Academic Working Paper Series

Fiscal Reform and its Firm-Level Effects in
John Anderson
WP No. 800 (August, 2005)

Abstract: This paper reports the first empirical evidence that fiscal reform efforts in transition countries have positive effects. Using the EBRD BEEPS I and II data, reported in 1999 and 2002, rigorous econometric models are estimated showing that the share of bribes paid to tax collectors is reduced in countries with more extensive fiscal reforms. This effect controls for selection bias in the likelihood that firms are required to make unofficial payments to tax authorities. On the basis of this evidence, we now have some confidence in the success of fiscal reform efforts. In addition, we have insight regarding what forms of fiscal reform may be more successful as the share of revenues generated from direct taxes (both personal and corporate) has an impact on tax bribes.
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Jel Codes: C21, H25, O23, O52
Keywords: Fiscal reform, Bribery, Transition economies, Eastern Europe, Central Asia

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Bond Yield Compression in the Countries Converging to the Euro
Lucjan T. Orlowski; Kirsten Lommatzsch
WP No. 799 (October, 2006)

Abstract: We demonstrate that bond yield compression is under way in the countries converging to the euro and that German yields are significant drivers of local currency yields. Based on the evidence from Poland, Hungary and the Czech Republic, we conclude that these new Member States of the European Union are ready to adopt the euro without risking a disruptive shock to their financial stability. This message transpires from investigating the daily volatility dynamics of local bond yields as a function of German yields, conditional on changes in local term spreads,
exchange rates and adjustments to central bank reference rates. Similar results of high sensitivity of local currency bond yields to changes in German yields are obtained from testing monthly
series of macroeconomic fundamentals. These findings provide evidence of the potential usefulness of term spreads as indicators of monetary convergence.
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Jel Codes: E43, E44, F36
Keywords: term spread, term premium, yield compression, monetary convergence, new Member States, EMU, conditional volatility, asymmetric GARCH models

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Contagion Across and Integration of Central & Eastern European Stock Markets: Evidence from Intraday Data
Balázs Égert; Evzen Kocenda
WP No. 798 (November, 2005)

Abstract: We analyze interrelations between three stock markets in Central and Eastern Europe and, in addition, interconnections which may exist between Western European (DAX, CAC, UKX)
and Central and Eastern European stock markets (BUX, PX-50, WIG20). The novelty of our paper rests mainly on the use of the five-minute tick intraday price data from the mid-2003 to the early 2005 for stock indices and on the wide range of econometric techniques employed. We find no robust cointegration relationship for any of the stock index pairs or for any of the extended specifications. There are signs of short-term spillover effects both in terms of stock returns and stock price volatility. Granger causality tests show the presence of bidirectional causality for returns as well as volatility series. The results based on a VAR framework indicate a more limited number of short-term relationships between the stock markets. In general, it appears that spillover effects are stronger from volatility to volatility than contagion effects from return to return series.
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Jel Codes: C22, F36, G15, O16, P59
Keywords: contagion and spillover effects, market integration, European emerging markets, intra-day data

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Real Exchange Rate Misalignment: Prelude to Crisis?
David M. Kemme; Saktinil Roy
WP No. 797 (October, 2005)

Abstract: A model of the long run equilibrium real exchange rate based upon macroeconomic fundamentals is employed to calculate real exchange rate misalignments for Poland and Russia during the 1990s using the Beveridge and Nelson (1981) decomposition of macrofundamentals into transitory and permanent components. Short run movements of the real exchange rate are estimated with ARIMA and GARCH error correction specifications. The different nominal exchange rate regimes of the two countries generate different levels of misalignment and different responses to exogenous shocks. The average misalignment in Russia is substantially greater than that in Poland, indicating incipient pressures to devalue the ruble immediately preceding the August 1998 crisis. The half life of an exogenous shock is found to be much shorter for Poland than for Russia in the pre-crisis period. Dynamic forecasts indicate that the movements of the real exchange rate in the post-crisis period are significantly different from those in the pre-crisis period. Thus, the currency crisis in Russia could not be anticipated with the movements of the real exchange rate estimated with the macroeconomic fundamentals.
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Jel Codes: F31, F36, P17
Keywords: Russia, Poland, equilibrium real exchange rates, misalignment, cointegration, exogenous shocks, macroeconomic crises

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Balassa-Samuelson Meets South Eastern Europe, the CIS and Turkey: A Close Encounter of the Third Kind?
Balázs Égert
WP No. 796 (November, 2005)

Abstract: This paper investigates the importance of the Balassa-Samuelson effect for two acceding countries (Bulgaria and Romania), two accession countries (Croatia and Turkey) and two CIS countries (Russia and Ukraine). The paper first studies the basic assumptions of the Balassa-Samuelson effect using yearly data, and then undertakes an econometric analysis of the assumptions on the basis of monthly data. The results suggest that for most of the countries, there is either amplification or attenuation, implying that any increase in the open sector's productivity feeds onto changes in the relative price of non-tradables either imperfectly or in an over-proportionate manner. With these results as a background, the size of the Balassa-Samuelson effect is derived. For this purpose, a number of different sectoral classification schemes are used to group sectors into open and closed sectors, which makes a difference for some of the countries. The Balassa-Samuelson effect is found to play only a limited role for inflation and real exchange rate determination, and it seems to be roughly in line with earlier findings for the eight new EU member states of Central and Eastern Europe.
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Jel Codes: E31, O11, P17
Keywords: Balassa-Samuelson effect, productivity, inflation, real exchange rate transition, South Eastern Europe, CIS, Turkey

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A Comparison of Reform-Era Labor Force Participation Rates of China's Ethnic Minorities & the Han Majority
Margaret Maurer-Fazio; James Hughes; Dandan Zhang
WP No. 795 (October, 2005)

Abstract: Previous research suggests that minorities are not faring well in China’s transition—both income and occupational attainment gaps are widening. We are particularly interested in whether the differences in majority and minority economic outcomes are the result of ethnicity per se, or whether they are artifacts of local economic conditions. In this paper, we employ data from the three most recent population censuses of China to explore differences in the labor force participation rates of a number of China’s important ethnic groups. We estimate urban labor force participation rates using probit regressions controlling for sex, marital status, educational attainment, age, ethnicity, and location. We also account for the geographic concentration of particular ethnic minorities and compare the participation rates of different ethnic groups within geographic regions that represent the areas of principal residence for each minority. We concentrate on seven important minority groups: Hui, Koreans, Manchu, Mongolians, Uygurs, Yi and Zhuang. We find that location has limited explanatory power in explaining differences in the probability of labor force participation between these important Chinese ethnic minorities and the majority Han.
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Jel Codes: J1, J2, J7, O1, O5, P2
Keywords: China, ethnic minorities, labor force participation, economic reform, population censuses

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Collective Action and Post-Communist Enterprise: The Economic Logic of Russia's Business Associations
William Pyle
WP No. 794 (September, 2005)

Abstract: Drawing on a unique set of surveys, this article explores the question of whether Russia’s post-communist business associations are generally antithetical to or supportive of the broad objectives of economic restructuring. Contrary to the most widely cited analysis as to the purposes of collective action in the business community, the survey evidence demonstrates that association members have embraced market-adapting behaviors at greater rates than nonmembers. The responses of both firms and associations, moreover, suggest that the associations themselves may, at least in part, be directly responsible. These findings point to the conclusion that in contemporary Russia the net returns to collective action in support of market development are high relative to those for purposes that are less benign.
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Jel Codes: D7, L2, L3, O1, P2
Keywords: business associations, collective action, post-communist transition, and market institutions

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Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues
Balázs Égert; László Halpern; Ronald MacDonald
WP No. 793 (October, 2005)

Abstract: In this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc. In particular, we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies. Amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual Balassa-Samuelson effect, such as the behaviour of the real exchange rate of the open sector and regulated prices. We then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model, namely: differences in the theoretical underpinnings; differences in the econometric estimation techniques; and differences relating to the time series and cross-sectional dimensions of the data. The ensuing three-dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size.
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Jel Codes: C15, E31, F31, O11, P17
Keywords: equilibrium exchange rate, Purchasing Power Parity, trend appreciation, Balassa-Samuelson effect, productivity, inflation differential, and others.

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Bribery: Who Pays, Who Refuses, What Are the Payoffs?
Jennifer Hunt
WP No. 792 (September, 2005)

Abstract: We provide a theoretical framework for understanding when an official angles for a bribe, when a client pays, and the payoffs to the client’s decision. We test this frame work using a new data set on bribery of Peruvian public officials by households. The theory predicts that bribery is more attractive to both parties when the client is richer, and we find empirically that both bribery incidence and value are increasing in household income. However, 65% of the relation between bribery incidence and income is explained by greater use of officials by high–income households, and by their use of more corrupt types of official. Compared to a client dealing with an honest official, a client who pays a bribe has a similar probability of concluding her business, while a client who refuses to bribe has a probability 16 percentage points lower. This indicates that service improvements in response to a bribe merely offset service reductions associated with angling for a bribe, and that clients refusing to bribe are punished. We use these and other results to argue that bribery is not a regressive tax.
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Jel Codes: H4, K4, O1
Keywords: Corruption, bribery, institutions, governance

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Gender Differences in Personality and Earnings: Evidence from Russia
Susan J. Linz; Anastasia Semykina
WP No. 791 (April, 2005)

Abstract: Does personality affect earnings? If so, are there gender differences in personality that explain part of the gender wage gap? We use survey data collected from over 2,600 Russian employees between 2000 and 2003 to evaluate the impact on earnings of two personality traits: locus of control (Rotter 1966)and challenge-affiliation (Hill et al. 1985). We find that gender differences in personality traits are significant. Men are more likely to exhibit an internal locus of control and need for challenge, while women are more likely to exhibit an external locus of control and need for affiliation. Moreover, there are differences in the effect of personality on earnings by gender – women’s earnings are affected by personality, while men’s earnings are not. Among participating employees in our study, the “unexplained” portion of the gender wage gap falls by as much as 12% when personality traits are included.
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Jel Codes: J31, J71, P23
Keywords: Personality, Locus of control, Earnings, Gender wage gap, Russias

