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WDI Home >> Publications >> Academic Working Papers

Directional Mobility of Ratings

Sumon Kumar Bhaumik; John Landon-Lane
WP No. 900 (November, 2007)

Abstract: In this paper we describe a method to decompose a well-known measure of debt ratings mobility into it’s directional components. We show, using sovereign debt ratings as an example, that this directional decomposition allows us to better understand the underlying characteristics of debt ratings migration and, for the case of the data set used, that the standard Markov chain model is not homogeneous in either the time or cross-sectional dimensions. We find that the directional decomposition also allows us to sign the change in quality of debt over time and across sub-groups of the population.
>> Download PDF

Jel Codes: F34, G15, H63
Keywords: Ratings migration, Mobility, Sovereign debt

The Choice of Exchange Rate Regimes in the MENA Countries: a Probit Analysis

Sfia Mohammed Daly
WP No. 899 (November, 2007)

Abstract: This paper analysis the choice of exchange regimes of 17 economies in the MENA region for the period 1990-2000. For this purpose we use both de jure and de facto regime classifications and estimate a series of binomial and multinomial probit models. Regressions results highlight the important influence of economic development and international reserve levels on exchange regime selection.
>> Download PDF

Jel Codes: C25, F33
Keywords: Exchange regime choice, MENA countries, probit model

Macroeconomic Sources of Foreign Exchange Risk in New EU Members

Tigran Poghosyan; Evzen Kocenda
WP No. 898 (November, 2007)

Abstract: We address the issue of foreign exchange risk and its macroeconomic determinants in several new EU members. The joint distribution of excess returns in the foreign exchange market and the observable macroeconomic factors is modeled using the stochastic discount factor (SDF) approach and a multivariate GARCH-in-mean model. We find that in post-transition economies real factors play a small role in determining foreign exchange risk, while nominal and monetary factors have a significant impact. Therefore, to contribute to the further stability of their domestic currencies, the central banks in the new EU member countries should continue stabilization policies aimed at achieving nominal convergence with the core EU
members, as nominal factors play a crucial role in explaining the variability of the risk premium.
>> Download PDF

Jel Codes: C22, F31, G15, P59
Keywords: foreign exchange risk, time-varying risk premium, stochastic discount factor, multivariate GARCH-in-mean, post-transition and emerging markets

Factors Influencing Corporate Governance in post-Socialist Companies: an Analytical Framework

Andreas Heinrich; Aleksandra Lis; Heiko Pleines
WP No. 896 (October, 2007)

Abstract: In explaining the corporate governance performance of post-socialist companies, this article identifies four factors of influence: (1) pressure from majority shareholders,
(2) pressure from outside minority shareholders, (3) pressure resulting from internationalization/ globalization and (4) pressure exerted by the state in the form of legal regulation.
If all four factors have an impact on corporate governance performance, their interaction has to be explained. On the basis of research conducted thus far, this article suggests an
analytical framework for the examination of corporate governance performance of postsocialist companies.
Case studies of oil and gas firms from Central and Eastern Europe illustrate how the above factors influence a company’s corporate governance performance.
>> Download PDF

Jel Codes: G34, L71, M14, P21, P31
Keywords: corporate governance, Russia, Central Eastern Europe, oil and gas industry

Real Convergence, Price Level Convergence and Inflation Differentials in Europe

Balázs Égert
WP No. 895 (November, 2007)

Abstract: This paper provides a comprehensive review of the factors that can cause price levels to diverge and which are at the root of different inflation rates in Europe including the EU-27. Among others, we study the structural and cyclical factors influencing market and non-marketbased service, house and goods prices, and we summarise some stylised facts emerging from descriptive statistics. Subsequently, we set out the possible mismatches between price level convergence and inflation rates. Having described in detail the underlying economic factors, we proceed to demonstrate the relative importance of these factors on observed inflation rates first in an accounting framework
and then by relying on panel estimations. Our estimation results
provide the obituary notice for the Balassa-Samuelson effect.
Nevertheless, we show that other factors related to economic
convergence may push up inflation rates in transition economies. Cyclical effects and regulated prices are found to be important drivers of inflation rates in an enlarged Europe. House prices matter to some extent in the euro area, whereas the exchange rate plays a prominent (but declining) role in transition economies.
>> Download PDF

Jel Codes: C22, E43, E50, E52, G21, O52
Keywords: price level, inflation, Balassa-Samuelson, tradables, house prices, regulated prices, Europe, transition

Determinants of House Prices in Central and Eastern Europe

Balázs Égert; Dubravko Mihaljek
WP No. 894 (October, 2007)

Abstract: This paper studies the determinants of house prices in eight
transition economies of central and eastern Europe (CEE) and 19 OECD countries. The main question addressed is whether the
conventional fundamental determinants of house prices, such as
GDP per capita, real interest rates, housing credit and demographic factors, have driven observed house prices in CEE. We show that house prices in CEE are determined to a large extent by the underlying conventional fundamentals and some transition-specific factors, in particular institutional development of housing markets and housing finance and quality effects.
>> Download PDF

Jel Codes: E20, E39, P25, R21, R31
Keywords: house prices, housing market, transition economies, central and eastern Europe, OECD countries

What do we really know about fiscal sustainability in the EU? A panel data diagnostic

Christophe Rault; Afonso Antonio
WP No. 893 (October, 2007)

Abstract: We assess the sustainability of public finances in the EU15 over the period 1970-2006 using stationarity and cointegration analysis. Specifically, we use panel unit root tests of the first and second generation allowing in some cases for structural breaks. We also apply modern panel cointegration techniques developed by Pedroni (1999, 2004), generalized by Banerjee and Carrion-i-Silvestre (2006) and Westerlund and Edgerton (2007), to a structural long-run equation between general government expenditures and revenues. While estimations point to fiscal sustainability being an issue in some countries, fiscal policy was sustainable both for the EU15 panel set, and within sub-periods (1970-1991 and 1992-2006)
>> Download PDF

Jel Codes: C23, E62, H62, H63
Keywords: intertemporal budget constraint, fiscal sustainability, EU, panel unit root, panel cointegration

The Political Economy of Corruption & the Role of Financial Institutions

Kira Boerner; Christa Hainz
WP No. 892 (October, 2007)

Abstract: In many developing and transition countries, we observe rather high levels of corruption. This is surprising from a political economy perspective, as the majority of people in a corrupt
country suffer from high corruption levels. Our model is based on the fact that corrupt offcials have to pay entry fees to get lucrative positions. In a probabilistic voting model, we
show that a lack of financial institutions can lead to more corruption as more voters are part of the corrupt system and, more importantly, as the rents from corruption are distributed
differently. Thus, the economic system has an effect on political outcomes. Well-functioning financial institutions, in turn, increase the political support for anti-corruption measures.
>> Download PDF

Jel Codes: D72, D73, H11, O17
Keywords: Corruption, Financial Markets, Institutions, Development, Voting

Growth, Volatility & Political Instability: Non Linear Time Series Evidence for Argentina 1896-2000

Nauro F. Campos; Menelaos Karanasos
WP No. 891 (September, 2007)

Abstract: What is the relationship between economic growth and its
volatility? Does political instability affect growth directly or indirectly, through volatility? This paper tries to answer such questions using a power-ARCH framework with annual time series data for Argentina from 1896 to 2000. We show that while assassinations and strikes (what we call “informal” political instability) have a direct negative effect on economic growth, “formal” political instability (constitutional and legislative
changes) has an indirect (through volatility) negative impact. We also find preliminary support for the idea that while the effects of “formal” instability are stronger in the long-run, those of “informal” instability are stronger in the short-run.
>> Download PDF

Jel Codes: C14, D72, E23, O40
Keywords: economic growth, volatility, political instability, power-ARCH

Social Costs of Mass Privatization

David Stuckler; Lawrence P. King
WP No. 890 (September, 2007)

Abstract: According to leading economic theorists, creating capitalism out of communism requires rapid privatization. In this article we empirically test the welfare implications of privatization policies in Post-Soviet countries by using cross-national panel mortality data as an indicator of social costs. We find that rapid privatization – whether measured by a novel measure of mass privatization program implementation or Enterprise Bank for
Reconstruction and Development privatization outcome scores – is a critical determinant of life expectancy losses, and that when privatization policies are reversed, life expectancy improves. Using selection models, we show that endogeneity understates the social costs of rapid privatization.
>> Download PDF

Jel Codes: I12, J18, L33, P36
Keywords: privatization, postcommunist, mortality crisis.

A Rise By Any Other Name? Sensitivity of Growth Regressions to Data Source

Jan Hanousek; Dana Hajkova; Randall K. Filer
WP No. 889 (July, 2007)

Abstract: Measured rates of growth in real per capita income differ drastically depending on the data source. This phenomenon occurs largely because data sets differ in whether and how they
adjust for changes in relative prices across countries. Replication of several recent studies of growth determinants shows that results are sensitive in important ways to the choice of data.
Previous warnings against using data adjusted to increase cross-country comparability to study within-country patterns over time (growth rates) have been largely ignored at the cost of possibly contaminating the conclusions.
>> Download PDF

Jel Codes: C82, O47
Keywords: Growth, Measurement

Mind the Gap! Social Capital, East and West

Jan Fidrmuc; Klarita Gërxhani
WP No. 888 (June, 2007)

Abstract: Recent Eurobarometer survey data are used to document and explain the stock of social capital in 28 European countries. Social capital in Central and Eastern Europe – measured by civic participation and access to social networks – lags behind that in
Western European countries. Using regression analysis of determinants of individual stock of social capital, we find that this gap persists when we account for individual characteristics and endowments of respondents but disappears completely after we
control for aggregate measures of economic development and quality of institutions. Informal institutions such as prevalence of corruption in post-communist countries appear particularly important. With the enlargement of the European Union, the gap in social capital should gradually disappear as the new member states catch up (economically and institutionally) with the old ones.
>> Download PDF

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

Ever Closer Union or Babylonian Discord?

Jan Fidrmuc; Victor Ginsburgh; Schlomo Weber
WP No. 887 (July, 2007)

Abstract: Extensive multilingualism is one of the most important and fundamental principles of the European Union. However, a large number of official languages (currently 23) hinders communication and imposes substantial financial and legal costs. We address the merits of multilingualism and formulate an analytical framework to determine the optimal number of official languages in the EU. Using the results of a 2005 Eurobarometer survey of languages in the EU 27, we first derive the sets of languages that minimize aggregate linguistic disenfranchisement of the Union’s citizens for any given number of languages. We then proceed by discussing the political-economy framework and feasibility of a potential linguistic reform in the EU under alternative voting rules. We argue that a six-language regime would be a reasonable intermediate choice: a lower number of official languages results in excessive linguistic disenfranchisement whereas adding further languages increases the costs but brings only limited benefits. We also show that even though a linguistic reform reducing the number of official languages to six is unlikely to gain sufficient support at the present, this may change in the future since young people are more proficient at speaking foreign languages.
>> Download PDF

Jel Codes: D70, O52, Z13
Keywords: Languages, Disenfranchisement, European Union, Linguistic standardization.

