40957 The Newsletter About Reforming Economies Beyond Transition January March 2007 · Volume 18, No. 1 http://www.worldbank.org/transitionnewsletter www.cefir.ru European Accession and Capacity Building Priorities John S. Wilson, Xubei Luo, and Harry G. Broadman 6 Internal Labor Mobility and Regional Labor Market Disparities Pierella Paci, Erwin Tiongson, Mateusz Walewski, Jacek Liwinski, Maria Stoilkova 8 Latvian Labor Market before and after EU Accession Mihails Hazans 10 The Impact of EU Accession on Poland's Economy Ewa Balcerowicz 11 Bulgaria's Integration into the Pan European Economy Bartlomiej Kaminski and Francis Ng 13 Forming Preferences on European Integration: the Case of Slovakia Tim Haughton and Darina Malova 15 Insert: Whither Europe? 16 Credit Expansion in Emerging Europe 17 New Findings The Economic Cost of Smoking in Russia Michael Lokshin and Zurab Sajaia 18 Insert: Smoking in Albania 19 Deregulating Business in Russia Ekaterina Zhuravskaya, Evgeny Yakovlev 20 Land and Real Estate Transactions for Businesses in Russia Photo: ECA, the World Bank Gregory Kisunko and Jacqueline Coolidge 21 Insert: Land Issues: Barriers for Small Businesses 22 Theme of the Issue: EU Enlargement Foreign Bank Profitability in Central and Eastern Europe Olena Havrylchyk and Emilia Jurzyk 23 EMU Enlargement: Why Flexibility Matters Banking in Ukraine: Changes Looming? Philipp Maier and Maarten Hendrikx 3 Natalya Dushkevych and Valentin Zelenyuk 24 Gains from Risk Sharing in the EU World Bank Agenda 25 Yuliya Demyanyk and Vadym Volosovych 4 New Books and Working Papers 27 Postponing Euro Area Expectations? Tanel Ross 5 Conference Diary 30 2 · From the Editor: Dear Reader, As with the previous issue of BT, which discussed the economic prospects of the Central Asian states, this issue also has a geographic focus. It examines the recent experiences of Central and Eastern European countries as new EU members, as well as their prospects. The issue highlights the challenges these countries face as they prepare to join the eurozone (Slovenia is already the EMU member) and analyzes some of the economic and political consequences of EU accession. The New Member States (NMS) have much higher inflation volatility compared to the old mem- bers, so their EMU membership could come with substantial adjustment costs (Maier and Hendrikx). Yet, for small countries the losses from being outside the EMU may outweigh the costs associated with the membership: the Bank of Estonia has calculated that the country can cumu- latively lose 10 percentage points of GDP growth in five years due to delayed membership (Ross). Tighter financial integration can help the NMS to improve risk sharing. The potential welfare gains in this case can amount to 5.2% of consumption (Demyanyk and Volosovych). Reducing barriers to labor mobility and trade would allow the NMS to decrease adjustment costs. Pierella Paci et al. provide concrete recommendations on how to improve labor market flexibility. The proposed measures include the facilitation of com- muting, investments in education and lifelong learning, and improvements in social protection systems. Mihails Hazans reviews the recent trends in the Latvian labor market and documents the increase in external labor mobility and the narrowing of the ethnic gap after EU accession. As for the trade dimension, since the new members are still lagging behind in port efficiency, cus- toms regimes, regulatory policy and IT infrastructure (Wilson, Luo and Broadman), they can gain relatively more compared to the "old" members if they lower behind-the-border barriers to trade. Country-specific evaluations of post-accession experiences offer interesting insights and valuable lessons for other countries. Eva Balcerowicz maintains that most fears regarding Poland's accession turned out to be unfounded and shows some unexpected ben- efits of EU membership, such as an increase in exports. The prospects of EU accession provided Bulgaria with powerful political and economic anchors to the reform process, which helped to boost the country's competitiveness (Kaminski and Ng). Positive eco- nomic developments in the post-accession period have perhaps contributed to public support for EU membership in Poland (Balcerowicz), and further EU enlargement and eurozone entry in Slovakia (Haughton and Malova). In the New Findings section Michael Lokshin et al. explore one area where the transition countries still differ much from Western Europe -- that is, an individual's attention to health. In Russia and Albania, a whopping 60% of men smoke. The authors show that the economic burden smokers impose on themselves and their societies is far from being trivial: smokers lose 15-28% in wages and GDP is decreased by 2%. Other articles in the New Findings section look at financial deepening and development of the banking sector, highlighting the role of foreign banks (Havrylchyk and Jurzyk; Dushkevych and Zelenyuk), as well as the barriers to doing business -- specifically access to land for large and small businesses in Russia (Kisunko and Coolidge), which remains difficult despite deregulation. Ksenia Yudaeva, Managing Editor Beyond Transition · January March 2007 Theme of the Issue: EU Enlargement · 3 EMU Enlargement: Why Flexibility Matters Inflation differentials can contribute to nominal and real adjustment, but may come with costs Philipp Maier and Maarten Hendrikx The European Monetary Union er. This is because the NMS are in a limited due to their relatively small eco- (EMU) continues to expand with Slovenia process of real and nominal economic nomic weight, the NMS would represent being its newest member since January 1, convergence. Taking into account current a substantial political/social factor as they 2007 and several others in the waiting nominal price levels and the recent speed account for about 25% of an enlarged room. As exchange rates become irrevo- of convergence, it is estimated that most euro area's population. The ECB may not cably linked to the euro, regional inflation NMS need several decades to achieve be able to deliver price stability for a con- differentials become an important adjust- price level convergence (see Table). That siderable part of the population of an ment mechanism: for instance, when is, if the NMS fixed their exchange rates enlarged monetary union. Since 1999, the countries grow at different speeds, infla- to the euro tomorrow, they would have a average share of total population that has tion differentials can emerge. Similarly, higher average inflation rate than the cur- an inflation rate within a ± 1 percentage inflation differentials that emerge due to rent euro area member states for a sus- point band around the GDP-weighted regions being hit by asymmetric shocks tained period of time. average inflation rate is about 80% for need not concern a central bank. A more the current EMU and slightly more than Unable to Deliver Monetary difficult situation for a monetary policy- half for a hypothetical monetary union of maker occurs when persistent inflation Stability? the EMU and NMS. differentials emerge because of inflexible Arguably, monetary policy making by labor and product markets. These could the ECB would be easier if most member Conclusion potentially lead to large adjustment costs, states were located closely around the The EMU has extended monetary sta- a loss of public support for the euro and average rate of inflation. In contrast, a bility throughout Europe. Arguably, one a weakening of the external value of the situation where two groups of countries of the factors contributing to the success euro. To avoid this, sufficient flexibility in persistently deviate from the union's of the EMU has been the high degree of labor and product markets is important average rate of inflation might expose the convergence among its members when to ensure smooth and sustainable nomi- monetary union to tensions. As nominal they formed the monetary union. To con- nal and real convergence of the New and real convergence in the NMS is still tinue the success story, European policy- Member States (NMS). far from being achieved, there is a risk makers should pay close attention to the The level of inflation dispersion in the that in an enlarged monetary union, two economic circumstances of the candidate EMU is close to levels observed in other groups of countries will emerge that have countries. Inflation differentials can con- monetary unions (see Figure). For the a different rate of inflation, and hence tribute to nominal and real adjustment, EU25 (all EU members except for the UK different needs for monetary policy. but may come with costs: insufficient and Denmark), however, the average level While the economic impact of the economic flexibility increases the risk of of dispersion has been considerably high- NMS accession to the EMU would be persistent regional inflation divergence, which could raise adjustment costs, com- Inflation dispersion Relative Price Index 2005, EU15=100 plicate monetary policymaking and erode public support for the euro. Policymakers therefore need to be aware of the impor- 1.5 Country GDP Household tance of economic flexibility to ensure Deflator Consumption smooth and sustainable convergence of the NMS to the euro area level. 1.0 Czech Republic 54 56 Estonia 56 63 Latvia 48 55 Lithuania 47 53 0.5 Philipp Maier is Senior Analyst at the Hungary 59 62 Bank of Canada, and Maarten Hendrikx is Poland 52 58 Economist at De Nederlandsche Bank. The Slovakia 53 56 0.0 article is based on the authors' paper Bulgaria 35 42 USA Germany Spain EMU EU25 "Implications of EMU enlargement for Romania 43 52 European monetary policy: A political econo- Note: Unweighted coefficient of variation of Lowest 3 Eurozone my view" published in "Kredit und Kapital" regional inflation rates. Data for the USA (12 Portugal 80 82 36, 137-166. The views expressed are the FED districts) is averaged over 1951-1999, for Greece 82 85 authors' and need not represent the views of Germany (9 Bundeslander) 1951-1996, for Spain 87 87 the institutions affiliated. The authors thank P. Spain (50 provinces) 1961-1998 and for EMU Cavelaars, D. Lecavalier, J. Lewis, L. Schembri (13 countries) and EU25 1999-2007. Source: Lewis (2007), Eurostat and J. Swank for helpful comments. BT The World Bank & CEFIR 4 · Theme of the Issue: EU Enlargement Gains from Risk Sharing in the EU The new EU countries could gain more from financial integration than the EU 15 Yuliya Demyanyk and Vadym Volosovych In 2004 ten countries joined the Domestic Macroeconomic obtain from moving from financial European Union. In addition to political Volatility Higher for the NMS autarky to full risk-sharing. The measure unification, the EU is moving toward a is estimated using GDP per capita data unified market with a joint economic The ten new EU countries have gener- under the proposition that in autarky a policy, single currency, and reduced ally higher and more volatile average country consumes its own GDP and restrictions on flows of goods, services, GDP per capita growth rates (4.2% per under full risk-sharing it consumes a por- labor, and capital. year) compared to the rates of the EU-15 tion of pooled group-wide GDP. Judging Unrestricted international trade is (2.5% per year). The variability of output from the estimated extent of risk-sharing, widely believed to be one of the most growth is three times larger for the NMS none of the economies we study is in beneficial aspects of economic integra- than for the EU-15. Both the rate of per financial autarky. Therefore, we also esti- tion. The merits of greater financial capita consumption growth and its vari- mate unexploited gains from risk-sharing openness and larger cross-border flows ability follow a similar pattern. when a country moves from the actual of money are more often disputed Income risk-sharing gives insight on level of consumption to the level under because of the recent financial crises and how effectively a country uses interna- full risk-sharing conditions. following instability they brought to a tional asset markets to insure national The countries with more volatile out- number of the emerging markets. In income against country-specific output put should, in theory, gain relatively addition, the economies within the euro- shocks and thus how well it is integrated more than countries with stable output from pooling the individual output risks. All 25 countries will benefit from financial integration, and the In addition, a country whose output is total average welfare gains of the NMS could amount to 5.2% counter-cyclical to other countries in the Union would be "compensated" for sta- zone cannot reduce the impact of into those markets. On average, the new bilizing the group-wide output. adverse country-specific events (such as EU countries have a larger degree of We find that the new EU members sudden falls in output due to, for exam- income risk-sharing than the EU-15 could on average gain more from finan- ple, natural disasters) by monetary poli- members. The average extent of income cial integration than the EU-15. The total cy instruments at a country level. This, in risk-sharing is 26% for the new members average welfare gains amount to 5.2% turn, can lead to the further instability of and 9% for the EU-15 (100% means full (permanent increase in the level of per individual economies and the economy risk-sharing). This may not mean that the capita consumption) for the new EU of the Union as a whole unless mecha- new EU countries are more open to capi- countries and to 1.2% for the EU-15. nisms that allow diversifying country- tal flows. Instead, this may imply they The welfare gains are larger for smaller specific shocks are in place. mostly share risk within the EU, while the economies and are especially large for EU-15 countries are more likely to Diversification of economic and Lithuania, Estonia, Malta, the Czech engage in risk-sharing with the rest of the financial risks within a group of coun- Republic and Slovakia. The average world, including investing in North tries is known in economic literature as unexploited welfare gains are again America and Asia. "risk-sharing." In case of full risk-shar- much larger for the NMS (6.6%) than Income risk-sharing would con- ing, all country-specific output shocks those for the EU-15 (0.9%). The larger tribute to consumption risk-sharing (or are completely diversified across the value of the gain for the NMS is prima- "consumption smoothing"). On average, group members so that individual coun- rily attributed to a higher volatility and the EU-15 exhibits a much higher degree try's output volatility is not reflected in sometimes the counter-cyclical pattern of of consumption risk-sharing (47%) than that country's income (full income risk- output and consumption spending. the new EU countries (15%). A lot of sharing) or consumption (full consump- Thus, the empirical results show that consumption smoothing within the EU- tion risk-sharing). if financial integration advances and the 15 is achieved through international EU member countries move closer to full We estimate the benefits from finan- transfers, national government spending, risk-sharing conditions, the welfare gains cial integration from international risk- and corporate and private saving. will be substantial for all the countries. sharing among the 25 EU countries and do not discuss any other aspects of the Larger Gains for the NMS integration that may improve the well- To quantify the potential benefits Vadym Volosovych is Assistant Professor being of the EU residents. We compare from risk-sharing, we estimate a welfare of Economics at Florida Atlantic University, potential gains form risk-sharing among U.S. Yuliya Demyanyk is Economist at gain from risk-sharing as a permanent Federal Reserve Bank of St. Louis, U.S. Full country-members and determine the increase in the level of consumption of a text of the article is circulated as"Gains from countries that would benefit the most representative individual when a country Financial Integration in the European Union: under conditions of the larger Union achieves full risk-sharing. We estimate Evidence for New and Old Members", fully achieving risk-sharing. total potential welfare gains the countries Florida Atlantic University, mimeo. BT Beyond Transition · January March 2007 · 5 Postponing Euro Area Expectations? While honoring the Treaty, the interpretation of the inflation criterion could be given a fresh look Tanel Ross For a number of the New Member equilibrium inflation rate above the pressure. The fulfillment of commitments States, including Estonia, adoption of the eurozone average. Yet on other occasions by individual member states would suf- euro is the key priority. This short article shocks to retail trade or telecom services fice for the efficient functioning of the discusses some political and economic that cannot be easily traded across the monetary union for years to come. issues of the enlargement and provides a single market, would result in real Enlargement of the eurozone would not brief update on Estonia's position. exchange rate depreciation and lower hinder the proper functioning of any of The starting point for the adoption of inflation. In either instance, divergence these mechanisms. the euro is rather straightforward. of inflation rates is a result of normal Nor would the views of representa- Eliminating exchange rate risk and pro- and manageable economic adjustment, tives of new entrants likely disrupt mone- moting real exchange rate stability and is not a sign of weakness. tary management. Central bank gover- boosts both intra-EU trade and GDP Clearly, eurozone members will con- nors from the NMS, according to some, growth. Adopting the euro would foster tinue to specialize in the single market are somehow more accustomed to infla- financial diversification and investment and face asymmetric shocks. The diver- tion rates exceeding 2%. Ironically, it flows. The enlargement of the eurozone gence of inflation rates and external could be also argued that governors from so far has provided substantial benefits positions is thus expected to continue the NMS would be too hawkish, as high- for the new and old member states alike. If the cost-benefit analysis is so Estonia's costs of delayed eurozone entry could amount to 10 per straightforward, why do doubts about centage points of a cumulative loss in GDP growth over five years the pace and breadth of the eurozone enlargement linger? In general, two lines irrespective of the enlargement. The cor- er interest rates would be preferable in of argument caution against a speedy responding adjustment path of real their home countries. enlargement. First, an economic line of exchange rates depends predominantly It should be underlined that the skepticism notes the eurozone and most on the flexibility of economic structures. members of the Governing Council do of the NMS are at different stages of the Therefore, the suggestion that the NMS not represent their central banks, but the economic cycle (or medium to long term should postpone joining the eurozone entire eurozone. This applies equally to development). Second, a political line of simply because of rapid output growth the present and future members of the skepticism focuses on eurozone gover- or current account deficits is not entirely eurosystem. Nevertheless, local econom- nance and, indeed, on EU governance in correct. Potential eurozone entrants are ic conditions may still count in the vot- general. likely to be flexible enough to adjust in ing pattern on the board. It is interesting the currency union without recourse to to note that in the Federal Open Market Economic Skepticism nominal exchange rates. Committee (FOMC), regional condi- The economic line of skepticism tions may have a stronger impact on notes that the New Member States are in Political Skepticism board members in Washington, DC than a fundamentally different cyclical posi- Political arguments that caution on FOMC members from the regional tion compared to the old ones. Economic against too rapid enlargement can be banks. convergence leads to higher GDP and divided into two broad categories, even productivity growth rates, a somewhat leaving aside general enlargement Estonia will Stay on Course higher CPI inflation, and often to current fatigue. Estonia, by adhering to a fixed account deficits, as well. Nominal One of these arguments points to the exchange rate and the currency board exchange rate flexibility, in this skeptical assumption that the enlargement of the framework, has been a de facto member view, is needed at some point to adjust to eurozone will be difficult without further of the common currency area since June a slower growth path. Premature entry political integration. This implies that 1992. With complete liberalization of to the eurozone would make that adjust- the credibility of the euro would suffer capital movement and full integration of ment too painful. without closer coordination among fiscal the financial system with the European These arguments, however, omit the and structural policies, or among other markets, Estonia has been as close to single most important feature of the policies. currency union as an independent coun- EMU -- its