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Why Are Some Public Officials More Corrupt Than Others?
Jennifer Hunt
WP No. 790 (September, 2005)

Abstract: Using detailed Peruvian data measuring bribery, I assess which types of public official are most corrupt and why. I distinguish between the bribery rate and the size of bribes received, and seek to explain the variation in each across public institutions. The characteristics of officials’ clients explain most of the variation for bribery rates, but none for bribe amounts. A measure of the speed of honest service at the institution explains much of the remaining variation for both bribery rates and amounts. The results indicate that the bribery rate is higher at institutions with bribe-prone clients, and that bribery rates and bribe amounts are higher where clients are frustrated at slow service. Faster and better service would reduce corruption. Overall, the judiciary and the police are by far the most corrupt institutions.
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Jel Codes: H4, K4, O1
Keywords: Corruption, bribery, institutions, governance

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Disinflation And Monetary Policy Arrangements In Romania
Daniel Daianu; Ella Kallai
WP No. 789 (November, 2004)

Abstract:

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Jel Codes: E52, F41, P44
Keywords: inflation-targeting, transition economy, EU accession

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Does Economic Uncertainty Affect the Decision to Bear Children? Evidence from East and West Germany
Jeffrey B. Nugent
WP No. 788 (August, 2005)

Abstract:

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Jel Codes: D81, J13, J22
Keywords: Falling Fertility, Uncertainty, Germany

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Economic Reform and Changing Patterns of Labor Force Participation in Urban and Rural China
Margaret Maurer-Fazio; James Hughes; Dandan Zhang
WP No. 787 (August, 2005)

Abstract: In this project, we employ data from the Chinese population censuses of 1982, 1990, and 2000 to examine reform-era changes in the patterns of male and female labor force participation and in the distribution of men’s and women’s occupational attainment. Very marked patterns of change in labor force participation emerge when we disaggregate the data by age cohort, marital status, sex, and rural/urban location.  Women have decreased their labor force participation more than men, and urban women much more than rural women. Single young people in urban areas have decreased their labor force participation to stay in school to a much greater extent than single young people in rural areas. The urban elderly have decreased their rates of labor force participation while the rural elderly have increased theirs. We also find evidence of the feminization of agriculture.
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Jel Codes: J0, J16, J21, J62, O15, O53
Keywords: China, labor force participation, economic reform, occupational attainment, population censuses

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The Determinants of Asset Stripping: Theory and Evidence From the Transition Economies
Nauro F. Campos; Francesco Giovannoni
WP No. 786 (August, 2005)

Abstract: During the transition from plan to market, managers and politicians succeeded in maintaining control of large parts of the stock of socialist physical capital. Despite the obvious importance of this phenomenon, there have been no efforts to model, measure and investigate this process empirically. This paper tries to fill this gap by putting forward theory and econometric evidence. We argue that asset stripping is driven by the interplay between the firm’s potential profitability and its ability to influence law enforcement. Our econometric results, for about 950 firms in five transition economies, provide support for this argument.
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Jel Codes: H82, K42, O17, P26, P31
Keywords: Asset stripping, law enforcement, corruption, transition.

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How to Catch Foreign Fish? FDI and Privatization in EU Accession Countries
Bruno Merlevede; Koen Schoors
WP No. 785 (August, 2005)

Abstract: We examine the determinants of FDI stocks of ‘old’ EU-members in ten accession countries. Our partial adjustment framework results in a dynamic panel data analysis.  In addition to the traditional variables, such as market potential and unit labour costs, we find institutional development to be a robust determinant of equilibrium FDI stocks. The adjustment towards equilibrium is rapid. The relationship between FDI and the privatization process is complex. Non-direct privatization schemes negatively affect the speed of adjustment, whereas direct privatization strategies positively affect the equilibrium itself. Privatization history increases equilibrium FDI stocks, independently of the method applied.
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Jel Codes: F20, F23, P33
Keywords: foreign direct investment, privatisation, partial adjustment

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Does the World Bank Have Any Impact on Human Development of the Poorest Countries? Some Preliminary Evidence from Africa
Sumon Kumar Bhaumik
WP No. 784 (August, 2005)

Abstract: In an attempt to better understand the impact of the World Bank on human development in poor countries, we use cross-country data on African countries, for the 1990-2002 period, to examine this relationship.  The coefficient estimates of our parsimonious fixed-effects models indicate that while loans and grants of the Bank have had a positive impact on some relatively short-term indicators of health and education in an average African country, there is little evidence to suggest that such loans and grants have helped these countries to consolidate on the short-term gains.
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Jel Codes: O15, O19, O55, P45
Journal Citation: Does the World Bank have any impact on human development of the poorest countries? Some preliminary evidence from Africa. Economic Systems. 2006.
Keywords: Development, Health, Education, World Bank, Africa

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Comparative social capital: Networks of entrepreneurs and investors in China and Russia
Bat Batjargal
WP No. 783 (July, 2005)

Abstract:

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Jel Codes: F23, G24, M13
Keywords: Social capital, entrepreneurs, venture capitalists, China and Russia

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Exchange Rate Regimes, Foreign Exchange Volatility and Export Performance in Central and Eastern Europe: Just Another Blur Project?
Balázs Égert; Amalia Morales-Zumaquero
WP No. 782 (July, 2005)

Abstract:

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Jel Codes: F31
Keywords: exchange rate volatility, export, trade, transition, structural breaks

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Equilibrium Exchange Rate in the Czech Republic: How Good is the Czech BEER?
Ian Babetskii; Balázs Égert
WP No. 781 (July, 2005)

Abstract:

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Jel Codes: F31
Keywords: Equilibrium exchange rate; real exchange rate; behavioral equilibrium exchange rate; Czech koruna, transition economies; stock-flow approach; productivity

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Autonomy and Performance of Foreign Subsidiaries in Five Transition Countries
Urmas Varblane; Katrin Männik; Helena Hannula
WP No. 780 (July, 2005)

Abstract:

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Jel Codes: F21, O14, O30
Keywords: international technology transfer, FDI effects on the host economy, subsidiary autonomy, subsidiary performance, transition countries

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The Political Economy of Industrial Policy in China: The Case of Aircraft Manufacturing
Andrea Goldstein
WP No. 779 (July, 2005)

Abstract:

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Jel Codes: H11, L62, O14
Journal Citation: http://www.tandf.co.uk/journals/journal.asp?issn=1476-5284&linktype=1, v. 4, n. 3, pp. 259-274
Keywords: aerospace, China

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Bank Supervision Russian style: Rules versus Enforcement and Tacit Objectives
Sophie Claeys; Gleb Lanine; Koen Schoors
WP No. 778 (July, 2005)

Abstract:

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Jel Codes: E5, G2, N2
Keywords: Bank supervision, bank crisis, Russia.

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Labor Market Trends and Institutions in Belarus
Zuzana Brixiová; Vera Volchok
WP No. 777 (June, 2005)

Abstract:

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Jel Codes: J21, J31, P23
Keywords: labor markets, institutions, transition

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Can Vietnam Achieve One of its Millennium Development Goals? An analysis of schooling dropouts of children
Vo Tri Thanh; Trinh Quang Long
WP No. 776 (June, 2005)

Abstract:

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Jel Codes: C31, D10, I20, I29
Keywords: Vietnam, education, MDGs

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Is The Link Between Reforms And Growth Spurious? A Comment
Tomasz Mickiewicz
WP No. 775 (May, 2005)

Abstract:

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Jel Codes: O49, P27
Keywords: growth, reform, liberalisation index, transition, inflation

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The Risk Aversion of Banks in Emerging Credit markets: Evidence from India
Sumon Kumar Bhaumik; Jenifer Piesse
WP No. 774 (May, 2005)

Abstract:

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Jel Codes: G21, O16
Keywords: Indian banking, Development, Credit-to-deposit ratio, Risk aversion

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Organized Labor and Restructuring: Coal Mines in the Czech Republic and Romania
Jan Bruha; Delia Ionascu; Byeongju Jeong
WP No. 773 (May, 2005)

Abstract:

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Jel Codes: J50, O17, P31, R11
Keywords: organized labor, restructuring, coal, transition, welfare

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Is Political Risk Company-Specific? The Market Side of the Yukos Affair
Alexei Goriaev; Konstantin Sonin
WP No. 772 (May, 2005)

Abstract:

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Jel Codes: G14, G28, P16

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Non-Linear Exchange Rate Dynamics in Target Zones:A Bumpy Road Towards A Honeymoon Some Evidence from the ERM, ERM2 and Selected New EU Member States
Jesús Crespo-Cuaresma; Balázs Égert; Ronald MacDonald
WP No. 771 (May, 2005)

Abstract:

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Jel Codes: F31, G15, O10
Keywords: target zone, ERM, non-linearity, SETAR

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Equilibrium Exchange Rates in Southeastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) Diseased?
Balázs Égert
WP No. 770 (May, 2005)

Abstract:

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Jel Codes: E31, O11, P17
Keywords: Balassa-Samuelson, Dutch Disease, Bulgaria, Croatia, Romania, Russia, Ukraine, Turkey

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Equilibrium Exchange Rates in Central and Eastern Europe: A Meta-Regression Analysis
Balázs Égert; László Halpern
WP No. 769 (May, 2005)

Abstract:

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Jel Codes: C15, E31, F31, O11, P17
Keywords: equilibrium exchange rate, Balassa-Samuelson effect, meta-analysis

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Testing for inflation convergence between the Euro Zone and its CEE partners
Imed Drine; Christophe Rault
WP No. 768 (April, 2005)

Abstract:

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Jel Codes: C15, E31, F0, F31
Keywords: Purchasing power parity, inflation convergence, developing country, panel unit-root tests allowing structural breaks.

