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Beyond TransitionThe Newsletter About Reforming Economies

January — March 2006 • Volume 17, No. 1

http://www.worldbank.org/transitionnewsletter

Theme of the Issue: China—RussiaComparison

Modernizing China's Growth Paradigm Eswar Prasad and Raghuram Rajan 3

Understanding Migration in RussiaYuri Andrienko and Sergei Guriev 5

Insert: Invasion or Necessary Stimulant? Zhanna Zaionchkovskaya 6

Labor Migration and Wage InequalityXiaohan Zhong 7

Has Trade Liberalization Brought Gender Equality?Yin He 8

China-Russia Trade DynamicsNatalya Volchkova 9

The Russian Stock Market: Lessons from the First DecadeAlexei Goriaev and Alexey Zabotkin 11

Entrepreneurship in China and Russia Compared Simeon Djankov, Yingyi Qian, Gerard Roland, and EkaterinaZhuravskaya 13

Why Shock Therapy May Lead To Worse Performance ThanGradual TransitionVladimir Popov 14

Industrial Agglomeration and Regional Specialization inChinaJiangyong Lu and Zhigang Tao 16

Russia's Regions: In What Social Space Do We Live?Natalya Zubarevich 17

Unleashing the Potential: Growth and Investments inRussian RegionsOlga Mosina 19

New Findings

Mongolia's Competitiveness and Economic Growth 21Janusz Szyrmer

Insert: Mongolia’s Economic Development Dynamics 22

FDI in Eastern Europe and NISIrina Tytell and Ksenia Yudaeva 23

Tajikistan — A Long Way to RecoveryAybek Gorey 24

Insert: Tajikistan is Still the Poorest CIS Country 24

World Bank \ IMF Agenda 25

New Books and Working Papers 27

Conference Diary 30

www.cefir.ru

Photos: courtesy of the World Bank

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Beyond Transition • January — March 2006

2 ·

Dear Reader,

In this issue we consider the transition experiences of the two largest transition countries —Russia and China. Most of this issue's papers were presented at the 2005 Global Institute Russia-China Conference in Beijing by Chinese and Russian economists, who had received their Ph.D.sat western universities, and then returned to their home countries. Thus, the issue also symbolizesthe transition of the economics profession in these countries during the reform years.

At the beginning of transition, Russia and China chose different reform strategies. The politicalsystem in China has been kept intact, and the government has kept a tight control over the econ-omy. State enterprises were left in government hands, while the private sector developed mainlythrough new investments. Nowadays, China has a complex and fairly developed economy whichis largely private. In this situation the incremental reform approach, which the Chinese govern-ment has used so far, becomes more and more difficult to implement. In order to sustain growth

momentum China needs to reform its financial sector and exchange rate policy. Such comprehensive reforms carry a lot of risk,but then the risks of not moving at a sufficient pace can be even greater, as Prasad and Rajan argue in their article.

Russia started its reforms 13 years later than China, and adopted sweeping reforms with much deeper scope. Its political systemunderwent significant changes, which are now being partially reversed however. Most Russian enterprises were privatized morethan 10 years ago. Some researchers believe that Russia reformed too fast, and a more gradual approach could have resulted insmaller losses and a faster return to the growth track (Popov). In the last six years Russia has been growing at an impressive rate.Its growth, fueled by high oil prices, was mainly based on restructuring and incremental investments into existing enterprises. Tokeep growing Russia needs to move to investment-based growth, and in order to do that it needs to undertake comprehensivemeasures aimed at business climate improvements both at the federal and regional level (Mosina).

In both countries reforms were accompanied by increased migration flows. In China most migration has been internal, from ruralto urban areas, and had a positive effect on wages of both migrants and local workers (Zhong). Russia needs more migration,both internal, which will remedy the misallocation of labor created under communism, and external (immigration), which willhelp to prevent current population shrinkage. Government policy has so far been ineffective on both scores: it has restricted themuch-needed migration flows and created illegal immigrants (Andrienko, Guriev).

Trade liberalization was a part of both countries' reform strategies. In China it led to the gender gap narrowing for women whohave higher education, yet widening the gap for women without this level of schooling (He). Russia has not yet fully exploitedthe potential opportunities of trade with China, particularly as a development tool for its Far East regions (Volchkova).

As the comparison of entrepreneurs in the two countries shows (Djankov, Qian, Roland, and Zhuravskaya), despite cultural dif-ferences, it is attitude to risk and social background that separates entrepreneurs from non-entrepreneurs in both countries. Thus,as this issue demonstrates, despite the difference in reform strategies, Russia and China often face similar challenges and can learna lot from each other's experience.

Ksenia Yudaeva, Managing Editor

From the Editor:

· 3Theme of the Issue: China—Russia Comparison

The World Bank & CEFIR

Modernizing China's Growth Paradigm

Eswar Prasad and Raghuram Rajan

China's current stage of development may make the present incrementaland piecemeal approach to reform untenable

China's remarkable growth perform-ance over the last three decades is widelyattributed to its unique developmentmodel. A principal element of this modelhas been an incremental and experimentalapproach to reforms, with the reformprocess being guided by some generalprinciples rather than a detailed blueprint.This has been complemented by a dual-track approach, which involves maintain-ing a planned track while encouraging thedevelopment of a market track in differ-ent areas of the economy, thereby allow-ing for efficiency gains at the margin with-out creating losers in absolute terms. Thisdevelopment paradigm — with its virtuesof flexibility, adaptability, and pragma-tism in the face of various constraints toreform — has served China well, generat-ing high and relatively stable growth overan extended period.

Our main contention in this article isthat this paradigm, for all its virtues andsuccess so far, may be in need of an over-haul. China's dramatic structural shiftstowards a complex market-oriented eco-nomy and its increasing integration intothe world economy are likely to exposeshortcomings in this approach. Notwith-standing the constraints that still exist dueto deficiencies in policy and institutionalframeworks, and the effects of variousproblematic legacies, there may now befew alternatives to bolder and more con-certed reforms in order to maintain highgrowth and economic stability. This is notto say that a different approach is notwithout risk, but we view the traditionalapproach as increasingly untenable andlikely to generate greater risks of its own.Furthermore, the policy distortionsrequired to maintain the old approachcould have adverse welfare consequences.

Of the multiple transitions thatChina's economy has been undergoing-from rural to urban, from low income tomiddle income etc., two are particularlyrelevant for our discussion. Firstly, Chinais rapidly moving from a commandeconomy to one led by the private sector,with this sector's share in GDP now esti-mated to be one-half to two-thirds.Secondly, from being a relatively closed

economy before the 1980s, China hasbecome very open to trade and moreintegrated into global financial markets.

Although these transitions have beenactively encouraged by Chinese policy-makers, each has brought with it somechallenges, including rising unemploy-ment and disparities in income, especiallybetween the rural and urban areas, grow-ing dependency on external demand andvulnerability to external shocks.

Nevertheless, China's economy hascontinued to grow at an impressive rateover the last two decades, and unlikemany other emerging market economies,it has not experienced any crises or othersharp disruptions to growth during thisperiod. Let us take a closer look at whatis behind this growth performance andhow the different economic pressureshave been managed so far.

Key Macroeconomic Policies China's exchange rate policy has of

course received the most attention recent-ly. The renminbi's value against the U.S.dollar had been maintained at a fixed

level since 1995, indicating the impor-tance that policymakers attach to thisnominal anchor. In principle, its value isnow set with reference to a basket of cur-rencies. In practice, however, the renmin-bi still appears to be pegged to the dollar,with limited de facto flexibility.

The management of capital flows hasbeen another key component of macro-economic policy. Capital controls, alongwith tax benefits and other incentives,have been used to promote inward FDIwhile other inflows have been discour-aged. Capital controls have also playedan important role in protecting the bank-ing system from external competition byrestricting the entry of foreign banks andby making it harder to take capital out ofthe country.

The uncertainties related to the tran-sition process, the limited availability of

instruments to borrow against futureincome to finance purchases, and the lackof international portfolio diversificationopportunities have all contributed to highhousehold savings. Financial repressionhas meant that there are few alternativesto funneling these savings into deposits instate-owned banks. Households willinglyhold bank deposits despite the weakness-es of the banking system because ofimplicit deposit insurance provided bythe government. This provides abundantliquidity for banks to expand creditwhich largely finances investment bystate enterprises. Thus, the investmentboom in recent years has been fueled bycheap credit and overoptimistic expecta-tions of future demand growth in sectorsthat are doing well at present.

Certain policy choices intended tomaintain macroeconomic control havethus made investment rather than privateconsumption the main source of demandgrowth. While factor accumulation is atime-honored path to higher growth formany developing countries, whethersuch a high level of saving mediated

mainly through an inefficient bankingsystem can produce long-lasting welfaregains is dubious. The costs of these inef-ficiencies are ultimately borne by depos-itors, in terms of low real returns ontheir savings, or through the financing offiscal transfers to firms and financialinstitutions.

Financial sector reform and develop-ment are clearly crucial priorities forgrowth and stability. But they can not betaken in isolation from other macroeco-nomic policies, including exchange rateflexibility. It is essential that China intro-duces greater flexibility in its exchangerate, which would give it a more inde-pendent monetary policy and also allowthe exchange rate to play a role in cor-recting external imbalances. It would alsoremove one of the hindrances to bankingsector reform because a fixed exchange

There may be now few alternatives to bolder and more concertedreforms in order to maintain high growth and economic stability

·4 Theme of the Issue: China—Russia Comparison

Beyond Transition • January—March 2006

rate reduces the central bank's ability touse market instruments such as interestrates to guide credit growth and insteadperpetuates a reliance on administrativemeasures, vitiating efforts to make thebanking system more commercially ori-ented. In addition, by making capitalaccount liberalization (a stated medium-term objective of the government) lessrisky and by creating incentives to devel-op financial products to hedge foreignexchange risk, a flexible exchange ratecould help stimulate broader financialmarket development as well.

Such policy shifts would allow forgrowth to be rebalanced towards self-sustaining domestic demand and tiltdomestic demand itself towards privateconsumption and away from investment.

Incremental Approach toReforms Increasingly Difficult

In discussing policy choices, it isimportant to recognize that Chinese poli-cymakers are operating in a difficult envi-

ronment with numerous institutionaldeficiencies, including a weak legal frame-work, poor governance, and economicdata of dubious quality. Furthermore,local governments have a significantdegree of autonomy in economic matters.Given the leadership's objective of main-taining political and social stability, thesefactors make the process of undertakingpolicy reforms a tight balancing act.

China has therefore typically takenthe approach of instituting reforms in anincremental manner. This has meanteither taking small steps or confiningreform experiments to specificprovinces. For example, tax reforms aregenerally first instituted in one or twoprovinces; the experience is then careful-ly studied before rolling out a nation-wide version of the reform. The learning-by-doing approach to reform has a num-ber of advantages: it reduces the costs ofpolicy errors and uncertain outcomes inthe reform process, and also gives poli-cymakers a clearer sense of the politicaland social pressures that could arise inopposition to such reforms.

There are potential limitations to theincremental approach, however, asChina's economy becomes more devel-

oped and complex. Firstly, some criticalreforms, especially those related to broadmacroeconomic issues such as exchangerate flexibility, can not be isolated tospecific geographical areas or sectors ofthe economy. Secondly, as the economybecomes more sophisticated, some play-ers become more mobile and more ableto take advantage of distortions. Forinstance, additional small movestowards exchange rate flexibility couldincrease speculative inflows in anticipa-tion of further revaluations, thereby fur-ther complicating the conduct of domes-tic monetary policy.

Thirdly, and perhaps most important-ly, China has reached a stage of develop-ment at which many key reforms areunavoidably interconnected, and it maybecome increasingly difficult to under-take individual reforms in isolation. Therestructuring of the banking sector wouldproceed much better if state enterpriseswere reformed and implicit pressures forstate banks to continue providing cheapcapital to state enterprises were eliminat-

ed. But reforming state enterprises wouldmean more unemployment which, in theabsence of progress towards constructinga more robust social safety net, could cre-ate social tensions.

There is also the practical considera-tion that it may become increasingly dif-ficult to keep a tight lid on certain partsof the economy. A prime example is thatcapital controls are becoming moreporous as domestic and internationalinvestors find ways to evade them.

Financial Sector Reform aCore Priority

Financial sector reform will necessi-tate turning the state banks into moreefficient financial intermediaries drivenby commercial considerations. But it alsorequires developing broader financialmarkets that can give firms alternativesources of funding and provide house-holds with alternative investment oppor-tunities.

This is also one of the key sectors inwhich a difficult balance will need to bestruck between picking up the pace ofreforms and not getting too far ahead ofinstitutional constraints. Continuedinterest rate liberalization, for instance,

is important for the banking system tofunction efficiently. But an all-out sprinttowards full liberalization without ade-quate regulatory and supervisory mecha-nisms in place could create subversiveincentives that might decrease financialsystem stability.

Fiscal policy has a role to play in thereform agenda as well, especially interms of strengthening the social safetynet to reduce the political and socialcosts of market-oriented reforms.Reorienting some government spendingtowards essential social expenditures,including healthcare and education, andreducing uncertainty on these fronts mayhelp to give households the confidence toincrease consumption levels.

Aspects of political economy alsopose some difficulties. Constituenciesthat favor the current system can beeffective at blocking reforms. The currentperiod of high growth and low inflationprovides an opportunity to counter theseforces by making resources available thatcould help broaden the dual-trackapproach to reform, allowing more of theeconomy to be opened up to marketforces while weaning the rest of the econ-omy off state support. This could be par-alleled by further opening of the econo-my to external influences, thereby creat-ing possible pro-reform coalitions.

Chinese policymakers certainly face adifficult balancing act — to push alongeach set of reforms at a reasonably rapidpace while, at the same time, overcomingbroader institutional constraints. Theyhave managed such balancing acts wellin the past. But, going forward, it may beharder for them to feel their waythrough controlled policy experiments.Broad and significant policy movementwill be more of a leap into the unknown,and will carry attendant risks, but therisks of not moving at a sufficient paceand along a broad front are even greater.

Eswar Prasad is Chief of the FinancialStudies Division and Raghuram Rajan isEconomic Counselor and Director of theResearch Department at the Internati-onal Monetary Fund. The full text of thepaper is available at: http://www.imf.org/external/pubs/ft/pdp/2006/pdp03.pdf.The paper is forthcoming in theAmerican Economic Review. The viewsexpressed here are those of the authorsand do not necessarily represent those ofthe IMF or IMF policy. BT

China has reached a stage of development at which it becomesincreasingly difficult to undertake individual reforms in isolation

· 5


Understanding Migration in Russia

Yuri Andrienko and Sergei Guriev

Russia is in the middle of a severedemographic crisis. If the current trendcontinues, its population will shrink by20% to 112 — 119 million people by2050. Despite some minor improvementsrecently, ageing and depopulation arelikely to continue for decades. Accordingto the 2004 World Population Data Sheet,Russia's population has been declining ata rate of - 0.6%, which is the world's sec-ond fastest rate after Ukraine.

In the nearest future, Russia will alsoface a shortage of people of working age.To compensate for this, Russia will needto triple its current inflow of immigrantsto the level of 1 million per year.Fortunately, there is a huge potentialpool from which to draw from: tens ofmillions of skilled Russian-speaking resi-dents from former Soviet Union coun-tries, many of whom are willing tomigrate to Russia.

Current External MigrationPolicy Restrictive

Starting from 1989, 11 million peo-ple immigrated to Russia according tothe 2002 Census. These were mostly eth-nic Russians who were repatriated fromother CIS countries.

As for labor migration to Russia,only a small proportion (less than 5%)of immigrants goes through officialchannels. The stock of illegal immi-grants, mainly from the CIS, is estimatedat 4 — 5 million. Workers come frommore than 100 countries, mainlyUkraine (32%), China (14%), Turkey(7%), and Vietnam (7%). They are pri-marily employed in agriculture andforestry (25%), trade (20%), construc-tion (17%), and transportation (15%).

External migration is heavily regulat-ed around the world for mainly politicalrather than economic reasons. Russianmigration regulation has been convergingtowards the restrictive migration policiesof the OECD countries. However, whileRussia suffers from similar demographicproblems to developed countries, unlikethem, it is a middle-income country witha corrupt and inefficient bureaucracy. So

designing and implementing EU-stylemigration regulation is unlikely to work(nor does it work well in Europe).Administrative barriers to migration turninto a source of rents and bribes for offi-cials and create a large pool of illegalimmigrants. Given the general problemswith crime and law enforcement and thelower costs of legal migration due to thefact that most migrants come from CIS

countries and have the same culturalbackground, Russia should be muchmore in favor of lenient immigrationpolicies than EU countries.

