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New Books and Working Papers World Bank Publications To receive ordering and price information for World Bank publications contact the World Bank, P.O. Box 960, Herndon, VA 20172, United States; tel.: 703-661-1580, fax.: 703-661-1501, email: books@worldbank.org, URL: http://www.worldbank.org/publications, or visit the World Bank InfoShop at 701 18th Street, N.W., Washington, D.C.; tel.: 202-458-5454. Working Papers http://econ.worldbank.org/ Aaditya Mattoo China’s General Agreement on Trade in Services commitments represent the most radical services reform program negotiated in the WTO. Over the next few years China has promised to eliminate most restrictions on foreign entry and ownership, as well as most forms of discrimination against foreign firms. This will require the implementation of complementary regulatory reform and the appropriate sequencing of reforms. Improved prudential regulation and measures to deal with the state banks’ large burden of nonperforming loans are necessary to realize the benefits of liberalization of financial services. Leora F. Klapper, Virginia
Sarria-Allende, and Victor Sulla Little is known about the relative importance of equity, debt, and interfirm financing for SMEs across countries. Using the Amadeus database, which includes financial information on more than 97,000 private and publicly traded firms in 15 Eastern and Central European countries, the authors analyze general financing patterns. They find that SMEs in Eastern Europe are generally small and hire fewer employees than SMEs in other regions. Nevertheless, SMEs seem to constitute the most dynamic sector of the Eastern European economies, and include many relatively new, highly leveraged, profitable, and rapidly growing firms; however, these firms are facing financial constraints that impede their access to long-term financing and their ability to grow. Karla Hoff and Joseph E. Stiglitz With the collapse of communism in Eastern Europe and the former Soviet Union in 1989–91, many reformers supported "big bang" privatization, that is, the rapid transfer of state-owned enterprises to private individuals. The hope was that big bang privatization would create the conditions for a demand-led evolution of legal institutions, including a legal framework for protecting investors. This did not happen, primarily because of the weakness of political demand for the rule of law. The view that once stripping of assets has been completed the "strippers" will say enough and—by supporting the rule of law—will seek public protection of their gains is flawed. Strippers assume that stolen assets should be removed from the public eye and do not trust regulators, judges, or jurors. Thus the presumption that the faster state property was turned over to private hands, the more rapidly a true market economy, including the rule of law, would be established, did not work. The big bang may have put into play forces that delay the establishment of the rule of law. Hua Wang and Yanhong Jin The authors surveyed about 1,000 industrial firms in three provinces of China and obtained detailed 1999 firm-level information. Their findings indicate that foreign-owned and collectively-owned enterprises perform better in terms of the intensity of water pollution discharges than state-owned enterprises and privately-owned domestic enterprises. The results also suggest that collectively-owned enterprises in China internalize environmental externalities. Hua Wang, and Wenhua Di Ron Hood, David Husband, and Fei Yu Branko Milanovic Some economists have argued that the disintegration of the world economy between the two World Wars led to income divergence between countries. This paper shows that the view that the period 1919-39 was associated with a divergence of incomes among the rich countries is wrong. On the contrary, income convergence continued, and even accelerated. Since the mid-19th century the incomes of rich countries have tended to converge in peacetime regardless of whether their economies were more or less integrated. This, in turn, implies that it may not be trade and capital and labor flows that matter for income convergence, but some other, less easily observable forces, such as the diffusion of information and technology. Monica Das Gupta, Jiang Zhenghua, Li
Bohua, Xie Zhenming, Woojin Chung, and Bae Hwa-Ok Son preference has persisted in China, India, and Korea in the face of sweeping economic and social changes. The authors attribute this to the countries’ similar family systems, which generate strong disincentives to raise daughters while valuing adult women’s contributions to the household. Urbanization, female education, and employment can only slowly change these incentives. Social movements, legislation, and the mass media can be of great help in this regard. Norbert Fiess Giuseppe Nicoletti and Stefano
