Stress test for reforms: Transition and East Asian 'contagion'

Contagion from East Asia imposed a severe 'stress test' on the market-orientedreforms of transition economies. We find that the portfolio reallocations of investors differentiated sharply among these economies at the height of the East Asian turmoil, appearing clearly in the relative movements in interest rates and share prices. Those countries that appeared more vulnerable to contagion had large public or private sector imbalances and low reserve cover of short-term debt. The analysis, however, goes beyond macroeconomic and financial imbalances to link these weak fundamentals to inadequate structural and institutional reforms. We find that flaws in public finances together with weak enterprises and financial institutions were key underlying factors in the vulnerability to East Asian contagion. They were also key causes of the Russian crisis, which initiated a new round of contagion driven primarily by high exposures to Russian trade.     

The end of economic transition

The transition from plan to market was the largest natural experiment in economics ever. Now, 20 years from the start of transition, all former socialist countries are market economies at the middle stage of economic development, and convergence with neighbours, if not with the developed world, is largely achieved. With hindsight, it is clear that economists have spent too much time debating proper sequencing of reforms and the fine‐tuning of reform packages. At the same time, the magnitude of the output and consumption fall in some countries was vastly underestimated, while the benefits of reforms have taken longer to materialize than expected. Successful practitioners of reform praise perseverance during and after the initial setbacks and willingness to make political compromises. At the conclusion of the natural experiment, transition economics has all but vanished as an academic discipline, although it played a crucial role in the formation of modern political economics.     

The curse of natural resources in the transition economies*

The curse of natural resources is a well‐documented phenomenon for developing countries. Economies that are richly endowed with natural resources tend to grow slowly. Among the transition economies of the former ‘Eastern Bloc’, a similar pattern can be observed. This paper shows that a large part of the variation in growth rates among the transition economies can be attributed to the curse of natural resources. After controlling for numerous other factors, there is still a strong negative correlation between natural resource abundance and economic growth. Among the transition economies the prime reasons for the curse of natural resources were corruption and a neglect of basic education. In order to overcome the curse of natural resources and move to a sustainable path of development, the resource abundant transition countries should fight corruption and ensure that their resource revenues are invested in human capital or the preservation of natural capital.     

The determinants of corruption in transition economies

This paper examines the determinants of corruption in transition economies. We found that the progress of structural reform, comprising marketization, rule of law, and democratization had a crucial impact on the extent of corruption control in former socialist countries.     

The Uncertainty of Economic Success When Economic Regimes Are Uncertain: A Study of Transition Periods

We construct a model of a reform economy in transition from central planning to free markets. The eventual success of the reform is uncertain. A numerical implementation of the model examines the implications of two alternative paths, instantaneous or gradual price reform. If the controlled-price sector has sharply decreasing returns to scale in production, then gradualism may lead to welfare higher than that of instantaneous reform. Given the inefficiencies in production in many transition economies, this may help to explain why countries that have used gradualism have sometimes fared better than those that have followed a path of rapid price liberalization. J. Comp. Econom., October 1994, 19(2), pp. 217-236. University of Kansas, Lawrence, Kansas 66045.     

COMPARING POST-COLD WAR MILITARY CONVERSION IN THE UNITED STATES AND RUSSIA

According to the conventional wisdom, military conversion in Russia would be more difficult than in the United States because Russia does not have the developed market infrastructure and institutions that help western defense firms redeploy resources for civilian production. A closer look raises doubts about these arguments. Western defense firms have had difficulties with conversion because they cannot compete with the existing relatively efficient civilian firms. Meanwhile, the principal competitors of the Russian defense firms, the large Russian civilian enterprises, are closer in nature to defense enterprises than to efficient market firms. While this does not bode well for the Russian economy in general, the defense enterprises should not find themselves at a significant disadvantage in the civilian markets. Two effects can be distinguished. On the one hand, due to the more developed market infrastructure, the U.S. economy is presumably good at redeploying defense-related resources across firm boundaries. On the other hand, the large and efficient civilian sector in the United States makes the marginal "civilian" value of the redeployed resources low. It is the interaction of these factors, rather than the degree of development of market infrastructure alone, that determines the relative difficulty of military conversion. Additionally, empirical evidence based on regional data indicates that despite enormous defense expenditure cuts, the economic performance of Russia's regions is only relatively weakly correlated with the regions' dependency on defense industry.     

Wage spillovers across sectors in Eastern Europe

This paper studies the interactions between wages in the public sector and the private traded and non-traded sector in ten transition countries which are members of the European Union, during the period 2000–2011. The theoretical literature on wage spillovers, as well as the Balassa–Samuelson hypothesis, suggests that the internationally traded sector should be the leader in wage setting, with sheltered and public sector wages adjusting. Using a cointegrated VAR approach we show that a large heterogeneity across countries is present, and non-traded and public sector wages are often leaders in wage determination or at least affect traded sector wages in the short run. This result is relevant from a policy perspective since wage spillovers, leading to costs growing faster than productivity, may affect the international cost competitiveness of the traded sector and thus the catching-up process may be accompanied by accumulation of large international imbalances.     