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Labor Mobility during Transition: Evidence from the Czech Republic
Jan Fidrmuc
WP No. 767 (April, 2005)

Abstract:

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Jel Codes: F22, J61, P23
Keywords: Migration, Mobility, Labor-market Adjustment, Regional Shocks, Survey data

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Formation of social capital in Central and Eastern Europe: Understanding the gap vis-à-vis developed countries.
Jan Fidrmuc; Klarita Gërxhani
WP No. 766 (April, 2005)

Abstract:

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Jel Codes: O17, O57, P37, Z13
Keywords: social capital, institutions, capitalism, transition

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Do Regional Integration Agreements Increase Business-Cycle Convergence? Evidence From APEC and NAFTA.
Viviana Fernandez; Ali Kutan
WP No. 765 (April, 2005)

Abstract:

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Jel Codes: B41, E32
Keywords: business-cycles convergence, wavelets, APEC, NAFTA.

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State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector.
Maxim Bouev
WP No. 764 (April, 2005)

Abstract:

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Jel Codes: E24, E26, H26, J31, J41, J42, J64, O17
Keywords: informal economy, regulations, wage bargaining, labour markets, search models

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The Feldstein-Horioka Puzzle Revisited: An "European-Regional" Perspective.
Jérôme Hericourt; Mathilde Maurel
WP No. 763 (April, 2005)

Abstract: The purpose of this paper consists in assessing the extent of financial  integration in European Union using the Feldstein-Horioka criterion. More precisely,  we test the cross-correlation of savings and investment rates across European Union regions, using NUTS 2 data coming from Eurostat regional database, over the period 1995-2000. Several important outcomes are reported by our article: if financial integration seems to be realized across all the regions forming European Union, the Feldstein-Horioka criterion keeps emphasizing differences between small and big countries, the later being less integrated at the regional level.  Furthermore, the testing of the relationship between savings and investment in consistent  sub-groups of regions (designed according to geographical, historical or economic criteria) emphasize that financial integration can  be higher at the regional level.
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Jel Codes: E22, F21, G15
Keywords: regional savings, investment, capital market, capital flows

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Transatlantic Differences in Labour Markets Changes in Wage and Non-Employment Structures in the 1980s and the 1990s.

WP No. 762 (March, 2005)

Abstract:

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Jel Codes: J21, J31, J64
Keywords: wage, earnings, unemployment, non-employment, rigidity, identification

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Resolution, Recovery and Survival: The Evolution of Payment Disputes in Post-Socialist Europe
William Pyle
WP No. 761 (March, 2005)

Abstract:

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Jel Codes: D23, D74, K40, K41, P37
Keywords: commercial dispute, business association, transition

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Foreign Exchange Interventions & Interest Rate Policy in the Czech Republic: Hand In Glove?
Balázs Égert; Luboš Komárek
WP No. 760 (March, 2005)

Abstract: This paper studies the impact of daily official foreign exchange interventions on the Czech koruna’s exchange rate vis-à-vis the euro (the German mark prior to 1999) from 1997 to 2002. Both the event study methodology, extended with official interest rate moves, and a variety of GARCH models reveal that central bank interventions, especially koruna purchases, seem to have been relatively ineffective from 1997 to mid-1998 compared to the
size of the interventions. From mid-1998 to 2002, however, koruna sales turn out to be effective in smoothing the path of the exchange rate up to 60 days. Nevertheless, the event
study approach indicates that the success of FX interventions may be intimately related to the coordination of intervention and interest rate policies.
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Jel Codes: F31
Keywords: central bank intervention, foreign exchange intervention, interest rate policy, event study, GARCH, transition economies, Czech Republic

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Assessing Market Expectations on Exchange Rates and Inflation: A Pilot Forecasting System for Bulgaria
Michael Berlemann; Kalina Dimitrova; Nikolay Nenovsky
WP No. 759 (March, 2005)

Abstract:

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Jel Codes: C93, E37
Keywords: forecasting, macroeconomics, inflation, exchange rates, experimental stock markets.

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Attitudes and Performance: An Analysis of Russian Workers
Susan J. Linz; Anastasia Semykina
WP No. 758 (March, 2005)

Abstract:

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Jel Codes: J24, P23
Keywords: locus of control, Russia, motivation, performance, gender

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Barter, Credit, and Welfare: A theoretical inquiry into the barter phenomenon in Russia
José Noguera; Susan J. Linz
WP No. 757 (March, 2005)

Abstract:

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Jel Codes: E0, E6, P20, P21, P23, P26
Keywords: Barter, welfare, Russia, money, credit, payment system, interest rate

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Sorting, Selection, and Transformation of the Return to College Education In China
Belton M. Fleisher; Haizheng Li; Shi Li; Xiaojun Wang
WP No. 756 (March, 2005)

Abstract:

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Jel Codes: J24, J31, O15
Keywords: Return to schooling, sorting gains, heterogeneity, financial constraints, comparative advantage, China

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Foreign Exchange Interventions in Croatia: Should We Give A Damn?
Balázs Égert; Maroje Lang
WP No. 755 (November, 2006)

Abstract: This paper studies the impact of daily official foreign exchange interventions on the exchange rates in Croatia for the period from 1996 to 2004. Using the event study methodology and a
variety of GARCH models reveals that the Croatian central bank was in a position to influence, to some extent, the level of the exchange rate during the period studied. This lends support to the view that foreign exchange intervention may be effective in emerging market economies.
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Jel Codes: F31
Keywords: central bank intervention, foreign exchange intervention, official interventions,foreign exchange market, effectiveness, exchange rate volatility, emerging economies,transition economies

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Targeting Relative Inflation Forecast as Monetary Policy Framework for Adopting the Euro
Lucjan T. Orlowski
WP No. 754 (February, 2005)

Abstract: This study proposes relative inflation forecast targeting as an operational framework of monetary policy for adopting the euro by the EU new Member States. This strategy assumes containing differentials between the domestic and the eurozone inflation forecasts as an operational target. A model prescribing the RIFT framework is presented along with a set of appropriate policy indicator variables and instrument rules. The proposed framework advances the strategy based on relatively strict inflation targeting that is currently pursued by some NMS. Several ARCHclass tests in various functional forms are employed for providing preliminary empirical evidence on convergence of inflation differentials relative to the euro area for Poland, Czech Republic and Hungary.
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Jel Codes: E42, E52, E61, F36, P24
Keywords: Inflation targeting; Monetary convergence; Euro adoption; EU new Member States.

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Internet Entrepreneurship: Networks and Performance of Internet Ventures In China
Bat Batjargal
WP No. 753 (February, 2005)

Abstract: This article examines the contingent value of entrepreneurs' networks to survival likelihood of Internet ventures, and the dynamics of entrepreneurs' networks over time. The empirical data are composed of the longitudinal surveys of 94 Internet ventures in Beijing, China. The study found the positive and the negative contingent effects of structural holes on the survival likelihood of new firms. The study found that networking skills of entrepreneurs are associated positively with the changes in networks over time. Improved social skills lead to greater firm legitimacy.
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Jel Codes: D85, L14, L25, M13, P27
Keywords: Structural holes, human capital, Internet, entrepreneurship, China

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Network Triads: Transitivity, Referral and Venture Capital Decisions in China and Russia
Bat Batjargal
WP No. 752 (February, 2005)

Abstract: This article examines effects of dyadic ties and interpersonal trust on referrals and investment decisions of venture capitalists in the Chinese and Russian contexts. The study uses the postulate of transitivity of social network theory as a conceptual framework. The findings reveal that referee-venture capitalist tie, referee-entrepreneur tie, and interpersonal trust between referee and venture capitalist have positive effects on referrals and investment decisions of venture capitalists. The institutional, social and cultural differences between China and Russia have minimal effects on referrals. Interpersonal trust has positive effects on investment decisions in Russia.
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Jel Codes: D85, G24, M13, P27
Keywords: Transitivity, triads, referral, venture capital, China, Russia

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Software Entrepreneurship: Knowledge Networks And Performance
Bat Batjargal
WP No. 751 (February, 2005)

Abstract:

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Jel Codes: D85, L14, L25, M13, P27
Keywords: networks, knowledge, entrepreneurs, software, China, Russia.

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Retained State Shareholding in Chinese PLCs: Does Government Ownership Reduce Corporate Value?
Lihui Tian; Saul Estrin
WP No. 750 (February, 2005)

Abstract: The role of government shareholding in corporate performance is central to an understanding of China's newly privatized large firms. In this paper, we analyze shareholders as agents that can both harm and benefit companies. We examine the ownership structure of 826 listed corporations and find that government shareholding is surprisingly large. Its effect on corporate value is found to be negative, but non-monotonic. Up to a certain threshold, corporate value decreases as government shareholding stakes increase, but beyond this corporate value begins to increase. We interpret this in terms of ownership concentration and the advantages of government partiality.
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Jel Codes: G15, G32, G34, L33
Keywords: government shareholding, corporate governance, China.