members' economies should The existing toolbox for policy coor- try can possibly be. Hence, early adop- be agile enough to make use of the dination within the EU, however, is tion of the euro is the only realistic poli- opportunities a stable monetary frame- already impressive. The renewed cy goal. Estonia has met all the work provides. To this end, economic Stability and Growth Pact and the new Maastricht criteria with ease -- except flexibility is needed in all eurozone mem- Lisbon strategy for growth and jobs for the current interpretation of the infla- ber states. On some occasions, the together provide a full framework for tion criterion. Balassa-Samuelsson effect will push an coordinating policy and applying peer Continued on p. 7 The World Bank & CEFIR 6 · Theme of the Issue: EU Enlargement European Accession and Capacity Building Priorities Almost 40% of the trade gains for the new members come from improvements in IT infrastructure John S. Wilson, Xubei Luo, and Harry G. Broadman In the transition countries of Europe technology infrastructure -- in order to the trade facilitation levels of the EU-15, reducing barriers to trade is increasingly estimate the gains from trade to the Czech the new member and candidate countries seen as the key policy priority to acceler- Republic, Estonia, Hungary, Latvia, have to overcome different challenges. ate integration into the world economy, Lithuania, Poland, Slovakia and Slovenia including through membership in the (hereafter EU-8); and Bulgaria, Romania, Large Gains from Behind European Union. A broad definition of and Turkey (candidate countries). the Border Improvements "trade facilitation" involves not only The new EU members have exhibited improved efficiency in logistics at ports Facing Different Challenges rapid economic growth in the last sever- and customs and the use of advanced We first measure how far a country's al years (around 2.5-3%), despite the rel- technology, but also streamlined regula- performance is from the best-practice atively weak performance of Western tory policy, deeper harmonization of country in each of the four dimensions. Europe and the world economy. Does standards, and conformance to interna- The best-practice country is indexed to a economic growth enable building trade tional norms. value of 1.0. facilitation capacity? There may be a EU membership should, over time, The 15 EU member countries are rel- relationship, as the more developed a facilitate the movement of goods atively advanced in all four areas, with country is, the more resources it can between member states. The harmoniza- an average value of 0.82, 0.87, 0.79, and devote to investing in trade facilitation tion and implementation of the acquis 0.78 in port efficiency, customs regimes, capacity. By the same token, it is likely communautaire also require new mem- regulatory policy, and information tech- that the larger the economy, the higher ber countries to make major improve- nology infrastructure, respectively. The the rate of return on investment in ments to their overall economic environ- EU8 countries, however, are less devel- improving trade facilitation. ment both at and behind the border. oped in these four areas with an average Yet, the gap in economic develop- In our research paper, we examine the value of 0.60, 0.73, 0.65, and 0.64, ment of the EU-15 and the EU-8 and four dimensions of trade facilitation -- respectively. As for Bulgaria, Romania candidate countries does not fully increased port efficiency, customs re- and Turkey, the development of their account for the lagged progress in the gimes, regulatory policy, and information trade facilitation is further behind, with latters' trade facilitation capacity. The the state of their customs regimes esti- only exception is Estonia, which per- Relative Trade Gains due to Improved mated at just 58% of the EU-15 level. forms stronger than the benchmark level Trade Facilitation Indicators The level of development of the new in all four indicators but also has a far and candidate member countries varies higher GDP growth rate than the region- EU 8 most in port efficiency, where Estonia al average. Compared with Hungary, a and Latvia are the top performers with country with similar economic charac- 70% of the best EU-15 performers. In teristics, Estonia is 40% more developed 39% 34% regulatory policy, the development levels in port efficiency, 30% in IT infrastruc- 14% 13% of all the examined countries are more ture and 20% in regulatory policy. homogeneous. Does trade facilitation promote The three largest economies -- the development? Our analysis suggests that Czech Republic, Hungary, and Poland -- barriers to trade facilitation in the EU-8 IT infrastructure Customs regimes are not only less developed than the and the candidate countries may weaken Regulatory policy Port efficiency EU-15 in trade facilitation as a whole, their development potential. For exam- but also constrained in particular dimen- ple, export growth is one of the most Candidate Members sions. Hungary's customs regime important factors that contributed to approaches 95% of the EU-15 level, recent economic growth in the Czech 19% while its ports efficiency does not exceed 39% Republic, Hungary, and Poland. If infra- 23% 60% of the this level. The Czech structure is upgraded and transactions 19% Republic is relatively developed in IT costs lowered, trade volumes could be infrastructure but much less so in port expanded. efficiency. Poland, the least developed Modeling the impact of hypothetical among the three, exhibits a level around improvements in port efficiency, customs IT infrastructure Customs regimes 70% of the EU-15 benchmark in all the regimes, regulatory policy and IT by half Regulatory policy Port efficiency four areas. In sum, in order to achieve of the EU-15 level on bilateral trade Beyond Transition · January March 2007 · 7 flows, we find that that behind-the-bor- countries come from improvements in IT procedures could be streamlined, the der factors will lead to the increase of infrastructure (see Figure). The second attendant time could be shortened and import and especially export volumes. largest potential gains for EU-8 -- costs saved. For example, the greatest absolute trade almost 30% -- come from port efficien- In general, improvements in port gains -- US$49 billion and US$62 billion cy. These two dimensions should be facilities and IT infrastructure may be respectively -- could be expected if port therefore given a higher priority for more costly than the administrative efficiency and IT infrastructure of the improvement. Bulgaria, Romania, and reforms at the center of customs regimes studied countries reach half the average level of the EU, and 70% of trade gains Improvements in trade facilitation in the New Member States and are associated with export expansion. Turkey will also bring sizable benefits to EU15 Improvements in behind-the-border factors by half of the EU-15 average also result in large relative trade gains of Turkey receive more widely dispersed and regulatory policy -- but they could around 11%. For instance, Lithuania's gains with investments in port efficiency, have correspondingly high payoffs. The trade volume would rise more than 25% customs regimes and regulatory policy at eligibility for additional EU financing if its IT infrastructure level reaches 50% around 20% of the total trade gains. with accession should provide more of the EU level. In relative terms, the EU-8 and the scope for improvements in these areas. candidate countries will benefit more Trading Partners Also than the "old" members, thanks to the Benefit existing relatively intense trade relation- Trade facilitation improvements ships. In particular, their relative trade John Wilson is at Development Research benefit not only the countries that gains are quite large should the largest Group, Xubei Luo is at Europe and Central Asia Region, and Harry Broadman is at implement them, but also their trading economies among them -- the Czech Africa Region, the World Bank, Washington, partners. The more intense trade rela- Republic, Hungary, and Poland -- DC. Full text of the authors' paper "Entering tions are between countries, the greater improve trade facilitation. For example, the Union: European Accession and Capacity the potential benefit partner countries if Poland increases its IT infrastructure Building Priorities" is available at: will enjoy. Given the importance of to half of the EU-15 average, the other http://econ.worldbank.org (World Bank intra-regional trade between the EU-15 seven new member countries will enjoy a Policy Research Working Paper No. 3832). and the EU-8 and the candidate coun- trade gain of 0.8%; Bulgaria, Romania, The findings, interpretations, and conclusions tries, the expected total trade gains to and Turkey will gain 0.25%, and the expressed in this paper are entirely those of the authors. They do not necessarily represent all of them may amount to almost EU-15 -- 0.29%. the view of the World Bank, its Executive US$10 billion if all four dimensions of Directors, or the countries they represent. The trade facilitation improve by up to a Concluding Remarks findings and conclusions here do not neces- half of the EU-15 level. Of these, 74% As our analysis has shown, improve- sarily represent the views of U.K. government accrue to the EU-15 countries. ment in IT infrastructure could lead to or the U.K. Department for International Almost 40% of the total estimated the largest gains for the new members Development, which has provided support trade gains for the EU-8 and candidate and the candidate countries. If clearance for the project. BT Continued from p. 5 explicit numerical target for calculating loss in GDP growth at 10 percentage the reference value of the price stability points over five years compared to the Against this backdrop, a few sugges- criterion, or only looking at the inflation baseline. Of course, strong policies can tions for future work could be made. rates of eurozone members. reduce the impact of the postponement All the Treaty provisions should, of The new interpretation of the criteri- or even render it negligible. In any case, course, be honored. Within this frame- on would not set an unwelcome prece- the fixed rate of exchange remains the work, however, taking a fresh look at the dent for any future enlargements. It sole anchor for Estonia's monetary poli- interpretation of the inflation criterion is would demonstrate that the adoption of cy. Over the medium term the inflation possible. The three countries with the the euro would be assessed only by eco- rate is expected to move closer to the lowest inflation rates are not necessarily nomic policy merits. Indeed, it is not eurozone average thus providing an the three best performers of the EU-25. entirely clear why a combination of low opportunity to adopt the euro in the not Indeed, it has been almost customary in inflation and a fluctuating nominal so distant future. recent convergence reports that two out exchange rate would be preferred to a of the three reference countries were strictly fixed rate when deliberating over ones with floating exchange rates that eurozone membership. Tanel Ross is Director of International might not serve as the most suitable It has been customary to ask what and External Relations Department of the benchmark for joining the currency will happen if entry to the eurozone is Bank of Estonia. He has contributed this arti- union. Thus, new ways should be indefinitely postponed. The Bank of cle to BT. The views expressed here are the explored, for instance, by taking into Estonia's calculations put the economic author's and do not necessarily reflect those account the european Central Bank's costs of delay in terms of a cumulative of the Bank of Estonia. BT The World Bank & CEFIR 8 · Theme of the Issue: EU Enlargement Internal Labor Mobility and Regional Labor Market Disparities In Central Europe and the Baltic region, commuting -- but not migration -- may facilitate transitions out of unemployment Pierella Paci, Erwin Tiongson, Mateusz Walewski, Jacek Liwinski, Maria Stoilkova The transition to a market economy sistent disparities in unemployment rates Capital flows in Central Europe and had dramatic labor market consequences across the regions in Central Europe and the Baltic region are generally not serv- in many of the countries in Central the Baltics are a particular concern. ing to help correct regional imbalances. Europe and the Baltic region: the Czech In particular, capital typically flows to Republic, Estonia, Hungary, Latvia, booming regions, where the human cap- Labor Mobility is an Impor Lithuania, Poland, Slovakia, and ital stock is high and where economic Slovenia. At the beginning of the transi- tant Adjustment Mechanism activity is concentrated. Wages adjust tion, these countries had essentially no The persistence of regional disparities slightly but the measured wage elasticity official unemployment and a very egali- over time indicates, in part, a lack of (in absolute terms) may be insufficient to tarian distribution of wages. Structural flexibility in the prevailing adjustment offset persistent and high rates of unem- reforms led to a sharp decline in employ- mechanisms. In principle, adjustment to ployment. In addition the responsiveness ment with a related increase in unem- regional imbalances may take place of wages to unemployment may be ployment and inactivity. mainly through a number of channels: declining as the level of unemployment Many of these countries began to · Where unemployment is high, increases so that at very high unemploy- experience an economic rebound by the wages are expected to fall and the ment levels wages may persist in staying mid-1990s. However, the recovery had a prospect of higher returns and lower unit down. Because adjustment mechanisms limited impact on unemployment. In labor costs should attract more firms have not been effective in reducing some cases, the late 1990s brought fur- into the region as well as encourage regional unemployment disparities, labor ther increases in unemployment in the existing firms to hire more workers. mobility is a potentially important wake of slumps in economic performance · If factors of production adjustment mechanism. and macroeconomic stabilization pro- respond to unemployment disparities, grams designed to restore macroeconom- capital should flow into lagging regions Labor Mobility is Weakly ic equilibrium and support structural in response to lower unit costs and Related to Unemployment reforms. On the eve of the 2004 EU workers should move out of high unem- Our findings are based on the 2004 enlargement, most of these countries had ployment, low wage regions into those Labor Force Survey data and various substantially higher unemployment rates where the returns for labor are higher. waves of the International Social Survey than the EU average and, in Slovakia and · Government action aimed at Program as well as summary informa- Poland, considerably higher than those of addressing regional imbalances could tion from the Eurobarometer Survey. any other EU member. The wide and per- take a number of forms. Our study focuses on internal labor migration alone, which, however, may Figure 1: Minimum and Maximum Regional Unemployment Rates (NUTS 3)*, 2004 have an impact on the results because international migration may serve as a substitute for internal migration. 50 In the countries analyzed, internal 45 Minimum Maximum migration is found to be low, to have 40 fallen over time, and to be generally 35 lower than that of the older EU mem- 30 bers. In addition, migration is, at best, 25 Central Europe and the Baltics average 20 weakly related to regional unemploy- 15 ment rates. Moreover, commuting rates 10 are higher than migration rates but vary 5 substantially across countries. In 2004, 0 commuters accounted for 1% of all Rep. Latvia Rep. Italy UK Estonia Poland Austria Finland France Greece Ireland Spain employed workers in Poland and for Hungary Lithuania Slovenia Denmark Sweden Bulgaria Norway Romania Czech Slovak 10% of such workers in Hungary. In Netherlands contrast, internal migrants accounted for Central Europe and the Baltics EU 15 Other compara tor countries less than 1% of all employed workers, *NUTS is the EU's system of classifying territorial units. on average. There is also evidence that Source: Eurostat and World Bank staff estimates commuting rates are growing. Beyond Transition · January March 2007 · 9 Unsurprisingly the probabilities of Figure 2. Migrants and Commuters: Labor Force Survey 2004 both commuting and migration are high- (In percent of the employed population; NUTS3 level unless otherwise indicated) est among men, the young and the better educated and among single or separat- ed/widowed workers. In Lithuania and 12% the Czech Republic, those who are Migrants Commuters 10% engaged in continuing education or train- ing are also more likely to commute. 8% Commuting appears to be much more prevalent among workers employed by 6% large firms. With respect to previous 4% employment status, commuting may facilitate the transition out of joblessness. 2% However, in the Czech Republic and Hungary, there is evidence that being pre- 0% Czech Czech Estonia Hungary Hungary Latvia Lithuania Poland Slovakia viously unemployed is associated with Rep. (NUTS2) Rep. (NUTS2) (NUTS2) lower probability of migration. This sug- Source: LFS and World Bank staff estimates gests that, at least in the case of internal labor migration, the already employed ty. In particular, we propose the follow- pelling empirical evidence demonstrating and the better skilled are more able to ing policy considerations: that generous unemployment and wel- benefit from better employment opportu- · Promote measures to facilitate fare benefits may serve to dampen labor nities in other regions than the unem- commuting. Measures to facilitate com- mobility, by raising reservation wages ployed. In addition, some occupations or muting, rather than migration, may be and reducing the incentive to look for workers in selected sectors are much more viable in areas where residential work among unemployed workers. It has more mobile than others. For example, mobility is traditionally low and where also been observed that regional dispari- agricultural workers tend to be less there are institutional barriers to chang- ties in real disposable per capita income mobile than service or industry sector ing residences. In addition, since most of may not be as large as suggested by dif- workers. At more disaggregated levels of the studied countries are relatively ferences in regional per capita income. employment sector, construction workers small, commuting is a more attractive This is due in large part to different price are relatively more mobile while educa- option than migration. Policy interven- levels and social transfers. The policy tion and health workers seem less mobile. tions to encourage commuting include challenge is to strike the right balance -- For understanding the growth and per- reducing the monetary and time costs of providing unemployment and welfare sistence of regional unemployment rate transport, such as improvements in benefits to mitigate income shocks while disparities, some findings are noteworthy: infrastructure and enhancing efficiency preserving job search incentives by the · Migration is generally not of the transport services market via a tightening of eligibility criteria. responsive in a consistent way to region- combination of private provision and But policy has its limits. Individuals al economic indicators but commuting is. public regulation. may be unwilling to relocate, despite the · Commuting but not migration · Invest in education and lifelong promise of better employment prospects, may facilitate transitions out of jobless- learning. As our findings suggest, those due to a legacy of central planning and ness as, in general, those previously inac- unemployed who are left behind in lag- permanently secure jobs. Attachments to tive or unemployed are more likely to ging regions are predominantly the low local communities, ancestral lands, and commute. In contrast, unemployment is skilled workers with the lowest employ- social networks, among other reasons only weakly associated with a higher ment prospects. As such, investments in encourage individuals to stay. probability of migration. education and training may facilitate the Furthermore, employment is often not Furthermore, the results of the analy- adjustment process, as workers acquire the only motivation for geographic sis of individual preferences suggest that the necessary skills to find jobs in more mobility; family matters, housing ameni- habits matter: many individuals express dynamic regions and move away from ties, utility costs, and living standards are a stronger attachment to their local com- lagging parts of the country. often important determinants of mobili- munities and such attachment, in turn, is · Enhance flexibility in labor ty. The report finds evidence that prefer- reflected in lower propensities to markets. For those left behind in lagging ences, attitudes and habits do restrain migrate. In addition, workers rely on regions, a policy package designed to individual mobility. informal