the newsletter about reforming economies beyond...

Beyond TransitionThe Newsletter About Reforming Economies

October — December 2007 • Volume 18, No. 4 http://www.worldbank.org/transitionnewsletterwww.cefir.ru

Theme of the Issue: Labor Markets andMigration

From Job Shortage to Skilled Worker ShortageJan Rutkowski 3

Regional Unemployment and Human Capital in TransitionEconomiesStepan Jurajda and Katherine Terrell 5

Insert: Employment Trends in Non�EU ECA Countries 6

Wages in Russia: Evolution and DifferentiationVladimir Gimpelson, Rostislav Kapelyushnikov 7

Insert: Russian Labor Market Flows in Transition 8

Labor Supply Behavior in the Czech RepublicAlena Bicakova, Jiri Slacalek and Michal Slavik 9

Gender Wage Gap in BelarusFrancesco Pastore and Alina Verashchagina 10

Informal Employment and Labor Market Segmentation inUkraineHartmut Lehmann, Norberto Pignatti 11

Informal Employment in Bosnia and HerzegovinaGorana Krstic and Peter Sanfey 12

How Do Active Labor Market Programs Work in Romania?Nuria Rodriguez�Planas 13

Russian Migrants to RussiaOlga Lazareva 14

Remittances: Recent Trends and Development ImplicationsDilip Ratha 15

Insert: Debt�Financed Migration in the 21st Century 17

New Findings

Robert Shiller, Yale University: "Crisis is an opportunity toadvance financial markets" 18

Neven Mates, IMF: "Convergence will continue, albeit at aslower pace" 18

Rolling Out the Red Carpet: Investment Promotion and FDIInflowsTorfinn Harding and Beata Smarzynska Javorcik 20

Impact of Ukraine's WTO AccessionVeronika Movchan 21

Russia's Foreign Trade OutlookNatalya Volchkova 23

Closing the Productivity Gap in UkraineChristian Gianella and William Tompson 24

World Bank Agenda 25

New Books and Working Papers 27

Conference Diary 30

Photo: the World Bank

Beyond Transition • October�December 2007

2 ·

From the Editor:

Dear Reader,

In this issue we look at labor markets in transition countries. As the transition process comes toan end, and transition countries converge either to the developed or developing countries clubs,the region is experiencing dramatic changes. In the 1990s labor demand in all transition countriesdeclined. Existing firms were shedding workers, who either remained unemployed or looked forjobs in the new private sector, including the informal one. In Eastern and Central Europe, whichintroduced a Western European type of social security system, this process resulted in high unem-ployment rates and jobless growth. In the CIS countries governments often put pressure on firmsnot to shed labor, so adjustments were made in terms of wages and hours worked. After severalyears of high growth in the early 2000s the situation in the labor market has seen changes in bothgroups of countries. Firms have moved from "defensive" to "strategic" restructuring, whichincludes expanding markets and increasing market share (Rutkowski; Gimpelson andKapelyushnikov; Denisova, Eller, and Zhuravskaya). Labor demand has increased rapidly, and

skill shortage has become the major challenge for growth in all the countries. This gap can only partially be overcome by migra-tion (Lazareva). At the same time labor supply behavior in transition economies has become very similar to the one in maturemarket economies (Bicakova, Slacalek, and Slavik).

In these new circumstances, labor policies mainly impact on low-skilled workers and women, who have higher unemploymentrates and/or receive lower wages (Jurajda and Terrell; Bicakova, Slacalek, and Slavik; Pastore and Verashchagina). Many of theseworkers end up in the informal sector. Only few choose informal jobs of their own free will, while for the majority formalemployment is a much more favorable destination as it produces a higher level of satisfaction and well-being (Lehmann andPignatti; Krstic and Sanfey). Active labor market policies, such as public employment services and small business assistance canimprove both employment opportunities and the incomes of workers (Rodriguez-Planas).

The New Findings section of this issue focuses on topics related to globalization. The impact of the recent WTO accession onUkraine is estimated in the article by Movchan, while other challenges faced by the country are discussed by Gianella andTompson. Volchkova examines Russia's export diversification opportunities, and related government policies. One of these poli-cies is FDI promotion, and the study by Harding and Javorcik produces recommendations regarding the effectiveness of gov-ernment efforts to attract higher FDI inflows.

Finally, in this issue we can not leave unnoticed the global financial crisis. Transition economies are highly open to trade anddependent on financial inflows, so the crisis may have a profound impact on their short-term growth opportunities. Two promi-nent economists — Robert Shiller from Yale University and Neven Mates from the IMF — agreed to discuss the nature of thecrisis and its impact on transition economies in this issue of BT.

Ksenia Yudaeva, Managing Editor

From Job Shortage to Skilled Worker Shortage

Jan Rutkowski

Until the early 2000s labor marketoutcomes were disappointing in virtuallyall New Member States (NMS — theCzech Republic, Estonia, Hungary,Latvia, Lithuania, Poland, the SlovakRepublic and Slovenia, Bulgaria andRomania). Unemployment was high —often in double digits — and the employ-ment/working age population ratio, ataround 60%, was low and below theEU-15 average of about 65%. Theseunfavorable labor market outcomes per-sisted despite economic growth; in fact,many countries experienced periods ofjobless growth.

Firms in these countries tried tobecome competitive by reducing costsand shedding redundant labor. The sizeof the new expanding sector (mainlysmall private firms and services) was toosmall to absorb labor released fromdeclining industries (such as heavy indus-try and mining). Moreover, many work-ers, especially older ones, who lost theirjobs in these declining industries, lackedthe skills required in the new sectors andwithdrew from the labor force, discour-aged by the scarcity of job opportunities.This was facilitated by the availability ofearly retirement schemes and other wel-fare benefits.

The scarcity of job opportunities isno longer present in the NMS. In themid-2000s — ignited by favorable glob-

al market conditions, the EU accession ofeight transition economies and anincrease in the labor driven growth —labor demand picked up and since thenjobs have become more plentiful. Themost spectacular turnaround occurred inthe Baltic States, but also in Poland andBulgaria. For example, in Estonia theannual rate of employment growthincreased from -2.0% during 1997-2000to 3.7% during 2005-2006.

In the early 2000s the unemploymentrate in the NMS hovered around 15%(with the exception of the CzechRepublic, Hungary, Romania andSlovenia). Currently, in most countriesthe unemployment rate is below 10%.The most dramatic drops in the unem-ployment rate occurred in the BalticStates, Bulgaria, Poland and Slovakia.For example, in Lithuania the unemploy-ment rate fell by nearly 11 percentagepoints over six years.

Surge in Labor Demand What has caused the recent spectacu-

lar improvement in labor market condi-tions in the region? Strong economicgrowth can only be part of the story.Among other possible explanations forthe recent fall in unemployment, anincrease in firms' demand for labor asso-ciated with successful firm restructuringis the most plausible one.

The average jobvacancy rate in theregion, which is anindicator of thestrength of labordemand, increased byalmost 60% within thelast two years alone.For example, from2005 to 2007 thevacancy rate morethan tripled inLithuania, doubled inPoland, and almostdoubled in the CzechRepublic and Latvia.

The wage growth that has accompa-nied employment growth is yet anothersign of an increase in labor demand in theregion. During the most recent period(2003-2006) wage growth was strongestin the Baltic States, where large-scale out-migration (relative to labor force) reducedlabor supply adding to the wage pressure.

While in the earlier period firms wereable to meet the demand for their prod-ucts by increasing productivity, andimproving competitiveness through lay-ing-off redundant labor — a processknown as "defensive restructuring" —recently firms have moved to "strategic"restructuring, which is associated withusing productivity gains to increase mar-ket share, expand output, and conse-quently, hire more workers. Strong androbust export growth since 2004 (at anannual rate of around 20%) supports theassertion that the countries reaped thebenefits of the earlier restructuringefforts, became more productive, andcan now successfully compete in theglobal market.

Low Participation Ratesamong Youth and OlderWorkers

While the unemployment rate hasdeclined substantially, the employ-ment/working age population ratioremains relatively low, especially amongyounger and older workers. In the NMSthe average youth employment rate is27%, compared with 40% in the EU15.The difference for older workers is lesspronounced: 42% against 45%; howev-er, it varies widely: from 28% in Poland,to 59% in Estonia. Clearly some coun-tries face a bigger challenge in increasingthe employment rate among older work-ers than others.

The youth employment rate is lowbecause young people in the NMS tendto stay longer in education than theirEU15 counterparts, and they are lesslikely to combine education with work.In few countries does youth account for

To address skill and labor shortages countries need to increase effective labor supply

· 3

The World Bank & CEFIR

Theme of the Issue: Labor Markets and Migration

Graph 1. Share of 15�24 in Part�Time Employment, 2006

706050403020100

Source: Eurostat, Bank staff calculations

EU 25 Average

Bulg

aria

Slov

akia

Cze

ch R

ep.

Hun

gary

Port

ugal

Latv

iaLu

xem

bour

gLi

thua

nia

Cyp

rus

Esto

nia

Gre

ece

Mal

ta

Aus

tria

Rom

ania

Ital

yG

erm

any

Pola

nd

Belg

ium

Spai

nFr

ance

Slov

enia

U.K

.Fi

nlan

dSw

eden

Den

mar

k

Net

herla

nds

more than 10% of part-time employ-ment, which is still well below the EU25average of 27% (see Graph 1). Youngworkers may also suffer from strictemployment protection regulations, suchas high rates of labor taxation or highminimum wages, which discourageemployers from hiring inexperiencedworkers whose productivity is uncertain.

The low employment rate amongolder workers in the region is stronglyaffected by the design of social securitysystems. Many people of working age(55-64) are not employed because of thelow statutory retirement age, and ampleopportunities for early retirement. As aresult, the average retirement age is sig-nificantly lower than the statutory retire-ment age (see Graph 2). In some coun-tries the gap between the statutory andactual retirement age is striking, withPoland being the most dramatic exam-ple. In addition, many older workerstake advantage of the often lax rules gov-erning eligibility for disability pensionsand use them as a substitute for retire-ment pensions or unemployment bene-fits. For example, disability pensionrecipients account for some 30% of allthe economically inactive populationaged 55-64 in Poland. In Estonia andLithuania the share is even higher.

Pervasive Problem ofLong�Term Unemployment

The incidence of long-term unem-ployment — which is the most sociallycostly form of unemployment — is stillhigh at 53% in the NMS and Croatiacompared with 42% in the EU15. Underconditions of strong labor demand, thelong-term unemployed are largely work-

ers who lack skills (or incentives) neces-sary to take available jobs. The problemis pervasive in virtually all countries inthe region, but is particularly pro-nounced in Slovakia, Croatia, Romania,Poland and Bulgaria. Slovakia is anextreme case: three out of four unem-ployed persons are jobless for more thanone year.

Less educated and older workers aredisproportionately represented amongthe long-term unemployed. For example,in Poland workers with less than second-ary education account for as much as60% of the long-term unemployed, butonly 40% of the employed. Apparently,long-term unemployment is stronglyassociated with poor or obsolete skills.This implies that unemployment in theNMS has a strong structural componentthat will persist even with furtherincreases in labor demand.

Skill Shortages: AnEmerging Challenge

Skill shortages have become one ofthe top business concerns, and areincreasingly seen as a constraint to futurefirm growth. On average in the NMSevery third company found that lack ofskilled workers is an important obstacleto business growth, especially in expand-ing companies. In Latvia, Lithuania, theCzech Republic, Poland, Romania andHungary the skills of available workerswere seen as an important obstacle tofirm activity by 35 to 45% of all firms.

The substantial skills mismatch maymean that skills acquired under centralplanning became obsolete, but also maysuggest that education systems are noteffective in producing workers with the

kinds of skills need-ed in moderneconomies.

In addition toskill shortages, laborshortages have alsobeen rising recently,in particular in thebooming construc-tion industry, butalso in manufactur-ing. It is skilledworkers for whomdemand hasincreased the mostbut who are in short-est supply. Out-migration to EU15

countries has contributed to labor short-ages and to wage pressures.

Policy OptionsTo address the emerging labor mar-

ket challenges the countries need toincrease the effective labor supply, that isthe supply of workers that have incen-tives to actively seek employment, andskills that enable them to take newly cre-ated jobs. To do so they need to move inthree directions:

• Improve labor supply incentivesthrough reforming the social security sys-tems and enhancing the opportunities forflexible work arrangements. The two tar-get groups are youth and older workers.Labor force participation by young work-ers may be raised through enhancinglabor market flexibility, introducing theyouth sub-minimum wage (around 80%of the adult minimum wage) in countrieswhere the statutory minimum wage is rel-atively high; and targeted reductions insocial security contributions. Measures toraise the labor force participation of olderworkers include first and foremost limit-ing early retirement.

