Employment - wage decisions in the insider-owned firm

The paper is intended to explain low sensitivity of employment decisions observed in transition economies where insider ownership prevails and capital markets are not highly developed. We introduce a stability concept for employment levels of a labor-managed firm and prove that there exists a segment of stable employment levels. If a level belongs to the interior of the segment then the firm keeps the same labor input level under any not too large changes. By contrast, the wage rate is re-sponsive. Only the firms on the boundaries of the segment may reconsider em-ployment decisions. Deterioration of market conditions entails decreasing labor inputs for firms with much excess labor and, the same time, increases employment for firms with low levels of labor input. This creates inter-firm flows of workforce and restrains the rise of total unemployment. Stability segments exist also for firms where employment-wage decisions are made by bargaining between workers and managers, and may exist for manager-dominated firms as well. Several concepts of labor hoarding are discussed.labor-owned enterprises; transition; Russia

Towards the Theory of Privatization

An attempt is made to define main problems of the privatization theory and to present a survey of some results in this area. Two models are discussed that demonstrate paradoxical consequences of property right restrictions and dynamics of property right redistribution which entails a stratification of society. Two ways of transition from centralized to a market system (through privatization and through price liberalization processes) are compared in frameworks of a mixed economy model with queues. Relations between theoretical conclusions and real issues of the Russian privatization are discussed as well.privatization; privatization theory; transition; Russia

Civic Culture and Economic Transition in Russia

In this paper we try to describe the main feature of Russian civic culture that could influence the outcome of the reform, initiated in 1992, and discuss channels through which the influence was realized. We begin with consideration of paternalism and what we call “habitual deviationism”, ordinary and routine deviation from official rules and laws. Both features were inherited from the Soviet period. Paternalism and habitual deviationism determine a system of people’s attitudes towards the state, the law, the property, and the liberal values. It will be demonstrated that this system entails an adversarial (using a Stiglitz’s term) style of governance and the opportunism and corruptibility of the ruling elite. It is argued that “shock therapy” may be destructive under this cultural environment and result in strong initial distortions since fast liberalization and privatization release a huge volume of rent and strengthen incentives for rent seeking activity. It is further argued that a good reform strategy should take civic culture into account and not put forward overly ambitious tasks. One has to build a sequence of interim institutions which would be more congruent to the initial cultural and institutional environment, facilitate the adaptation of the people, and stimulate modernization of cultural norms to reach an effective market system with time.Civic culture; economic transition; Russia

Institutional Traps and Transition

Two myths have harmed many economies throughout the world. One is the theory of absolute advantage of central planning over the market mechanism, and the other is the belief that efficient markets develop spontaneously and quickly enough if appropriate economic legislation is established. Volumes have been written to debunk the first myth. The falsity of the second needs to be better understood. The problem is that inside of any legislated change there exists a room for development of different institutions, or behavior norms, and it is not simple to predict which direction will be chosen by an economy. The hypothesis that efficient institutions must arise because of natural selection does not prove to be truthful. Inefficient development can be self-supporting and stable. The supporting mechanisms were systematically investigated by Arthur (1988) for technological changes. North (1990) pointed out that the same mechanisms plaid an important role in the evolution of institutions. A number of examples have been studied in different branches of economics. The most striking examples can be found in recent history of economic reforms in Russia and East European countries. This chapter uses the ideas by Arthur and North to describe a general scheme for the formation of inefficient yet stable norm or institutions, referred herein as institutional traps. The scheme is substantially based on the concepts of transaction costs, transformation costs, and transitional rent discussed below. Then the theory developed is applied to explain emergence in Russia of barter, mutual arrears, tax evasion, corruption, and some other institutional traps. Implications for reform strategy are explored. The analysis shows that the formation of institutional traps is a major risk in any reform process, and avoidance of these traps is an urgent task during transition.arrears; barter; civic culture; civil society; coordination failures; corruption; institutional trap; multiple equilibria; path dependence; rent seeking; reputation; systemic crises; transaction costs; transformation costs; transitional rent; trust

Institutional Trap

One of the main obstacles for successful economic development is the formation of institutional traps, inefficient yet stable norms of behaviour. Domination of barter exchange, arrears, corruption and black market activities are examples of institutional traps that have hampered reforms in transition economies. Institutional traps are supported by mechanisms of coordination, learning, linkage and cultural inertia. The acceleration of economic growth, systemic crisis, the evolution of some cultural characteristics and the development of civil society may result in breaking out of institutional traps. Examples from the history of the United States and Russia are considered.arrears; barter; civic culture; civil society; coordination failures; corruption; cultural inertia; hysteresis; institutional trap; linkage effect; lock-in; multiple equilibria; path dependence; rent seeking; reputation; systemic crises; transaction costs; transformation costs; transitional rent; trust