The costs being incurred from thelarge stock of illegal immigrants arelarge and growing. Hence, an immigra-tion amnesty is both unavoidable andwelcome, and Russia will probably haveto make this decision in the coming fewyears. The amnesty should be coupledwith a transition to a point-based systemof admission for new legal migrants,which will help to rationalize the skillcomposition and geographical destina-tions of immigrants.

If Russia has a clear understanding ofwhat skills are in demand and from whatorigins Russia wants migrants from, theright of legal entry will be given to thosewith desirable skills from desirable coun-tries. Given the high level of corruption,this system must be designed in a verysimple and straightforward way. A regu-larization campaign should also belaunched through the collection of

microeconomic data on immigrantsalready in the country. This will finallyprovide Russian policymakers with reli-able information to design migrationpolicy in the future.

Millions to be MovedInternal migration is also important

for Russia's social and economic devel-opment. It may help mitigate huge inter-regional imbalances in income andunemployment and put scarce laborresources to more efficient use. Russiahas inherited an industrial structure thatdates back to the Soviet industrializationperiod when location decisions were not

Russia's current migration policy is counterproductive as it bothrestricts much-needed migration and creates illegal immigrants

To compensate for depopulation and shortage of working agepeople, Russia will need to triple its current inflow of immigrants tothe level of 1 million per year

Internal migration and immigration from FSU countries, million(Arrows show changes in regulation)

Number of intermal migrants

Number of immigrants from FSU

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

5

4

3

2

1

0



necessarily made for economic reasons.Capital markets remain underdevelopedand problems with property rights pro-tection and contract enforcement persist.Capital would not flow to some regionseven in the absence of any barriers sim-ply because of cold temperatures andprohibitive transportation costs.

Even though some labor reallocationoccurred during transition, there are stillmillions to be moved. Despite economicgrowth in the past six years, quickly ris-ing wages, and little unemployment inmany prosperous regions, there are stillmany regions with low wages and highunemployment. In the past there has beenvery limited interregional convergence inincome and no convergence in unemploy-ment rates. Even though the interregionaldifferentials are higher than in the US,internal migration is much lower.

If one assumes a 5.5% natural unem-ployment rate, there are 2.3 millionunemployed who could find jobs inlabor-scarce regions. There are alsomany workers in depressed regions whocould make a substantial contribution toRussia's growth by moving away from

these low-productivity and low-wageregions to productive, high-wage ones.

Removing Barriers toInternal Migration

The number of Russians changingtheir place of residence fell from 3.2% ofthe population in 1994 to 1.4% a decadelater. This is partly due to internal admin-istrative controls, including a registrationsystem. However, far from all migrantsregister in their new place of residence, sothe flow of migrants may be significantlylarger. The 2002 Census counted morepeople in European Russia than hadbeen expected based on the birth andmigration data.

Some policies that can help removebarriers to internal migration include:

1. Abolish internal administrativecontrols. Their existence simply redis-tributes rents in favor of bureaucrats.Once the administrative controls aregone, this rent would transform intohigher real estate prices that wouldtransfer the rents in favor of the residentsand raise tax revenues.

2. Develop financial and housingmarkets.

3. Reduce information asymmetryby disseminating information on jobsand housing in different regions.

4. Phase out subsidies to depressedregions, thus providing incentives forresidents to move out.

Subsidizing internal mobility is prob-ably not going to help except in the mostacute cases, due to limited publicresources. The government may very wellmisallocate the subsidies, given the highvolatility of regional economic shocks.Instead, the government should make upfor failings in the financial market andsupport private sector lending to internalmigrants to cover the costs of a move.

Sergei Guriev is Associate Professorand Rector of the New Economic School,Moscow. Yuri Andrienko is an economistat CEFIR, Moscow. This article is basedon a policy note written for the WorldBank. The full text of the paper can beviewed at: http://www.cefir.ru (PolicyPaper No 21). BT

Invasion or Necessary Stimulant?

The transition to a market economy has dramaticallyincreased the economic distance between the Europeanpart of Russia and its eastern regions, almost pushing theFar East out of the domestic market and closer to the AsiaPacific countries. The Far East, especially the Primorskyand Khabarovsk regions, has a favorable geographicalposition in the Asia-Pacific and its further development islogically to be associated with integration into that region.

In the period between 1989 and 2002, the populationof the Far Eastern Federal District dropped by 1.3 millionpeople, i.e. by 16%, of which 1 million emmigrated.Neighboring China, with its huge demographic potential,is perhaps the main source of labor for the border areasof Siberia and the Far East. Today bringing in Chineselabor is seen as being the key and indispensable conditionof the region's development and of stemming the processof its depopulation.

At present, contrary to the aggressive tone of themedia and the whipping up of fear in the face of the sup-posed "Yellow Peril" assessments of the Chinese presenceare more moderate. The 2002 census registered 35,000Chinese in Russia. The total number of Chinese who hadvisited Russia during that year was 800,000. Local assess-ments of Chinese presence are much lower. For the mostpart Chinese immigrants are low-skilled workers

employed in such sectors as construction, agriculture andretailing, where skills are acquired on the job.

For China, emigration of its own population is anecessity. The Chinese authorities are encouraging theoutflow of people from the country and are exploringevery avenue towards this end. In connection withRussia's bid to join the WTO China is demanding thatRussia open up its labor market to Chinese workers. Thiscan be seen not only as the wish to consolidate China'sposition in Russia, but also to be ahead of potential com-petitors for jobs in its northern neighbor. Although oneshould treat such demands with due caution, the easing ofthe border and customs regime in some points on theChinese-Russian border and the creation of free-tradezones could benefit Russia as well by contributing to thedevelopment of its eastern regions. In the first place thismeans replenishing its labor force.

Zhanna Zaionchkovskaya is Director of the MigrationStudies Centre, Chairperson of the Independent MigrationResearch Council for the CIS and Baltic Countries, and amember of the Board under the Federation CouncilCommittee for CIS Affairs. The piece is based on theauthor's interview to BT and the article "Facing up toMigration" (Pro and Contra, No 3, 2005). BT

· 7


Labor Migration and WageInequality

Xiaohan Zhong

Since the beginning of China'sreforms and especially after the late1980s, the system of permanent residenceregistration (Hukou) and related govern-ment policies, which had been preventingpeople from migrating for several decadesand had thus resulted in the segmentationof the labor market, gradually but persist-ently became less strict. Labor from less-developed rural areas in mid and westChina flocked into developed urban areasalong the eastern coast.

The impact of this so-called "tide ofrural labor" has seen rural migrants tak-ing jobs unoccupied by urban workersand thus coming to dominate in all kindsof unskilled occupations, such as con-struction workers, repairers, waiters,cleaners or nannies. Related to (but prob-ably not resulting from) such an occupa-tional segmentation, rural migrants havebeen earning much lower salaries thantheir urban counterparts. Additionally,labor flows have not led to wage conver-gence across regions. On the contrary, inthe past two decades the trend has beendivergence between urban and rurallabor, and east and west regions.

The theoretical model proposed inour research paper is based on Kremer

and Maskin (1996). The model gives aspecific production function, where atypical production process can beaccomplished only through the coopera-tion of workers playing different roles,e.g. "white-collar" and "blue-collar"workers. There are two assumptions:first, there are imperfect substitutions ofskills in these two roles, and second, therelative importance of these skills differs.Under some conditions, our theoreticalmodel shows that:

• After entering urban labor mar-kets, the less-skilled rural migrants willdo blue-collar work only, and urbanworkers will do white-collar work only,thus, these groups exist alongside eachother with no crossover or mixing.

• Real wages of rural migrants inurban labor markets will remainunchanged, and those of urban workerswill rise.

Labor Migration BenefitsAll Workers

The implications of the model arequite striking: labor migration, throughcross-match, benefits both rural andurban workers. However, the wage gap

between rural migrants and urban work-ers increases. Finally, occupational segre-gation and wage differentials are bothoutcomes of skill differentials, no causal-ity exists between them. East-westregional divergence can also be explainedby using a variation on this model.

How does labor immigration affectlocal wage growth? In our analysis,which uses provincial cross-sectionaldata in various periods after the reformand averaged across years, we find findthat throughout the reform era, laborimmigration was increasing local work-ers' wage growth rate. In a typical year,1% labor immigration (as a share of thelocal population) raises local wagegrowth rate by roughly 1% (see Graph).

From the above theoretical andempirical analyses several importantimplications follow: first, skill differ-ences seem to be root causes of bothwage inequality and occupational segre-gation. Thus, education might be the sin-gle most important approach to elimi-nating the 'dual labor market' and relat-ed inequalities. Second, labor migrationhas really been a reform without losers.The theory explains why there are hard-ly any tensions between rural migrantsand urban workers, at least from theurban side. Third, wage inequality maybe a natural result of resource re-alloca-tion by markets, and not by policy dis-criminations. Regional divergence maynot be a bad thing at all — wage differ-entials and occupational segregation areat least better than market segmenta-tions, for everyone involved.

Xiaohan Zhong is a Lecturer ofEconomics at School of Economics andManagement, Tsinghua University,Beijing, China. This summary ofresearch findings is based on the author'spaper presented at the Global InstituteChina-Russia Conference in Beijing inDecember 2005. BT

Labor immigration in China seems to have positive effects on wagegrowth for both labor migrants and local workers

Effect of Labor Flow on Wage Growth (1985-2002)

SichuanHunan

Guangxi

Jiangxi

Anhu

HebeiJilinGuizhouHubei

Henan

Heilongjiang QinghaiGansu Shanxi

ShandongLiaoning

Yunnan

Fujian

XinjiangHainan

Ningxia

Jiangsu

Shanghai

Beijing

Guangdong

Zhejiang

Tianjin

.04

.02

0

-.02

-.005 0 .005 .01 .015

Immigration Scale

Wag

e G

row

th



Has Trade Liberalization BroughtGender Equality?

Yin He

It is a wide spread phenomenon allover the world that female workers havelower wages than their male colleagues.The 2004 labor market survey of gradu-ating college students in Beijing,Shanghai, and Guangzhou, the threebiggest cities in China, shows that thenumber of employers who believe thatmale college graduating students aremore efficient as "professional workers"is 46 times higher than the number ofemployers who believe in the efficiencyof female graduates. For sales jobs, theproportion is nine to one, and for man-agement jobs four to one. None of theemployers think that female graduatescan do better than their male colleaguesin manufacturing. Therefore, the numberof employers who are willing to hire amale student for a given wage is 14 timeshigher than those willing to hire a femalestudent.

It is believed that part of the genderwage gap can be explained by wagedeterminants, such as education andexperience. Due to cultural traditionsand the fact that females usually spendmore time and effort on family, femalesgenerally get a lower level of educationand less work experience. Moreover,females may not be suitable for somejobs, e.g. laborers or engineers, so femaleworkers, on average, get a lower wagethan males. However, it is true that thesecharacteristics can not completelyexplain the gender wage gap, and labormarkets all around the world do dis-criminate against women.

More importantly, the gender wagegap is closely correlated with trade liber-alization. Trade liberalization could nar-row the gender wage gap via two chan-nels. Firstly, it increases the overallincome and development level of a coun-try, so that access to education is easierand less costly for females. Secondly,trade brings more competition into thedomestic market, which reduces theprofit margin and leaves domestic

employers with fewer resources to dis-criminate. However, trade liberalizationcould also widen the gender wage gap.As openness increases competition,minority groups in the labor market suchas female workers have lower bargainingpower and get a lower wage rate.

We examine two household incomesurveys conducted in China in 1988 and1995. Between those years China'simports increased from US$55 billion toUS$132 billion, exports expanded fromUS$47 billion to US$149 billion, andannual real income per capita almosttripled, according to China StatisticsBureau and UN Commodity TradeStatistics.

Fairer Pay for College Gra-duates in Import-CompetingSector

In studying the effect of trade liberal-ization on the change in the gender wagegap, especially the change in the gap forgroups with different education levels, wefind that the wage level for both femaleand male increased dramatically between1988 and 1995 in line with the large

increase in trade liberalization. However,Chinese female workers continuouslyexperienced a lower income level thanmale workers with the same educationlevel, political identity, and contract type,in the same industry sector and a firmwith the same type of ownership. Moreinterestingly, trade liberalization was sig-nificantly associated with the wageincrease for females with technical schoolor college degrees, while for females withonly high school education or lowerdegrees there was no such increase.

More importantly, we also find thatbetween 1988 and 1995 the residual

gender wage gap widened for peoplewith high school education or lower, butnarrowed for technical schools and col-lege graduates. For every one percentagepoint increase in the ratio of imports toGDP from 1988 to 1995, the genderwage gap for college and technicalschool graduates decreased by aboutRMB 38 Yuan and RMB 29 Yuan,respectively.

This is consistent with the fact thatduring this time period imports intoChina were mostly skill-intensive prod-ucts. As more imports penetrated intothe Chinese market, import-competingfirms suffered more severe competition.As a result, domestic firms in the import-competing sectors had to take a lowerprofit margin and no longer had as manyresources to discriminate as before. Dueto this, the gender wage gap within highskill labor groups narrowed, providingfemales who had higher education withboth a more equal position in the labormarket and fairer pay. Additionally, dueto general economic development andoverall income increases during the peri-od, the cost of getting an education,especially higher education, became

much lower than before and the numberof females enrolled in tertiary educationincreased dramatically. Female workersenjoyed stronger bargaining power inthe labor market, which provided themwith an opportunity to be treated moreequally.

Technical School GraduatesPreferred by Exporting Firms

Exports from China also increasedduring this period, although not as muchas imports. As exporting firms facedmore furious competition in the world

Trade liberalization in China has narrowed the gender wage gap for women with higher levels of edu-cation but increased discrimination in the labor market against uneducated women in urban areas

The number of employers willing to hire a male student for a givenwage is 14 times higher than those willing to hire a female student

· 9


markets, their profit margin decreased,which forced them to be more efficient inproduction and management. Thebiggest gender wage gap reduction wasin the group with completed technicaleducation, followed by high school grad-uates, college graduates, and finally byworkers with junior high school and ele-mentary school education. The reasonfor such a sequence lies in relatively lowskill-intensive exports from China in thelate 1980s and early 1990s. Employers inthe exporting sectors preferred workerswho had professional training from tech-nical school rather than with a higherlevel of general education. So, in thiscase, female employees with technicalschool and high school qualificationswere treated more equally due to theincrease in exports.

Finally, in urban areas the income offemales without any qualifications notonly increased by a smaller margin gen-erally, but also became even lower com-

pared to their male colleagues. Thechange in openness was positively corre-lated with an increase in the gender wagegap for workers without qualificationsfrom 1988 to 1995. A one percentagepoint increase in the ratio of imports toGDP from 1988 to 1995 implies that thegender wage gap for workers withoutqualifications increased by RMB 43.95Yuan. The adoption of the "householdcontract responsibility system" increasedthe productivity of the agricultural sectoron a large scale and released millions ofpeople as surplus labor — largely com-prised of unskilled female workers —from the rural areas. As a result,unskilled female workers in urban areassuffered from a huge inflow of unskilledlabor, and with relatively lower wage lev-els the wage gap further increased.

To summarize, female workers con-tinuously experienced discrimination inthe labor market in the late 1980s andearly 1990s. Trade liberalization brought

more severe competition into the domes-tic market and more equality for mostworkers. More specifically, it narrowedthe gender wage gap for women with arelatively higher level of education, espe-cially those who graduated from collegeand technical schools. However, femaleswithout any qualifications in urban areassuffered the most discrimination in thelabor market, mostly due to the shift inrelative labor demand in favor of peoplewith relatively higher education levelsand the large-scale migration of unedu-cated female labor from the rural areas.

Yin He is Assistant Professor atChina Center for Economic Research,Peking University, Beijing, China. Thearticle is based on the author's presenta-tion at the China-Russia Conference andher ongoing research on trade liberaliza-tion in China. BT

China-Russia Trade Dynamics

Natalya Volchkova

China and Russia should pursue regional initiatives rather than national trade policies to promotebilateral trade as the possibility for large-scale growth in the trade volume between the two countriesremains limited

In terms of trade Russia has histori-cally been important for China, andremains one of China's top ten tradepartners. Russia-China trade grew by37.1% in 2005 compared to 2004 andreached US$29.1 billion. Bilateral tradegrowth was 14% above China's totaltrade growth last year.