sources of employment infor- support job creation, encourage capital mation. In regions where unemployment to move into the area and enhance pro- is high, informal job search methods may ductivity is critical. Policy measures This summary is based on Pierella Paci, be much less effective outside the unem- Erwin R. Tiongson, Mateusz Walewski, Jacek designed to promote wage flexibility in ployed worker's region of residence. Liwinski, Maria M. Stoilkova (2007) local labor markets -- such as through "Internal Labor Mobility in Central Europe decentralized wage bargaining systems -- and the Baltic Region", World Bank Working Policy Implications are a critical component of this package. Paper No. 105, Washington, DC. The report Appropriate policy measures are nec- · Ensure that social protection was written prior to the 2007 EU enlarge- essary to promote labor market flexibili- does not inhibit mobility. There is com- ment process. BT The World Bank & CEFIR 10 · Theme of the Issue: EU Enlargement Latvian Labor Market before and after EU Accession Labor market flexibility in Latvia has considerably improved after the EU accession Mihails Hazans Between 2002 and 2005, the Latvian Latvia's regions have become less ethnic gap in employment remains sub- labor market witnessed dramatic polarized in terms of both unemploy- stantial at ten percentage points, and has changes related both to unprecedented ment and earnings. While wages in the not changed significantly since 2002. economic growth -- 28% in three years capital city remain significantly higher Latvians are over-represented in -- and to a massive outflow of the labor than in the rest of the country, and highly skilled non-manual occupations, force after EU enlargement in May 2004. wages in Latgale region significantly in non-market services and agriculture, This emerging shortage of labor has led lower than in other regions, both gaps and in the public sector. Non-Latvians to strong growth of real wages and have declined since 2002. Similarly, the are found more frequently in skilled reduction of unemployment. Moreover, rural-urban earnings gap has declined manual and elementary occupations, in it has improved the labor market posi- considerably in the three year period -- industry and market services, and in the tion of ethnic minorities, the elderly, in fact, in 2005, average earnings of private sector. "Vertical" segregation fixed-term workers, the low-skilled, and rural workers were statistically indistin- (among nine main groups of occupation) other disadvantaged groups. Wage guishable from their peers in urban is modest, on average; just 12% of non- growth, in turn, has increased labor areas. Plausibly, two factors -- improved Latvians would have to change occupa- force participation, resulting in further internal labor mobility and the external tion to make their occupational distribu- increase of employment rates. In fact, mobility shock in connection to the tion identical to that of Latvians. This employment rate in Latvia has been ris- accession -- have contributed to these can be largely explained, according to a ing faster than in any other New positive developments. recent survey of employees in Latvia, by Member State and faster than in the differences in language skills. Among "old" EU except Spain. Ethnic Gap Narrowed employees with good Latvian language We conduct a detailed analysis of skills just 7% would have to change these changes before and after Latvia's While the minority population still occupation to make their occupational EU accession, using micro-level data has a somewhat lower employment rate, distribution identical to that of native from Latvian Labor Force surveys for the overall gap reduced from more than Latvian speakers, while for workers with 2002-2005. six percentage points in 2002 to less than medium and poor Latvian language three percentage points in 2005. skills 25% and 49%, respectively, would Moreover, the increase in employment Unemployment Risk Much have to change their occupation. between 2002 and 2005 took place pri- More Even There also exists a wage gap of 9.6% marily (and as far as women are con- between ethnic groups, which is almost Unemployment risk has become cerned, exclusively) within minority pop- completely unexplained by education, spread much more evenly across social ulation. For men, ethnic gaps both in age, occupation or similar characteris- groups. Unemployment rates have participation and employment disap- tics. However, once differences in declined in all age groups for men and in peared. The ethnic gap in employment Latvian language skills are accounted most age groups for women; and youth rates narrowed in all age groups except for, the "unexplained" gap in earnings unemployment is no longer considered a the young and the elderly. Nevertheless, (compared to native Latvian speakers) serious problem. for people with tertiary education the becomes substantially smaller: 4%, 7%, and 1% for workers with good, medium, Occupational Segregation and Wage Gaps between Native Latvian Speakers and poor knowledge of Latvian language and Other Workers, by Self Reported Latvian Language Skills Level. Full time Employees Aged 18 64, 2005, Percent respectively (see Table). Returns to Education Knowledge Share of Duncan Index of Gross Productivity Unexplained Unchanged of Latvian Workers Occupational Wage Dif Differential Wage Gap Language Segregation ferential What has not changed much in 2005 compared to 2002, are the high returns Native 62.3 to tertiary education and low returns to Good 19.9 7.0 2.1 5.7 3.8 secondary education -- by international Medium 12.2 24.7 10.0 3.0 6.8 standards. In 2005, people with higher Poor 5.4 49.0 13.4 12.4 0.9 education earned, on average, 76% more Source: Calculations based on data from survey of wage earners for the national program of labor compared to people with basic educa- market studies. tion, other things being equal; this differ- Beyond Transition · January March 2007 · 11 ential was especially high for females, somewhat earlier), after which it decreas- In sum, the findings of our study sug- native Latvians, public sector employees es. In Latvia, the male earnings profile gest that labor market flexibility in and the rural population. Returns to sec- peaks at the age of 38 for workers with Latvia improved considerably after the ondary education remained modest at higher education, and at 34 for workers EU accession. Responding to strong eco- 10-20%. with secondary and basic education. The nomic growth combined with increased As in many post-communist countries earnings of a 38-year-old and a 23-year- external labor mobility, the Latvian (but unlike the Czech Republic for exam- old only differ by 9% for men and 7% labor market in just three years under- ple), returns to experience in Latvia have for women -- this is a remarkably small went changes on a scale which is well been decreasing compared to the socialist difference compared to the US, where the beyond expectations. wage setting system and are at an earnings difference between the same age extraordinarily low level. In a typical categories amounts to a whopping 100% industrialized country age-earnings pro- for men and 70% for women. However, Mihails Hazans is Associate Professor at file in most education groups rises up to compared to 2002, return to experience the University of Latvia. The full text of his the age of 50 (except for female college has slightly increased for highly skilled paper is available at: http://ssrn.com graduates, for whom the peak is recorded male workers. /abstract=971198 BT The Impact of EU Accession on Poland's Economy Most fears concerning EU entry turned out to be unfounded, except for the increase in prices Ewa Balcerowicz Poland's integration into the EU has tional GDP growth per year. Estimates Contrary to pessimistic expectations, been a gradual and lengthy process, and by CASE showed that trade liberaliza- export growth rate outpaced that of it is not yet complete. It is important to tion and the reduction of technical barri- imports and the foreign trade deficit note that the developments in the Polish ers would bring an increase of 3.4% to shrank for a sixth consecutive year. In economy in 2004-2006 were influenced Poland's GDP in the long run. The real 2005-2006 the trade balance with the to a large extent by institutional and reg- wages of unskilled workers in Poland EU countries became positive, implying ulatory reforms undertaken in the years were estimated to increase by 1.7%. that the current trade deficit has been prior to the accession. generated by trade with non-EU coun- The transposition of EU legislation Economy Grew 4.2% a Year tries. Adoption of the Common Customs allowed Poland to profoundly reform the In the first two years of EU member- Tariffs for trade with third countries led way in which its economy is regulated ship, Poland enjoyed sound economic to a drop in average tariffs from 8.9% to and restrict government intervention in growth at an average rate of 4.2% a 4.1%. Not surprisingly, imports from the private sector. Changes in such areas year, and the trend seems to have contin- developing countries (mainly China) as financial markets, company and com- ued in 2006. At such a rate, Poland rapidly increased. Exports to third coun- petition law, accounting, and intellectual ranked eighth among the EU-25 coun- tries (mainly to Russia and Ukraine) also property rights have created a better tries, yet lagged behind other new mem- reached record levels, helped by export environment for business and have led to bers, such as the Baltic states and subsidies to trade in foodstuffs that now economic growth. Poland has also bene- Slovakia. Poland's convergence with also apply to Poland. Liberalization of fited from access to EU structural funds, "old" members is clearly taking place: its trade in foodstuffs generated an increase which can potentially contribute to the GDP per capita (in PPS) increased from of Polish exports to the EU. improvement of public infrastructure. 40% of the EU-15 average in 1997 to Various studies undertaken before 46% in 2005, but the pace is too slow FDI Reaches Record High the enlargement estimated gains from and on account of this Poland lags As forecasted, there was a spectacu- the enlargement at 1.3-2.1% of addi- behind most of the New Member States. lar increase in FDI inflows in the year of the accession compared to 2003 (see GDP, Exports and Imports in 1997 2005, Growth Rates (%) Figure). Altogether EUR 10.29 billion was invested in 2004, nearly reaching 1997 1998 1999 2000 2001 2002 2003 2004 2005 the peak level of 2000, when most priva- GDP 7.1 5.0 4.5 4.2 1.1 1.4 3.8 5.3 3.4 tization deals occurred. In 2005 FDI Exports 12.2 14.4 2,5 23.2 3.1 4.8 14.2 14.0 8.1 inflows went down by 22%, however Imports 21.4 18.6 1.0 15.5 5,3 2.7 9.3 15.2 4.9 forecasts for 2006 are very good. Portfolio investment in Poland also Source: Poland's Central Statistical Office data increased. The World Bank & CEFIR 12 · Theme of the Issue: EU Enlargement young people (below istration are to blame for the slow Foreign Direct Investment and Foreign Portfolio Investment in Poland,1997 2005 (in ECU/EUR million) 35 years) among absorption. During 2006, the situation migrants further improved, as domestic regulation con- increased: from 51% cerning the use of EU funds was relaxed 14000 in 2000 to 61% in and administrative capacity increased. 12000 2004. The migrants are, unfortunately, 10000 Public Attitude More very often overquali- 8000 Positive fied for jobs they 6000 The share of people who positively take abroad. assess the impact of EU membership on 4000 Fears that the Poland has been constantly growing. 2000 massive migration Two years after the integration, 54% of from Central Europe 0 respondents believed that EU member- 1997 1998 1999 2000 2001 2002 2003 2004 2005 will have a devastat- ship brought more benefits than it did Foreign Direct Foreign Portfolio Current ing effect on destina- Investment Investment Account costs for the country. This is 15 percent- tion countries have Deficit age points more than after the first three Source: National Bank of Poland turned out to be months and 8 percentage points more unfounded. The size than after the first year of the accession. of inflows to the UK, Until now, Poland has been the main The positive perception of Poland's Ireland and Germany turned out to be recipient of FDI among the recent EU EU accession and its impact on the coun- below these countries' absorptive capac- entrants, and understandably so, consid- try and personal well-being dominates in ity, according to the World Bank. The ering the size of the Polish economy. In all socio-demographic groups and across inflow of foreign workers supplemented relative terms, however, the cumulative the political spectrum, and is especially domestic labor rather than replaced it, foreign investments in Poland have been visible among those who are younger, and the wages in destination countries less impressive: they amount to only wealthier, have completed tertiary educa- remained stable. 31% of GDP, which places Poland close tion, and live in big cities. According to In Poland, shortages of skilled work- to the end of the rankings (ahead of only public opinion, the most important ers have been noted in several sectors, Slovenia and Romania). benefits are the possibility to legally particularly in health care. Wage pres- The EU-15 was the major investor in work in other member countries, open sures have increased, mainly in agricul- Poland, accounting for over 83% of total borders, support to agriculture, and the ture and construction. As a result, Poland FDI at the end of 2005. The Netherlands, availability of EU funds. may be forced to import labor, and will Germany and France topped the list with have to relax its immigration policy vis- almost 61% of the cumulative FDI inflow a-vis non-EU countries. On the positive Conclusions to Poland. Capital flows to Poland from side, Poland has benefited from increased The widespread fears raised in other New Member States, although still remittances and expects to regain some Poland concerning EU entry turned out at a low 2% of cumulative investments, of the labor that has acquired new skills to be unfounded, except for, to some have recently been increasing. and knowledge. extent, the increase in prices after the Also Polish investments abroad accession. However the monetary policy increased spectacularly, more than dou- Using EU Funds secured price stability in the years of bling in 2004 (to EUR 636 million) com- 2004-2006. Simultaneously there were In 2004, Poland was a net beneficiary pared to the previous year, and jumping positive phenomena which were unex- in the EU budget. Net transfers reached further to EUR 2,493 million in 2005. pected. Contrary to pessimistic expecta- EUR 1.7 billion and accounted for tions, the rate of growth for exports out- 0.75% of the country's gross national paced the rate of growth for imports. Increased Migration income (GNI). The supply of EU funds to Polish exports of foodstuffs to the EU Poland is expected to reach 1.5% of GNI Pressured Wages but flourished. Surprisingly, public support in 2007 and 3.25% of GNI in 2008. Increased Remittances for Poland's EU membership has been Among the new financial instruments constantly and substantially increasing As forecasted, the external mobility available to Poland since the accession, since accession. of the labor force intensified after the EU funds for agriculture and rural develop- Finally, it should be noted that until accession, and as predicted, the inflows ment and transfers for structural reforms now no precise assessment of the total were mostly concentrated to the three accounted for the biggest shares of trans- impact of the accession on Poland's EU countries that had opened their labor fers, at 27% and 23%, respectively. economy has been made. markets: the UK, Ireland and Germany. Yet absorption of EU budget funds In 2004, approximately 250,000 Poles has been slow. The decentralized system stayed abroad for at least two months, of managing structural programs, the Ewa Balcerowicz is the President of the and most of them worked. This is 20% poor quality of relevant legislation, insuf- Board of CASE -- Center for Social and more than in 2003. ficient public financing for infrastructure Economic Research. Full text of the paper can Polish migrants are generally younger development projects and the co-financ- be accessed at: http://www.case.com.pl/ and relatively better educated than the ing of infrastructural investments, and upload/publikacja_plik/13286555_sa335.pdf population on average, and the share of the inadequate capacity of public admin- (Studies and Analyses No. 335, 2007). BT Beyond Transition · January March 2007 · 13 Bulgaria's Integration into the Pan European Economy The gap in export peformance between EU 8 and Bulgaria has been slowly closing in recent years Bartlomiej Kaminski and Francis Ng Bulgaria stands apart from new EU owned firms. Many state owned firms, economic regime, on hold until the 1996 members in one important respect which which five years earlier might have been financial crisis, was responsible for lack- has had huge implications for the successfully privatized, lost any attraction luster foreign trade performance, a process of industrial realignment to pan- to potential investors, foreign and domes- strong indication of the absence of European markets: while the country ini- tic alike. Furthermore, human capital industrial restructuring and develop- tially moved swiftly to implement first- skills that were still available in early ment. The 2000-04 period witnessed generation reforms in 1991, the original 1996 either disappeared due to migration improvements in export performance bold program of dismantling central or were simply depleted because of a lack indicating that liberal reforms have acti- planning and overcoming transforma- of employment opportunities. vated some creative restructuring. tional recession was quickly abandoned In consequence, it took much longer First, although one might have with the re-introduction of central con- for the usual returns from macrostability, expected a stronger rebound in Bulgaria's trols. To make things worse, progress privatization and liberalizing structural exports after a contraction in 1998-1999, towards creating institutional conditions reforms to materialize. Delayed --almost performance over 2002-2003 showed a conducive to development driven by pri- a decade into transition -- structural significant improvement in the ability of vate entrepreneurial dynamism has been reforms combined with a historically Bulgarian producers to withstand com- uneven since the collapse of central plan- high dependence on "socialist trade" had petitive pressures in global markets. This ning in 1989-1990. deeply affected Bulgaria's path of restruc- refers also to their competitiveness in a It appears that weaknesses in state turing and integrating into world mar- single European market for industrial capacity combined with the state's cap- kets. While initially Bulgaria's progress products, the so-called pan-European ture by private interests groups stood in away from central planning appeared to market. Particularly noteworthy is the the way of moving quickly along with be similar in terms of macroeconomic fact that the largest increases occurred in structural reforms until the 1996 finan- cial collapse. The consequence of this was Structural reforms were delayed almost a decade, but in 2000 another transformational recession, with 2004 export performance improved and FDI increased two consecutive years, 1996 and 1997, of falling aggregate output. Bulgaria, togeth- and export performance to that of other 2002 and 2003. Rates of export growth er with Romania and Moldova, are the bold reformers, the differences surfaced stood at 12% and 31% respectively, only transition economies that experi- rather dramatically during and immedi- despite the fact that the latter was tainted enced this second transformational reces- ately after the second transformational by the significant increase in the intensity sion, i.e., at least two consecutive years of recession. The abolition of the state of competition in preferential markets contracting aggregate output. Technically, monopoly over foreign trade combined due to the removal of all tariffs on indus- the Czech economy also experienced two with the collapse of "socialist markets" trial products among signatories of the consecutive years of falling aggregate out- initially resulted in an impressive reorien- Pan-European Cumulation of Origin put in 1997-1998. But the contraction of tation of exports, albeit from very low Agreement. The Agreement paved the 0.8% and 1% was just a fraction of the levels, to EU markets. However, stagna- way for the establishment in 2002 of a fall experienced in a single year by tion replaced initial growth in 1996-99. single European trading bloc for industri- Bulgaria, Moldova or Romania. Had it not been for the rapid expansion al products, encompassing the EU-25, of clothing exports under the EU-driven EFTA, Bulgaria, Romania and Turkey. outward processing, total exports would Second, progress in implementation "Real" Structural Reforms have significantly contracted. of structural reforms and converging to Only in 1997 the EU acquis communautaire led to a Hence, the real transition to competi- significant enhancement in the quality of tive markets began only in 1997. In con- Improved Competitiveness the domestic business climate. trast to the first aborted transition, the of Bulgarian Producers Last but not least, there was a signif- conditions under which the second stabi- Thanks to structural reforms and a icant increase in FDI inflows accounting lization program was launched in 1997 liberal regional trading environment, on average for around 8% of GDP over were much more adverse and demanding Bulgaria successfully, though belatedly, 2000-03. Although clothing and than the ones in 1991. For one thing, began taking advantage of opportunities footwear dominated its export basket in almost half a decade of mismanagement offered by participation in the EU-driven 2003, there were some shift towards wiped out the financial sector and led to Eastern Enlargement regional integra- skilled labor and capital intensive a massive stripping of assets of state tion project. Unfinished reform of the exports usually associated with FDI. The World Bank & CEFIR 14 · Theme of the Issue: EU Enlargement The evolution of Bulgaria's total 2000 and 2003), accounted for 16% of icant scale. But by 2002 they had made exports in terms of factor intensities Bulgaria's EU-oriented exports in 2003 up significant strides in information commu- before the second transformational reces- from 4% in 2000. The star performers are nication technology products and auto- sion was a testimony to aborted econom- mostly from the electro-engineering sec- motive parts with the share of parts and ic reforms. It not only defied expectations tors indicating the shift towards more engineering products growing from 3.1% derived from the experience of other processed goods. Among emerging fast of Bulgaria's EU-oriented exports in 1998 Central European economies and its pro- growers, i.e., products whose exports to 5.4% in 2003. Furthermore, the shift duction factor endowments but also dra- growth exceeded annual changes in EU towards furniture (more exactly, furniture matically increased the cost of adjustment import demand by at least 30% in 2000- parts) within "buyer-driven" networks' to market conditions for the economy. 