Scarpetta Jan Rutkowski Lithuania is a transition economy undergoing rapid enterprise restructuring associated with substantial job turnover. At the same time, unemployment is high and of long duration. This presents a puzzle: high job turnover epitomizes labor market flexibility, while high unemployment indicates labor market rigidities. What are the reasons behind this paradox? Why do the unemployed not benefit from job opportunities created by high job turnover, which entails high rates of job creation and hiring? The author finds that employers in Lithuania have a substantial degree of flexibility in relation to employment adjustment, coupled with limited flexibility in relation to wage adjustment because of a high statutory minimum wage. The relatively rigid wage structure locks out low-productivity workers, who are preponderant among the unemployed. The low-skilled, long-term unemployed have become marginalized and unable to compete successfully for available jobs, while the high job turnover is largely accounted for by job to job transitions. As a result, a dynamic labor market coincides with a stagnant unemployment pool. Pradeep Mitra and Nicholas Stern How have tax systems, whose primary role is to raise resources to finance public expenditures, evolved in the transition countries of Eastern Europe and the former Soviet Union? • The ratio of tax revenue to GDP decreased largely because of a fall in revenue from corporate income taxes. • The fall in revenue from corporate income taxes led to a decline in the importance of income taxes, notwithstanding a rise in the share of individual income taxes. • Social security contributions and payroll taxes became less important in the CIS. • Domestic indirect taxes gained in importance in overall tax revenues. Depending on their stage of development, transition countries, should aim for a tax revenue to GDP ratio in the range of 22 to 31 percent, made up of value added taxes (6 to 7 percent), excise taxes (2 to 3 percent), income taxes (6 to 9 percent), social security contributions and payroll taxes (6 to 10 percent), and other taxes such as on trade and on property (2 percent). (See also Transition, October-November-December 2002, p. 30.) Dominique van de Walle and
Dorothyjean Cratty Are the household characteristics that are good for transition to a more diversified, market-oriented development process in Vietnam also important for reducing poverty or are there trade-offs? Using comprehensive national household surveys for 1993 and 1998 the authors find that participation in the emerging, rural, nonfarm market economy will be the route out of poverty for some, but certainly not all, of Vietnam’s poor. Martin Ravallion and Dominique van
de Walle Nazmul Chaudhury, Jeffrey Hammer,
and Edmundo Murrugarra Because of the cuts in public financing of health services and the decentralization and increased privatization of health care provision, private out-of-pocket contributions are becoming a significant component of health costs in Armenia. To help poor families cope with this constraint, the Armenian government provided a free of charge basic package of services to eligible individuals in vulnerable groups, such as the disabled and children from single parent households. Drawing on the 1996 and 1998-99 Armenia integrated survey of living standards, which allows the identification of eligible individuals under this program, the authors estimate the impact of the fee-waiver program on the utilization of health services, particularly among the poor. Families with four or more children, the largest beneficiary group under the vulnerable population program, have decreased their use of health care services in a disproportionate manner, that is, by 21 percent, between two survey rounds. This suggests that the program was inadequate in stemming the decline in the use of health services. Bartlomiej Kaminski and Beata
Smarzynska The Czech and Slovak Customs Union (CSCU), which came into effect in January 1993, aimed at minimizing the economic cost of a decline in economic ties between its members rather than setting in motion a mechanism of integration. The creation of the CSCU ensured a smooth and conflict-free break up of Czechoslovakia and resulted in a divergence in the regulatory regimes of the two republics. The process of mutual adjustment triggered by the emergence of national borders is over, and integration within the CSCU similar in depth and scope to that existing within the EU would be a desirable policy objective. By deepening integration, both the Czech and Slovak Republics would be better prepared to handle challenges associated with EU accession. Such a regulatory realignment would also lower border costs and behind-the-border barriers to trade and result in a more attractive investment environment in both countries. Martín Rama Michael M. Lokshin and Branko
Jovanovic Susmita Dasgupta, Uwe Deichmann,
Craig Meisner, and David Wheeler Rob Swinkels and Carrie Turk In Vietnam during the 1990s poverty was halved, enrollment rates in primary education rose to 91 percent (although there is a quality problem), indicators of gender equity were strengthened, child mortality was reduced, maternal health improved, and real progress was made in combating malaria and other communicable diseases. In contrast, Vietnam scores worse than other comparable countries in relation to child malnutrition, access to clean water, and combating HIV/AIDS. At the same time improving equity became a major challenge, both in terms of ensuring that the benefits of growth were distributed evenly across the population and in terms of access to public services. Edwin Shanks and Carrie Turk Monica Das Gupta, Helene