Along with the trade volume growthboth in Russia and China, importantchanges have occurred in terms of theirmajor trade destinations. Between 1992and 2004 China was neglecting Asiantrade partners in favor of NorthernAmerican and European ones, and theshare of Chinese exports to Asia declinedfrom 55% to about 33% of totalexports. During the same period NorthAmerica's share in Russia's exports dou-

bled to 5% of total exports, while that ofthe European Union remained relativelystable accounting for 55% of the total in2004. The share of China's exports intoRussia and Russia's into China remainedquite stable at 2% and 5%, respectively.

So while we have observed a substan-tial increase in the trade volume in realterms between Russia and China, it hasmostly reflected the countries' overallgrowth in output and increased open-ness, rather than some specific develop-ment of bilateral relations.

Export Composition SkewedThe composition of Russia's exports

to China has some peculiarities com-pared to the average composition of

Russian exports to other countries.While Russia's overall exports are heavi-ly dominated by fuel and minerals(about two-thirds of total exports), itsexports to China are slightly more diversi-fied, with four main categories — fuel, fer-rous metals, timber and paper, and chemi-cals — making up 67.1% of total exportsin 2004. Another large category — 15%of exports — is machinery, electronicequipment and optics.

In China's export to Russia lightindustry products — textiles, footwear,and toys — prevail. While this categoryconstitutes a quarter of China's exportsto the rest of the world, it amounts to astriking 65% of exports to Russia. Toother countries China exports almost anequally large share of machinery, elec-



tronic equipment and optics, as it does oflight industry products.

Thus, while Russia's exports arehighly dominated by minerals, itsexports to China are better-balanced.Chinese exports to the rest of the world,on the contrary, are much better diversi-fied than its exports to Russia.

The Balassa index approach pro-vides a deeper analysis of export com-position. The indexes are constructedon commodity or industry aggregation

levels and show how biased the trade ina good of a particular country is relativeto the worldwide trade in this good.Balassa indexes above 100% for bothexports and imports mean an extensivetrade both ways, i.e. a country exportsand imports the particular good on alarger scale than the world as a whole.This kind of intra-industry trade ismore characteristic of developed coun-try trade flows, and can make up to70% of a country's trade. The goods(industries) with the export index above100% and the import index below100% are the goods (industries) inwhich a country specializes as anexporter according to comparativeadvantage principles.

Examined this way, Russia andChina demonstrate obvious differencesin their trade composition. China trades

many more goods intra-industrially thanRussia. These include transport equip-ment, watches, chemicals, textile, fur,wool, and others. The only such good inRussia is textiles. China has a compara-tive advantage in export of explosives,processed food, and leather goods, whileRussia specializes mostly in resources:metals, fuel, and fertilizers. This impliesthat China's trade composition hassome features usually attributed todeveloped countries, while Russia's

structure of trade flows is typical for adeveloping country. Between themselves,China and Russia also mostly trade ingoods in which they have a comparativeadvantage, and have little intra-industri-al trade.

Russia’s Exports to Chinaat “Normal” Level

In order to understand the extent ofRussia-China trade in the context ofworld bilateral trade flows we perform agravity model analysis and compare pre-dicted and actual trade flows.Controlling for GDP per capita, size, dis-tance between capitals, existence of acommon border, regional trade agree-ments, etc. we find that the level ofRussia's exports to China can be consid-ered as "normal" given the economicand geographical size of both countries,

their development levels, and their cul-tural and historical differences. At thesame time there is a little bit of "under-trading" from China's side. Therefore,given language differences, the absenceof a shared (colonial) history and a cur-rency union, there are limited possibili-ties for large-scale growth in the bilater-al trade volume.

A Special Place for theRussian Far East?

China has recently been trying toincrease its presence in traditional andnew markets in Russia. The Chinese areinterested in getting access to Russia'snatural resources and technologicalpotential. At the same time Russia couldbenefit from better economic coopera-tion between its Far East regions and arapidly developing southern neighbor.Due to their remote geographical posi-tion and high transportation costs theseregions have not been getting any signif-icant positive effects from economicdevelopment in European Russia. Theproximity of these regions to a huge andfast-developing market could play animportant role in stimulating businessactivity in the Far East and the geo-graphical diversification of production inRussia. The only way to exploit thisopportunity is through greater tradeintegration between the Far East regionsand China.

However, a simple analysis of theregional trade flow distribution fromRussia to China shows that the regionscurrently most actively involved in tradeare those further away from China.Perm, Irkutsk, Karelia, Voronezh,Belgorod, Vologda, Chelyabinsk, Tula,Murmansk, and Novgorod regions haveabove average trade with China, whilethe Far East clearly under-exploits thepotential advantages of trade linkageswith China.

Hence we believe that regional initia-tives, rather than a country-wide tradepolicy would give higher returns in termsof increasing trade linkages betweenChina and Russia.

Natalia Volchkova is a SeniorEconomist at the Centre for Economicand Financial Research, Moscow. The arti-cle is based on the author's presentation atthe China-Russia Conference in Beijing inDecember 2005. BT

China’s trade composition has some features attributed to devel-oped countries, while Russia’s structure of trade flows is typical fora developing country

China’s export shares

TO ASIA TO NORTH AMERICA TO EUROPEAN UNION

TO AFRICA TO RUSSIA TO OTHERS

100%

80%

60%

40%

20%

0%

1992 1994 1996 1998 2000 2002 2004

The Russian stock market hasbecome one of the largest emerging mar-kets in the world. Starting from scratchin late 1994, it has now reached the totalmarket capitalization of over US$400billion, or 60% of GDP. More than 250Russian stocks are listed locally orabroad, the monthly trading volume isover US$14 billion, and IPOs are boom-ing. Yet, the path leading to this outcomehas not been smooth, reflecting the upsand downs of Russia's transition andinvestors' perceptions of the country'srisks.

During the last 11 years the RTSI, themost prominent index of the Russianstock market, has grown by more than11 times, which corresponds to the aver-age annual return of around 50%.However, high returns were accompa-nied by high risks, both in time andcross-sectional dimensions. In almostevery year, the RTSI's annual highexceeded the same year's low by more

than 50%. The worst year was 1998when the RTSI lost 85% of its valueafter the Russian government defaultedon its debts and devalued the rouble. Thecross-sectional variance of returns wasalso considerable, with the differencebetween the lowest and highest deciles ofannual returns always above 150%.What were the fundamental determi-nants of the investment risk driving theRTSI and explaining differences in indi-vidual stock returns?

Mirroring HistoryThroughout its brief history, the

Russian stock market has mirrored thecountry's defining moments from the1996 re-election of President Yeltsin,which headed off the threat of a Sovietrevanche, to the serious setbacks of thefinancial debacle of 1998 and, morerecently, the destruction of Yukos (seeFigure 1). Yet, the extreme volatilityassociated with these shocks should not

obscure the market's sensitivity to manyless dramatic, but still important devel-opments, including those in corporategovernance and Russia's relations withthe outside world.

In the first years of the market's his-tory, up to the resignation of PresidentYeltsin at the end of 1999, the marketwas moved by a binary perception thatRussia would either fall back into Soviettimes if the communists came to power,or else would develop into a market-based system. The RTSI's first monthswere marked by a steady decline reflect-ing fears of the seemingly inevitable vic-tory of the communist party in the com-ing elections. In the second quarter of1996, the RTSI tripled as the initiallyhopeless prospects of Yeltsin's re-electiondramatically reversed. However, after there-election, the political leadershiplacked the political capital to implementtough but essential reforms, above all fis-cal reforms. This became a root cause of

the 1998 financial crisis, eventhough the collapse had been pre-cipitated by the Asian crisis.

Meanwhile, the administration'sweakness was compounded by thegrowing power of the so-called "oli-garchs" who had acquired controlof natural resources assets in thenotorious “shares-for-loans” priva-tization schemes in late 1995. Withmany senior officials and legislatorseffectively on the payroll of differ-ent business groups, the alreadyweak administration became evenless capable of carrying out reforms,including the enforcement of bettercorporate governance standards.The risk of expropriation byYeltsin's successor increased theincentive for the oligarchs to extractas much cash from their companiesas they could, which meant abusingminority shareholder rights in aseries of scandalous dilutions, trans-fer pricing and poor disclosure.

· 11


The Russian Stock Market: Lessonsfrom the First Decade

Alexei Goriaev and Alexey Zabotkin

Since 2005, the Russian stock market has become more sensitive to macroeconomic factors, asopposed to corporate governance scandals and political risks as was the case before

Figure 1. The RTSI dynamics in 1995-2005

Source: UFG Research

1,000

900

800

700

600

500

400

300

200

100

01995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Yeltsin reelectedfor 2nd term

9/11Asian crisis

breaks out

Government fired

Devaluation and default

2nd Chechen war starts

Yeltsin resigns

Putin elected

president

Putin/Bush summit in

Texas

BP-TNK deal Putin reelected

Yukos-Sibneft

merger can-celled

Yugansksold

to Rosneft

Tax claims againstmobile provider

Vimpelcom

Yukos -Sibneft merger

announced

Khodorkovsky

arrested

Lebedev arrested



The years after President Putin'selection in March 2000 can bedivided into two periods. Initially,it took two years for investors torecover confidence in Russian equi-ties. In July 2000, President Putinand business leaders reached acompromise including a de factoamnesty of the 1990s privatizationschemes in exchange for the oli-garchs' consent to stay out of poli-tics. This agreement, along with theadoption of the new law on jointstock companies in 2002, trans-formed the incentives for improv-ing corporate governance, as thecontrolling owners of major corpo-rations became interested inincreasing their companies' marketvaluation.

Yukos First to ImproveCorporate Governance

The company that took the leadin the move from vice to virtue onthe corporate governance front wasMikhail Khodorkovsky's Yukos. Once anightmare for minority shareholders,starting from 2000, Yukos began settingnew standards in reporting, auditing, anddividends payments. In June 2002, theshareholdings of Khodorkovsky and hispartners in the Menatep group were dis-closed. As a result, the company's shareprice increased by more than twelvetimes in the course of two years, whichmade Yukos Russia's second-largestcompany (see Figure 2). Corporate gov-ernance improvements in other Russiancompanies have also increased their mar-ket capitalization.

Putin's popularity assured politicalstability, and a recovering oil price andprudent fiscal policy were keys to macro-economic stability. In addition, the newadministration demonstrated the readi-ness and ability to pursue serious struc-tural reforms, including the introductionof a flat 13% income tax in 2000. Yet itwas only in the fourth quarter of 2001that the rally in the stock market started.It was triggered by the external shock ofthe 9/11 events, when Russia emerged asa US ally in the new "war on terror".

Since then, there has been one majorinterruption in the market's progress —"the Yukos affair". In the second half of2003, Yukos' top managers and majorowners, Mikhail Khodorkovsky andPlaton Lebedev, were arrested on charges

of tax evasion and embezzlement. Thecompany was put under scrutiny andreceived numerous backdated tax claimsthat eventually amounted to US$27.5billion. Apparently investors interpretedthe Yukos events as a sign of a toughen-ing of government policy towards thebusiness community. Analysis of stockprice sensitivity to Yukos events showsthat firm-specific political risks appearedespecially high for non-transparent pri-vate firms, oil companies, and companiesprivatized via loans-for-shares auctions.The Yukos affair triggered four correc-tions in the market, the most serious ofwhich, in April — July 2004, dragged theRTSI down by 33%.

In the end, investors believed that thedestruction of shareholders' equity inYukos along with several other instancesof backdated tax claims against privatecompanies would not lead to a wide-scale expropriation of companies by thestate. Since 2005, the Russian stock mar-ket has become more sensitive to macro-economic factors, such as oil prices,money liquidity and global equity mar-ket performance, rather than corporategovernance scandals and political risks,as was the case before. A favourablemacroeconomic environment spurred themost recent rally in the market, whichstarted in August 2005 and nearly dou-bled the RTSI by February 2006. Thecontinuing surge in oil prices helped the

government to boost its revenues, repaya large fraction of debt and set up a sta-bilization fund. Companies in the oil andrelated industries have also benefited.Excessive money liquidity, driven by thehigh domestic banking system's liquidityand foreign inflows, has pushed updemand for stocks. In addition, theRussian market has become more inte-grated into global equity markets, whichthemselves have shown decent perform-ance during the period.

The relative success of the Russianstock market at this point in time reflectssubstantial progress in the developmentof new institutions and economicreforms. Yet, many problems remain: highconcentration, low liquidity, sensitivity tonon-economic risks, and, as a result,potentially high market volatility. Theseissues must be gradually solved to ensurefurther development of the market.

Alexei Goriaev is Professor at theNew Economic School and a LeadEconomist at CEFIR, Moscow. AlexeyZabotkin is Director of Equity strategyat Deutsche UFG, Moscow. The articlesummarizes the authors' research onRussian financial markets, and AlexeyGoriaev's presentation at the China-Russia Conference in Beijing inDecember 2005. BT

Figure 2. The dynamics of Yukos' stock price in 2000-2005

2500

2000

1500

1000

500

02000 2001 2002 2003 2004 2005

Yukos

RTS index

Lebedev arrested

Khodorkovsky arrested

First tax claim lodged

39,5% of commonstocks are frozen

Yuganskneftegazauctioned

Khodorkovskyand Lebedevsentenced to 9yars in prison

· 13


Entrepreneurship in China and Russia

Simeon Djankov, Yingyi Qian, Gerard Roland, and Ekaterina Zhuravskaya

Chinese and Russian entrepreneurs have many common characteristics: they take risks, choose workover leisure, and want more money compared to other people

This comparison of Chinese andRussian entrepreneurs is based on a pilotsurvey conducted in Russia in 2003 —2004 and in China in 2004 — 2005,which is a part of a large-scale researchproject in Russia, Brazil, China, India,and Nigeria. In both Russia and China,individuals in seven large cities in fourdifferent regions were surveyed. The sam-ples include both entrepreneurs and non-entrepreneurs in order to understandhow these groups differ in terms of indi-vidual characteristics, sociological vari-ables, and their perceptions of the institu-tional, social and economic environment.

Entrepreneurs on average are moremobile across jobs and geographically. InRussia, they have lived in more localitiesand have had a significantly higher num-ber of professional activities than non-entrepreneurs. Chinese entrepreneurshave worked in a larger number of indus-tries compared to non-entrepreneurs.

In line with the common perceptionthat entrepreneurship is associated withrisk-taking, entrepreneurs report signifi-cantly lower risk aversion than non-entrepreneurs. When asked whetherrespondents were willing to accept oneof two risk-neutral gambles, 77% ofentrepreneurs in Russia and 90% ofentrepreneurs in China responded yes(compared to 67% and 57% of non-entrepreneurs, respectively).

Entrepreneurs report higher levels ofsatisfaction with life compared to non-entrepreneurs. In Russia, 92% of entre-preneurs said they were happy comparedto 73% of non-entrepreneurs. In bothcountries a higher proportion of entre-preneurs thought themselves to be veryor quite successful compared to non-entrepreneurs: 74% vs. 37% in Russia,and 64% vs. 43% in China.

Another important differencebetween entrepreneurs and non-entre-preneurs relates to leisure-work choices.Entrepreneurs were much less likely toagree to retire if they had received awindfall income of 100 to 500 times theannual GDP per capita of the country. Inboth countries, a very strong reason fornot retiring was the desire to earn more

money. In Russia, job satisfaction and afeeling of being useful for society alsoplayed an important role; the oppositewas true for China however.

Compared to non-entrepreneurs, alarger share of parents of Russian entre-preneurs (73% vs. 48%) had higher orspecial education. There are no differ-ences in parents' education in China.Nevertheless, fathers of entrepreneurs inboth countries were more likely to havebeen bosses or directors (19% vs. 12%in Russia, and 30% vs. 13% in China).

One very large difference betweenthe two groups in both countries is theproportion of entrepreneurs amongone's family members and friends. InRussia, 57% entrepreneurs and 49% inChina have entrepreneurs among familymembers, compared to 34% and 24%,respectively, among non-entrepreneurs.

As for values and beliefs, the majordifference is the value attached to work:75% of Russian and 80% of Chineseentrepreneurs consider work to be veryimportant, which is consistent with thelabor-leisure preferences reported above.This can be compared to 53% and 63%of non-entrepreneurs in Russia andChina respectively. Chinese entrepre-neurs value political freedom verystrongly compared to non-entrepreneurs(73% vs. 28%) whereas Russian entre-preneurs attach less value to it comparedto non-entrepreneurs (62% vs. 74%).

