Privatization and State Capacity in Postcommunist Society

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 deindustrialization. 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.http://deepblue.lib.umich.edu/bitstream/2027.42/40192/3/wp806.pd

Worker Training in a Restructuring Economy: Evidence from the Russian Transition

We use 1994-1998 data from the Russian Longitudinal Monitoring Survey (RLMS) to measure the incidence and determinants of several types of worker training and to estimate the effects of training on workers' interindustry, interfirm, and occupational mobility, their labor force transitions, and their wage growth in Russia compared to the U.S. We hypothesize that the shock of economic liberalization in Russia may raise the benefits of training, particularly retraining for new jobs, but uncertainty concerning the revaluation of skills may raise the costs, with an overall ambiguous effect on the amount of training undertaken. The RLMS indicates a lower rate of formal training than studies have found for the U.S., suggesting that the second effect dominates. Previous schooling is estimated to affect the probability of training positively, but the relationship is much stronger for additional training in the same field than for retraining for new fields, consistent with the hypothesis that schooling and training are complementary but become more substitutable in a restructuring environment. Foreign ownership of the firm also positively affects the probability of undertaking training, providing evidence of active restructuring by foreigner investors. Additional training in workers' current fields is estimated to reduce mobility and earnings, suggesting inertial programs from the pre-transition era. Retraining in new fields increases all types of worker mobility and has higher returns than those typically observed for training in the U.S., but it also raises the variance of earnings and the probability of employment, consistent with a search view of such retraining. Given the large returns to retraining, the efforts of Russian workers to learn new skills may increase as uncertainty is resolved and restructuring proceeds.http://deepblue.lib.umich.edu/bitstream/2027.42/39715/3/wp331.pd

Markets and Growth

This paper studies key markets (financial, labor, natural resource, and product) to assess how they are facilitating or constraining growth. First, we draw on the body of existing theoretical and empirical literature to discuss the links between markets and growth. Second, we present four stylized scenarios of the process of growth, which summarize market infrastructure and efficient factor reallocation in response to shocks appear to be among the most important growth determinants. We highlight the relative lack of research on the relationship between labor markets and growth, as opposed to the relationship between human capital production and growth. Finally, we combine suggestions of Topel (1999) and Pritchett (2000) to argue that country-specific markets should be a principal focus of future research on growth. This paper provides a framework for such studies.http://deepblue.lib.umich.edu/bitstream/2027.42/39766/3/wp382.pd

The Governance Grenade: Mass Privatization, State Capacity and Economic Growth in Post-communist Countries

Why did the transitions from state socialism to capitalism result in improved growth in some countries but significant economic declines in others? Three main arguments have been advanced: (1) the most successful countries rapidly implemented privatization, liberalization, and stabilization policies; (2) failures were unrelated to economic policies but occurred because of a poor institutional environment; and (3) the policies were counterproductive because they damaged the state. We present a state-centered theory which argues that the more radical the privatization program, the worse the subsequent performance. We agree with the second account, that institutions matter, but demonstrate that it was radical privatization itself which was a major determinant of institutional weakness. In addition, our account holds that privatization was in fact a crucial determinant of institutional failure, operating primarily through the creation of a massive shock to state revenues. We perform cross-national regressions for a sample of 30 countries between 1990 and 2000, and find that mass privatization programs negatively impacted economic growth, state capacity and property rights protection. These findings are corroborated with data from a random sample of 4,000 firms from 26 post-communist countries. We show that in countries which implemented sizable mass-privatized programs, privatized firms were substantially less likely to engage in successful industrial restructuring but considerably more likely to engage in barter and have tax arrears than their state owned counterparts.

Slow Recoveries

Economies respond differently to aggregate shocks that reduce output. While some countries rapidly recover their pre-crisis trend, others stagnate. Recent studies provide empirical support for a link between aggregate growth and plant dynamics through its effect on productivity: the entry and exit of firms and the reallocation of resources from less to more efficient firms explain a relevant part of transitional productivity dynamics. In this paper we use a stochastic general equilibrium model with heterogeneous firms to study the effect on aggregate short-run growth of policies that distort the process of birth, growth and death of firms, as well as the reallocation of resources across economic units. Our findings show that indeed policies that alter plant dynamics can explain slow recoveries. We also find that output losses associated to delayed recoveries are large.

Subduing High Inflation in Romania. How to Better Monetary and Exchange Rate Mechanisms?