Grandvoinnet, and Mattia Romani Guifang Yang and Keith E. Maskus Alfred Watkins Russia possesses a sophisticated science and technology (S&T) infrastructure (research capability, technically trained work force, and technical research universities) that even today is a world leader in many fields. Despite this world-class basic research capacity, Russia’s exports are primarily raw materials. At a time when wealth depends to an increasing degree on knowledge, Russia does not have an effective system for converting its scientific capacity into wealth. Russia’s S&T resources are isolated bureaucratically in that they are deployed in the rigid hierarchical system devised in the 1920s to mobilize resources for rapid, state-planned, industrial development and national defense;, functionally, because of the scarce links between the supply of S&T output by research institutes and the demand for S&T by Russian or foreign enterprises; and geographically, because many assets are located in formerly closed or isolated cities. Overcoming these inefficiencies and adjusting the S&T system to the demands of a market economy will require a major program of institutional and sectoral reform. Scott Wallsten Policymakers are simultaneously concerned about the consequences of a worsening "digital divide" between rich and poor countries and hopeful that information and computing technologies can increase economic growth in developing countries. However, little research has explored the reasons for the digital divide beyond noting that it is strongly correlated with standard development indicators, and no empirical research has explored the role of regulation. The author finds that regulation is strongly correlated with lower Internet penetration and higher Internet access charges. Controlling for such factors as income, development of the telecommunications infrastructure, ubiquity of personal computers, and time trends, countries that require formal regulatory approval for Internet service providers to begin operations have fewer Internet users and Internet hosts than countries that do not require such approval. Moreover, countries that regulate Internet service providers’ final user prices have higher Internet access prices than countries that do not have such regulations. These results suggest that developing countries’ own regulatory policies can have large impacts on the digital divide. Miguel Palacios Other World Bank Publications Bulgaria: Public Expenditure
Issues and Directions for Reform Bulgaria has made substantial progress toward long-term macroeconomic stability. Growth has returned, per capita income has improved, inflation has remained low, poverty has been reduced, and the external debt to GDP ratio has declined. In addition, the share of the private sector in the economy is increasing, major regulatory reform is under way, the banking sector is on a more solid footing, and energy pricing reforms are improving efficiency and reducing the fiscal burden. Nevertheless, important challenges still lie ahead: Bulgaria must continue to maintain macroeconomic stability, make progress on structural reforms to sustain the momentum of growth, and attain further reductions in poverty and unemployment. Building Trust: Developing the
Russian Financial Sector Robert Holzmann, Mitchell Orenstein,
and Michal Rutkowski, eds. Merlinda Ingco Maurice Schiff and L. Alan Winters Shahid Yusuf Shahid Yusuf and Simon J. Evenett World Development Report
1978-2003 with Selected World Development Indicators 2002: Indexed Omnibus
CD-ROM Edition This omnibus CD-ROM edition includes the text of all 25 editions, as well as PDF versions of the 2002 and 2003 editions of the World Development Report. The contents of this CD-ROM are fully indexed and cross-referenced for easy searching across the volumes in the archive. It also includes selected indicators from the World Development Indictors 2002, a comprehensive range of statistical indicators for more than 200 economies. Data can be exported for use in other applications, such as spreadsheets and databases. Patrick Honohan, James A. Hanson,
and Giovanni Majnoni, eds. Given the ease with which capital flows between countries and the impact such flows can have on countries with weak national financial systems, finance is clearly a fundamental dimension of globalization; however, until a financial crisis erupts, analysts and policymakers often remain focused on the domestic financial market, overlooking the global impact of their choices. Banking, securities, contractual savings, and systemic macroeconomic aspects are all considered. United States Department of Agriculture Publications To order: USDA, 1800 M Street, N.W., Washington, D.C. 20036-5831, United States; tel.: 800-999-6779, URL: http://www.ers.usda.gov. Britta Bjornlund, Nancy Cochrane,
Mildred Haley, Roger Hoskin, Olga Liefert, and Philip Paarlberg William Liefert and Johan Swinnen Stefan Osborne and Michael A.