Asked about social norms, in bothcountries more entrepreneurs than non-entrepreneurs consider bribes acceptable.This probably reflects their greater expe-rience in doing business rather thanintrinsic values. Russian entrepreneurs areconsiderably less trustful of foreignersand of people from out of town whereasthere is no significant difference in China.Russians in general trust all levels of gov-ernment substantially less than theChinese: only 37% of Russians surveyedhad at least some trust in the central gov-ernment compared to 77% in China.

Of the Chinese entrepreneurs 82%think that local government favors themand 70% of non-entrepreneurs share thisview. In Russia, only 49% of entrepre-neurs are of the same opinion (53% ofnon-entrepreneurs). Compared to the restof the population, Russian entrepreneurshave a more negative perception of thegovernment's attitude towards entrepre-neurship (at all levels of government).Entrepreneurs in China feel more securewith respect to property rights protectionand trust courts more compared to non-

entrepreneurs. The opposite is true forRussia. When asked whether they wouldgo to court if abused by a governmentofficial, roughly 72% of non-entrepre-neurs say "yes" in both countries.However, only 62% of Russian entrepre-neurs respond positively, whereas 80% oftheir Chinese equivalents do.

The results thus suggest that thedeterminants of entrepreneurship in thetwo countries are multiple. Entrepre-neurs in both countries like to take risks.Cultural differences do not seem to playa key role, even though there are somenotable differences between entrepre-neurs and non-entrepreneurs, includingtheir self-proclaimed work ethic. Creditconstraints appear to play an importantrole in discouraging people from startingor expanding an enterprise. Above all,social network effects — having entre-preneurs in the family and among one'sfriends — appear very important in thechoice to become an entrepreneur.

Simeon Djankov is a ProgramManager at the World Bank's ResearchDepartment; Gerard Roland and YingyiQian are Professors at the University ofCalifornia, Berkeley; and EkaterinaZhuravskaya is the Academic Director ofCEFIR and Associate Professor at theNew Economic School, Moscow. Thefull text of the paper can be viewed at:http://www.cefir.ru (WP No. 49). BT

82% of Chinese entrepreneurs think that local government favorsthem whereas only 49% of Russian ones share the opinion



Why Shock Therapy May Lead toWorse Performance Than GradualTransition

Vladimir Popov

Among many explanations for thetransformational recession that occurredin the 1990s in most transition econo-mies, there is one that hardly anyone candeny: the adverse supply shock caused bythe change in relative prices. The evidencefrom all transition economies shows thata reduction of output in a country is wellexplained by distortions in industrialstructure and trade patterns (it remainsstatistically significant no matter whatcontrol variables are added). The magni-tude of these distortions, in turn, deter-mines the change in relative prices, whenthey are deregulated.

In Russia, industries with the greatestadverse supply shock (deterioratingterms of trade — relative price ratios foroutputs and inputs), such as light indus-try, experienced the largest reduction ofoutput (see Graph 1). Such an explana-tion is simple and straightforward, yet

somehow it is not discussed much in theliterature.

Consider a country where deregula-tion of prices (or elimination of trade tar-iffs/subsidies) leads to a change in relativeprice ratios and thus produces an adversesupply shock for at least some industries.Capital should be reallocated from indus-tries facing declining relative prices andprofitability to industries with rising rela-tive prices. Assume that 50% of total out-put is concentrated in non-competitiveindustries: this whole sector should dis-appear either gradually or at oncedepending on how fast relative priceschange; capital is not homogeneous andcannot be moved to the competitive sec-tor, whereas labor can be reallocated tothe competitive sector without costs.

If prices are liberalized instantly, thena non-competitive sector becomesunprofitable and output falls immediate-

ly by 50%; later savings for investmentare generated only by the competitivesector, so it takes a number of years toreach the pre-recession level of output. Ifreforms are carried out slowly (gradualprice deregulation or elimination of tar-iffs/subsidies), so that every year outputin the non-competitive sector falls by,say, 10%, this fall could be largely com-pensated by the increase in output in thecompetitive sector. The best trajectory, ofcourse, is one with a speed of deregula-tion that leads to the reduction of outputin the non-competitive sector at a naturalrate, i.e. as its fixed capital stock retiresin the absence of new investment.

The example illustrates that there is alimit to the speed of reallocating capitalfrom non-competitive to competitiveindustries, which is determined basicallyby net investment/GDP ratio (grossinvestment minus retirement of capitalstock in the competitive industries, sincein non-competitive industries the retiringcapital stock should not be replaced any-way). It is not reasonable to wipe awayoutput in non-competitive industriesfaster than capital is being transferred tomore efficient industries.

Market type reforms in many post-communist economies created exactlythis kind of a bottleneck. Countries thatfollowed the shock therapy path foundthemselves in a supply-side recession thatis likely to become a textbook example:an excessively quick change in relativeprices required a degree of restructuringthat was simply not achievable with thelimited pool of investment. Up to half ofthese economies was made non-competi-tive overnight due to the change in rela-tive prices after deregulation. Output inthese non-competitive industries wasfalling for several years and fell in somecases to virtually zero, whereas thegrowth of output in competitive indus-

The speed of reforms involving a reallocation of resources should be such that the scale of restruc-turing does not exceed the investment potential of the economy

Graph 1. The RTSI dynamics in the period 1995-2005

Ratio of 1998 prices to 1990 prices as a percentage of industrial average

Jan

uar

y 19

98 o

utp

ut

as a

% o

f Ja

nu

ary

1990

ou

tpu

t

Electric energy

40% 60% 80% 100% 120% 140% 160%

90

60

30

0

Wood

Machinery

Chemicals

Construction materials

Light

Steel

Non-ferrous metals

Petrochemicals

Fuel

Food

R=0.4062

· 15


tries was constrained, among other fac-tors, by limited investment potential andwas not strong enough to compensate forthe output loss in the inefficient sectors.

Hence, at least one general conclu-sion from the study of the experience oftransition economies appears to be rele-vant for the reform process in all coun-tries: provided that reforms create a needfor restructuring (reallocation ofresources), the speed of reforms shouldbe such that the scale of required restruc-turing does not exceed the investmentpotential of the economy. In short, thespeed of adjustment and restructuring in

every economy is limited, if only due tothe limited investment potential neededto reallocate capital stock. This is themain rationale for gradual, rather thaninstant, phasing out of tariff and non-tariff barriers, of subsidies, and otherforms of government support of particu-lar sectors (it took nearly 10 years for theEuropean Economic Community and forNAFTA to abolish tariffs).

Empirical evidence for such anexplanation seems to be very persuasive.The collapse of output during transitioncan be best explained as adverse supplyshock caused mostly by a change in rel-

ative prices after their deregulation dueto distortions in industrial structure andtrade patterns accumulated during theperiod of central planning (additionaladverse supply shock came from the col-lapse of state institutions), while thespeed of liberalization, to the extent thatit was endogenous, that is, determinedby factors of political economy, had anadverse effect on performance. In con-trast, at the recovery stage ongoing lib-eralization starts to affect growth posi-tively, as the impact of pre-transitiondistortions disappears. Institutionalcapacity and reasonable macroeconomicpolicy, however, continue to be impor-tant prerequisites for successful per-formance.

Not surprisingly, in 2004 — 2005 thelist of countries that exceeded the 1989pre-recession level of output included alot of procrastinators in terms of eco-nomic liberalization: in addition to 5central European countries and Estonia,there were also Turkmenistan,Uzbekistan, Belarus and Kazakhstan, notto mention China and Vietnam.

Vladimir Popov is a Professor at theNew Economic School (Moscow) and aVisiting Professor at the Institute ofEuropean and Russian Studies (EURUS),Carleton University (Ottawa). The fulltext of the paper "Shock Therapy versusGradualism Reconsidered: Lessons fromTransition Economies after 15 Years ofReforms" is available at: http://http-serv-er.carleton.ca/~vpopov/ BT

Graph 2. GDP in 2004 as a percentage of 1989

40 60 80 100 120 140 160 180

MoldovaGeorgia

UkraineTajikistan

AzerbaijanKyrgyzstan

RussiaLithuaniaBulgariaLatvia

Croatia Armenia

RomaniaKazakhstan

BelarusEstoniaTurkmenistan

Czech RepublicUzbekistan

Hungary Slovakia

SloveniaPoland

RMB, bn % yoy RMB, bn % yoy

1994 4819.8 13.1 1936.0 -1995 6079.4 10.9 2471.8 14.01996 7117.7 10 2908.2 12.51997 7897.3 9.3 3175.2 11.31998 8440.2 7.8 3354.1 8.91999 8967.7 7.6 3535.7 8.52000 9921.5 8.4 2368.5 9.82001 10965.5 8.3 2695.0 8.72002 12033.3 9.1 3148.2 10.02003 13582.3 10 4104.5 12.82004 15987.8 10.1 5480.5 16.72005 18232.1 9.9 7619.0 11.4

China GDP and Industrial Output (1994-2005)Year GDP Industrial Output

Source: China Economic Indicators at www.worldbank.org/china



Industrial Agglomeration andRegional Specialization in China

Jiangyong Lu and Zhigang Tao

There are two ways of characterizinggeographic concentration of economicactivities: one is to examine if productionin selected industries is concentrated in afew regions, called industrial agglomera-tion, and the other is to look at the spe-cialization of economic activities in select-ed regions, called regional specialization.These two measures are closely related.Industries become more agglomerated asregions become more specialized.Conversely, industries become more dis-persed as regions become despecialized.

From the founding of the People'sRepublic of China in 1949 up until1979, the Chinese government dispersedits important industries across the coun-try, especially in mountain areas, forpolitical and strategic reasons.Obviously, the geographic distributionof economic activities was economicallysuboptimal. With the economic reformstarted in 1979, it is expected that thegeographic distribution of economicactivities will have dramatic adjustmentstoward economic optimality. Previousresearch has shown that geographic con-centration in China declined after partialeconomic reforms and started to increaselater on. However, there is some contro-versy over the time span of these trendspartly because of a lack of large samplesof firm-level data.

We used firm-level data of more than160,000 industrial firms year-on-yearfrom 1998 to 2003, covering all state-owned firms and non-state owned firmswith annual sales of more than 5 millionRMB. These firms stand for the majorityof China's industrial output, and so thedata is highly representative. Each firm'sdetailed address and product informa-tion was double checked to make sureevery firm had a correct regional andindustrial classification. We also appliedG. Ellison and E. Glaeser's recentlydeveloped measurements for industrialagglomeration, which had not been pre-viously implemented for Chinese data.

Foreign Firms Concentratedin Coastal Regions

Using Geographic InformationSystem (GIS), we drew several maps ofthe geographic distribution for firmswith various ownership structures andfound that:

• Of all types of enterprises, state-owned firms are distributed most evenlyacross the country.

• Collective-owned firms weremore concentrated than state-ownedenterprises, but more dispersed thanother types of firms including Chineseprivate enterprises and firms with for-eign investments.

• The fastest growing type offirms between 1998 and 2003 was pri-vate firms, which had grown from 9,000to 60,000 in the sample.

• The share of foreign firms hasnot changed much during the period,and has remained concentrated incoastal regions.

Industrial AgglomerationIncreased Across Sectors

Calculation and comparison of vari-ous indexes with other studies of Chinaand other countries produced the follow-ing findings:

• Industrial agglomeration meas-ured by the Hoover Index [measures theevenness of distribution across territorialunits — ed.] increased between 1998 and2003 for all industry and region combi-nations.

• In relation to the United States(US), the most comparable country interms of aggregation level in the data,the percentage of "not very agglomerat-ed industries" in China (80%) is muchhigher than in the US (10%).

• Concerning the degree of co-agglomeration, which measure how sub-industries within broader industrialgroups agglomerate together, the levelsfor China were also lower than those of

the US for most industries.We first analyzed regional specializa-

tion in China by dividing the countryinto three regions: coastal, inland, andwestern; then analyzed the situation insmaller regions, including provinces,cities, and counties. Our findings can besummarized as follows:

• The coastal region was special-ized in significantly different industriesas compared to the inland and westernregions, while differences between theinland and western regions were notobvious.

• Regional specialization indicesshowed that the degree of regional spe-cialization for most provinces increasedbetween 1998 and 2003. Meanwhile,coastal provinces were the most special-ized, followed by inland provinces, thenwestern provinces.

• Intra-regional similarity, whichmeasures how sub-regions within broad-er areas specialize in similar industries,increased for most regions.

Our study has uncovered strong evi-dence for increasing geographic concen-tration — both regional specializationand industrial agglomeration — inChina in recent years. It suggests that,with the economic reforms started in1979, economic forces have been playinga dominant role in the geographic con-centration of economic activities despitelocal protectionism. This will strengthenthe competitiveness of China's industriesin the long run.

Jiangyong Lu is a Research Fellow ofthe Center for China in the WorldEconomy at Tsinghua University, Beijing.Zhigang Tao is a Professor of the Facultyof Business and Economics at theUniversity of Hong Kong. This summaryof research findings is based on theauthors' presentation at the China-Russia Conference in Beijing inDecember 2005. BT

An increase in the geographic concentration of economic activities in recent years indicates theincreasingly important role of economic, rather than political, forces behind location decisions

· 17


Russia's Regions: In What SocialSpace Do We Live?Natalya Zubarevich met BT to discuss Russia’s regional inequalities, regional policies and trends in thesocial and economic development of the regions

BT: Given the heterogeneity ofRussia's regions, can one single out somecommon features in their social and eco-nomic development? Have any trendsemerged recently?

The overall trend has been economicgrowth since 1999; the differences areonly in the rate of growth and its sus-tainability. Import-substituting regionswere the first to start growing, but theireconomic growth has gone up and downdepending on the rise in householdincomes as well as the demand in theextraction industries for engineeringproducts. Growth in the export-orientedregions got off to a late start, but thenaccelerated thanks to the rise in worldprices for their export commodities.Some regions have witnessed a slow-down of growth or even a decline, butthe latter was often related to institu-tional factors. For example, industrialdecline in the Tomsk region in 2005 wasdue to problems connected to the Yukosaffair, and in the Samara region institu-tional factors were added to the prob-lems of the leading enterprise, carmakerAvtoVAZ, which led to stagnation.

A second sustained trend has beenthe universal reduction of poverty, whichhas, however, lagged behind incomegrowth. Average per capita incomes inthe majority of regions were back to thepre-default level by late 2002, but it wasnot until the end of 2004 that the pover-ty level dropped to the 1997 level. Thisimplies that the distribution of the bene-fits of economic growth was unevenamong social groups, with the poor lefton the sidelines.

Furthermore, with the exception ofthe least developed regions which hadgrowing demographic pressures, Russia'seconomic growth was accompanied by asignificant reduction in unemployment inthe regions only as it rebounded after thedefault. But between 2002 and 2005 theunemployment level hardly changed at allbecause export-driven growth creates

almost no new jobs. As a result, suchgrowth cannot be regarded as sustainable.

Yet another factor is investment,which should back up economic growth.The geography of investments, however,reveals obvious regional disparities. InRussia investments flow to two destina-tions: oil and gas-producing regions andmetropolitan agglomerations (Moscowand St. Petersburg and their surroundingareas). More than half of Russia's regionsreceive minimal per capita investments infixed capital.

Finally, Russia is probably unique inthat no other country has experiencedfive years of sustained economic growthand at the same time a decline in lifeexpectancy. All these factors indicate thatthe current economic growth is unsus-tainable and of an inferior quality.

BT: To what extent has economicgrowth contributed to bridging the gapbetween regions?

In some ways economic growth had apositive impact on this process, but inother ways it aggravated the problem.The gaps between regions have nar-rowed somewhat in terms of average percapita incomes. But, as is well known,this was due to a massive transfer offunds from richer regions into the feder-al treasury that was subsequently redis-tributed to the least developed regions.As a result, underdeveloped regions are

often better off than revenue-generatingregions in terms of per capita budgetspending (adjusted for the cost of livingin the region). This is a peculiar featureof Russia's regional policy.

Economic differences between theleaders and the majority of backwardregions are growing: per capita GRP inthe rich Tyumen region was three timeslarger than the country's average in1997, and 3.5 times larger (adjusted forthe cost of living) in 2003. In poorIngushetia, on the contrary, it droppedfrom 0.24 to 0.14 of the average.

BT: How acute is the problem ofinequality for Russia's regions?

First of all, it is not a novel problem.We have been facing it for more than adecade. Second, economic backwardnessis often camouflaged by redistribution.Per capita budgetary expenditures insome of the poorer regions are higherthan in most averagely-developed andeven in some comparatively well-devel-oped regions, if adjusted for inflation.Even more revealing is a comparison ofneighbors with similar living conditions:in the very poor Buryat AutonomousOkrug per capita budgetary expendi-tures are 1.2 times higher than in themore developed Irkutsk (1.8 times high-er in 2003).