2003, capital intensive products stood out. exports, information communication final products and automotive parts with- De Industrialization in Shift Towards Higher in "producer-driven" exports and strong Early 1990s Technology Content expansion of exports of other parts and engineering products point to significant The derailed economic reforms New exports came mainly from progress in industrial restructuring and appear to have been responsible for a restructured industrial capacities, augur- ensuing gains in competitiveness. very unusual evolution of the factor con- ing well for future competitiveness in tent of Bulgaria's exports indicating a international markets. Of the electro-engi- very significant de-industrialization that neering products that performed well on Lessons Learnt occurred during 1991-1995. Three dif- EU-15 markets exports of machinery top Bulgaria's economic development as ferent phases in the evolution of the fac- the list, contributing almost 40% to the observed through the lens of its EU-ori- tor content of EU-oriented exports illus- total of top performers' exports. In conse- ented exports offers valuable lessons for trated this process. While the first phase quence, the share of manufacturing in other economies. First, subsidization of in 1992-93 witnessed what turned out to Bulgaria's trade did not only significantly exports is not sustainable and ultimately be peak levels in the share of unskilled increase but there was a shift towards leads to a very high cost of adjustment. labor intensive products in EU-oriented products with higher technology content Second, the prospects of deeper, policy- exports from these countries, the second and capital goods. Simultaneously, the induced integration into a more devel- phase, 1994-1996, witnessed a major share of traditional inputs, i.e., products oped region provide powerful political realignment in the export growth pat- used for further processing, in Bulgaria's and economic anchors to the reforms tern, with skilled labor and capital inten- exports were accompanied by a marked process. Last but not least, the returns sive products emerging as major contrib- increase in the share of machinery. This, usually associated with liberal reforms, utors to Bulgaria's exports. combined with the increase of more tech- i.e., gains in competitiveness combined The third phase following the 1996 nologically advanced manufacturing in with shifts towards products in line with crisis was reminiscent of developments in Bulgaria's exports, suggests a gradual a country's endowments in production the early 1990s in European transition shift towards more processed exports. factors take time. They began to surface economies that launched radical first-gen- The gap between Central and Eastern only around three years after the reform eration reforms in terms of both its European economies and Bulgaria in process was launched. In contrast to the dynamism and change in export offer. terms of export performance and its fac- period preceding the second transforma- While 1996-2000 witnessed little or no tor embodiments appears to have been tional recession, gains in competitiveness gains in the overall competitiveness of closing, albeit slowly, as exports of capital derived from corporate and industrial Bulgarian producers in world markets, and skilled-labor intensive products restructuring and not from subsidies. except for clothing mainly in EU markets, began growing. While overall Bulgaria there has been a significant increase in the has a long way to catch up with other presence of Bulgarian exporters in world new EU members in terms of participat- Bartlomiej Kaminski is Associate markets more recently, especially in 2003. ing in "producer-driven" network trade, Professor at the Department of Government & Politics, University of Maryland; Francis Although exports of unskilled labor inten- there were healthy symptoms of growth Ng is a trade economist at Development sive products continued towering over in 2001-2003. Bulgarian producers did Research Group, World Bank, Washington, other exports, the top performers in EU- not become part of the division of labor DC. Full text of the paper can be viewed at: 15 markets (with an increase in EU based on production fragmentation in http://papers.ssrn.com/sol3/papers.cfm?abstra imports of at least 2.85 times between vertically integrated sectors on any signif- ct_id=922989 BT Bulgaria and Romania: Strong Growth, Likely to Moderate in 2007 Real GDP growth Real Exports Growth Growth of Industr. Output FDI Net (% of GDP) 2004 2005 2006 2004 2005 2006 2004 2005 2006 2004 2005 2006 Bulgaria 6.6 6.2 6.1 12.7 8.5 9.0 17.1 6.7 6.1 9.1 14.5 15.9 Romania 8.5 4.1 7.7 13.9 8.1 10.6 5.4 2.2 7.1 8.9 6.6 9.4 Source: the World Bank Beyond Transition · January March 2007 · 15 Forming Preferences on European Integration: the Case of Slovakia Preferences are based on the country's history, size, party politics and the power of interest groups Tim Haughton and Darina Malova What shapes a country's stance on the country knows that by acting unilat- that Slovakia would be very much in European integration? We use Slovakia erally it is unlikely to have much impact favor of further economic integration. as a case study to illuminate preference in foreign affairs, but acting in concert Although many societal groups such formation in the New Member States through EU channels it may have more as trade unions are rather weak, others, and explore a number of explanations, influence. One area where Slovakia built most notably big businesses have highlighted in previous research. on its expertise and displayed activist appeared to be much more powerful. tendencies has been enlargement Slovakia's neo-liberal economic agenda History and Its Legacies towards the Western Balkans. under the Dzurinda-led government Slovakia's sinuous transition path is became increasingly fuelled by powerful an important component in explaining Ideology business lobbies. This pressure has con- the country's stance on further integra- During Dzurinda's second term as tinued since the new government came tion. During the mid 1990s, due to a prime minister there was an increased to power. Businesses have pushed for combination of nationalist policies, a emphasis on the ideological dimension easier access to European markets and series of murky privatization deals and a of politics. After 2002 the government the fast adoption of the euro, but have disregard for democratic norms, began to implement radical socio-eco- opposed harmonization, especially in the Slovakia became what Madeleine nomic reforms, such as the introduction fiscal sphere. Albright called "the black hole of of a flat tax, cuts in welfare benefits, as The influence of business interest Europe" and was consequently not invit- well as pension and health reforms. For groups has been facilitated by domestic ed to begin accession negotiations in these, the EU represented a threat. The party politics. The political scene has 1997. The new broad-based coalition formation of a more leftist-orientated been fluid over the past years, with many government led by Mikulas Dzurinda in coalition government in 2006, however, new parties -- often elite creations -- 1998 placed a high priority on EU acces- suggests that ideology is less important formed. Not only do elite-created parties sion, and in 1999 Slovakia was invited to than had been earlier thought. Indeed, tend to be closely associated with their begin negotiations. despite parties of a different ideological founders and leaders, they also often For most of the period until May hue holding the reins of power there has lack developed mechanisms of accounta- 2004 the focus of debates was on catching been a striking continuity of policy vis- bility, and can be dependent on and up with other prospective entrants and a-vis the EU. beholden to the generosity of initial achieving membership per se rather than financial backers. what type of a European Union the coun- Public Opinion try wanted to belong to. This allowed the Public opinion can play a significant government to shape the country's stance Conclusions role in constraining a government's on EU integration, particularly in the first Thus, we contend that ideology is European policy. In Slovakia, citizens years of membership. With accession not such a good indicator of shaping are satisfied with being members: the achieved, parties, which had EU entry at preferences. Rather, preferences are latest Eurobarometer survey suggests the centre of their campaign, shifted focus based on the country's recent history 61% consider membership a "good to more ideological concerns. and size, and linked to the nature of thing", well above the 53% EU average. In addition, the process of accession party politics and the power of particu- Public opinion supports eurozone entry, helped to strengthen the power of the lar interest groups, with the latter being further EU enlargement and integration executive and weaken the parliament. particularly important in the socio-eco- in defense and security policy, but This has important consequences for nomic domain. opposes harmonization in the fiscal domestic politics, because it is structural- Attempting to assess preference for- sphere and, thus, has been in line with ly easier for the government to pursue a mation and the behavior of the NMS is the governments' positions on a range of radical agenda if there are no strong made more complicated by the fact that European issues. domestic institutional brakes. while two of the variables are largely fixed (size and history), two others are Powerful Groups, Depen subject to change. Indeed, there are some Size dency, and Party Politics indications that party politics is becom- As a relatively small state, Slovakia is Slovakia is dependent on the ing less fluid in Slovakia. The 2006 elec- likely to have a stronger preference for European Union, both as a significant tions, for example, were the first since more powerful common institutions and net recipient of EU funds (3.27% of independence when no new parties cede some degree of sovereignty. Indeed, GNI), and as an exporter. This suggests entered the legislature. Additionally, The World Bank & CEFIR 16 · Theme of the Issue: EU Enlargement domestic interest groups, such as trade democracy, nationalism and entry into Malova is Professor at Comenius University unions, clearly have the potential to Euro-Atlantic clubs, have largely gone. in Bratislava, Slovakia. The article is based on become more organized and influential in The contemporary political scene has the authors' paper presented at Johns shaping policy. At the same time the busi- become focused primarily on domestic Hopkins University-SAIS Conference in April 2007. The authors thank the University ness lobby may not necessarily retain its issues of distribution, allocation and Association for Contemporary European powerful position. socio-economic organization. Studies for according funds through its More broadly, the overarching bases Fellowship scheme to Tim Haughton and the of political contestation in Slovakia Slovak Research and Development Agency until the early 2000s, such as the char- Tim Haughton is Senior Lecturer at the (No. APVV-0660-06) for funding Darina acter of the political regime, illiberal University of Birmingham, UK, and Darina Malova's research. BT Whither Europe? The IMF-World Bank seminar, held in Singapore in 2006, integration of service markets, the much weakened final ver- brought together distinguished speakers representing found- sion of the adopted service directive needs to be strengthened ing, new and aspiring European members, and the Asian eco- if Europe is to develop a single market for services that can nomic community representatives to debate the future of compete with the US. However, an appropriate communica- Europe and implications for Asian integration. Panelists dis- tion strategy will be essential to any further reforms. cussed some of the findings emerging from the reflection and H.E. Ali Babacan (Turkish Minister of State in charge of consultations that have taken place in Europe over the last Economy) agreed with the importance of communication, year, with a particular focus on the following questions: arguing that the rejection of the constitutional treaty was · What is the future of the constitution? Will it be largely due to voters' perception that Brussels is removed abandoned in favor of a "political declaration" or will it be from their cares and concerns. As to the limited economic resurrected in a slimmed down version? dynamism of the EU, it can be helped by further enlargement · Might the rejection of the constitution and the and the associated growth in the goods and labor markets. popular vote of no confidence promote a return to the In addition, the integration of Turkey into the EU would approach of quiet incremental reform that has served the EU promote democracy, security and stability, and therefore be so well in the past? fully in line with the original goals of the European project. · Where should Europe's borders lie? Is Europe's cur- It will also help demonstrate that democracy and Islam can rent neighborhood policy working? co-exist and provide a bridge between civilization that is · Can Europe's "social model" survive in the face of crucial to the safety of the EU. global pressure? H.E. Heidemaries Wieczorek-Zeul (German Minister of Mr. Joaquin Almunia (Commissioner for Economic and Economic Co-operation and Development) reminded the Monetary Affairs at the European Commission) argued that audience that the creation of the Union sprang from a deep the failure of the constitutional process in France and the reaction to war and dictatorship -- with membership also Netherlands has indeed created a political crisis as a growing helping democratic achievements in countries such as Spain, Union needs a new distribution of responsibilities between Portugal and Greece. The hope is that the adaptability that national and supra-national levels. However, there may be a the EU has shown in the process can now be expanded to the new window of opportunity with the 2007 German presi- Middle East. The rejection of the constitution was a set-back dency, and elections in France and the Netherlands. Further, but one that should be interpreted as a vote of no confidence Europe is far from paralyzed by the set-back on the constitu- on the economic and political process, and motivated by a tion as evidenced by the important decisions made in the last fear of globalization. As to the social model of Western year on integration and expansion. In addition, the econom- Europe, it does need reform but remains an important model ic situation in the EU improved last year. In sum, there is a that helps assure people they will not be at the mercy of mar- political problem but the EU is gaining momentum econom- ket forces. Countries without this kind of safety net revert to ically and forging ahead on political integration. protectionism during economic downturns. Europe's social Mr. Leszek Balcerowicz (President of the National Bank model represents a good way of smoothing globalization's of Poland) emphasized that the constitution is not essential impact on households. from an economic perspective. Instead the EU should focus What could Asia learn from European integration? Mr. on the Lisbon agenda and the country level actions to achieve Haruhiko Kuroda (President of the Asian Development it. This includes reducing fiscal pressures -- Europe is over- Bank) noted that Asia's integration has been rapid and mar- taxed compared to Asia, and this is because European coun- ket driven, mostly through trade and investment: intra- tries spend too much particularly on social protection: public regional trade, at 55%, is similar to that of the EU. Indeed, expenditure to GDP ratio in Europe is around 40% com- regional economic integration has been one of the successful pared to only 20% among the Asian Tigers. In addition, the factors of the region. ASEAN may now need to work on the countries need to do more to deregulate, especially in labor institutional and political elements of this integration. The markets. More can also be done at the European level: this experience of the EU with small country bias and subsidiar- will require abiding by the growth and stability pact. As to ity principles will be helpful. BT Beyond Transition · January March 2007 · 17 Credit Expansion in Emerging Europe Some countries have witnessed a true credit boom that has contributed to overheating of their economies Eastern and Central European coun- below 30% in the Baltic countries and SEE countries. External debt levels have tries entered the EU with reformed and Hungary and below 10% in other coun- increased sharply in some countries, with relatively modern banking systems. tries (compared to e.g. over 70% in UK). the external debt-to-GDP ratio in Estonia Despite the impressive progress, all of the The demand for credit has grown and Latvia reaching about 80% of GDP NMS face the challenge of financial sys- because of increases in disposable income in 2005. Most countries have not taken tem deepening and remain far behind the and higher confidence related to EU adequate advantage of the strong growth eurozone in respect of financial depth of accession, falling inflation and interest to consolidate public finances and have bank and non-bank financial institutions, rates, stable or appreciating local curren- been running pro-cyclical fiscal policies. and capital market development. In some cies, and better investment opportunities. Thus, while credit expansion to a sig- countries, such as Latvia and Romania, The increased supply of bank loans has nificant extent reflects a normal catching- the total assets of financial institutions been driven primarily by financial sector up process by previously underdeveloped still constitute less than 50% of GDP. In deregulation and deepening (due to large financial systems and credit to the private most NMS, foreign-owned banks domi- privatizations in the sector and increased sector as a share of GDP remains in line nate the banking system. competition from foreign banks). with per capita incomes in the region, some countries, in particular the Baltic Rapid Credit Expansion Large Macroeconomic and the SEE countries, have witnessed a Over the last decade, bank credit to Imbalances in Some Countries true credit boom that has contributed to the private sector has expanded impres- surging consumption and the overheating An analysis of the current financial sively in almost all countries, at an aver- of their economies. Slovenia, which health of banks suggests that generally age annual compounded rate of 24%.The joined the eurozone in January 2007, they are well-capitalized and profitable. growth of bank lending was particularly probably enjoys the best protection They have also visibly improved the qual- strong and sustained in Southeastern against any potential financial distress. ity of credit portfolios. For example, in the Europe (SEE) -- Romania and Bulgaria International experience suggests that Czech Republic the ratio of non-perform- -- and the Baltic countries. The credit prolonged, rapid credit growth coupled ing loans (NLP) to total loans decreased expansion of the last two years is largely with macroeconomic imbalances can eas- from around 13% in 2001 to 4.3% in a result of increased loans to households, ily deteriorate into financial distress. 