European Transition Economies Research Articles

Bridging 'the Great Divide': Countering Financial Repression in Transition

The large and widening gap between economic performance in Eastern European transition economies and those of former Soviet Union has been dubbed the Great Divide by Berglof and Bolton (2002). This paper provides a rationale for gap based upon concept of financial repression. The magnified effects of transition to market can be attributed to government manipulation of financial markets in these countries, with divide defined by length of time that governments relied upon financial-market manipulation to finance government fiscal policy. Policies undertaken to assist in financing government expenditures caused financial repression and financial fragmentation, to use terms introduced by McKinnon (1973). After an introductory section, I introduce a theoretical model of real and financial sectors in transition. The dynamic path to equilibrium from transition is derived. It is shown to have a tendency toward output contraction and hyperinflation when government policies promote financial repression. In third section this hypothesis is examined with macroeconomic data from Ukraine for period 1992 - 2001. This data is consistent with hypothesis, although other factors (e.g., recession in trading partners) are also shown to be important.

The Role of Tax Depreciation for Investment Decisions: A Comparison of European Transition Countries

This study compares incentive effects of various tax depreciation methods currently adopted in European transition economies. In these countries straight-line, geometric-degressive and accelerated depreciation measures are quite popular in combination with different corporate tax rates. Their generosity is determined on the basis of Samuelson’s true economic depreciation. For this purpose, the present value model is applied under the particular consideration of different financial structures. In this context the traditional Modigliani-Miller theorem for capital structure is revisited. Furthermore, the aspect of inflation is integrated into the model. The central issue is that the historical cost accounting method generally applied for the calculation of the corporate tax base causes fictitious profits in inflationary phases that are also taxed. Therefore, in an inflationary period generous tax depreciation provisions do not promote private investment as designed, but partly compensate such additional tax burdens caused by inflation.

Competition and Contestability in Central and Eastern European Banking Markets

This study analyzes the evolution of competitive conditions in the Banking industries of fourteen Central and Eastern European (CEE) transition economies using firm-level data for the period 1993-2000. The results of the competition analysis suggest that the banking markets of CEE countries cannot be characterized by the bipolar cases of either perfect competition or monopoly over 1993-2000 except for FYR of Macedonia and Slovakia. That is, banks earned their revenues as if operating under conditions of monopolistic competition in that period. Furthermore, the cross-sectional analysis of competitive structure reveals initially a decreasing trend between 1993 and 1996 and a subsequent increasing trend in competitive conditions after 1996. Large banks in transition countries operate in a relatively more competitive environment compared to small banks, or in other words, competition is lower in local markets compared to national and international markets.

Exchange Rate Regime Choice in Central and Eastern European Transitional Economies

The article develops a model of exchange rate regime choice centered on the tradeoff between internal price stability and external competitiveness. The model allows for institutional costs of altering exchange rate arrangements. The main implication of the model is a nonlinear relationship between the rate of inflation and the choice of regime for the next period. The model also suggests that a major inflationary shock, like the one to which all Central and Eastern European economies were subject when they allowed prices to be determined by the market, should give rise to a tightening of the exchange rate regime, followed by a gradual introduction of more flexibility as inflation subsides. A series of regressions on a sample of thirteen Central and Eastern European economies yield results consistent with the hypothesis.

National Differences in Technology Transfers in East European Transition Economies

En dépit d’une activité scientifique et technique autrefois assez intense, les économies en transition d’Europe centrale et orientale éprouvent des difficultés à améliorer le niveau technologique de leurs procédés de production et de leurs produits. Avec des ressources non négligeables, bien qu’en diminution, mais mal utilisées, leur situation offre des perspectives prometteuses pour les transferts de technologie. La réalité est à la fois plus contrastée et moins brillante. Cet article examine trois exemples très différents, la Croatie, la Hongrie et la Pologne qui souffrent de handicaps de natures diverses plus ou moins accentués et dont la situation est loin de permettre une mise en valeur des capacités locales existantes.

FDI as a multiplier of modern technology in Hungarian industry

Foreign direct investment is generally expected to play a significant role as a multiplier of modern production and management know-how in Central Eastern European transition economies. The following paper examines the various mechanisms by which such technological spillover effects could in theory take place and compares them with the results of an empirical study of their practical significance for Hungarian industry.