The problem is that the need for"camouflage", that is, financial injectionsinto the weakest economies, is growing,and so are the risks of continuing such apolicy. Pumping huge amounts of cashfrom the center to the regions will notsolve the problem until a coherent policyemerges for stimulating internal sourcesof growth and the natural competitiveadvantages, however small, that a regionmay have. If instead resources continue tobe funneled into inefficient institutions, asis the case today, nothing but corruptionand a "free-rider" mentality can result.

There is a growing awareness of thedead-end nature of the policy being pur-



sued, and there are signs of a shifttowards a policy of supporting thestronger regions. The draft regionalstrategy of the Ministry of RegionalDevelopment proposes identifying 10 —12 advanced regions that will become"sources of growth". This is all verywell, but the Ministry is sure that it candetermine who will be lucky enough tobe designated as the "locomotives"based on the criteria that it has come upwith itself.

In my opinion, such dirigisme ispatently ineffective. It is necessary toloosen the financial "knot" and to allowmore independence to the regions, whichare already demonstrating better gover-nance. This will help create variousregional development models, foster nor-mal competition among the regions forinvestments, and broaden the choice ofbest practices for the remaining regions.At present, such choice is depressinglystraightforward and essentially consistsof trying to get closer to the redistribu-tion of oil money. As soon as the oilboom subsides, all the unresolved prob-lems will resurface.

BT: What are the most effectivemeasures, at all levels, that could dimin-ish the gap between regions?

There are no simple recipes. One hasto balance aid and development to, onthe one hand, prevent the degradation ofunderdeveloped regions and, on theother, grant the stronger regions a degreeof independence that would enable themto tap all their resources. It is impossibleto find an effective solution in the frame-work of Russia's rigid vertical powerstructure, when decisions that aredeemed to be effective are handed downfrom above. This leads to total distortionof the original idea; as the measuresmove down the hierarchy they arefleshed out with details that turn theminto a caricature of those originallyplanned.

Inequality is inevitable, it stimulatesdevelopment. The important question isof the degree of inequality and the mech-anisms used to stimulate development.Natural positive trends are alreadyemerging: city agglomerations and theareas around them develop the fastest.Policy should help to move growth fur-ther down the hierarchy of cities.Advancements are already being diffusedin Russia from big cities to regional cap-

itals, to smaller cities with export-orient-ed industries. This diffusion comes in theform of faster income growth and theexpansion of local service markets andmodern consumer behavior followed bya change of incentives. Another area ofgrowth is sea port regions located on themain trade routes (especially in thesouth) whose development has accelerat-ed in recent years.

Despite these positives, delicate andcreative work lies ahead which cannot beeasily combined with the extension ofthe vertical power structure down to themunicipal level. Thus, the logic should be

simple: to follow the trend and speed upthe geographical diffusion of advance-ments rather than having this diffusionproceed orthogonally to the develop-ment trend.

BT: Does the typology of regions thatyou have developed coincide with thedivision of regions into rich and poor?

The typology of regions has beenchanging as the patterns of spatial devel-opment are continually shifting.Metaphorically speaking, in the mass"body" of regions we can easily determinethe "tail" and the "head" on the basis ofaggregate indicators. But the middle is farmore fluid and heterogeneous. It is unlike-ly that a strict typology can be quantita-tively assessed and developed once and forall. For now, one has to be careful abouttypologies. Just one example: who couldimagine five years ago that Chukotkawould be among the leaders, and in a cou-ple of years — this is my forecast — willagain drop to the middle? Equally artifi-cial is the surge of GRP growth in internaloffshore areas, Kalmykia and Mordovia.On the other hand, there is powerful realgrowth in the Leningrad region, and thesouthern regions, Rostov and, so far lesssteadily, Krasnodar.

Instead of a strict typology one candivide the regions into four groups: theleaders, Moscow and the Tyumen areas,which are out of reach for the others inthe near future; 10 — 12 relatively devel-oped regions; "middle" regions compris-ing two-thirds of the regions, and about15 heavily subsidized backwaters. Thegroup of relatively developed regions is a

bit like a two-way street: for example,the Murmansk region is sinking towardsthe middle while the Leningrad region ismoving in the opposite direction.

BT: Which regions, in your opinion,have the biggest potential to becomemore competitive?

There is institutional potential in atleast three Russian regions that have astrong innovative component in gover-nance and business management: Tomsk,Samara, and Perm. The Krasnodar andthe Rostov regions (in the future, also

Kaliningrad) are certainly up and coming,although until recently their coastal loca-tions — an important factor in the worldeconomy — have played a minor role.

Three agglomerate areas of growthare emerging in Russia: Moscow and theMoscow region, including the Yaroslavlregion and adjacent parts of neighboringregions; St. Petersburg and the Leningradregion; Rostov and Krasnodar and theirport zones. There are comparatively large"nuclei" in the Volga and Urals areas:Perm, Samara-Togliatti agglomeration,and Yekaterinburg, although each is notwithout problems. The situation inTatarstan depends heavily on politicalfactors. East of the Urals Tomsk has themost advanced institutions, and possiblyKrasnoyarsk, while Novosibirsk has sofar been short of resources. Growth in theFar East (other than the oil-rich Sakhalin)is the most problematical, because it isbeing arrested by the corruption-riddeninstitutions in the Primorsky region andexcessive dirigisme in Khabarovsk, aswell as puny federal investments.

So, for now the growth zones do notreach further than Lake Baikal. This con-figuration is based on natural growthfactors — agglomeration, infrastructureand institutions — and so may be a long-term one.

Natalya V. Zubarevich is Professor atMoscow State University. She is Directorof the Program "A Social Atlas ofRussia's Regions" which the IndependentInstitute for Social Policy in Moscow hasbeen creating since 2003. Julia Babichconducted the interview. BT

Natural positive trends are already emerging: city agglomerationsand the areas around them develop the fastest

· 19


Unleashing the Potential: Growthand Investment in Russia's Regions

Olga Mosina

Progress in investment and growth inRussia's regions has been limited andhighly uneven, despite the many potentialopportunities. In order to sustain the higheconomic growth levels of recent years,Russia needs to diversify its economy.Active promotion of small businessgrowth and foreign investments in theregions are crucial factors in this regard.Both large foreign investors and smalldomestic firms tend to have relatively lit-tle leverage to work around ill-function-ing institutions and corrupt bureaucra-cies, so market-friendly and well-function-ing institutions, regulations and policiesare very important for these two groups.

High Potential, PoorPerformance

The investment climate in Russia as awhole remains relatively poor, which isnot surprising given the low level of insti-tutional development (measured by gov-ernance indicators in Kaufmann et al.).According to UNCTAD, Russia ranked97th out of 140 economies in 2003 interms of inward FDI performance and27th in terms of inward FDI potential.The accumulated investment stock in2004 was US$98 billion (or 17% ofGDP), which can be compared to US$245bln in China (15% of GDP) and US$61bln in Poland (25% of GDP).

Just as the Russian economy as awhole is dominated by Moscow and theenergy rich regions, so are the foreigninvestments. To date, the city of Moscowalone has attracted about one-third ofthe FDI stock, and the top five regionssome 70% of the FDI stock.

The low level of FDI is revealed bydata on foreign owned firms' share intotal industrial output (see Map). Theaverage share of foreign firms in industri-al output (constructed using firm-levelbalance-sheet data and excluding off-shore firms) is 10.3%, and their share inemployment is 5.4%. As a comparison, in

the early 2000s the average share ofemployment by foreign firms in Polandwas 20%, Czech Republic 32%, andEstonia 41%. The highest share of pro-duction by foreign-owned companies isfound in the food and timber industries,in which many firms are relatively smalland young. The share of foreign-ownedfirms in the fuel industry remains thelowest among all industries, due to polit-ical reasons.

Why have some regions succeeded toimprove their attractiveness, while oth-ers have failed? Apart from the obviousfactors, such as geographical location,urban-rural differences and the availabil-ity of natural resources, regions have dif-fered in:

• their relationship with the fed-eral authorities and local businesses,

• their ability and willingness toimplement reforms,

• their support for entrepreneur-ship and innovations.

Reforms Working inOpposite Directions?

Two reforms that have affected thefederal-regional relationship were intro-duced in Russia in the last few years. Thepolitical reform of2004 gave the presi-dent the power toappoint governors.The rationale for thereform was toimprove the account-ability of regionalgovernors and theirmeasures to improvethe welfare of localresidents, and toincrease the politicalcontrol of the centerover the regions. Thefiscal reform aimedat improving theregions' fiscal incen-

tives, dividing financial responsibilitiesbetween the federal and regional govern-ments, and reforming the system ofsocial benefits. While this politicalreform lowered the governors' bargain-ing power tremendously, the fiscal decen-tralization gave the regions greaterautonomy. The reforms may, thus, workin opposite directions. Although the cen-ter now has more power to fire gover-nors, the latter might no longer havestrong incentives to care about the wel-fare of citizens, and instead care moreabout making a positive impression onthe president.

Another phenomenon that has had aneffect on regional growth is so-calledstate capture, whereby politically power-ful firms receive preferential treatments,such as tax breaks, investment credits,subsidies, free grants of state property,etc., and influence the rules of the gameand create obstacles to the emergenceand development of competitive busi-nesses. A CEFIR study of state captureacross regions shows that it may in factgenerate short-term growth, because cap-tors usually represent a large share of theregional economy, and as they benefitfrom the system, the regional economyalso benefits. However, this is not sus-

Peformance of the Russian regions has depended on their relationship with the federal authoritiesand local businesses, their ability to implement reforms, and support to new sources of growth

Share of firms with substantial (>10%) foreignownership in regional industrial output, 2003

0.1-1.21.5-2.42.4-3.33.6-6.36.6-11.211.6-19.920.3-54.2



tainable growth, and the long-term costsfrom the lack of diversification are poten-tially large for the regional economy.Besides, the rest of the economy suffers:with an increase in capture, firms withoutpolitical influence stagnate, their produc-tivity, sales, and investments decline.Regional budgets are negatively affectedas tax collection decrease and budgetarrears increase. The degree of capture, itis found, depends on industrial concen-tration, level of education, and voterawareness.

One can note that the regions that areon the top-20 list for least state captureare the very same regions that occupy thetop-20 list for growth and a high share ofsmall business activity. In terms of thesefactors, St Petersburg comes out as a par-ticularly strong performer.

SMEs Growth RespondedPositively to Reforms

According to the Russian SMEResource Center, small and medium-sizedenterprises (up to 250 employees) werenon-uniformly distributed over Russia in2003: the number of enterprises per 1000economically active people varied from44 in the Republic of Buryatia to 450 inthe Republic of Altai.

The fastest growth of SMEs tookplace in 2002, when most reforms aimed

at easing administrative burden for firmsand limiting the abilities of local govern-ments to intervene in the functioning ofsmall business were implemented.However, during this period growth wasunevenly distributed across regions(Table 1). Regional variation in reformimplementation may help to explain thisdifference.

Five rounds of monitoring surveysconducted by CEFIR in 2002 — 2005indeed concluded that the regulatoryburden for small businesses — in theform of inspections by government agen-cies, licensing, certification, tax adminis-tration, and registration procedures —remained high and that the problemsstemmed from regional and localenforcement, rather than federal legisla-tion. The five surveys also showed thatreforms seem to initially have had a sig-nificant positive effect, but the speed ofprogress declined over time.

Despite large variations in regionalperformances, regions could not beranked as "good" or "bad," as there aresignificant differences in how severe eachproblem is within one region. For exam-ple, in the fifth round, Sakhalin was theworst performer in terms of costs forlicensing, but the best region in terms ofinspections.

Overall, three main determinants forreform progress are: local fiscal incen-tives and a high level of pre-reform smallbusiness presence in a region. As withstate capture, less concentration of out-put has a positive role for the regionaleconomy, and is associated with moredynamic reform progress.

Regional and local authorities alsohave a potentially significant role inimproving the regional business climate,as the survey of the business climate per-ceptions by small business owners sug-gests (see Table 2). While macroeconom-

ic stability is obviously beyond the reachof regional administrations, they coulddo a lot to improve tax administration,battle corruption and ensure a level play-ing field for all firms. A positive finding ofthe survey is that competition — the onlyproblem on the list that firms in a freemarket economy should worry about —increased in significance throughout theyears, indicating that local markets, inwhich most SMEs operate, have becomemore competitive.

New Sources of GrowthRegional authorities could also help

industrial firms which are going througha process of massive technological andorganizational restructuring to innovatemore. A joint study by CEFIR and theInstitute for the Economy in Transi-tionin Moscow estimates that the number offirms engaged in both innovations andimitations was as high as 60% in 2005.A lack of funding, both from internaland external sources has been cited asthe main obstacle to innovations.However, regional governments have avital role in fostering innovation byimproving the infrastructure and sup-porting education and continued train-ing, as 24% of firms named shortage ofqualified personnel and management asa significant barrier, and for 16% offirms this barrier was infrastructure.Such support would allow a more effi-cient use of the existing human capital,capable of innovating, and not only imi-tating. This task will become more andmore urgent as the Russian technologicalposition improves.

The discrepancy between the invest-ment and growth potential and the high-ly uneven progress in Russia's regions isto a great extent based on the institu-tional, political, fiscal and social struc-tures of Russia. Postponement of vitalreforms and the poor implementation ofreforms in combination with directlycontradictory reforms are the main chal-lenges to bridging the gap.

The piece is based on the joint report“Unleashing the Potential: Growth andInvestments in Russia’s regions”, preparedby researchers at the Centre for Economicand Financial Research (CEFIR) inMoscow and the Stockholm Insitute ofTransition Economics. The papers re-ferred to in the article are listed in Biblio-graphy at the back of the volume. BT

Moscow Region 35.6%St Petersburg City 31.8%Kaliningrad 22.5%Leningrad 22%Samara 19.6%Voronezh 18%Tomsk 17.5%

Table 1: Regions with a relativelylarge share of small business

employment

2001 2002 2003 2004

3.28 2.78 2.60 2.89

2.62 2.69 2.78 2.86

3.10 2.67 2.59 2.59

2.26 2.09 2.19 2.3

2.10 1.87 1.93 2.03

Macroeconomic instability

Competition

Tax administration

Unequal competitive environment

Corruption

Note: 5=threatens firm's existence, 4=a very serious problem, 3=a serious problem, 2=aslight problem, 1=not a problem

Table 2: General perception of business climate, selected indicators

· 21New Findings


Mongolia's Competitiveness andEconomic Growth

Janusz Szyrmer

On the World Economic Forum's(WEF) competitiveness index Mongoliaranked a low 96th. In 2005, Mongoliawas included in the WEF ranking systemfor the first time and became one of 117countries covered by the 2005 WEFGlobal Competitiveness Report.

The WEF defines competitiveness asthe "collection of factors, policies andinstitutions, which determine the level ofproductivity of a country" and thus thelevel of prosperity that can be attainedby an economy. Productivity is viewed asthe key driver of the rates of return oninvestment which in turn determinegrowth rates. A more competitive econo-my is one that is more likely to growfaster over the medium and long term.

WEF competitiveness indexes arebased on both standard statistics andopinion surveys of business executives.By their very nature, grades given to dif-ferent competitiveness factors are arbi-trary to some extent, and in some casescan be quite controversial. The WEFrankings are closely and positively corre-lated with the countries' current levels ofoverall economic development (GDP percapita), with the richest countries classi-fied as the most competitive. Yet this canlead one to question whether themethodology is consistent with theWEF's definition of competitiveness. Aresuch countries as Sweden or Belgium,which have a high competitivenessindex, more likely to grow faster thanemerging market economies with lowercompetitiveness grades, e.g. Vietnam,China, India, Armenia, and Croatia?

Mongolia is 96th in the 2005 growthcompetitiveness ranking and lies in102nd place in the GDP per capita rank-ing (in purchasing power parity dollars),with GDP per capita equal to US$1,918in 2004. One can thus conclude thatMongolia is doing reasonably well, sinceits competitiveness is ranked higher thanits level of development.

Yet, upon examination of other aggre-gate indicators, such as national dispos-able income (including foreign aid),Mongolia is likely to be positioned high-er on the development level scale, inwhich case its performance would notlook as good as it does in the WEF report.