• Improve worker skills throughreforming the educational systems so asto make them more responsive to labormarket demands. Reforms aimed atimproving worker skills include provid-ing solid foundation for continuouslearning to as many students as possible;expanding life-long learning opportuni-ties to adapt to rapid technologicalchange, and linking training to trends inthe industrial and occupational profile oflabor demand.

• Import labor with skills that arein short supply by opening labor marketsto foreign workers. This is a fast way ofdealing with labor and skills shortages.

Policies to address the factors causinglabor shortages need to be tailored tocountry-specific conditions. While insome countries reforms should focusmore on improving worker skills, in oth-ers they should focus more on removinglabor supply disincentives created by thesocial security systems or on enhancinglabor market flexibility.

The report was prepared by a team ofWorld Bank economists in the region led byJan Rutkowski. Full text of the World BankEU8+2 Regular Economic Report publishedin September 2007 is available at:www.worldbank.org/eu8-report. BT

·4 Theme of the Issue: Labor Markets and Migration


Graph 2. Official and Actual (Median) RetirementAge in EU8+2, 2005

EELTLVROCZBGSKHRHUSIPL

Source: Romans (2007), MiSSOC Database, National Strategy Report onAdequate and Sustainable Pensions (2006), Bank staff calculations

Men

52 54 56 58 60 62 64 66

Official

Median

· 5


Regional Unemployment and HumanCapital in Transition Economies

Stepan Jurajda and Katherine Terrell

Why are differences in regional unem-ployment in post-communist economiesso large and persistent? For example, in2001 the Czech district of Most was fac-ing a 20% unemployment rate, while thenearby Kladno district had 10% unem-ployed and Prague-West, which neigh-bors on Kladno, had less than 5% of theeconomically active population jobless.In existing research, institutional defi-ciencies, such as underdeveloped housingmarkets, have been typically blamed forthe finding of weak labor migration'sability to equilibrate cross-regionalunemployment differences.

We search for a different explanationmotivated by two observations. First, thetransition from central planning to mar-kets is occurring in an era of skill-biasedtechnological change. Indeed, recentcross-country and cross-industryresearch suggests that global shifts inlabor demand towards skilled labor areimportant for national unemploymentlevels in post-communist economies.Second, transition economies inheritedlarge regional differences in human capi-tal endowments.

Regional VariationsIncreased Over Time

Our study starts by pointing out thatregional variations in skill endowmentsin transition countries are wide in com-

parison to developed Europeaneconomies and have increased overtime. There are large differences amonglocal areas in the share of college-edu-cated workers (see Graph). In any coun-try, one would expect to find an inordi-nately high share of college-educatedindividuals in the capital city, given theconcentration of universities, culturalamenities valued by the highly educated,and public institutions staffed with ahighly educated labor force. However,we find an extensive variation in theshare of the college educated populationeven outside the capital city. For exam-ple, in 2001 in Bulgaria, the share of theadult population with a college educa-tion ranged between 7% and 17% out-side of the capital city, and in Ukraine,between 9% and 19%. Moreover, theincrease in the share of college educatedworkers was faster in areas that beganthe transition with more college-educat-ed workers.

This pattern could reflect a dynamicthat explains the persistent dispersion ofregional unemployment rates. Comple-mentarities between skilled workers andbetween capital and skills could moti-vate skilled labor and capital to flow toregions where skilled labor is plentiful,rather than where it is scarce. Skilled-biased labor migration could reinforceand exacerbate regional differences inunemployment, explaining the lack of

equilibrating migration found in otherstudies.

Alternatively, the early-transitionregional distribution of skills could berelated to initial regional shocks tolabor demand. When local demand forlabor collapses, low-skilled workersmay be less likely to migrate and hencemore likely to remain unemployed thanhigh-skilled workers, whose opportuni-ty cost of not working is higher. Thiswould exacerbate the level of unem-ployment of the unskilled in areas witha large share of unskilled workers, cre-ating more dispersion in the unemploy-ment rates of regions.

Skilled Migration HigherThan Non�Skilled One

To explore these mechanisms, we useregional (NUTS-3 level) and worker-level data from the Czech Republic,Hungary, Bulgaria and Ukraine to meas-ure the explanatory power of regionalskill endowments for regional unemploy-ment. We also study the related capitaland labor flows and potential skill com-plementarities.

First, variation in regional humancapital explains the lion's share of thevariation in regional unemploymentrates in transition economies. This is notonly because of the national unemploy-ment differences across skill groups, but

High wage floors support the high regional unemployment disparities

Divergence in Regional Shares of College Educated at NUTS3 Level

Note: Data is at the NUTS�3 regional level. NUTS are the Nomenclature of Territorial Units for Statistics, level 3 corresponds to counties/regions/districts

.08

.06

.04

.04 05 .06 .07 .08 .09 .1 .11 .12 .13 .14 .15 .16 .17 .18

.05

.04

.03

.02

.01.04 .05 .06 .07 .08 .09 .1 .11 .12 .13 .05 .01 .15 .2 .25

Ch

ang

e fr

om

200

1 to

199

1

Ch

ang

e fr

om

200

1 to

1990

Ch

ang

e fr

om

200

1 to

198

9

Share of population with college education in 1991 Share of population with college education in 1990 Share of population with college education in 1989

Prague Budapest Kiev

Crimea

Pest

.05

.04

.03

.02

.01

Czech Republic Hungary Ukraine



also because the unemployment rateamong the least skilled workers is sub-stantially lower in regions endowedwith high shares of college-educatedworkers. We also show that the persist-ence of regional unemployment overtime is especially strong among the low-skilled.

Next, we study cross-region migra-tion by skill using the data from the2001-2003 labor force surveys. We findthat low skilled workers are less likely tomigrate than high skilled workers, whotend to migrate to regions with a rela-tively high concentration of skilled peo-ple and low unemployment. Similarly,we find that foreign direct investmenttends to flow to regions with high skilllevels, although this evidence is weakerwhen capital cities are excluded.

We then ask about the two potentialmechanisms that could explain theselabor and/or capital flows and the pat-terns of regional unemployment by edu-cation groups: (i) the presence of com-plementarities and (ii) differences in theresponse of skilled and unskilled individ-uals to regional demand shocks, which

may be driven in part by centralizedlabor market institutions.

We find little evidence for comple-mentarities using an identification strate-gy recently employed in US research,which relies on the historical location ofcolleges to identify exogenous variationin regional skill endowments.

The Role of Labor MarketInstitutions

Do labor market institutions con-tribute to the lack of migration ofunskilled workers and lack of conver-gence of regional unemployment rates?The social safety net with its minimumguaranteed income level (effective mini-mum wage) may discourage work inregions affected by negative productivityshocks and lower the variance of thewage of less skilled workers acrossregions, lowering the benefits frommigration. Consistent with this argu-ment, we find that in the more developedlabor markets of Central Europe theregional variance of the wages of lowskilled workers is much lower than the

variance of the wages for high skilledworkers. On the other hand, unemploy-ment among the highly educated variesmuch less across regions than unemploy-ment of the least skilled workers. Thiscomparison is less stark in Bulgaria andUkraine, where social safety nets are lesscomprehensive.

Thus, high wage floors in CentralEurope seem to lower the incentives forless skilled workers to migrate and sup-port the high regional unemploymentdisparities.

Stepan Jurajda is Associate Professor anda member of the Executive and SupervisoryCommittee of CERGE-EI, Prague. KatherineTerrell is Professor at the Stephen M. RossSchool of Business and the Gerald R. FordSchool of Public Policy, University ofMichigan, USA. Full text of the paper can beaccessed at: home.cerge-ei.cz/jurajda/RegionalHC_Nov-07.pdf (CERGE-EIWorking paper No. 345). The research hasbeen supported under the EBRD projectC14116/JAP-2003-07-01/43 "Unemploymentin Central and Eastern Europe: Why is it sohigh today?" within the Japan-EuropeCooperation Fund. BT

Employment Trends in Non�EU ECA CountriesThe rather good economic performance seems to finally

impact on employment-to-population ratios. The downwardtrend, observed ever since the breakdown of the Soviet sys-tem, finally stopped and a slight increase of the ratio hasbeen observed in recent years. The male employment-to-pop-ulation ratio in 2007 was 0.4 percentage points higher thanten years ago, at 63.8%. Women's ratio in 2007 was 0.5 per-centage points higher than ten years ago at 45.6%.Employment-to-population ratios for young people alsoseem to have reached a turning point with an upward trendin recent years, but they are still only at the same level as tenyears ago, a rather low 36%.

Unemployment rates continue to be high with only avery slow downward trend which, of course, further dis-courages people to participate in labor markets. The unem-ployment rate for the whole region was 8.5% in 2007,unchanged from the previous year. The youth unemploy-ment rate was at 17.3 per cent in 2007. The region has tra-ditionally not seen big differences in unemployment forwomen and men, and for the overall unemployment situa-tion women actually have a lower unemployment rate thanmen. But, in the youth cohort, women face a higher unem-ployment risk than men, which was not the case right afterthe transition took place. This should be seen as a warningsign that gender equality in labor markets has started todeteriorate.

The main tasks for Central & South-Eastern Europe(non-EU) & CIS countries are to reverse high unemploymentand low employment rates so that there is better use of thepotential offered by the working age population. This willonly be possible if macroeconomic policies are launched thatboost investment and decent job creation and if labour mar-ket and social policies contribute to the inclusion, especiallyof young people, and to poverty reduction. Given that eco-nomic growth, so far, has neither led to considerably lowerunemployment nor to less risky employment situations, it isnot surprising that the region faces big emigration flows.The level of migration is of increasing concern because ofthe exodus of well-skilled nationals, which may reduce thecapacity for long-term economic development. This is par-ticularly troubling given that the youth share in the working-age population, which was already very low in comparisonto other countries, will further decrease. If not identified asa major concern the ageing and decreasing of societies willturn into a constraint for further development in the region.The challenges for labour markets, social security systems,pension policies, health care, savings and consumption pat-terns are enormous.

Source: Global Employment Trends-2008, the InternationalLabour Organization, http://www.ilo.org/global/What_we_do/Publications/lang--en/docName--WCMS_090106/index.htm BT

· 7


An analysis of the Russian wage for-mation shows that its key distinguishingfeature is a high degree of flexibility.Reaction to economic shocks is manifest-ed above all in the change of the price oflabor while the level of employment islittle affected. In periods of economicdecline a minority do not lose their jobs,but all workers see their wages drop. Thebenefits of growth, in turn, translatethemselves not so much into the creationof new jobs as into overall growth ofwages. Whatever jobs are created aremainly in the informal sector of the econ-omy. Thereby, economic growth increas-es segmentation in the labor market.

This model "saved" low-productivityjobs in the Russian economy in the mostdifficult periods of the 1990s thus helpingto keep unemployment at a relatively lowlevel. However, the stability of such amodel in the future is far from guaranteed.

A Unique Wage StructureThe high degree of wage flexibility

stems directly from the unusual structureof the wages themselves. In Russia theshare of the fixed (guaranteed) part ofpay has been and remains very low byinternational standards, at about 50-60%. Accordingly, much of the remuner-

ation is variable and is made up ofbonuses, benefits, lump-sum payments,etc. At the same time the share of the"non-wage" component in the structureof labor costs is no longer disproportion-ately large and is approximately at thesame level as in most developed or post-socialist countries.

In terms of overall wage inequality,Russia is among the most unequal coun-tries in the world. Russian wages are notonly flexible, they are closely related to:

• the region, which is the key dif-ferentiating factor because of the highcost of migration and low level of labormobility;

• the sector of industry to whichthe enterprise belongs;

• the professional status of theworker;

• the financial and economic per-formance of the enterprise.

When setting wages Russian employ-ers proceed from the economic situationat their enterprises rather than thenational wage scale or the situation inthe local labor market. Such factors asgender, age, employment history, andeducation contribute only little or not atall to wage inequality.

A comparison of the wages of moreexperienced andless experiencedworkers makesparadoxical read-ing (see Graph). InRussia the upwardtrend of the indi-vidual's wage curveends by the age of35 and workers atthe most produc-tive age earn only30-40% more thanyoung people. Thiscan be comparedwith a 2-2.5 timesdifference in the USwhere relativewages may also

continue to grow until the age of 55.Obviously, the Russian mechanism ofwage-setting is greatly distorted. A largeproportion of the knowledge and skillsacquired by the older generations in theplanned economy have been dramaticallydevalued and these losses of human capi-tal are unlikely to ever be made up.