Foreign direct investment in Russia: how the investment climate matters

Among European transition economies and the CIS, Russia is the largest country and has the most important endowment of natural resources, well-educated labour force, and large potential market. Paradoxically, Russia is one of the least attractive host countries in this region. This situation may generate a risk of economic marginalization. Our main task is to develop our understanding of FDI in Russia by asking a main question: Why is Russia an exception in the context of FDI globalization? Is Russia willing to stay outside the general trend of fierce competition for FDI and able to developed endogenously sustainable growth?

Regional Cooperation and the Enlargement of the European Union: Lessons Learned?

The article evaluates and attempts to draw some lessons from the recent initiatives aimed at stimulating regional cooperation among transition economies in Northern, Central, and South-Eastern Europe. Although these initiatives varied significantly in their scope, objectives, and domain of activity, the author highlights the common elements and discusses both their major achievements and greatest weaknesses. The author then relates these initiatives to the recent theoretical debate on regionalism, the main conclusions in the empirical literature, and the most important policy issues concerning current integration processes and eu enlargement. The role of subregional economic cooperation among transition economies is examined within the context of the problems posed by the variable speed integration policies of the European Union. The general conclusion is that the overall experience of regional cooperation among European transition economies has, on balance, been positive, though clear limitations and many unresolved questions remain. (For acronyms see page 323.)

What Moves Capital to Transition Economies?

Between 1991 and 1999, capital flows to 25 transition economies in Europe and the former Soviet Union differed widely in terms of overall levels and the share and composition of private flows. With some exceptions (notably Russia), the main form of private inflows was foreign direct investment. Portfolio investment was volatile and concentrated in a handful of countries. Regressions show that direct investment can be well explained in terms of economic fundamentals, whereas the presence of a financial market infrastructure and a property-rights indicator are the only explanatory variables that seem to have had a robust effect on portfolio investment.

What Moves Capital to Transition Economies?

Between 1991 and 1999, capital flows to 25 transition economies in Europe and the former Soviet Union differed widely in terms of overall levels and the share and composition of private flows. With some exceptions (notably Russia), the main form of private inflows was foreign direct investment. Portfolio investment was volatile and concentrated in a handful of countries. Regressions show that direct investment can be well explained in terms of economic fundamentals, whereas the presence of a financial market infrastructure and a property-rights indicator are the only explanatory variables that seem to have had a robust effect on portfolio investment.

The Road to the Euro: Exchange Rate Arrangements in European Transition Economies

The Road to the Euro: Exchange Rate Arrangements in European Transition Economies

The Road to the Euro: Exchange Rate Arrangements in European Transition Economies

This article examines the monetary policy road of the ten candidate countries from central and eastern Europe (CEE-10) on their way to EU accession and ultimately to adoption of the euro. The authors proceed in three steps. First, they describe the evolution of the monetary regime of the CEE-10 since the demise of the centrally planned economic system. Second, they deal with the currency crises of emerging market economies in the 1990s and develop potential lessons for the CEE-10. Third, they delineate the road map for the candidate countries by looking at both formal requirements and economic challenges that these countries have to meet before they can adopt the euro.

The Road to the Euro: Exchange Rate Arrangements in European Transition Economies

The Road to the Euro: Exchange Rate Arrangements in European Transition Economies

Recent Claims of China's Economic Exceptionalism: Reflections Inspired by WTO Accession

The desirability of WTO membership for China depends on whether its economic successes have been the result of its discovery of new institutional forms (e.g. dual track pricing, SOE contracts, and fiscal contracts) that are for China's particular economic circumstances, or have been the result of the convergence of its economic institutions to those of a typical advanced member of WTO. If the experimentalist interpretation of China's phenomenal growth is correct, then WTO membership is a negative development because it could be a straitjacket for WTO-enforced institutional harmonisation that would constrain China's scope for experimentation. But if the experimentalist interpretation is wrong, then WTO membership is a positive development that will lock China on to the path of deepening economic reform. We assess several recent claims of China's economic exceptionalism, and conclude that they neglected the considerable costs associated with the use of these innovative mechanisms (which have led to the repeal of every one of these optimal mechanisms) and that these mechanisms were unlikely to have produced positive results in the transition economies in Europe. Because a major reason for the failure of Gorbachev's reforms was opposition from the entrenched interests within the ruling structure, China's forthcoming WTO accession could be seen as an attempt by reformers to lock economic policies on to a market-oriented course that is costly to reverse.

