The Generic Private Sector in an Economy of Transition: Developments and Impacts on the Czech Economy

The long-lasting problems of the Czech economy, which have become apparent since 1996, have their roots in the behavior of a significant part of the domestic enterprise sector. These problems were called into being by a very intensive, nevertheless deeply non-standard mass privatization. The authentic (generic) private sector cannot be based on a command coming from the upper hierarchies of the social organization. It can arise only from gradual acts at the level of economic agents making their decisions autonomously at the grass roots of the economy. Soft market environment set by the Czech mass privatization policies was counter-productive for the development of entrepreneurial activities as defined by Schumpeter. The lobbies of pressure groups, defending the privileges of former socialist corporations, became dominant in shaping Czech politics, fiscal and banking economic policies and the build-up of economic institutions. The authentic private sector that evolved mainly from small and medium-sized enterprises was driven from its start to a position of an outsider. Notwithstanding the lack of government support, market imperfections, bureaucracy and failing judiciary, the sector of newly established businesses has shown a high degree of viability and at the end of the 1990s it became a dominant player on the market side of the Czech economy. The future of the Czech economic development cannot be separated from the situation in both the enterprises under foreign ownership and the small and medium-sized firms under indigenous owners. The economic policy-making should be based on these facts and provide for the requirements of these two progressive segments of the Czech authentic private sector. This also implies that merits of mass privatization should be subject to a fundamental overhauling on both the academic and the economic policy sides

Three Dimensions of Political Economy: Markets, Hierarchies and Kinships

The author challenges the dualistic view of social, political, and economic governance, where markets and hierarchies (i.e. the state and government are agents) dominated the theoretical fields. This is also a problem of new outlook of economics. A classification method of analyzing the "fundamental ways" in organizing and governing human societies is developed and the authentic building blocks for a "third way" policy-making are found in the interests of individuals and their micro-organizations. No instruments of socio-political governance can dissociate themselves from patterns of behavior where justice, solidarity, altruism, reciprocity, consensus, local networks, human capital or ethics play important roles. The demise of communism, the hardships of transition and the differences in the performance of capitalism can be explained by the particular involvement of the third social pillar into the working of state hierarchies and economic markets. The interaction of markets, hierarchies and institutions of culture; of organizations and individuals; and interdependencies between the future and the past - all these phenomena call for wider "endogenisation" of theories explaining modern social order, for further integration of social sciences and for a more varied portfolio of choices offered by political parties

Determining Factors of Trade Specialization and Growth of a Small Economy in Transition: Impacts of the EU Opening-up on Czech Exports and Imports

In this paper we discuss and estimate the factors of growth and structural adjustment in small open economies in transition. Our theoretical considerations are empirically tested on Czech exports and imports in exchanges with two regions: the European Union and the rest of world. By using the export and import functions, we estimated the determining factors of trade intensities relative to the changes in aggregate demand, competitiveness, factor endowments and policy measures. It was of our special interest to analyze the outcome of the massive liberalization of trade with the EU during 1990-99. We worked with the commodity breakdown into 61 industries. The factors acting universally in all four of our tests were the aggregate demand of the destination countries and the structure of the foreign direct investment, representing the human capital. The competitiveness of Czech imports was based generally on quality, while Czech exports to the EU competed in prices. Factor endowments, tariffs and subsidies had also their specific role in shaping the Czech specialization pattern. The appreciation of real exchange rate had only a marginal net effect on the trade balance. Further structural adjustments can be expected not only in further deepening of the Czech export commodity specialization but, due to spillovers of both exports and imports, also in the domestic production for domestic market. The intensive structural and growth incentives associated with the EU accession will bring about pressures for a new wave of restructuring of enterprises, further reallocation of existing resources and a provision of production factors that become the constraints to growth. It is the nature of transition economies that their development, associated with fast growth and convergence to the EU GDP per capita average, will remain for a long time subjected to periodical (though attenuating) waves of adjustments. The economic volatility caused by adjustments to external shocks will be for long more intensive in transition economies than in stabilized economies. The core of fundamental adjustments rests in the changing conditions for the specialization in trade between accession and the EU incumbent countries. The degree of resistance of enterprises to pressures for restructuring coming from the trade potential is therefore reflected in the proneness of the economies in transition to macroeconomic instability (slow growth, budget deficit, structural unemployment and external imbalance). These politically sensitive developments are closely related to decision-making on a choice of macroeconomic and structural policies

EU Structural Support: Its Macroeconomic and Distributional Effects and Social Environment

This is a report about the fourth workshop from the seminar series of IIASA's Economic Transition and Integration Project entitled "The Process of EU Accession: Preparation by Learning and Exchange". The workshop was held in Prague on 9-11 November, 2000. The first section summarizes recent developments in the accession process in the individual candidate countries. The second is devoted to the establishment of regional institutions for managing the structural support funds of the EU. The next section deals with the organization of planning, monitoring and evaluation of EU financed programs as experienced and perceived in the current member states and the candidate countries. The fourth section is devoted to the essence and realization of the principles of EU programs, while the fifth analyzes the macroeconomic effects of past and future such programs. Section 6 deals with the impact of EU funds on national and regional convergence, while section 7 with the issue of program selection. Finally, section 8 is devoted to the special problems of the two heavy weight sectors in EU programs: agriculture, as well as transport and infrastructure

Catching Up and EU Accession - Conditions for Fast Real Convergence in the Candidate Countries