Minimal Importance ofMinimum Wage

For most of the transition period inRussia the minimum wage has been solow that its impact on the labor markethas been barely noticeable. Nor were low-productivity workers pushed out of thelabor market as normally happens indeveloped countries and post-socialistcountries. These workers kept their jobs,but had to accept a very low pay — oftenmuch lower than the official poverty line.The fact that a huge mass of unproductive(and low-paid) workers stayed in thelabor market was an important factorbehind the dramatic drop in labor pro-ductivity and, on the other hand, a signif-icant growth in wage inequality. It cannotbe ruled out, however, that the attempts toraise the minimum wage that have beenstepped up in recent years may result inlow-productivity workers being pushedout of the labor market.

Possible Future ScenariosThe persisting gap in wages is current-

ly accompanied by another importanttrend: a faster growth of real wages com-pared to labor productivity.

Russia has yet to work out institu-tional mechanisms for curbing wageinflation. In the countries of continentalWestern Europe such a mechanism is pro-vided by the coordination of the wagepolicy between employers and the tradeunions aimed above all at protecting theinterests (and maintaining the competi-tiveness) of the most competitive sectors.

The high level of wage inequalities,while contributing to a high turnover of

Wages in Russia: Evolution and Differentiation

Vladimir Gimpelson, Rostislav Kapelyushnikov

The growth in wage inequality and the wage race will most probably continue in the medium term

Age�Related Changes of Relative Wages in Russia (2005)and the US (2004) (Wages of 18�24 Age Group = 100%)

260

240

220

200

180

160

140

120

10018�24

All workers (Rus)

All workers (US)

Men (Russia)

Men (US)

Women (Russia)

Women (US)

25�29 30�34 35�39 40�44 45�49 50�54 55�59 60�64 65 andolder



manpower also spurs the wage race.Besides, it is a disincentive for employersto invest in personnel training whileencouraging them to "poach" workersfrom their rivals. The result may be fur-ther growth of wages not matched byhigher labor productivity.

There is a high probability that bothtrends will continue in the medium term.They will inevitably leave an imprint onall the other aspects in the country's eco-nomic development which until recentlyhas seen a growing labor supply. But thesituation is changing rapidly and withina few years the Russian economy mayface a constantly shrinking workforce.

At the same time, the continued highrate of economic growth in Russiawould mean that labor demand will con-stantly increase. A combination of theseopposite trends — steady decline of

labor supply and steady growth ofdemand for labor — will inevitably sendwages upward.

The progressive growth of the cost oflabor may undermine the competitive-ness of many Russian enterprises on theinternational and domestic markets. Thesectors that produce tradable goods willbe particularly vulnerable. In the futurethe shrinking and highly inelastic laborsupply may become the major constrainton the growth of the Russian economy.

Policy RecommendationsThe government's actions to bridge

wage inequalities could proceed in twomain directions:

• Strengthening the mechanisms ofmarket selection would speed up the "sift-ing off" of inefficient enterprises withlow-valued labor. That would stimulate

the reallocation of workers into competi-tive sectors with a higher price of labor,and would thus bridge the gap in wages.

• A lowering of administrativebarriers and the costs of migration wouldspeed up the flow of labor from low-wage to high-wage regions. An increaseof wages in sending regions and a declineof wages in receiving regions would elim-inate interregional differences and thusreduce the overall wage inequality.

Vladimir Gimpelson is the Director andRostislav Kapelyushnikov is Deputy Directorof the Labour Studies Center of StateUniversity — Higher School of Economics,Moscow. The article is based on Chapter 8 andthe Summary chapters of the book "Wages inRussia: Evolution or Differentiation" (SU —Higher School of Economics, 2007), edited bythe authors. BT

The transition from a command to a market economycaused a significant reallocation of resources, especially oflabor. Based on micro-level data from 11 rounds of theRussian Longitudinal Monitoring Survey covering the years1994-2006, we estimate labor market trajectories in Russiawith special attention to flows between state and private sec-tor and upward and downward occupational mobility. Inparticular, we estimate conditional probabilities at eachpoint in time for a person to move between different labormarket sectors: work for wages, self-employment/entrepre-neurship, unemployment and out-of-the-labor-force. Withinwork for wages, we identify those working in the public sec-tor or at state enterprises with no private participation ver-sus those working at private or mixed-ownership enterpris-es. In addition to the private/public division, we introduce adistinction between having a high-qualification job versus alow-qualification job. Our main findings are as follows:

• The public sector was shedding labor throughoutthe period, with the major flow being to jobs in the privatesector. The share of males staying within the public sectordeclined from almost 80% in 1990 to 27% in 1994. Thistrend continued in the period 1994-2000 with almost a halfof all males leaving the public sector. The share of femalesstaying in the public sector diminished during the early1990s and then stabilized but at a higher level compared tomales. This is consistent with other pieces of evidence thatpoint to the fact that many families in Russia diversify risksacross sectors with males working in the private sector andfemales working in the public sector.

• The private sector strengthened dramatically dur-ing the period and substituted for the public sector. Theshare of both males and females working in the private sec-tor reached about 60% in recent years. The flow from unem-

ployment to work in the private sector increased from 15%to 25% for males and from 10% to 17% for females after2000. This is another indication of the fact that the privatesector overtook the public sector in Russia, and more unem-ployed found jobs in the private sector compared to the pub-lic sector. As transition proceeded, more graduates startedtheir careers in the private sector or in self-employment.

• Self-employment served as a buffer in the period offinancial crisis. The stock of self-employed in the economy in2006 reached 3-4% of the working age population for malesand 2-3% for females, which is rather low by internationalstandards. Self-employment and entrepreneurship attractedlabor from wage jobs, especially in the public sector. Themost intensive changes took place in the early 1990s whileafter 2000 the in and outflows balanced out. The stability ofself-employment also increased dramatically and now, fol-lowing one year of self-employment, almost 50% of malesand 60% of females stay self-employed for a second year ina row.

• The transition-related movements of people withthe same qualifications between the public and the privatesectors are especially pronounced among those in mid andlow qualification jobs. About 20% of males and 15% offemales in low position jobs in the public sector moved tothe private sector. The reverse movement declined steadilythroughout the period and resulted in halving the share ofpeople holding low position jobs in the private sector fromalmost 20% in 1995 to 10% in 2005.

Source: CEFIR/NES Policy Paper No. 28 "Transition Patternsin the Russian Labor Market: 1994-2006" by Irina Denisova,Marcus Eller, and Ekaterina Zhuravskaya. BT

Russian Labor Market Flows in Transition

· 9


In many planned economies —including Czechoslovakia, EastGermany, and the Soviet Union — laborforce participation was obligatory dur-ing Communism. Although a gradualwithdrawal from the labor marketoccurred after the change of regime,labor force participation rates in manytransition countries, in particular amongwomen, remain high, when compared tomature market economies such asFrance, Germany and the US (see Table).

Using 2002 household income surveydata, we estimate the wage elasticity oflabor force participation using two dif-ferent definitions of wage: gross wage,ignoring the tax and benefit system, andthe effective net wage, which takes intoaccount the taxes paid and benefitsreceived. We interpret the differencebetween the two specifications as abehavior-based measure of welfare sys-tem disincentives, which we consider tobe more preferable for policy discussionsthan the traditional ex ante make-work-pay indicators.

Behavior of Czech LaborSupply is Comparable toOther Market Economies

We find that a 1% rise in the grosswage increases the probability of work-ing by 0.16 and 0.02 percentage pointsfor women and men, respectively. When

we substitute the gross wage with theeffective net wage, these semi-elasticitiesfall to 0.06 for women and 0.01 for men.Under both specifications and for bothgenders, wage sensitivity of the laborforce participation decreases with earn-ings. Gross wage elasticity in the topwage quintile is lower, by 47% forwomen and by 85% for men, than theelasticity in the bottom wage quintile;the corresponding differences for theeffective net wage are similar: 83% formen and 41% for women.

Measured as the difference betweenthe marginal effects for the gross and theeffective net wage specifications, the wel-fare system disincentives are greater forwomen than for men and vary only a lit-tle with wages. The marginal effect of theeffective net wage on labor force partici-pation is lower than the effect of thegross wage by 65% and 57% for womenand men, respectively. The disincentivesvary between 52% and 57% for menand between 63% and 67% for womenacross the five wage quintiles and tend tobe a bit lower for the rich.

Labor supply behavior in the post-transition Czech Republic is comparableto the one in mature market economiesin other aspects as well. While othersources of household income reducelabor force participation of both gen-ders, being married and having youngchildren has an adverse effect only on

women's decisionto work.

Our estimatesof the wage elastic-ity of labor supplyare at the lower endof the range of val-ues documented inprevious researchthat was mostlyfocused on themature marketeconomies.

The small sizeof our estimates isconsistent with

other empirical evidence that labor sup-ply in countries with high labor forceparticipation rates, such as in the CzechRepublic, tends to be less sensitive towages. We therefore expect a limitedresponse of labor supply to wages also inother post-transition countries whichhave retained high labor force participa-tion rates since the Communist period.

Policy ImplicationsOur findings suggest that changes in

taxes or benefits resulting in changes ofthe effective net wage will have the great-est impact on individuals at the bottomof the wage distribution and also onwomen (rather than on men).

Policy measures aimed at enhancinglabor supply should therefore primarilytarget these groups and focus on incometaxes at the lowest tax brackets and onthe potential disincentives of unemploy-ment benefits and benefits to low incomefamilies. Under the current benefitscheme, major changes in labor forceparticipation should not be expected inresponse to changes in tax levels becausethe estimated effects are fairly small evenfor the most wage-elastic individuals.

As part of the changes in the Czechwelfare system, tax reform implementedin January 2006 extended the range ofthe lowest tax bracket and decreased thetax rate in the lowest two brackets from15% to 12% and from 20% to 19%,respectively. Its focus on the reduction ofdisincentives due to the tax burden of theindividuals with wages in the lowest quin-tile of the wage distribution is in line withour finding that it is low wage individualswho are likely to respond to the changesin the effective net wage the most.

Alena Bisakova is Assistant Professor atCERGE-EI, Prague, Czech Republic. JiriSlacalek and Michal Slavik are Economists atEuropean Central Bank, Frankfurt am Main,Germany. Full text of the paper is availableat: www.cerge-ei.cz/pdf/wp/Wp351.pdf,CERGE-EI Working Paper No. 351. BT

Labor Supply Behavior in the Czech Republic

Alena Bicakova, Jiri Slacalek and Michal Slavik

Labor supply in countries with high labor force participation rates is less sensitive to wages

Pre and Post�Transition Participation Rates (percent)

1988 2005 1988 2005Czech Republic 97.0 94.8 93.1 81.6Slovakia 96.9 93.2 88.8 82.5Russia 96.2 92.5 91.7 86.3Germany* 90.6 93.3 60.8 80.0France 95.6 93.6 71.2 80.3United States 93.5 90.7 72.7 76.7

Notes: Participation rates (ratios of economically active to total population)for individuals between 25 and 54 years of age. * 1988 figures exclude the German Democratic Republic.Source: ILO, http://laborsta.ilo.org/.

Men Women



In all transition economies womenhave been one of the weakest groups inthe labor market and the ones who havehad to pay the cost of increasingly hardbudget constraints for the state, firms andhouseholds. As the state has progressivelyreduced its presence in the economy, it hasalso reduced expenditures on income sup-port schemes for maternity and the provi-sion of childcare facilities. Privatizationand market competition have also rein-forced firms' preferences towards hiringmen over women. Thus, economic transi-tion has increased the opportunity cost ofchild rearing, forcing women to substitutemarket for non-market work. This mighthave reduced the productivity of womenand, therefore, also the relative demandfor women's labor.

In Central and Eastern Europeancountries, firms have been constrainedby stronger labor market institutions andwage setting mechanisms, so female rela-tive wages have remained stable, whilefemale participation has reduced. In theCIS countries, however, labor marketinstitutions appeared to be weaker andfor a long time the state was taking onthe cost of social distress by maintaininghigher than acceptable levels of employ-ment and a living wage for all. This haspushed firms to reduce female wages,rather than employment. As a resultwomen might have been able to reduce

their effort and productivity due to asmaller reduction in labor supply, but inexchange for greater relative wage losses.