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Financial Development and Technology
Solomon Tadesse
WP No. 749 (February, 2005)

Abstract:

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Jel Codes: E44, G1, G21, G32, O14, O31, O34, O4
Keywords: Financial Development, Productivity Growth, Technological Progress, Innovation

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Banking Fragility and Disclosure: International Evidence
Solomon Tadesse
WP No. 748 (February, 2005)

Abstract: Motivated by recent public policy debates on the role of market discipline in banking stability, I examine the impact of greater bank disclosure in mitigating the likelihood of systemic banking crisis. In a cross sectional study of banking systems across 49 countries in the 90s, I find that banking crises are less likely in countries with financial reporting regimes characterized by (i) comprehensive disclosure (ii) informative disclosure, (iii) timely disclosure and (iv) more stringent auditing.
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Jel Codes: G21, G28
Keywords: Banking Crisis, Disclosure, Transparency, Audit Stringency

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Consolidation, Scale Economies and Technological Change in Japanese Banking
Solomon Tadesse
WP No. 747 (February, 2005)

Abstract: The paper examines the technological structure of the Japanese banking sector before the onset of the banking crisis and structural reforms of the 90s in order to shade light on the logic of the recent trend to consolidation in the industry. While diseconomies of scale are shown to be pervasive in the large banks, defying the rationale for consolidation, the paper presents evidence of an underlying technological progress that operates to significantly increase the industry's efficient minimum size, generating economies at larger banks, thus justifying the ongoing trend in consolidation. The results suggest that, to the extent that consumers can benefit from lower costs of bank production, policies that promote a more concentrated banking structure might be consistent with public interest.
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Jel Codes: D24, G21, O3
Keywords: Scale Economies; Technical Change; Banking

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Trade Creation and Diversion Effects of Europe's Regional Liberalization Agreements
Yener Kandogan
WP No. 746 (January, 2005)

Abstract: After a short background on recent developments in gravity modelling and liberalization agreements in Europe, this paper measures the trade creation and diversion effects of major European agreements based on the results of a correctly specified triple-indexed gravity model with bilateral fixed effects. For each agreement and partner country, welfare implications are discussed in sectors of different factor intensities with emphasis on the role of similarity in income or relative factor endowments between partners, as well as the date and the reciprocity of the agreement. This is followed by a description of the characteristics of the non-partner countries that are affected by these agreements in each sector.
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Jel Codes: F14, F15
Keywords: Gravity Model, Fixed Effects

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Quality of Institutions, Credit Markets and Bankruptcy
Christa Hainz
WP No. 745 (February, 2005)

Abstract: The number of firm bankruptcies is surprisingly low in economies with poor institutions. We study a model of bank-firm relationship and show that the bank's decision to liquidate bad firms has two opposing effects. First, the bank receives a payoff if a firm is liquidated. Second, it loses the rent from incumbent customers that is due to its informational advantage. We show that institutions must improve significantly in order to yield a stable equilibrium in which the optimal number of firms is liquidated. There is also a range where improving institutions may decrease the number of bad firms liquidated.
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Jel Codes: D82, G21, G33, K10
Keywords: Credit markets, institutions, bank competition, information sharing, bankruptcy, relationship banking.

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How Transition Paths Differ: Enterprise Performance in Russia and China
Sumon Kumar Bhaumik; Saul Estrin
WP No. 744 (January, 2005)

Abstract: We use enterprise data to analyse and contrast the determinants of enterprise performance in China and Russia. We find that in China, enterprise growth and efficiency is associated with rapid increases in factor inputs, but not correlated with ownership or institutional factors. However, in Russia, enterprise growth is not associated with increases in factor quantity (except for labor) or quality. The main determinants of company performance are instead demand and institutional factors at a regional level. We explore possible interpretations of these results, including the impact of institutional and managerial quality.
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Jel Codes: D23, L22, O12, P31
Journal Citation: How Transition Paths Differ: Enterprise Performance in Russia and China. Journal of Development Economics. forthcoming.
Keywords: enterprise performance; privatization in Russia and China.

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Inflation Targeting, Between Rhetoric and Reality. The Case of Transition Economies
Daniel Daianu; Laurian Lungu
WP No. 743 (January, 2005)

Abstract: The paper examines the inflation targeting regime in the context of transition economies. Recent years have witnessed an increasing number of central banks in these countries moving towards the implementation of inflation targeting regimes. However, the success of such a regime depends largely on the degree to which certain general requirements are met. As experience in a number of transition economies has shown so far, targeting inflation is not an easy task. The ongoing restructuring process in these economies makes the inflation forecasting process more difficult and introduces an additional source of uncertainty in the system. By unequivocally choosing inflation as a nominal anchor the central banks could face potential dilemmas if, for example, exchange rate appreciated too much under the pressure of massive capital inflows. The paper presents the broad framework in which inflation targeting could operate efficiently and attempts to assess the extent to which such a regime, when applied to transition economies, could fit into this framework.
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Jel Codes: E52, E60
Keywords: Inflation Targeting, Eastern Europe

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How Does Law Affect Finance? An Empirical Examination of Tunneling in an Emerging Market
Vladimir Atanasov; Conrad S. Ciccotello; Stanley B. Gyoshev
WP No. 742 (January, 2005)

Abstract: This paper documents that law affects finance in emerging markets through the methods used by controlling shareholders to "tunnel" wealth out of the firm. We find that Bulgarian securities law enabled financial tunneling via dilution and freeze-out tender offers. During the period 1999- 2001, about two-thirds of the 1,040 firms on the Bulgarian Stock Exchange were delisted. Freeze-out tender offers for minority shares averaged about 25% of the shares' intrinsic value. Bulgarian securities law changes in 2002 made financial tunneling more costly for controlling shareholders. Subsequent increases in stock market valuations and liquidity suggest that controlling shareholders have shifted from financial tunneling to less value-destroying methods, such as transfer pricing, to extract wealth from firms.
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Jel Codes: G34, K22
Keywords: Tunneling, freeze-out, controlling shareholders, appraisal rights, preemptive rights

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Do Insider Trading Laws Matter? Some Preliminary Comparative Evidence
Laura Nyantung Beny
WP No. 741 (January, 2005)

Abstract: Despite the longstanding insider trading debate, there is little empirical research on insider trading laws, especially in a comparative context. The article attempts to fill that gap. I find that countries with more prohibitive insider trading laws have more diffuse equity ownership, more accurate stock prices, and more liquid stock markets. These findings are generally robust to controlling for measures of disclosure and enforceability and suggest that formal insider trading laws (especially their deterrent components) matter to stock market development. The article suggests further avenues of empirical research on the specific mechanisms through which insider trading laws might matter and the political economy of their adoption.
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Jel Codes: G14, G15, G18, G32, K22
Keywords: Insider trading law, Market efficiency, Ownership structure, Law and finance,

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Autopsy on an Empire: Understanding Mortality in Russia and the Former Soviet Union
Elizabeth Brainerd; David M. Cutler
WP No. 740 (January, 2005)

Abstract: Male life expectancy at birth fell by over six years in Russia between 1989 and 1994. Many other countries of the former Soviet Union saw similar declines, and female life expectancy fell as well. Using cross-country and Russian household survey data, we assess six possible explanations for this upsurge in mortality. Most find little support in the data: the deterioration of the health care system, changes in diet and obesity, and material deprivation fail to explain the increase in mortality rates. The two factors that do appear to be important are alcohol consumption, especially as it relates to external causes of death (homicide, suicide, and accidents) and stress associated with a poor outlook for the future. However, a large residual remains to be explained.
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Jel Codes: I12, J10, P36
Keywords: health, mortality, Russia, Eastern Europe

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Not Separate, Not Equal: Poverty and Inequality in Post-Apartheid South Africa
Berk Ozler; Johannes G. Hoogeveen
WP No. 739 (January, 2005)

Abstract: As South Africa conducts a review of the first ten years of its new democracy, the question remains as to whether the economic inequalities of the apartheid era are beginning to fade. Using new, comparable consumption aggregates for 1995 and 2000, this paper finds that real per capita household expenditures declined for those at the bottom end of the expenditure distribution during this period of low GDP growth. As a result, poverty, especially extreme poverty, increased. Inequality also increased, mainly due to a jump in inequality among the African population. Even among subgroups of the population that experienced healthy consumption growth, such as the Coloureds, the rate of poverty reduction was low because the distributional shifts were not pro-poor.
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Jel Codes: D63, I32
Keywords: Poverty, Inequality, South Africa

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The Marketing Structure in Agribusiness during the Transition in Bulgaria
Steve Murray; Yordan Staykov; Valentin Katzerov
WP No. 738 (January, 2005)

Abstract: Bulgaria is moving toward a food processing and marketing system which resembles that of Western Europe and the U.S. Large grocery chains from Germany, Austrai and Turkey are building supermarkets and hypermarkets in Bulgaria's larger cities. However, income in Bulgaria remains much lower than in Western Europe and most Bulgarian consumers cannot afford to shop in the new stores yet. Neighborhood markets, which serve average Bulgarians, are expanding their product selections and remain the primary shopping venue. Food processing plants in Bulgaria are being upgraded to meet EU standards. Farmers are getting more efficient as land is consolidated. On the whole, the agriculture and agribusiness sectors in Bulgaria are improving.
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Jel Codes: O52, P23, Q13
Keywords: Bulgaria, food marketing, transition

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Passive Creditors
Koen Schoors; Konstantin Sonin
WP No. 737 (January, 2005)

Abstract: Creditors are often passive because they are reluctant to show bad debts on their own balance sheets. We propose a simple general equilibrium model to study the externality effect of creditor passivity. The model yields rich insights in the phenomenon of creditor passivity, both in transition and developed market economies. Policy implications are deduced. The model also explains in what respect banks differ from enterprises and what this implies for policy. Commonly observed phenomenons in the banking sector, such as deposit insurance, lender of last resort facilities, government coordination to work out bad loans and special bank closure provisions, are interpreted in our framework.
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Jel Codes: G21, G28, G33, P5
Keywords: creditor passivity, bankruptcy, arrears, bad loans, bank closure

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From a currency board to the euro: Public attitudes toward unilateral euroization in Bulgaria
Neven T. Valev
WP No. 736 (January, 2005)

