Open Transition Economy Research Articles

Misunderstanding of FDI in the Western Balkans: Cart before the Horse and Wheels without Suspension

ABSTRACTOne of the key characteristics of the world economy in the last few decades has been the rise of foreign direct investments (FDI), which represent the major and most desirable form of capital flows from developed to developing and transition countries. The aim of this paper is to investigate specificities of FDI inflow to six small open transition economies of the western Balkans over the 2004–2014 period. Formal econometric tests carried out in the paper imply that—contrary to widespread ideology—FDI inflows exhibit at best no impact whatsoever or indeed a statistically significant negative impact on both GDP and GNP (cumulative) growth rates in the western Balkans. After exploring stylized facts and contrasting them with theoretical predictions, the article goes on to debunk several misconceptions in regard to motives, modes of operation and economic effects of FDI confronted with inconsistent, partial or outright detrimental government policies. The authors therefore call for a considerably different attitude towards FDI and the growth-generating concept in the Balkans.

Constraints in the Supply of Credit in an Open Transition Economy under New Basel III Requirements: The Case of the Czech Republic

This article contains formal and empirical analyses of the constraints on the supply of credit in open transition economies as the external solvency of the economy and the banking sector is ensured when their international investment position is negative, foreign owners have significant participation in domestic banks, and banks face increasing regulatory requirements under Basel III. Our objective is to define the factors that affect constraints on the supply of credit at both the macro and banking level and to quantify the relationship between international investment sustainability determinants and the sources of foreign funding in the economy/banking system using an unrestricted ARDL ECM model in the Czech Republic.

How to enlarge the fiscal space and gain efficiency when adopting automatic fuel pricing mechanisms? The Tunisian case

In small open transition economies, where the fiscal sustainability is threatened by the world oil price and exchange rate stochastic shocks, the macroeconomic fragility due to fluctuations may be reduced by implementing an automatic adjustment rule (AAR) of the retail fuel price. Given the resistance of social stakeholders to structural reforms, only partial reforms could be envisaged in the transition phase. By offering for the first time a formalized fuel price structure which can also be used for other analytical purposes, a fuel distribution scheme, and especially the forward-looking price forecasts for the Tunisian case, our findings are as follows. First, the implementation of the AAR for only the gasoline expands the fiscal space by reducing the public deficit by 10%, and makes the fluctuations smoother compared with the full pass-through situation. Second, unlike the applied literature, we adopt the RBC approach to dating the cyclical fuel price fluctuations and show that the previous subsidy intervention was desynchronized with fluctuations, and the AAR should be adopted on the basis of a forward simulation process, and accompanied by an additional new distribution’ mechanism we propose to improving the distributive efficiency. Finally, some additional policy recommendations are proposed.

Ownership Concentration and Firm Performance in Transition Economies: Evidence from Montenegro

Abstract The relationship between ownership concentration and firm performance has been the focal point of corporate governance literature and the subject of rather rich empirical literature. However, the current literature lacks uniformity and consensus regarding the nature and direction of this relationship. This research aims to contribute to this literature by investigating the relationship in a small and open transition economy of Montenegro. We use primary data1 from the period 2004-2008 to analyse, for the first time, the impact of ownership concentration on firm performance in Montenegro. The results support the hypothesis that high ownership concentration enables effective monitoring by investors to protect their interests; i.e. in the specific circumstances of transition, ownership structure may be (temporarily) used as a viable substitute for the still underdeveloped corporate governance framework.

The effects of fiscal policy in a small open transition economy: The case of Croatia

In this paper, we use the structural VAR model to analyse the dynamic effects of (discretionary) fiscal shocks on the economic activity of the private sector in Croatia between 2000 and 2012. Due to the fact that Croatia is a small open transition economy, we assume that shocks of foreign origin can have notable effects on its performance. Therefore, the original Blanchard-Perotti identification method is extended by introducing variables that represent external (foreign) demand shocks. The results show that government spending has a positive and statistically significant effect on private aggregate demand and private consumption, and that net indirect taxes have a negative and statistically significant effect on private consumption and private investment.

Bank credits and non-oil economic growth: Evidence from Azerbaijan

We examine the impact of bank credits on non-oil tradable sector output using aggregate data from Azerbaijan. We apply ARDL Bounds Testing approach, Engle–Granger two-step methodology, and Johansen's approach while correcting for small sample bias to test for cointegration and construct error correction models. Results from all three approaches are similar indicating that bank credits have a positive impact on non-oil tradable sectors output both in the long- and short-run. Short-run deviations are corrected to the long-run equilibrium within one quarter. Our results are useful for the macroeconomic policy makers and contribute to the literature that studies the relationship between the financial sector development and economic growth in the resource driven small open transition economies.

Assessing Monetary and Fiscal Policy Interaction in a Small Open Economy: the Case Republic of Macedonia

The aim of this paper is to analyze empirically the interaction between monetary and fiscal policy in a small open transition economies: the case the Republic of Macedonia. This paper employs SVAR methodology to examine jointly the impact monetary and fiscal policy on real GDP and prices. The result reveals that the monetary policy counteracts the effects of fiscal policy and persists until the effects of fiscal policy changes disappear. This causes a crowding out effect. In addition, the result shows that the best fiscal policy for stimulating the economy appears to be one of tax-cuts. The empirical research, in jointly analyzing fiscal and monetary policy also provides an additional, possibly interesting result. The sizes of the responses of real GDP and prices to monetary shock are not significantly reduced when fiscal shock is included into monetary SVAR.