Romania's overall economic performance during the first ten years of transition can be termed so far as disappointing: the country has not been able to deliver steady growth, low unemployment and low inflation. This paper focuses on the effectiveness of monetary mechanisms and policies during this period. Special emphasis is set on the exchange rate mechanism. The first part of the text develops a short introduction to relevant monetary theory in the transition context. In the second part, we analyse the stylised facts pertaining to Romanian economy and put forward some weaknesses of its banking system and monetary policies. The conclusion presents a set of recommendations for a reform of the going monetary policy.http://deepblue.lib.umich.edu/bitstream/2027.42/39786/3/wp402.pd

Privatization and State Capacity in Postcommunist Society

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 deindustrialization. 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.privatization, transition economies, state capacity, property rights, institutions, growth

Microeconomics of transformation in Poland : a survey of state enterprise responses

State enterprise behavior and reform have emerged as key issues in the emerging market economies of Eastern Europe because of the size of the state manufacturing sector as measured by its share in GDP, exports, and tax revenues. The difficulties experienced by Polish state-owned enterprises (SOEs) in adjusting and responding to the new economic environment have led to fiscal imbalance, deteriorating portfolios of commercial banks, and burgeoning interfirm payment arrears. The authors examine the economic and behavioral reactions of a significant sample of Poland's largest SOEs to the macroeconomic reforms introduced as part of the"big bang"in January 1990. They track the evolution of output, costs, and profits, and examine wage setting behavior, enterprise debt dynamics, and enforcement of the"micro"hard budget constraint by banks. They conduct a firm-level analysis of the export boom and its causes and document the evolving tax burden on enterprises. Their findings are based on a survey of 75 large SOEs in manufacturing during June 1989 - March 1991 - six months prior to and 15 months following the big bang. Some of the main quantitative conclusions were: (1) The high nominal interest rate on working capital (from 50 to 72 percent of the month of January 1990 alone) inhibited borrowing and motivated firms to pay off zloty loans, leading to a squeeze on working capital. The huge decline in real wages led to a demand shock, witnessed by rising finished goods inventories. Consequently, the initial, unexpectedly large, decline in output could be explained by a combination of nominal interest rate shock and standard demand considerations. (2) High profits in 1990 were temporary, stemming from inflationary gains on once-off inventory sales, devaluation gains on enterprise dollar accounts, and implicit input subsidies from CMEA trade. (3) Banks were lax in enforcing creditworthiness, leading to an adverse selection problem marked by loans going mainly to"bad"firms. (4) State-owned enterprises tend to be myopic, with considerable short-run pressure on wages that works to the detriment of restructuring investments essential for reducing energy and material intensity and product redesign. (5) Nominal and real wages both displayed remarkable flexibility. Employment reduction has lagged output reduction partly because partial indexation of wages to inflation has kept real wages low and partly because of the natural reluctance of worker-controlled SOEs to shed labor. So, there is clear possibility of much higher transitional unemployment once privatization and commercialization get underway on large scale. (6) The hard-currency export boom in 1990 was motivated more by slack domestic demand than higher export profitability. The main qualitative change is a definite attitudinal shift in favor of profits and marketing in contrast to the old exclusive emphasis on production targets. But there is a serious principal-agent problem with managers serving at the pleasure of the workers'council and no obvious owner stressing long-term viability considerations in decision-making. The paper concludes by discussing the microeconomic transformation needed to complete the largely economic big bang. The importance of addressing firm-level managerial incentives and empowering managers is emphasized in the transition to eventual privatization.Markets and Market Access,Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Financial Intermediation

Worker Training in a Restructuring Economy: Evidence from the Russian Transition

We use 1994-1998 data from the Russian Longitudinal Monitoring Survey (RLMS) to measure the incidence and determinants of several types of worker training and to estimate the effects of training on workers' interindustry, interfirm, and occupational mobility, their labor force transitions, and their wage growth in Russia compared to the U.S. We hypothesize that the shock of economic liberalization in Russia may raise the benefits of training, particularly retraining for new jobs, but uncertainty concerning the revaluation of skills may raise the costs, with an overall ambiguous effect on the amount of training undertaken. The RLMS indicates a lower rate of formal training than studies have found for the U.S., suggesting that the second effect dominates. Previous schooling is estimated to affect the probability of training positively, but the relationship is much stronger for additional training in the same field than for retraining for new fields, consistent with the hypothesis that schooling and training are complementary but become more substitutable in a restructuring environment. Foreign ownership of the firm also positively affects the probability of undertaking training, providing evidence of active restructuring by foreigner investors. Additional training in workers' current fields is estimated to reduce mobility and earnings, suggesting inertial programs from the pre-transition era. Retraining in new fields increases all types of worker mobility and has higher returns than those typically observed for training in the U.S., but it also raises the variance of earnings and the probability of employment, consistent with a search view of such retraining. Given the large returns to retraining, the efforts of Russian workers to learn new skills may increase as uncertainty is resolved and restructuring proceeds.training, retraining, on-the-job training, mobility, labor market, transition

Dynamism and Inertia on the Russian Labour Market: A Model of Segmentation

This paper proposes an explanation of the puzzling coexistence of elements of inertia and dynamism on the Russian labour market using a segmentation model. Risk averse workers are differentiated according to their productivity. They face a trade-off between wages and access to social services provided by the firm. The most productive workers leave their initial firm, contract on the spot labour market, and concentrate in the best performing firms. The model provides a possible interpretation of wage arrears which can be viewed as an element of an implicit contract between firms and less productive workers. We test some of the predictions of the model using a panel dataset containing 13,410 firms, for 1993 - 1997.http://deepblue.lib.umich.edu/bitstream/2027.42/39632/3/wp246.pd