Abstract: Bulgaria has operated a currency board since 1997. It is expected to join the EU in 2007 and the EMU thereafter. This paper uses survey data to analyze public attitudes toward adoption of the euro in advance of EMU membership. Bulgarians are equally split in support for and opposition to euroization. The reasons to support euroization include the eliminated risk of currency devaluation and the perception that the euro is already widely used in the economy. The opposition derives from people's attachment to the national currency and from concerns about the conversion costs involved in a switch to the euro.
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Jel Codes: F3, P2
Keywords: Euroization; Dollarization; Euro; Survey Data; Bulgaria; Currency Boards

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Dictators and Their Viziers: Agency Problems in Dictatorships
Georgy Egorov; Konstantin Sonin
WP No. 735 (January, 2005)

Abstract: The possibility of treason by a close associate has been a nightmare of most dictators throughout history. Better informed viziers are also better able to discriminate among potential plotters, and this makes them more risky subordinates for the dictator. To avoid this, dictators, especially which are weak and vulnerable, sacrifce the competence of their agents, hiring mediocre but loyal subordinates. One reason why democracies generally witness more talented people in the government is the dictator's inability to commit to the optimal (less than the capital) punishment for those who unsuccessfully plotted to remove him from power. Furthermore, any use of incentive schemes by a dictator is limited by the fact that rewards are conditional on dictator's own willingness to keep his promises, while punishments are conditional on dictator's own survival. We model a principalagent game between a dictator and his (probably, few) viziers both in static and dynamic perspectives. The dynamic model allows us to focus on the succession problem the insecure dictators face.
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Jel Codes: D72, P16
Keywords: dictatorship, formal political theory, principal-agent theory, institutions

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Foreign Investment, Corporate Ownership, and Development: Are Firms in Emerging Markets Catching Up to the World Standard?
Michal Skorepa; Jan Svejnar; Katherine Terrell
WP No. 734 (January, 2005)

Abstract: Economic development implies that the efficiency of firms in developing countries is approaching that of firms in advanced economies. We examine the extent of this convergence in the Czech Republic and Russia, economies that represent alternative models of implementing development policies, often referred to as the Washington Consensus, that have promoted privatization, competition and foreign investment. We also test hypotheses positing that only firms near the efficiency frontier benefit from these policies and catch up. Using 1992-2000 panel data on virtually all industrial firms in each country, we find that privatization to domestic owners did not markedly improve the efficiency of firms; domestic firms are not catching up to the (world) efficiency standard given by foreign-owned firms; and the distance of the Russian firms to the efficiency frontier is much larger than that of the Czech firms and continued to grow for most firms beyond 1997 while remaining constant in the Czech Republic. Domestic firms closer to the frontier are not more likely to catch up than firms further from the frontier although foreign firms do exhibit this behavior. Foreign-owned firms are increasingly displacing domestic firms in the top deciles of the overall distribution of efficiency, due in part to slower "learning" by domestic firms, higher efficiency of foreign startups, and foreigners' acquisitions of more efficient domestic firms. The two alternative implementations of the Washington Consensus policies have thus not enabled domestic firms to start catching up to the world standard.
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Jel Codes: C33, D20, G32, L20
Keywords: Efficiency, productivity, economic development, foreign direct investment, ownership, convergence, frontier, Czech Republic, Russia, Washington Consensus.

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Businessman Candidates: Special-Interest Politics in Weakly Institutionalized Environments
Konstantin Sonin; Scott Gehlbach
WP No. 733 (December, 2004)

Abstract: We initiate examination of the political boundaries of the firm by exploring the phenomenon of "businessman candidates": business owners and managers who bypass conventional means of political influence to run for public office themselves. We argue that in-house production of political influence will be more likely in institutional environments where candidates find it difficult to make binding campaign promises. When campaign promises are binding, then a businessman may always pay a professional politician to run on the platform that political competition would otherwise compel the businessman to adopt. In contrast, when commitment to a campaign platform is impossible, then candidate identity matters for the policies that will be adopted ex post, implying that a businessman may choose to run for office if the stakes are sufficiently large. We illustrate our arguments through discussion of gubernatorial elections in postcommunist Russia, where businessmen frequently run for public office, institutions to encourage elected officials to keep their campaign promises are weak, and competition for rents is intense.
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Jel Codes: D72, N40, P16, P26
Keywords: Businessman candidates, elections, citizen candidates, institutions, political economy

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Measuring the Institutional Change of the Monetary Regime in a Political Economy Perspective (Groups of interest and monetary variables during the Currency Board introduction in Bulgaria)
Nikolay Nenovsky; Yorgos Rizopoulos
WP No. 732 (December, 2004)

Abstract: The paper explores the possibilities to measure the institutional change in the monetary field. A political economy theoretical framework is built up, where the change of the monetary regime is analyzed as the outcome of the debtors - creditors interactions. In this perspective, the value of some traditional monetary variables during the period before and after the introduction of the Currency Board in Bulgaria, in 1997, reveals the main actors' evolving relative positions.
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Jel Codes: E42, E52, O10, P30
Keywords: institutional change, monetary regime, Currency Board, transition, Bulgar

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Impact Of Regulated Price Adjustments On Price Variability In A Very Low Inflation Transition Economy: Case Of Armenia
Aghassi Mkrtchyan
WP No. 731 (November, 2004)

Abstract: The impact of macroeconomic management (monetary policy) and administrative price adjustments on price variability in a low inflation economy characterized by relatively frequent administrative price adjustments is examined. Fluctuations of market determined prices, prices of agricultural goods in particular, are linked to the lack of synchronization between administrative price changes and monetary policy. If monetary policy does not account for expected changes in administrative prices, demand in "free" goods markets will shift causing fluctuation of prices for agricultural goods, because the supply of these goods is highly inelastic in Armenia. The findings contribute to a better understanding of agricultural price variability during 1998-2002. The impact of macroeconomic policy and structural adjustments on income distribution and rural poverty incidence are also examined. This research has immediate policy implications since Armenia will undergo major upward price adjustments for goods and services with regulated prices, which may have a negative impact on income distribution if aggregate demand management is unchanged.
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Jel Codes: E31, E61
Keywords: Inflation, price variability, regulated prices

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Reform, FDI and Economic Growth: Tale of the Tortoise and the Hare
Bruno Merlevede; Koen Schoors
WP No. 730 (November, 2004)

Abstract: Our main interest is the impact of the choice of the speed of economic reform on economic growth. We estimate a system of 3 equations where economic growth, economic reform and FDI are jointly determined. We find that new reforms affect economic growth negatively but attract FDI, whereas the level of past reform leads to higher growth. This means that the immediate adjustment cost of new reforms is counterbalanced by an immediate increase in FDI inflows and higher growth in the future through a higher level of past reform. Reform reversals contribute to lower growth. We use the model to simulate the impact of big bang reform and gradualist reform on economic growth. This is only meaningful in the presence of reform reversals, which requires aggregate uncertainty about the appropriate reform path. Using the coefficients from the empirical model we find that even relatively small ex ante reversal probabilities suffice to tilt the balance in favour of gradualism. This could be reinforced by the shortsightedness of policymakers, but may be moderated by voter myopia.
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Jel Codes: O57, P21, P26, P27
Keywords: policy reform, gradualism, big bang, FDI, economic growth

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The Effects of Transition and Political Instability On Foreign Direct Investment Inflows: Central Europe and the Balkans
Josef C. Brada; Ali M. Kutan; Taner M. Yigit
WP No. 729 (November, 2004)

Abstract: This paper examines the effect of transition and of political instability on FDI flows to the transition economies of Central Europe, the Baltics and the Balkans. We find that FDI to transition economies unaffected by conflict and political instability exceed those that would be expected for comparable West European countries. Success with stabilization and reform tends to increase FDI inflows. In the case of Balkan counties, conflict and instability have reduced FDI inflows below what one would expect for comparable West European countries, and reform and stabilization failures have further reduced FDI to the region. Thus the economic costs of instability in the Balkans have been quite high.
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Jel Codes: F21, F23, P52
Keywords: foreign direct investment, transition, political instability, political risk

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Institutional Distance And International Business Strategies In Emerging Economies
Saul Estrin; Klaus Meyer; Delia Ionascu
WP No. 728 (November, 2004)

Abstract: The concept of "distance" has been used by international business scholars to explain variations in international business strategies and operations across countries. The more distant a host country is from the organizational centre of a multinational enterprise (MNE), the more it has to manage cultural, regulatory and cognitive differences, and to develop appropriate entry strategies, organizational forms, and internal procedures to accommodate these differences. Scholarly research has focused on the concept of psychic distance, which has been narrowed down in empirical work to indices based on Hofstede's work on culture. However, these measures capture only very partially the dimensions of distance of concern to international business. In this paper, we show how the broader theoretical concept of institutional distance, which incorporates normative, regulatory and cognitive aspects, affects entry strategies. Specifically, our theoretical arguments suggest that the impact of distance varies with different aspects of the concept of institutional distance, and that this impact interacts with both the investor's experience and with the relative importance of the pertinent operation for the investing MNE. Using a unique dataset of foreign direct investment in emerging economies that incorporates multi-host as well as multi-home countries, we find empirical support for our propositions, and provide an explanation for apparently inconsistent results in the previous literature.
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Explaining Patterns of Corruption in the Russian Regions
Phyllis Dininio; Robert W. Orttung
WP No. 727 (November, 2004)

Abstract: Corruption is one of the key problems facing the Russian state as it seeks to evolve out of its socialist past. Naturally, regional patterns of corruption exist across a country as large and diverse as the Russian Federation. To explain these variations, we analyze 2002 data from Transparency International and the Information for Democracy Foundation that provides the first effort to measure differences in incidence of corruption across 40 Russian regions. We find that corruption in Russia primarily is a structural problem, and not one related to its institutions. Within each region, the amount of corruption increases as the size of the regional economy grows, the per capita income decreases, and the population decreases. Russian policymakers can therefore work to reduce corruption by encouraging economic development outside of the key centers of Moscow and St. Petersburg. Because the data show that voter turnout also lowers corruption, policymakers can also fight corruption by fostering more political accountability in elections.
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Jel Codes: D73
Keywords: Corruption, Russia