FDI and the Consequences Towards more complete capture of spillover

Bruno Merlevede; Koen Schoors
WP No. 886 (August, 2007)

Abstract: We analyze productivity spillovers of FDI on domestic companies, both within and across industries. In the identification of intraindustry spillovers, we separate out labor market effects from other effects. Interindustry spillovers are identified through
upstream, downstream, and supply-backward linkage effects. Dynamic input output tables are used to construct the linkages. For a panel of Romanian firms, we find evidence that labor market effects differ from other intraindustry effects. Spillovers
across industries dominate those within industries. The supply-backward effect behaves as predicted by theory. Firm-specific level of technology, firm size, and ownership structure are all found to affect spillovers.
>> Download PDF

Jel Codes: F2
Keywords: FDI, spillovers, absorptive capability, firm size, ownership structure

Consumption Smoothing and Vulnerability in Russia

Christopher Gerry; Carmen Li
WP No. 885 (July, 2007)

Abstract: Applying bootstrapped quantile regression to the Russian Longitudinal Monitoring Survey (RLMS) data, we examine the channels through which individuals experience and seek to cope with changes in consumption. We find that married individuals living in small households, with educated heads in urban areas are better equipped to smooth consumption. Investigating the impact of idiosyncratic shocks, we find that the labour market is an important transmission mechanism allowing households to smooth their consumption but also exposing them to risk, mainly through job loss. Outside of pension payments the formal social safety net does not facilitate consumption smoothing, thus heightening the importance of informal coping institutions. It transpires that both support from relatives/friends and home production act as important insurance mechanisms for the most vulnerable.
>> Download PDF

Jel Codes: I31, P20
Keywords: Russia, economics, vulnerability, consumption smoothing, quantile regression

National Cultural & Financial Systems

Chuck Kwok; Solomon Tadesse
WP No. 884 (March, 2005)

Abstract: Countries differ in the way their financial activities are organized. In Anglo-Saxon countries such as the U.S. and the U.K., financial systems are dominated by stock markets whereas in Continental Europe and Japan, banks play a predominant role. Why do
countries differ in the configuration of their financial systems? We argue that national culture plays a significant role. We find that countries characterized by higher uncertainty avoidance, as an attribute of their national culture, are more likely to have a bank-based system.
>> Download PDF

Jel Codes: G1, G2, P51, Z1
Keywords: Financial Systems, Bank-based, Market based, Culture, Uncertainty Avoidance

Stock Markets Liquidity, Corporate Governance and Small Firms

Solomon Tadesse
WP No. 883 (June, 2005)

Abstract:

While the importance of equity markets as a vehicle for capital formation is well recognized, their role in providing economically valuable governance services, particularly to small and medium enterprises (SME), has not received much attention. The paper examines the role of public policy in promoting the governance role of secondary equity markets for the benefit of SMEs. The paper first outlines the mechanisms through which equity markets could promote good governance in small firms, showing that equity markets serve as a monitoring and control conduit for outsiders to enforce good governance at the firm. It then establishes that the ability of equity markets to deliver good governance is closely related to those markets’ liquidity, presenting further international evidence that firms supported by liquid equity markets realize improved economic performance. Thus, the governance services of secondary equity markets have real economic value to the firms. The paper then argues that public policy can have a positive impact on the effectiveness of equity markets in delivering governance services through enhancing market liquidity. It examines the impact on market liquidity of two significant U.S. Securities and Exchange Commission (SEC) regulatory reforms applied to The Nasdaq Stock Market: SEC’s ‘trade reporting’ rules of 1992, and SEC’s “order handling” reforms of 1997. The paper concludes that public policies that increase market transparency and efficiency—such as “trade reporting” requirements and better “order handling” rules—promote the effectiveness of the secondary equity markets in delivering corporate governance through increased market liquidity.

>> Download PDF

Jel Codes: G1, G14, G18, G3
Keywords: Governance, Stock Markets and Liquidity

The MNC as an Agent for Change for Host-Country Institutions: FDI and Corruption

Chuck Kwok; Solomon Tadesse
WP No. 882 (September, 2006)

Abstract:

Most empirical research examines how the institutional environment of corruption shapes the behavior of MNCs. In this study, we would like to highlight the other side of the picture: how the presence of MNC may shape the institutional environment of corruption over time. We propose three avenues through which the MNC may have an impact on its host institutions: the regulatory pressure effect, the demonstration effect, and the professionalization effect. Based on extensive data on FDI and corruption for a large sample of countries over the last 30 years, the empirical results are consistent with our general hypothesis that foreign direct investment generates positive spillover effects on the institutional environment of host countries. Such findings provide a glimmer of hope for the future of the host country where corruption is most prevalent.

>> Download PDF

Jel Codes: F21, F23, M14, M16, O73
Keywords: Foreign Direct Investment, Corruption

The Allocation and Monitoring Role of Capital Markets: Theory & International Evidence

Solomon Tadesse
WP No. 881 (June, 2007)

Abstract: Capital markets perform two distinct functions: provision of capital and facilitation of good governance through information production and monitoring. I argue that the governance function has more impact on the efficiency with which resources are utilized within the firm. Based on industry level data across thirty-eight countries, I present evidence suggesting a positive relation between market-based governance and improvements in industry efficiency. The measures of governance are also positively correlated with productivity improvements and growth in real output. Furthermore, while governance affects efficiency, the capital provision services induce technological change.
The evidence underscores the role of capital markets as a conduit of socially valuable governance services as distinct from capital provision.
>> Download PDF

Jel Codes: E44, G14, G3, G34, O16
Keywords: Corporate Governance, Information Aggregation, Monitoring, Economic Efficiency, Productivity, Economic Growth

Tunisia: Sources of Real Exchange Rate Fluctuations

Sfia Mohammed Daly
WP No. 880 (March, 2006)

Abstract: Using structural VARs identified with long-run restrictions, this paper evaluates the importance of nominal shocks and real disturbances on the Tunisian Dinar during the nineties. The estimated macroeconomic behaviour in response to the shocks identified with a Clarida and Gali–type structural VAR for Tunisia is generally in line with theoretical priors stemming from the Mundell-Fleming model. The structural decomposition shows that relative real demand and supply shocks account for most of the variations in real exchange rate changes during the estimation period and indicates that real disturbances explain about 80% of the variance of the forecast error of the real exchange rate.
>> Download PDF

Jel Codes: F41
Keywords: Tunisia, real exchange rate, structural VAR

Financial Development and Technology

Solomon Tadesse
WP No. 879 (June, 2007)

Abstract: Research in development economics reveals that the bulk of cross-country differences in economic growth is attributable to differences in productivity. By some accounts, productivity
contributes to more than 60 percent of countries’ growth in per capita GDP. I examine a particular channel through which financial development could explain cross-country and crossindustry differences in realized productivity. I argue that financial development induces technological innovations – a major stimulus of productivity - through facilitating capital
mobilization and risk sharing. In a panel of industries across thirty eight countries, I find that financial development explains the cross-country differences in industry rates of technological
progress, rates of real cost reduction and rates of productivity growth. I find that the effect of financial development on productivity and technological progress is heterogeneous across
industrial sectors that differ in their needs for financing innovation. In particular, industries whose younger firms depend more on external finance realize faster rate of technological change in countries with more developed banking sector.
>> Download PDF

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

Consolidation, Scale Economies and Technological Change in Japanese Banking

Solomon Tadesse
WP No. 878 (June, 2007)

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.
>> Download PDF

Jel Codes: D24, G21, O3
Keywords: Scale Economies; Technical Change; Banking

Innovation, Information and Financial Architecture

Solomon Tadesse
WP No. 877 (June, 2007)

Abstract: Does a financial system architecture anchored on banks better than one centered on markets in fostering technological innovations as engine of growth? In a panel of industrial sectors across a large cross section of countries, I find that while market-based systems have a general positive effect on innovations in all economic sectors, bank-based systems foster more rapid technological progress in more informationintensive industrial sectors, suggesting a heterogeneous impact of financial architecture. Thus, the relative performance of bank-based systems vis-à-vis market-based systems depends on the industrial structure of the economy.
>> Download PDF

Jel Codes: E44, G1, G21, G32, O14, O31, O34, O4
Keywords: Technological Progress, Innovation, Intangible Assets, Financial System Architecture,Bank-Based System, Market-Based System

Corporate Cash Holdings, National Culture, and Multinationality

Andres Ramirez; Solomon Tadesse
WP No. 876 (July, 2007)

Abstract:

We examine the relations between national cultures, the multinationality of the firm and its holdings of cash. We develop several hypotheses from well known corporate finance theories and theories of the multinational firm, positing that cultural factors as well as the degree of multinationality of firms influence their decisions to hold cash. In particular, firms in countries with high uncertainty avoidance, as a national culture, hold more cash as a way to hedge against undesired states of nature. Furthermore, as a reflection of their longer business cycles, multinational firms typically hold more cash. At the same time, however, the multinationality of the firm moderates the effects of culture on the firm’s decision to hold liquid assets. Based on a large panel of firms in forty countries, we present evidence consistent with these hypotheses. While firms in countries with high levels of uncertainty avoidance tend to hold more cash, the degree of multinationality of the firm is positively correlated with holdings of cash. On the other hand, the effect of national culture on firm’s cash holdings is lower for multinationals.

>> Download PDF

Jel Codes: G32, M14, N20
Keywords: Cash, Culture, Finance

Corporate Cash Holdings, National Culture, and Multinationality

Andres Ramirez; Solomon Tadesse
WP No. 876 (June, 2007)

Abstract: We examine the relations between national cultures, the multinationality of the firm and its holdings of cash. We develop several hypotheses from well known corporate finance
theories and theories of the multinational firm, positing that cultural factors as well as the degree of multinationality of firms influence their decisions to hold cash. In particular, firms in countries with high uncertainty avoidance, as a national culture, hold more cash as a way to hedge against undesired states of nature. Furthermore, as a reflection of their longer business cycles, multinational firms typically hold more cash. At the same time, however, the multinationality of the firm moderates the effects of culture on the firm’s decision to hold liquid assets. Based on a large panel of firms in forty countries, we present evidence consistent with these hypotheses. While firms in countries with high levels of uncertainty avoidance tend to hold more cash, the degree of multinationality of the firm is positively correlated with holdings of cash. On the other hand, the effect of national culture on firm’s cash holdings is lower for multinationals.
>> Download PDF

Jel Codes: G32, M14, N20
Keywords: Cash, Culture, Finance

The Economic Value of Regulated Disclosure: Evidence from Banking Sector

Solomon Tadesse
WP No. 875 (January, 2006)

Abstract: The study examines the economic consequences of regulated disclosure in the banking sector, focusing on its impacts on the stability of banking systems. In a cross-country study of banking
systems across 49 countries in the 90s, I find that banking crises are less likely in countries with greater regulated disclosure and transparency. Specifically, banking systems are less vulnerable
to crisis if supported by financial reporting regimes characterized by (i) more comprehensive disclosure (ii) more timely financial reporting (iii) more informative reporting, and (iv) more credible financial disclosure. To the extent that banking crises are costly, the paper documents the positive impact of accounting information to the real sector of the economy.
>> Download PDF

Jel Codes: G18, G21, K23, L51, M41, M42
Keywords: Regulated disclosure, informativeness, timeliness, credibility, banking crisis

Banking Fragility & Disclosure: International Evidence

Solomon Tadesse
WP No. 874 (June, 2007)

Abstract: Motivated by recent public policy debates on the role of market discipline in banking stability, the study examines the impact of greater bank disclosure in mitigating the likelihood of systemic banking crisis. In a cross sectional study of banking systems
across forty-nine countries in the nineties, it finds evidence that banking crises are less likely in countries with regulatory regimes that require extensive bank disclosure and stringent auditing.
>> Download PDF

Jel Codes: G21, G28
Keywords: Banking Crisis, Disclosure, Audit Stringency

The Impact of Outward FDI on Home-Country Employment in a Low-Cost Transition Economy

Jaan Masso; Urmas Varblane; Priit Vahter
WP No. 873 (May, 2007)

Abstract: The current extensive literature on the home-country employment effect of FDI focuses al-most exclusively on the case of investments from high-income and high labour cost home countries. In our paper we analyse the home-country employment effect in Estonia as a low- cost medium-income transition economy. The data from the population of Estonian firms be-tween 1995 and 2002 was studied with regression analysis and propensity score matching in order to construct an appropriate counterfactual for the firms that have invested abroad. The results indicate that in general, outward FDI had a positive impact on the home-country em-ployment growth. Concerning direct investors (domestic firms investing abroad) and indirect investors (foreign-owned firms investing abroad), the former group had a stronger home- country employment effect due to their smaller pre-investment size and because the subsidiar-ies of indirect investors are served from other locations rather than from Estonia. The positive employment effect was much stronger in the case of investments made after 1999 due to the better macro-economic performance of Estonia from the year 2000 onwards. Services firms demonstrated a stronger home-country employment effect than manufacturing firms. Our re-sults imply that the logic of the outward investments from low-cost transition and developing economies differs from that of high-income countries.
>> Download PDF

