Balassa-Samuelson, Product Differentiation and Transition

Recent panel studies have found relatively high estimates for the elasticity of real exchange rates with respect to productivity measures in transition economies within Balassa-Samuelson frameworks. This contrasts with other findings reporting cross-section price-income elasticity estimates to depend positively on average income in the sample. This paper aims to reconcile both results by putting real exchange rate developments of transition economies in an international perspective. We illustrate the special status of these economies in a simple world-wide Balassa-Samuelson-type price-income benchmark relationship between a real exchange rate measure (Penn World Table comparative prices, i.e., exchange rate gaps) and PPP-adjusted per capita income. A pronounced undervaluation at the start of transition, followed by a strong appreciation results in normalisation towards the benchmark for Central and East European economies (CEEC) but not for the CIS. We then make an attempt at extending the simple price-income relationship to incorporate other real factors as well as reforms related to price deregulation. Our results imply that, when accounting for demand shifts, external liberalisation, and especially for reform effort, the price-income-elasticity for CEEC economies was not different from that of non-transition economies during the nineties.Balassa-Samuelson, transition

Trade Liberalisation and Import Margins

Trade policy has well documented effects on trade volumes. Reaching beyond volumes, I explore the impact of European emerging economies’ recent institutional trade liberalisation on extensive (i.e., the set of imported goods) versus intensive import margins (volumes per imported good) with highly disaggregated data. Differentiating goods categories by use, I find robust evidence of stronger extensive import margin effects of liberalisation for intermediate and capital goods compared to consumer goods. This identifies an important channel for the link between reforms and growth in transition. The results also support new models of heterogeneous firms and trade, which predict that extensive import margin effects of a country’s institutional trade liberalisation should – via lowering fixed costs for rest of the world exporters – increase with decreasing substitutability among products.Gravity, Product Variety, Trade Liberalisation

How to improve public investment efficiency in Ukraine?

Public investment can both serve socially useful purposes and be growth enhancing, if sufficient levels are allocated efficiently and if budgeting is managed properly. Public investment in Ukraine has recently risen from low to sufficient levels. Private participation in investment for socially useful purposes, such as road construction and other infrastructure investment, is still small. Activities with doubtful rationale for long-term state intervention (economic activities, utilities) receive one third of all public capital expenditure. More than half of this is aid in form of capital transfers to public enterprises, allocated in long bargaining processes. Public investment budgeting rules suffer from a lack of integrated treatment with respect to decision-making bodies, components of capital expenditures, and planning horizons. At current public investment levels, the impact on the economy can nevertheless be increased. • Socially useful investment can be boosted by more private sector involvement in the financing of roads and other infrastructure, including utilities, by concession schemes. • Improved investment budgeting requires o transparent priorities and rules-based selection criteria (cost-benefit analysis); o smoother integration of capital expenditures in the budgeting process; capital and maintenance budgeting can be harmonized by multi-year controls. o Resource ceilings in project selection should be set early, to minimize demand for public funds and to avoid long bargaining processes for public aid. • In the medium term, state aid in form of capital transfers to public enterprises can be re-allocated towards core public activities, education, and health.

Can we identify Balassa-Samuelson effects with measures of product variety?

The Balassa-Samuelson hypothesis – i.e. that real exchange rates between each pair of countries increase with the tradables sector productivities ratio between these countries, and decrease with their non-tradables sector productivities ratio – has been one of the most prominent frameworks in open economy macroeconomics for more than forty years. However, empirical studies have often been unable to confirm it. We argue that this might at least in part be due to measurement errors leading to downward-biased estimates. We test the Balassa-Samuelson hypothesis with innovative trade-based vari-ety measures to differentiate between tradables and non-tradables sector productivities that do not suffer from such errors-in-variables. Using a pairwise regression approach, we find stable and very robust Balassa-Samuelson effects over all our specifications.Balassa-Samuelson, product variety, measurement errors, pairwise regressions

Institutional reforms versus selective targeting? Comments on the draft law `On state support of investment and encouraging investment activity' drafted by the Ministry of Economy

Elements of the institutional framework, i.e., the rules and regulations of the economy and the institutions that enforce them, are the main long-run criteria for private investment decisions. In particular, it is openness to trade and transparency that increase the chances of enhancing domestic investment and increasing FDI. Against the background of Ukraine’s still rather poor institutional framework, specifically targeted investment incentives for pre-defined sectors, regions, and/or types of investment, can be both costly and ineffective. Leaning towards selective targeting, the draft law does not sufficiently serve to sustainably enhance private investment in the long run. We recommend to consistently re-draft the law to represent Ukraine’s Guidelines for Public Support of Private Investment, in line with private investor preferences and international experience. Compared to the first draft, we specifically suggest: to focus on improvements of the institutional framework and eliminate all specific targeting elements from the law; to eliminate all references to public investment from this draft law, which should concentrate on public support for private domestic and foreign investment; not to revert to state aid in order to support private investment activity; to expand the final provisions of the draft law and explicitly mention supplementary legislation necessary to improve the institutional framework for investment in Ukraine. In particular, we recommend to focus on the adjustment of the tax legislation according to international standards, employment standards, and provisions that define property rights, to improve law enforcement, the transparency of the public sector, and the efficiency of public spending by cutting state aid. This would serve to demonstrate that institutional framework reforms need a broad and concerted effort from all sources of legislative action.

The Penn Effect and Transition : The New EU Member States in International Perspective

Recent panel studies have found relatively high point estimates for the elasticity of ag-gregate price measures with respect to productivity in (former) transition economies, while other studies report price-productivity elasticity estimates to depend positively on average productivity in the sample. We aim to reconcile both results by putting com-parative price developments of transition economies in an international perspective. We argue that estimating simple price-productivity relationships without the inclusion of other real factors connected to reform effort might severely bias estimates for CEEC economies. Our results imply that, when controlling for reform effort and therefore avoiding this endogeneity problem, the price-productivity-elasticity for CEEC econo-mies was not different from that of non-transition economies during the first 15 years of transition.Balassa-Samuelson, transition

External liberalization, specialization, and institutional change in times of globalization: the case of central, east and southeast Europe

During the early nineties, central, east and southeast European countries set on liberalizing their economies on an unprecedented scale, including more or less speedy or profound external liberalizations in country-specific approaches. Since then, we have observed increasingly differentiated changes in these countries' legal institutions. Based on a small but growing literature, we may conjecture that both observations do not only describe a chronological sequence but a causal relationship. This note discusses this conjecture and argues that the globalization of production processes acts as a channel in this causal relationship. Whether or not trade liberalization helps in improving countries' domestic legal institutions depends on the nature of openness emanating from liberalization: some countries firms' joined fragmented, globalized production processes, for others, the dependence on primary products even increased

Product variety and technical change

Several trade-based measures of product variety have recently been used implicitly to represent states of technology, promoting long-run growth. In this paper, we define the state of technology as the range of specialised production processes and propose the variety of capital goods available for production as a direct measure of technology. Within a simple growth framework, we derive a testable “conditional technological convergence” hypothesis on this measure. The hypothesis is tested with highly disaggregated trade data by economic categories, using tools from the income convergence literature. The results suggest that trade-based count measures of the variety of available capital goods indeed behave “as if” they were representing technology and that there is conditional technological convergence among our panel of mainly OECD and transition economies.Product variety, diffusion, adoption, technical change