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The Politics of Institutional Learning and Creation: Bank Crises and Supervision in East Central Europe
Gerald A. McDermott
WP No. 726 (November, 2004)

Abstract: This article examines the political conditions shaping the creation of new institutional capabilities. It analyzes bank sector reforms in the 1990s in three leading postcommunist democracies Hungary, Poland, and the Czech Republic. It shows how different political approaches to economic transformation can facilitate or hinder the ability of relevant public and private actors to experiment and learn their new roles. With its emphasis on insulating power and rapidly implementing self-enforcing economic incentives, the "depoliticization: approach creates few changes in bank behavior and, indeed impedes investment in new capabilities at the bank and supervisory levels. The "deliberative restructuring" approach fostered innovative, costeffective monitoring structures for recapitalization, a strong supervisory system, and a stable, expanding banking sector.
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Jel Codes: F02, G28, K23, P26, P48
Keywords: Institutional change, transition economies, bank crises, bank supervision, learning

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International Business And Development Economics: A Winning Combination: Generating A World's View Based On Buckley And Casson And Hirschman's Books
Tamir Agmon
WP No. 725 (November, 2004)

Abstract: Much of the discussion in economics is concerned with growth. Economic growth can be discussed and measured in terms of a national state. It can be also discussed and measured in terms of a corporation, (often using the term value rather than growth). Development Economics is concerned with growth of countries run by governments; International Business is concerned with the behavior and the value of multinational enterprises run by management. This paper is about the interface between the two. The vehicle used in this paper to explore the interface is a comparative analysis between two very influential books; "The Strategy of Development" by Hirschman, (1958), and the "Future of the Multinational Enterprise" by Buckley and Casson, (1976). The main argument of the paper is that Development Economics and International Business do approach a very similar issue, but they do it from two different dimensions perpendicular to each other. Looking at the whole picture, (the matrix as a whole rather than along the two separate vectors), gives the observer a more meaningful picture. This is done in the paper through a critical comparison of the two texts focusing on the two dimensions on internalization, growth and internalization, investment choices and strategies, and multinational enterprises and the dynamics of development.
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Jel Codes: F23
Keywords: Development Strategy, International Business Theory

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Importing High-Risk Capital And Revealing Hidden Comparative Advantages
Tamir Agmon
WP No. 724 (November, 2004)

Abstract: The comparative advantage of a country is determined by its factor intensity. In many cases factors of production can be accumulated over time and thus effect a change in the comparative advantage of a given country. The changes in the accumulation of factors can be a policy decision, or it can arise from other economic developments. The change in the comparative advantage of Israel in the last decade of the 20th century where the country has become a center for innovative new technology was affected by the globalization of the US capital market and the ability of Israeli companies and service organization to build an informational infrastructure that has made it possible to import high-risk specific sector capital to Israel. Importing this type of capital has completed the already existing human capital and makes a potential, hidden, advantage into a business reality. The Israeli experience is evidence to the contribution of international capital movements to economic growth of a small country. It also shows the relations between the international finance model of capital movements and the development economics case for the changing pattern of the comparative advantages of small countries, and the contribution of the capital markets to the process.
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Jel Codes: F21
Keywords: International capital movements, globalization of capital markets, and comparativea dvantage of small countries

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Which entrepreneurs expect to expand their businesses? Evidence from survey data in Lithuania
Ruta Aidis; Tomasz Mickiewicz
WP No. 723 (October, 2004)

Abstract: This paper presents an empirical study based on a survey of 399 small and medium size companies in Lithuania. Applying bivariate and ordered probit estimators, we investigate why some business owners intend to expand their firms, while others do not. Our main findings provide evidence that the characteristics of the owners matter. Those with higher education and "learning by doing" attributes either through previous job experience or additional entrepreneurial experience are more likely to expand their businesses. In addition, the model implications include that the intentions to expand are correlated with exporting and with size of the enterprise: medium and small size companies are more likely to grow than micro enterprises and self-employed entrepreneurs. We also analyse the link between the main perceptions of constraints to business activities and growth expectations and find that the factors, which are perceived as main business barriers, are not necessary those, which are associated with low growth expectations. In particular, perceptions of both corruption and of inadequate tax systems are main barriers to growth.
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Jel Codes: D21, L21, P37
Keywords: SME, Employment, Human Capital, Taxes, Corruption

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Russia from Bust to Boom: Oil, Politics or the Ruble?
Bruno Merlevede; Koen Schoors; Bas van Aarle
WP No. 722 (October, 2004)

Abstract: This paper develops and estimates a small macroeconomic model of the Russian economy. The model is tailored to analyze the impact of the oil price, the exchange rate, and political stability on economic performance. The model does very well in explaining Russia's economic history in the period 1995-2002. We then use the model to simulate two sets of scenarios, one with various oil price scenarios and one with various adverse shocks. The simulations suggest that the Russian economy is still very vulnerable to oil price swings, and that these swings have asymmetric effects. Indeed the cost of a downward swing of oil prices seems to be larger than the benefit of an upward swing. We also find that the aggregate effects of an oil price collapse are comparable to these of renewed political instability. Although their propagation mechanism is quite different, both adverse shocks do have a similar effect on real GDP. A real exchange rate appreciation on the other hand has relatively mild effects on real GDP. All in all, it is suggested that Russia should reduce its vulnerability to adverse oil price shocks and maintain political stability.
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Jel Codes: C70, E17, E58, E63
Keywords: Russia, Macroeconomic Modeling, Macroeconomic stabilization

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Distance to the Efficiency Frontier and FDI Spillovers
Klara Sabirianova Peter; Jan Svejnar; Katherine Terrell
WP No. 721 (September, 2004)

Abstract: We establish that domestically owned firms in two alternative models of emerging market economies, the Czech Republic and Russia, have not been converging to the technological frontier set by foreign owned firms. In both countries, the distance of domestic firms to the frontier grew (in all parts of the distribution) from 1992-1994 to 1995-1997 and did not change from 1995-1997 to 1998-2000. However, the distance to the frontier is orders of magnitude greater in Russia than in the Czech Republic throughout 1992-2000. We also find in both countries that domestic firms in industries with a greater share of foreign firms are falling behind more than domestic firms in industries with a smaller foreign presence. However, in the Czech Republic this "negative spillover" effect is diminished over time, whereas in Russia it continues to cause domestic firms to fall further behind. On the other hand, we find in both countries that foreign firms experience positive spillovers from other foreign firms operating in the same product market. This evidence on the dynamics of efficiency is consistent with the view that economies (firms) need to be more technologically advanced and open to competition in order to be able to gain from foreign presence.
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Jel Codes: C33, D20, F23, G32, L20, O33
Keywords: foreign direct investment, productivity, convergence, frontier, knowledge spillovers, Czech Republic, Russia.

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An Analysis of Gender Wage Differentials in Russia from 1996-2002
Rita Hansberry
WP No. 720 (September, 2004)

Abstract: This paper examined the male-female differentials in hourly earnings in Russia from 1996 to 2002. The gender wage gap did not alter significantly in the earlier years, a period characterized by economic instability, but as the economy recovered, the differential in earnings increased initially. This trend reversed in 2002 and while the gender wage gap in mean earnings fell to its previous level the differential increased at the lower percentiles. Throughout all years, most of the gender wage differential is accounted for by differences in rewards rather than differences in observable characteristics. Occupational segregation continues to be a salient feature of the labor market with women clustered in professional, clerical and service occupations while men are more predominantly employed in blue-collar jobs.
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Jel Codes: J16, J31, P31
Keywords: Russia, economic transition, gender wage gap, occupational segregation

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Returns to Schooling in Russia and Ukraine: A Semiparametric Approach to Cross-Country Comparative Analysis
Yuriy Gorodnichenko; Klara Sabirianova Peter
WP No. 719 (August, 2004)

Abstract: n Russia and Ukraine (1985-2002). There has been an increase in returns to schooling in both countries but the increase is much bigger in Russia than in Ukraine. The intriguing question is why returns to schooling in Russia and Ukraine diverged so much over the transition period while the skill composition of employment did not. Our approach in analyzing the sources of cross-country differences in returns to schooling is to compare the Mincerian earnings functions between the two countries and then to employ decomposition techniques. Using semiparametric methods, we construct counterfactual wage distributions for university and secondary school graduates for Ukraine using the distributions of Russian characteristics, returns to characteristics, and unobservables. This allows us to decompose differences in returns to schooling between the two countries due to differences in the labor market returns (price effect), differences in unobservables (residual effect), and differences in the labor force composition (composition effect). We conclude that of these three effects the price effect makes a major contribution to the observed differences in the returns to schooling.
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Jel Codes: C14, I20, J31, O15, O57, P50
Keywords: returns to schooling, earnings function, semiparametric approach, decomposition, counterfactual, cross-country analysis, retrospective data, transition, Russia, Ukraine

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The emergence of large shareholders in mass privatized firms: Evidence from Poland and the Czech Republic
Irena Grosfeld; Iraj Hashi
WP No. 718 (August, 2004)