Jel Codes: D21, F23, J23
Keywords: outward foreign direct investments, employment effects of FDI, Central- and Eastern Europe, transition

Local Distributional Effects of Government Cash Transfers in Chile

Claudio Agostini; Philip H. Brown
WP No. 872 (May, 2007)

Abstract: Despite rapid economic growth and poverty reduction, inequality in Chile has remained high and remarkably constant over the last 20 years, prompting academic and public interest in the subject. Due to data limitations, however, research on inequality in Chile has concentrated on the national and regional levels. The impact of cash subsidies to poor households on local inequality is thus not well understood. Using poverty-mapping methods to asses this impact, we find heterogeneity in the effectiveness of regional and municipal governments in reducing inequality via poverty-reduction transfers, suggesting that alternative targeting regimes may complement current practice in aiding the poor.
>> Download PDF

Jel Codes: H53, I38, O54
Keywords: Inequality; Poverty Mapping; Subsidies; Targeting; Chile

How do Workers Fare During Transition? Perceptions of Job Insecurity among Russian Workers, 1995-2004

Susan J. Linz; Anastasia Semykina
WP No. 871 (May, 2007)

Abstract: Labor market conditions deteriorated substantially in the1990s during Russia’s transition from plan to market, generating pervasive and prolonged economic insecurity. Our objective is to
document perceptions of job insecurity among Russian workers over the course of the transition period and evaluate whether these perceptions are consistent with actual economic outcomes. We use RLMS data to examine perceptions of job insecurity among Russian workers between 1995 and 1998, when economic conditions were relatively chaotic, and between 2000 and 2004, when economic conditions had stabilized. We employ two measures to assess worker perceptions of job insecurity: one reflects workers’ concerns about job loss, and the second evaluates their concern about ability to find employment in case of a lay-off. Our descriptive analysis focuses on workers who perceived their job situation as insecure during this period, categorizing workers based on their socio-demographic characteristics, job characteristics and region of residence. Using ordered probit analysis, we study conditional distributions of our measures of perceived job insecurity, and how those varied by worker characteristics, current economic conditions, and over time. Similar to studies conducted in developed market economies, we find that perceptions of job security are higher among workers with more education, among workers with status positions (supervisory responsibilities), and among workers who live in locales that are not adversely affected by economic conditions. Unlike these studies, however, we find that perceptions differ between men and women; age is negatively, rather than positively, correlated with confidence in keeping one’s current job; and longer job tenure does not improve perceptions of job security. We find that worker perceptions are largely consistent with actual labor market conditions. Specifically, perceptions of job security were very low in years of major economic change and uncertainty (1995-1998), but improved during the years of relative economic stability (2000-2004). In both periods, workers with relatively weak positions
in the labor market tended to have lower perceptions of job insecurity.
>> Download PDF

Jel Codes: J31, J71, P23
Keywords: perceptions, Russia, job insecurity, gender

Does Reform Work? An Econometric Examination of the Reform-Growth Puzzle

Ian Babetskii; Nauro F. Campos
WP No. 870 (April, 2007)

Abstract:

Why are socially beneficial reforms not implemented? One simple answer to this question (which has received little attention in the literature) is that this may be caused by generalised uncertainty about the effectiveness of reforms. If agents are unsure about whether a proposed reform will work, it will be less likely to be adopted. Despite the numerous benefits economists assign to structural reforms, the empirical literature has thus far failed to establish a positive and significant effect of reforms on economic performance. We collect data from 43 econometric studies (for more than 300 coefficients on the effects of reform on growth)
and show that approximately one third of these coefficients is positive and significant, another third is negative and significant, and the final third is not statistically significant different from zero. In trying to understand this remarkable variation, we find that the measurement of reform and controlling for institutions and initial conditions are main factors in decreasing the probability of reporting a significant and positive effect of reform on growth.

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Jel Codes: C49, O11, P21
Keywords: structural reforms, liberalization, growth, transition

Perceptions and Behavior: Analyzing Wage Arrears in Russia

Susan J. Linz; Anastasia Semykina; Charles Petrin
WP No. 869 (May, 2007)

Abstract:

We investigate the link between perceptions and behavior using the wage arrears phenomenon in Russia as our case study. To measure perception, we utilize assessments of ‘marketability’ –what we call perceived demand. For behavior, we first consider the behavior of managers in the allocation of wage arrears, and second, the response by workers to wage arrears. Using Russian Longitudinal Monitoring Survey data collected between 1994 and 2004 and controlling for regional macroeconomic conditions, firm characteristics and worker characteristics in the probit and Poisson regressions, we find that managers avoid allocating wage arrears to workers with high perceived demand. We argue that this happens because workers with high perceived demand tend to have more employment options and consequently are more likely to quit their jobs. Managers try to retain these workers by reducing their wage arrears. Our empirical results support this argument, as we find that job change is reduced by lowering arrears.

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Keywords: perceived demand, wage arrears, perceptions, behavior, Russia

The Endogeneity of Association Agreements & Their Impact on Trade ifor Eastern Countries: Empirical Evidence for Romania

Christophe Rault; Ana Maria Sova; Robert Sova
WP No. 868 (April, 2007)

Abstract: The main goal of regionalization is the creation of free trade areas and the guarantee for countries to accede to a widened market. Many studies dealing with the effects of regional free trade agreements on trade flows already exist in the economic literature and the explosion of regional agreements among nations has recently stressed the key role of regionalization.
However, the effects of agreements on trade have not yet been clearly determined in those studies. Our research in this paper aims at reassessing the genuine role of associations. For this matter, we particularly study the association of Romania with European Union countries. Our econometric analysis based on qualitative choice models highlights in particular why European countries chose to conclude an association agreement with Romania, and stresses the fact that European Union countries select endogenously the conclusion of association agreements. We also find a 0.29 positive impact of the association agreement on Romanian export performances.
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Jel Codes: C25, E61, F13, F15
Keywords: Regionalization, European integration, Qualitative choice models, Probit

Institutions and Entrepreneurship Development in Russia: A Comparative Perspective

Ruta Aidis; Saul Estrin; Tomasz Mickiewicz
WP No. 867 (February, 2007)

Abstract: In this paper we use a comparative perspective to explore the ways in which institutions and networks have influenced entrepreneurial development in Russia. We utilize Global
Entrepreneurship Monitor (GEM) data collected in 2001 and 2002 to investigate the effects of the weak institutional environment in Russia on entrepreneurship, comparing it first with all available GEM country samples and second, in more detail, with Brazil and Poland. Our results provide strong evidence that Russia’s institutional environment is important to explain its relatively low levels of entrepreneurship development, where the latter is measured in terms of both number of start-ups and of existing business owners. In addition, Russia’s business environment contributes to the relative advantage of entrepreneurial insiders (those already in business) to entrepreneurial outsiders (newcomers) in terms of new business startups.
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Jel Codes: M13, O17, P36
Keywords: Entrepreneurship, Institutions, Networks, Russia, Poland, Brazil

Dutch Disease Scare in Kazakhstan: Is it real?

Balázs Égert; Carol Leonard
WP No. 866 (March, 2007)

Abstract: In this paper we explore the evidence that would establish that Dutch disease is at work in, or poses a threat to, the Kazakh economy. Assessing the mechanism by which fluctuations in the price of oil can damage non-oil manufacturing—and thus long-term growth prospects in an economy that relies heavily on oil
production—we find that non-oil manufacturing has so far been spared the perverse effects of oil price increases from 1996 to 2005. The real exchange rate in the open sector has appreciated over the last couple of years, largely due to the appreciation of the nominal exchange rate. We analyze to what extent this
appreciation is linked to movements in oil prices and oil revenues. Econometric evidence from the monetary model of the exchange rate and a variety of real exchange rate models show that the rise in the price of oil and in oil revenues might be linked to an appreciation of the U.S. dollar exchange rate of the oil and
non-oil sectors. But appreciation is mainly limited to the real effective exchange rate for oil sector and is statistically insignificant for non-oil manufacturing.
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Jel Codes: F31, F36, O11
Keywords: Dutch Disease, Kazakhstan, real exchange rate

Minimum Wage and Tax Evasion: Theory & Evidence

Mirco Tonin
WP No. 865 (March, 2007)

Abstract: The paper investigates the role of the minimum wage in a competitive economy in which there is underreporting of earnings by employed labour. The minimum wage induces higher compliance by some low- productivity workers and transforms a nominally neutral fiscal system into a regressive one. A spike in the wage distribution at the minimum wage level appears and a positive correlation between the size of the spike and the size of the informal economy is predicted and documented using cross-country data for Europe. A further result is that employees whose officially declared earnings appear to be boosted
by a minimum wage hike actually experience a decline in their true income. This prediction finds support in an empirical test using the massive increase in the minimum wage that took place in Hungary in 2001 as a quasi-natural experiment.
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Jel Codes: H26, H32, J38, P2
Keywords: MinimumWage, Tax Evasion,Wage Distribution,Hungary

Dynamics of the Financial Wealth of the Institutional Sectors in Bulgaria: Empirical Studies of the Post-Communist Period

Nikolay Nenovsky; Gergana Mihaylova
WP No. 864 (March, 2007)

Abstract:

The question of who benefits and who loses from the transition, the channels and mechanisms of redistribution of wealth in the post-communist period, and the relation between redistribution and monetary regime are, in our opinion, fundamental in understanding theoretically the deep systemic changes in Eastern Europe. This article has two basic tasks – one empirical and one theoretical. Our empirical task is to analyse the dynamics of the financial wealth of the institutional sectors in Bulgaria in the period 1998-2005 and to identify the major net creditors and net debtors. The empirical data used for the purpose are based on adapted methodology for the financial account of the Bulgarian economy according to the requirements of the System of National Accounts (SNA). Econometric simulations have been carried out of the major factors conditioning the change in the sectoral financial wealth. The empirical investigations are given in Part 3. Our theoretical task is to prove the hypothesis (which is to a large extent supported by the empirical results) about the functional relationship
between the dynamics of redistribution and the change in monetary regime. This is presented in Part 2 and is discussed in Part 4.