Trueblood United Nations Children’s Fund Publications To order: UNICEF, Piazza SS. Annunziata, 12, 50122 Florence, Italy; tel.: 39-055-20330, fax.: 39-055-244-817, email: jmicklewright@unicef.org, URL: http://www.unicef-icdc.org. Jeni Klugman, John Micklewright, and
Gerry Redmond John Micklewright Other Publications Wladimir Andreff, ed. To order: La Découverte/ROSES, 9 bis, rue Abel-Hovelacque, Paris 75013, France; tel.: 0144-088400. David Green and Karl Petrick, eds. The eastward expansion of the EU is one of the most explosive economic and political issues of the early 21st century. This volume, written by scholars and practitioners from Central and Western Europe and the United States, confronts the issues involved in three of the countries most likely to be successful applicants to the EU: the Czech Republic, Hungary, and Slovenia. It focuses on the banking and financial industries, because they are crucial to the achievement of economic stability. The authors suggest that the state’s role in both creating and maintaining an effective financial sector is central. Furthermore, they argue that well-regulated commercial banks and strategic foreign investors are a must as, in practice, the attempt to skip straight to modern capital markets has been ruinous. To order: Edward Elgar Publishing, 136 West Street, Suite 202, Northampton, MA 01060-3711, United States; tel. 413-584-5551, fax.: 413-584-9933, email: scalamari@e-elgar.com. James Gwartney, Robert Lawson, Chris
Edwards, Walter Park, Veronique de Rugy, and Smita Wagh Marta Mackiewicz, Elzbieta
Malinowska, Wojciech Misiag, Adam Niedzielski, and Marcin Tomalak To order: Gdansk Institute for Market Economics, Ul. olobrzeska 16, 02-923 Warszawa, Poland; email: ibngr@ibngr.edu.pl, URL: http://www.ibngr.edu.pl. Sigma Bleyzer Studies indicate that the investment needed to recapitalize and modernize the productive capabilities of the countries of the former Soviet Union (FSU) over the next 10 years may be as high as $800 billion. The financing of these investments will not be simple, given that most FSU countries have low levels of domestic savings and underdeveloped financial systems. Thus most FSU countries will not be able to maintain their pace of economic growth without recourse to international savings, particularly from international private capital and more targeted financing by bilateral and multilateral financial institutions. Foreign direct investment is likely to be the largest and most significant sources of foreign financing in FSU countries. In 1999 SigmaBleyzer launched a major effort to identify best practices in economic reforms in a number of successful transition and developing countries. As the experiences of other countries show, in addition to macroeconomic stabilization, comprehensive programs addressing the following nine policy areas are necessary to achieve significant and sustainable capital investments, both foreign and domestic: • Liberalizing and deregulating business activities • Stabilizing the legal environment and making it more predictable • Improving corporate and public governance • Removing international capital and foreign trade restrictions • Facilitating business finance • Reducing corruption • Minimizing political risks • Improving promotion and country image • Introducing rational investment incentives. Industrial countries, for their part, must provide greater access to their markets and targeted aid and know-how for building a market economy. Many key products of the FSU countries currently face significant trade restrictions and distortions that must be addressed. Financial assistance from bilateral and multilateral agencies must also be better targeted and directly linked to the support of private enterprises. To order: Bleyzer Foundation, 123 North Post Oak Lane, Suite 410, Houston, Texas, United States; tel.: 713-621-3111, fax.: 713-621-4666, email: sbleyzer@sigmableyzer.com. Stanley Foundation To order: Stanley Foundation, 209 Iowa Avenue, Muscatine, IA 52761, United States; tel.: 563-264-1500, fax.: 563-264-0864, URL: http://www.stanleyfoundation.org. Randall W. Stone To order: Princeton University Press, 41 William Street, Princeton, NJ, 08540, United States; URL: http://www.pup.princeton.edu. Richard Rose and Neil