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.     

Trade policy and quality leadership in transition economies

Trade policy and quality leadership in transition economies are analyzed in a duopoly model of trade and vertical product differentiation. We first show that the incidence of trade liberalization is sensitive to whether firms in transition economies are producers of low or high quality. Second, we find that neither free trade nor the absence of a domestic subsidy are optimal: Both a tariff and a subsidy increase price competition and while the former extracts foreign rents the latter results in quality upgrading. Third, there exists a rationale for a government to commit to a socially optimal policy to induce quality leadership by the domestic firm when cost asymmetries are low. Finally, we establish an equivalence result between the effects of long-run exchange rate changes and those of trade policy on price competition (but not on social welfare).     

Growth in transition economies: A trade policy perspective1

This paper examines the influence of trade liberalization on GDP growth during the transition from communism. The level of trade liberalization is found to raise the growth rate, particularly in the early part of the transition and for the countries nearest to the European Union. For the remaining countries and for the later transition period, the positive influence of trade reform on growth requires the negative effect of the interaction between trade reform and privatization to be taken into account. Even with the interaction terms the effect of trade liberalization is not statistically significant in the later transition period.     

Geography,geopolitics, and policy in the performance of transition economies

The economic performance of the transition economies as of 2015 is well explained by three variables: (1) years of membership in the EU; (2) physical distance from the heart of the EU economy, taken to be Dusseldorf; and (3) annual revenues from oil and gas production, reflecting natural resource deposits. These three factors account for around 86 percent of the variation in per capita income across the 28 transition economies, and reflect the interplay of domestic policy, geopolitics, geography and natural resources.     

The sequencing of reform in transition economies

In this paper, we examine the consequences of sequencing on the progress of reforms in transition economies. The paper uses panel logit models to determine whether or not progress in some reforms enhances the prospects for other reforms. We find that progress on small-scale privatization is associated with advances in several other reforms, perhaps because small-scale privatization creates lobbies for reform. Our estimations suggest that a comprehensive program of small-scale privatization is needed to stimulate large-scale privatization, trade, and banking reform in a country that has undertaken little reform. Moreover, if restructuring is to occur banking reform is necessary. We also find that relaxing the fiscal constraint stimulates large-scale privatization, restructuring, and trade reform. Finally, we find that negotiations about EU accession negotiations advance the transition but only in banking reform and competition policy. Journal of Comparative Economics 33 (4) (2005) 835–850.     

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.     

Growth effects of FDI in 80 developing economies: the role of policy reforms and institutional constraints

Theoretical and empirical literatures have identified several channels through which foreign direct investment (FDI) influences economic growth. This paper examines the impact of FDI on economic output growth per worker using aggregate production function augmented with FDI inflows, economic policy reforms and institutional constraints. The paper covers 80 developing countries over the period 1980–2006. We use panel data and employ fixed, random effects and GMM methods for estimation. Our results highlight the importance of FDI, policy reforms and institutional development for growth in developing economies. Finally, we demonstrate that irrespective of reforms and institutions, an increase in FDI affects output growth positively.     

Entrepreneurship prompts institutional change in developing economies

The Review of Austrian Economics - Entrepreneurship plays a pivotal role for institutional change and economic development in transition and developing economies. Formal and informal institutions...     

Competition policy in open economies

Abstract

This paper examines aspects of R&;D spillovers across countries, in particular, the role of international trade and human capital as the catalysts for international diffusion of technology. We present a new way of measuring foreign R&;D stocks embodied in foreign intermediate goods and capital equipment, which we argue is free from the criticism of previous measures. With the pooled panel data spanning 1970 through 1995 for 103 countries, we find that the effects of foreign R&;D on total factor productivity growth of both industrial countries and developing countries are substantial and that human capital is the most influential channel for absorbing foreign R&;D spillovers.     

Aid and institutions in transition economies

We investigate whether aid contributed to institutional development in transition economies. We find that aid flows have a positive effect on democratization, especially on constraints on the executive and political participation. At the same time, total aid has no effect on overall quality of governance, while US aid appears to have a negative impact on some dimensions of governance. Aid’s differential impact on democracy and governance is consistent with uneven development of institutions and the democracy consolidation hypothesis. We also find that aid has a non-linear effect on democracy. Openness has a positive effect on both democracy and good governance. Oil resources have an adverse effect on democracy. Adult mortality, civil war and adherence to Islam are all detrimental to good governance.     