Belarus can be seen as an extremecase of the CIS model of transition, wherethe so-called model of "market social-ism" prevailed, and firms had to keep theentire workforce. Soft budget constraintsand the absence of bankruptcy risks forfirms translated into incentives forwomen to maintain practically the samelevel of labor supply. Indeed, from 1996to 2004 female participation was high atover 80% — at Soviet-era levels.Consequently, women had to accept wagereductions. This explains why in the faceof remarkably stable participation ratesof women, the gender wage gap (GWG),in terms of both total, net monthly andhourly wages has more than doubled.What are the causes of such deteriorationof women's position in the labor market?

Factors Driving the GenderWage Gap

To explore the issue, we develop asimple analytical framework and test itusing data from three rounds of theBelarusian Household Survey of Incomeand Expenditure (BHSIE) conducted in1996, 2001 and 2004. Our sampleincludes only the working age popula-tion holding a paid job.

Several offsetting factors appear to beat work. Sizeable positive shifts have beenobserved as to the educational level ofemployed women: university and second-ary school graduates have slowly butcontinuously crowded out women withlower levels of education. Moreover,women's attainments in education havebeen increasing at a faster rate thanmen's. However, the shifts in the industri-al composition of employment by genderhave been striking. While in 1996 menand women were almost evenly distrib-uted across sectors, a massive process ofhorizontal segregation has led an increas-ing number of women to move out of thehighly valued so-called "material produc-tion", as well as IT and communications— a sector providing some of the best-paid jobs in the country. At the same time

there is as increasing presence ofwomen in low-wage public service jobsconcentrated in traditionally female dom-inated sectors, like education and health.

The results suggest that the higherand increasing educational level madewomen able to "swim upstream" and tomore than offset unfavorable changes inthe structure of employment until 2001(see Figure). Furthermore, the redistribu-tion of women towards low-paid indus-tries and their concentration in the statesector had an opposite effect of wages,jointly driving the increase in the GWG.

ConclusionDespite the apparent stability of the

female participation rates in Belarus, theslow transition process has not been gen-der neutral and has hit women harderthan men. Our findings suggest that,although lower than in Russia andUkraine, the gender wage gap is on therise in Belarus.

Gender differences in pay are notonly unjust, they are also detrimental tothe functioning of the economy, as theycan lead to poverty and social exclusion.In Belarus, the contribution of workingwomen to the well-being of the house-hold is decisive, therefore if they face dif-ficulties in finding good jobs, householdsrun a serious risk of falling into poverty.

The policy priority should be onincreasing the competitiveness of womenin the labor market, by for example, con-trolling the gender distribution in educa-tional establishments and adjusting theeducation system to the changing needsof the economy. Working out schemesallowing women to combine motherhoodand work, including expanding part-timejob opportunities, would help to preventthe devaluation of female labor.

Francesco Pastore is Assistant Professor inEconomics at Seconda Universita di Napoli,and Alina Verashchagina is a PhD student atUniversita di Siena. Full text of the authors'paper "When Does Transition Increase theGender Wage Gap? An Application toBelarus" can be accessed at http://www.iza.org,IZA Discussion Paper No. 2796. BT

Gender Wage Gap in Belarus

Francesco Pastore and Alina Verashchagina

The slow transition process has not been gender neutral, and the gender wage gap is on the rise

Contribution of ObservedCharacteristics to the GWG

Note: Using log of net monthly wage as dependentvariable.Source: own estimates using BHSIE.

Hours of work

Marital status

Disability

Chernobyl

Ownership type

Industry

Region

1996 2001 2004

�0.08 �0.06 �0.04 �0.02 0 0.02 0.04 0.06 0.08

Work experi�ence

Education

· 11


Informal Employment and LaborMarket Segmentation in Ukraine

Hartmut Lehmann, Norberto PignattiUkraine has found itself in a pro-

longed transition recession for most of the1990s. Reform efforts have been inconsis-tent and incoherent, making Ukraine oneof the "laggards" among the transitioncountries. Only towards the end of theperiod did reform efforts by the govern-ment lead to positive growth of GDP.

Using the Ukrainian LongitudinalMonitoring Survey (ULMS), a nationallyrepresentative survey of the Ukrainianworking age population, we investigateto what extent the informal sector playsa role in labor market adjustment in atransition economy. We define informalemployment or informal economic activ-ity of the self-employed as employeeswithout a formal contract and self-employed activity that is not registered.Workers in formal employment relationsare treated as formally employed salariedworkers, even if they might receive partof their wages in an informal fashion, asundeclared "envelope payments".

From the data, we observe that theemployment structure has significantlychanged between 1991 and 2004 (seeTable). The agricultural and industrialsectors lost employment shares (even ifagricultural employment was still rela-tively large compared to many transitioneconomies) while the services sectorgrew. However, the "laggard" status ofthe Ukrainian economy is clearly reflect-ed in the low share of employment in pri-vatized and new private firms. For com-

parison, in Central European countries,by 1997, the average employment sharein the private sector was 65%. Verystriking is also the low share — in inter-national perspective — of the self-employed: 4% compared with 13% inboth the Czech Republic and Hungary,16% in Poland and 6% in Russia.

While in a centrally planned econo-my much of production took place inlarge conglomerates, the employmentshare of workers in relatively small firmswas accelerating in Ukraine between1997 and 2004. By 2004, nearly half theworkforce was employed in firms withless than 50 employees.

A Segmented Labor MarketAccording to conventional wisdom

growth in an economy translates into theexpansion above all of formal employ-ment relations. However, the stronggrowth of the Ukrainian economybetween 2003 and 2004, which broughtwith it a substantial fall in the unem-ployment rate, did not result in anexpansion of formal employment.Instead, the fall in unemployment wasentirely driven by growing informalemployment relations.

The analysis undertaken with thehelp of transition matrices, however,points to the existence of a segmentedlabor market in Ukraine. Our findingsindicate that most workers try to enter

formal employment and seem to useunemployment as well as informaldependent employment as waiting stagesfor entry into formal dependent employ-ment. The flow analysis also demon-strates that at all ages workers line up fordependent formal employment, which isby far the most favored destination. Atthe same time, some workers are forcedto take up informal salaried jobs, while aminority engage in informal jobs of theirfree will.

Our wage analysis further confirmslabor market segmentation. In particular,our analysis points to a segmented labormarket for dependent workers. This seg-mentation includes formal jobs, "uppertier" informal jobs that are well remuner-ated but have restricted access, and amajority of informal jobs that workersare forced to take up but bring no gainwhen workers move into them. Wheneverpossible, workers move from these latterjobs to formal employment relations.

There is less segmentation in urbanself-employment, as returns to both for-mal and informal self-employment are ofthe same magnitude. The difference-in-differences analysis that compares earn-ings outcomes of stayers and movers alsoconfirms our contention that informalself-employment in urban areas is volun-tary since movement into this type ofemployment is associated with large gainsin earnings. In rural areas, informal self-employment is above all linked to subsis-

tence agriculture with the extremelylow returns inherent in this type ofeconomic activity.

Hartmut Lehmann is a Professor ofEconomic Policy at the University ofBologna and Program Director of theIZA research area "Labor Markets inEmerging and Transition Countries".Norberto Pignatti is a Research Fellowat the Department of EconomicSciences of the University of Bologna.The study can be accessed athttp://ftp.iza.org/dp3269.pdf (IZADiscussion Paper No. 3269). BT

Formal employment is by far the most favored destination for workers

Employment Changes by Sector, Ownership and Size, 1991�2004

1991 15.98 32.01 47.21 1.59 1.26 0.33 33.77 23.541997 16.30 26.21 52.89 11.73 8.33 2.02 41.36 30.132004 13.59 23.07 59.18 19.59 20.09 4.36 53.98 43.52

Agri�culture

Sector (% share)*

Notes: * Excluding public administration share. ** Including public administration employees. Source: ULMS.

Ownership (% share)**

Industry Services Privat�ized

NewPrivate

Non�Agricultu�

ral Self�Employed

Firms withover 100

employees

Firms withless than 50employees

Size (% share)



Informal Employmentin Bosnia and Herzegovina

Gorana Krstic and Peter Sanfey

According to IMF estimates, real GDPin Bosnia and Herzegovina (BH) trebledover the period 1996-2004. However,there is still great uncertainty about thesize of the Bosnian economy, GDPgrowth, unemployment, etc. as officialstatistics fail to take account of informalactivities, which are generally believed tobe widespread throughout the country.

We study the degree of flexibility inthe labor market and the role of formalversus informal activities for reducingpoverty and inequality and enhancinglife satisfaction in BH. Our analysis isbased on panel data from the LivingsStandards Measurement Studies takenbetween 2001 and 2004.

Perhaps the most remarkable obser-vation from the data is the dramaticincrease, by nearly ten percentage points,in the labor force participation ratebetween 2001 and 2004. The data alsoshow how significant the informal sectorremains — representing nearly 43% oftotal employment in 2004, although itssize as a percentage of total employmenthas fallen between 2001 and 2004.Compared to the formal sector, monthlyearnings in the informal sector are onaverage about 30% lower.

Mobility is Surprisingly HighWe find that the degree of movement,

even in one year, from one category of thelabor force to another is surprisingly highwhen compared to other transition coun-tries. The informal sector is a significantsource of labor mobility, providing morejob opportunities for the unemployed andinactive but also having more job destruc-tion than the formal sector. For example,almost two-thirds of those who lost orleft a job between the two surveys had ajob in the informal sector in 2001.

More educated people are the mostlikely to move from informal to formalemployment. For instance, workers whocompleted college (in 2001) were 30%more likely to move from informal toformal employment, relative to thosewith secondary education. Across sec-

tors, workers in the service sector weremost likely to move from informal toformal employment; and those in agri-culture least likely.

Formal Employment isBetter at Reducing Poverty

Our findings indicate that informalemployment helps to reduce poverty butby much less than formal employment.Transitions to formal employment wereassociated with a higher probability ofescaping poverty relative to staying ininformal employment. More than 65% ofworkers who moved out of povertybetween 2001 and 2004 remained orbecame employed in the formal sector.Informal workers were less likely toescape poverty over this period relative toformal workers and saw lower consump-tion increases than formal workers. Infact, it is the formally self-employed whofaced the lowest poverty incidence, sug-gesting that formal self-employment maybe an important route out of poverty.

Those who made the move frominformal to formal jobs gained signifi-cantly in terms of increase in earnings,with average monthly earnings for thisgroup rising by 26% (in nominal terms)over a three-year period.

Higher InequalityUsing various inequality measures we

establish that, firstly, earnings in formalemployment were higher than in infor-mal employment in 2001 and 2004, andthe ratio between the two increasedslightly over that time. Secondly, inequal-ity in both sectors declined over time.Thirdly, inequality was higher in bothperiods in the informal sector relative tothe formal sector, possibly due to the rel-atively high minimum wage, which isenforced in the formal but not in theinformal sector.

The Least HappyLooking at how subjective estimates

of well-being are correlated with differ-

ent labor market positions in 2004, wefind that workers in formal employmentshowed higher levels of satisfaction thaninformal employees. The formal self-employed reported the highest levels ofsatisfaction. With the sole exception ofthe unemployed, informal employeeswere the least happy among the work-ing-age population, even when control-ling for differences in income.

ConclusionsShould we care about the large size of

the informal sector, and if so, what canbe done about it? Even though the infor-mal sector represents an important safe-ty net for many individuals and families,there are good reasons for the authoritiesin BH to try to bring these people intothe formal economy. The main reason isthat informal economic activities oftenact as unfair competition for those whoplay by the rules, and they also representa loss of tax revenues to the state, imply-ing a higher burden for others. An addi-tional benefit of bringing people into for-mal employment is that this may lead toan improvement in the accuracy of BH's(up to now) notoriously unreliable realeconomy data.

Our results on self-employment sug-gest the need for further efforts to pro-mote entrepreneurship and the creationof micro-enterprises. Many highly edu-cated people are stuck in low-skill infor-mal jobs and run the risk that their skillswill be eroded over time and thereforeoptions to move to better-quality jobs inthe formal sector will be reduced. Amuch better option for some is to opentheir own businesses.

Peter Sanfey is a Lead Economist at theEBRD and Gorana Krstic is a SeniorEconomist at the Economics Institute,Belgrade. Full text of the paper can beaccessed at: http://www.ebrd.com/pubs/econo/wp0101.pdf (EBRD Workingpaper No. 101). The paper has been pub-lished in Economic Systems, vol. 31 (2007),pp. 311-335. BT

Highly educated people, stuck in low�skill informal jobs, run the risk that their skills will be eroded

· 13


After initial economic contraction inthe early 1990s, Romania experienced asecond period of economic decline in1996, which was mainly caused by a lackof enterprise restructuring. The recoverywas slow and did not produce significantresults until 2000. Since then, the econo-my has grown at an average of 4-5% peryear. Growth was accompanied by thefall in registered unemployment from11.5% in 1999 to 9% in 2001.

