Understanding the Transaction Costs of Transition: it's the Culture,Stupid

The process of transition in Central and Eastern Europe from socialism to capitalism is a cultural issue rather than a mere technical one. To support this proposition, economic analysis must explain why and how informal rules affect the results of transition.     

The Determinants of Foreign Direct Investment in the CEECs: New evidence from sectoral patterns

This paper investigates the determinants of European Union FDI in the CEECs at sectoral level. The aim is to understand whether and to what extent FDI undertaken in different sectors reacts to the characteristics of the host countries. The analysis is based on a dataset created specifically for this purpose. It concentrates on the manufacturing sectors, classified according to the Pavitt taxonomy. Firstly, data summarizing the recent trend of FDI in the CEECs is presented and then empirical evidence given to account for differences between sectors. The estimated model is a generalization of a three-way fixed effect model incorporating 'classic' variables, such as labour costs as well as country-specific variables, i.e., the stage reached in the transition process. The results confirm the presence of heterogeneity at sector level.     

The Coevolution of Finance and Property Rights: Evidence from Transition Economies

The transition from communism to capitalism was necessarily accompanied by a sudden and abrupt increase in the financialization of society. This increase occurred in an environment that, even now, still has little experience with or expertise in financialization. Given that financialization occurred simultaneously with the growth and evolution of other political and economic institutions, the question arises: What was the effect on these other nascent institutions like property rights? This article empirically analyzes the relationship between financialization and property rights in transition countries. Using a unique monthly database of twenty transition countries over a period from 1989 to 2012, this article finds that the influence of financialization depends on which definition of “financialization” is used. In particular, increases in basic financial intermediation improved property rights. However, higher-order “financialization,” proxied here by the size of capital markets and the wages in the financial sector, appeared to have a negative impact on the development of broad-based property rights in transition.     

A sequential approach to regional integration: The European Union and Central and Eastern Europe

This paper develops a theory of optimal sequencing of regional integration and applies it to the specific question of Central and Eastern European countries (CEECs) and the EU. We show that the timing of transition and integration has implications for the long-term trade structure of Europe. In this model the interest to integrate the CEECs comes from harmonization of policies to attract industries. Without integration, European countries will try to inefficiently protect their industries. Because of the transfers implied by the CAP and the Structural Policies, the EU delays enlargement until the CEECs have sufficiently converged. CEECs might at this point prefer to stay outside the EU and attract industries by offering them more generous protection than the EU. Such timing may be inefficient ex ante for all countries because it may prevent full European integration in the long run, inducing firms to relocate outside of the EU and governments in the EU and the CEECs to inefficiently protect industry. During the transition, all countries benefit from regional integration among the CEECs.     

中东欧经济转型的成就与挑战

文章对中东欧经济转型进行了回顾,指出了中东欧经济转型的特点。在此基础上,文章分析了中东欧经济转型的成就,强调中东欧国家在建立市场经济体制和经济发展上取得了重大进展。与此同时,目前遭受全球金融危机冲击的中东欧国家也面临着许多挑战,需要推动许多领域,特别是社会领域的改革。     

How Much Will It Cost to Join the Club? The Extra Costs of Approximating Lithuanian Environmental Laws with Those of the European Union

This paper presents estimates of costsassociated with approximating Lithuanianenvironmental protection legislation with thatof the European Union (EU). Lithuania is oneof twelve EU associate members in Central andEastern Europe that is currently preparing foraccession by approximating their legislationwith that of the EU. The costs of fifteen EUdirectives are considered and details are givenon four directives. Necessary investments maytotal Euro 1500 million by 2015 and the presentvalue of all annualized costs is expected to beabout Euro 2200 million. In 2015, annualized costsare estimated to be approximately Euro 500 million,but these costs are only part of the totalcosts of approximation. Non-environmentalcosts are not considered. Assuming a modestlyambitious average annual growth of GDP of 2.0%per year implies that approximation with thefifteen directives analyzed will cost roughly3.5% of GDP in 2015. This level of additional commitment to environmentalprotection is itself much higher than the 2.0%of GDP being spent on average by OECD countriesand suggests the possibility of a substantialeconomic burden on the Lithuanian economy. Public budgets and households are expected tocarry a substantial portion of this cost,because many directives are the responsibilityof national and local governments. Making theright choices that are expected to be part ofapproximation with the environmental acquis is likely to benefit from carefulcomparisons of costs and willingness to pay forthe environmental benefits of approximation.     

Unemployment and the dynamics of political support for economic reforms

I analyze the dynamics of political support for economic reforms using a version of Rodrik's (1995) two-sector model of the transition economy. The key role is played by the pattern of flows between the state and private sectors and unemployment. It is shown that while the workers in the private sector always support rapid reforms, the workers in the state sector and the unemployed will support rapid reforms only at the outset of the transition. Later, state-sector workers and unemployed vote for a reduction in the speed of reforms.     

Are imports and remittances cointegrated for the Central and Eastern European countries?

In this article, we investigate the existence of long-run common trends between imports and remittances in 11 Central and Eastern European countries which are part of the European Union. Using the Engle–Granger two-step procedure, we determine that for all countries in our sample there are no long-run common trends (no cointegration) between imports and remittances. However, the results are mixed when running a Granger causality test. For nine countries, we can establish either a bidirectional or unidirectional Granger causality, indicating that past values of one variable have predictive content on the other variable. In two countries, there is no Granger causality between imports and remittances.     

Economic development and evolving state capacities in Central and Eastern Europe: can “smart specialization” make a difference?

We position “smart specialization” (SS) as the third external and conditionality-based reform of economic policy rationales – after Washington Consensus and Europeanization – in Central and Eastern Europe (CEE). We discuss what kind of state, policy, and administrative capacities, or routines, SS presumes. We show that over the years CEE economies have built very different routines, especially for policy coordination and public–private interactions. Design and implementation of functional SS strategies requires critical attention and development of these routines through contextual policy experimentation in all CEE regions. We provide some general guidelines for this.     

Market power and risk of Central and Eastern European banks: Does more powerful mean safer?

As understanding the market power–risk relationship in CEE banking systems is of the utmost importance to policy-makers in these countries, we investigate whether CEE banks must have greater market power to be safer. Our results suggest that more market power reduces the fragility of banking institutions, on one hand, and that banking market concentration tends to make these banks riskier, on the other. Our findings are robust to whatever form of market power-risk relationship and whatever market-power measures we use. More precisely, financial markets perceive CEE banks with more market power as less fragile, while the latter are also better capitalised with respect to the distribution of their returns. Moreover, they are even (much) better capitalised when they hold less-diversified and less-liquid assets and when they operate within a stricter banking regulatory environment, which suggests a risk-stabilising role for diversification, liquidity and the bank regulatory environment in these countries.     

Hitting and hoping?: Meeting the exchange rate and inflation criteria during a period of nominal convergence

This paper analyses the effect of the nominal convergence process on the ability of Central and Eastern European Countries (CEECs) to meet both the inflation and the exchange rate criteria for Eurozone entry. The size of these convergence effects on the exchange rate (for inflation targeters) and for inflation differentials (under a fixed exchange rate) is estimated for a variety of different convergence scenarios. The key result, robust across all scenarios, is that countries with fixed exchange rates will find it much harder to simultaneously meet the criteria than inflation targeters. Probit estimates on the ability of a country to get inflation below the reference value under a fixed exchange rate show a strong effect for the relative price level.