The impact of institutional volatility on financial volatility in transition economies

What have been the determinants of financial volatility in the transition countries of Central and Eastern Europe and the former Soviet Union? This paper posits that institutional changes, and in particular the volatility of crucial institutions such as property rights, have been the major causes of financial volatility in transition. Building a unique monthly database of 20 transition economies from 1991 to 2017, this paper applies the GARCH family of models to examine financial volatility as a function of institutional volatility. The results show that more advanced institutions help to dampen financial sector volatility, while institutional volatility feeds through directly to financial sector volatility in transition. Democratic changes in particular engender much higher levels of volatility, while property rights are sensitive to the metric used for their measurement.     

Public Saving and Policy Coordination in Aging Economies

In the coming decades, the share of people of working age will fall significantly in most developed countries. According to optimal taxation theory, public debts should be reduced before the baby‐boom generation retires. I find that if debts are instead maintained at current levels, welfare may be reduced substantially in countries with a large public sector and/or a large demographic change. Since population aging will be less dramatic in the United States than in Europe and Japan, capital will move from Europe and Japan to the United States. These capital movements will facilitate the US demographic transition but aggravate the transition in most European countries.     

论体制转轨的动态过程——非国有部门的成长与国有部门的改革

本文试图将中国经济体制转轨所取得的成就和所面临的问题 ,放在一个简化了的动态模型中加以系统地分析。文章指出 ,动态地看 ,体制转轨的根本问题就是非国有经济比重的不断提高和经济的所有制结构的转变。在非国有经济的增长率高于国有经济的增长率的“基本假定”下 ,体制转轨的最重要的问题首先不是改革国有经济 ,而是发展非国有经济。这不仅是由于非国有经济的发展支撑着经济的增长和市场体制的形成 ,而且也是由于它创造出使国有经济得以改革的更有利的条件。国有经济改革的重要性主要在于 ,它们若不改革 ,就还要占用大量资源 ,而且是要从非国有经济转移资源作为事实上对国有经济的补贴。这种补贴在过去一个时期主要体现在银行坏债、资本市场上的“坏股”、非国有经济的“综合税赋”事实的不断提高 ,等等 ,现在也体现在政府债务增大。正因如此 ,尽管中国目前并不面临金融危机 ,但必须加快国有企业和国有银行控制的金融体制的改革进度 ,以保证非国有经济能持续发展下去 ,保证整个体制转轨过程的持续进行而不被某种危机所打断。     

Does public‐sector employment fully crowd out private‐sector employment?

Employment matters for development because it can raise household income, lower inequality, promote economic growth, and contribute to political stability. Many countries have high rates of public employment, but what effect does this have on overall employment and unemployment rates? This paper investigates if and to what extent public‐sector employment crowds out (reduces) private‐sector employment. In particular, we estimate regressions of unemployment or private‐sector employment on two measures of public‐sector employment. The study uses an especially assembled dataset, which is novel for its coverage of a large sample of developing countries as part of a panel of rich and poor countries. Our results point to full or just about full crowding‐out for the entire sample. Unlike previous cross‐country studies, which were restricted to advanced economies, we are able to show that these results also apply to developing countries, although crowding‐out may not be quite as high as in advanced economies. The results mean that high rates of public employment have an offsetting large negative impact on private employment rates and do not reduce overall unemployment rates. With the qualifier that government activities may help the economy in other ways, our results imply that, rather than creating public‐sector jobs, scarce fiscal resources could be better spent on other developmental needs.     

Market Reform and Infrastructure Development in Transition Economies

This paper analyzes the determinants of investments in physical infrastructure over the first decade of market reform in Central and Eastern Europe and other former Soviet economies. Both market and political reform would be expected to have an impact on the level of infrastructure, but the relationship will likely differ for infrastructure which remains dependent on the public sector and that which becomes more dependent on private investment after such reforms. Results for a large cross section of transition economies show that market reform has had a positive impact on both traditional and newer types of infrastructure, with a stronger impact on the newer types which are more likely to be market‐derived. The findings also suggest that market reform is more likely to push investors to develop infrastructure when political and market reforms are accomplished in tandem.     

Economic transition and private-sector labor: Evidence from urban China

This paper studies the transition of labor from the state sector to the infant private sector in urban China. We examine the impact of the first wave of housing reforms, which untied access to housing in urban areas from working for the state sector. We find that the reform significantly increased private housing ownership and private-sector employment, and reduced private-sector wages. The housing reform had no effect on unemployment or self-employment.     

