intra‐Industry Trade?*

This study compares the results of skill content tests for types of trade flows under alternative assumptions about the technologies used to produce imports and exports. For trade between high‐ and middle‐income countries, we show that the match between the actual skill content of trade and that predicted by endowments in a Heckscher–Ohlin–Vanek framework improves substantially if technological heterogeneity across countries is allowed for and if the factor content of intra‐industry trade is included with that of inter‐industry trade. Endowment differences are important in explaining net trade and vertical intra‐industry trade, but not horizontal intra‐industry trade.     

Forecasting economies in transition: The case of Romania

Structural change is endemic in the Eastern European economies and the newly emerging Commonwealth of Independent States yet conventional econometric modelling techniques proceed under the assumption that there is a structurally stable true economy to be discovered. This paper extends the analysis of Hall (1993) by exploring the consequences of endemic structural change for forecasting and building structural econometric models. We propose a model formulation which makes the econometric model itself able to adjust its parameters in the light of economic change using the Kalman Filter.The paper then illustrates this approach by building a small model of Romania and investigating its forecasting properties.This work was presented at a meeting of the MEET II network funded by the ACE project, Econometric Inference into the Macroeconomic dynamics of East European Economies.     

An analysis of repressed inflation in two transition economies

We construct a simple model that tests for repressed inflation by estimating a true rate of inflation that explains behavior of observed money demand. We estimate the model using quarterly data for Czechoslovakia and Poland. Although our results should be viewed as preliminary, given the imperfect nature of our data, we do have strong evidence that, prior to 1991, there was considerable repressed inflation in Poland, while there was essentially no repressed inflation in Czechoslovakia.This paper was funded by a World Bank project on formerly planned economies. We would like to thank Jong-goo Park for suggesting the topic, and Fabrizio Coricelli and Adnan Mazarei for helpful discussions. The views expressed here are our own and do not necessarily reflect the opinions of the World Bank.     

Privatization in transition economies: Privatization scale and country size

This paper examines determinants of privatization in transition countries. Empirical studies of privatization are few and even fewer formal empirical analyses of privatization in transition countries exist. Another goal is to examine differences between large-scale and small-scale privatization. We find that scales of privatization respond differently to various determinants. Particularly, privatization scales are sensitive to changes in economic prosperity, unemployment, and inflation. Country size, not government size, seems to be driving privatization in transition countries. Effects of Soviet legacy are non-existent. Some findings are unique to the literature, while others differ from existing studies. Policy implications are discussed.     

De facto and official exchange rate regimes in transition economies

This paper provides an empirical investigation on the discrepancies between official and de facto exchange rate regimes in transition economies. We use a probit model to describe the determination of regime discrepancies. We find that “errors” in the selection of official regimes as well as the macroeconomic developments calling for conflicting adjustments in exchange rate regimes are important determinants of regime discrepancies.     

Equity block transfers in transition economies: Evidence from Poland

This paper investigates valuation effects of share block transfers and employs agency theory to explain the determinants of equity block premia. A sample of transactions from Poland is used to measure benefits and costs of ownership concentration. Block premia are found to be remarkably low and comparable with those for the most developed economies. Shareholders expect to benefit from intensified monitoring and from corporate restructuring resulting from block acquisitions. Still, shareholders are wary of expropriation stemming from the extraction of private benefits of control by block holders. The opportunities to extract such benefits depend on relative power of investors.     

Estimating models of complex FDI: Are there third-country effects?

The recent general equilibrium theory of trade and multinationals emphasizes the importance of third countries and the complex integration strategies of multinationals. Little has been done to test this theory empirically. This paper attempts to rectify this situation by considering not only bilateral determinants, but also spatially weighted third-country determinants of foreign direct investment (FDI). Since the dependency among host markets is particularly related to multinationals’ trade between them, we use trade costs (distances) as spatial weights. Using panel data on U.S. industries and host countries observed over the 1989–1999 period, we estimate a “complex FDI” version of the knowledge-capital model of U.S. outward FDI by various recently developed spatial panel data generalized moments (GM) estimators. We find that third-country effects are significant, lending support to the existence of various modes of complex FDI.     

Export discoveries, diversification and barriers to entry

The literature on the relationship between economic diversification and development established that diversification rises with development up to a point. Some have argued that market failures reduce private investments that are necessary to find out whether a new product can be exported profitably, thus implying that the threat of entry can reduce export discoveries and consequently hamper diversification. In parallel, the trade literature on the “extensive margin” of trade has focused on the role of fixed costs of exporting, which affects the number and types of firms that enter into exporting activities. This article presents data suggesting that export diversification and export discoveries are correlated over the course of development, and it provides an empirical test of market failures that might deter export discoveries. The findings suggest that the threat of entry by imitators reduces the number of export discoveries within countries and industries for a given rate of growth of non-discovery exports. However, this market-failure effect is less pronounced when allowing for inter-industry spillovers, whereby export discoveries in one industry lead to discoveries in another industry. The policy implication is that barriers to entry should not be used to protect innovators from the threat of imitation, but governments could consider interventions that directly focus on stimulating export discoveries.     

Weber,Marx, and work values: Evidence from transition economies

Are work values a cause (Weber) or consequence (Marx) of the economic environment? The collapse of the Soviet Union at the end of 1991 provides a unique opportunity to investigate this link. Using data collected from an employee survey conducted in over 340 workplaces in Armenia, Azerbaijan and Russia, we investigate generational differences in adherence to the Protestant work ethic (PWE). Our results indicate that Marx was ‘right’ about the link between work values and economic environment. That is, despite economic and cultural differences emerging during the transformation process, in all three countries, participating workers born after 1981 adhere more strongly to PWE than workers born before 1977. Moreover, the estimate magnitudes are very similar across these economically and culturally diverse countries. More generally, PWE adherence is stronger among participating workers with an internal locus of control and among supervisors. PWE adherence also tends to be stronger among participants with high relative earnings, as well as among those working in organizations that reward hard work with the chance to develop new skills or learn new things.     

Technology and endowments as determinants of comparative advantage: Evidence from Mexico

We analyze whether the pattern of Mexico's comparative advantages in manufacturing trade flows, vis-à-vis its closest competitors, are related with productivity differentials (Ricardian hypothesis) or with differences in factor endowments (Heckscher–Ohlin hypothesis). The results suggest that Heckscher–Ohlin determinants tend to be more relevant than labor productivity differentials to explain the differences in the export patterns between Mexico and its competitors. This result holds even when we restrict the analysis to Mexico and other countries with relatively small differences in factor endowments, although in this case Ricardian comparative advantages gain some relevance.     

Fiscal impact of privatization revisited: The role of tax revenues in transition economies

In contrast to earlier literature, this paper finds empirical evidence that privatization has deteriorated fiscal balances in transition economies. The investigation focuses on the role of tax revenues in explaining the fiscal impact of privatization, as it appears that tax revenue in many transition countries remained lackluster even after the adoption of several tax reforms in the last two decades, and no formal econometric assessment has been conducted of the extent to which privatization has affected tax revenues. Using panel data for 29 Eastern European and former Soviet Union countries, the analysis finds robust signs of a strong negative impact of privatization on different tax revenue sources. The paper also provides some empirical evidence favoring the early adoption of value-added taxes that appear to have contributed to government revenue recovery.