Abstract: Mass privatization offers a particularly suitable framework to study the change in ownership concentration as the extent of change is unusual for a stable market economy. Focusing on two different mass privatization schemes in two transition economies, Poland and the Czech Republic, we find that despite important differences in the design of the two programmes and despite different quality of legal and regulatory framework, ownership structure in the two countries has rapidly evolved and the emerging ownership patterns are remarkably similar. This suggests that private benefits of control are large and the quality of investor protection regime is low in both countries. However, looking at the relationship between the change in ownership concentration and firm performance, we find an interesting difference between the two countries: in the Czech Republic the increase in ownership concentration seems to be less likely in poorly performing firms while in Poland the quality of past performance does not affect investors' willingness to increase their holdings. This effect may be interpreted in the light of the theory stressing the importance of the quality of investors' protection. It could be argued that if Czech investors are more risk averse and more concerned with diversification this is largely due to the weakness of the legal protection they face.
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Jel Codes: G3, L2, P3, P5
Keywords: ownership concentration, mass privatisation, corporate governance, transition

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Wage Determination Under Communism and In Transition: Evidence from Central Europe
Swati Basu; Saul Estrin; Jan Svejnar
WP No. 717 (August, 2004)

Abstract: Using large firm-level data sets from the Czech Republic, Slovakia, Poland and Hungary, we show that the wage behavior of firms changed considerably as these economies launched their transitions to a market system. We find evidence of worker sharing in their enterprise rents and losses at the end of the communist period in some economies and within a year after the launching of the transition, we find rent sharing in all of them. Using the Czech and Slovak data we show that the state-owned enterprises (SOEs) that existed under communism and survived allow for less worker rent-sharing than other firms. We also test for the presence of a wage curve and with the exception of Slovakia we do not find a significant association between local unemployment and wages. Finally, we do not find significant effects of firm ownership on wages.
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The Evolution of Cross-Region Price Distribution in Russia
Konstantin Gluschenko
WP No. 716 (July, 2004)

Abstract: The behavior of the entire cross-section distribution of prices in Russian regions is analyzed from 1992 through 2000, using non-parametric techniques. The cost of a staples basket is used as a price representative. Price dispersion measured as the standard deviation of prices is found to be diminishing since about 1994; and the shape of the cross-region distribution of prices tends to be more regular over time. To characterize intra-distribution mobility, a transition probability function (stochastic kernel) is estimated. It is also used to derive a long-run limit of the price distribution. Overall, the results suggest that, excluding a few years following the price liberalization, price convergence has been happening among Russian regions.
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Jel Codes: P22, R10, R15
Keywords: price convergence, price dispersion, distribution dynamics, market integration, Russia

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Languages in the European Union: The Quest for Equality and its Cost
Jan Fidrmuc; Victor Ginsburgh
WP No. 715 (July, 2004)

Abstract: The European Union has recently expanded from 15 to 25 countries. In line with this enlargement, the list of official EU languages has grown from 11 to 20. Currently, the EU extends equal treatment to all member countries? official languages by providing translations for documents and interpreting services for meetings and sessions of the European Parliament. This, however, is costly, especially when recognizing that many Europeans speak one of the procedural languages of the EU, English, French or German, either as their native language or as a foreign language. We compute disenfranchisement rates that would result from using only the three procedural languages for all EU business, and marginal costs per disenfranchised person associated with providing translations and interpreting into the remaining 17 languages. The marginal costs are shown to vary substantially across the different languages, raising important questions about the economic efficiency of equal treatment for all languages. We argue that an efficient solution would be to decentralize the provision of translations.
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Jel Codes: D70, O52, Z13
Keywords: Languages, Disenfranchisement, European Union, Cost and benefit analysis

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Voice of the Diaspora: An Analysis of Migrant Voting Behavior
Jan Fidrmuc; Orla Doyle
WP No. 714 (July, 2004)

Abstract: This paper utilizes a unique dataset on votes cast by Czech and Polish migrants in their recent national elections to investigate the impact of institutional, political and economic characteristics on migrants' voting behavior. The political preferences of migrants are strikingly different from those of their domestic counterparts. In addition, there are also important differences among migrants living in different countries. This paper examines three alternative hypotheses to explain migrant voting behavior: adaptive learning; economic self-selection and political selfselection. The results of the analysis suggest that migrant voting behavior is affected by the institutional environment of the host countries, in particular the tradition of democracy and the extent of economic freedom. In contrast, there is little evidence that differences in migrants' political attitudes are caused by self-selection based either on economic motives or political attitudes prior to migrating. These results are interpreted as indicating that migrants' political preferences change in the wake of migration as they adapt to the norms and values prevailing in their surroundings.
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Jel Codes: J61, P26, P33, Z13
Keywords: Voting, elections, migration, political resocialization, transition

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International Coercion, Emulation and Policy Diffusion: Market-Oriented Infrastructure Reforms, 1977-1999
Witold J. Henisz; Bennet A. Zelner; Mauro F. Guillen
WP No. 713 (July, 2004)

Abstract: Why do some countries adopt market-oriented reforms such as deregulation, privatization and liberalization of competition in their infrastructure industries while others do not? Why did the pace of adoption accelerate in the 1990s? Building on neo-institutional theory in sociology, we argue that the domestic adoption of market-oriented reforms is strongly influenced by international pressures of coercion and emulation. We find robust support for these arguments with an event-history analysis of the determinants of reform in the telecommunications and electricity sectors of as many as 205 countries and territories between 1977 and 1999. Our results also suggest that the coercive effect of multilateral lending from the IMF, the World Bank or Regional Development Banks is increasing over time, a finding that is consistent with anecdotal evidence that multilateral organizations have broadened the scope of the "conditionality" terms specifying market-oriented reforms imposed on borrowing countries. We discuss the possibility that, by pressuring countries into policy reform, cross-national coercion and emulation may not produce ideal outcomes.
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Jel Codes: C41, F02, F42, H11, L33, L94, L96, N70, O19, P16
Keywords: Privatization, deregulation, liberalization, infrastructure, International Monetary Fund (IMF), World Bank, Multileral Institutions, Development, Reform, Globalization, Adoption, International

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Votes and Vetoes: The Political Determinants of Commercial Openness
Witold J. Henisz; Edward D. Mansfield
WP No. 712 (July, 2004)

Abstract: Societal theories of trade policy stress the importance of domestic interest groups, whereas statist theories focus on the effects of domestic institutions. Debates over the relative merits of these approaches have been fierce, but little systematic empirical research has been brought to bear on the relative merits of these theories. In this paper, we argue that, while societal and statist factors are generally regarded as having independent and competing effects, it is more fruitful to view the influence of each type of factor as conditional on the other. As societal explanations contend, deteriorating macroeconomic conditions are a potent source of protectionist pressures. The extent to which such conditions reduce commercial openness, however, depends centrally on the domestic institutions through which societal pressures must filter to influence policy. Two institutional features stand out. First, in states marked by greater fragmentation and more "veto points," it is harder to change existing policies because any number of actors can block such change. Consequently, we expect the effects of macroeconomic conditions on trade policy to be weaker in fragmented states than in those characterized by a highly centralized national government. Second, we expect both fragmentation and the societal pressures stemming from the economy to have a more potent impact on trade policy in democracies than in other regimes, since the electoral constraints facing democratic leaders force them to respond to demands made by key segments of society. The results of our statistical tests covering more than one hundred countries during the period from 1980 to 2000 strongly support these arguments.
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Jel Codes: F13, P16, P26
Keywords: Protectionism, openness, veto players, veto points, positive political theory, unemployment, trade

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Interest Groups, Veto Points And Electricity Infrastructure Deployment
Witold J. Henisz; Bennet A. Zelner
WP No. 711 (July, 2004)

Abstract: In this paper we examine the effects of interest group pressure and the structure of political institutions on infrastructure deployment by state-owned electric utilities in a panel of 78 countries during the period 1970 - 1994. We consider two factors that jointly influence the rate of infrastructure deployment: (1) the extent to which the consumer base consists of industrial consumers, which are capable of exerting discipline on political actors whose competing incentives are to construct economically inefficient "white elephants" to satisfy the demands of concentrated geographic interests, labor unions and construction firms; and (2) veto points in formal policymaking structures that constrain political actors, thereby reducing these actors' sensitivity to interest group demands. A higher fraction of industrial customers provides political actors with stronger incentives for discipline, reducing the deployment of white elephants and thus the infrastructure growth rate, ceteris paribus. Veto points reduce political actors' sensitivity to interest group demands in general and thus moderate the relationship between industrial interest group pressure and the rate of infrastructure deployment.
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Jel Codes: F21, L32, L94
Keywords: Electricity, Institutional Environment, Investment, Regulation, interest group, state owned enterprise

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Firms' Price Markups and Returns to Scale in Imperfect Markets: Bulgaria and Hungary
László Halpern; Gábor Kõrösi; Rumen Dobrinsky; Nikolay Markov
WP No. 710 (July, 2004)

Abstract: Under perfect competition and constant returns to scale, firms producing homogeneous products set their prices at their marginal costs which also equal their average costs. However, the departure from these standard assumptions has important implications with respects to the derived theoretical results and the validity of the related empirical analysis. In particular, monopolistic firms will charge a markup over their marginal costs. We show that firms' markups tend to be directly associated with the employed production technology, more specifically with their returns to scale. Accordingly, we analyze the implications for the markup ratios from the incidence of non-constant returns to scale. We present quantitative results illustrating the effect of the returns to scale index on the firms' price markups, as well as the relationship between the two indicators, on the basis of firm-level data for Bulgarian and Hungarian manufacturing firms.
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Jel Codes: C23, D21, D24
Keywords: markup pricing, market imperfections, return to scale, Bulgaria, Hungary

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The Stability and Growth Pact from the Perspective Of the New Member States
Gábor Orbán; György Szapáry
WP No. 709 (July, 2004)

