Enterprise isolation programs in transition economies : evidence from Romania

How should countries in transition to market economies handle the losses of large loss-making enterprises? Over the past six years several governments in transition economies have implemented isolation programs that combine features of reorganization under bankruptcy (as in industrial countries) with severance payments for employees and assistance with labor deployment. The author analyzes isolation programs for financially distressed firms in transition economies based on empirical evidence from Romania, the program that had the greatest coverage. The results indicate that Romania's isolation program fulfilled none of its intentions. Despite substantial costs, it neither delivered tangible improvements in operational performance nor improved the process of privatization or liquidation of large loss-making enterprises. Worse still, the program may have delayed restructuring by not imposing hard budget constraints. Firms included in the program faced softer budget constraints than their counterparts outside the program. Loss makers were not selected through objective criteria, and the agency in charge was not sheltered from politicalpressure in enforcing hard budget constraints. The author therefore questions the feasibility of creating special programs for enterprise restructuring under government auspices, with government agencies choosing beneficiaries and deciding on the scope of activity. His conclusion supports the insistence of international donor organizations that governments in transition economies privatize rapidly, without attempting first to restructure enterprises.Small and Medium Size Enterprises,Microfinance,Municipal Financial Management,Banks&Banking Reform,Small Scale Enterprise,Banks&Banking Reform,Municipal Financial Management,Private Participation in Infrastructure,Microfinance,Small Scale Enterprise

Ownership structure and enterprise restructuring in six newly independent states

The author investigates the relationship between ownership structure and enterprise restructuring in six newly independent states: Georgia, Kazakstan, the Kyrgyz Republic, Moldova, Russia, and Ukraine. He documents the changing pattern of ownership in 960 privatized manufacturing companies from 1995-97. There are large differences in ownership structure across countries, differences that seem to be determined by the method of privatization pursued. Enterprises in countries where the privatization programs favored incumbent managers (Georgia and Ukraine) ended with heavy ownership by managers (an average 53.6 percent and 46.2 percent respectively). Countries that used mainly the mass privatization approach (Kazakstan and the Kyrgyz Republic had the highest proportion of ownership shares held be outside investors (37 percent and 21.2 percent respectively). Foreign ownership is positively associated with enterprise restructuring at high ownership levels (above 30 percent of shares). By contrast, the relationship between management ownership by outside local investors or the state is not significantly correlated with restructuring.Financial Crisis Management&Restructuring,Economic Theory&Research,Banks&Banking Reform,Small and Medium Size Enterprises,International Terrorism&Counterterrorism,International Terrorism&Counterterrorism,Banks&Banking Reform,Municipal Financial Management,Financial Crisis Management&Restructuring,Economic Theory&Research

Restructuring of insider-dominated firms

Using enterprise survey data for 1995-97, the author studies and compares how different modes of privatizing to insiders affect enterprise restructuring in two former Soviet republics, Georgia and Moldova. Restructuring in companies in which incumbent managers received significant ownership stakes for free was similar to that in companies that were still state-owned. By contrast, restructuring was faster in companies bought by their managers. The author interprets these results as suggesting that managers'incentives to restructure decrease when they regard their newly acquired ownership as a windfall gain.Microfinance,Small and Medium Size Enterprises,Banks&Banking Reform,Small Scale Enterprise,Financial Crisis Management&Restructuring,Private Participation in Infrastructure,Microfinance,Small Scale Enterprise,Financial Crisis Management&Restructuring,Banks&Banking Reform

Corruption and firm behavior

This paper investigates how corruption affects firrm behavior. Firms can engage in two types of corruption when seeking a public service: cost-reducing "collusive" corruption and cost increasing "coercive" corruption. Using an original and unusually rich dataset on bribe payments at ports matched to firrm-level data, we observe how firms respond to each type of corruption by adjusting their shipping and sourcing strategies. "Collusive" corruption is associated with higher usage of the corrupt port, while "coercive" corruption is associated with reduced demand for port services. Our results suggest that firms respond to the opportunities and challenges created by different types of corruption, organizing production in a way that increases or decreases demand for the public service. Understanding how firms respond to corruption has important implications for how we conceptualize, identify and measure the overall impact of corruption on economic activity

