Effects of Private Ownership,Trade, and Foreign Direct Investment on Labor Productivity Growth in Transition Economies: Evidence from the Croatian Manufacturing Industry

In this study, we investigate the determinants of labor productivity dynamics in transition economies using data from Croatian manufacturing industries. Capital intensity growth and human capital accumulation have been significant contributors to stronger productivity gains. Private-sector development has positively affected productivity growth—but mostly through the increasing role of new private companies. Still, unfinished privatization represents a significant obstacle to stronger productivity gains. The effect of increasing trade openness is significant but negative, most likely owing to weak export competitiveness of Croatian companies. Neither greenfield nor (predominant) brownfield foreign direct investment inflows have contributed to higher labor productivity growth. Further privatization and structural reforms seem to be the most promising policy measures that need to be undertaken in order to achieve higher productivity gains.     

Fiscal devaluations: evidence using bilateral trade balance data

We study the effects of fiscal devaluations on the trade balances of European Union countries over the 2000–2014 period using bilateral trade balance data. This enables us to control for the coincidence of tax policy measures in different countries, which is an aspect left unconsidered in previous econometric studies. A fiscal devaluation consisting of a budget-neutral tax shift in the amount of 1% of gross domestic product (GDP) from employers’ social security contributions to value added tax leads to a short-term improvement of bilateral trade balance ranging between 0.3 and 0.6% of GDP. An extrapolation of our baseline estimate to the overall trade balance yields an impact of 4.3% of GDP for the whole sample, which is slightly higher than presented in previous empirical research. Applying extrapolation to the trade deficit countries in the euro area shows that these countries’ balance of trade with the rest of the euro area improves by only 0.75% of GDP. Thus, the magnitude of the fiscal devaluation impact on the trade balance varies significantly across countries, depending on their trade openness, among other potentially relevant factors.     

Fiscal devaluation and real exchange rates in the Euro area: Some econometric insights

We explore whether a fiscal devaluation, that is, a reduction in employers’ social security contributions and an increase in value added tax, affects two indicators of bilateral real exchange rates in the euro area: one based on unit labor costs, and another based on consumer prices. We find that, in the short term, cuts in employers’ contributions depreciate real exchange rates based on unit labor costs, while value added tax hikes appreciate real exchange rates based on consumer prices. In the long run, a value added tax increase also appreciates the real exchange rates based on unit labor costs.     

Developing countries in competition for foreign investment

This study analyzes the competition for foreign direct investment (FDI) among countries at different stages of development. It is assumed that domestic companies in a more-developed country use more capital in production and that wages in a less-developed country are lower. Countries can compete for FDI by increasing the supply of public inputs in the economy, in addition to (or instead of) offering subsidies or tax reliefs to foreign investors. The results reveal that if governments of competing countries are not allowed to discriminate between domestic and foreign firms, there may be situations in which a less-developed economy will attract FDI depending on the labor cost differential and the responsiveness of foreign investor's and domestic companies' output to changes in the supply of public inputs. If tax discrimination between domestic and foreign firms is permitted, both countries will optimally raise the supply of public inputs, but the more-developed country will always win the foreign investment despite higher labor costs. Thus, governments of less-developed countries may have an incentive to work on an international agreement to disallow tax discrimination.