Munro Russians want both free elections and order, but order—a sense of predictability in everyday life and the rule of law—has been in short supply. This is the challenge that Russia presents to Vladimir Putin. This book is about Russia’s attempt to achieve democratization backward, holding elections without having created a modern state. It examines the multiplication of parties that do not hold the Kremlin accountable; the success of Vladimir Putin in offering a "third way" alternative to the Communist Party and the Yeltsin family; the president’s large, but vague, election mandate; the popular appeal and limits of Putin’s coalition; and what the Russian people make of the combination of free elections and disorderly government. The book features the first major survey of the leadership of Vladimir Putin and the state of Russian democracy. Christian Thimann, ed. To order: European Central Bank, Kaisertrasse 29, 60311 Frankfurt am Main, Germany; tel.: 49-69-13440, fax.: 49-69-1344-6000, URL: http://www.ecb.int. Special Publications The Singapore Economic Review is a biannual journal devoted to the publication of theoretical and empirical papers on all aspects of economics with an emphasis on economic problems related to Asian countries. The journal has a long history of publication of a broad range of economic issues impinging on Southeast Asia and the broader Asia-Pacific region. URL: http://www.worldscinet.com/ser/ser.shtml. Montenegrin Economic Papers is an economics and finance journal published by the Center for Banking, Finance, and International Economics in Montenegro. The first issue includes an article by Zeljko Bogetic entitled "Costs and Benefits of Unilateral Monetary Unions." This article notes that in recent decades extensive unofficial dollarization and financial innovations have clearly led to a lower currency to GDP ratio and greater use of noncash forms of money. The slower monetary growth reduced the potential costs of full dollarization. The worldwide trend toward greater regional integration bodes well for full dollarization, because it preempts the perceived loss of national sovereignty by adopting a foreign currency. Thus one could reasonably expect an increasing number of countries officially adopting the dollar, the euro, and perhaps the yen. Other articles include "After Socialism: Where Hope for Individual Liberties Lies" by Svetozar Pejovich and "Real Versus Pseudo Currency Crises" by Steve H. Hanke. To order: CBFEcon, Bregalnicka 5, 81000 Podgorica, Montenegro, Serbia and Montenegro; tel: 381-81-227- 269, fax: 381-81-227- 279, email: cbfecon@cg.yu. BOFIT Discussion Papers Karsten Staehr Broadly based reform policy is good for growth, but so is a policy of liberalization and small-scale privatization without structural reforms. Conversely, large-scale privatization without accompanying reforms, market opening without supporting reforms, and bank liberalization without enterprise restructuring affect growth negatively. The speed of reforms appears to have only limited effects on short-term and medium-term growth. Swift reform policies allow transition countries to benefit from higher growth for a longer period of time. Eugene Nivorozhkin This paper uses a dynamic, unrestricted, capital structure model to examine the determinants of private companies’ target financial leverage and the speed of adjustment to it in two transition economies, Bulgaria and the Czech Republic. The results indicate that Bulgarian corporate credit markets were less supply constrained than those of the Czech Republic during the period under investigation. Bulgarian companies adjusted much faster to the target leverage than Czech firms. The speed of adjustment related positively to the distance between the target and observed ratios for Bulgarian companies, while the relationship was neutral for Czech companies. The conservative policies of Czech banks and the exposure control were probably responsible for the slower adjustment among larger companies, while the opposite was true for Bulgarian banks and companies. To order: Bank of Finland, Institute for Economies in Transition, P.O. Box 160, FIN 0-0010, Helsinki, tel.: 3589-183-2268, fax: 3589-183-2268, email: bofit@bof.fi, URL: http://www.bof.fi/bofit. Centre