2005, and in Slovakia from almost 25% while growth in the corporate sector has Many countries have been concerned to 5.5%. Banking supervision has also remained modest. The latter has been due about excessive credit growth and have improved significantly. Yet, the low ratios to an improvement in companies' earn- taken measures to control this. However, of NLP today are no guarantee of low lev- ings, accumulation of liquid funds and their effectiveness is unclear as credit con- els in the future, and credit quality may be access to external lending. This raises tinued growing rapidly and macroeco- deteriorating. Besides, less sound banks questions about the productive impact of nomic imbalances remained large. are equally engaged in lending and may the observed credit growth. be taking even higher risks. Moreover, Among loans to households, housing there is no guarantee that parent banks of Policy Advice loans have been growing particularly fast. foreign owned banks would come to the A proactive policy response is needed Between 2004 and 2005 alone, such loans rescue in case of trouble. ranging from enhanced supervision and increased 95% in Bulgaria and around The sharp increase in domestic possibly regulation to more hard-hitting 90% in Latvia and Lithuania. However, demand, especially household consump- measures, including tightening of mone- compared to the EU-15, the level of resi- tion, has spurred real GDP growth in the tary policy (where possible) and fiscal dential mortgage debt remains rather low, region since 2000, but also contributed to policies aimed at discouraging household the emergence of large borrowing and stimulating private sav- Bank Credit to the Private Sector macroeconomic imbal- ings. Authorities should also prepare (% of GDR, 1995/2001/2005) ances in some countries. themselves for the unlikely, but not Output growth has been impossible scenario of a financial dis- particularly rapid in the tress, and put in place adequate contin- 80 74,3 1995 2001 2005 gency plans. Given the lessons learned 70 67,5 Baltic countries at around 61,9 from previous experience, it is clear that 60 55,9 10% in 2000-2005. In 50,3 50 prudence should dominate the "growth 43,4 these countries, strong 41,0 40 35,7 34,8 versus imbalance" policy dilemma that 28,2 inflationary pressures have 30 21,1 raised concern about over- many of the NMS face today. 20 heating. The domestic 10 demand boom has led to a 0 Source: World Bank EU8+2 Regular CZ EE HU LV LT PL SK SI BG HR RO surge in imports and large Economic Report, January 2007, www.world- Source: national Central Banks; World Development current account deficits, bank.org/eu8-report. The report covers the Indicators for 1995. especially in the Baltic and NMS in Central and Eastern Europe. BT The World Bank & CEFIR 18 · New Findings The Economic Cost of Smoking in Russia Russian male smokers earn 14.8% less then non smokers Michael Lokshin and Zurab Sajaia Tobacco smoking is widely prevalent whole, it provides information on a typ- unadjusted wage premium over smokers. in Russia. About 50 million Russians ical Russian region. The Tomsk region The wage premium of non-smoking between the ages of 18 to 65 smoke, and has a population of about 1.1 million women was quite a bit lower at 6%, each year 375,000 Russians die of smok- people, many of whom live in urban which translated to an approximately ing-related illnesses. According to the areas. Large industrial enterprises and US$15 "bonus". World Health Organization, Russia has research centers in the region provide the world's fourth-highest rate of smok- employment for the majority of the ing. The last decade witnessed a sharp workforce; the share of the public sector Why Lower Wages? increase in the number of smokers, espe- in total employment is high. Several theories explain the lower cially among the female and younger wages associated with smoking. Health populations. Russia is the third-largest effects of smoking are arguably the most market for tobacco in the world, with 30 to 35 Year olds Most frequently noted link; smoking causes smokers spending up to US$6 billion on Likely to Smoke various morbidities, which could there- tobacco products. Along with alcohol In our sample of over 2,500 respon- fore result in lower labor productivity. A consumption, smoking is a leading pub- dents, 61% of males and 14% of females second, partially health-related explana- lic health problem, and together they categorized themselves as smokers. The tion, is the higher costs to employers of contribute to Russia's declining life span. incidence of smoking is higher among the hiring a smoker relative to a non-smoker In recent years, the Russian anti- male rural population and female urban (for example, due to healthcare costs smoking movement, assisted by the gov- dwellers (see Table). The prevalence of induced by smoking). Even if smokers ernment in its effort to reverse or slow smoking increases sharply with age, peak- are equally productive or do not incur population decline, has made some ing at 30-35 years. The lower proportion more costs in employment, discrimina- progress in controlling tobacco com- of old-age smokers in the sample could be tion against smokers in the workplace merce and consumption. As a result, the explained by higher attrition rates in that may result in lower earnings for those Russian Parliament has ratified several group. Accumulated over a lifetime, the who smoke. Finally, smoking could be decrees and laws restricting smoking in negative effects of smoking could lead to correlated with lower earnings because public places and banning tobacco earlier exit from the labor market or even of the differences in preferences over advertisements on television and radio. death. For both genders the prevalence of present and future consumption between However, smoking is still on the margins smoking declines with education. More smokers and non-smokers. of Russia's policy agenda. Russia has not than two-thirds joined the Framework Convention on of men and about Prevalence of Smoking and Simulated Wage Losses Tobacco Control that 167 countries had 25% of women signed and 57 national parliaments had with high school Prevalence of Smoking Simulated endorsed by February 2005. diplomas smoke. by Region, Age and Wage Losses Those propotions Education Groups from Smoking Economic Losses Ignored drop significantly (Mean) (%) by Gender The anti-smoking debate in Russia for individuals Men Women Total Men Women has focused mostly on the adverse effects with university of smoking on health, and not so much degrees or higher. Tomsk 55.1 18.6 35.0 19.7 4.1 on the costs that smokers impose on the On average, Other Urban 55.7 14.4 33.5 23.2 12.1 economy through the reduction in their n o n - s m o k i n g Rural 65.6 11.9 38.0 9.7 6.0 productivity. But such costs could play men earn more Age groups an important role in the anti-smoking than smokers: 25 30 60.3 17.7 39.2 17.5 9.2 policy debate in Russia. 10,732 rubles per Our study provides the first empirical month (about 35 40 64.7 15.4 36.6 11.9 10.9 estimates of the economic losses stem- US$400 at the 45 50 60.0 12.3 33.0 14.9 0.4 ming from the negative effect smoking exchange rate of 55 60 51.2 9.4 29.9 has on wages in Russia. The analysis is RUR27/US$1) vs. Education based on data from the Living Standards 8,992 rubles Secondary general or less 72.5 26.8 56.1 5.2 16.4 Survey conducted in the Tomsk region of (US$330), respec- University and higher 43.6 8.8 22.7 19.3 3.6 Russia in 2006. While the survey is not tively, thus enjoy- Total 61.1 13.9 36.2 14.8 0.6 intended to represent the nation as a ing about a 19% Beyond Transition · January March 2007 · 19 Losses up to 2% of GDP The deleterious impact of smoking on the sale price of cigarettes. If an individ- Individuals who choose to smoke wages is greater for younger men: the ual who smokes a pack of cigarettes per may be different from non-smokers in wages of smoking men aged 25-35 are day quit smoking, the losses in taxes for some unobserved dimensions that are almost 18% lower than wages of non- the state would be at least 10 times lower negatively correlated with wages. The smokers of the same age group. The neg- than the individual's losses in earnings. challenge for our empirical strategy is to ative impact of smoking on wages is also We can conclude that the economic estimate the effect of smoking on wages larger for men and women with higher cost of smoking represents an important controlling for such unobserved factors. educational attainment. component of the burden smokers The results of our estimations demon- Aggregating the individual wage loss- impose on Russian society. The argu- strate that smoking indeed has an es from smoking at the regional level, we ments presented here could be used in the adverse effect on the wages of smokers. can conclude that Tomsk region loses a anti-smoking debate because they show Controlling for observed individual considerable share of its revenue just that Russia bears an immediate loss from characteristics, such as age, level of edu- from the reduction in productivity due to smoking, as opposed to the long-term cation, health status, and household smoking. On average, a male smoker health-based losses that lie beyond the composition, we find that the smoking loses about 1,125 rubles per month due decision horizon of most policymakers. wage differential amounts to about to smoking, and a loss in wages for a 10.9% for males and about 3.8% for smoking woman is about 29 rubles per females. Taking into account differences month. Taking into account that there Michael Lokshin is a Senior Economist in both observable and unobservable are 154,000 men and 33,000 women in and Zurab Sajaia is an economist at the characteristics, our estimations show the total work force who smoke, the Development Economics Research Group, the that men earn about 14.8% less if they Tomsk region looses 2.1 billion rubles or World Bank, Washington, DC. The findings smoke. No such effect of smoking on 2.0% of the regional GDP per year. and interpretation of this paper are those of wages is found for women in this esti- the authors and should not be attributed to Obviously, the state would lose taxes the World Bank Group, its Executive mation. The estimates of the negative if people reduce their cigarette consump- Directors, or the countries they represent. Full effect of smoking on wages in Russia are tion. However, the tobacco duties exist- text of the paper "The economic cost of larger than the estimates for Germany ing in Russia are among the lowest in the smoking: Differences in wages between and the U.S., where workers lose 4% to world. Tobacco companies pay only 65 smokers and non-smokers in Russia" is avail- 8% of their wages because of smoking. rubles per 1000 cigarettes plus 8% on able from the authors. BT Smoking in Albania In Albania, 60% of adult males and 18% of females smokers for all age groups with the largest gap in wages smoked in 2002 and the number of smokers has been increas- observed for workers between the ages of 35 and 50. ing rapidly over the last decade. Anti-smoking policies are When controlling for productive human capital charac- high on the country's agenda. In January 2006, the govern- teristics, such as education and knowledge of English, Italian ment submitted a new draft law on tobacco and smoking that and Greek, etc. we find a stronger dependence between wages outlawed sales of cigarettes to minors younger than 18, and and these characteristics for non-smokers than for smokers. presented stricter rules for the tobacco industry regarding the This supports the idea that smokers and non-smokers have sale and advertising of tobacco products. different preferences over present and future consumption. Data from the fourth round of the Albania Living For working Albanian men aged 25 to 60, our analysis Standard Monitoring Survey allowed us to estimate forgone shows that the wages of smokers are significantly lower than earnings from smoking for working Albanian men (the pro- the wages of individuals who never smoked. Consistent with portion of female smokers in the sample was too small).We other studies for developed countries, the wage penalty differs find that the incidence of smoking is similar among the urban depending on how the observed and unobserved traits of and rural male populations in Albania. The prevalence of cur- smokers and non-smokers are addressed. A simple comparison rent smokers is close to 50% among the least educated males of mean wages produces the 8% difference, as shown above. and declines for better-educated men. Only 25% of men with When taking into account observable personal characteristics, a university degree smoke. The propensity to smoke varies by we find that the negative wage effect of smoking is reduced to religion: the highest proportion of smokers (36%) is among 4%. However, considering both the differences in observable Albanian Muslims, including Bektashi. Albanian Christians and unobservable characteristics of smokers and nonsmokers, smoke at a rate of about 30%. the wage penalty for smoking becomes much larger: smokers The incidence of smoking increases with the age of the experience wage reductions of 21-28%. This indeed provides respondents. Less than 20% of 25 year old men classified strong evidence for the potential policy relevance of tobacco themselves as current smokers. The proportion of smokers control initiatives for developing countries such as Albania. increases sharply for older age groups peaking at about 35% for men 38 years old and older. On average, non-smokers earned about 26,300 lek per Source: "Forgone earnings from smoking: Evidence for a devel- month relative to 24,290 lek per month for smokers (8.3% oping country" by Michael Lokshin and Kathleen Beegle, both from difference). Wages of non-smokers are higher than wages of the Development Economics Research Group, the World Bank. BT The World Bank & CEFIR 20 · New Findings Deregulating Business in Russia Better progress in regions with more transparent, less corrupt and more fiscally motivated governments Ekaterina Zhuravskaya, Evgeny Yakovlev In recent years deregulation has been Second, we study which institutional fac- comprised of local taxes rather than a popular topic on policymakers' agenda: tors affected the level of enforcement of transfers from the federal center. in 2005 and 2006 alone, 55 countries deregulation laws in different regions. undertook reforms that lowered the costs And third, we estimate the causal effect Effect Similar for All Firms of doing business, the World Bank of deregulation on outcomes -- firm Interestingly, these institutional fac- reports. How can the reform achieve the entry, employment in small businesses, tors affect in the same way both the entry desired results at the local level if started public health, and pollution. deregulation and the liberalization of reg- by the central government? What results ulations on established firms. This did deregulation of business activity bring Transparent and Account implies that industrial lobbies accelerate to businesses and the population at large? able Governments Succeed deregulation in all areas of regulation and In addressing these questions, we use To begin with, we compare the actual do not use entry regulation to protect a unique combination of a deregulation regulatory burden with the official level themselves from potential competitors. policy experiment undertaken in Russia established by the legislation and find According to our estimates, deregula- in the early 2000s and detailed panel that official regulations are poorly tion had a positive significant effect on data on the actual regulatory burden on enforced and grossly understate the regu- firm entry and employment in small firms across regions. The data come from latory burden, as much of the actual reg- business. At the same time, no effect on regularly-repeated surveys of 2,000 firms ulation is in excess of the official levels. either pollution or public health (mor- in 20 regions of Russia about their actu- The difference in timing of the initial bidity from poor-quality products) has al levels of regulatory burden in each enactment of different deregulation laws been recorded. area of regulation affected by the reform. allows us to estimate the effect of the In concluding it is worth repeating enactment on regulatory burden. that it is the regions with the least cor- Ambitious Reforms Controlling for all regional characteris- rupt, transparent, accountable, and most Between 2001 and 2004, Russia tics, macro-economic shocks, and region- fiscally-motivated governments that passed laws that drastically simplified specific trends we find that, on average, achieve most progress in deregulation. procedures and reduced red tape associ- the enactment of a deregulation law has The evidence allows us to evaluate the ated with entry regulation, and with the led to a significant reduction in regulato- competing theories of the nature of regu- regulation of existing business. The laws ry burden for Russian firms in the area of lation. Our findings are inconsistent with introduced clear measurable limits to regulation affected by that law. the public interest theory because regions regulatory burden, for example, they At the same time, reform progress with transparent and accountable gov- established that registering a business exhibited a large regional variation. ernments are the ones that achieve requires a trip to just one government Therefore, looking only at the largest progress in deregulation, and moreover, agency (`one-stop shop') and takes no cities may give a misleading picture deregulation does not have an adverse more than a week; each inspecting about the state of regulation in the coun- effect on pollution or morbidity (two agency, comes to inspect a business no try as a whole. Moreover, the geographi- market failures that regulations are sup- more frequently than once in two years; cal variation of regulatory burden in posed to cure). The evidence is also hard licenses are valid for no less than five each area of regulation prior to the to reconcile with the regulatory capture years. In addition, the reform foresaw a reform's implementation had also been theory because the presence of a politi- substantial amount of `delicensing', i.e., very large. So in examining what deter- cally-powerful industrial lobby has the the exemption from licensing of many mines the success of a deregulation same effect on regulation of entry and business activities which previously had reform at the regional level, we take into existing business. Industrial lobbies accel- required licenses. account the pre-reform regional institu- erate deregulation in all areas and do not Prior to the reform, Russian firms tional environment. Based on our esti- use entry regulation to protect themselves suffered from excessive regulatory bur- mations we can conclude that four fac- from potential competitors. But, in accor- den. It was argued that over-regulation tors significantly boost enforcement of dance with `tollbooth' theory, the least was among the most important reasons deregulation laws in a region: corrupt and most fiscally-motivated gov- for the country's poor economic per- · Government transparency; ernments promote deregulation the most. formance during the first eight years of · Low corruption; transition. The proclaimed goal of the · Presence of a strong industrial reform was to induce the entry and lobby, i.e. the extent to which regional Ekaterina Zhuravskaya is Academic Director at CEFIR in Moscow; Evgeny growth of small business. authorities are under the influence of Yakovlev is a Ph.D. student at University of In our study we, first, examine powerful industrial groups; California at Berkeley, USA. Full text of the whether the reform succeeded in bring- · Strong fiscal incentives, i.e. the paper is available at www.cefir.ru ing down administrative costs for firms. extent to which regional budgets are (CEFIR/NES Working Paper No. 97). BT Beyond Transition · January March 2007 · 21 Land and Real Estate Transactions for Businesses in Russia Businesses complain about little land privatization, non transparency and favoritism in the process Gregory Kisunko and Jacqueline Coolidge Land privatization in the Russian much lower at 35%. The city of Moscow tion of the official price from the higher Federation has a checkered history, with stands out with 100% of land still pub- to the lower end of the federally mandat- a clear favorable policy not firmly estab- licly owned. The remainder of the land is ed range is associated with a significant lished until the enactment of the 2001 owned by legal