On the other hand, one would expectthat a classification based on otherdevelopment prospects indicators thatreflected the current and expected ratesof growth over the medium and longterm, would provide a much highergrowth competitiveness score toMongolia than the one granted to it bythe WEF. By arranging the countries inorder of 2004 annual growth rates, therelationship between competitivenessand development looks very differentfrom the WEF correlation above. Norelationship between WEF growth com-petitiveness rankings and GDP growthrates can be spotted. Mongolia belongsto the group of countries with the fastest

growing economies and low WEF com-petitiveness rankings. Thus, shiftingscore evaluations from the level to therate of change would probably result inquite different rankings for competitive-ness, in which many developing coun-tries, including Mongolia, would begiven much higher ranks than those pro-duced by the WEF.

A succinct evaluation of Mongolia,based on the results of a survey of busi-ness executives (see Figure 1), shows thatgovernment bureaucracy, corruption,infrastructure, and taxes are the mainstumbling blocks for Mongolia's eco-nomic growth.

Table 1 presents Mongolia's mainstrengths viewed through the prism ofWEF variables. The best performingvariables are those that get much higherranks than the country's overall growthcompetitiveness ranking (i.e. above 96out of 117). The variables for whichscores are below the average are those

The main obstacles to Mongolia's economic growth are government bureaucracy, corruption, infra-structure, and taxes, while the country's strengths include a good education system, flexible labormarkets, and an ability to innovate

Figure 1. The most problematic factors for doing business in Mongolia

Percent of responses

0 5 10 15 20

Inefficient government bureaucracy

Inadequate supply of infrastructure

Tax rates

Corruption

Access to financing

Tax regulation

Poor work ethic in national labor force

Inadequately educated workforce

Crime and theft

Inflation

Policy instability

Government instability/coups

Restrictive labor regulations

Foreign currency regulations

·22 New Findings


that place Mongolia in the group ofworst performers.

The areas in which Mongolia isdoing relatively well are as follows:

1. The flexibility of Mongolia'slabor market, which helps competitive-ness, as considered by business execu-tives. Wages are set by the market ratherthan by the government.

2. Mongolia's education systemhas relatively high enrollment rates in ter-tiary-level education and generally highlevels of teaching in math and sciences.

3. The country's capacity toabsorb new technologies and innovate,which is supported by the good educa-tion level.

4. The conditions for doing busi-ness in the country, including the safetyof doing business (low threat of terror-ism) and improvements in the access tobank credits.

The areas in which Mongolia is per-forming worse than all but a few coun-tries are:

1. Most of the supplies to domesticbusinesses come from abroad. Exportingcompanies are primarily involved inresource extraction and are poor at prod-uct design, marketing, sales, logistics, andafter sales services. Besides, the numberof foreign markets that exporting compa-nies sell to is very limited.

2. Corporate governance and busi-ness standards/culture are indicated asproblem areas. Firms offering poor protec-tion to minority shareholders interests arenot highly responsive to customers andmake insufficient efforts to retain them.

3. In the opinion of Mongolianbusiness executives, the legal frameworkfor private businesses to settle disputesand challenge the legitimacy of govern-ment actions and/or regulations is ineffi-cient and subject to manipulation. Publicspending is wasteful, and the govern-ment fails to provide many public goodsand services. Nor is the governmenttransparent and neutral in its dealings.When deciding upon policies and con-

tracts, government officials often favorwell-connected firms and individuals.Many firms make undocumented irregu-lar payments or bribes in relation toexports and imports.

4. Environmental protection andmanagement are singled out as majorfailures of Mongolian policy. The com-panies in natural resource, extraction orprocessing industries rarely concernthemselve with the degradation ofecosystems. Government authorized dis-closures of environmental performanceand pollutant releases are virtually non-existent. The environmental regulation islax compared to most countries.

The very presence of Mongolia in areputable ranking system, such as theWEF's, awards it a status that manycountries with larger and more developedeconomies still do not have. The areas ofstrong performance boost the image ofMongolia in the international communi-ty and promote Mongolia's involvementin the global economy. Of course,Mongolian leaders should opt for poli-cies that help improve the country's com-petitiveness scores. Yet, bad scores havetheir uses too. They can fuel public dia-logue and bring the attention of policy-makers and leaders to important issues inthe country's overall development.

Janusz Szyrmer is a Senior PolicyAdvisor to the Government of Mongolia.He has previously served as an advisor togovernments of several former Soviet bloccountries. He was also a faculty memberat the University of Pennsylvania andother universities in the US and othercountries. The graphs in the article havebeen produced by J. Doljinsuren. BT

Table 1. Mongolia's Strengths (WEF rankings)

Labor marketFlexibility of wage determination 14Pay and productivity 27

EducationGross tertiary enrollment 47Quality of math and science education 62

TechnologyGovernment prioritization of ICT 22Capacity for innovation 66

Business conditionsBusiness costs of terrorism 15Access to credit 35

Variable Rank

Mongolia Economic Development DynamicsKey indicators 2000 2004 2006 (projected)

GDP (US$ million) 946.6 1516.0 1790GDP (% change, previous year ) 1.1 10.6 6.0Unemployment rate 4.6 3.6 —Consumer price index (% change, previous period) 11.6 7.9 4.3Exports of goods (US$ million) 535.8 872.0 883.0Imports of goods (US$ million) -676.0 -1021.0 -1150.0Foreign direct investment (US$ million) 40.0 93.0 115.0Total external dept (US$ million) 837.0 1360.0 1511

Source: http://worldbank.org/

· 23


FDI in Eastern Europe and NIS

Irina Tytell and Ksenia Yudaeva

It is believed that FDI can improvehost countries' technological capacitiesand managerial style. This is due to boththe direct effect on the companies thatreceive FDI and because of the spillovereffect on domestic companies in the sameindustry and in upstream industriesthrough backward linkages. This enthu-siasm is, however, not based on rigorouseconomic theory and evidence. We studythe potential effect of FDI entry ondomestic companies' production func-tions in Russia, Ukraine, Poland, andRomania, the largest and most populouscountries in the region.

These countries represent a wide spec-trum of macroeconomic performance andinstitutional development. In terms ofgeneral effectiveness and rule of law,Poland ranks by far the highest andUkraine the lowest. The corruption levelis lowest in Poland and highest inUkraine, with Romania and Russia some-where in the middle. Russia and Ukraineare much less open to trade and foreigninvestment than Poland and Romania.

The sources of data include thenational statistical authorities in Russiaand Ukraine (with the data coveringlarge and medium-sized industrial enter-prises) and Amadeus database of Bureauvan Dijk for Poland and Romania (withthe data also including some smallermanufacturing firms).

Foreign Firms are MoreEfficient

In comparing the productivity andfactor intensities of domestic and foreignfirms, we find that firms with FDI aresignificantly more productive, less laborintensive, and more capital intensivethan domestic companies in all fourcountries. In Russia, firms with foreigncapital are 70% more efficient thandomestic firms, while in Poland the dif-ference in efficiency is just 9%. Suchvariation in efficiency is due in a largepart to differences in the productivity ofdomestic firms.

However, we find no presence of pro-ductivity spillovers, with the only excep-

tion of export-oriented FDI, which havepositive spillover effects on the produc-tivity of domestic firms in Russia. Thisresult does not necessarily mean thatknowledge spillovers do not exist, butpossibly that they are offset by the nega-tive effect of the increase in competitivepressure from the foreign companies.

In a country with a better investmentclimate, such as Poland, domestic com-panies in the sectors with high FDI pres-ence are more capital intensive and lesslabor intensive than domestic companiesin other sectors. This suggests that for-eign entry may indeed force domesticfirms to introduce technologicalchanges, and to upgrade their capital. Ina poor investment climate, such as in

Russia, the effect of foreign entry is theopposite, possibly because foreigninvestors only outsource the productionof simple labor intensive components tolocal producers.

How does foreign presence affect thechange in, rather than the level of, pro-ductivity of domestic firms? Accordingto our results, foreign and partly foreigncompanies in Poland and Romaniasqueeze the market available to the larg-er of the competing domestic firms.There is no evidence for positive produc-tivity spillovers to domestic firms, exceptin sectors where foreign and partly for-eign firms dominate. In Russia andUkraine, foreign presence does notappear to have a significant effect on theproductivity of domestic firms.

The Role of Education andInstitutions

Formally, the education level in all thecountries that we consider is quite high.According to the latest population census,in Russia about 77% of the populationhas at least secondary education; inUkraine this proportion is 84% and inPoland and Romania it is comparably

high. However, the education level of thelocal population differs substantially fromregion to region within a country, whichmay potentially influence both the deci-sion of foreign firms to locate in a certainregion and their choice of technologies.

According to our analysis, the effectsof education on the characteristics offoreign investors do not follow any sin-gle pattern. Only in Ukraine productivityspillovers from FDI depend positively oneducation. Results for Russia and Polandsuggest that education may play a role infacilitating the effect of foreign presenceon the production function of domesticfirms.

The institutional environment, meas-ured by the corruption level, has a more

complicated effect on foreign anddomestic firms. In Russia, foreign firms,located in relatively uncorrupt regions,are much more productive than domesticfirms. As a result, productivity spilloverson domestic firms are negative anddomestic firms have to change their pro-duction functions in order to better com-pete or work as suppliers for foreignfirms. The productivity of foreign firms,located in more corrupt environments, isnot significantly different from the pro-ductivity of domestic firms, possiblybecause foreign firms are subject tointerference from local authorities. Thelack of competitive pressure reduces theincentives to adopt new technologiesthat would allow domestic firms tobecome more efficient.

Ksenia Yudaeva is Academic Directorat Center of Strategic Research, Moscow.Irina Tytell is an economist at the IMF.Full text of the paper can be viewed athttp:/www.cefir.ru (WP No 60). Theviews expressed in this article are thoseof the authors and should not be attrib-uted to the IMF, its Board of Directors,or its management. BT

Spillovers from foreign investments in Russia, Ukraine, Poland, and Romania are positive only for FDIthat are export-oriented or hold a dominant position in an industry

Firms with FDI are significantly more productive, less labor inten-sive, and more capital intensive than domestic companies

·24 New Findings


Tajikistan — a Long Way to RecoveryAybek Gorey

Although Tajikistan was one of thefirst ex-Soviet countries to initiate eco-nomic reforms, the following yearsturned any dreams sour due to variousinternal factors. Already the poorest andthe least urbanized country among theformer Soviet Republics, the countrywent through a catalogue of catastro-phes, including a severe three-yeardrought and a civil war; its economic tieswith the CIS countries, mainly Russiaand Ukraine, broke down.

With inflows of capital, resourcesand know-how from Russia halted,Tajikistan's industrial and commercialbase collapsed; in the beginning of 2005production was still a mere 50% of the1989 output. The priority of the govern-ment's economic policies is on returningto the standard of living prior to the col-lapse of the Soviet Union.

The legislative reform that took placein the mid 1990s was quite successfuland paved the way for stabilization andenhancing future economic growth.Indeed, according to CIS StatisticalCommittee data, Tajikistan's economyhas been growing at an average rate of10% each year starting from 2000. InOctober 2000, the former currency wasabandoned and the country adopted thenew currency Tajik Somoni, successfullycompleting the conversion by April 2001.

Recent research undertaken by theTurkish Foreign Economic RelationsBoard has outlined the obstacles to for-eign investments in and trade toTajikistan. These include:

• A very small banking sector and,consequently, a very low level of financialintermediation. The number of banks isquite large but many of them are small, sothe sector is subject to consolidation, with17 banks closed down in the last fiveyears. On a brighter note, the bankingsector is now predominantly in privatehands (86% of all banks). Foreign banksare free to operate legally but conditionsare still not desirable for most.

• An underdeveloped transportinfrastructure. Tajikistan is a landlocked(and mountain-locked) country, so itdepends on neighboring countries for thetransportation of export and importcommodities. The only commerciallyviable railroad and the few highways thatexist are in a bad state of repair, the carand truck fleet is worn out, and mainte-nance and technical service facilities arelacking, so transporting export goods tointernational markets is very costly.

• Lack of any significant depositsof fossil fuels. Tajikistan has therefore torely on hydroelectric power. The countryhas vast water resources and the greatestpotential for hydroelectric power produc-

tion in the region, but this is still under-utilized. The country needs massive invest-ments in building and modernizing dams.Unless this is done, foreign investment,especially in manufacturing, will be hin-dered by the current energy usage level.

• Immensely underdevelopedcommunication technologies, with only3.6 telephone lines for every 100 people.Internet communications and e-tradepossibilities hardly exist.

• Human capital hugely deterio-rated during the civil war, which brokeout after gaining independence, whenmany skilled Russians fled the country.

Policymakers should focus on assist-ing small and medium-sized enterprises,fostering entrepreneurship and investingin human capital. The country's currentoverdependence on primary productsshould be reduced, thereby promoting amore diversified and healthier economy.In this, foreign investors and trade part-ners can play a big role.

Aybek Gorey is a graduate student atMonash University, Australia. The articleis based on the ongoing research projectcarried out by the Turkish Foreign Econo-mic Relations Board, in which the authorparticipates. The project results are avail-able at http://www.deik.org.tr. BT

Tajikistan is Still the Poorest CIS CountryGrowth. Since 1999 Tajikistan GDP per capita in cur-

rent prices grew by an average annual rate of 10%. Muchof the growth was generated by expansion of the cottonmarket and rise in world cotton prices. Tajikistan's econo-my continues to be heavily influenced by cotton and alu-minum production and by massive inflows of labormigrant remittances. Commodity exports make up 70% ofthe export structure. The IMF estimates that remittancesmay have generated up to 20% of the GDP in 2004.

Income Poverty. Although the number of poor fell to64% in 2003 compared with 81% in 1999, about 70%of the population live on less than US$2 per day. Whilepeople's average earnings increased, the revenue andexpenditure gap continued pushing different incomegroups father apart. Gini coefficient by expenditures rosefrom 0.33 in 1999 to 0.35 in 2004 and by revenues from0.47 in 1999 to 0.51 in 2004. Although inequality was

higher in rural than in urban areas, their absolute pover-ty rates of 65% and 59% respectively suggest a relative-ly uniform distribution of poverty.

Business Climate. Recent surveys suggest that thenumber of entrepreneurs in Tajikistan is growing. Mostbusinesses operate in wholesale, retail, and cateringindustries. According to a 2003 IFC survey, most SMEscontinued to regard the business climate in Tajikistan asdifficult. Half of the respondents considered that admin-istrative requirements, such as licensing, certification,import-export documentation and taxes, are difficult tofulfill due to their complexity and the poor condition ofthe public agencies administering them. Only 14% ofentrepreneurs had a good understanding of business laws.

Based on World Bank PRSP Second Progress Report,June 2005 BT

· 25Agenda


Latest Quarterly Russian Economic ReportReleased

The Quarterly Russian Economic report estimates thatRussia's GDP grew by 6.4% 2005, compared with 7.2% in2004. Preliminary data for the first two months of 2006 sug-gest a continued industrial slowdown. Non-tradable sectorsare driving GDP growth, and investment remains concentratedin oil and gas. The April 2006 issue analyzes current econom-ic policy and also takes a look at how Russia can make itsbudget less dependent on oil. A new multimedia webpage forthe Report provides a slideshow with useful data, as well as achapter-by-chapter breakdown of the findings. To view thereport, visit: http://www.worldbank.org/ru.

Three More Countries in ECA ReceiveFunding to Combat Avian Flu

On the heels of the World Bank agreement in January toallow countries to draw from a US$500 million avian flu fund,the Bank's Board of Directors has approved avian flu projectsin three countries in the Europe and Central Asia (ECA)region: the Kyrgyz Republic, Azerbaijan, and Turkey. TheKyrgyz Republic was selected because it is located on a majormigratory flyway path and the current capacity in the countryto monitor migratory birds and potential transmission of dis-ease to and among local poultry is very weak. The World Bankgrant will help minimize the threat avian flu poses to humansand to prepare for, control, and respond to future outbreaks. InAzerbaijan, funds were made available by restructuring anexisting Second Institution Building Technical AssistanceProject, and additional funds will be drawn from two agricul-ture and health care projects currently under preparation. Thenew operation for Turkey has similar goals as the Kyrgyzgrant. For more information, visit the World Bank's Avian Fluwebsite at: http://www.worldbank.org/avianflu.