This is a report about the fifth workshop from the seminar series of IIASAs Economic Transition and Integration Project entitled "The Process of EU Accession: Preparation by Learning and Exchange". The workshop was held in Bratislava on 7-9 February 2002. The first two sections summarize the opening of the workshop and two introductory presentations dealing with economic policies of Slovakia on its way to the EU accession and the historical perspectives of growth, integration and recommended policies for catching-up in transition countries. The next section presents an outline of recent developments in the accession process in ten individual candidate countries. The fourth section concentrates on the analysis of factors determining savings and investments in accession countries and the role of banking intermediation, as illustrated on the case of Hungary. The fifth section is dedicated to questions of competitiveness - to the alternative ways of its measurement and policies that support exports and/or the ability of domestic producers to substitute imports, stressing that policies on the company and industry level are more important than national policies. The sixth section deals with the problems of macroeconomic financial convergence and the requirements on national performance for becoming a member of the European Monetary Union. Its first paper discusses alternative policies of central banks from Eastern and Central Europe for a smooth monetary integration of their countries with the euro-zone. Its second paper tests the empirical evidence on the speed of economic convergence in various transition countries. Its third paper analyses the aspects of the so-called nominal and real convergence and the potential scope of alternative monetary policies in accession countries in order to retain their external balance. The seventh section presents the summary of three presentations that dealt with international institutions. The first one is dealing with the policies and the support for catching up provided by the World Bank. The second paper describes the experiences of Ireland, Latvia and Estonia in preparing the national development plans and in the usage of structural and cohesion funds provided by the European Commission. The third paper concentrates on the problems of domestic agricultural policies and the EU Transfers, as based on the comparison of Slovakia with some other EU candidate countries and with the EU incumbents. The next two sections discuss the questions associated with the R&D, foreign direct investment, human capital and their spillovers. In the first of them the lessons from the Irish experience are summarized and compared with the present situation in accession countries. The paper, that follows next, analyses the data on education, compares the EU candidate countries with some less developed EU member countries and draws conclusion about policies for the human capital development and their association with growth. The last (tenth) section is based the on the comparative analysis of the empirical evidence from transition countries on the indicators of human development and the policies for a more comprehensive convergence of these countries to the levels of present EU member states

Structure and Dynamics of Trade in a Small Economy in Transition before the EU Accession: The Case of Czech Exports and Imports

The basic objective of this paper is to design an appropriate structural model based on economic behavioral foundations and test it on data representing the determining factors of Czech trade specialization and growth. Policy recommendations based on the functioning of some policy instruments relevant to monetary policy decisions are also a part of the study. In the empirical part of the analysis, we use alternative specifications of export and import functions estimated as panels for the EU and non-EU countries, disaggregated into 29 industries for 1993-2001. It is evident from our tests that the future of the Czech trade balance and GDP growth will hinge on ow the Czech economy substitutes its present comparative advantage in labor by building up its capital endowments, most notably its human capital endowments. Although our tests confirm that the balance of trade was fundamentally influenced by the exchange rate, aggregate demand and tariff changes, the underlying fundamental factors relevant for a sustainable trade balance and an equilibrium exchange rate rest on supply-side capacities (such as changes in factor endowments, inflows of foreign direct investment (FDI), developments in productivity and wage rates, pricing policy of enterprises and the nature of competitiveness of domestic production), which are extremely closely related to export and import performance. It seems evident that industrial policies (such as support for FDI, capital availability, the building-up of human capital or labor mobility and the promotion of domestic import substitution) can lead to significant changes in the nature of Czech exports and international competitiveness. We can induce from our analysis that the fundamental restructuring of Czech enterprises in the period 1993 -2001 was driven by openness to trade, especially with the EU. While exports offered growth and employment, accelerating import penetration required the downsizing of many industries, which burdened the whole Czech economy with high adjustment costs. Now, in a period of economic structural stabilization and EU accession, the prospects for accelerated economic growth are much higher. The seemingly low or even reversed response of trade intensities to real exchange rate appreciation can be explained by supply-side gains in the quality of products, productivity improvements, the buildup of human capital associated with FDI and the fast dynamics of intra-industrial trade, which had a low sensitivity to exchange rate fluctuations. Relative to the unwieldy performance of the state sector or the domestic production of the non-traded commodities, Czech export sector made a tremendous progress in competitiveness during 1993- 2001, showing high dynamics of growth, intensive level of structural adjustments and an accelerated seed of integration with the EU

The determinants and impact of foreign direct investment in Central and Eastern Europe: A comparison of survey and econometric evidence

This note considers evidence that has been collected on the determinants and effects of foreign direct investment in Central and Eastern Europe, with a strong focus on Hungary, Poland and the Czech Republic. There are two main sources from which information is drawn: survey studies and econometric studies. We consider how each of these sources can contribute to research, whether they provide complementary or contradictory information, and how the information can be best exploited. We conclude that the findings of econometric studies tend to support survey results. This suggests that market size and growth potential have been the driving forces behind foreign direct investment, with factor-cost advantages playing a lesser, but still significant role. Macroeconomic and political stability were also taken into account. Investment incentives have not had a decisive influence on foreign direct investment inflows; however, the privatization process has affected the timing of foreign direct investment. Access to markets has been the primary motive for foreign direct investment; however, the absence of trade barriers and membership in free trade areas have been important for export-oriented investments. Foreign direct investment inflows have improved the overall growth potential of the economies under consideration, primarily through productivity improvements within foreign affiliates, rather than through linkages with domestic firms or spillovers

Who Commits to the Rule of Law? Constrained Government and Foreign Direct Investment in Postcommunist States

Research linking credible commitments to the rule of law in terms of property rights and contract enforcement is a hallmark of recent efforts to explain economic growth and development. However, many postcommunist states have had difficulty making such commitments and spurring growth. Many argue political polarization prevents states from reforming laws and protecting property rights in some countries whereas single-party governance renders state promises incredible in others. I analyze pooled cross-sectional time-series data for twenty-four postcommunist countries and provide evidence effective constraints among elected officials act as democratic commitment mechanisms rendering government policies credible