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Jel Codes: D31, E42, P30
Keywords: redistribution, financial wealth, financial account, Bulgaria

Impact of Derivatives Trading on Emerging Capital Markets: A Note on Expiration Day Effects in India

Sumon Kumar Bhaumik; Suchismita Bose
WP No. 863 (March, 2007)

Abstract: The impact of expiration of derivatives contracts on the underlying cash market – on trading volumes, returns and volatility of returns – has been studied in various contexts. We use an AR-GARCH model to analyse the impact of expiration of derivatives contracts on the cash market at the largest stock exchange in India, an important emerging capital market. Our
results indicate that trading volumes were significantly higher on expiration days and during the five days leading up to expiration days (“expiration weeks”), compared with nonexpiration days (weeks). We also find significant expiration day effects on daily returns to the market index, and on the volatility of these returns. Finally, our analysis indicates that it might be prudent to undertake analysis of expiration day effects (or other events) using methodologies that model the underlying data generating process, rather than depend on comparison of mean and median alone.
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Jel Codes: G14
Keywords: derivatives contracts, expiration day effect, India

SHORT- AND MEDIUM-TERM DETERMINANTS OF CURRENT ACCOUNT BALANCES IN MIDDLE EAST AND NORTH AFRICA COUNTRIES

Aleksander Aristovnik
WP No. 862 (March, 2007)

Abstract: The main aim of the paper is to examine the short- and medium-term empirical link between current account balances and a broad set of (economic) variables proposed by theoretical and
empirical literature. The paper focuses on the Middle East and North Africa (MENA), an economically diverse region, which has so far mainly been neglected in such empirical analyzes. For this purpose, a (dynamic) panel-regression technique is used to characterize the properties of current account variations across selected MENA economies in the 1971-2005 period. The results, which are generally consistent with theoretical and previous empirical analyses, indicate that higher (domestic and foreign) investment, government expenditure and foreign interest rates have a negative effect on the current account balance. On the other hand, a more open economy, higher oil prices and domestic economic growth generate an improvement in the external balance, whereas the latter implies that the domestic growth rate is associated with a larger increase in domestic savings than investment. Finally, the results show a relatively high persistency of current accounts and reject the validity of the stages of
development hypothesis as poorer countries in the region reveal a higher current account surplus (or lower deficit).
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Jel Codes: C23, F32, O53
Keywords: MENA countries, current account, determinants, dynamic panel data

Time-Varying Comovements in Developed & Emerging European Stock Markets: Evidence from Intraday Data

Balázs Égert; Evzen Kocenda
WP No. 861 (March, 2007)

Abstract: We study comovements between three developed (France, Germany, the United Kingdom) and three emerging (the Czech Republic, Hungary and Poland) European stock markets. The
novelty of our paper is that we apply the Dynamic Conditional Correlation GARCH models proposed by Engle (2002) to five-minute tick intraday stock price data for the period from June
2003 to January 2006. We find a strong correlation between the German and French markets and also between these two markets and the UK stock market. By contrast, very little
systematic positive correlation can be detected between the Western European stock markets and the three stock markets of Central and Eastern Europe, as well as within the latter group.
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Jel Codes: F37, G15
Keywords: stock markets, intraday data, comovements, bi-variate GARCH, European integration

Giving Children a Better Start: Preschool Attendance & School-Age Profiles

Samuel Berlinski; Sebastian Galiani; Marco Manacorda
WP No. 860 (March, 2007)

Abstract: We study the effect of pre-primary education on children's subsequent school outcomes by exploiting a unique feature of the Uruguayan household survey (ECH) that collects retrospective information on preschool attendance in the context of a rapid expansion in the supply of preprimary places. Using a within household estimator, we find small gains from preschool attendance at early ages that magnify as children grow up. By age 15, treated children have accumulated 0.8 extra years of education and are 27 percentage points more likely to be in school compared to their untreated siblings. Instrumental variables estimates that control for non random selection of siblings into pre-school lead to similar results. We speculate that early grade repetition harms subsequent school progression and that pre-primary education appears as a successful policy option to prevent early grade failure and its long lasting consequences.
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Jel Codes: I2, J1
Keywords: Preschool, Pre-primary education, Primary school performance

Real Exchange Rates in Small Open OECD & Transition Economies: Comparing Apples with Oranges?

Balázs Égert; Kirsten Lommatzsch; Amina Lahreche-Revil
WP No. 859 (January, 2007)

Abstract: We find that productivity gains in tradables cause an appreciation of the real exchange rate via both tradable and nontradable prices in the CEE-5 and have no affect in the Baltic countries, while they lead to a depreciation of the real exchange rate of tradables in OECD economies that overcompensates the appreciation due to nontradable prices. Rising net foreign liabilities lead to a real appreciation in the Baltic countries instead of the expected depreciation found in OECD and CEE-5 countries. These differences are due to the different impact of the fundamentals on the real exchange rate depending on the time horizon studied.
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Jel Codes: C15, E31, F31, O11, P17
Keywords: real exchange rate, equilibrium exchange rate,productivity, tradables, Balassa-Samuelson effect

Is Education the Panacea of Economic Deprivation of Muslims? Evidence from Wage Earners in India, 1987-2004

Sumon Kumar Bhaumik; Manisha Chakrabarty
WP No. 858 (February, 2007)

Abstract: Few researchers have examined the nature and determinants of earnings differentials among religious groups, and none has been undertaken in the context of conflict-prone multi-religious societies like the one in India. We address this lacuna in the literature by examining the differences in the average (log) earnings of Hindu and Muslim wage earners in India, during the 1987-2004 period. Our results indicate that education differences between Hindu and Muslim wage earners, especially differences in the proportion of wage earners with tertiary education, are largely responsible for the differences in the average (log) earnings of the two religious groups across the years. By contrast, differences in the returns to education do not explain the aforementioned difference in average (log) earnings. Citing other evidence about persistence of educational achievements across generations, however, we argue that attempts to narrow this gap using quotas for Muslim households at educational institutions might be counterproductive from the point of view of conflict avoidance.
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Jel Codes: I28, J15, J31
Keywords: earnings gap, education, decomposition, religion

Human Capital, Economic Growth, and Regional Inequality in China

Belton M. Fleisher; Haizheng Li; Min Qiang Zhao
WP No. 857 (February, 2007)

Abstract:

We study the dispersion in rates of provincial economic- and TFP growth in China. Our results show that regional growth patterns can be understood as a function of several interrelated factors, which include investment in physical capital, human capital, and infrastructure capital; the infusion of new technology and its regional spread; and market reforms, with a major step forward occurring following Deng Xiaoping’s “South Trip” in 1992. We find that FDI had much larger effect on TFP growth before 1994 than after, and we attribute this to emergence of other channels of technology transfer when marketization accelerated. We find that human capital positively affects output per worker and productivity growth. In particular, in terms of its direct contribution to production, educated labor has a much higher marginal product. Moreover, we estimate a positive, direct effect of human capital on TFP growth. This direct effect is hypothesized to come from domestic innovation activities. The estimated spillover effect of human capital on TFP growth is positive and statistically significant, which is very robust to model specifications and estimation methods. The spillover effect appears to be much stronger before 1994. We conduct cost-benefit analysis and a policy “experiment,” in which we project the impact increases in human capital and infrastructure capital on regional inequality. We conclude that investing in human capital will be an effective policy to reduce regional gaps in China as well as an efficient means to promote economic growth.

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Jel Codes: O15, O18, O47, O53
Keywords: Regional Inequality, China, Human Capital, Foreign Direct Investment, Spillovers, Technology Transmission

Does Better Environmental Performance Affect Revenues, Cost, or Both? Evidence From a Transition Economy

Dietrich Earnhart; Lubomír Lízal
WP No. 856 (February, 2007)

Abstract:

This study analyzes the effect of corporate environmental performance on financial performance in a transition economy. In particular, it assesses whether good environmental performance affects revenues, costs, or both, and if so, in which directions. As environmental performance improves, do revenues rise and costs fall so that profits unambiguously increase? Or vice versa? If both revenues and costs rise (or fall), does better environmental performance improve or undermine profitability? To answer these questions, our study analyzes the links from environmental performance to revenues, costs, and profits using an unbalanced panel of Czech firms from the years 1996 to 1998. The analytical results indicate strongly that better environmental performance improves profitability by driving down costs more than it drives down revenues, consistent with the substantial regulatory scrutiny exerted by environmental agencies and the primary pollution control approach implemented by firms during the sample period.

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Jel Codes: D21, G39, Q53
Keywords: Czech Republic, environmental protection, pollution, financial performance

Media Coverage & Charitable Giving After the 2004 Tsunami

Philip H. Brown; Jessica Minty
WP No. 855 (February, 2007)

Abstract:

Media coverage of humanitarian crises is widely believed to influence charitable giving, yet this assertion has received little empirical scrutiny. Using Internet donations after the 2004 Tsunami as a case study, we show that media coverage of disasters has a dramatic impact on donations to relief agencies, with an additional minute of nightly news coverage increasing donations by 0.036 standard deviations from the mean, or 13.2% of the average daily donation for the typical relief agency. Similarly, an additional 700-word story in the

New York Times or Wall Street Journal raises donations by 18.2% of the daily average. These results are robust to controls for the timing of news coverage and tax considerations. We repeat the analysis using instrumental variables to account for endogeneity bias, and the estimates are unchanged. However, we also find that the effect of news coverage varies considerably by relief agency.
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Jel Codes: L31, L82, O19
Keywords: Charitable giving; Media; Disasters; Tsunami; Southeast Asia

Default Rates in the Loan Market for SMEs:Evidence from Slovakia

Jarko Fidrmuc; Christa Hainz; Anton Malesich
WP No. 854 (November, 2006)

Abstract: Banks entering an emerging market face a lot of uncertainty about the risks involved in lending. We use a unique unbalanced panel of nearly 700 shortterm loans made to SMEs in Slovakia between January 2000 and June 2005. Of the loans granted, on average 6.0 per cent of the firms defaulted. Several probit models and panel probit models show that liquidity and profitability factors are important determinants of SMEs defaults, while debt factors are less robust. However, we find that above average indebtedness significantly increases the probability of default. Moreover, the legal form that determines liability has important incentive effects.
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Jel Codes: C25, G21, G33
Keywords: SME, Credit, Loan Default, Mortality Rates, Incentives, Probit, Panel Data.

Monetary Policy before Euro Adoption: Challenge for EU New Members

Jan Filácek; Roman Horvath; Michal Skorepa
WP No. 853 (November, 2006)

Abstract: This article analyzes the main issues for monetary policy in new EU member states before their euro adoption. These are typically rooted in the challenge of fulfilling concurrently of the Maastricht inflation and exchange rate criterion, as these countries are experiencing equilibrium real exchange rate appreciation. In this article we first distinguish between the wording, written interpretation and “revealed” interpretation of the inflation and exchange rate criteria. Then we discuss the options for monetary policy in the period of fulfilment of these criteria in terms of its transparency, its continuity with the previous monetary policy regime, the choice of central parity for the ERM II, the setting of the fluctuation bandwidth, the probability of fulfilment of both criteria and the impact on economic stability.
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Jel Codes: E52, E58, F33, F42
Keywords: monetary policy, euro adoption, ERM II, EU

Private-Sector Credit in Central & Eastern Europe: New (Over) Shooting Stars?

Balázs Égert; Peter Backé; Tina Zumer
WP No. 852 (November, 2006)

Abstract: This paper analyzes the equilibrium level of private credit to GDP in 11 Central and Eastern European countries in order to see whether the high credit growth recently observed in some of these countries led to above equilibrium private creditto- GDP levels. We use estimation results obtained for a panel of small open OECD economies (out-of-sample sample) to derive the equilibrium credit level for a panel of transition economies (in-sample panel). We opt for this (out-of-sample) approach because the coefficient estimates for transition economies are fairly unstable. We show that there is a large amount of uncertainty to determine the equilibrium level of private credit. Yet our results indicate that a number of countries are very close or even above the estimated equilibrium levels, whereas others are still well below the equilibrium level.
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Jel Codes: C31, C33, E44, G21
Keywords: private credit, credit growth, transition economies

Interest Rate Pass-Through in Central & Eastern Europe: Reborn from Ashes Merely to Pass Away?

Balázs Égert; Jesús Crespo-Cuaresma; Thomas Reininger
WP No. 851 (November, 2006)

Abstract: In this study, we seek to better understand the interest rate pass-through in five Central and Eastern European countries – the Czech Republic, Hungary, Poland, Slovakia and Slovenia, the CEE-5. Our pass-through estimates for several retail rates are generally lower than those reported in the literature, given the absence of cointegration between policy rates and long- or even short-term market rates. In addition, the pass-through has been declining over time in the CEE-5, and we argue that it is likely to decrease further in the future. Finally, the pass-through appears
similar in the CEE-5 than in Spain and is higher than in core euro area countries. Hence, euro adoption by the CEE-5 would not further increase heterogeneity within the euro area with regard to the interest rate passthrough. However, substantially more research is needed to establish commonalities and differences between the CEE-5 and the euro area with respect to the reaction of prices and output to monetary policy action.
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Jel Codes: C22, E43, E50, E52, G21, O52
Keywords: interest rate pass-through, monetary transmission mechanism, transition economies, Central and Eastern Europe, Austria,Germany, Spain.