To help the unemployed during thetransition period, as early as 1991, theRomanian government adopted passivelabor programs, such as unemploymentbenefits. In addition, in 1997 it launchedactive labor market programs (ALMPs).Two programs offered on a relativelylarge national scale were:

• Public Employment Services(PES), which offered counseling, jobsearch and placement assistance, and

• Small-Business Assistance(SBA), which provided counseling indeveloping and implementing a businessand often included financial assistance.

Since the primary objective of bothprograms was to get the unemployedworkers back into jobs that were, at leastimplicitly, as good as previous ones, Iexamine the direct effects of the two pro-grams, that is, workers' reemploymentprobabilities (in paid or self-employedjobs), and their earnings at the new job. Ialso determine which population groupsthese programs work best for, and relatethese differences to different institutionalset-ups and theoretical explanations.

The evaluation is conducted usingrich survey data and matching methods.The analysis is based on a 2002 survey of2,610 persons who registered at theEmployment Bureau during 1999. Abouttwo-fifths of the sample was ALMP par-ticipants, and the rest were unemployednon-participants who were registered asunemployed around the same time andin the same county as participants. Thedata allowed us to observe earnings andemployment status at least 24 monthsafter the programs had started.

ALMPs are Superior toNon�Participation

Consistent with recent empirical evi-dence in developed, transition, and devel-oping countries (see references inBibliography), the analysis shows thatparticipation in either program was suc-cessful in getting the unemployed back towork. Compared to non-participation,

• PES improved participants' eco-nomic outcomes in all dimensions. Itincreased the probability of beingemployed at the time of the survey by8.45 percentage points (or 20%) andimproved the likelihood of beingemployed for at least six months duringthe two-year period 2000-2001 by 6.22percentage points (or 9%). It alsoreduced the accumulated number ofmonths participants were unemployedby almost two months (or 17%); and itincreased average current monthly earn-ings by 57,000 lei (or 22%) and averagemonthly earnings during 2000-2001 by87,000 lei (or 28%).

• SBA was also quite successful,although not in all dimensions. Itincreased by 8.38 percentage points (or12%) the likelihood of being employedfor at least six months during the two-year period 2000-2001; and it reducedthe accumulated number of months par-ticipants were unemployed and receivingunemployment benefit payments byalmost 15%. However, SBA did not seemto increase the average monthly earningsof its participants relative to non-partici-pants — perhaps because entrepreneursare more likely to under-report theirearnings than wage and salary workers.

When comparing the relative effec-tiveness of the two programs, I find thatin terms of the accumulated employmenteffects, PES was superior to SBA.Moreover, SBA participants would havebeen better off had they participated inPES instead, as PES would have increasedtheir likelihood of being employed for atleast 12 months in the period 2000-2001by 17.02 percentage points (or 25%).

Targeting Different GroupsThe analysis of the suitability of these

programs for different population sub-groups (age, region of residence, educa-tion, unemployment duration, and gen-der), as well as the channels throughwhich the programs worked shows that:

• In economies with large infor-mal job-search channels, PES are relative-ly more effective for workers with littleaccess to those channels — such as youngworkers, and those living in rural areas.

• In economies with segmentedlabor markets, SBA programs work betterfor workers with less access to the primarylabor market sector, such as less-qualifiedworkers and those living in rural areas.

• However, if the policy decisionis whether to offer PES or SBA to unem-ployed workers in transition countries,PES are better suited for workers with-out a high-school degree and SBA pro-grams are more effective for workerswith a high-school degree.

Cost�EffectivenessA comparison of the costs per client

with the economic benefits reveals thatthe cost per client served was 123,740 leifor PES and 179,150 lei for SBA, while thepredicted earnings over the 2000-2001amounted to an annual sum of 1,047,840lei for PES, and 4,783,200 lei for SBA.Thus, in both cases, benefits cover by farthe cost per client served, indicating thatboth programs were cost-effective.

Given the small cost differencesbetween the two programs, and benefitsof each program for certain sub-groups ofthe unemployed, the policy recommenda-tion is to target each program to thosesub-populations most likely to benefitfrom participation.

Nuria Rodriguez-Planas is an AssociateProfessor at Department of Economics andEconomic History, Universitat Autonoma deBarcelona, Spain. Full text of the paper can beaccessed at: www.iza.org (IZA Discussionpaper No. 3051). BT

How Do Active Labor MarketPrograms Work in Romania?

Nuria Rodriguez�Planas

The programs offer tangible benefits to specific sub�groups and should be targeted accordingly



Russian Migrants to Russia

The collapse of the Soviet Union gaverise to massive population movementsamong the newly independent states.Ethnicity was a major determinant ofmigration among the former SovietUnion (fSU) countries. The biggest ofthese movements was migration of ethnicRussians and Russian-speaking peoplefrom the former Soviet republics back toRussia. According to a census, 5.2 millionresidents of Russia, or 3.6% of its popu-lation, said in 2002 they had lived outsidethe country in 1989. Almost all of themmoved to Russia in the early and mid-1990s. The majority of migrants arrivedfrom Kazakhstan (1.4 mln), Ukraine (0.8mln), and Uzbekistan (0.6 mln).

Compared to typical internationalmigrants, Russian immigrants to Russiahad fewer assimilation problems, as theywere either of Russian nationality orspoke Russian as a native language.Moreover, they had received a compara-ble education (as educational standardswere uniform across the Soviet Union)and had a similar cultural background.They also faced smaller informationalbarriers as they could acquire informa-tion about their destination more easily.

While the decision to leave was in asense forced upon migrants by politicalchanges, they still had a choice of whereto settle in Russia. Russia's more than 80regions vary dramatically on many eco-nomic and social characteristics, includ-ing labor market conditions. Regionaldistortions in supply and demand forvarious skills have persisted over timedue to high interregional barriers tomovement of labor and capital.

Using Russian LongitudinalMonitoring Survey data from 2004-2005 (which allow us to identify immi-grants), I test whether migrants sortedthemselves across regions according tothe relative demand for their skills on theregional labor market, i.e. where theycould expect to get the highest payoff fortheir skills. If this was the case, we wouldexpect migrants to compete for jobs withfellow immigrants rather than withlocals. Hence, their labor market out-comes should be affected by the numberof other immigrants in the location.

The data show that almost all Russianregions received some immigrants fromthe fSU. A relatively high number settlednear the Russian border with other for-mer Soviet republics. This is not surpris-ing, given smaller distance and informa-tion-related costs and higher cross-bordercommerce opportunities. One of the high-est concentrations of migrants is observedin the oil-rich Tymen region, whichoffered many job opportunities in thethriving energy industry. Moscow and St.Petersburg received a relatively smallnumber of migrants due to restrictivelocal migration policies.

So what affects the share of migrantsin the region? My analysis suggests thata higher share of Russian immigrants in2002 is found in regions that had:

• low unemployment rate in themid-1990s;

• better regional infrastructure, inparticular, greater availability of hous-ing;

• smaller distance to other fSUrepublics (bordering regions).

Brighter Prospects in SmallImmigrant Communities

How then does the size of immigrantpopulation in the region affect the labormarket position of immigrants relative tolocal population? It should be noted thataccording to the data Russian migrantsare on average slightly younger than thelocal population, but hardly differ interms of education, skill level and otherindividual characteristics.

The regression results show that whenthere are few migrants in the region theyare more likely to be employed comparedto locals. Specifically, in the regions withfew migrants their employment probabil-ity is over 99% while the employmentprobability for a local resident of similarage, schooling, and labor market experi-ence is around 95%.

This effect gradually declines with thegrowing share of migrants in a region andeventually becomes negative. In theregions with the highest shares ofmigrants the immigrants' predicted unem-ployment rate is over 12%, which is three

times higher than the unemployment ratefor local workers with similar educationand experience. It should be noted thatemployment probability for local resi-dents does not depend on the size of themigrant population in the region.

Wages Higher for MigrantSkilled Workers

When considering four broad skillcategories: manager, professional, skilledand unskilled worker, I find that:

• migrant skilled workers onaverage earn more than local skilledworkers with a similar level of educationand experience;

• migrant managers earn lesscompared to local managers, which mayindicate migrants' lack of sector-specificor location-specific knowledge that maybe important for a manager;

• wage premiums for migrantworkers mainly exist within sectors.

Thus, the evidence indeed suggeststhat migrants chose the location wheretheir skills were most in demand andwhere they had little competition withlocals for available jobs. In other words,they filled some regional labor marketniches left vacant by the local popula-tion. With the arrival of more migrantswith similar skills, however, the competi-tion among migrants intensified andtheir employment probability declined.

In the presence of barriers to interre-gional migration in Russia, the inflow ofRussian migrants has probably had someequilibrating effect on regional labormarkets. At the same time, betteremployment opportunities for migrantsin the regions with smaller migrant com-munities and persisting wage premiumsfor some skill groups among migrantsindicate that there still exist substantialbarriers to migration among the regions,and this preserves large regional dispari-ties and results in an inefficient labormarket structure in Russia.

Olga Lazareva is a Senior Economist atCEFIR, Moscow. Full text of her paper canbe accessed at www.cefir.ru (Working PaperNo. 117). BT

Migrants chose the region in Russia where their skills were most in demand

Olga Lazareva

· 15


This article describes recent trends inmigrants' remittances to developingcountries and provides an overview ofthe implications of remittances for devel-opment. It concludes by outlining somenew technologies for remittance trans-fers and the regulatory and other chal-lenges that have still to be overcome.

Recent TrendsRemittance flows to developing coun-

tries are estimated to have reachedUS$240 billion in 2007, up from US$221billion in 2006 and more than double thelevel reached in 2002 (see Table). Thisamount, however, reflects only transfersthrough official channels — the true sizeof remittances received by developingcountries including unrecorded flowsthrough formal and informal channels isbelieved to be in excess of US$300 bil-lion, or nearly three times the size of offi-cial development assistance.

Latin America and the Caribbeanremains the largest recipient of (record-ed) remittances, but the growth of remit-tances to this region has slowed marked-ly in recent months. Remittances

received by Mexico grew by only 1%during 2007, compared to over 20%annual growth in 2002-06. The slow-down in Mexico is partly due to theweak job market in the United States,especially in the construction sector aswell as the recent increase in enforce-ment efforts. Apprehensions along theUS-Mexico border have declined bynearly 50% from the level in 2000, indi-cating a decline in the number ofmigrants trying to enter the United Stateswithout proper documentation. Thedeceleration in the growth of remittancesis less marked in rest of the LatinAmerica and the Caribbean region.Interestingly, while the US remains themajor destination for Latin Americanmigrants, there appears to have been ashift towards Spain and other Europeancountries in recent years.

Countries in South Asia and EastAsia are experiencing robust growth inremittances. Remittances rose by 13% inthe Philippines and by over 20% inBangladesh and Pakistan in 2007. Highoil prices and strong economies in theoil-exporting Middle Eastern countries

are contributing to strong demand formigrant labour. Many of these remit-tance-receiving countries are also experi-encing an appreciation of their curren-cies relative to the U.S dollar (and alsorelative to currencies linked to the USdollar such as the UAE dirham) which isreducing the purchasing power of remit-tance recipients. While remittances toMexico, India and the Philippinesincreased by 38%, 44%, and 48%respectively during 2004-2007 in nomi-nal U.S dollars, after accounting for theappreciation of these countries' curren-cies against the U.S dollar and domesticinflation, the respective increases were by19%, 13%, and 3% during the threeyear period. Recorded remittance flowsto Sub-Saharan Africa are very small anda large share of remittances appears to bethrough informal channels.

In 2007, India, Mexico, China and thePhilippines were the top four recipients ofremittances. The top ten recipients listalso includes several high-income coun-tries such as France, Spain and Britain —these countries receive remittances most-ly from the other high-income Europeancountries. As a share of GDP, however,remittances to these countries were about0.5% or less in 2007. In contrast, remit-tances as a share of GDP are the highestin smaller countries such as Tajikistan,Moldova, Tonga, and the KyrgyzRepublic, where remittances exceeded aquarter of the GDP (see Figure).

Implications for Develop�ment

Remittances are a large, stable andcountercyclical source of externalfinancing in many poor countries.Remittances as a share of personal con-sumption expenditure rose in Indonesia,Mexico and the Philippines followingfinancial crisis and in Central Americafollowing natural disasters. Remittanceshave provided a lifeline to the poor inHaiti and Somalia, in countries affectedby political conflict.