Trade Liberalisation, Changing Forest Management and Roundwood Trade in Europe

This paper analyses the development of roundwood trade in Europe in the context of changes in supply and trading patterns due to liberalisation in European transitional economies (CEEC), nature-oriented forest management as well as prospective EU enlargement. First, it is studied whether roundwood imports have extended their share in apparent consumption in the EU and whether liberalisation in CEEC has changed the geographical composition of imports. Next, the development of the export structure of EU accession candidates is examined. Finally, rough assessments of the sustainability of roundwood production in CEEC as well as future of the trade flows in Europe are provided.

Recent claims of China's economic exceptionalism: Reflections inspired by WTO accession

The desirability of WTO membership for China depends on whether its economic successes have been the result of its discovery of new institutional forms [e.g., dual-track pricing, state-owned enterprise (SOE) contracts, and fiscal contracts] that are optimal for China's particular economic circumstances or have been the result of the convergence of its economic institutions to those of a typical advanced member of WTO. If the experimentalist interpretation of China's phenomenal growth is correct, then WTO membership is a negative development because it could be a straitjacket for WTO-enforced institutional harmonization that would constrain China's scope for experimentation. But, if the experimentalist interpretation is wrong, then WTO membership is a positive development that will lock China on to the path of deepening economic reform. We assess several recent claims of China's economic exceptionalism and conclude that they neglected the considerable costs associated with the use of these innovative mechanisms (which have led to the repeal of every one of these “optimal” mechanisms) and that these mechanisms were unlikely to have produced positive results in the transition economies in Europe. Because a major reason for the failure of Gorbachev's reforms was opposition from the entrenched interests within the ruling structure, China's forthcoming WTO accession could be seen as an attempt by reformers to lock economic policies on to a market-oriented course that is costly to reverse.

Dealing with the bad loans of the Chinese banks

Chinese banks suffer from serious financial fragility manifested by high proportions of nonperforming loans and low capital-adequacy ratios. A key policy introduced recently by the Chinese government to reduce financial risks is the establishment of four asset management companies (AMCs) for dealing with bad loans. Drawing on the experiences of the Resolution Trust Corporation in the United States and bank restructuring in the Central European transition economies, we argue that the original AMC design will not be successful in resolving the existing nonperforming loans, nor will it prevent the creation of new bad loans. We recommend a modification of the current proposal that redefines the relationships between the parent banks and the AMCs by transferring the deposits of problem enterprises along with their nonperforming loans from parent banks to AMCs.

Random‐walk and efficiency tests of Central European equity markets

The existence of weak‐form efficiency in the equity markets of the three main Central European transition economies (the Czech Republic, Hungary, and Poland) is examined for the period July 1995 through September 2000, using weekly Investable and Comprehensive indexes developed by the International Finance Corporation. Several different approaches are used. Univariate and multivariate tests provide some evidence that stock prices in these exchanges exhibit a random walk, which constitutes evidence for weakform efficiency. This differs in some cases from studies using data for the initial years of these markets. The variance ratio test (VR) of Lo and MacKinlay (1988) yields somewhat mixed results concerning the random‐walk properties of the indexes. A modelcomparison test compares forecasts from a NAÏVE model with ARIMA and GARCH alternatives. Results from the model‐comparison approach are consistent in rejecting the random‐walk hypothesis for the three Central European equity markets.

Reintegration of Formerly Centrally Planned Economies into the Global Trading System

This article analyses the progress of the reintegration of the formerly centrally planned economies into the global trading system, focusing on the relationship between multilateral processes and regional integration schemes. Almost all the countries in transition from central planning have accepted the WTO rule-based system in principle. Although most of the European economies in transition are likely to join the European Union, they will then be in a trading unit which generally respects WTO principles. The regional blocs to which the transition economies of Southeast Asia and the former Soviet Union are attaching themselves do not have a strong record of implementing preferential trade policies. In sum, the potential danger of regionalism proving more attractive than multilateralism has not eventuated. Some implications for ASEAN members are drawn.

Organization and Management Research in Transition Economies

This article ascertains some problematic issues that may arise when conducting organization and management research in the former socialist countries. It reflects on methodological difficulties the two authors have encountered themselves in doing empirical research in a number of East European transition economies (the Baltic States, Bulgaria, and the CIS-especially in Belarus, Russia, and the Ukraine) since the beginning of the transformation in the late 1980s. By providing examples from their own experience, the authors suggest some solutions for solving methodological problems, which other researchers might face while accomplishing empirical studies in a peculiar but also a very attractive research context.