Intra-industry trade, foreign direct investment, and the reorientation of Eastern European exports

In the first half of the 1990s exports to Organization for Economic Cooperation and Development (OECD) countries from many Central and Eastern European countries grew rapidly. The authors explore the extent that export growth reflects economic restructuring and changes in trade composition as opposed to redirection of traditional Council of Mutual Economic Assistance (CMEA) exports to the West. They also investigate vertical intra-industry exchanges role in trade expansion with Western Europe. They find a strong relationship between export performance and growth in vertical intra-industry trade with the European Union (EU). The Czech and Slovak Republics, Hungary, Poland, and Slovenia all rely heavily on the EU for inputs. As their per capita exports to the EU have grown the fastest, this appears to be a successful transition characteristic. The Czech and Slovak Republics registered the highest export growth and the greatest trade pattern reorientation. They have the highest intra-industry trade growth level and rate with the EU, but have undergone the least change in export composition. But substantial changes have occurred in the export composition within traditional export categories. This suggests that Czech and Slovak firms pursueda strategy of upgrading and differentiating traditional exports, relying on EU firms for new machinery, components, and know-how. Simple redirection of goods that were traditionally exported to CMEA markets does not appear to have played an important role in the growth of exports to Western Europe. Export growth is in products that were not exported to the CMEA or in traditional export items that have been substantially upgraded or differentiated. Foreign direct investment inflows correlate highly with intra-industry trade levels. But, excluding the automobile sector, foreign direct investment seems unlikely to have been a major force driving intra-industry trade growth. These exchanges and the underlying integration in the world economy mostly reflect arm's length transactions between Central and Eastern European firms and their European counterparts.Agribusiness&Markets,Economic Theory&Research,Trade Policy,Environmental Economics&Policies,Export Competitiveness,Environmental Economics&Policies,Trade Policy,Agribusiness&Markets,Economic Theory&Research,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT

Catching up with Eastern Europe? The European Union's Mediterranean free trade initiative

Many countries in the Middle East and North Africa that are considering liberalizing, privatizing, and deregulating markets face difficult policy issues. Gradual, piecemeal reform efforts have had limited success. The option of a Euro-Mediterranean Agreement (EMA) offers a new opportunity to implement structural reform. Two questions can be posed: (1) Why pursue regional integration? and (2) Is an EMA sufficient? Justifications for regional integration include the following: The EMA may offer a stronger mechanism for locking in economic reform than does the World Trade Organization (WTO), while the preferential nature of an EMA might help overcome domestic resistance to liberalization. Harmonization of regulatory regimes and administrative requirements could facilitate trade. Market access could be more secure if countries agreed not to impose contingent protection, such as antidumping actions. Transfers from the European Union to partner countries (financial or technical assistance) would help offset lost tariff revenue and the costs of trade diversion. The EMA signed between Tunisia and the European Union does not go significantly beyond existing multilateral (WTO) disciplines. The long 12-year transition path may reduce incentives to initiate rapid restructuring and may create problems in implementing future tariff reductions. While the EMA option gives the Mediterranean countries a unique opportunity to pursue far-reaching trade liberalization credibly and gradually, the economic benefits will be limited if trade liberalization is restricted to manufactured products. Service markets and foreign investment must also be liberalized to ensure a supply response and create new employment opportunities. Equally important are factors that cannot be"imported"through an agreement with the European Union: efficient public institutions, domestic competition, investment in education, high rates of private savings and investments, a stable economy, and openness to the world economy. The greater the extent to which the EMA-based preferential liberalization is extended to non-European countries, the greater the benefits for participating Mediterranean countries.Economic Theory&Research,Environmental Economics&Policies,Trade Policy,Payment Systems&Infrastructure,Rules of Origin,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Theory&Research,Trade and Regional Integration,Environmental Economics&Policies,Trade Policy