Remittances: Recent Trends and Development Implications

Dilip Ratha

Remittances are a large, stable and countercyclical source of external financing in many poor countries

Global Flows of International Migrant Remittances (US$ billion)

INFLOWS 2002 2003 2004 2005 2006 2007e 2002�07

Developing countries 116 144 161 191 221 240 107%East Asia and the Pacific 29 35 39 47 53 58 97%Europe and Central Asia 14 17 21 29 35 39 175%Latin America and the Caribbean 28 35 41 49 57 60 115%Middle�East and North Africa 15 20 23 24 27 28 86%South Asia 24 30 29 33 40 44 81%Sub�Saharan Africa 5 6 8 9 10 11 116%

Low�income countries 32 39 40 46 56 60 88%Middle�income countries (MICs) 84 105 121 145 166 179 114%

Lower MICs 55 68 76 90 102 112 103%Upper MICs 29 37 45 55 63 67 136%

High income OECD countries 53 60 67 68 72 74 40%High income non�OECD countries 1 2 3 4 4 4 298%

Change

Source: Authors' calculation based on data from IMF Balance of Payments Statistics Yearbook 2007.Remittances are defined as the sum of workers' remittances, compensation of employees, and migrant trans�fers — see www.worldbank.org/prospects for data definitions and the entire dataset.



Cross-country analysis shows that a10% increase in per capita remittances isassociated with a 3.5% decline in theshare of poor people. In Nepal, remit-tances are believed to have reduced theextent of poverty by 3-5 percentage pointsover the last decade. Remittances mayhave reduced the share of poor people inthe population by 11 percentage points inUganda, 6 percentage points in Bangla-desh and 5 percentage points in Ghana.

Remittances are also associated withincreased household investments in edu-cation, health, and small business invest-ments. In Mexico, Guatemala, Nicaraguaand Sri Lanka children in remittancerecipient households have higher birth

weights and better health indicators thanother households. Remittances from theUnited States accounted for about onefifth of the capital invested in microenter-prises in urban Mexico.

Remittances can improve financialaccess for migrants and remittance recip-ients. Increasing access to bank accountsfor migrants and their families back homewould not only provide them a lower costand more secure remittance channel, itwould also enable them to save more.Banks, private firms and microfinanceinstitutions in Mexico, El Salvador, India,Peru, and the Philippines offer transna-tional consumer loans, mortgage loans,and microfinance products.

Remittances can improve the accessto international finance of the countriesof origin. Large banks in some countries(e.g., Turkey, Brazil) have used theiraccess to foreign currency-denominatedremittances as collateral for raising inter-national bond financing at lower costsand longer maturities. Preliminary esti-mates suggest that countries in Sub-Saharan Africa alone can potentiallyraise, annually, US$1-3 billion by reduc-ing the cost of international migrantremittances, US$5-10 billion by issuingbonds to the overseas diaspora, andUS$17 billion by securitizing futureremittances and other future receivables.These mechanisms can be used to raisefunds for development projects such aslow-income housing, or power andwater supply.

New Opportunities andChallenges

The remittance industry has experi-enced a shift in remittances from infor-mal to formal channels and remittancecosts have fallen in recent years. Averageremittance costs in the US-Mexico corri-dor, one of the largest remittance corri-dors, fell dramatically by nearly 55%between 1999 and 2004, but appear tohave levelled off lately. The cost for send-

Top Recipient Countries

Sources: See Table.

US$ billion

27,0 25,7 25,0

17,0

12,58,9

7,2 7,0 7,0 6,8

as % of GDP

36,2 36,232,3

27,4 25,6 24,5 24,3 22,8 21,6 20,3

IndiaChina

Mexico

Philippines

FranceSpain

Belgium

Germany

U.K.

Romania

Tajikistan

MoldovaTonga

Kyrgyz Rep.

Honduras

Lesotho

Guyana

LebanonHaiti

Jordan

Emigration, 2005• Stock of emigrants: 47.6 million or 10.0% of pop-

ulation• Top 10 emigration countries: Russia, Ukraine,

Turkey, Kazakhstan, Poland, Serbia and Montenegro,Uzbekistan, Belarus, Bosnia and Herzegovina, Azerbaijan.

• Identified destinations: high-income OECD coun-tries (28.5%), high-income non-OECD countries (5.3%),intra-regional (57.6%), other developing countries (0.2%).

Skilled Emigration, 2000• Emigration rate of tertiary educated (top 10 coun-

tries): Croatia (29%), Bosnia and Herzegovina (29%),Macedonia FYR (21%), Albania (20%), Serbia and

Montenegro (17%), Slovak Republic (15%), Romania(14%), Estonia (14%), Poland (12%), Hungary (12%).

• Emigration of physicians: 19,555 or 1.3% of physi-cians trained in the region.

Immigration, 2005 • Stock of immigrants: 31.1 million or 6.5% of pop-

ulation (compared to 190.6 million or 3.0% for the world)• Female as percentage of immigrants: 57.2% (com-

pared to 49.6% for the world).• Top 10 immigration countries: Russia, Ukraine,

Kazakhstan, Turkey, Uzbekistan, Belarus, Poland, Croatia,Serbia and Montenegro, Czech Republic.

Remittances, 2007Top five remittance recipients: Romania (US$6.8 bn),

Poland (US$5.0 bn), Serbia and Montenegro (US$4.9bn),Russia (US$4.0 bn), Bosnia and Herzegovina (US$1.9 bn).

Source: Migration and Remittances Factbook compiled by DilipRatha and Zhimei Xu, the World Bank, www.worldbank.org/prospects/migrationandremittances. BT

Migration in Europe and Central Asia: Some Facts

Population in Europe and Central Asia, millions, 2006 460 Labor force, millions, 2006 210Urban population, % of population, 2006 63.8GNI, US$ billions, 2006 2,421GNI per capita, Atlas method, US$, 2006 4,796GDP growth, avg. annual %, 2002�2006 6.2

· 17


ing money between developing countries(South-South remittances) continues toremain high.

The remittance industry has alsoseen the introduction of cell phone-based remittances and several pilotsinvolving remittance-linked financialproducts. In the Philippines, G-Cash andSMART provide deposit, credit andmoney transfers through mobile phones.In Kenya, Vodafone through its sub-sidiary Safaricom, has launched amobile banking service M-PESA whichhas more than one million clients. InIndia, Visa has linked up with some ofthe major commercial banks to extendits domestic card-to-card transfer serv-ice to mobile phones. Western Unionand the GSM Association have also

announced a pilot project for mobilephone remittances.

Regulations to stop money launder-ing and counter the financing of terror-ism appear to have become a constraintto reducing remittance costs, especiallyfor smaller remittance service providersand mobile operators dependent on cor-respondent banks. Many countries arenow considering simpler prudential reg-ulations for remittance service providers.Many governments are also beginning torealize that exclusivity contracts betweennational post offices and a single moneytransfer company stifles competition andin the end, hurts poor migrants and theirfamilies. It is time now for policymakersto find ways for harmonising telecomand financial services regulations.

This article draws on "LeveragingRemittances for Development" Policy Briefby Dilip Ratha, Migration Policy Institute,Washington DC, 2007 (www.migrationpoli-cy.org/pubs/MigDevPB_062507.pdf), and"Remittance Trends" 2007 brief(http://siteresources.worldbank.org/EXTDEC P R O S P E C T S / R e s o u r c e s / 4 7 6 8 8 2 -1157133580628/BriefingNote3.pdf) issuedby the Development Prospects Group, theWorld Bank. Dilip Ratha is Senior Economistand Manager of the Migration andRemittances Team at the DevelopmentProspects Group of the World Bank. Thanksto Uri Dadush, Sanket Mohapatra and SoniaPlaza of the World Bank for discussions andK.M. Vijayalakshmi and Zhimei Xu for col-laboration and data collection. BT

Illegal migration is a problem of growing scale andimportance. The most conservative estimates amount to tensof millions of irregular immigrants worldwide; in the USonly, this number stands at 12 million. The InternationalOrganization for Migration believes that half of all newentrants into developed economies are illegal.

According to the United Kingdom Home Department,75% of illegal migrants use the expensive services of smug-glers. Given increasing international wage differentials,unstable political circumstances and the importance offinancial constraints in most source countries of migration,the demand for human smuggling services may rise further.

Migrants and their families often cannot self-financecosts that can reach or even exceed US$50,000 (estimatedChina-US smuggling fees) and, hence, put themselves indebt. According to surveys among illegal Chinese immi-grants 90% had to borrow money to pay the fee. Smugglersand other intermediaries finance the costs of transportation,provide forged documents and assist in entering the countryof destination. The debt repayment is taken out of migrants'wages in sweatshops and restaurants that are related to theseintermediaries. The migrant thus provides his labor as col-lateral to the smuggler or the smuggler's business partnersuntil the debt is paid back.

As long as a migrant is employed in the illegal sector, thedebt-holders can enforce the contract through coercion. Thisis more difficult when a migrant works in the legal sector ofthe economy, where s/he receives some protection from thehost country's legal system. Thus, migrants who move suc-cessfully to the legal sector can default on their debt pay-ment. But, at the same time, they become visible to lawenforcement agencies and bear higher risks of being deport-ed to the source country.

Our theory of financial contracting between wealth-con-strained migrants and intermediaries examines the effect of

various policies on illegal immigration and finds that:• Stricter border controls decrease overall immigra-

tion, but may result in an increase of debt-financed migra-tion, as they may induce illegal migrants to move from self-financed migration to debt/labor contracts.

• Stricter deportation policies increase rather thandecrease the flow of illegal migrants, as migrants are lesslikely to try moving to the legal sector of the economy andthere are, therefore, less defaults on debt repayments.Financing migrants becomes more rewarding for intermedi-aries and, hence, that the flow of migrants financed bydebt/labor contracts increases. At the same time, the netpresent value of migration for wealthier self-financedmigrants decreases, which reduces their inflow. Migrant skillcomposition deteriorates, given the strong positive correla-tions between wealth and skills in developing countries.

• There can be complementarities between employersanctions and deportation policies. With intensified employ-er inspections and sanctions, deportation policy becomes amore effective tool for decreasing migration.

What about the effect of amnesties on decisions tomigrate? Since each amnesty raises expectations for futureamnesties, it results in higher incentives to migrate, especial-ly for the highly skilled. On the other hand, anticipating thatimmigrants may obtain legal status through amnesty, inter-mediaries will refuse to lend. Hence, amnesties will decreaselow-skilled migration and improve the skill composition ofincoming migrants.

Guido Friebel is Researcher at Toulouse School of Economics,France and Professor at the University of Frankfurt, Germany.Sergei Guriev is Professor and Rector at New Economic School,Moscow, Russia. The authors' paper "Smuggling Humans: ATheory of Debt-financed Migration" is published in the Journal ofEuropean Economic Association, December 2006. BT

Debt�Financed Migration in the 21st Century

·18


New Findings

The two pieces below discuss the impact of the ongoing financial crisis on the emerging markets inEurope, and these countries’ prospects in the medium term.

The financial crisis that has started inthe US and spread to other countries isthe biggest in decades. Failures of banksand building societies in the US,Germany, France, and the UK (the bankrun on Northern Rock was the first inthe UK since 1866) point to the severityof the situation. About one millionhomes in the US are now in default, andthe number is rising. No country shouldfeel immune from the crisis, as it hasstarted to come around the world.

I believe this crisis is caused byhuman psychology and a boom mentali-ty, speculative excess and the correctionof that. In just nine years from 1997 to2006 home prices in the US nearly dou-bled, and in some cities, such as LosAngeles or New York, prices went up by3 to 3.5 times. At the same time, con-struction costs in the US actually wentdown in real terms; the population wasgrowing steadily; interest rates had beenfalling for 20-30 years, and real rentsstayed unchanged (so demand for hous-ing services did not increase).

Interestingly, these events occurredsimultaneously in many countries, bothdeveloped and developing. This is nocoincidence, as this indicates that theeconomy is globalizing and a certain wayof thinking tends to become pervasiveamongst everyone as humans communi-

cate so much with each other. Many peo-ple in different countries believe that realestate prices can only increase as there isonly so much land, the population isgrowing, and so is the economy. But whyshould housing be a good investment? Ithas to be maintained, it depreciates, goesout of style... While there had indeedbeen a lot of land speculation before, thepopular view that investments in homesare the best way to secure one's future isa new one.

In the recent boom the BRIC coun-tries have played a role. Their rapidgrowth spooked people in developedcountries, as well as spreading anxietiesabout how to fit in to the new capitalistworld.