Monetary Transmission Mechanism in Central & Eastern Europe: Gliding on a Wind of Change

Fabrizio Coricelli; Balázs Égert; Ronald MacDonald
WP No. 850 (November, 2006)

Abstract: This paper surveys recent advances in empirical studies of the monetary transmission mechanism (MTM), with special attention to Central and Eastern Europe. In particular, while laying out the functioning of the separate channels in the MTM, it explores possible interrelations between different channels and their impact on prices and the real economy. The empirical findings for Central and Eastern Europe are then briefly compared with results for industrialized countries, especially for the euro area. We highlight potential pitfalls in the literature and assess the relative importance, and potential development, of the different channels, emphasizing the relevant asymmetries between Central and Eastern European countries and the euro area.
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Jel Codes: E31, E51, E58, F31, O11, P20
Keywords: Monetary transmission, transition, Central and Eastern Europe, credit channel, interest rate channel, interest-rate pass-through, exchange rate channel, exchange rate pass-through, asset price channel

Crime Distribution & Victim Behavior During a Crime Wave

Rafael Di Tella; Sebastian Galiani; Ernesto Schargrodsky
WP No. 849 (November, 2006)

Abstract: The study of how crime affects different income groups faces several difficulties. The first is that crime-avoiding activities vary across income groups. Thus, a lower victimization rate in one group may not reflect a lower burden of crime, but rather a higher investment in avoiding crime. A second difficulty is that, typically, only a small fraction of the population is victimized so that empirical tests often lack the statistical power to detect differences across groups. We take advantage of a dramatic increase in crime rates in Argentina during the late 1990s to document several interesting patterns. First, the increase in victimization experienced by the poor is larger than the increase endured by the rich. The difference appears large: low-income people have experienced increases in victimization rates that are almost 50 percent higher than those suffered by high-income people. Second, for home robberies, where the rich can protect themselves (by hiring private security, for example), we find significantly larger increases in victimization rates amongst the poor. In contrast, for robberies on the street, where the rich can only mimic the poor, we find similar increases in victimization for both income groups. Third, we document direct evidence on pecuniary and non-pecuniary protection activities by both the rich and poor, ranging from the avoidance of dark places to the hiring of private security. Fourth, we show the correlations between changes in protection and mimicking and changes in crime victimization. Fifth, we offer one possible way of using these estimates to explain the incidence of crime across income groups.
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Jel Codes: K42
Keywords: Victimization, income distribution, private security, victim adaptation.

Real-Time Time-Varying Equilibrium Interest Rates: Evidence on the Czech Republic

Roman Horvath
WP No. 848 (October, 2006)

Abstract: This paper examines (real-time) equilibrium interest rates in the Czech Republic in 2001:1-2005:12 estimating various specifications of simple Taylor-type monetary policy rules. First, we estimate it using GMM. Second, we apply structural time-varying coefficient model with endogenous regressors to evaluate fluctuations of equilibrium interest rate over time. The results suggest that there is substantial interest rate smoothing and central bank primarily responds to inflation (forecast) developments. The estimated parameters seem to sustain the equilibrium determinacy. We find that the equilibrium interest rates gradually decreased over sample period to the levels comparable to those of in the euro area reflecting capital accumulation, smaller risk premium and successful disinflation in the Czech economy.
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Jel Codes: E43, E52, E58
Keywords: equilibrium interest rates, Taylor rule, augmented Kalman filter

Financial Accelerator Effects in the Balance Sheets of Czech Firms

Roman Horvath
WP No. 847 (November, 2006)

Abstract: The paper examines a financial accelerator mechanism in analyzing determinants of corporate interest rates. Using a panel of the financial statements of 448 Czech firms from 1996–2002,
we find that balance sheet indicators matter for the interest rates paid by firms. Market access is particularly important in this regard. The strength of corporate balance sheets seem to vary
with firm size. There is also evidence that monetary policy has a stronger effect on smaller than on larger firms. On the other hand, we find no asymmetry in the monetary policy effects over the business cycle.
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Jel Codes: G11, G32
Keywords: balance sheet channel, financial accelerator, interest rates, monetary policy transmission

Central Bank Interventions, Communications & Interest Rate Policy in Emerging European Economies

Balázs Égert
WP No. 846 (November, 2006)

Abstract: This paper analyses the effectiveness of foreign exchange interventions in Croatia, the Czech Republic, Hungary, Romania, Slovakia and Turkey using the event study approach. Interventions are found to be effective only in the short run when they ease appreciation pressures. Central bank communication and interest rate steps considerably enhance their effectiveness. The observed effect of interventions on the
exchange rate corresponds to the declared objectives of the central banks of Croatia, the Czech Republic, Hungary and perhaps also Romania, whereas this is only partially true for Slovakia and Turkey. Finally, interventions are mostly sterilized in all countries except Croatia. Interventions are not much more effective in Croatia than in the other countries studied. This suggests that unsterilized interventions do not automatically influence the exchange rate.
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Jel Codes: F31
Keywords: central bank intervention, communication, foreign exchange intervention,verbal intervention

On the Role of Absorptive Capacity: FDI Matters to Growth

Yuko Kinoshita; Chia-Hui Lu
WP No. 845 (November, 2006)

Abstract: The paper studies the effects of foreign direct investment (FDI) on economic growth when sufficient provisions of infrastructure is a pre-requisite. In the overlapping generations structure setting, we show that technology spillovers via FDI take place only when the host country has the sufficient level of infrastructure. Infrastructure has a subsequent positive feedback on further investment which leads the country grow faster. If infrastructure falls short of the critical level, however, then FDI has little effect on growth as the country is trapped in a low-growth equilibrium.
We also present the simulations and empirical results based on panel data for 42 developing countries between 1970 and 2000. They provide support to the model that FDI and infrastructure are complements in affecting per capita GDP growth.
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Jel Codes: F21, H54, O33, O40
Keywords: foreign direct investment; economic growth, technology diffusion,infrastructure

Current Account Sustainability in Selected Transition Countries

Aleksander Aristovnik
WP No. 844 (November, 2006)

Abstract: The article examines the question of whether the current account deficits seen in selected transition economies in recent years mainly as a symptom of the dynamic economic activity of the catching-up process are a source of potential macroeconomic destabilisation. Given the possible significant reduction of capital flows, as well as restrictions and lessons from recent financial crises, current account deficits must be closely monitored in the
region. In this respect, the issue of ‘current account sustainability’ in seventeen transition economies is investigated. For this purpose, two accounting frameworks (Milesi-Ferreti and Razin, 1996; Reisen, 1998) based on certain strict assumptions are employed. The results show that if the observed level of foreign direct investment (FDI) flows is kept in the medium run almost all countries could optimally have a higher level of
external deficit, with the exception of countries such as Baltic States, Hungary, Macedonia, Moldova and Romania. Accordingly, the maintenance of relatively large FDI inflows (especially greenfield investments) to national economies is a key priority in securing future external sustainability. In the end, the results indicate that current account deficits of transition economies that exceed 5 percent of GDP generally involve problems
of their external sustainability.
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Jel Codes: C33, F32
Keywords: transition economies, current account deficits, sustainability, FDI

Policy, Economic Federalism & Product Market Entry: The Indian Experience

Sumon Kumar Bhaumik; Shubhashis Gangopadhyay; Shagun Krishnan
WP No. 843 (November, 2006)

Abstract: Productivity growth has long been associated with, among others, contestability of markets which, in turn, is dependent on the ease with which potential competitors to the incumbent firms can enter the product market. There is a growing consensus that in emerging markets regulatory and institutional factors may have a greater influence on a firm’s ability to enter a product market than strategic positions adopted by the incumbent firms. We examine this proposition in the context of India where the industrial policies of the eighties and the nineties are widely believed to be pro-incumbent and procompetition, respectively, thereby providing the setting for a natural experiment with
1991 as the watershed year. In our analysis, we also take into consideration the possibility that the greater economic federalism associated with the reforms of the nineties may have affected the distribution of industrial units across states after 1991. Our paper, which uses the experiences of the textiles and electrical machinery sectors during the two decades as the basis for the analysis, finds broad support for both these hypotheses.
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Jel Codes: L11, L52, L64, L67, O14, O17
Keywords: Entry, Institutions, Regulations, India, Textiles, Electrical Machinery, Reforms

Price Mobility of Locations

Konstantin Gluschenko
WP No. 842 (October, 2006)

Abstract: This paper applies the concept of mobility to cross-location price dynamics. Exploiting data on prices across Russian regions over 1994-2000, a contribution of relative and absolute mobility of regions to price convergence among them is analyzed.
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Jel Codes: P22, R12
Keywords: Price dispersion; Price convergence; Mobility; Russian regions

THE ROLE OF FOREIGN DIRECT INVESTMENT IN THE FIRM SELECTION PROCESS IN A HOST COUNTRY: EVIDENCE FROM SLOVENIA

Katja Zajc Kejzar
WP No. 841 (October, 2006)

Abstract: This paper examines the role of inward foreign direct investment (FDI) in firm selection processes in the Slovenian manufacturing sector in the 1994-2003 period by assessing the impact of the entry and presence of foreign firms on a domestic firm’s probability of exiting. The results confirm that not only do foreign entrants tend to be above-average productive but they also find it easier to exit (particularly those entering in the form of acquisitions). Further, the least efficient firms are found to experience a drop in their survival probability upon a foreign firm’s entry. In addition, a foreign firm’s entry seems to stimulate the selection process not only within the industry but also through backward linkages in the upstream supplying industries. Regarding the productivity spillover effects from foreign to local
firms the results suggest that they mostly operate through vertical linkages rather than within the same industry.
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Jel Codes: C23, F23, L11, L25
Keywords: foreign direct investment, firm selection process, crowding out, productivity spillovers,Slovenia

Family Ownership & Control in Large Firms: The Good, The Bad & The Irrelevant and Why

Mike Peng; Yi Jiang
WP No. 840 (October, 2006)

Abstract: There is a major debate regarding the role of concentrated family ownership and control in large firms, with three positions suggesting that such concentration is (1) good, (2) bad, or (3) irrelevant for firm performance. This article reports two studies to shed further light on this debate. Study 1 uses 744 publicly listed large firms in eight Asian countries to test competing hypotheses on the impact of the combination of family ownership and control on firm performance. On a country-by-country basis, our findings support all three positions. On an aggregate, pooled sample basis, the results support the “irrelevant” position. Study 2, based on a sample of 688 firms from the same eight Asian countries, endeavors to answer why Study 1 obtains different results for different countries. We theorize and document that Study 1 findings may be systematically associated with the level of shareholder protection embodied in legal and regulatory institutions. Study 2 thus sketches the contours of a cross-country, institution-based theory of corporate governance. Overall, our two studies lead to a finer-grained and more cumulative understanding of the crucial debate on family ownership and control in large firms.
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Jel Codes: M1
Keywords: corporate governance, family firm, ownership, Asia Pacific

Price Linkages of Russian Regional Markets

Konstantin Gluschenko
WP No. 839 (September, 2006)

Abstract: Exploiting time series of the cost of a staples basket across 75 Russian regions over 1994-2000, price linkages of the regions are analyzed with the use of Granger causality as a tool. Price linkages of Russian regions are found extensive: on average, an individual regional market is linked through prices with 62% of others. Neither isolated clusters of regions nor autarkic regions are revealed; each region is linked with all others either directly or indirectly, through a chain of no more than two intermediate regions. Spatial autocorrelation is found to be widespread, taking place in two thirds of regions.
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Jel Codes: C22, P22, P23, R12
Keywords: market integration, Granger causality, integration clubs, spatial autocorrelation

The Effect of Pre-Primary Education on Primary School Performance

Samuel Berlinski; Sebastian Galiani; Paul Gertler
WP No. 838 (July, 2006)

Abstract: Although the theoretical case for universal pre-primary education is strong, the empirical foundation is weak. In this paper, we contribute to the empirical case by investigating the effect of a large expansion of universal pre-primary education on subsequent primary school performance in Argentina. We estimate that one year of preprimary school increases average third grade test scores by 8 percent of a mean or by 23 percent of the standard deviation of the distribution of test scores. We also find that preprimary school attendance positively affects student’s self-control in the third grade as measured by behaviors such as attention, effort, class participation, and discipline.
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Jel Codes: I2, J1
Keywords: Preschool, Pre-primary education, Primary school performance

Do Investors Value Insider Trading Laws? International Evidence

Laura Nyantung Beny
WP No. 837 (August, 2006)