entities and individuals, increase in the rates of land privatization Land Code. Even after the enactment, with individuals owning significantly (more than doubling for some regions). many vital parameters of land privatiza- more land parcels than businesses do. Excluding the pricing policy from tion, including pricing parameters, have In addition, there is still considerable consideration, the length of time required still not been settled. evidence of municipalities abusing their to complete the relevant procedures The new Land Code explicitly calls market power through administrative becomes the main factor influencing the for land to be privatized as follows: barriers, not necessarily to keep rents level of land privatization; the longer the · Land under buildings that were high, but more often to favor some firms duration of the procedure, the lower the privatized earlier is supposed to be sold over others and/or exercise undue influ- rate of land privatization in a region. A (or leased) to the owner of the building ence over local business development. decrease in the average procedure dura- at an administered price within parame- tion by one month increases the overall Limited Access to Land as ters set by federal legislation (this cate- number of land privatization transactions gory accounts for the great majority of an Obstacle to Business per 100,000 residents by about 11%. land transactions involving businesses). Businesses continuously complain If businesses are deterred from apply- · Vacant land intended for new that there has been very little land priva- ing for ownership rights, their only other construction is supposed to be privatized tization to date, and that the limited choice is to apply for lease rights. Delays by transparent auction or tender proce- amount of privatization that has taken associated with land privatization proce- dures (there have so far been relatively place has suffered from severe inconsis- dures lead to an increase in the propor- few transactions of this type). tencies, non-transparency, and outright tion of transactions for long-term land The privatization procedure for land favoritism. While this problem is not leases as opposed to land ownership. If under privatized buildings (the most unique to Russia, cross country compar- the delays are reduced by 25% from common procedure for acquisition of isons suggest that businesses in Russia their mean length, the rate of land lease land) involves an average of 11 stages, are even more likely to perceive "access transactions would decrease by about 15 eight different agencies, 17 different doc- to land" as an obstacle, relative to many percentage points in favor of land priva- uments, 220 days, and about 70,000 other emerging markets. tizations. Rubles (about US$2,400) in official fees. In our study we investigate the prob- A second factor influencing land pri- The range, however, is quite large, from lems faced by businesses in carrying out vatization is the frequency of refusals by low figures of about 50 days in Rostov land and real estate transactions in government agencies in the course of a region and 10,000 Rubles in Novgorod Russia. The analysis is based on a survey procedure.The analysis demonstrates that region to high figures of over 400 days in carried out by the Foreign Investment while processing land privatization appli- Novosibirsk and 360,000 Rubles in Advisory Service, which covered 15 cations, government agencies tend to Moscow region. Russian regions and included information refuse the completion of such transactions To date, most land of interest to busi- from 517 business intermediaries that twice as much, on average, as land lease nesses is still owned or controlled by helped clients with land and real estate procedures, even though the procedures municipal governments, which gives them transactions in 2004, as well as 1,188 and criteria are supposed to be the same. strong "market power" as near-monopo- legal entities and sole proprietors that list landlords, while greater legal flexibili- attempted, underwent or completed land More Corruption in ty over land rents (as opposed to buy-out and real estate transactions in that year. Complex Procedures With prices and land taxes) provides a strong Our analysis demonstrates that the fiscal incentive to municipalities to try to principal factor influencing the level of Sunk Costs maintain their ownership rights, and land privatization in a region (dominated Procedures in which applicants have encourage businesses to apply for lease by privatization of land under buildings) significant sunk costs (e.g., they have rights instead of ownership rights. In ten is the pricing policy pursued by local already purchased their land and are now out of 15 regions in our survey, more than authorities. In those surveyed regions trying to register their ownership rights) three-quarters of land is owned or is in where the local government pricing poli- take about 34% more time than the possession of the state or municipali- cy is at the low end of the range stipulat- "reversible" procedures. Procedures in ties. Only in one region -- Rostov -- the ed by federal law, the rate of land priva- which sunk costs are involved are also share of state and municipal lands is tization transactions is higher. A reduc- more prone to corruption: the share of The World Bank & CEFIR 22 · New Findings stages involving unofficial payments is while use of such mechanisms is associ- time limits should be introduced. higher by 11% as compared to the ated with higher rates of land privatiza- Officials should be required to provide a "reversible" ones. tion, there is not yet clear evidence that written explanation, against established More complex land procedures are they are associated with other positive legal or administrative criteria, for any more prone to corruption. Each extra outcomes such as fewer delays or unoffi- refusal of applications for land privatiza- stage added to the procedure increases cial payments. tion, within a stipulated time limit. If no the percentage share of stages in which decision has been rendered by the time unofficial payments were reported by Policy Recommendations limit, it should be deemed approved, about 4 percentage points. · Unnecessary complexity should with enforcement available through the The procedure duration does not sig- be reduced in administrative procedures courts if necessary. nificantly affect the level of unofficial for businesses' access to land. Regions · Auctions and tenders for land payments. However, the official cost of with the simplest procedures should privatization should be further encour- the procedures, along with the complex- serve as a positive example for regions aged, but need to be monitored closely ities associated with them, has a signifi- with more complex procedures. for transparency and fairness. cant effect on the level of unofficial pay- · For privatization of land under ments -- the higher the official cost, the privatized buildings, keeping adminis- Gregory Kisunko is Sr. Public Sector higher the level of unofficial payments. tered land prices low helps to encourage Specialist at the Public Sector Group of the Established relationships with gov- land privatization transactions and helps Poverty Reduction and Economic ernment officials may help to reduce the to develop a competitive secondary mar- Management Network of the World Bank; duration of the process somewhat, ket in land. At the same time, if munici- Jacqueline Coolidge is Lead Investment Policy although the effect is not significant. palities cannot obtain revenues from Officer at the Foreign Investment Advisory However, such connections cost money land rents, they may need some compen- Service (FIAS), which is a multi-donor facility to maintain -- intermediaries who have sating source of revenue (e.g. enhanced of the World Bank Group. Full text of the paper "Survey of Land and Real Estate connections that they think can help in land taxes) to maintain their fiscal bal- Transactions in the Russian Federation" can the facilitation of their work charge ances and to encourage their coopera- be viewed at: http://papers.ssrn.com/sol3/ more for the completion of procedures. tion with land privatization. papers.cfm?abstract_id=958175#Paper The use of auctions or tenders is still · For many administrative proce- Download (World Bank Policy Research not very common in many regions, and dures, a policy of "silent consent" with Working Paper No. 4115). BT Land Issues: Barriers for Small Businesses Questions, connected with the acquisition and renting of purchasing the land, could not finish the purchasing proce- land and premises, play an important role in the decision to dure within the six months. In 2006, the duration of such create and expand small businesses.This is proved by the sixth procedures did not change significantly. round of monitoring the administrative barriers to small busi- · Purchasing federal property. The procedure for pur- ness development. The monitoring is carried out by CEFIR chasing federal property was in 2003 -- and still remains -- and comes in the form of yearly repeated surveys of 2,000 the most expensive, time-consuming and the least transpar- firms in 20 regions of Russia. CEFIR has been conducting the ent. In 2006, the procedure duration for an average firm was survey since 2002 in order to evaluate the results of the dereg- three months. ulation reform, started by the federal government in 2001. · Costs connected with purchasing and renting land The monitoring results show that about half the firms and premises. The survey results from 2004 show that this face problems with land, while the problem of acquisition was not influenced by who the partner is in the transactions: and renting of land and premises was singled out as the most whether it be a private party or the federal authorities. serious problem connected with the federal regulations. However, there was more pressure to give bribes while con- · The procedure duration. Purchase of land and ducting the transaction with government agencies. premises looks like a lottery: in some cases the procedure is Thus, the survey results show that small businesses face relatively fast (one to three months), while in others it drags serious problems when trying to acquire premises and/or on and takes more than six months. In 2003, more than a land plots. A significant number of entrepreneurs abandon third of the firms, trying to acquire premises, had to spend plans to start or expand their business due to these difficul- over six months on the procedure; around 90% of the firms, ties. In order to decrease the arbitrariness of the local author- ities, the appropriate procedures must be simplified; this will Duration (Days) for the Procedure of Acquiring Premises, be a strong incentive for the development of small business Median Values in Russia's regions. Purchase of Purchase of Rent of the Rent of the the Federal Private Federal Private Property Property Property Property Source: Centre for Economic and Financial Research, Moscow, www.cefir.ru. Questions, related to the purchasing and renting land 2004 22 60 30 7 and premises, have been added to the monitoring survey on the ini- 2006 30 30 30 7 tiative and with the financial help of the Foreign Investment Advisory Service (FIAS). BT Beyond Transition · January March 2007 · 23 Foreign Bank Profitability in Central and Eastern Europe Performance of greenfield banks is superior to the other types of banks Olena Havrylchyk and Emilia Jurzyk What determines bank profitability? ters for the foreign banks' performance has important spillover effects on the per- What is the impact of ownership struc- and whether the performance of differ- formance of domestic banks in CEE. As ture and mode of entry on bank perform- ent types of banks converges over time. the participation of foreign banks ance? Clearly, compared to domestic increases, the costs of domestic banks Greenfield Banks More banks, foreign banks may be differently rise. This can be viewed as a "negative" affected by some common factors. For Profitable spillover effect, but is explained by the example, they may be less sensitive to the First, our results clearly show that the fact that in countries with a low level of structure of liabilities and local economic mode of entry for foreign banks is an economic development the costs of conditions. At the same time, they may be important determinant of their perform- domestic banks rise in response to com- influenced by additional factors com- ance. Profitability of takeover banks is petition from foreign banks, because they pared to local banks, for example, home not different from that of domestic have to invest in new technology and country economic conditions and the banks, whereas greenfield banks earn human capital to be able to compete. strategies of parent institutions. 0.95 percentage points higher return on Over time, however, a certain degree Foreign banks are not a homoge- assets than other banks. Higher prof- of convergence occurs between banks neous group, and they differ according itability results from the lower costs of with different ownership structures. The to the mode of entry: greenfield banks greenfield banks, and not from higher profitability of greenfield banks decreas- (foreign banks newly established in a interest or non-interest margins. Loan es, as their costs rise. This is a sign of a country), and takeover banks (domestic loss provisions and costs in an average positive spillover effect: with time, banks sold to private foreign investors). greenfield bank are lower by 6.43 and domestic banks become more competi- Greenfield banks are closely integrated with parent institutions, depend on them Costs in a greenfield bank are lower by 1.23 percentage points for capital and apply approved risk and portfolio management techniques. In 1.23 percentage points, respectively, than tive, and greenfield banks can no longer contrast, when taking over a bank, for- in a domestic bank. Greenfield banks' earn abnormal profits. eign investors inherit personnel, infra- better quality of loan portfolio might be structure and client portfolio, and have due to their superior skills in screening Conclusions to spend time and money to modernize potential borrowers and their subse- Thus, our analysis shows that the the target. Additionally, as domestic quent monitoring. Alternatively, green- performance of greenfield banks is supe- banks offered to foreign buyers are often field banks may also target different rior to the other types of bank, which is illiquid and burdened with non-perform- market segments, namely the largest and the result of their modern management ing loans, cleaning up and restructuring most transparent enterprises, leaving and lending techniques, superior reputa- costs fall, too, on the new owners. riskier clients to domestic banks. tion, and support from parent institu- We examine the sources of profitabil- Second, we find that the mode of tions. None of these factors appears to ity using data on 419 commercial and entry determines foreign banks' vulnera- improve the performance of takeover savings banks from 11 Central and bility to local and international condi- banks, but this could be due to the short Eastern European countries (CEE), tions. Greenfield banks are not sensitive time that has elapsed from the change of namely Bulgaria, Croatia, the Czech to domestic factors, such as the structure ownership and the significant burden of Republic, Estonia, Hungary, Latvia, of their balance sheets, GDP growth and bad loans that these banks inherited. Lithuania, Poland, Romania, Slovakia, interest rates. At the same time, they are Foreign banks' entry has a positive and Slovenia, between 1993 and 2004. affected by the health of their parent impact on banking sector stability, since This region has the world's highest share institutions and interest rate changes in they are less sensitive to the domestic eco- -- 71% -- of foreign investors in the the EU. This reflects very tight links nomic environment compared to domes- banking sector, with both greenfield and between greenfield institutions and par- tic banks. Moreover, greenfield banks takeover banks operating in all countries. ent banks, which support their sub- enjoy support from parent institutions. We decompose banks' profits into net sidiaries in CEE. Interestingly, the prof- interest margin, net non-interest income, itability of takeover banks depends on loan loss provisions and overhead costs their own level of capital, and is not sen- Olena Havrylchyk is economist at CEPII, and examine their relation to a set of sitive to either the local macroeconomic Paris, France and Emilia Jurzyk is a PhD stu- domestic and international factors. This environment or international factors. dent at the Department of Economics and allows us to see whether being a part of Third, we find that the entry of for- LICOS, KU Leuven. Full text of the paper is a multinational financial institution mat- eign banks (both greenfield and takeover) available at: http://ssrn.com/abstract=965 BT The World Bank & CEFIR 24 · New Findings Banking in Ukraine: Changes Looming? Two main risks of the Ukrainian banking industry are liquidity and currency risks Natalya Dushkevych and Valentin Zelenyuk During the last decade, the banking to three quarters of what Raiffeisen increase transparency, yet the process has industry in Ukraine has exhibited an International had paid for the second been going too slowly despite increasing enormous growth in assets (see Figure). largest bank just 17 months earlier. At threats. The number of commercial banks went the same time, the stock market price for What are the main risks to the from 76 at the beginning of independ- banks taken over by international play- Ukrainian banking industry? One is the ence to a peak number of 230 banks in ers has increased dramatically, signalling increasing liquidity risk. Most of the 1995 and to 193 banks in 2006. There a higher level of trust from investors. bank liabilities are short-term deposits remain only two state-owned banks with However, it is also very likely that the and current accounts, while most assets about 12% of the total assets -- a much proportion of domestic banks in Ukraine are mortgages and other long and medi- lower share than e.g. in the Czech will remain much higher than in the um-term loans. This threat is unlikely to Republic (24%) or Russia (35%). The above countries. This is because relative materialize if trust in the banking system industry is quite competitive with no one to other transition countries (except continues to increase, no large-scale neg- bank having a dominant position. The Russia) Ukraine has many more large ative economic shocks ensue, economic Herfindahl-Hirschman index of business domestically owned business groups, growth continues and incomes keep ris- concentration has stayed at around 400 which own or control local banks. For ing. Yet, the presence of so many uncer- points for many years, which is similar to example, the largest Ukrainian bank, tainties makes the system vulnerable. the levels in the UK or France. Privatbank, is associated with one of the The second is an increasing currency Big international players, such as largest FIGs in Ukraine, the Privat Group. risk. While many loans are taken in US Citibank, ING and HVB entered Ukraine dollars, most deposits are made in the before 2000 but did not make it into the Industry Shakeout Likely local currency (hryvnia). This is because top 20 banks in terms of assets. The last Thanks to increased competition, the the interest rate for dollar loans is 1.5 two years, however, showed a markedly Ukrainian banking industry is ranked times lower than for the hryvnia ones, increased interest from foreign investors higher by the World Bank than in most while the exchange rate has remained vir- in Ukrainian banking. The new wave of transition and even some developed tually unchanged in the past years. An foreign acquisitions started in 2005 countries. However, the weakness of external shock causing devaluation of when Raiffeisen International purchased many small banks, with some being on hryvnia is likely to cause a credit crisis, as the second largest Ukrainian bank, Aval. the verge of bankruptcy, is likely to lead many borrowers with hryvnia-denomi- Other big international players followed to an a massive exit of banks and the nated incomes will find it hard to meet promptly, increasing the proportion of consolidation of others. International obligations. foreign ownership from about 15% in experience shows that many industries The National Bank has considered 2004 to about 30% by the end of 2006. go through a "shakeout" period around various measures to discourage loans in In 2006, about 65% of all FDI into the 15th year of their development. The hard currency. Yet, this is unlikely to Ukraine went to the banking industry. Ukrainian banking, which is already in solve the problem as the "remedies" are Not surprisingly, the prices skyrocketed: its 17th year, also demonstrates a decent applied to the consequences rather than in early 2007, Swedbank agreed to pay level of maturity in providing primary to the root of the problem. In our opin- about US$750 million for the 19th services -- another factor considered ion, a more market-oriented solution largest Ukrainian bank, which was equal critical for inducing an would entail switching from the pegged industry shakeout. to floating exchange rate regime, togeth- Annual Growth of Main Banking Indicators A large wave of bank- er with inflation targeting. This should ruptcies -- the worst-case stimulate convergence of interest rates in domestic and hard currencies. 