Financal markets can indeed beimproved to better deal with some ofthese psychological problems, such associal contagion and wishful thinking.The current crisis is providing us withthe opportunity to advance our financialmarkets. After the 1929 stock marketcrash the US took some radical meas-ures, by for example creating a Securitiesand Exchange Commission, FederalDeposit Insurance Corporation, FannieMae, and Home Owners LoanCorporation. These are all governmentinstitutions that supported the financialmarkets and made them work again.

This time this is not as bad a crisis, but itshould also be dealt with properly.

Despite negative events recently, thereis a number of very positive things goingon in the financial markets, including:

• great advances in financial the-ory;

• advances in behavioral financein the past 20 years;

• a revolution in informationtechnology;

• the democratization of finance,i.e. making sophisticated financialinstruments available to more people.

Yet we need better markets for risksthat really matter to people, such as per-sonal income risks, longevity risks (therisk of outliving one's wealth), andmortgage risks (i.e. a decline in homeprice). We can also expand the scope ofmarkets for energy, and manage therisks of GDP decline by issuing GDP-linked securities. There is enormouspotential for improvement in humanwelfare from radical financial innova-tion in these areas.

Robert J. Shiller is Professor of Economics,Yale University, and Co-Founder and ChiefEconomist, MacroMarkets LLC. The piece isbased on his presentation at New EconomicSchool in Moscow in March 2008. BT

Robert Shiller, Yale University: "Crisis is anOpportunity to Advance Financial Markets"

What impact will financial turmoil insome developed countries have on eco-nomic growth in Europe?

Europe will not be able to avoid theeffects of global shocks. Historicallythere has always been a spillover effect ofUS economic slowdown onto theEuropean economy. For one percentage

point drop in growth in the US thegrowth in Europe will slow down by onaverage 0.5 percentage points. We expectthat growth in the advanced Europeaneconomies will decline by 1.25 to 1.5percentage points in 2008 and will weak-en further in 2009.

Emerging European economies maybe more vulnerable to a global slow-

down than the advanced economies. Thedirect trade effect from a sharp down-turn abroad is likely to be significantbecause countries in the region are high-ly open, with exports accounting for 30-80% of GDP. Moreover, the heavydependence on foreign capital leaves theregion exposed to an abrupt retrench-ment of capital inflows. The appreciation

Neven Mates, IMF: "Convergence willContinue, Albeit at a Slower Pace"

· 19


of the euro and the sharp increase inheadline inflation, driven by food andenergy prices, is adding to the troubles.In emerging European markets GDPgrowth is projected to decline from6.9% in 2007 to 5.5% in 2008 and5.2% in 2009.

Thus, growth in emerging economieswill remain quite robust and the conver-gence towards more advanced Europeanpeers will continue, although at a slow-er pace.

What are the main challenges for theemerging market economies?

Tighter integration with the moreadvanced European economies hasallowed emerging European economiesto grow considerably faster than coun-tries with similar income levels in otherregions. A very good growth perform-ance over the last five years was achievedthanks to technological progress andincreasing investment. Besides, there hasbeen a very strong link between growthand financial deepening.

Yet, many emerging economies inEurope have current account deficits andlevels of external debt that, as a share ofGDP, are considerably higher for theirincome levels than the rest of the world's.This increases vulnerabilities to external

shocks — risks that have been rising con-siderably with the ongoing global finan-cial turbulence. In some of the countries,primarily in the Baltic countries,Bulgaria, Romania and Slovakia, the cur-rent account deficits are excessive.

In many cases, loose fiscal and mone-tary policies have contributed to largecurrent accounts deficits and increases inexternal vulnerability. On the positiveside, foreign direct investments con-tributed a lot to financing the currentaccount deficits. Besides, it was domesticdemand rather than real effective curren-cy appreciation that was the main reasonfor this worsening of current accountdeficits. This suggests that it will be lessdifficult to reverse the current accountdeficits and improve the situation with-out major changes in real exchange rates.

What should policy response be?The challenges facing policymakers

in advanced economies are to restoreconfidence in the financial system andminimize the impact of the financial sec-tor crisis on the real economy, whilemaintaining inflation credibility andsafeguarding long-term fiscal sustain-ability.

In emerging European economies,policies need to focus on reducing vul-

nerabilities and strengthening theresilience of the financial system. Ourpolicy recommendations for the emerg-ing market economies in the region canbe summarized as follows:

• Enact structural reforms toincrease potential growth by ensuringfair market competition, reducing therole of the state in the economy, improv-ing the business environment, cutting redtape, reforming the judiciary, and pro-gressing in the EU harmonizationprocess in EU-candidate countries;

• Implement policies to ensuremacroeconomic stability, address exter-nal imbalances, and reduce vulnerabili-ties, including tightening monetary poli-cies, and advancing fiscal consolidation;

• Implement policies to strength-en the financial sector and create buffersto help adjust to shocks, including pru-dential measures. Establishing credit reg-istries and strengthening non-bankfinancial sector supervision would sub-stantially increase the effectiveness ofthese measures.

Based on presentation of the April 2008IMF report "Regional Economic Outlook:Europe — Reassessing Risks" by NevenMates, the IMF Senior ResidentRepresentative in Russia. BT

Source: IMF World Economic Outlook April 2008

Economic Outlook: Regional Perspective

2007 2008 2009 2007 2008 2009 2007 2008 2009

Estonia 7.1 3.0 3.7 6.6 9.8 4.7 �16.0 �11.2 11.2Latvia 10.2 3.6 0.5 10.1 15.3 9.2 �23.3 �15.0 �10.5Lithuania 8.8 6.5 5.5 5.8 8.3 6.1 �13.0 �10.5 �8.8Czech Rep. 6.5 4.2 4.6 2.8 6.0 3.5 �2.5 �3.0 �2.8Hungary 1.3 1.8 2.5 7.9 5.9 3.5 �5.6 �5.5 �5.1Poland 6.5 4.9 4.5 2.5 4.1 3.8 �3.7 �5.0 5.7Slovak Rep. 10.4 6.6 5.6 1.9 3.3 3.1 �5.3 �5.0 �4.7Bulgaria 6.2 5.5 4.8 7.6 9.7 6.0 �21.4 �21.9 �18.9Romania 6.0 5.4 4.7 4.8 7.0 5.1 �13.9 �14.5 �13.0Russia 8.1 6.8 6.3 9.0 11.4 8.4 5.9 5.8 2.9Ukraine 7.3 5.6 4.2 12.8 21.9 15.7 �4.2 �7.6 �9.7Kazakhstan 8.5 5.0 7.0 10.8 17.1 8.3 �6.6 �1.7 �1.0

Real GDP Consumer Prices (AnnualAverage)

Current Account Balance(% of GDP)

Real GDP, Consumer Prices and Current Account Balance in Selected ECA Countries(annual percent change unless noted otherwise)

·20


New Findings

Rolling Out the Red Carpet: Invest�ment Promotion and FDI Inflows

Torfinn Harding and Beata Smarzynska Javorcik

Investment promotion is viable option for developing countries that wish to attract FDI

Countries around the world competefiercely to attract foreign direct invest-ment (FDI). Policymakers, especiallythose in developing countries, hope thatFDI inflows will bring much-needed cap-ital, new technologies, marketing tech-niques and management skills. Foreigninvestment is expected to create jobs andincrease the overall competitiveness ofthe host economy.

Technological progress which allowsfirms to split various stages of produc-tion, declines in transport and communi-cation costs, increasing openness of coun-tries to foreign capital, and internationaltrade have increased the attractiveness ofspreading the production chain acrossvarious geographic locations. This phe-nomenon has led to a spectacular increasein global FDI flows thus giving morecountries an opportunity to become partof the global production chains. But it hasalso intensified competition for FDI.

In response, many countries have setup investment promotion agencies (IPAs)as a key part of their strategy to attractforeign investors — there are more than160 IPAs at the national level and over250 at the sub-national level. In 2004, thetotal spending of the 82 IPAs that report-ed their budget figures in the recent IPACensus reached almost a billion dollars; aquarter of this amount was spent oninvestment promotion (see Table). Inaddition, some IPAs are empowered to

provide support in the form of tax holi-days or other quasi-fiscal measures.

The main purpose of investment pro-motion is to reduce the costs of FDI byproviding information on business con-ditions and opportunities in the hosteconomy and by helping foreigninvestors cut through bureaucratic pro-cedures. Investment promotion activitiesencompass: advertising, investment sem-inars and missions, participation in tradeshows, one-to-one direct marketingefforts, matching prospective investorswith local partners, helping obtain per-mits and approvals, preparing projectproposals, conducting feasibility studiesand servicing investors whose projectshave already become operational. Asobtaining information on investmentopportunities in developing countriestends to be more difficult than gatheringdata on industrialized economies, invest-ment promotion should be particularlyeffective in a developing country context.

How Inward InvestmentPromotion Works

Investment promotion can affect thechoice of foreign investment site at allstages of the decision-making process.The process of site selection usuallystarts with drawing a long list of poten-tial host countries. Such list typicallyincludes 8 to 20 countries which can bethought of as belonging to three groups:

• most popularFDI destinations inthe world,

• c o u n t r i e sclose to the exist-ing operations ofthe investor, and

•emerging FDIdestinations (i.e.,countries that theinvestor may not beinitially very seriousabout but whichrepresent "out ofthe box" thinking).

The inclusion of the third categorypresents an opportunity for IPAs toincrease the chances of their countrybeing listed via advertising, trade showsor pro-active contacting of potentialinvestors. The long list is then narroweddown to about five potential sites basedon the trade-off between costs and thequality of business environment. As this isusually done without visiting sites underconsideration, the accessibility of theinformation about potential host coun-tries plays a crucial role. IPAs that provideup-to-date, detailed and accurate data ontheir websites and IPAs that are willing tospend time preparing detailed answers toinvestors' inquiries and customize theseanswers to the needs of an individualinvestor can increase the chances of theircountries being included in the short list.A visit by the investor to the host country,which is the next step in the process, givesIPAs the opportunity to emphasize theadvantages of locating in their country,answer questions, show off potentialinvestment sites and facilitate contactswith the local business community. IPAscan also play a role in the final stage ofthe process by providing information oninvestment incentives and offering helpwith the registration process.

Does it Work?Is there any indication that investment

promotion leads to higher FDI inflows?To examine this question, it is helpful torely on the fact that the majority of IPAstarget particular sectors in their efforts toattract FDI, as it is believed that moreintense efforts concentrated on a few pri-ority sectors are likely to lead to greaterFDI inflows than less intense across-the-board attempts to attract FDI. If invest-ment promotion is effective then weexpect to see that priority sectors experi-ence an increase in FDI inflows after tar-geting starts relative to non-priority sec-tors during the same time period.

The detailed information on prioritysectors and the timing of FDI targetingactivities in developing countries com-

Size of Investment Promotion Budget in 2004 by Income Group

High income US$1,214,708 US$9,447,493

Upper middle income US$487,480 US$1,376,448

Lower middle income US$342,319 US$983,926

Low income US$304,349 US$534,864

Median Mean

Notes: Based on 19 responses for HI, 15 for UMI, 18 for LMI and 14 for LI .Source: IPA Census 2005.

FDI promotion budget in 2004Income group

· 21


bined with the figures on flows of USFDI, disaggregated by host country andsector, suggests that investment promo-tion efforts are associated with higherFDI inflows to developing countries.

Priority sectors receive more thantwice as much FDI as sectors not targetedby IPAs. While the magnitude of the effectmay seem large, it is not implausible. Ifwe consider only positive flows of US FDIto developing countries, the median sec-tor-level flow to a host country was equalto US$11 million during the 1990-2004period. Thus, the estimated effect ofinvestment promotion translates into anadditional annual inflow of US$17 mil-lion for the median sector-country combi-nation. A quick look at the amountsmultinational corporations actually investin developing countries reveals that FDIinflows of that magnitude are not uncom-mon. For example, in 2005 Wal-Martplanned to open 70 new units in Mexicowith an expected investment of US$736million and in 1995 Pepsi announced aUS$55 million investment in a snack-foodcompany in South Africa, while BoeingMcDonnell Douglas invested US$31 mil-lion in the Czech Republic in 1998.

One may be concerned that IPAschoose sectors that already receive a lotof FDI as their priority industries inorder to show good results. This is, how-ever, unlikely. In 67 of 97 IPAs surveyedin the Census, the agency board was notat all involved in choosing priority sec-tors. Moreover, our conclusions holdeven if we exclude countries that report-

ed in the Census that the targeting deci-sion was based on the past success orfailure in attracting FDI to the sector. Inaddition, we find no evidence suggestingthat targeting took place in sectors withrelatively high or low inflows in theyears preceding targeting.