Monetary policy in open economies

The recent literature on monetary policy in open economies has produced a strong presumption in favor of activistic policy and flexible exchange rates. We argue that this result may owe much to the combination of two commonly made assumptions: That nominal goods prices are rigid. And that the monetary authorities have a lot of information about the economy. When the source of nominal rigidity is found in wages and monetary policy is conducted according to less information demanding rules (such as a standard interest rate rule) policies that stabilize the money supply or the nominal exchange rate may perform better.     

Energy efficiency in transition economies

This article outlines and estimates a measure of underlying efficiency in electricity consumption for an unbalanced panel of 27 transition economies and 6 European OECD countries between 1994 and 2007. A Bayesian Generalized True Random Effects stochastic frontier model with persistent and transient inefficiency is considered by estimating an aggregate electricity demand function that leads to consumption efficiency scores, giving further insights than a simple analysis of energy intensity. There is evidence of convergence between the CIS countries and a block of Eastern European and OECD countries, although other country groups do not follow this tendency, such as the Balkans.     

Benchmarking competitiveness in transition economies

This paper constructs an indicator for the current level of international competitiveness of countries in transition. We find that Hungary is the most competitive country in the group while Turkmenistan is the least. Competitiveness measurement, in our view, is a way to use uniform criteria to gauge the extent to which a country makes use of various levers to promote sustained improvements in its well-being. We construct our measure of competitiveness drawing upon both the popular literature on competitiveness as well as modern economic theory. The approach acknowledges the importance of synergies between firms, markets, and government and, above all, the crucial role of institutions. Our choice of variables stresses the special characteristics of transition countries. By bringing to bear all the existing data on these countries, together with new survey data collected for the purpose, we are able to go beyond the mere ranking of countries to decompose the sources of competitiveness into their constituent parts. This allows policy makers to identify areas where their countries are lagging behind relative to other countries in their region. Our indicator is also compatible with the Global Competitiveness Report series categories, thus allowing us to benchmark transition countries against the rest of the world.
JEL classification: C82, O47, O57, P27, P52.     

Banking efficiency in transition economies

An increasing share of the banking sector is controlled by foreign capital in the majority of transition countries. To analyse the effects of this trend on the performance of the banking sector in these countries, this study conducts a comparative analysis of the performance of foreign‐owned and domestic‐owned banks operating in the Czech Republic and Poland. We use the stochastic frontier approach to compute cost efficiency scores. Following Mester (1996 ), financial capital is included in the cost frontier model to control for risk preferences. Our finding is that on average foreign‐owned banks are more efficient than domestic‐owned banks. We conclude, however, that this advantage does not result from differences in the scale of operations or the structure of activities.     

Institution building and growth in transition economies

Drawing on the recent literature on economic institutions and the origins of economic development, we offer a political economy explanation of why institution building has varied so much across transition economies. We identify dependence on natural resources and the historical experience of these countries during socialism as major determinants of institution building during transition. Using natural resource reliance and the years under socialism to extract the exogenous component of institution building, we also show the importance of institutions in explaining the variation in economic development and growth across transition economies during the first decade of transition.     

Competition policy in the transitional economies

Conclusion It is very encouraging to note how much progress has been made with competition policy, especially in the four Visegrad countries. One might add that the developments were not merely in the legal front; in both Poland and Hungary the competition offices have forceful and impressive heads who have used their considerable discretion to shape anti-monopoly practice in their respective countries. The weakness of Bulgaria and Romania on this front is a reflection of the more general problems in implementing market-based reforms, and in establishing true independence between the economic and the political sphere.Nonetheless, our discussion indicates several cases where further developments could be made. The legislative structures in the reforming economies perhaps place excessive faith on quantitive indicators of dominance, and in many countries the independence of the competition offices from the political system is insufficient. The reliance on EU-type legislative structures perhaps also leads to insufficientper se prohibitions.     

Inter-enterprise arrears in economies in transition

In the context of economies in transition, the paper argues that an excessive liquidity squeeze could throw the economy into a persistent state of low economic activity. In such bad equilibrium, enterprise transactions become largely demonetized, with a chain of arrears, a form of involuntary credit, spreading over the entire system. The empirical analysis of the Romanian experience seems to support the view advanced in the paper.