Which firms do foreigners buy : evidence from the Republic of Korea

Using data on mergers and acquisitions involving Korean firms, the authors identify which sectors and firms attracted foreign investment after the liberalization of investment of activity at the end of 1997. They find that domestic acquisitions are similar to foreign acquisitions by sector (of both the target and the acquiring firm), but that international transactions are larger than Korean transactions. This suggests that consolidation is a two-stage process: Firms consolidate first domestically, then internationally. The authors also find that foreign investment is focused on high-value-added sectors, on larger and more profitable firms, on firms with low debt, and on firms that export a large share of output. Their results suggest that growth induces foreign investment.ICT Policy and Strategies,International Terrorism&Counterterrorism,Economic Theory&Research,Trade and Regional Integration,Foreign Direct Investment

Competition law in Bulgaria after central planning

The authors investigate the activities of the Bulgarian competition office, the Commission for the Protection of Competition, for the years 1991-95. They provide descriptive statistics on the industry incidence of investigations, the types of behavior investigated, and the frequency with which violations were found and penalties imposed. Although the Commission tried to focus on nontradable sectors, and to target both cartel and abuse-of-dominance cases, the remedies they imposed appear to have been rather ineffective. Moreover, instead of focusing on hard-core anticompetitive behavior, much of the Commission's activity centered on"unfair"trade practices (such as false advertising, trademark infringement, and the behavior of ex-employees of specific enterprises). Many enforcement cases basically dealt with contract enforcement problems. Only a small percentage of cases concerned collusive practices that restricted entry/expansion, such as bid-rigging, price-fixing, and market allocation. And remedies for egregious violations of the law were not dire enough to give firms a strong incentive to abide by the law. Recently proposed amendments to the law should go some way toward allowing the Commission to focus more narrowly on anticompetitive practices, and to strengthen the law's deterrent effect.Markets and Market Access,Environmental Economics&Policies,Economic Theory&Research,Labor Policies,ICT Policy and Strategies,Markets and Market Access,Environmental Economics&Policies,Economic Theory&Research,ICT Policy and Strategies,Access to Markets

An Empirical Study of Corruption in Ports

We generate an original dataset on bribe payments at two competing ports in Southern Africa that allows us to take an unusually close look at the relationship between bureaucratic organization, bribe-setting behavior and the costs corruption imposes on users of public services. We find that the way bureaucracies are organized can generate different opportunities for bureaucrats to engage in "collusive" or "coercive" types of corruption. We then observe how firms adjust their shipping and sourcing strategies in response to different types of corruption. "Collusive" corruption is cost-reducing for firms, increasing usage of the corrupt port, while "coercive" corruption is cost-increasing, reducing demand for port services. Our findings therefore suggest that firms respond to the opportunities and challenges created by different types of corruption, organizing production in a way that increases or decreases demand for the public service.Corruption; Transport; Trade Costs; Firm Behavior

Disintegration and trade flows : evidence from the Former Soviet Union

The authors study the effects of trade barriers and the persistence of past linkages on trade flows in the former Soviet Union. Estimating a gravity equation on trade among and between nine Russian regions and 14 former Soviet republics, they find that Russian regions traded 60 percent more with each other than with republics in the reform period (1994-96). By contrast, the Russian regions did not trade significantly more with each other than with republics in the pre-reform period (1987-90). The results suggest that the bias toward domestic trade in the reform period is primarily the result of tariffs. In addition, past linkages-such as infrastructure, business networks, and production and consumption chains-have limited the reorientation of trade.Environmental Economics&Policies,Trade Policy,Common Carriers Industry,Economic Theory&Research,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT