Inequality, Growth and Public Spending in Central, East and Southeast Europe

The article analyses the joint determinants of inequality and growth with a special emphasis on public spending structures in transition. The mutual benefit of low real interest rates, to both equity and economic development is a major result of this paper. In terms of public spending items we find a positive correlation with equity and a negative with growth as several of the government expenditure items seem to act counter-cyclically. In the late 1990’s and early 2000’s the European integration process allowed most of the transition economies to aim for the best of both worlds: equity and economic development.Inequality, Government Expenditures, Economic Growth, Transition

Inequality, growth and public spending in Central, East and Southeast Europe

The article analyses the joint determinants of inequality and growth with a special emphasis on public spending structures in transition. We find especially government expenditures on subsidies to be negatively correlated with both inequality and growth, as more generally government expenditures seem to act counter-cyclically and inequality reducing. Also, there is a mutual benefit of low real interest rates, to both equity and economic development. This hints to the fact that in the late 1990's and early 2000's the European integration process allowed several of the transition economies to aim for the best of both worlds: equity and economic development.Inequality; Government Expenditures, Economic Growth, Transition

Real Exchange Rate Distortion in Southeast Europe

In this paper, first we investigate to which extent the real exchange rate is distorted in the 7 Southeast European countries (SEECs), and compare the findings with other countries in Europe. Second, we shed light into possible determinants and effects of the real exchange rate distortions. Finally, a policy change away from a possibly distorted real exchange rate in the SEECs is being simulated. The results indicate that especially the West Balkan countries have overvalued real exchange rates, while other transition countries' exchange rates are rather undervalued. Some of the main determinants of the real exchange rate distortion are related to the inflow of remittances and FDI, while it was found that nominal exchange rate depreciation and trade openness reduce the real exchange rate distortion. The simulation model shows that a devaluation can have large positive effects on domestic output, exports and trade with self.Real Exchange Rate, Partial Equilibrium Model, Simulation Model, International Trade, Southeast Europe

Economic Inequality in Central, East and Southeast Europe

The article analyses the issue of economic inequality in the transition economies of Central, East and Southeast Europe. It consists of a literature review and a descriptive analysis as well as an econometric modelling exercise. In the fi rst part we point at the fact that the rise in income inequality was triggered by the magnitude of transitional output loss and a reduction of formal employment. Rising wage inequality was at the core of total income dispersion, while government transfers had a redistributional function only in Central and Southeast European countries contrary to the Commonwealth of Independent States (CIS). In the econometric analysis it is found that for instance public utilities infrastructure liberalisation has increased inequality in transition, while price and trade liberalisation has decreased it. A high share of employment in industry and high government expenditures are connected with less inequality.income distribution, inequality, transition economies

The Impact of Customs Procedures on Business Performance: Evidence from Kosovo

This paper aims to identify formal and informal institutional factors in customs procedures and their impact on the performance of small and medium-sized enterprises (SMEs) involved in international trade in Kosovo based on a questionnaire conducted in 2009. The econometric findings show that one of the most important obstacles encountered by SMEs are regular appeals against customs decisions that are assumed to be inter alia a consequence of frequent changes in over-complicated laws and regulations. However, there is a positive and significant effect of the formal customs institutions that facilitate the trade of imported goods, namely of so-called customs procedures with economic impact.customs, firm performance, formal and informal institutions, small and medium-sized enterprises, Kosovo

Illegal Trade in South East Europe

Based on the theoretical foundations as described in Bhagwati (1974), illegal trade can be defined to consist of faked invoicing on the one hand and smuggling on the other hand. While in the first case at least one of the trading partner countries has recorded a trade flow either as an export or as an import, in the latter case no official customs data is available. Smuggling is bypassing legal trade channels altogether. Therefore it is difficult to estimate the full magnitude of illegal trade with the help of one single method. In this paper we rather tried to detect faked invoicing and smuggling in the Balkans separately. Therefore we first tried to measure illegal cross-border trade in South East Europe (SEE) in order to have at least some impressions about the magnitude of this phenomenon and second we analysed illegal trade from a more theoretical perspective and provided an overview of possible policy relevant aspects. The paper ends with some discussion on the impact of illegal trade on security and of some soft security instruments that could be used to address it.Illegal Trade, Faked Invoicing, Smuggling, South East Europe

Household Tax Compliance and the Shadow Economy in Central and Southeastern Europe

This paper presents and applies a new indicator of the size of the shadow economy based on the estimation of tax compliance in the household sector. These estimates are performed for the countries of Central, Eastern and Southeastern Europe using 2001 data. Estimates of income declaration rates and of corresponding undeclared household income are computed using household consumption data as well as detailed data on household taxation. Specific aspects such as remittances, the role of agriculture and the impact of tourism are explicitly taken into account and discussed.

Capacity Constraining Labor Market Frictions in a Global Economy

Convex vacancy creation costs shape firms’ responses to trade liberalization. They induce capacity constraints by increasing firms’ cost of production, leading a profit maximizing firm not to fully meet the increased foreign demand. Hence, firms will only serve a few export markets. More productive firms will export to more countries and charge higher or similar prices compared to less productive firms. Trade liberalization also affects labor market outcomes. Increased profits by exporting firms triggers firm entry, reduces unemployment and increases wage dispersion in the on-the-job search model with monopolistic competition.on-the-job search, capacity constraints, international trade, heterogeneous firms, monopolistic competition

Raising capital taxes and investing in social protection and education may reduce income polarisation in Europe.

Rising income polarisation and inequality in Europe has been of concern to governments and policymakers since before the beginning of the financial crisis in 2008. Using survey data from over 300,000 EU households, Mario Holzner examines how government policies can affect levels of income polarisation for the rich and poor. He finds that higher progressive labour and capital taxes are correlated with lower levels of income polarisation. Higher levels of public expenditure on social protection, education and economic subsidies are also related to a lower degree of polarisation

Prospects for Further (South) Eastern EU Enlargement: Form Divergence to Convergence?

This paper looks at the experience of South East Europe which – for the purposes of this paper – includes the former states of Yugoslavia except for Slovenia (i.e. Croatia, Serbia-Montenegro, Bosnia-Herzegovina, and Macedonia), Albania, and the two EU candidate countries, Bulgaria and Romania. For all these economies, accession to the EU will be the overriding driving force of the policy-making agenda for the foreseeable future, albeit with widely different time horizons in the individual economies. In Part One we describe the South East European (SEE) ‘region’ as one which has over the 1990s significantly ‘fallen behind’ in the process of economic development relative to the group of Central and Eastern European (CEE) economies which will join the EU in 2004. While developments are somewhat heterogeneous, there is, in particular, an abysmal employment record which has not even started to turn around, as well as an extremely bad productivity and export performance. In Part Two, we discuss in greater detail the conditions required to move towards a sustained growth and catching-up process. We analyse the problematic states of transition in some of the SEE economies as well as the basic disequilibria (fiscal, external, labour markets) which need to be resolved for sustained development to take place. The prospects of making up for the lost decade and dealing with the unresolved disequilibria will be a crucial issue in evaluating the prospects of EU accession some time in the future. We discuss the stumbling blocks both from the SEE side and the EU side in developing a clear perspective of integration with the EU.South East Europe, Balkan economies, convergence, EU enlargement