Bank Credits and Non-Oil Economic Growth: Evidence from Azerbaijan

We examine the impact of bank credits on non-oil tradable sector output using aggregate data from Azerbaijan. We apply ARDL Bounds Testing approach, Engle-Granger two-step methodology, and Johansen's approach while correcting for small sample bias to test for cointegration and construct error correction models. Results from all three approaches are similar indicating that bank credits have a positive impact on non-oil tradable sectors output both in the long- and short-run. Short-run deviations are corrected to the long-run equilibrium within one quarter. Our results are useful for the macroeconomic policy makers and contribute to the literature that studies the relationship between the financial sector development and economic growth in the resource driven small open transition economies.

Macroeconomic announcements, communication and order flow on the Hungarian foreign exchange market

We investigate the relationship between intradaily HUF/EUR exchange rate on the one hand and news announcements and order flow on the other hand. We extend the existing literature on foreign exchange market microstructure by considering a small open transition economy. We find that the intradaily exchange rate depends on both news announcements and order flow. We conclude that news on the HUF/EUR market are transmitted directly via immediate reactions to news announcements as well as indirectly via order flow. We decompose the total effect of news on exchange rate and find that order flow accounts for approximately three quarters, compared with one quarter for direct news impact. Although the HUF is pegged to the EUR, the exchange rate shows similar characteristics as reported in the literature for major currencies. It does, however, differ in quantitative terms: the importance of indirect news transmission is remarkably higher on the HUF/EUR market. Furthermore, we extend the commonly used set of news by communication of central bankers and significantly improve the explanatory power of the estimates. Thus, central bank communication can be regarded as an important determinant for the HUF/EUR rate. Copyright © 2010 John Wiley & Sons, Ltd.

What Drives Bank Lending in Domestic and Foreign Currency Loans in a Small Open Transition Economy with Fixed Exchange Rate? The Case of Macedonia

The main research aims of this paper are to empirically investigate the existence of the bank lending channel and its determinants in Macedonia. We estimate two different loan supply functions by disaggregating the loans by currency, in denars and in foreign currency (mainly in euros). The rationale for examining the two loan supply functions separately is the relatively high share of foreign currency loans in the total loans in the Macedonian banking sector (see Figure 9.1), Open image in new window Figure 9.1 Stock of total bank loans and stock of loans in denars to non-financial private sector, in millions of denars Source: NBRM (http://www.nbrm.mk/?ItemID=A55FFC32FC478E4A89444507A6C02C45). which is typical of many transition economies, and the belief that such loans may respond to variables different from those affecting loans in domestic currency (Kohler et al., 2005).

Inflation Targeting in Armenia: Monetary Policy in Transition

As the monetary and financial systems in transition economies have evolved so have monetary policies. Many central banks have followed a course from exchange rate targeting, to targeting monetary aggregates to targeting inflation. We examine the development of monetary policy in Armenia, a small, open transition economy that adopted inflation targeting in January 2006. First, we review monetary policy in Armenia. Then we evaluate the capacity of the Central Bank of Armenia to implement inflation targeting. Finally, we estimate and simulate reaction functions to evaluate the effectiveness of monetary policy. We find that the Central Bank may have been overly restrictive.

Decomposition of external capital inflows and outflows in the small open transition economy: The case analysis of the Slovak Republic

The main objective of the proceeding is to perform a logical decomposition of the structure of external capital inflows and outflows in the Slovak republic in order to analyze the main trends in the external financial integration and its development through the period of 1994-2006. In order to fulfill our objective we observe the changes in the structure of external financial assets and liabilities in order to provide the explanation of main trends in the external capital portfolio of the Slovak republic. Finally, we explore the implications of the accumulated stock of external capital for future trade and current account balances. .

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

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

Real exchange rates in small open OECD and transition economies: Comparing apples with oranges?

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.

Internationalisation of Firms from Small Open Transition Economies

The aim of this study is to determine the joint impact of intra-firm factors and inward foreign relationships on the status and stage of the outward internationalisation process of firms from small open transition economies. These factors and connections include firm's production capacity, experiential knowledge, psychic distance to target markets, inward international involvement (including foreign ownership and supply relations), and spillover effects. According to the empirical evidence, the inward internationalisation of Estonian manufacturers has considerably facilitated their export intensity.

Retail Banking in Hungary: A Foreign Affair?

Over the last decade, Hungary has experienced more foreign bank entry than any country in world, starting with foreign greenfield operations and then followed by the privatization of four of its largest banks to strategic foreign owners. Currently about two thirds of all banking assets in Hungary are foreign owned; the only major bank without a foreign owner is Orszagos Takarekpenztar es Kereskedelmi Bank (OTP). During a decade in which lending to households declined in real terms until recently and household deposits remained relatively steady at around 20% of GDP, OTP lost its monopoly in retail banking to foreign-owned banks. By the end of the decade, OTP held shares of just over 50% in both household deposit and credit markets. In the last half of the decade, foreign banks increased substantially their market shares and currently hold more than 40% of all household deposits and about 40% of all loans to households. In this paper, we identify the important role played by foreign greenfield operations in intermediation within the household sector, especially from 1997. We provide evidence that, once they take control of formerly state-owned banks, strategic foreign investors move aggressively into retail banking. As the decade came to a close, retail banking was a growth industry in Hungary and foreign-owned banks were actively participating in both markets. Foreign entry provided healthy competition to OTP and prodded this widely held domestically controlled bank to develop new products and better services for Hungarian households. Over the last half of the decade, bank cards have been introduced to Hungarian households and transactions using these cards have grown by a factor of more than five. Over half of the population uses bank cards twice a month on average, almost exclusively for cash withdrawals from their current accounts. By investing heavily in information technology and using its extensive branch network, OTP has become the market leader in this new, growing business with more than 40% of all ATMs and bank cards issued in Hungary and more than 70% of all bank card transactions. Our analysis of OTP's behavior indicates that domestically controlled banks with local expertise may have a significant role to play in retail banking in small, open transition (or emerging) economies.