Macroeconomic Management and the Transition to the Market in Vietnam

Vietnam′s macroeconomic performance during the transition to a market economy has been very strong, better than those of most economies in Eastern Europe and of the former Soviet Union. Vietnam grew at an average annual rate of 7% during 1989-1992; inflation declined from over 400% in 1988 to 17% in 1992; and exports increased at more than 30% per year during this period. The macroeconomic success can be attributed to the combination of good endowments and good policy. Vietnam′s output is concentrated in agriculture, services, and light industries, all sectors that responded quickly to price liberalization, strengthened property rights, and real exchange-rate devaluation. J. Comp. Econom., June 1994, 18(3), pp. 357-375. World Bank, Washington, DC 20433.     

Relative standing and temporary migration: Empirical evidence from the South Caucasus

This paper empirically investigates the relationship between households’ relative deprivation and the intentions of their members to temporarily migrate abroad in three transition economies of the South Caucasus: Armenia, Azerbaijan and Georgia. To capture respondents’ relative deprivation, we use self‐reported information on respondents’ perception of the relative standing of their household in comparison to those of their neighbors. Controlling for households’ absolute income and other relevant subjective dimensions, we illustrate that households’ relative position vis‐à‐vis their reference groups plays an important role in determining the intentions of their members to migrate abroad. In particular, individuals are more willing to engage in temporary emigration if they perceive themselves to be poorer than the reference group. Our results may have important policy implications. A conjectural suggestion of our empirical exercise is that if migration has to be curbed, reducing absolute poverty alone may not be sufficient. In addition, policy‐makers may need to decrease relative income differentials within the country.     

Fiscal deficits,banking crises and policy reversal in a semi-open economy

We study the effect of domestic policies and external shocks in a semi-open economy characterized by incomplete liberalization of the financial sector. We argue that in such transition economies stabilization programs can have a negative impact on the fiscal imbalances, offsetting to some extent the very achievement of the stabilization program. We develop a simple general equilibrium model which allows propagation of shocks in the presence of government guarantees and imperfect capital mobility. We also empirically test the impact of positive foreign interest shock on the Indian economy using a reduced form VAR approach. The econometric evidence, though broadly consistent with the main predictions of the model, suggests no significant impact of foreign interest rate shock on output and credit. We conclude that incomplete liberalization of the financial sector in transition economies has two effects. It reduces i) exposure to external financial shocks (like the current credit crisis) and ii) ability to deal with real sector shocks (which may arise from global recession in the medium term) due to endogenous policy reversals and presence of government guarantees.     

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).     

Trade, regulations, and income

We examine the relationship between openness and per-capita income using cross-country data from 126 countries. We find that trade leads to a higher standard of living in flexible economies, but not in rigid economies. Business regulation, especially on firm entry, is more important than financial development, higher education, or rule of law as a complementary policy to trade liberalization. Specifically, after controlling for the standard determinants of per-capita income, our results imply that a 1% increase in trade is associated with more than a one-half percent rise in per-capita income in economies that facilitate firm entry, but has no positive income effects in more rigid economies. The findings are consistent with Schumpeterian “creative destruction”, which highlights the importance of new business entry in economic performance, and with previous firm-level studies showing that the beneficial effects of trade liberalization come largely from an intra-sectoral reallocation of resources.     

The sequencing of reform policies in China's agricultural transition*

This paper provides evidence regarding gains due to agricultural market liberalization in China. We empirically identify the different effects that incentive and farm restructuring reforms and gradual market liberalization have on China's agricultural economy during its transition period. We find that average gains within the agricultural sector due to reforms that improved incentives and increased decision‐making authority of producers exceed gains due to market liberalization by a large margin. Our method of analyzing the effects of transition policies on economic performance can be generalized to other reform paths in other transition economies.     

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.     

What explains persistent inflation differentials across transition economies?1

We document that a persistent inflation differential has opened across different groups of transition economies since 2001, with the CIS‐West seeing particularly high outcomes. We consider a range of non‐monetary explanations discussed in the literature (economic structure, policy and institutions), and controlling for economic shocks, we find a role for political stability, as emphasized in previous cross‐country work. However, our results suggest that lagging internal and external liberalization have been the key disincentives to disinflation. Consequently, lower inflation targets would not be credible in the absence of stronger structural and monetary policy frameworks.     