Fast Track Initiative Aims to AchieveEducation MDG

Major donors for education gathered in Moscow on March14 to assess progress toward the Millennium DevelopmentGoal of universal primary education by 2015. In 2006, Russiaassumed the G8 presidency and the co-chair of the global com-pact on education, known as the Education for All — FastTrack Initiative (FTI). Three years ago, world leaders recog-nized that with more than 100 million children out of school,it would be impossible to achieve this goal without drasticefforts. In response, the FTI was created in 2002 as the firstever global compact on education to help low-income coun-tries achieve a free, universal basic education by 2015. At themeeting, Russia's Minister of Education and Science AndreiFursenko pledged US$7.2 million to the Initiative. The FTI hasput into place two funds, including the Catalytic Fund, whichprovides short term financial help to close the education financ-ing gaps for poor countries with too few donors, and theEducation Program Development Fund, which provides technical

support so countries can develop sound education strategies. Formore information about FTI, visit: www.fasttrackinitiative.org.

World Bank Touts Knowledge Economy asKey to Economic Growth

To maintain current high growth rates, countries in theECA region must invest in reforms that improve their so-called"knowledge economy." A new World Bank publication, PublicFinancial Support for Commercial Innovation, analyzes thenecessary reforms for converting the strong research base inmost ECA countries into commercially viable applications. Themultimedia webpage for the report contains a slideshow of keydata, a video clip of the author, and a chapter-by-chapterbreakdown. This study was released at the fifth annual ECAKnowledge Economy Forum, held in Prague from March 28 —30. This year's Forum focused on "Innovation and TechnologyAbsorption for Growth." To download the World Bank report,visit: http://www.worldbank.org/eca/kestudy.

New Strategy Released for Kosovo

With the final status of Kosovo currently looming, theWorld Bank approved an Interim Strategy Note aimed at help-ing generate new sources of economic growth, addressing envi-ronmental legacy issues, and ensuring macroeconomic stabili-ty. In post-conflict countries, the World Bank prepares InterimStrategy Notes in partnership with other donors to plan forresource mobilization. Against the backdrop of weak econom-ic growth, widespread poverty, and poor governance, theStrategy addresses two central themes: spurring growth andensuring associated environmental and social improvements.The Strategy spans fiscal years 2006 and 2007 and envisagesaround US$19 million in grant funding for Kosovo. Since fis-cal year 2000, the Bank has approved 22 grants totaling US$95million to Kosovo. The Strategy for Kosovo was developed incooperation with the European Commission and other donors.For more information on the World Bank's work in Kosovo,visit: http://www.worldbank.org/kosovo.

Northern Aral Sea Fills Up Ahead ofSchedule

The Northern Aral Sea in Kazakhstan, whose surface hadshrunk to half its original size, has filled up just months afterthe Kok-Aral Dam was erected between it and the SouthernAral Sea in August 2005. The World Bank is involved in therestoration of the Aral Sea as part of the Syr Darya andNorthern Aral Sea project. Its experts originally predicted itwould take five to 10 years to fill up the northern portion ofthe sea. With the water level already high, a sluice can beginoperating to allow excess water to flow into the parchedSouthern Aral Sea in Uzbekistan. The sea began to shrink in the1960s, when massive water diversion for cotton cultivationunder the Soviet Union drained the two rivers that feed the sea,the Syr Darya and Amu Darya. The resulting three-fourths

·26 Agenda


decrease in volume of the Aral Sea by 1996 had devastated thesurrounding environment and ruined the coastal fishing econ-omy. New waterworks along the Syr Darya are increasing thecarrying capacity of the river, filling the Northern Aral Sea, andalso providing irrigation. Additional waterworks are plannedto restore fishing lakes in the delta region, which will serve ashatcheries from which to restock the Northern Aral Sea's fishpopulation. For more information on the World Bank's workin Kazakhstan, visit: http://www.worldbank.org/kz.

EU8 Quarterly Report Reflects FavorableGrowth

The World Bank's EU8 Quarterly Economic Report coversthe economic development of the eight Central and EasternEuropean countries that joined the European Union in May,2004 (excluding Malta and Cyprus). The most recent report,published February 9, states that economic performance inthese countries was largely favorable in 2005 despite a mixedexternal environment and weak reform momentum related torecent or prospective elections in the Visegrad countries. Eachissue focuses on a special topic, and this time the report analyzesaggregate growth patterns in the EU8 economies, examining themain factors affecting growth as well as some of the policiesthat may help to sustain or enhance growth prospects. Theanalysis is supplemented by a more detailed, sector-based exam-ination of the largest country in the region — Poland. For themost recent report, visit: http://www.worldbank.org/eu8-report.

Czech Republic Graduates from WorldBank Borrowing

The Czech Republic officially observed its graduation fromWorld Bank borrowing on February 28 in Prague, and WorldBank President Paul Wolfowitz was there for the occasionmeeting with top officials, students, young Roma leaders, andfinancial sector experts. The World Bank — Czech Republicrelationship has focused more on partnership than on borrow-ing, particularly since 1998. The Bank supported the country'sEuropean Union accession process, capital and financial mar-ket reform, enterprise restructuring, and fiscal managementimprovement. Banking regulation and accounting standards isa pioneering area for the country, which overcame a bankingcrisis in the late 1990s in the wake of transition. For this rea-son, the government and the Bank also hosted an InstitutionalFoundations for Sound Finance forum to coincide with thegraduation celebration and the visit of Wolfowitz. To readmore about the World Bank's cooperation with the CzechRepublic, visit its country page at: http://www.worldbank.org/cz.

This section has been provided courtesy of Merrell Tuck andChristina Lakatos, Europe and Central Asia External Affairs.

World Bank's Role in Middle IncomeCountries

Speaking in Prague on the occasion of the Czech Republic’sformal graduation from borrower to donor status at the Bank onFebruary 28th, 2006, President Wolfowitz made a strong case forthe Bank’s continued engagement in middle-income countries.Wolfowitz outlined the reasons why the Bank remains cruciallyrelevant even in places like China, Brazil, Russia or Poland. Athird of the world's poor live in middle-income countries. Middle-income countries are “indispensable to the mission of the WorldBank Group to fight poverty worldwide,” said Wolfowitz.Because of their experience, middle-income countries act as a cru-cial link in the transmission of development knowledge to poor-er countries. Their strength and continuing development con-tributes to: ensuring stability, developing regional integration,responding to global challenges, and eliminating enduring pock-ets of poverty. If middle-income countries are key contributors tothe World Bank’s effort to alleviate world poverty, the Bankmust make sure these countries continue to grow on solidfoundations. This is where the Bank’s vast know-how in pover-ty reduction and development programs comes into play.“More than ever, we are focused on supporting middle-income countries, helping them to meet their developmentchallenges — by helping them to build strong institutions,” saidWolfowitz. For more information, visit: http://www.world-bank.org/eca.

A Breath of Fresh Air

A protracted effort to liberalize Tajikistan's air transport sec-tor finally bears fruit. Starting from February 3, weekly TurkishAirline flights to Dushanbe are opening the country to furthertrade, aid and investments. Tajikistan’s reputation as a travel andbusiness destination had long suffered from the country’s lack ofmodern hotels, Tajik Air’s near-monopoly on flights and the phys-ical isolation of the landlocked country. Improving the transportsector was identified as a key development issue by the WorldBank back in 2001. Until now, 80% of Tajikistan’s internationalair traffic has been with Russia.

Turning the Tide: HIV/AIDS in EasternEurope and Central Asia

In the last year alone, there were 270,000 new HIV/AIDScases in Eastern Europe and Central Asia, according to UNAIDSestimates. In the region, 1.6 million people live with the disease —a number which has increased almost twenty-fold in the lastdecade. This fast-growing epidemic is affecting mostly youngerpeople and an increasing number of them are women. There aresigns that HIV/AIDS is spreading from traditionally vulnerablegroups, such as intravenous drug users and sex workers, to thegeneral population. A three-day conference called "Facing theChallenge," has been organized by the Russian Government withthe support of UNAIDS, the World Bank and other internationalpartners on May 15 against this back-drop. Its goal is to strength-en the collective capacity of Eastern European and Central Asiangovernments, civil society groups, experts, people living withAIDS and donors to respond to the epidemic, nearly 25 yearsafter HIV/AIDS was first identified. For more information, visit:http://www.worldbank.org/eca BT

· 27New Books and Working Papers


World Bank Publications

Information and orders: the World Bank, P.O. Box 960,Herndon, VA 20172, U.S.; tel.: +1-703-661-1580, fax.: 703-661-1501, email: [email protected], www.worldbank.org/publications, or visit the World Bank InfoShop at 701 18thStreet, N.W., Washington, D.C., tel.: +1-202-458-5454.

Ani Balabanyan, Denzel Hankinson, and Gevorg SargsyanFrom Crisis to Stability in the Armenian Power Sector:

Lessons Learned from Armenia's Energy Reform ExperienceReport # 35408

After the Soviet Union's collapse, Armenia faced a wholelot of problems common to all former Soviet republics.Armenia's electricity system and its entire energy supply systemhad been designed to operate as part of a much larger, inte-grated Trans-Caucasus system. The problems with this systembegan to show in 1992. The start of the war over Nagorno-Karabakh, and the resulting imposition by Azerbaijan andTurkey of an economic blockade, cut off Armenia's only sourceof gas and oil for its thermal plants. Four years prior to that, amassive earthquake had forced a shut down of the Medzamornuclear power plant, a source of roughly one-third ofArmenia's generating capacity. Supply from a new gas pipeline,built in 1993 through neighboring Georgia, was regularlyinterrupted by acts of sabotage. By late 1996 a number ofmeasures had been taken to restore 24-hour energy supply. It'sobviously now that Armenia's power sector has made impres-sive progress since the beginning of the reforms. The reportoffers 12 lessons from Armenia's experience that may have rel-evance to other countries under-taking similar reforms.

World Bank Working Papershttp://econ.worldbank.org

Francis Ng and Bartlomiej KaminskiBulgaria's Integration into the Pan-European Economy and

Industrial RestructuringWPS3863, March 2006

The paper looks at Bulgaria's industrial restructuringthrough its evolving specialization in the international divisionof labor and integration into international markets with a spe-cial emphasis on EU markets. It finds that: (1) Developmentsin Bulgaria's exports during the "second transition" followingthe 1996 crisis have become reminiscent of developments inthe early 1990s in European transition economies that havestayed the reform course. (2) The evolution of Bulgaria's totalexports in terms of factor intensities before the "second trans-formational" recession was a testimony to aborted economicreforms. It not only defied expectations built up from the expe-rience of CEEC-10 economies and its production factorendowments but also dramatically increased the cost of adjust-ment to market conditions for the economy as a whole. (3)Exports of unskilled labor-intensive products continue tower-ing over other exports even now during the current expan-sionary phase. Bulgaria's export offerings in EU markets havebegun shifting toward more processed goods, mostly products

of electro-engineering sectors. Gains in competitiveness com-bined with a shift toward products in line with the country'sendowments in production factors began to surface onlyrecently; they derive from corporate and industrial restructur-ing and not from subsidies.

Xubei Luo and Nong ZhuNon-Farm Activity and Rural Income Inequality: A Case

Study of Two Provinces in ChinaWPS3811, January 2006

Based on data from the Living Standards MeasurementStudy in the provinces of Hebei and Liaoning, the authorsstudy the distribution of non-farm income in rural China. Theresults show that non-farm activity reduces rural incomeinequality by raising the income of poor households to a larg-er extent than that of rich households. Improving rural infra-structure and implementing universal basic education are crit-ical to build up the capacity of households (and in particular,poor households) to participate in non-farm activity.Strengthening the links between farm activity and non-farmactivity is essential to optimize the contribution of non-farmactivity to pro-poor rural economic development.

European Bank of Reconstructionand Development (EBRD)

http://www.ebrd.org/pubs/econo/series/wp.htm

Clemens Grafe, Martin Raiser, and Toshiaki SakatsumeBeyond Borders: Reconsidering Regional Trade in Central

AsiaMarch 2006

This paper investigates the barriers to trade in Central Asia,using relative prices to shed some light on this issue. It finds thatthe impact of borders on price variations across different loca-tions in Central Asia is much smaller than conventionallythought. While prices vary significantly across the region, varia-tions within one country are just as large as variations acrosscountries. This may be due to obstacles to trade, and in particu-lar rent-seeking by enforcement agencies at the numerous inter-nal check points. The paper also confirms that in relative terms,the borders with Uzbekistan are considerably more difficult tocross than those with Kazakhstan or the Kyrgyz Republic.

Transition Report 2005: Business in TransitionISSN: 1356-3424, November 2005

Transition Report 2005 draws on the findings of the latestBusiness Environment and Enterprise Performance Survey(BEEPS). While the business environment in the transitionregion has generally improved since the last survey in 2002,there is considerable variation between countries. The reportlooks at what kinds of firms are particularly affected by a dif-ficult business environment and compares the transition coun-tries with mature market economies. The high costs of businessregulation, a poor institutional framework, weak propertyrights, and an unstable macroeconomic environment allemerge from the survey as major obstacles to doing business in

·28 New Books and Working Papers


transition countries. The report also takes a close look at theperformance of enterprises in the region. It assesses what typesof firms — private or state-owned, foreign or domestic — havebeen the most successful in increasing their sales and improv-ing efficiency and highlights the main factors that influence afirm's performance.

CERGE-EIhttp://www.cerge.cuni.cz/publications

Jan Bena and Jan Hanousek Rent Extraction by Large Shareholders: Evidence Using

Dividend Policy in the Czech RepublicWP 291, February 2006

This paper is an empirical study of dividends from a transi-tion country in Central and Eastern Europe (CEE). Since manyCEE countries underwent a similarly quick transition from astate-controlled to a market economy, thus the findings basedon data from the Czech Republic may to a large extent be validfor other countries from this region as well. Theoretical paperssuggest that large shareholders have a dual impact on firms. Onthe one hand, large owners have a strong incentive to monitormanagement to ensure that a firm's value is maximized, whileon the other hand, their behavior is motivated by the possibili-ty to extract rents and enjoy the private benefits of control. Thepaper studies whether this rent extraction takes place, how sig-nificant it is, and whether minority shareholders are able tomonitor large shareholders in order to preclude rent extraction.

Peter Toth and Petr ZemcikWhat Makes Firms in Emerging Markets Attractive to

Foreign Investors? Micro-Evidence from the Czech RepublicWP 294, March 2006

The paper conducts a firm-level study, which investigatesfactors influencing FDI in a given firm. The authors concen-trate on a host country as opposed to concentrating on a coun-try of origin. The paper does not study aggregate FDI flows butinstead their distribution among domestic firms. The authorsaddress the question of which firms are chosen by foreigners,based on the decision to purchase a share of a firm in the CzechRepublic. The authors find that foreigners target firms with ahigh concentration of ownership, preferably in industries char-acterized by greater profit volatility, in countries where laborcosts and corporate income taxes are lower as compared to thecountry of origin.

Centre for the Study of Economic andSocial Change in Europe (SSEES)

http://www.ssees.ac.uk/economic.htm

Igor Filatotchev, Natalia Isachenkova and TomaszMickiewicz

Corporate Governance, Manager Independence, Exporting,and the Performance of Firms in Transition Economies

WP 62, February 2006

Using data on 157 large companies in Poland and Hungarythis paper examines interrelationships between corporate gov-ernance, the independence of managers from owners in terms ofstrategic decision-making, exporting, and performance. It isfound that manager independence is positively associated witha firm's financial performance and exporting. In turn, the extentof manager independence is contingent on the firm's corporategovernance parameters: it is negatively associated with owner-ship concentration, but positively associated with the percent-age of foreign directors on the firm's board. The authors inter-pret these results as an indication that (i) risk averse, concen-trated owners tend to constrain managerial autonomy at thecost of the firm's internationalization and performance, (ii) onthe other hand, board participation of foreign stakeholders,enhances the firm's export orientation and performance byencouraging executive autonomy in decision-making.

Ruta AidisEntrepreneurship in Transition Countries: A ReviewWP 61, January 2006

The aim of this paper is to provide an overview of the keyissues surrounding entrepreneurship development in transitioncountries focusing on six main themes. Though it can beargued that the transition countries started from more or lessthe same point when they embarked on their transitional path,in this paper we indicate a number of differences in initial con-ditions which further influenced SME development. By survey-ing the existing literature on SME development, this paperillustrates that as the transition process progresses entrepre-neurship development in transition countries is a story ofincreasing divergence. The transitional context provides uniqueopportunities for entrepreneurial activities to develop.However, at the same time this environment presents uniquechallenges for entrepreneurial development. This is especiallytrue for knowledge-based entrepreneurship as the free-marketsystem matures within a context of low levels of SMEs andinherited negative attitudes towards entrepreneurship.