Abstract: The article presents a simple agency model of the relationship between corporate valuation and insider trading laws. The article then investigates the model’s three testable hypotheses using firm-level data from a cross-section of developed countries. I find that more stringent insider trading laws and enforcement are associated with greater corporate valuation among the sample firms in common countries, while they are generally irrelevant to corporate valuation for the sample firms in civil law countries. This puzzling dichotomy is robust to various alternative specifications and to controlling for a wide range of potentially omitted variables. The result for the firms in common law countries is consistent with the claim that insider trading laws can help to reduce corporate agency costs. I also find that insider trading laws and cash flow ownership appear to be complementary means to reduce agency costs, contrary to my hypothesis that they are substitute mechanisms for controlling agency costs; however, this result is generally statistically insignificant. Finally, I confirm prior findings of an “incentive effect” of greater cash flow ownership by controlling shareholders.
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Jel Codes: G30, G38, K22
Keywords: Corporate Finance and Law, Governance, Valuation, Capital Budgeting, Investment policy, Comparative Law, International Business

How Corruption Hits People When They Are Down

Jennifer Hunt
WP No. 836 (August, 2006)

Abstract: Using cross–country and Peruvian data, I show that victims of misfortune, particularly crime victims, are much more likely than non–victims to bribe public officials. Misfortune increases victims’ demand for public services, raising bribery indirectly, and also increases victims’ propensity to bribe certain officials conditional on using them, possibly because victims are desperate, vulnerable, or demanding services particularly prone to corruption. The effect is strongest for bribery of the police, where the increase in bribery comes principally through increased use of the police. For the judiciary the effect is also strong, and for some misfortunes is composed equally of an increase in use and an increase in bribery conditional on use. The expense and disutility of bribing thus compound the misery brought by misfortune.
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Jel Codes: H1, K4, O1
Keywords: Corruption, bribery, governance

Mirage at the Bottom of the Pyramid

Aneel Karnani
WP No. 835 (August, 2006)

Abstract: Poor people – at the bottom of the pyramid (BOP) – represent a very attractive market opportunity. The ‘BOP proposition’ argues that selling to the poor can simultaneously be profitable and help eradicate poverty. This is at best a harmless illusion and potentially a dangerous delusion. This paper shows that the BOP argument is riddled with fallacies, and proposes an alternative perspective on how the private sector can help alleviate poverty. Rather than focusing on the poor as consumers, we need to view the poor as producers. The only way to alleviate poverty is to raise the real income of the poor.
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Jel Codes: I30, M10
Keywords: Poverty; Bottom of the pyramid; Selling to the poor; social responsibility

Ownership concentration and firm performance: Evidence from an emerging market

Irena Grosfeld
WP No. 834 (August, 2006)

Abstract: The initial view of the advantages of ownership concentration in joint stock companies was determined by the concern about the opportunistic managerial behavior. The growing importance of knowledge and human capital in the operation of firms shifts the focus of concern: excessive ownership concentration may stifle managerial initiative. This may be particularly true, and the results obtained in this paper support this hypothesis, in firms with high share of knowledge related activities. I explore the determinants of ownership concentration and the relationship between ownership structure and firm value in the context of a transition economy, i.e. an economy undergoing important changes in its legal and regulatory framework, in macroeconomic policy and most of all, in its property rights allocation. I focus on all non-financial companies traded on the Warsaw Stock Exchange since its inception in 1991 and up to 2003. We can observe that ownership of companies becomes more dispersed with the number of years of listing. The results reported in this paper suggest that firm adjust their ownership structure to firm specific characteristics and that firms belonging to the sector of high technology tend to have lower ownership concentration. However, the positive impact of ownership concentration on firm value detected in OLS regressions becomes even stronger when we control for the endogeneity of ownership.
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Jel Codes: D21, G32, O16, P2, P34
Keywords: Ownership structure, corporate governance, firm behaviour, uncertainty, knowledge economy

Institutions, Networks and Entrepreneurship Development in Russia: An Exploration

Ruta Aidis; Saul Estrin
WP No. 833 (June, 2006)

Abstract: In this paper we explore the ways in which institutions and networks influence entrepreneurial development in Russia. By utilizing new Global Entrepreneurship Monitor (GEM) data collected in 2001, we investigate the effects of the weak institutional environment in Russia in terms of three dimensions: on the rate of productive entrepreneurial activity measured in terms of start-ups and existing business owners; on the characteristics of business owners; and on business financing. In addition, the analysis explores the effectiveness of Russia’s informal networks for circumventing the weak institutional environment for business development. Our results indicate that Russia’s business owners share many of the same characteristics as business owners in advanced western countries, though education is not associated with entrepreneurial activity. However, the main differences are in the sources of financing and the fact that relatively few individuals engage in productive entrepreneurial activity. Our results support the notion of the limited effectiveness of Russia’s networks for supporting entrepreneurial activity in its weak institutional environment.
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Jel Codes: L14, M13, P36
Keywords: Entrepreneurship, Institutions, Networks, Russia

Long and Short-Run Linkages in CEE Stock Markets: Implications for Portfolio Diversification & Stock Market Integration

Manolis Syllignakis; Georgios Kouretas
WP No. 832 (July, 2006)

Abstract: This paper examines the short- and long-term relationships between seven Central Eastern European (CEE) stock markets and two developed stock markets, namely the German market and the US market. Application of the Gonzalo and Granger (1995) methodology indicates that the examined stock markets are partially integrated, while there is also evidence that the five stock markets in the central Europe (Czech Republic, Hungary, Poland, Slovenia and Slovakia) together with the German and the US stock markets have a significant common permanent component, which drives this system of stock exchanges in the long run. Contrary, the Estonian and Romania markets are segmented. A DCC model indicates that the short – term interdependencies between the CEE stock markets and the developed stock markets have strengthened during the Asian and Russian crises but since then (except for the Czech Republic, Hungary, Poland) they returned almost to their initial (relatively low) levels. Moreover, significantly increased volatility is observed during the Russian crisis period for all the markets under enquiry.
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Jel Codes: C12, C32, F36, G15
Keywords: Central Eastern European equity markets, Market Integration, Common trends, DCC, SWARCH-L.

Inequality, Fiscal Capacity and the Political Regime: Lessons from the Post-Communist Transition

Christopher Gerry; Tomasz Mickiewicz
WP No. 831 (July, 2006)

Abstract: Using panel data for twenty-seven post-communist economies between 1987-2003, we examine the nexus of relationships between inequality, fiscal capacity (defined as the ability to raise taxes efficiently) and the political regime. Investigating the impact of political reform we find that full political freedom is associated with lower levels of income inequality. Under more oligarchic (authoritarian) regimes, the level of inequality is conditioned by the state’s fiscal capacity. Specifically, oligarchic regimes with more developed fiscal systems are able to defend the prevailing vested interests at a lower cost in terms of social injustice. This empirical finding is consistent with the model developed by Acemoglu (2006). We also find that transition countries undertaking early macroeconomic stabilisation now enjoy lower levels of inequality; we confirm that education fosters equality and the suggestion of Commander et al (1999) that larger countries are prone to higher levels of inequality.
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Jel Codes: D31, H21, P26, P35
Keywords: income inequality, democracy, oligarchy, fiscal capacity, economic reform, transition

Business Groups in Emerging Markets-Financial Control & Sequential Investment

Christa Hainz
WP No. 830 (June, 2006)

Abstract: Business groups in emerging markets perform better than unaffiliated firms. One explanation is that business groups substitute some functions of missing institutions, for example, enforcing contracts. We investigate this by setting up a model where firms within the business group are connected to each other by a vertical production structure and an internal capital market. Thus, the business group’s organizational mode and the financial structure allow a self-enforcing contract to be designed. Our model of a business group shows that only sequential investments can solve the ex post moral hazard problem. We also find that firms may prefer not to integrate.
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Jel Codes: G31, G32, G34, K49, L22
Journal Citation: Christa Hainz,"Business Groups in Emerging Markets - Financial Control and Sequential Investment", forthcoming in the Journal of Institutional and Theoretical Institutions, Winter 2007
Keywords: Business groups, self-enforcing contract, institutions, internal capital market

Sophisticated Discipline in Nascent Deposit Markets: Evidence from Post-Communist Russia

Alexei Karas; William Pyle; Koen Schoors
WP No. 829 (June, 2006)

Abstract: Using a database from post-communist, pre-deposit-insurance Russia, we demonstrate the presence of quantity-based sanctioning of weaker banks by both firms and households, particularly after the financial crisis of 1998. Evidence for the standard form of price discipline, however, is notably weak. Estimating the deposit supply function, we show that, particularly for poorly capitalized banks, interest rate increases exhibit diminishing, and eventually negative, returns in terms of deposit attraction, a finding consistent with depositors interpreting the deposit rate itself as a signal of otherwise unobserved bank-level risk.
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Jel Codes: G21, O16, P2
Keywords: banking, market discipline, deposit market, transition, Russia

Financial Deregulation and Financial Development, and Subsequent Impact on Economic Growth in the Czech Republic, Hungary and Poland

Patricia Mc Grath
WP No. 828 (June, 2006)

Abstract: Results support Arestis’s theory, that low real interest rates do not prevent economic growth (though he related it to the regulation debate). Here in the deregulation environment, it also stands. Results also support Shaw’s assertion that financial liberalisation increases the monetary sector. Stiglitz’s theory, that government intervention leads to improved quality of loans, is contradicted as the reduction of state involvement led to bad loans falling. Support is given to Everett and Kelly’s view that financial liberalisation supports growth. Finally King and Levine studies are supported – banking sector development leads to faster growth, and also Barth’s view that state involvement leads to poorly developed banks.
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Jel Codes: G, G15, G21
Keywords: Transition Economies, Financial Deregulation, Financial Development,Economic Growth, Eastern Europe

The Determinants & Excessiveness of Current Account Deficits in Eastern Europe & the Former Soviet Union

Aleksander Aristovnik
WP No. 827 (June, 2006)

Abstract: The article investigates the main factors of current account deficits in order to assess the potential excessiveness of current account deficits in selected countries of Eastern Europe and former Soviet Union. According to the simulated benchmark calculated on the basis of selected determinants (in period 1992-2003), the results confirm that the actual current account balances are generally close to their estimated levels in the 2000-2003 period in the transition region. This notion is in line with the intertemporal approach to the current account balance, suggesting that higher external deficits are a natural outcome when permanent domestic output exceeds the current one and when current investments and government consumption exceed their permanent levels. Hence, the results suggest that most countries in Eastern Europe and former Soviet Union are justified in running relatively high current account deficits.
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Jel Codes: C33, F32
Keywords: transition countries, current account deficits, excessiveness, determinants, dynamic panel data

Privatization with Government Control: Evidence from the Russian Oil Sector

Daniel Berkowitz; Yadviga Semikolenova
WP No. 826 (February, 2006)

Abstract: Governments that privatize state industries often retain control over key distribution assets. While there are many examples of this form of partial privatization, to our knowledge there are no substantial quantitative studies of how governments use their control under these circumstances. In this paper we argue that the Russian government privatization of the oil sector during 1994-2003 is a useful case study because the federal government privatized oil production but retained monopoly control rights over the transport of crude onto world markets. Based on a simple analysis of the costs and benefits of control and ownership, we argue that that in these circumstances the federal government would use its control over transport capacity to provide privileged access to those companies over which it has influence. We find that in 2003 this is indeed the case and that this system detracted from economic efficiency. In particular, private and regionally owned companies had to be much more productive than companies over which the federal government (the state) had influence to receive comparable access to world markets; state-influence companies had preferential access to routes with more capacity; and, the allocation of route capacity was sensitive to transport costs only in the state-influence sector.
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Jel Codes: K23, L5, P20
Keywords: control, ownership, oil pipeline, Tobit

Corruption & Bureaucratic Structure in a Developing Economy

John Bennett; Saul Estrin
WP No. 825 (February, 2006)

Abstract: We address the impact of corruption in a developing economy in the context of an empirically relevant hold-up problem - when a foreign firm sinks an investment to provide infrastructure services. We focus on the structure of the economy’s
bureaucracy, which can be centralized or decentralized, and characterize the ‘corruptibility’ of bureaucrats in each case. Results are explained in terms of the noninternalization,
under decentralization, of the ‘bribe externality’ and the ‘price
externality.’ In welfare terms, decentralization is favoured, relatively speaking, if the tax system is less inefficient, funding is less tight, bureaucrats are less venal, or compensation for expropriation is ungenerous.
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Jel Codes: D73, H11, H77
Keywords: Corruption, Bureaucratic Structure, Developing Economy

Regulatory Barriers & Entry in Developing Economies

John Bennett; Saul Estrin
WP No. 824 (June, 2006)

Abstract: We model entry by entrepreneurs into new markets in developing economies with regulatory barriers in the form of licence fees and bureaucratic delay. Because laissez faire leads to ‘excessive’ entry, a licence fee can increase welfare by discouraging entry. However, in the presence of a licence fee, bureaucratic delay creates a strategic opportunity, which can result in both greater entry by first movers and a higher steady-state number of firms. Delay also leads to speculation, with entrepreneurs taking out licences to obtain the option of immediate entry if they later observe the industry to be profitable enough.
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Jel Codes: L50, O14
Keywords: Entry, Entry Barriers, Developing Economy.