The relationship between economic growth and the speed of liberalization during transition

We examine existing results on the effect of speed of liberalization on growth during transition. We highlight methodological problems in existing studies, noting the existence of simultaneity and the use of variables that are not valid measures of the phenomena they supposedly represent. We implement solutions, examining the simultaneous relationship between growth and speed of liberalization. Initial conditions are much more important than policy changes in determining growth performance in the first four years of transition. Growth performance during the early years of transition has a strong effect on liberalization speed.     

No Credit for Transition: European Institutions and German Unemployment

The Stability and Growth Pact, adopted by members of the European Union,imposes tight limits on government deficits. But since the collapse of Communism,Europe has been faced with the problems of economies in transition: and reunifiedGermany—the leading economy of the EU—combines a prosperous western stateand an eastern economy in the process of transition. In a model where unions play akey role in wage bargaining and transition imposes a substantial burden on thenational budget, we analyze the implications of balancing the budget for the path ofunemployment. Where high but temporary costs are financed by raising taxes onemployment to satisfy the Stability and Growth Pact, then the title is a misnomer:relative to a policy of `tax smoothing', the pact increases unemployment and slowsgrowth. In designing fiscal rules for Europe, the benefits of tax smoothing must beweighed in the balance along with the virtues of fiscal discipline.     

On the dynamics of inequality in the transition

Inequality has increased in many of the transition economies. At the same time, spending on education has declined. In this paper we survey the factors driving these changes. We then set up a small general equilibrium model to simulate the effect of different policy choices on the path of inequality over the transition. We show that the policies selected in Central Europe engender a relatively rapid spike in inequality but with a Kuznets curve. In the simulations that broadly capture features of the policy regime dominating in Russia and the FSU, we find no Kuznets curve. We then turn to the longer run and look at the way in which both trade liberalization and technological and organizational change are likely to affect the relative demand for types of labour. We show how substantial technological and organizational change - obvious features of transition - can result in raising inequality. Persistence in inequality can be expected to depend critically on the pace at which the acquisition of skills takes place in the economy - and, hence, on the evolution of the educational system. As such, policies aimed at raising adaptability - such as quality educational systems - can be expected to dampen the increase in wage inequality.     

Business Cycle Co‐movement between Australia and East Asia

This article analyses business cycle co‐movement between Australia and 10 major economies in the East‐Asian region by using two measures: concordance indices and correlation coefficients. The results from the concordance index suggest that Australia's business cycle is becoming increasingly synchronised with those in East Asia, particularly with China and Japan. The correlation coefficients of gross domestic product (GDP) growth and the deviation of real GDP from its trend between Australia and its East‐Asian neighbours are also significantly higher since 2000, relative to the correlation coefficients found for the 1990s. The growing importance of East Asia in Australia's economic future implies that the risks facing the economy have changed and Australia needs to engage in more macroeconomic policy dialogues with its neighbouring economies to improve their policy responses.     

Structure and performance of the service sector in transition economies1

This paper examines the performance of the service sector in the Eastern European transition economies during the 1997–2004 period. The performance of the service sector as a whole and of its sub‐sectors is very heterogeneous within the region. Service sub‐sectors that are information and communications technology producers or users and those using skilled labour more intensively exhibit the highest labour productivity growth. Our estimates show a positive and significant effect of liberalization on service labour productivity growth that is stronger for sub‐sectors that are more distant from the technological frontier. Service liberalization is also shown to have a positive effect on labour productivity levels and growth of downstream manufacturing industries.     

Policy Shifts and Financial Instability in Emerging Markets

We explain periods of financial instability following drastic policy shifts within a Hayekian framework. Hayek emphasized that prices, established via the market process, help market participants to form coherent expectations about the future and coordinate plans with one another. In this paper, we elaborate on how policy shifts may undermine planning based on price signals and exacerbate uncertainty about the future, which can contribute to financial instability. Based on our postulated framework, we clarify how financial liberalization in the 1980s/1990s and the recent discretionary monetary policies in the advanced economies may have contributed to recurring episodes of financial instability in emerging markets. In particular, this paper provides an explanation for (1) why we observe financial instability mainly shortly following financial liberalization, and (2) why financial developments in the emerging markets are sensitive to unexpected monetary policy changes in the advanced countries in the current zero‐interest rate environment.     