转轨国家技术创新效率的评价——基于转轨国家技术创新数据的经验分析

现有转轨经济理论研究中鲜有对转轨国家的技术创新效率问题进行探讨,而技术创新是转轨国家经济持续增长的源动力。基于此,本文运用整体分析和分段分析的研究方法,对24个转轨国家的技术创新效率进行了评价和比较,发现渐进式改革的国家技术创新效率从整体上高于激进式改革的国家,并且从其阶段变化动态来看,前者的效率提升幅度也大于后者。同时,需要指出的是转轨国家技术创新效率远远低于世界平均水平,未来转轨国家应该在政策和行动中加大对技术创新的投入力度,进一步提高研发支出在GDP中的比例,加快创新型国家的建设步伐,以便尽快赶上并超过世界技术创新效率的平均水平。     

The explanatory power of market-based trade theories for the trade between market economies and reform countries

We try to explain the bilateral trade structure between Austria and three of its former socialist neighbours by trade theories developed for market economies, specifically focussing on the Heckscher-Ohlin model in its commodity version. We use data on factor intensities in about 100 industries in the EC and in Austria and can explain a modest amount of the trade structure before and after the start of the transition process and to some degree also of the change in the trade structure. The restrictions given by the data, the absence of a price system in socialist countries and the disequilibria in the actual trade suggest why the explanatory power of the tested theory is not higher. The study however indicates that at least some part of the industry in the former Czechoslovakia and in Poland had been well endowed with capital and energy before the transition. In the first five years of the transition a balanced trade turned into a high deficit of the reform countries.The authors wish to thank the participants of the EMPIRICA ECONOMIC POLICY FORUM Consequences of Eastern European Reform in Vienna, October 18, 1993 for an intensive discussion. Thanks to Robert Holzmann, Michael Landesmann, Gabor Oblath, Sandor Richter, Gunther Tichy, Michael L. Wyzan for comments. We also thank Christa Magerl and Elisabeth Neppl-Oswald for the calculations and for reading various drafts of the paper.     

Introduction

We look at the growth experience of 25 transition countries over the 25 years since the dissolution of the USSR. The initial collapse in income was much more severe in 12 former Soviet Union countries (FSU12) than in the 10 transition countries that joined the EU in 2004 and 2007 (EU10). In 2015, FSU12 income levels were further behind EU10 than they were at the start of transition, despite more rapid growth in the last 15 years. Compared to predictions from a parsimonious growth model, the region as a whole is ‘normal’ in terms of growth performance since the 2000s. However, the FSU12 over-perform and the EU10 under-perform relative to model predictions for the last 15 years.     

Employment and wage behaviour of industrial enterprises in transition economies: The cases of Poland and Czechoslovakia1

In this paper we use two very large panel datasets from Poland, 1988-90 and Czechoslovakia, 1990-1992 to explore the dynamics of employment and wage determination at the enterprise level in the early years of transition. The study is intended to assist in building a coherent picture of microeconomic adjustment in transition, a field which was not sufficiently explored in the early years of reform. We find that Polish firms were already to some extent responsive to market conditions pre-reform, notably to demand in determining employment. Czechoslovak firms, however, were largely unresponsive to such pressures in 1989-90. The elasticities rose significantly in both countries in the early years of reform, especially in Czechoslovakia which quickly attained initial Polish patterns of adjustment. Firms became much more responsive to sales and cost pressures in adjusting employment and to their own productivity in setting pay. Ownership effects in these early years were, however, much more modest, with state-owned firms adjusting employment more than their private counterparts, perhaps because over-manning was more serious in that sector.     

The Distribution of Economic Well-being in Urban Russia at the End of the Soviet Era

Assessing the extent of inequality and how various groups in the population were faring in the former Soviet Union is difficult. There are conceptual problems and severe data limitations. Here we analyse the distribution at the household level using unique microdata. The sample was collected for the Russian city Taganrog in 1989. We portray inequality in equivalent income terms, investigate income packaging, decompose inequality by population subgroups and relate equivalent income to household characteristics. The results indicate that inequality in living standards for urban Russia was small, but not extremely small. Public sector transfers and income taxes played a smaller role than in several advanced Western countries. The income situation of a household in the former Soviet Union was very strongly linked to its work efforts and dependency burden. Thus, aged persons and families with a newborn child were much worse off than people of active ages. Persons in households with a female head had considerably lower income than those with male head of households. The results also shows a clear positive relation between length of education and living-standard.     

Russian language skills and employment in the Former Soviet Union

During the Soviet era, proficiency in the Russian language was often a ticket to attractive employment opportunities in the member republics. Does it still contribute to securing employment in the former Soviet republics after two decades of transition? Using data from Armenia, Azerbaijan and Georgia in the years 2008–2010, this paper demonstrates that Russian language skills remain economically valuable. The baseline estimates suggest that Russian language skills increase probability of employment by about 6 (males) and 9 (females) percentage points. Our results bear important implications for the ongoing debates on language policies in the post‐Soviet countries.     

A macroeconomic model of Russian transition

We present a model in which capital assets can only be owned by members of a relatively small politically connected elite (‘the oligarchs’), each member of which faces a given risk of being expropriated, and we investigate the implications of such an imperfection of property rights for the transition to a market economy. At the start of the transition, the oligarchs are long on local capital assets but short on safe deposits abroad. This causes a depression phase characterized by acute liquidity constraints and large capital outflows at the same time. As the oligarchs acquire enough safe deposits, the economy enters a recovery phase, still accompanied by capital outflows. The model can parsimoniously explain both the steep decline suffered by the Russian economy in the first stage of its transition to a market economy and the subsequent turnaround. The decline could be avoided by allowing foreigners to own some domestic capital assets, but home‐country oligarchs may not be able credibly to collectively commit to such a reform.