Enterprise Restructuring in Belarus

Marina Bakanova; Saul Estrin; Igor Pelipas; Sergei Pukovich
WP No. 823 (May, 2006)

Abstract: We explore the impact of privatization and the entry of new firms on enterprise performance in Belarus, a transition economy in which reform and market-orientated institutional development has been limited. We hypothesize that private ownership will enhance company performance, measured in a variety of ways including profitability and capacity to export to the West, and that newly created firms will perform better than state-owned ones. Our work is based on a large enterprise level survey which includes state-owned firms, privatized companies and newly created enterprises. The data refute both hypotheses. We conclude that this is probably because the institutional environment has not evolved sufficiently from the socialist era to permit free competition and effective governance by new owners.
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Jel Codes: L1, P2, P31
Keywords: Enterprise restructuring, privatization, transition, Belarus

Reforms, Entry and Productivity: Some Evidence from the Indian Manufacturing Sector

Sumon Kumar Bhaumik; Shubhashis Gangopadhyay; Shagun Krishnan
WP No. 822 (March, 2006)

Abstract: It is now stylized that, while the impact of ownership on firm productivity is unclear, product market competition can be expected to have a positive impact on productivity, thereby making entry (or contestability of markets) desirable. Traditional research in the context of entry has explored the strategic reactions of incumbent firms when threatened by the possibility of entry. However, following De Soto (1989), there has been increasing emphasis on regulatory and institutional factors governing entry rates, especially in the context of developing countries. Using 3-digit industry level data from India, for the 1984-97 period, we examine the phenomenon of entry in the Indian context. Our empirical results suggest that during the 1980s industry level factors largely explained variations in entry rates, but that, following the economic federalism brought about by the post-1991 reforms, variations entry rates during the 1990s were explained largely by state level institutional and legacy factors. We also find evidence to suggest that, in India, entry rates were positively associated with growth in total factor productivity.
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Jel Codes: L11, L52, L64, L67, O14, O17
Keywords: Entry, Productivity, Institutions, Regulations, India, Reforms

Falling Walls and Lifting Curtains: Analysis of Border Effects in Transition Countries

Yener Kandogan
WP No. 821 (March, 2006)

Abstract:

Since McCallum’s (1995) finding of surprisingly high border effect on trade between US and Canada, there have been a number of studies on other parts of the world, and improvements made to the gravity model to accurately measure this effect. This paper suggests some other modifications to the model, and applies it to a region of the world that presents a distinctly interesting case. Changes in border effects of formerly socialist countries in Central and East Europe, and countries in the former Soviet Union are analyzed during 1976-2002 at country and sectoral levels, and also with respect to blocs of countries. A discussion on cross-country variations in border effects follows the computations.

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Jel Codes: F14, F15, P20, P33
Keywords: Gravity models, integration, disintegration

Home versus Host Country Effects of FDI: Searching for New Evidence of Productivity Spillovers

Priit Vahter; Jaan Masso
WP No. 820 (March, 2006)

Abstract: This paper investigates the effects of both inward and outward foreign direct investment (FDI) on productivity in manufacturing and services sectors. The main novelty is the analysis of the spillover effects of outward FDI that may occur outside the investing firms on the rest of the home country. Our results based on panel data from Estonia do not indicate much spillover effects of outward or inward FDI that are robust to different specifications of the estimated model. There is substantial heterogeneity in the findings on spillovers across different specifications of the model or sector studied.
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Jel Codes: F10, F21, F23
Keywords: foreign direct investment, spillovers, home country effects, productivity

Earnings Inequality in India: Has the Rise of Caste & Religion Based Politics in India Had an Impact?

Sumon Kumar Bhaumik; Manisha Chakrabarty
WP No. 819 (March, 2006)

Abstract: Since 1989, there has been a sharp increase in the role of caste and religion in determining political fortunes at both state and federal levels in India. As a consequence, significant intercaste and inter-religion differences in earnings have the potential to stall the process of economic reforms. Yet, the patterns and determinants of such differences remain unexplored. We address this lacuna in the literature, and explore the determinants of the differences in inter-caste and inter-religion earnings in India during the 1987-99 period, using the 43rd and 55th rounds of National Sample Survey (NSS). Our results suggest that (a)earnings differences between “upper” castes and SC/ST have declined between 1987 and 1999, (b) over the same period, earnings differences between Muslims and non-Muslims have increased, to the detriment of the former, and (c) inter-caste and inter-religion differences in earnings can be explained largely by corresponding differences in educational endowment and returns on age (and, hence, experience). However, differences in returns on education do not explain inter-caste and interreligion earnings differences to a great extent.
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Jel Codes: O15, O17
Keywords: Inequality, Caste, Religion, India

Financial Deregulation and Industrial Development: Subsequent Impact on Economic Growth in the Czech Republic, Hungary and Poland

Patricia Mc Grath
WP No. 818 (February, 2006)

Abstract: The Czech Republic, Hungary and Poland all experienced an initial reduction in the number of industries and an increase in unemployment, once they moved to a market driven economy. Over time the unemployment problem reduced in significance though Poland still experiences high levels to date. Industries sprung up in the private sector in all three countries which counterbalanced the drop in state enterprises. Private sector industries all reported easy access to credit once the business set up while firms with head offices overseas tended to use the home country for borrowing purposes. For these companies, the most significant feature of financial deregulation in the Czech Republic, Hungary and Poland was that of freedom of capital movement, which increased both the level of business and investment opportunities. Results show that financial deregulation led to industrial development in all three countries. Tests to indicate the impact of industrial production on economic growth, show that for the three countries industrial production caused economic growth. This was a uni-directional causality.
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Jel Codes: E, E23, F43
Keywords: Transition Economies, Industrial Development, Financial Deregulation,Economic Growth, Eastern Europe

The Politics of Institutional Renovation & Economic Upgrading: Lessons from the Argentine Wine Industry

Gerald A. McDermott
WP No. 817 (December, 2005)

Abstract: Through a comparative, longitudinal analysis of the wine industry in two Argentine provinces, this article examines how different political approaches to reform shape the ability of societies to build new institutions for economic upgrading. The article finds that inherited structural factors per se can not easily explain the different solutions to this challenge. A better explanation focuses on how governments confront the dual challenge of redefining the boundary between the public and private domains and of recombining the socio-economic ties among relevant firms and their respective business associations. A “depoliticization” approach emphasizes the imposition of arm’s-length incentives by a powerful, insulated government, but appears to contribute little to institutional change and upgrading. A “participatory restructuring” approach promotes the creation of public-private institutions via adherence to two key principles: a) inclusion of a wide variety of relevant stakeholder groups and b) rules of deliberative governance that promote collective problem-solving. This latter approach appears to have the advantage of facilitating collaboration and knowledge creation among previously antagonistic groups, including government.
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Jel Codes: D8, F23, H4, L1, L5, M13, O1, P16
Keywords: institutions, networks, upgrading, Latin America, industrial policy

Worker Morale in Russia: An Exploratory Study

Susan J. Linz; Linda Good; Patricia Huddleston
WP No. 816 (January, 2006)

Abstract: Despite unanimous agreement in the existing literature that morale influences employee performance, no well-defined measure of morale exists. Our study develops a robust measure of morale and focuses on the factors that influence morale among Russian workers. Survey data were collected from Russian employees at two different points in time, 1995 and 2002, in five Russian cities. Among the workers participating in our study, expectation of receiving a desired reward contributes to high morale, with expected monetary rewards having a larger influence than expected non-monetary rewards, but praise for a job well done and a feeling of accomplishment also contribute positively to employee morale. There is a significant correlation between positive attitudes toward work and morale, and a positive correlation between performance assessment and morale. Demographic characteristics (age and gender) have no discernable influence on morale when controls are included for work experience.
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Jel Codes: J28, J33, P23
Keywords: Morale, Russia, Expected rewards, Motivation, Performance

Capital Account Liberalization and Exchange Rate Regime Choice, What Scope for Flexibility in Tunisia?

BEN ALI Mohammed Sami
WP No. 815 (March, 2006)

Abstract: Capital account liberalization and exchange rate regime choice, what scope for flexibility in Tunisia? This study evaluates within a game-theoretic framework the exchange rate regime from a welfare perspective. In a tradable-nontradable goods model framework, Tunisia’s exchange rate regime choice is cast in terms of strategic interactions between the monetary authority and domestic enterprises. The monetary authority is assumed to choose an optimal exchange rate regime according to a welfare-related criterion by minimising a loss function defined in terms of
external competitiveness and domestic inflation. Simulations outcomes reveal that capital account liberalization in the Tunisian economic context is compatible with a flexible exchange rate regime.
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Jel Codes: F31, F32, F37, F47
Keywords: Exchange rate regime, Liberalization, Convertibility, Capital Account, Welfare, Tunisia.

Evaluation of Mass Privatization in Bulgaria

Jeffrey Miller
WP No. 814 (March, 2006)

Abstract: The mass privatization program in Bulgaria was implemented in 1996-97. Following programs in countries like the Czech Republic, more sophisticated regulatory bodies were put into place to prevent the kind of abuses observed elsewhere. This study finds that Bulgaria avoided some of the extreme problems that manifested themselves in these other countries, but there were still serious problems of dilution. Dilution is similar in both mass privatization firms and nonmass privatization firms. Dilution is associated with positive performance, suggesting that more concentrated ownership has had some benefits. Even after a
number of years have passed, mass privatization firms have performed less well than firms privatized by other means.
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Jel Codes: G3, P3, P5
Keywords: Bulgaria, mass privatization, dilution

Current Account Adjustments In Selected Transition Economies

Aleksander Aristovnik
WP No. 813 (February, 2006)

Abstract: The paper investigates sharp reductions seen in current account deficits in selected transition countries in the 1992-2003 period. The analysis focuses on three important aspects of these current account reversals: a) to examine those factors that might have triggered the reversals and to provide some insights into the current account adjustment process; b) to reveal some characteristics of persistent current account deficits; and c) to investigate the direct impact of these reversals on economic growth in the region. Results suggest that restrictively defined reversals seem to be closely related to factors such as domestic savings, real export growth, international reserves and external indebtedness as well as with the budget and trade balances. While the role of exchange rate depreciation seems ambiguous, we found that the sharp current account reversals are systematically associated with a gradual GDP growth slowdown in the pre-reversal period and with robust GDP growth impetus afterwards. Indeed, less restrictively defined reversals show that reversals are associated with an increase of output by around 1.20 percentage points in the second year of recovery. Finally, the results suggest the significant possibility that persistent current account deficits, which on average last more than five years, are consumption-driven in the transition countries.
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Jel Codes: C33, F32
Keywords: current account deficit, reversals, persistency, transition, GDP growth, panel data analysis