A few observations on financial liberalization and financial instability

Recent studies have conjectured that there may be a link between financial liberalization (FL) and financial instability in emerging economies. Most of these studies, however, do not investigate whether emerging economies are, in fact, becoming structurally more vulnerable to currency and banking crises. In this paper, I argue that emerging economies are becoming more susceptible to both currency and banking crises after FL. Using data for 27 emerging economies—excluding transition economies—from 1973 to the present, a univariate analysis indicates that the likelihood of currency crises may increase with stronger reactions to financial variables than to real or external trade variables. Similarly, for banking crises, interest rate, exchange rate, maturity, and default may increase, while simultaneously the support structure of the government seems to decline.     

Structural policies and growth: Time series evidence from a natural experiment

Documenting the long term impact of structural policies on economic performance has generated tremendous interest in the development literature. In contrast, contemporary effects of structural policies are difficult to establish. Structural policies seldom change sufficiently in the short run, and accepted instruments to control for endogeneity in cross sections are inappropriate for time series analysis. In this paper we utilize an eleven year panel of 26 transition countries to identify short term effects of structural policies that are large and significant. A ten percent change in the quality of structural policies (or the Rule of Law) towards OECD standards is shown to raise annual growth by about 2.5%. To control for endogeneity, we develop an instrument using the hierarchy of institutions hypothesis and find that it holds a robust explanatory power. We also document that early reformers reap the greatest benefits, but that it is never too late to begin structural policy reforms.     

Exchange Rate Regimes and the Stability of Trade Policy in Transition Economies

This paper examines the interplay between exchange rate regimes and commercial policy in six transition economies. In all these economies, the rate of protection afforded domestic industry by the exchange rate has been eroded by high rates of inflation and insufficient growth in productivity. As a result, there has been pressure on governments to increase trade barriers. Each country examined has had recourse to various means of restricting imports. We argue that more flexible management of the nominal exchange rate would be a preferable way of dealing with the real appreciation of these countries' currencies.J. Comp. Econom.,December 1998, 26(4), pp. 642–668. World Trade Organization, Geneva, Switzerland, and Arizona State University, Tempe, Arizona 85287-3806.     

Exchange Rate Policy in Transition Economies: The Case of Hungary

We review the experience of Hungary with the preannounced crawling band exchange rate system during 1995–97. When selecting the exchange rate regime, several key characteristics of the transition process must be taken into account: reform-induced inflationary pressure, the necessity to restructure production and exports, and the need to establish credibility. We argue against a premature fixing of the exchange rate in transition economies and suggest that a crawling band can serve well the dual objectives of maintaining competitiveness and moderating inflation if it is supported by appropriate fiscal and structural policies. The exchange rate can be used more actively for disinflation if an acceptable wage policy can be negotiated, but this is difficult to achieve in the initial phase of the transition when the credibility of policy is weak.J. Comp. Econom.,December 1998, 26(4), pp. 691–717. National Bank of Hungary, Szabadság tér 8-9, H-1054 Budapest, Hungary.     

How should emerging economies float their currencies?

Floating exchange rates seem to be gaining ground in Latin America, East Asia and the transition economies. The recent crises left many economies with no alternative but to float. Others have moved toward floating, searching for greater flexibility and insulation from external shocks. The question for most emerging market economies, then, is no longer to float or not to float, but how to float. Four issues arise in this regard. The first is how to float and have low inflation. The second is whether floating provides as much insulation as conventional theory predicts, especially in the presence of dollarized liabilities. Which leads to the third point: the relationship between the stability of the exchange rate and that of the financial system. The fourth is how to conduct monetary policy under a float, and the role of inflation targeting. We consider each of these points in turn, and conclude that a workable model of how to float seems to be emerging from the so‐far successful experience of countries like Chile and Brazil. It involves the adoption of an inflation target as the main anchor for monetary policy, coupled with a monetary policy reaction function that — aside from reacting to the output gap and other determinants of the inflation rate — reacts also partially to movements in the nominal exchange rate. JEL classification: F3, F4, E4, E5     

Coordinating Tariff Reduction and Domestic Tax Reform under Imperfect Competition*

A major constraint on trade liberalization in many countries is the prospective loss of government revenue. Recent results, however, have established a simple and appealing strategy for overcoming this difficulty, whilst still realizing the efficiency gains from liberalization, in small, competitive economies: combining tariff cuts with point‐for‐point increases in destination‐based consumption taxes unambiguously increases both national welfare and total government revenue. This note explores the implications of imperfect competition for this strategy. Examples are easily found in which this strategy unambiguously reduces domestic welfare.