80% scenario -- could be pre- vented (or minimized) by Overall, the industry dynamics sug- 70% encouraging mergers and gest that the Ukrainian banking is about 60% acquisitions of small to go through substantial changes and the 50% banks, many of which suf- result will depend on how well it address- es the risks and transparency issue. 40% fer from managerial and marketing deficiencies. 30% Until recently, foreign 20% investors have kept away Natalya Dushkevych is at EERC (Kyiv 10% from buying such banks, School of Economics) and Kyiv Economics Institute, KEI. Valentin Zelenyuk is at Kyiv 0% mainly because of their 2002 2003 2004 2005 2006 Economics Institute, KEI, EERC and inadequate transparency. Own capital Assets Liabilities Millennium Capital. The views expressed in Deposits of Deposits of The recent legislative ini- this article are those of the authors and do not Loans individuals business tiatives should help to represent the views of above organizations. BT Beyond Transition · January March 2007 Agenda · 25 Knowledge Economy Forum: Adopt or participants of the conference "Education Reforms and Roma Innovate? Inclusion in Central and Eastern Europe," hosted by the Roma Education Fund (REF) and the Government of Hungary on April 2-3. The Roma Education Fund's first major conference The Sixth Annual Knowledge Economy Forum on in its two years of operations brought together government "Technology Acquisition and Knowledge Networks" took representatives, donors, and Roma civil society. REF Board place in Cambridge, England on April 17-19. Based on exam- member and World Bank Country Director Annette Dixon, as ples of international best practice, the forum discussed critical well as Open Society Institute chairman George Soros in a elements in enhancing the absorption of technology and video message, called on donors to solidify their commitments knowledge by firms and explored the policy recommendations to ensure that REF's successful projects can be scaled up, such that support such processes in Europe and Central Asia (ECA). as school integration and access to preschool education. Cambridge's experience as one of the world's leading hubs for Conference participants shared their experiences in panel dis- enterprise innovation provided important insights on the role cussions and roundtables, bringing to light best practice exam- of universities, private entrepreneurs, and government in facil- ples, such as the importance of involving parents and the Roma itating technology and knowledge transfer to industry. The community in education reforms, and the improved education- acquisition of technology and know-how from around the al outcomes for students in integrated classrooms. Several world offers greater potential for sustained economic growth innovative examples of collaboration were shared, such as a in ECA in the short to medium term than innovation. While program in Hungary that works with Roma secondary school countries in ECA are striving to emulate Western European students to prepare them for employment in the private sector. and Asian approaches as they face the challenges of competing However, government cooperation is required to implement in an increasingly integrated world, they cannot afford to and enforce anti-discrimination and desegregation laws, and ignore what is happening further east. China and India have projects must be tailored to the specific situation, as no vast, increasingly well-educated populations whose talents are panacea exists for all cases. Donors, governments, and NGOs being tapped by local and international firms flourishing in must also work together to optimize the use of the European what are relentlessly competitive business environments, which Union's Structural Funds in the new member states. For more have developed largely thanks to these economies' ability to information, visit http://www.romaeducationfund.hu acquire cutting edge technology and eventually innovate indigenously. Ongoing research by the World Bank suggests that governments in ECA must do their part in supporting the New Country Partnership Strategy in catch-up process by putting in place an incentive-compatible Macedonia Focuses on EU Accession regulatory framework conducive to technology acquisition by the private sector and the creation of networks that can chan- The World Bank's Board of Executive Directors discussed nel knowledge across countries. For more information, visit on March 27 the new Country Partnership Strategy (CPS) for http://www.worldbank.org/eca/ke the Former Yugoslav Republic of Macedonia, which envisages a lending program of up to US$280 million for the period Latvia and Hungary Graduate from World 2007-2010. Priorities of the new CPS are centered round the Bank Assistance country's ambition to join the European Union and aim at sup- porting the government's program to accelerate economic growth and job creation. The CPS builds on the country's The governments of the Republics of Latvia and Hungary progress in firmly establishing macro-economic stability and exchanged letters with ECA Vice-President Shigeo Katsu dur- will support important reforms to further improve the condi- ing the World Bank/IMF Spring Meetings April 14-15, signal- tions for private sector investment. In addition, it presses for- ing their "graduation" from World Bank borrower to donor ward with reforms in key sectors where weaknesses in gover- status. Since Latvia became a member of the European Union, nance continue to undermine the country's economic reforms. the partnership between Latvia and the World Bank has Improved transparency and accountability in service delivery focused on measures to implement Latvia's convergence pro- are critical to meet the government's program on growth, fos- gram, promote regional development, and strengthen gover- ter human capital, and meet EU standards. The proposed activ- nance. Hungary, which is the largest donor to the International ities envisaged under the CPS focus on two pillars: a) foster Development Association among the eight Central European growth and job creation, increase living standards for all, and countries that joined the European Union in 2004, acknowl- b) public service delivery and supporting good governance. For edged its 25 years as a member of the World Bank and indi- more information, visit http://www.worldbank.org/mk cated its desire for a continued partnership with the Bank based on knowledge sharing. For more information, visit http://www.worldbank.org/eca World Bank Engages with Bulgaria in Key Sectors to Hasten EU Convergence Roma Education Conference Calls for Bulgaria's economy has grown steadily since 2000, and this Scaling up from Donors, Governments positive trend is expected to continue in the near future. However, raising productivity and employment to narrow the Continued progress in improving equal access to quality income gap and facilitate convergence with other member education for Roma will require strong commitments from states in the European Union will remain Bulgaria's main chal- donors and the backing of national governments, stressed the lenge for the next few years. The World Bank Board of The World Bank & CEFIR 26 · Agenda Executive Directors approved three projects on March 21 that IDA Websites for Armenia and Bosnia Go Live aim to strengthen the country's EU integration and conver- gence of living standards. The Social Sector Institutional As part of the World Bank's focus on the results achieved Reform Development Policy Loan will support Bulgaria's through financing from the International Development reform agenda in the areas of health, education, and social pro- Association (IDA) across the globe, IDA websites for Armenia tection. The Second Trade and Transport Facilitation in and Bosnia have gone online. IDA is undergoing its 15th round Southeast Europe will facilitate Bulgaria's national and inter- of replenishment, known as IDA15. IDA lends money (known as national trade and transport by improving the capacity, effi- credits) on concessional terms. This means that IDA credits have ciency, and quality of services at selected EU border crossings, no interest charge and repayments are stretched over 35 to 40 with a particular focus on the Trans-European Transport years, including a 10-year grace period. Since its inception, IDA Network. The board of directors also approved additional credits and grants have totaled US$161 billion, averaging US$7- financing for the active Bulgaria Social Investment and 9 billion a year in recent years. The Armenia and Bosnia IDA Employment Promotion Project. The project aims to improve websites take a look at IDA's work in the country and its unique the standard of living in disadvantaged communities and make role in development and poverty reduction.The IDA story is told better use of the opportunities presented to Bulgaria by its through a succinct country study, short project profiles, inter- accession to the European Union. For more information, visit views with government officials, and photo slideshows. For http://www.worldbank.org/bg more information, visit http://www.worldbank.org/ida Armenia's Poverty Reduction Agenda Stays on Track This section has been provided courtesy of Merrell Tuck and Christina Lakatos, Europe and Central Asia External Affairs The World Bank Board of Directors approved on March 8 a US$28 million Poverty Reduction Support Credit for Armenia. In Moldova, a 70 percent Decrease in AIDS This is the third project under a four-year program that will Mortality assist the government with the implementation of its Poverty Reduction Strategy Program (PRSP). The credit will help sustain Moldova's health status markedly declined between 1990 the country's economic growth and poverty reduction efforts by and 2000. Life expectancy at birth is one of the lowest in providing budget support and moving ahead with the high pri- Europe (68 years in 2003). From the mid-1990's onward, ority reform agenda identified by the PRSP. The Armenian HIV/AIDS prevalence increased by more than 25 times among authorities are currently completing a review of the PRSP in the 15-49 age group, reaching 0.90% in 2003. Service-wise, the close consultation with civil society and donors. During the next country was trying to maintain extensive facilities inherited phase of the PRSP process, the government will prepare an from Soviet times on a meager budget. Resources were skewed extensive analysis of the causes of poverty and identify the short toward large hospitals, which represented 70% of health spend- and long term challenges on the road to greater economic ing. The First Health Sector and HIV/AIDS Control Strategy, growth. While growth has only recently begun lowering unem- developed with assistance from IDA, the Dutch Government ployment levels in the country, currently standing at nearly one- and other donors, helped the government set evidence-based third of the labor force, the nascent rise in employment levels has policy directions and provide a framework for coordinating had so far limited impact on the income of many households, donor assistance in the sector. IDA's total contribution amount- particularly in the less productive sectors, such as agriculture. ed to US$15.5 million. Collaboration between the Moldovan For more information, visit http://www.worldbank.org/am government, NGOs, and supporting donors has contributed to stabilizing life expectancy, a decrease in maternal and infant Comprehensive Drought Strategies for mortality, and 70 percent decrease in mortality due to AIDS. Caucasus and Central Asia in New Report Health sector reforms created a new minimum benefits package and improved rural access to health care. For more information, Drought-susceptible countries in the Caucasus and Central visit http://go.worldbank.org/IKYDS1WAN0. Asia must establish National Drought Plans that are well inte- grated into other disaster-management plans, stresses a new New Country Director in Russia World Bank report. Drought Management and Mitigation Assessment for Central Asia and the Caucasus: Regional and Mr. Klaus Rohland has assumed the position of the Country Country Profiles and Strategies is the result of research and con- Director and Resident Representative of the World Bank in sultations conducted in eight countries over the past two years. Russia. He first joined the World Bank in 1981 as an advisor to The report was prompted by a severe and prolonged drought in the German Executive Director and has since then held a num- the region in 2000-2001, as well as the knowledge that expo- ber of key positions in the Bank. His most recent posting was as sure to drought will only increase in Central Asia, and with peo- the Bank's Country Director for Vietnam.The previous Country ple in all eight countries vulnerable to drought conditions due Director for Russia, Mrs. Kristalina Georgieva returned to the to lack of careful planning and poverty. Thus far, disaster-man- Bank's headquarters in Washington, D.C. She was appointed as agement agencies have not adequately addressed the severity of Deputy Vice-President, Sustainable Development, a recently long-term drought impacts, focusing instead on more immedi- established department that combines infrastructure develop- ate disasters. To access the materials in both English and ment, agriculture, environment and social development. More Russian, visit http://www.worldbank.org/eca/drought information: http://go.worldbank.org/XDF661E1P0 BT Beyond Transition · January March 2007 New Books and Working Papers · 27 World Bank Working Papers regional electricity markets. Electricity tariffs for residential consumers in Montenegro are likely to gradually increase by http://econ.worldbank.org 40% to over 100%. This significant price rise will impose a heavy burden on poor households and it may adversely affect Vojislav Maksimovic, Asli Demirguc-Kunt, Meghana the environment. In an ex-ante investigation of the welfare Ayyagari impact of this price increase on households in Montenegro, the Firm Innovation in Emerging Markets: The Roles of authors show that the anticipated price increase will result in a Governance and Finance significant increase in households' energy expenditures. A sim- March 2007, WPS 4157 ulation of alternative policy measures analyzes the impact of different tariff levels and structures on the poor and vulnerable The authors investigate the determinants of firm innovation households in particular. Higher electricity prices could also in over 19,000 firms across 47 developing economies. They significantly increase the proportion of households using fuel define the innovation process as including not only core inno- wood for heating. vation such as the introduction of new products and new tech- nologies, but also other types of activities that promote knowl- Clifford Zinnes, Laura Bouriaud, Ioan Abrudan, Valy edge transfers and adapt production processes.The authors find Marochko, Jeffrey R. Vincent, Jean-Daniel Saphores that more innovative firms are large exporting firms with pri- Detecting Collusion in Timber Auctions: the Case of vate owners, highly educated managers with mid-level manage- Romania rial experience, and access to external finance. In contrast, firms December 2006, WPS4105 that do not innovate much are typically state-owned firms with- out foreign competitors. The identity of the controlling share- Romania was one of the first transition countries in Europe holder seems to be particularly important for core innovation, to introduce auctions for allocating standing timber in public with private firms, whose controlling shareholder is a financial forests. In comparison with the former system of administrative institution, being the least innovative. While the use of external allocation at set prices timber auctions offer several potential finance is associated with greater innovation by all private advantages: greater revenue generation for the government, a firms, it does not make state-owned firms more innovative. higher probability that tracts will be allocated to the firms that Financing from foreign banks is associated with higher levels of value them most highly, and stronger incentives for technologi- innovation compared with financing from domestic banks. cal change within industry and efficiency gains in the public sec- tor. Competition is the key to realizing these advantages. Mona Haddad Unfortunately, collusion among bidders often limits competi- Trade Integration in East Asia: the Role of China and tion in timber auctions. The result is that tracts sell below their Production Networks fair market value, which undermines the advantages of auc- March 2007, WPS4160 tions.The paper confirms that data from Romanian timber auc- tions can be used to determine the likelihood of collusion, and Production networks have been at the heart of the recent it suggests that collusion reduced winning bids in Suceava for- growth in trade among East Asian countries. Fragmentation est directorate in 2002 and perhaps also in Neamt forest direc- trade, reflected mainly in the trade in parts and components, is torate.The paper concludes with a discussion of actions that the expanding more rapidly than the conventional trade in final government can take to reduce the incidence of collusion and products.This is mainly due to the relatively more favorable pol- minimize its impact on auction outcomes. icy setting for international production, agglomeration benefits arising from the early entry into this new form of specialization, considerable intercountry wage differentials in the region, lower trade and transport costs, and specialization in products exhibit- CASE ing increasing returns to scale. The economic integration of http://www.case.com.pl China has deepened production fragmentation in East Asia, countering fears of crowding out other countries for interna- Maria Cernobrovciuc, Joanna Konieczna, Mariana Puntea, tional specialization. International production fragmentation in Marcin Sowa, Alexandru Stratulat East Asia has intensified intraregional trade but has depended Prospects for EU-Moldova Economic Relations heavily on extraregional trade in final goods. While production CASE Reports No. 67 networks centered on China have contributed significantly to growth in East Asia, they also breed vulnerabilities. They have In recent years, external links with the Republic of not automatically led to technology spillovers but resulted in an Moldova have been determined by the influence of two geopo- extreme interdependence across East Asian countries. litical blocks, the CIS and the EU. Despite the strong ties with the CIS, Moldova's relations with the EU are becoming Dragana Radevic, Irina Klytchnikova, and Patricia Silva increasingly important particularly with regard to the econom- Poverty and Environmental Impacts of Electricity Price ic situation in the country. The report presents recent econom- Reforms in Montenegro ic trends in Moldova, analyzes the effects of recently proposed February 2007, WPS 4127 and implemented macroeconomic policies, and discusses some of the structural changes that have taken place during the last The Government of Montenegro is preparing an electricity five years. It also provides a background of EU-Moldova rela- tariff reform due to recent developments in the national and tions and describes the prospects of future economic relations. The World Bank & CEFIR 28 · New Books and Working Papers Finally, it reports on the current attitudes towards integration regional political characteristics affected judicial decisions with the EU, based on an expert opinion poll, and concludes about the number and types of bankruptcy proceedings initiat- with a set of recommendations for Moldovan policy-makers. ed after the law took effect. Controlling for indicators of firms' insolvency and the quality of the regional judiciary, re-organi- Malgorzata Jakubiak, Maryla Maliszewska, Irina Orlova, zation procedures were significantly more frequent in regions Vitaly Vavryschuk, . with politically popular governors and governors who had hos- Non-Tariff Barriers in Ukrainian Export to the EU tile relations with the federal center. Poor judicial quality was CASE Reports No. 68 also associated with a higher incidence of re-organizations. Second, the quality of the regional judiciary affected the per- Overall EU tariffs for Ukrainian products are rather low and formance of firms under the re-organization procedure: in traditional protection measures apply only to selective sectors. regions with low quality judges, firms that were re-organized Moreover, the latter are expected to disappear within the next according to the 1998 law had significantly lower growth in few years, following Ukraine's WTO entry and the establish- sales, labor productivity, and product variety compared to ment of the EU-Ukraine