Piotr Jaworski and Tomasz Mickiewicz (eds)Polish EU Accession in Comparative Perspective:

Macroeconomics, Finance, and the GovernmentISBN: 0-903425-76-9, SSEES Occasional Papers # 65

The book offers a collection of papers on the macroeco-nomic and financial aspects of Poland's EU accession, seen incomparative perspective. There are two main themes that arecovered. One relates to empirical estimations, evaluating theeffects of integration on fiscal balance, prices, and FDI flows.The second theme relates to institutional reform and policy rec-ommendations. Benecki and co-authors, and also Antczak, intheir papers discuss how transparency and fiscal rules, includ-ing those implied by EU accession, may help to reduce thedeficit bias in fiscal policy. Supported by empirical evidence,Ilieva and her co-author, Kluza and co-authors, and Janeckiand his co-author, argue Central Bank independence is criticalfor maintaining low inflation. In relation to finance Jaworski,Wierbicki, and Bednarczyk discuss institutional change in theinsurance sector, running parallel to EU accession and implica-tions for the offer of insurance to SMEs. Giblin, Barry, andWeresa focus on FDI and argue that to have a beneficial effect

· 29


on economic growth it has to be seen as part of a wider set ofcomplementary policies.

Centre for Economic and FinancialResearch (CEFIR)

http://www.cefir.ru

Alexander Dyck, Natalya Volchkova, and Luigi ZingalesThe Corporate Governance Role of the Media: Evidence

from Russia WP 54, September 2005

The paper studies the effect of media coverage on corporategovernance outcomes by focusing on Russia in the period 1999 —2002. Russia provides a setting with multiple examples of cor-porate governance abuses, where traditional corporate gover-nance mechanisms are ineffective, and where an exogenoussource of news coverage can be identified by the presence of aninvestment fund, the Hermitage fund, that tried to shame com-panies by exposing their abuses in the international media. Theauthors show that the news coverage in the Anglo-Americanpress positively affects the probability of reversal of an instanceof corporate governance abuse. Media had an effect throughtwo main mechanisms: media pressure that led to an interven-tion by a regulator or a politician, or the choice by the compa-ny itself to relent, after realizing that continuing the battlewould incur too high a cost to reputation.

Sergey Guriev and Guido FriebelAttaching Workers Through In-kind Payments: Theory and

Evidence from RussiaWP 57, December 2005

When economies are hit by massive shocks dramaticallyaffecting the productivity of capital in different sectors,resources, in particular labor, ought to reallocate acrossregions. In a perfect world, this reallocation should be swift,but there may be important obstacles slowing it down, e.g.underdeveloped housing markets and social norms. Theauthors argue that strong endogenous forces may also be atwork. Firms may devise "attachment" strategies to keep work-ers from moving out of a local labor market, e.g. non-monetaryforms of compensation. When capital markets are imperfect,workers must have cash to finance the costs of migration. Butwhen they are compensated through in-kind payments orfringe benefits, they are forced to consume and cannot save thecash needed for migration. The authors set up a simple modelthat can generate predictions on how competition betweenemployers affects geographical mobility and worker welfare.Using data from Russian Longitudinal Monitoring Survey(RLMS), they find evidence for the model: a one-standard-deviation increase in market concentration increases the prob-ability of in-kind payments by at least three percentage points.

Bernard S. Black, Inessa Love, and Andrey Rachinsky Corporate Governance and Firms' Market Values: Time

Series Evidence from Russia WP 53, November 2005

The paper studies the connection between the firm-levelgovernance of Russian companies and their market values over1999 — 2004. The research exploits the out-of-equilibriumnature of Russian corporate governance, due to Russia's con-tinuing transition to a market economy and its recovery fromthe 1998 financial crisis. The importance of corporate gover-nance to investors in Russian firms has spawned no less thansix different indices. The availability of different indices, cov-ering similar firms over a similar time period, lets the authorsassess the predictive power of different approaches to measur-ing governance. It also matters how one measures governance.

Other Publications

Peter H. Solomon (ed.) Recrafting Federalism in Russia and Canada: Power,

Budgets, and Indigenous GovernanceCentre for Russian and East European Studies, University

of Toronto ISBN 0-7727-0820-7, pp.134

The volume is based upon a workshop held in December2004 — the third one in a series of workshops relating to fed-eralism and regional development in Russia and Canada. Thefirst two articles, by Vladimir Leksin and Irina Podporina,explain the strength and weakness of the federalism reformsundertaken under Vladimir Putin. Leonid Polishuk in his chap-ter explores the costs and benefits of political, as opposed totechnical, decentralization within federations and analyzes thesteps taken by President Putin in centralizing power within theRussian Federation by eliminating the direct election of gover-nors and republican presidents. The last three essays, by MikhailTodyshev, Gary Wilson, and Natalia Loukacheva, deal with thesituation of indigenous people within the Russian and Canadianfederal systems. All the articles demonstrate common elementsfaced by Russia and Canada relating to governance in federa-tions, including such general problems as imbalances in the eco-nomic strength of provinces or regions and the role of munici-pal government, and problems specific to indigenous people.

Devesh Kapur and John McHaleThe Global Migration of Talent: What does it Mean for

Developing Countries?October 2005http://www.cgdev.org/content/publications/detail/4473

The paper shows that human capital flows from poor coun-tries to rich countries are large and growing. A leading cause isthe increasing skill-focus of immigration policy in a number ofleading industrialized countries — a trend that is likely tointensify as rich countries age and competitive pressures buildin knowledge-intensive sectors. While fears of the "braindrain" were exaggerated in earlier decades, the recent celebra-tion of "brain gain" is also overdone, especially as highly selec-tive migration policies deprive poor countries of scarce inno-vators and institution builders. The authors explore availablepolicy responses to improve the net effect on developmentwithout making the international migration system even moreilliberal than it is today. BT

·30 Conference Diary


12th World Congress of Social EconomicsJune 8 — 10, 2007, Amsterdam, the Netherlands

The Association for Social Economics will hold its TwelfthWorld Congress at the University of Amsterdam. The generaltheme is "Social Values and Economic Life." It is not necessaryto be a member of the Association to participate. Five broadareas for exploring the theme of social values and economic lifeinclude: (1) family and community relationships; (2) the work-place and its social organization; (3) the social nature of marketrelationships; (4) macroeconomic social policy issues; and (5)economic methodology and the history of economic thought.

Information: http://www.socialeconomics.org/callMay30.htm

World Urban Forum IIIJune 19 — 23, 2006, Vancouver, Canada

UN-HABITAT and the Canadian government are organiz-ing the third World Urban Forum, a meeting that will bringtogether public and private institutions, experts and decision-makers from around the world to discuss the key urban chal-lenges facing the world today. The Forum's main theme is:"Our Future: Sustainable Cities — Turning Ideas into Action".

More information: http://www.unchs.org/wuf/2006/introduc-tion2005.asp

Warsaw East European Conference, Third AnnualSession

July 5 — 8, 2006, Warsaw, Poland

Organizer: The Center for East European Studies atWarsaw University. The main theme is 25 years of change in thepost-communist world: from the Cold War and communisttotalitarianism through to Solidarnost and perestroika to post-communist democracies, new dictatorships and color revolu-tions. A list of specific topics, application and paper proposalforms are all available at the conference Internet site.

E-mail the application form and proposals to Jan Malicki withthe subject "Form" to: [email protected]. Information:http://www.uw.edu.pl/en.php/gen_inf/conf_06/list_en.html

Barriers to Entry and Expansion in the DevelopingWorld: The Role of Institutional Constraints

August 28, 2006, Amsterdam, the Netherlands

This workshop will seek common ground between thethemes of poverty and the role of access to finance in develop-ment. Both empirical and theoretical works will be presentedthat examine the set of barriers to establishment and growth indeveloping countries. Possible areas include: government regu-lation, access to finance, human capital access, corruption, theeconomics of the informal sector. Empirical works that makeeffective use of micro-level datasets that convincingly addressthese questions are of particular interest.

Information: http://www.cepr.org/Meets/diary/listyear.asp?year=2006

Risk, Regulation and Competition: Banking inTransition Economies

September 1— 2, 2006, Ghent University, Belgium

The conference is organized by the Department of FinancialEconomics, Ghent University, and the InteruniversityAttraction Poles Program financed by Belgian Science Policy.Both theoretical and empirical research related to the followingtopics will be considered:

• Banking risk and systemic stability in transitioneconomies

• Financial regulation and supervision • Bank market structure.

Information: http://www.feb.ugent.be/fineco/rrcbte2006/

Ninth Bi-annual Conference of the EuropeanAssociation for Comparative Economic Studies

September 7— 9, 2006, University of Brighton, UK

The ninth EACES Conference is organized in associationwith the Brighton Business School at the University of Brighton(UK). The general topic of the conference is "DevelopmentStrategies — a Comparative View." Suggested themes include:

• Comparative economics• Economic development • The enlarged EU; the EU and its neighborhood• Privatization and governance• Finance and monetary issues • Marketing and Performance Measurements in

Emerging Markets.

Information: http://eaces.gelso.unitn.it/Eaces/Conference.htm,contact: Marcello Signorelli: [email protected] and JensHolscher: [email protected].

Institutions: Economic, Political and Social Behavior10th Annual Conference of the International Society

for New Institutional Economics September 21 — 24, 2006, Boulder, Colorado USA

The conference program will include organized sessions,selected papers, and keynote addresses by 1993 economicsNobel Laureate Douglass C. North, Spencer T. Olin Professorof Arts & Sciences, Washington University, and by JaneMenken, Director of the Institute and Behavioral Science andDistinguished University Professor of Sociology at Universityof Colorado. The issues under discussion will also includesocial behavior and law, new institutional economics in politi-cal economy, anthropology, and the social sciences.

Information and application form: http://www.isnie.org

EALE Conference 2006September 21 — 23, 2006, Prague, Czech Republic

The 2006 meeting of the EALE will be organized byCERGE-EI, the Center for Economic Research, in collabora-tion with the Institute of Economic Studies at CharlesUniversity, the Czech Economic Society, the Czech National

· 31Conference Diary / Bibliography


Bank and the EALE Secretariat in Maastricht. Papers are invit-ed in any area of labor economics.

Additional information, list of themes, terms of participation,registration forms can be found at: http://www.eale.nl/confer-ence/eale2006/Call2006.htm

Business and Marketing Strategies for Central andEastern Europe

November 3 — December 2, 2006, Arcotel HotelWimberger Vienna, Austria

14th Annual Conference of the Department of Marketing,College of Commerce, DePaul University Chicago and theInstitute of International Business, Vienna University ofEconomics and Business Administration, Austria.

Empirical research, case studies or discussion sessions aresought which address such topics as comparative analysis ofmarket entry conditions in CEE countries, market entrythrough exports versus market entry via capital investment,acquisitions as opposed to joint ventures in CEE, marketingstrategies to reach CEE consumers, marketing-mix-decisionsfor markets in CEE, financial strategies for opening CEE mar-kets, case studies of CEE experiences by western firms.

Abstracts of papers, in English, should be received bySeptember 15, 2006. The final papers must be ready byNovember 1, 2006.

For more information or to send abstracts contact either of theconference sponsors: Prof. Dr. Reiner Springer, ViennaUniversity of Economics and Business Administration,

Althanstr. 51, 1090 Wien, Austria, Phone: + 43-1-313 36/4377,fax: + 43-1-313 36/751, e-mail: [email protected] or Prof. Dr. Petr Chadraba, Department ofMarketing, College of Commerce, DePaul University, 1 EastJackson Boulevard, Chicago, Illinois 60604,USA. Phone: (312)362-6889, fax: (312) 362-5647, e-mail: [email protected]

International Conference on Social Policy andRegional Development

November 30, 2006, Zagreb, Croatia

Organizers: Institute of Economics, Zagreb and FriedrichEbert Stiftung, Croatia. The conference aims to explore aspectsof territorial cohesion, social inclusion and social justice. It willfocus on the regional (sub-national) dimensions of social poli-cy, and the social dimensions of regional development policy. Arange of questions to be addressed at the conference include:

• The impact of regional inequalities on overall socio-economic development

• The likely social, economic and territorial implica-tions of the new EU cohesion policy

• The relationship between regional competitivenessand social cohesion

• The role of social networks in regional economicdevelopment

• The problems and possibilities resulting from thedecentralization of social policy.

Contact: Dr. Marijana Sumpor, Conference coordinator, tel.+385 (0)1 2335 700; fax: +385 (0)1 2335 165, e-mail: [email protected], web sites: www.eizg.hr, and www.fes.hr. BT

Bibliography

“Modernizing China's Growth Paradigm” by Eswar Prasad andRaghuram Rajan

Blanchard, Olivier, and Francesco Giavazzi (2005) "RebalancingGrowth in China: A Three-Handed Approach", MIT Department ofEconomics Working Paper 05/32.

Chamon, Marcos, and Eswar Prasad (2006) "The Determinants ofHousehold Saving in China", manuscript, IMF.

Eichengreen, Barry (2004) “Chinese Currency Controversies”,CEPR Discussion Paper 4375.

Goodfriend, Marvin, Prasad (2006) “A Framework for IndependentMonetary Policy in China”, IMF Working Paper, forthcoming.

Lau, Lawrence, Qian, Yingyi, and Gerard Roland (2001) "TheDual-Track Approach to Reform", Journal of Political Economy, Vol.108, No. 1, pp. 120 — 43.

Lin, Justin Yifu; Cai Fang, and Zhou Li (1998) “Competition,Policy Burdens”, and State-Owned Enterprise Reform, AmericanEconomic Review, Vol. 88, No. 2, pp. 422 — 27.

Prasad, Eswar, Thomas Rumbaugh, and Qing Wang (2005) “Puttingthe Cart Before the Horse? Capital Account Liberalization andExchange Rate Flexibility in China", IMF Policy Discussion Paper 05/1.

Prasad, Eswar, and Shang-Jin Wei (2006) “China's Approach toCapital Inflows: Patterns and Possible Explanations", in CapitalControls and Capital Flows in Emerging Economies: Policies,Practices and Consequences, ed. by Sebastian Edwards (forthcoming;Chicago IL: University of Chicago Press).

“Has Trade Liberalization Broght Gender Equality?” by Yin HeHe, Yin (2004) “Are You Popular on the Job Market?” The

Employment of Graduating Student Research Group of People'sUniversity. China Education.

“China-Russia Trade Dynamics” by Natalya Volchkova Rose, A. (2004) “Do We Really Know That The WTO Increases

Trade?”, American Economic Review, 94, (1)Eichengreen, B., Rhee, Y. and H. Tong (2004) “The Impact Of

China On The Exports Of Other Asian Countries”, NBER WorkingPaper 10768

“Unleashing the Potential” by Olga MosinaEnikolopov, Ruben, Sergei Guriev and Ekatherina Zhurvskaya

(2002) “Fiscal Federalism in Russia: Development Scenarios”, CEFIRWorking Paper 18, 2002.

Kozlov, Konstantin and Ksenia Yudaeva (2005) “Imitations andInnovations in a Transition Economy”, CEFIR Policy Paper 16.

OECD (2004) “Relations with Non Member Economies, RecentDevelopment in the Russian Business Environment”, TD/TC/NME(2004) 8, Paris.

UNCTAD (2005) World Investment Report 2005 TransnationalCorporations and the Internationalization of R&D, United Nations,New York and Geneva.

Yakovlev, Evgeny and Ekaterina Zhuravskaya (2004) “StateCapture and Controlling Owners of Firms”, CEFIR Working Paper #44.

Zhuravskaya, Ekaterina (2000) “Incentives to provide local publicgoods: fiscal federalism, Russian style”, Journal of Public Economics76 (2000) 337 — 368.

Akhmedov, Akhmed, Oleg Schetinin, Evgeny Yakovlev, OlegZamulin and Ekaterina Zhuravskaya (2002-2005), CEFIR PolicyPapers ##5, 11, 14, 18, 20

·32


Beyond TransitionManaging Editor: Ksenia Yudaeva(Center of Strategic Research, Moscow)

Editorial Board:Alan Gelb, Director, Development Policy(The World Bank, Washington, DC)

Pradeep Mitra, Chief Economist Europe & Central Asia Region (The WorldBank, Washington, DC)

Boris Pleskovic, Research Manager, Development Economics (The WorldBank, Washington, DC)

Erik Berglof (EBRD, London)

Editor in Chief: Olga Mosina (CEFIR atNES, Moscow)E-mail: [email protected]

Co-ordinating Editor: Andrew Austin(CERGE-EI, Prague)Production Manager: Julia Babich(CEFIR at NES, Moscow)Cartoons: Ekaterina Yakovleva

The World Bank 1818 H Street, N. W.Mail Stop: MC3-302Washington D.C. 20433, USAhttp://www.worldbank.org

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