for Economic Policy Research To order: 90-98 Goswell Road, London EC1V 7RR, United Kingdom. Information: Robbie Lonie, tel.: 4420-7878-2919, mobile: 44-7740-519-225, email rlonie@cepr.org. David Begg and others The EU is now preparing for the entry of 10 new members. As the accession countries embark on the next phase of the path toward formal entry into the EU, most are expected to join the Exchange Rate Mechanism (ERM-II), prior to adopting the euro. This period will be a time of heightened vulnerability to financial instability that requires extremely adept economic management. With limited exchange rate flexibility under ERM-II, disinflationary conditions, and no exemptions from full international capital mobility, EU accession countries are likely to experience large "convergence play" capital inflows. Such inflows arise because investment opportunities are large, but domestic savings are small and the domestic financial system is still developing, and because a rising real exchange rate offers the prospect of attractive returns. Alarmingly, large capital inflows figured in virtually every financial crisis of the 1990s. Martin Raiser, Mark E Schaffer, and
Johannes Schuchhardt Orla Doyle and Jan Fidrmuc How does implementing harsh economic reforms influence voting behavior? How do the patterns of political support change over the course of transition? The authors analyze these issues using data from a sequence of 11 opinion surveys conducted in the Czech Republic between 1990 and 1998. They find that while voters’ ideological positions and some socioeconomic characteristics, such as age and education, tend to have a stable impact on voting behavior over time, economic outcomes, such as employment status, income, and unemployment, only affect political preferences in the later stages of the transition. This is consistent with the predictions of the theoretical literature on political constraints during transition: as the uncertainty about reform’s outcomes dissipates, constituencies of winners and losers emerge. The winners are the young, educated, high-wage earners and workers employed in de novo private firms. The losers are the elderly, low-skilled, and low-wage workers and the unemployed. The balance between these two constituencies then determines the support for reform-minded and left-wing parties at election time. Micael Castanheira This publication develops a general equilibrium model that jointly considers the influence of capital accumulation constraints and of labor market frictions on the process of transition. It endogenizes the economic and budgetary costs of different government policies and shows that early in transition, governments ought to subsidize state firms. Provided that intertemporal commitment is feasible, this policy limits the initial output fall, which relaxes capital accumulation constraints, accelerates transition, and increases welfare. Moreover, by resorting to indirect instead of direct taxes, governments can bring the path of transition closer to the first best. Yet political pressures may induce a policy of excessive subsidization. Jozef Konings, Patrick van Cayseele,
and Frederic Warzynski The authors use representative firm-level panel data of 1,701 Bulgarian and 2,047 Romanian manufacturing firms to estimate market power (price-cost margins) and to analyze how these are affected by privatization and increased competitive pressure. In contrast to earlier work that analyzes the effect of ownership on firm performance, the estimation method used deals with potential endogeneity problems that are associated with estimating firm performance by making use of the properties of the primal and dual Solow residual. State-owned enterprises have lower price-cost margins than privatized and foreign owned firms, which suggests that state-owned enterprises price closer to marginal costs and are more concerned with maximizing social welfare (allocative efficiency). In addition, the results support the idea that opening to trade has a disciplining effect on firms’ market power. The authors find that increased import penetration is associated with lower price-cost margins in sectors where product market concentration is relatively high. |
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