free trade area in manufacturing goods. firms not subject to bankruptcy proceedings. In contrast, in However, the EU often resorts to non-tariff barriers to trade, regions with high quality judges, firms in re-organization out- such as certification of origin, customs procedures and technical performed firms not in bankruptcy proceedings. This effect of standards, to protect its own market, which may prove prohib- judicial quality on the performance of re-organized firms was itive for Ukraine. The report explores whether and to what stronger when governors were politically popular. These find- extent the non-tariff barriers impede Ukrainian exports to the ings are consistent with the view that politically strong gover- EU. It reviews the Ukrainian trade policy and the evolution of nors subverted the enforcement of the 1998 bankruptcy law. bilateral trade flows with the EU, and discusses the experience of Central and Eastern European countries in relation to over- Other Publications coming non-tariff barriers and the extent to which this can be applicable to Ukraine. Finally, the report presents the results of Andrei V. Vernikov the survey on non-tariff barriers to trade faced by Ukrainian Russia's Banking Sector Transition: Where to? exporters and concludes with policy recommendations. BOFIT Discussion Paper 5/ 2007 http://www.bof.fi/bofit_en/ CEFIR http://www.cefir.ru This paper applies an analytical paradigm of institutional economics to the transition of the Russian banking sector, Irina Denisova focusing on the interplay between ownership change and insti- Entry to and Exit from Poverty in Russia: Evidence from tutional change. It finds that the state's withdrawal from com- Longitudinal Data mercial banking has been inconsistent and limited in scope. To March 2007, CEFIR/NES Working Paper 98 this day, core banks have yet to be privatized and the state has made a comeback as owner of the dominant market partici- More than 25 million Russians have incomes that are pants. The paper also looks at the new institutions imported lower than the subsistence level. The study investigates how into Russia to regulate banking and finance, including rule of entry to and exit from poverty are shaped using survival law, competition, deposit insurance, bankruptcy, and corporate analysis and utilizing the Russian Longitudinal Monitoring governance. The unfortunate combination of this new institu- Survey (RLMS) panel for 1994-2004. The study shows, among tional overlay and traditional local norms of behavior have other things, that the presence of children increases the brought Russia to an impasse -- the banking sector's owner- chances of moving into poverty and decreases the chances of ship structure hinders further advancement of market institu- leaving it, while a high share of adults with university degrees tions. Indeed, one may now be witnessing a retreat from the in the household and the urban residence have the opposite original market-based goals of transition. effect. Interestingly, economic upturns and downturns have an asymmetrical impact on poverty: economic growth lowers the Barry Bosworth, Susan M. Collins chances of slipping into poverty but also reduces hazards from Accounting for Growth: Comparing China and India poverty. This implies that poor households during economic February 2007, NBER Working Paper 12943 upturn are those with serious problems and are to be paid spe- http://www.nber.org/papers/w12943 cial attention to. The authors compare the recent economic performances of Ariane Lambert-Mogiliansky, Konstantin Sonin, Ekaterina China and India using a simple growth accounting framework Zhuravskaya that produces estimates of the contribution of labor, capital, Are Russian Commercial Courts Biased? Evidence from a education, and total factor productivity (TPF) for the three sec- Bankruptcy Law Transplant tors of agriculture, industry, and services as well as for the March 2007, CEFIR/NES Working Paper 99 aggregate economy. The growth accounts show a roughly equal division in each country between the contributions of capital The authors study the nature of judicial bias in bankruptcy accumulation and TFP to growth in output per worker over the proceedings following the enactment of the 1998 bankruptcy period 1978-2004, and an acceleration of growth when the law in Russia. The two main findings are as follows. First, period is divided at 1993. However, the magnitude of output Beyond Transition · January March 2007 · 29 growth in China is roughly double that of India at the aggre- ern regions, although they have a lower level of GDP per capi- gate level, and also higher in each of the three sectors in both ta, have a higher level of non-income indicators. The author sub-periods. In China the post-1993 acceleration was concen- finds that in the east, social norms and group preferences are trated mostly in industry, which contributed nearly 60% of more oriented towards social policies and public services, while China's aggregate productivity growth. In contrast, 45% of the in the west the norms and preferences are more oriented growth in India in the second sub-period came in services. towards a market economy. Reallocation of workers from agriculture to industry and serv- ices has contributed 1.2 percentage points to productivity Markku Kotilainen growth in each country. Free Trade between the EU and Russia -- Sectoral Effects and Impacts on Northwest Russia Guido Friebel, Elena Panova Working Paper No. 1087 Insider Privatization and Careers -- A Study of a Russian The Research Institute of the Finnish Economy, Firm in Transition http://www.etla.fi/eng/julkaisuhaku.php March 2007, NBER Working Paper 12998 http://www.nber.org/papers/w12998 The paper analyzes the implications of free trade between the EU-25 and Russia using a computable general equilibrium The paper studies how transition has affected human model, with a focus on the regions in Northwest Russia. Free resources policies of a Russian heavy industry firm. The data trade on its own would have a negative terms-of-trade effect in set contains personnel files of 1,538 white-collar workers over Russia and cause a small decline in welfare. If coupled with an 17 years: from 1984 to 2000. The authors find that until 1991, increase in productivity, welfare would increase. This empha- still in Soviet times, the firm featured stable patterns of upward sizes the importance of reforms in the Russian economy. mobility that looked quite similar to career paths in western Ferrous and non-ferrous metallurgy, machine-building and firms. From 1992 when liberalization reforms began, to 2000, metal working, and wood and paper are the principal losers no similar career paths were observed. The reason is that in all due to free trade. At the same time, production in capital tiers of the firm's hierarchy except for the lowest one, more goods, fuel industry, and services increases. Due to its produc- managers were hired from the outside, and fewer managers left tion structure, the Northwest seems to benefit slightly less than the firm. As a result, the firm became "toploaded", and pro- Russia on average in terms of the volume of GDP. motions were blocked. A possible reason is extremely weak outsider property rights enforcement in Russia. Alexandra Ferreira Lopes The Costs of EMU for Transition Countries Celine Allard REPEC: http://repec.org/mmf2006/up.7815.1140017467.pdf Inflation in Poland: How Much Can Globalization Explain? IMF Working Paper WP/07/41 Should the Czech Republic, Hungary and Poland -- the February 2007, IMF Working Paper 07/41 biggest economies that joined the EU in 2004 -- adopt the euro? The author constructs a model to evaluate the economic costs of The paper analyzes how globalization has affected inflation the loss of autonomy of the monetary policy as a result of join- in the EU's New Members States and Poland in particular since ing the EMU. The findings suggest that EMU membership can 1995. It finds prices have become less sensitive to domestic be a costly decision to these countries. The decision of entering economic conditions as trade integration rose, possibly because the EMU is more costly when technological shocks are stronger, monetary policy incentives increasingly shifted toward meeting when correlation of the monetary policy shocks is weaker, when price stability objectives. Quantitatively, globalization appears consumers are more risk averse and when the import share to have lowered Polish prices by 0.5-1 percentage point annu- between the countries studied and the EMU is lower. ally since 1995, substantially more than in advanced economies. However, future inflation-dampening effects in the Floro Ernesto Caroleo, Francesco Pastore NMS are likely to be smaller as the pace of increases in trade A New Regional Geography of Europe? The Labor Market openness moderates. Impact of the EU Enlargements IZA Discussion Paper No. 2620 Pasquale Tridico Available at SSRN: http://ssrn.com/abstract=969620 Regional Human Development in Transition Economics: The Role of Institutions The aim of this paper is to summarize research ideas and Universite degli Studi Roma Tre, Working Paper 70 outcomes on how the changing political and economic map of http://host.uniroma3.it/dipartimenti/economia/pdf/wp70.pdf Europe affects labor markets in both the old and new EU mem- ber states. The specific focus of the discussion is on the micro- The aim of this paper is to analyze regional difference in economic foundations of structural change and its spatially human development in Poland. The author constructs Human asymmetric impact on local labor markets. The issues dis- Development Regional Indexes for 16 Polish regions and cussed include: regional job and worker turnover; the impact describes the income and non-income dimensions of human of migration on regional unemployment differences; a region- life. During transition, western Polish regions experienced al dimension of gender differences; human capital as a factor higher growth of GDP per capita than eastern regions. Yet, this of regional convergence; the impact of trade and FDI on has not produced a higher level of non-income dimension indi- regional labor markets; hidden economy and hidden employ- cators -- education and life expectancy. On the contrary, east- ment; national and EU regional policy. BT The World Bank & CEFIR 30 · Conference Diary 2nd annual Emerging Markets Private Equity · Implications of CIBS growth for other economies: Conference (EMPEC 2007) opportunities, challenges and threats; June 4-5, 2007, Moscow, Russia · Growth paths and development prospects of CIBS, including possible setbacks, and lessons for other countries; The conference titled "Russia and Other Emerging · Commodity and services trade: the changing patterns Markets: Investors Knocking at the Gates" is organized by the of trade, competitive and complementary trade relationships, International Council of Institutional Investors. EMPEC 2007 and volatility in commodity prices; provides insights and opportunities with respect to private · Capital flows and financial markets: the role, determi- equity, venture capital and real estate investments in emerging nants and spillover effects of FDI, government strategies in markets of Russia and CIS republics. The list of speakers attracting FDI, prevention of financial crisis, exchange rate includes representatives of the Russian governments, foreign regimes, capital account control; and Russian investment banks, venture funds, and internation- · CIBS' role in WTO negotiations, regional trade al organizations. arrangements and the implications for Southern economies; · Possible consequence for energy demand, climate Information: http://www.empec.org/2007/index.php?lang=ru change and regional tensions; · Technology transfer, intellectual property rights, and Globalization, EMU and the Reshaping of European national research policies; Economies · Political economy and international governance June 22, 2007, Florence, Italy issues, including implications for foreign policies. While European economies have become increasingly inte- More information: http://www.wider.unu.edu/conference/ grated over the last 15-20 years, there are striking differences conference-2007-2/conference-2007-2.htm in the degree of product and labor market liberalization, the organization and reform of the welfare and public finance sys- First Summer School on "Transnationality of Migrants" tems, and the degree of openness to international capital mar- September 9, 2007, Lake Garda, Italy kets. Rates of R&D expenditures and investment in new tech- nologies are far from converging. The workshop organizers The school intends to provide an intensive training course welcome submission of theoretical, empirical and policy con- for PhD students and young researchers who are working in the tributions addressing these issues. The main goal of the work- fields of international economics and development. This year it shop is to shed light on the roots of the differences in European will focus on the main analytical and empirical approaches to countries ability to reap the benefits of regional and global eco- the study of the impact of international migration on the host nomic integration. country. The school is open to 40 students from all countries. Students are expected to attend the school full time. The school More information: www.cepr.org is organized as part of the Marie Curie Research Training Network on "Transnationality of Migrants". European Summer School on Industrial Dynamics September 3-9, 2007, Dubrovnik, Croatia More information: www.cepr.org The 2007 edition will be dedicated to the special topic of CEPR/ESI 11th Annual Conference on Global the "Economics of Science". Applications are invited from Imbalances, Competitiveness and Emerging Markets PhD students and young scholars on the following topics: September 28, 2007, Pretoria, South Africa · The economics of public research (university funding, science policy) The topic of the conference will cover the following areas: · The labor market for scientists · Implications of global imbalances for banking, finan- · Scientists' careers, networks, and productivity cial markets and financial stability in mature and emerging · The commercialization of academic research markets; · Any other topic related to economic aspects of scien- · Impact of global imbalances on monetary policy in tific enquiry. emerging markets (with special emphasis on the following channels: carry trades, capital flows, liquidity, asset inflation More information: http://www.unibocconi.it/essid2007 and exchange rates); · Modeling competitiveness and balance of payments WIDER Conference: Southern Engines of Global issues associated with mature and emerging markets. The Growth: China, India, Brazil, and South Africa (CIBS) intention is to have three policy lectures by senior central September 7-8, 2007, Helsinki, Finland bankers. The organizers will select the three best papers for presen- This conference focuses on the inter-linkages between CIBS tation at the conference in a special session of central bank and the global economy, including the impact of these research papers and will award the best of these three papers economies on their respective regions. The main themes are with the CEPR/ESI Prize 2007 for the Best Central Bank growth, trade, international finance, global governance and Research Paper. geopolitics. The conference is expected to cover the following (non-exhaustive) topics: More information: www.cepr.org BT Beyond Transition · January March 2007 Bibliography · 31 "EMU Enlargement: Why Flexibility Matters" by Philipp "The Economic Cost of Smoking in Russia" by Michael Maier and Maarten Hendrikx Lokshin and Zurab Sajaia Aksoy, Y., De Grauwe, P. and Dewachter, H., 2002. "Do asym- Becker, G., and K. Murphy, 1988. "A Theory of Rational metries matter for European Monetary policy?" European Addiction." Journal of Political Economy, Vol. 96: 675-700 Economic Review 46 (2002), 443-469. Chaloupka, F., 1991. "Rational Addictive Behavior and Berk, J. and Swank, J., 2007. "Regional real exchange rates Cigarette Smoking." Journal of Political Economy, Vol. 99: 722-734 and Phillips curves in monetary unions: Evidence from the US and Heineck, G., and J. Schwarze, 2003. "Substance Use and EMU". De Nederlandsche Bank, mimeo. Earnings: The Case of Smokers in Germany." Discussion Paper # Lewis, J., 2007. "Hitting and hoping? Meeting the exchange 743, IZA, Germany rate and inflation criteria during a period of nominal conver- Hoad, N., and D. Clay, 1992. "Smoking Impairs the Response gence", DNB Working Paper, no. 130. to a Physical Training Regime: a Study of Officer Cadets." Journal Maier, P. and Bezoen, S., 2004. "Supporting and bashing of of the Royal Army Medical Corps, Vol. 138:115-117 central banks: The Bundesbank and the European Central Bank", Levine, P., Gustafson, T., and A. Valenchik, 1997. "More Bad European Journal of Political Economy 20, 923-939. News for Smokers? The Effect of Cigarette Smoking on Wages." Industrial and Labor Relations Review, Vol. 50: 493-509 "Gains from Risk-Sharing in the EU" by Yuliya Demyanyk and Ogloblin, C. and G. Brock, 2003. "Smoking in Russia: The Vadym Volosovych 'Marlboro Man' Rides but Without 'Virginia Slims' for Now" Comparative Economic Studies, Vol. 45: 87-103 Kalemli-Ozcan, S., B. Sorensen and O. Yosha, 2001. "Regional Integration, Industrial Specialization and the Asymmetry of Shocks "Deregulating Business in Russia" by Ekaterina Zhuravskaya, across Regions," Journal of International Economics 55, 107-137. Evgeny Yakovlev Sorensen, B. and O. Yosha, 1998. "International Risk Sharing and European Monetary Unification," Journal of International De Soto, Hernando, 1990. "The Other Path". New York: Economics 45, 211-238. Harper and Row. van Wincoop, E., 1994. "Welfare Gains from International Pigou, Arthur. 1938. "The Economics of Welfare". London: Risk Sharing," Journal of Monetary Economics 34, 175-200. Macmillan. Shleifer, Andrei and Robert W. Vishny., 1993. "Corruption." "Postponing Euro-Area Expectations?" by Tanel Ross Quarterly Journal of Economics 108(3):599-617. Stigler, George J., 1971. "The Theory of Economic Meade, Ellen E. and D. Nathan Sheets, 2005. "Regional Regulation." Bell Journal of Economics 2(1):3-21. Influences on FOMC Voting Patterns". Journal of Money, Credit and Banking, Vol. 37, No. 4, pp. 661-677. "Land and Real Estate Transactions for Businesses in Russia" by Gregory Kisunko and Jacqueline Coolidge "Latvian Labor Market before and after EU Accession" by Mihails Hazans FIAS, 2006. "Survey of Land and Real Estate Transactions in the Russian Federation", available at: http://www.fias.net/ifcext/ Hazans M., 2007. "Coping With Growth and Emigration: fias.nsf/AttachmentsByTitle/LandSrv_CrossRegRep_Mar2006.pdf Latvian Labor Market Before and After EU Accession", SSRN: /$FILE/LandSrv_CrossRegRep_Mar2006.pdf http://ssrn.com/abstract=971198 FIAS, "Report on Access of Enterprises to Land" (prepared for MEDT), FIAS/EU "Report on Land and Real Estate Transactions" "The Impact of EU Accession on Poland's Economy" by Ewa (prepared for FIAS) at www.worldbank.org/russia/fias. Balcerowicz Khakhalin, Andre A. and Stephen B. Butler, "Privatization of Enterprise Land in the Russian Federation: 1992-2003", prepared CASE, 2006. "The Polish Economic Outlook. Trends, for USAID, unpublished manuscript. Analyses, Forecasts". Quarterly No. 3 (30). Muir and Shen, "Land Markets: Promoting the Private Sector CBOS, 2006. "Bilans dwoch lat czlonkostwa Polski w Unii by Improving Access to Land", World Bank Group Viewpoint Europejskiej. Komunikat z badan" ("An Evaluation of the two Note, http://rru.worldbank.org/PublicPolicyJournal/Summary. years of Poland's membership in the European Union". Survey aspx?id=300 results), April, available at http://www2.ukie.gov.pl/ World Bank, 2003. "Land Policies for Growth and Poverty European Commission, 2006. "Enlargement, Two Years After: Reduction", Oxford University Press. An Economic Evaluation". Occasional Papers, no. 24. Bureau of European Policy Advisers and DG ECFIN, May, available at "Banking in Ukraine: Changes Looming?" by Natalya http://europa.eu.int/comm/economy finance/index en.htm Dushkevych and Valentin Zelenyuk European Commission, 2006. Economic Forecasts Autumn 2006, European Economy, DG ECFIN, No 5, available at Sherif K., Borish M., Gross A., 2003. "State-owned Banks in http://ec.europa.eu the Transition: Origins, Evolutions and Policy Responces". World Maliszewska M, 2004. "The EU Enlargement: Benefits of the Bank. Single Market Expansion for Current and New Member States". Carbo-Valverde S. et. al., 2006. "Cross-Country Comparisons CASE Studies & Analyses, no. 273, at http://www.case.com.pl of Competition and Pricing Power in European Banking". World Bank, 2006. "World Bank EU-8" Quarterly Economic Presentation on the 42 Annual Conference of Bank Structure and Report, Part II: Special Topic: Labor Migration from the New EU Competition. Member States. The World Bank & CEFIR 32 · Order Form Beyond Transition The Beyond Transition Newsletter is FREE of charge. Please fill in the order form below if you would like to receive a complementary subscrip- tion to the English version. 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