Abstract: The purpose of this paper is to examine the fiscal characteristics of the new members in the light of the requirements of the SGP and the criticisms levelled against the Pact and to see in what ways their initial conditions differ from those faced by the current euro zone countries in the run-up to the adoption of the euro. Overall, because of the lower debt levels and greater yield convergence already achieved, the new members will be able to rely less on gains from yield convergence than the current euro zone members were able to do. EU accession will also have a negative net impact on the budgets of the new members in the early years of membership. We also look at the cyclical sensitivities of the budgets and find that in the new members the smoothing capacity of the automatic stabilizers might be weaker than in the current euro zone members. Beyond these general characteristics, we also emphasize that there are large differences in the starting fiscal positions of the new members. Some of the policy implications of our findings are discussed.
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Jel Codes: E61, H6, H87
Keywords: EU enlargement, fiscal policy, fiscal rules, Stability and Growth Pact

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Contract Violations, Neighborhood Effects, And Wage Arrears In Russia
John S. Earle; Klara Sabirianova Peter
WP No. 708 (July, 2004)

Abstract: We present a model of neighborhood effects in wage payment delays. Positive feedback arises because each employer's arrears affect the late payment costs faced by other firms in the same local labor market, resulting in a strategic complementarity in the practice. The model is estimated on panel data for workers and firms in Russia, facilitating identification through the use of a rich set of covariates and fixed effects for employees, employers, and local labor markets. We also exploit a policy intervention affecting public sector workers that provides an instrumental variable to estimate the endogenous reaction in the non-public sector. Consistently across specifications, the estimated reaction function displays strongly positive neighborhood effects, and the estimates of four feedback loops - operating through worker quits, effort, strikes, and legal penalties - imply that costs of delays are attenuated by neighborhood arrears. We also study a nonlinear case exhibiting two stable equilibria: a "punctual payment equilibrium" and a "late payment equilibrium." The estimates imply that the theoretical conditions for multiple equilibria under symmetric local labor market competition are satisfied in our data.
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Jel Codes: A12, B52, J30, K42, L14, O17, P31, P37
Keywords: wage arrears, contract violation, neighborhood effect, social interactions, multiple equilibria, network externality, strategic complementarity, transition, Russia.

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Determinants of Employment Growth at MNEs: Evidence from Egypt, India, South Africa and Vietnam
Sumon Kumar Bhaumik; Klaus Meyer; Saul Estrin
WP No. 707 (July, 2004)

Abstract: Foreign investors are expected to contribute to economic development through a variety of channels. However, many foreign investment operations are small, and almost insignificant in their impact on the local environment. An important indication of the potential contribution of foreign investors is thus their employment growth. Employees working for, and trained by, a multinational enterprise may become carriers of new technology and business practices. The more employees receive access to new knowledge, the more they in turn may spread the knowledge across the economy, for instance by setting up their own businesses. In this paper, we make a first step in investigating the determinants of this important mediating variable, employment growth. For a dataset covering four diverse emerging economies, we find that wholly-owned FDI operations have higher employment growth, while local industry characteristics moderate the growth effect.
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Jel Codes: F23, J21, O13, O33
Journal Citation: Determinants of Employment Growth at MNEs: Evidence from Egypt, India, South Africa and Vietnam. Comparative Economic Systems. forthcoming.
Keywords: MNE, employment growth, control, institutions, FDI policy

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Economic Reform in Tanzania and Vietnam: A Comparative Commentary
Brian Van Arkadie; Do Duc Dinh
WP No. 706 (June, 2004)

Abstract: The economic reforms in Tanzania and Vietnam represent the two typical cases of transition economies in Asia and Africa, particularrly the transformation of the two developing economies from the planned to the market mechanism. In this paper, the two authors, Brian - a British economist and Dinh - a Vietnamese economist, have, basing on a comparative approach, enquired into various economic and social aspects of the economic reforms in the two countries, including the demographic transition, the change in population growth, the investment in human capital, the growth of GDP, the structural sransformation, the linkage between gricultural growth, rural development, food production and poverty alleviation, the reform in the industrial sector and the state enterprises, the change of ownership , the role of the State, the capital formation, the role of the domestic savings, foreign aid, investment and trade, the gains and losses from globalisation, with an aim to find the answer to the question why in the two cases, Tanzania seemed to follow the donors' guidance better than Vietnam, but achieved smaller successes'.
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Jel Codes: E6, F41, F43, H11, N10, N15, N17, O11, O53, O55, O57, P52
Keywords: Reform vesus Renovation; Fast Liberalisation vs Step-by-Step Transformation; Privatisation vs Equitisation; Multi-Sector Ownership vs Private Ownership Bias; Industrialisation vs Agriculture-Driven Growth; Active State vs Passive State.

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Beliefs about Exchange-Rate Stability: Survey Evidence From the Currency Board in Bulgaria
Neven T. Valev; John A. Carlson
WP No. 705 (June, 2004)

Abstract: We use unique survey data from Bulgaria's currency board to examine the reasons for persistent incomplete credibility of a financial stabilization regime. Although it produced remarkably positive effects in terms of sustained low inflation since 1997, the currency board has not achieved full credibility. This is not uncommon in other less-developed countries with fixed exchange rate regimes. Our results reveal that incomplete credibility is explained primarily by concerns about external economic shocks and the persistent high unemployment in the country. Past experiences with high inflation do not rank among the top reasons to expect financial instability in the future.
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Jel Codes: E5, F3
Keywords: Credibility, Currency Boards, Financial Stabilization Programs

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Returns to Schooling in China Under Planning and Reform
Belton M. Fleisher; Xiaojun Wang
WP No. 704 (June, 2004)

Abstract: We estimate returns to schooling using a retrospective work history survey covering more than 4,000 workers over the period 1950 to 1994, with particular emphasis to the returns to schooling for workers who attended institutes of higher education and who graduated from college. We find evidence that schooling returns declined throughout the period leading up to the Cultural Revolution (CR), with returns for workers who did not attend college becoming negligible. Returns to those with some college education remained positive, but low compared to other countries. Consistent with other studies, we find that returns to schooling did not recover from their CR low until the 1990s. Increases in the return to schooling during the transition following the CR were not associated directly with workers changing jobs or with taking "new-economy" jobs but appear to have occurred for most workers across all ownership categories. Workers most likely to leave jobs in the traditional ownership sector for jobs in the private or jointventure categories were those who entered the labor force prior to 1967. We do not find evidence supporting other studies' finding that schooling returns for college graduates increased more than for workers with lower levels of schooling attainment.
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Jel Codes: J24, J31, O15
Keywords: returns to schooling, skills, China

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Returns to Skills and the Speed of Reforms: Evidence from Central and Eastern Europe, China, and Russia
Belton M. Fleisher; Klara Sabirianova Peter; Xiaojun Wang
WP No. 703 (June, 2004)

Abstract: We explore the pace of increase in returns to schooling during the transition from planning to market over time across a number of Central and Eastern European countries, Russia, and China. We use metadata from 33 studies of 10 transition economies covering a period from 1975 through 2002. Our empirical model is an attempt to account for cross-section and over-time variation in rates of return as a function of the timing, speed, and volatility of reform processes as well as estimation methods used and sample characteristics. Our principal aim is to investigate the relative strength of two hypotheses: (1) the speed of economic transformation from planning to market represent the relaxation of legal, regulatory, and institutional constraints on wage-setting behavior, leading directly to adjustment returns to schooling to market rates; 2) the rapid increase in returns to schooling during the early reform period reflects the ability of highly-educated individuals to respond to changing opportunities in a disequilibrium situation. We find that both the speed of reforms and the degree of economic disequilibrium as reflected in macroeconomic volatility help to explain cross-country differences in the time paths of the returns to schooling. We report the systematic effects of sample characteristics, estimation methods, and model specifications on estimated returns to schooling.
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Jel Codes: J24, J31, O15, P2, P3, P5
Keywords: Returns to schooling, skills, speed of reforms, meta-analysis, transition, Central and Eastern Europe, China, Russia.

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What Makes Small Firms Grow? Finance, Human Capital, Technical Assistance, and the Business Environment in Romania
J. David Brown; John S. Earle; Dana Lup
WP No. 702 (May, 2004)

Abstract: Although the development of a new private sector is generally considered crucial to economic transition, there has been rather little empirical research on the determinants of startup firm growth. This paper uses panel data techniques to analyze a survey of 297 new small enterprises in Romania containing detailed information from the startup date through 2001. We find strong evidence that access to external credit increases the growth of both employment and sales. Taxes appear to constrain growth. The data suggest that entrepreneurial skills have little independent effect on growth, once demand conditions are taken into account, and there is only weak evidence for the effectiveness of technical assistance, and only when it is provided by foreign partners. A wide variety of alternative measures of the business environment (contract enforcement, property rights, and corruption) are tested, but none are found to have any clear association with firm growth.
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Jel Codes: M13, O16, O19, P26
Keywords: Small Firms, Entrepreneurship, Microfinance, Business Environment, Romania

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The Effects of Multiple Minimum Wages Throughout the Labor Market
T.H. Gindling; Katherine Terrell
WP No. 701 (May, 2004)

Abstract: This paper investigates the effects of legal minimum wages on wages, employment, hours worked and monthly earnings among workers covered by minimum wage legislation as well as those for whom it does not apply (the uncovered sector) in Costa Rica. This country's large uncovered sector and complex minimum wage policy, which has for decades set numerous wages throughout the wage distribution, provide a stimulating counterpoint to the U.S. framework for the analysis of the impact of minimum wages. We find that legal minimum wages have a significant positive effect on the wages of workers in the covered sector (with an elasticity of 0.10) but no effect on wages of workers in the uncovered sector. We also find that a 10% increase in minimum wages lowers employment in the covered sector by 1.09% and decreases the average number of hours worked of those who remain in the covered sector by about 0.6%. Finally, we show that despite the wide range of minimum wages, the largest impact on the wages and employment of covered sector workers is in the lower half of the distribution.
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Jel Codes: J23, J31, J38
Keywords: minimum wages, employment, wages, Costa Rica

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