Reassessing the Standard of Living in the Soviet Union: An Analysis Using Archival and Anthropometric Data

Elizabeth Brainerd
WP No. 812 (March, 2006)

Abstract: Both Western and Soviet estimates of GNP growth in the USSR indicate that GNP per capita grew in every decade – sometimes rapidly – from 1928 to 1985. While this measure suggests that the standard of living improved in the USSR throughout this period, it is unclear whether this economic growth translated into improved well-being for the population as a whole. This paper uses previously unpublished archival data on infant mortality and anthropometric studies of children conducted across the Soviet Union to reassess the standard of living in the USSR using these alternative measures of well-being. In the prewar period these data indicate a population extremely small in stature and sensitive to the political and economic upheavals visited upon the country by Soviet leaders and outside forces. Remarkably large and rapid improvements in infant mortality, birth weight, child height and adult stature were recorded from approximately 1940 to the late 1960s. While this period of physical growth was followed by stagnation in heights and an increase in adult male mortality, it appears that the Soviet Union avoided the sustained declines in stature that occurred in the United States and United Kingdom during industrialization in those countries.
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Jel Codes: N34, P23, P36
Keywords: Soviet Union; Russia; height; health; standard of living

Foreign Exchange Risk Premium Determinants: Case of Armenia

Tigran Poghosyan; Evzen Kocenda
WP No. 811 (March, 2006)

Abstract: This paper studies foreign exchange risk premium using the uncovered interest rate parity framework in a single country context. The analysis is performed using weekly data on foreign and domestic currency deposits in Armenian banking system. The paper provides the results of the simple tests of uncovered interest parity condition, which indicate that contrary to established view dominating in empirical literature there is a positive correspondence between exchange rate depreciation and interest rate differentials in Armenian deposit market. Furthermore, the paper presents and discusses a systematic positive risk premium required by the economic agents for foreign exchange transactions, which increases over the investment horizon. The two currency affine term structure framework is applied to identify the factors driving the systematic exchange rate risk premium in Armenia. At the end, possible directions for further research are outlined.
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Jel Codes: E43, E58, F31, G15, O16, P20
Keywords: “forward discount” puzzle, exchange rate risk, affine term structure models, foreign and domestic deposits, transition and emerging markets, Armenia

Convergence and shocks in the road to EU: Empirical investigations for Bulgaria and Romania

Jean-Marc Figuet; Nikolay Nenovsky
WP No. 810 (March, 2006)

Abstract: Despite their progress Bulgaria and Romania significantly differ from the EU economies. In this article, on the basis of the theoretical and empirical achievements of the theory of optimal and (endogenous) currency areas we study to what extent the two South European economies are able to adopt the common economic (and above all monetary) policy of the EU, and to what extent the convergence to the EU stimulates the economic development of these countries. Despite the similarities, the two countries now differ fundamentally in their choice of a monetary regime – while Romania uses inflation targeting and a flexible exchange rate, Bulgaria has adopted a currency board regime. For this purpose we analyze: (i) the degree of nominal, real and financial convergence and synchronization of the economic cycle with that of the European Union (using unconditional b convergence approach). Income and price levels, inflation rate, interest rate, monetary aggregates, credit, productivity etc. are among the studied variables; (ii) the resistance to different external and internal shocks (using VAR model) as well as (iii) the mechanisms for balancing and absorption of these shocks. To give a better comparative picture we compose the panel including Hungary and Czech Republic.
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Jel Codes: E3, F4, P2
Keywords: convergence, shocks, EU enlargement, Bulgaria and Romania

The Cost Structure of Microfinance Institutions in Eastern Europe and Central Asia

Valentina Hartarska; Steven Caudill; Daniel Gropper
WP No. 809 (January, 2006)

Abstract: Microfinance institutions are important, particularly in developing countries, because they expand the frontier of financial intermediation by providing loans to those traditionally excluded from formal financial markets. This paper presents the first systematic statistical examination of the performance of MFIs operating in Eastern Europe and Central Asia. A cost function is estimated for MFIs in the region from 1999-2004. First, the presence of subsidies is found to be associated with higher MFI costs. When output is measured as the number of loans made, we find that MFIs become more efficient over time and that MFIs involved in the provision of group loans and loans to women have lower costs. However, when output is measured as volume of loans rather than their number, this last finding is reversed. This may be due to the fact that such loans are smaller in size; thus for a given volume more loans must be made.
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Jel Codes: G20, G21, O16
Keywords: Eastern Europe, banking, microfinance, efficiency

Ethnic Conflict and Economic Disparity: Serbians & Albanians in Kosovo

Sumon Kumar Bhaumik; Ira N. Gang; Myeong-Su Yun
WP No. 808 (September, 2005)

Abstract: We use the Living Standards Measurement Study (LSMS) household survey from post-conflict Kosovo to examine economic deprivation among Serbs and Albanians. Economic deprivation is measured by per capita household expenditure and by the incidence of poverty as captured by the headcount ratio. We examine the roles played by the stock of attributes and by the impact of these attributes on deprivation using Oaxaca-type decomposition methods. Empirical results for both decomposition analyses show differences in characteristics as well as returns to measured characteristics favor Serbs, even though Serbs have lower expenditures and higher poverty incidence than Albanians.
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Jel Codes: I32, J15, O12
Keywords: poverty, ethnicity, decomposition

A Note on Poverty in Kosovo

Sumon Kumar Bhaumik; Ira N. Gang; Myeong-Su Yun
WP No. 807 (December, 2005)

Abstract: Kosovo is a war-torn corner of the former Yugoslavia, where a civil war between ethnic Albanians and ethnic Serbs raged during most of the 1990s. We examine the incidence and depth of poverty and some of its correlates in post-conflict Kosovo using the Living Standards Measurement Survey.
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Jel Codes: I32, J15, O12
Keywords: poverty, ethnicity, transition

Privatization & State Capacity in Postcommunist Society

Lawrence P. King; Patrick Hamm
WP No. 806 (December, 2005)

Abstract: Economists have used cross-national regression analysis to argue that postcommunist economic failure is the result of inadequate adherence liberal economic policies. Sociologists have relied on case study data to show that postcommunist economic failure is the outcome of too close adherence to liberal policy recommendations, which has led to an erosion of state effectiveness, and thus produced poor economic performance. The present paper advances a version of this statist theory based on a quantitative analysis of mass privatization programs in the postcommunist world. We argue that rapid large-scale privatization creates severe supply and demand shocks for enterprises, thereby inducing firm failure. The resulting erosion of tax revenues leads to a fiscal crisis for the state, and severely weakens its capacity and bureaucratic character. This, in turn, reacts back on the enterprise sector, as the state can no longer support the institutions necessary for the effective functioning of a modern economy, thus resulting in de-industrialization. Using cross-national regression techniques we find that the implementation of mass privatization programs negatively impacts measures of economic growth, state capacity and the security of property rights.
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Jel Codes: B52, C31, D02, D23, F02, H11, P26, P51
Keywords: privatization, transition economies, state capacity, property rights, institutions, growth

Corporate Governance, Managers' Independence, Exporting & Performance of Firms in Transition Economies

Igor Filatotchev ; Natalia Isachenkova; Tomasz Mickiewicz
WP No. 805 (February, 2006)

Abstract: Using data on 157 large companies in Poland and Hungary this paper employs Bayesian structural equation modeling to examine interrelationships between corporate governance, managers’ independence from owners in terms of strategic decision-making, exporting and performance. It is found that managers’ independence is positively associated with firms’ financial performance and exporting. In turn, the extent of managers’ independence is contingent on the firm’s corporate governance parameters: it is negatively associated with ownership concentration, but positively associated with the percentage of foreign directors on the firm’s board. We interpret these results as an indication that (i) risk averse, concentrated owners tend to constrain managerial autonomy at the cost of the firm’s internationalization and performance, (ii) board participation of foreign stakeholders, on the other hand, enhances the firm’s export orientation and performance by encouraging executives’ decision-making autonomy.
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Jel Codes: G32, G34, L21, L22, L25, P31
Keywords: corporate governance, strategic independence, exporting, performance

Financial Deregulation and Economic Growth in the Czech Republic, Hungary and Poland

Patricia Mc Grath
WP No. 804 (November, 2005)

Abstract: Advocates of financial regulation, Arestis and Demetriades, argue that financial liberalisation does not impact on financial market efficiency and the allocation of investment. Results in this study find that Czech, Hungarian and Polish firms are subject to scrutiny when applying for credit. The firm’s ability to provide collateral, the potential of the proposed investment project and individual financial backgrounds are all factors that are used before loans are offered, and it likely that allocational efficiency is strengthened in these circumstances, and not weakened. Stiglitz has the view that financial repression improves the quality of the pool of loans. Results here indicate that companies in these countries previously had very limited access to credit while
government owned companies and government projects received the bulk of credit. After deregulation it became apparent that the quality of the pool of loans was very poor. This study
supports Shaw’s assertion that financial deregulation improves financial deepening.
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Jel Codes: G, G2, G21
Keywords: Transition Economies, Industrial Development, Financial Deregulation,Economic Growth, Eastern Europe

Evaluating the Causal Effect of Foreign Acquisition on Domestic Performances: The Case of Slovenian Manufacturing Firms

Sergio Salis
WP No. 803 (January, 2006)

Abstract: This paper investigates the impact of foreign acquisition in 1997 on the performances of a sample of Slovenian manufacturing firms. It uses the propensity score-matching estimation technique combined with the difference-in-differences approach to control for the potential bias arising from the non-random selection of acquired firms (endogeneity of foreign ownership). After confirming that foreign investors acquire the most productive firms in Slovenia, it shows that the productivity of such firms subsequently increases as a result of foreign takeover. This finding is consistent with the hypothesis that foreign firms transfer their technology to Slovenian affliates.
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Jel Codes: C14, D21, F23
Keywords: Foreign acquisition, productivity, propensity score, matching estimator.

Implications of ERM2 for Poland's Monetary Policy

Lucjan T. Orlowski; Krzysztof Rybinski
WP No. 802 (December, 2005)

Abstract: This study proposes an extension to the inflation targeting framework for Poland that takes into consideration the exchange rate stability constraints imposed by the obligatory participation in the ERM2 on the path to the euro. The modified policy framework is based on targeting the differential between the domestic and the implicit euro area inflation forecasts. The exchange rate stability objective enters the central bank reaction function and is treated as an indicator variable. Adjustments of interest rates respond to changes in the relative inflation forecast, while foreign exchange market intervention is applied for the purpose of stabilizing the exchange rate. The dynamic market equilibrium exchange rate is ascertained by employing the Johanssen cointegration tests and the threshold generalized autoregressive heteroscedasticity model with the in-mean extension and generalized error distribution (TGARCH-M-GED).
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Jel Codes: E58, E61, F33, P24
Keywords: inflation targeting, monetary convergence, ERM2, euro, Poland, cointegration,GARCH

Original Sin, Good Works, & Property Right's in Russia: Evidence From a Survey Experiment

Tim Frye
WP No. 801 (September, 2005)

Abstract: Are property rights obtained through legally dubious means forever tainted with original sin or can rightholders make their ill-gotten gains legitimate by doing good works? This is a critical question for developing countries (and Russia in particular) where privatization is often opaque and businesspeople may receive property, but remain unwilling to use it productively due to concerns about the vulnerability of their rights to political challenge. Using a survey of 660 businesspeople conducted in Russia in February 2005, I find that the original sin of an illegal privatization is difficult to expunge. Businesspeople, however, can improve the perceived legitimacy of property rights by doing good works, such as investing in the firm and by providing public goods for the region. Finally, managers that provide public goods for their region are more likely to invest in their firms than those who did not. The finding that public goods providers invest at higher rates is at odds with standard economic logic, but fits well with the more political view of property rights developed here. These findings have implications for political economy and contemporary Russia.
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Jel Codes: K11, O17, P14, P16
Keywords: Property Rights, Transition, Rule of Law, Privatization

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