Rent Seeking, Tax Policy, and Economic Growth

It is suggested a Romer-Barro - type model of endogenous economic growth where producers contest for distribution of a fixed share of the government’s tax revenue. The proportional contest mechanism is assumed. We studied conditions under which consumers gain or lose due to existence of the Rent seeking, tax policy, and economic growth (RS) opportunities. It is found that RS always decreases rate of growth but nevertheless may raise consumer’s overall utility. RS is advantageous if tax rate is too high or rate of production return is too low. The area of parameters, where RS has positive effect, is larger for more impatient consumers. We study also a static RS production model with heterogeneous producers and show that excessive tax burden creates incentives for RS (which is interpreted as corruption). It is argued that the producers’ support of corruption-free regimes depends on the marginal cost elasticity of the production technologies and may be reached due to technical progress. The results demonstrate that the connection, observed in a number of empirical papers, between economic development and RS may be two - way since it may be caused by factors that influence both RS and economic growth.Endogenous economic growth; rent seeking

Innovation and Imitation at Various Stages of Development

A simple model of imitation and innovation is developed to explain a complicated picture of relative productivity growth in different countries. The model makes difference between global and local innovations and does not assume that a country always imitates the most advanced technology. It is shown that there are three types of stationary states, where only imitation, only innovation or a mixed policy prevails. We demonstrate how one can find the stationary states and check their stability for a broad class of imitation-innovation cost functions. Using World Bank statistical data for the period of 1980-1999, we reveal the dependence of innovation and imitation costs on GDP per capita measured in PPP and on an indicator of investment risk. An appropriate choice of two adjustment parameters of the model gives a possibility to generate trajectories of more than 80 countries and, for most of them, get qualitatively correct pictures of their movement. It turns out that three groups of countries behave differently, and there is a tendency to converge inside each group. Increase in institutional quality get countries out of underdevelopment traps, from the imitation area to a better steady state where local innovations and imitations are jointly used. All countries with high quality of institutions are moving toward the area where pure innovation policy prevails.innovation; imitation; institutional quality

Democratization, Quality of Institutions and Economic Growth

There are two innovations in the paper as compared to the previous literature on democracy and growth. First, we consider not only the level of democracy, but also changes in this level in the 1970s-1990s as measured by increments of Freedom House political rights indices. Second, the distinction is made between democracy and law and order (order based on legal rules); the latter is measured by the rule of law, investors' risk and corruption indices. We discuss two interconnected threshold hypotheses: (1) in countries where law and order is strong enough, democratization stimulates economic growth, whereas in countries with poor law and order democratization undermines growth; (2) if democratization occurs under the conditions of poor law and order (so that illiberal democracy emerges), then shadow economy expands, quality of governance worsens, and macroeconomic policy becomes less prudent. We adduce a number of stylized facts to support our hypotheses. However our econometric findings are mixed: we report results that support the hypotheses as well as regressions that contradict them.Economic growth; democracy; rule of law

An Evolutionary Model with Interaction between Development and Adoption of New Technologies

We propose a difference-differential equation that reflects interactions between innovation and imitation processes to describe the evolution of the distribution curve of firms by efficiency levels. An explicit solution of this equation is obtained for arbitrary finite initial conditions. It is shown that this equation admits one-parametric family of logistic waves, and that arbitrary solution exponentially converges to one of the waves. This result explains two stylized empirical facts: the "logistic" shape of diffusion curves and the stable form of production capacities distribution by efficiency levels. Possible generalizations, modifications and applications are discussed.innovation; imitation; diffusion; logistic distribution; efficiency; wave solution; stability; Burgers equation

Stages of Development, Economic Policies and a New World Economic Order

This paper summarizes theoretical arguments, empirical evidence, and econometric findings to support the statement that rational economic policies depend qualitatively on stages of development that are defined by productivity and institutional indicators of a country. We consider the impact of industrial policies, speed of foreign exchange reserves accumulation, technology transfers and immigration policies, as well as FDI and liberalization of capital flows, on rate of economic growth. It is argued that the impact may be positive or negative; in many cases a threshold combination of GDP per capita and institutional quality indicators may be found to separate two different outcomes. A precondition of economic success is the timely switching of economic policies to avoid both types of mistakes: excessive inertia or premature use of instruments that are effective for more advance countries only. The stage of development theory implies that international financial institutions (including IMF, WB, and EBRD) should work out a list of differentiated prescriptions that may be efficiently followed by countries with different levels of institutional and technological development, and so the system of assistance to developing countries could be improved. This and some other elements of "a New World Economic Order" are discussed in the paper.Stages of development; economic growth