If investment promotion works, weshould also see that agencies followingthe best practice model are more effec-tive. For instance, it is generally believedthat a quasi-government status is themost appropriate IPA setup. Quasi-gov-ernmental bodies benefit from their linksto the government when assistinginvestors in getting regulatory approvalsand lobbying authorities on behalf offoreign companies. At the same time,they have more flexibility in planningtheir activities and are not bound by gov-ernment pay scales and hiring and firingpractices, which makes them better posi-tioned to engage the private sector andrespond quickly to changing market con-ditions. As expected, our analysis con-firms that quasi-governmental bodies aremore effective at attracting FDI thansubunits of ministries.

Our final observation pertains to theconcern of government officials that poli-cies in competing countries might divertFDI inflows. Anecdotal evidence suggeststhat many large foreign investors narrowtheir attention to a few potential sites inneighboring countries and then let thehost country authorities bid on tax,financial or other incentives they want tooffer. Our data presents evidence in sup-

port of this view. We find that investmentincentives offered by other countries inthe same region are associated with lowerFDI inflows. This competition is limitedto a geographic region as there is no evi-dence of such competition taking placeamong countries with the same level ofincome, but located in different regions.

What the Research Meansfor Policy

Our observations have two policyimplications.

• Investment promotion is a viablepolicy option for developing countriesthat have a sound business climate andwish to attract FDI inflows. In the pres-ence of knowledge externalities associatedwith FDI subsidizing provision of infor-mation is an appropriate policy action.

• Regional competition in taxincentives point to potential benefits ofregional coordination in this area.

Torfinn Harding is Economist in theResearch Department of Statistics, Norway,and Beata Smarzynska Javorcik is Reader inEconomics, University of Oxford, and CEPRResearch Affiliate. The article is based on"Roll out the red carpet and they will come:effect of investment promotion on FDIinflows" published at www.VoxEU.org. Fulltext of the paper is available as the WorldBank Policy Research Working Paper No.4339 or CEPR Discussion Paper No. 6418,"Developing economies and internationalinvestors: Do investment promotion agenciesbring them together?". BT

Impact of Ukraine’s WTO Accession

Veronika Movchan

Ukraine’s WTO membership may bring 5.7% increase in real GDP in the long term

On February 5, 2008 the GeneralCouncil of the WTO approved the acces-sion package of Ukraine, thereby suc-cessfully completing almost 14 years ofnegotiations. Ukraine applied for themembership in 1993, when most of thecountry's commodity trade was conduct-ed with non-GATT/WTO members. Thesituation has changed dramatically sincethen. According to the State Committeeof Statistics of Ukraine, in 2007 thecountry’s commodity trade with WTOmembers accounted for over 62% of

exports and 58% of imports. Ukraine'smajor non-WTO trade partners remainthe CIS countries, primarily Russia,Belarus, and Kazakhstan, currently alsonegotiating the WTO membership.

The long negotiations ensured that alot of changes embedded in Ukraine'saccession agreements have already beenintroduced. This includes passing strictintellectual property rights protection leg-islation, harmonizing the Ukrainian sys-tem of standardization and conformityassessment, adopting the new Customs

Code, and bringing import tariffs foralmost all manufacturing products in linewith Ukraine's tariff proposal.

Post�Accession ChangesWhat will change after Ukraine

becomes a WTO member? Most impor-tantly, import tariffs will be bound atquite a low level. For agricultural prod-ucts, this means a reduction of the aver-age tariff rate by a quarter to 10.66%.The maximum binding tariffs are envis-aged for sugar (50%) and sunflower seed

·22


New Findings

oil (30%). The average binding rate forindustrial goods will be 4.95%, which isone-fifth above the current average tarifffor these products. Also, specific andmixed tariffs pervasive for most agro-food products will be replaced by moretransparent ad-valorem tariffs.

In addition, Ukrainian export tariffswill be gradually reduced and quantita-tive export restrictions will be eliminat-ed. This is expected to boost exports, andincrease domestic prices on some prod-ucts, e.g. oilseeds, and grain.

Membership in the WTO willimprove access to external markets forUkrainian exporters. As to the immediatebenefits, the quotas on exports of steelproducts to the EU will be eliminated.Import tariffs faced by Ukrainian pro-ducers in WTO member countries will bereduced to the most favored nation levelregime if previously full tariff rates wereapplied. It is estimated that the reductionwill affect approximately one-fifth of theUkrainian export value.

Additional 2.6% GrowthWe estimated the economic impact of

Ukraine's WTO accession using the com-putable general equilibrium model forUkraine. The model was a 'small openeconomy' model covering 38 sectors. Itsdistinctive feature was the special treat-ment of service providers, allowing theimpact of the reduction of FDI barriers inservices to be modelled.

Several scenarios were considered,including:

• the reduction of barriers to for-eign service providers of telecommunica-tion and financial services;

• tariff reform simulating thereduction of tariffs on imports accordingto the commitments made by Ukraine;

• improved market access forUkrainian metal and chemical products,and agriculture.

According to our estimates, Ukraine'sWTO membership will be beneficial forthe country, bringing additional 2.6%growth in real GDP and 7.2% increase inwelfare over the medium term. In thelong term, when capital will adjust to anew steady state, the gains will be evenlarger: 5.7% increase in real GDP and15% rise in welfare. The liberalization oftariff protection will stimulate imports,accounting for almost half of a 5.1%import increase over the medium term.Higher imports will dampen consumerprices and increase the variety of prod-ucts on the market, positively affectingthe welfare of households. Exports willincrease by 4.1% in the medium run,driving up the real wages in the economy.

The decomposition of the gainsshows that:

• Liberalization of the FDI barri-ers in services accounts for most of thegains in real GDP and in welfare throughincreases in the available service varietyand total factor productivity. In themedium term, service liberalization leadsto a 1.5% real GDP growth and 4.8%increase in welfare, especially affectingnon-poor households.

• The contribution of import tar-iff reform, primarily a reduction of tariffprotection in agro-food sectors, is thesecond largest. It accounts for a 0.8%gain in real GDP and 1.1% rise in wel-fare over the medium term.

• Improved market access for

metal and chemical production, andagriculture causes 0.3% increase in realGDP and 1.3% gain in welfare in medi-um term, though this scenario has thelargest labor adjustment effects on theeconomy.

Export�Oriented Manu�facturing Benefits the Most

As for the sector effects, the estimatesshow that export-oriented manufactur-ing sectors like metal and chemical pro-duction will benefit the most, as well asindustries supplying inputs for these sec-tors, e.g. extraction of non-energy mate-rials and coke production. At the sametime, considerable contractions willoccur in the food processing and auto-motive industry where tariffs arereduced the most. Also, agriculture pro-duction will be adversely affected,though the negative shock of the reduc-tion in tariffs will be to a large extentcompensated by better access to externalmarkets. In business services, especiallyin financial intermediation, the numberof foreign firms will significantlyincrease, and output will grow. Also,hotel and restaurant businesses will sig-nificantly expand their output thanks tocheaper inputs and higher demand.

Although the WTO accession willbenefit the economy as a whole, makingit more competitive and allowing cheap-er prices and higher variety of productsfor consumers, some production factoradjustments will be necessary. In particu-lar, it is estimated that 1.1% of skilledemployees and 1.8% of unskilled willhave to find new jobs. Thus, thestrengthening of active labor marketpolicies will be required to ensure thesmooth adjustment of the economy.

Veronika Movchan is Academic Directorof the Institute for Economic Research andPolicy Consulting (Kyiv, Ukraine). The CGEmodel was developed by the consortium ofthree institutions: Copenhagen Economics,Denmark; Institute for East EuropeanStudies. Munich, Germany; and Institute forEconomic Research and Policy Consulting,Ukraine, within the framework of the project"Analysis of the economic impact ofUkraine's WTO accession" (2005), DutchGrant No. TF 050270. Some changes to themodel were made in 2006, within the project"The assessment of the economic impact ofthe establishment of the FTA between Ukraineand the EU" conducted on request of theMinistry of Economy of Ukraine. BT

Medium�term Impact of the WTO Accession on Selected Sectors, %

Agriculture, hunting �0.8 15.3 5.9 �2.1Coal and peat 8.5 3.6 12.5 7.5Food�processing �13.0 �9.0 95.4 �14.3Textile and leather �9.5 �8.8 1.2 �10.4Coke products 13.0 11.0 15.8 7.9Chemicals, rubber and plastic products 5.0 5.6 �0.2 3.5Metallurgy and metal processing 14.2 14.9 �1.4 12.3Machinery and equipment �5.3 �6.2 0.8 �7.6Trade 1.3 2.6 0.5 �1.8Hotels and restaurants 4.7 6.6 0.9 3.0Telecommunication 3.2 0.7 20.6 1.9Financial intermediation 2.4 0.9 15.4 1.5

Aggregateoutput

Exports Imports Skilledemployment

· 23


International experience shows thatthe industries with the best developmentpotential are those that use a similar setof resources compared to the sectors inwhich a country already has competitiveadvantages. This is the starting premiseof our forecast for potential areas ofdiversification of Russian exports.Proceeding from the current exportstructure we have identified industrieswith potential for export development.The study is based on COMTRADE(UN) data and uses the methodology ofHausmann, Hwang and Rodrik (2006).

The structure of the Russian exportbasket in 2005 was similar to the basketof a country with a per capita income ofalmost US$11,000 (in current prices)whereas the actual per capita income inRussia was a mere US$4,500. Thus, theRussian export basket revenue index in2005 was more than double the per capi-ta GDP, which suggests that the countryhas a good outlook of economic growththrough access to world markets.

However, compared to other CIScountries Russia's export basket revenueindex was the lowest, which is explainedby Russia’s biggest per capita GDPamong these countries. According to ourcalculations, Kyrgyzstan has the biggestgrowth potential among the CIS coun-tries, followed by Moldova, Ukraine andAzerbaijan. A substantial excess of theexport revenue index over per capita

GDP in developing countries is positive-ly linked to future economic growth asexports can serve as the locomotive ofdevelopment.

Although the export structure inRussia, like in other CIS countries, canbe described as fairly advanced, Belarusand Ukraine seem to have betterprospects for export diversification.

What are the export goods in whichRussia has a competitive advantage thatit has not yet tapped? We found thatRussia has considerable potential forexporting to the CIS such goods as alu-minum and aluminum alloys, coniferoustimber, nitric mineral or chemical fertiliz-er and newsprint.

Trade Flows Shift to AsiaAccording to our forecast until 2020

based on the gravity model of trade innominal 2000 prices, Russian exportswill grow by 1.7 times and Russianimports will double during this period,while the share of trade in GDP willremain stable at around 47%. The geog-raphy of Russian trade will change dur-ing the period because of the growth ofthe Asian region and the CIS marketscompared with the developed markets inEurope and North America. Accordingto our forecast, the share in Russianexports (see Figure) to:

• Western Europe will drop from47% to 43%,

• North America will remain at5.5%,

• Asia and Oceania will growfrom 13% to 15%.

The biggest changes will occur in theexport of low- and medium-tech goods,whose share of exports will grow from25% to 29%.

The analysis of the geography ofRussian imports reveals a similar picture.The share of imports from WesternEurope will drop from 50% to 43%,while of those from North America willremain practically unchanged at about3%. Asia and Oceania will increase theirshare to almost 22%. The share of hi-tech goods in total imports will increaseby 1.5 percentage points to 18.5%.

The results of our analysis show thatRussia may significantly increase itsexports to some developed countries,such as Norway, Australia, NewZealand, Iceland and Japan, and to manysmall countries in Africa, Oceania andthe Caribbean.

Policy RecommendationsAn obvious economic policy measure

aimed at a more effective diversificationof the Russian export basket (and indeedthose of other CIS countries) can be arevision of its tariff and non-tariff regu-lations to bring them in line with theprobability of the emergence of newexport goods in this basket.

Russian trade and domestic econom-ic policy must be aimed at:

• stimulating the export of thosegoods for which there is untappedexport potential;

• prioritizing the production ofthose goods, whose export would con-tribute to the faster economic growth ofthe country.

Natalya Volchkova is Senior Researcherand Konstantin Kozlov is Researcher atCEFIR, Moscow. The results of the project"Prospects for the Development of theForeign Trade of Russia and the CIS Countrieswith Third Countries (EU, South Asia, Chinaand others), are available on request from theauthor: [email protected]. BT

Geography of Russia's Exports: A Forecast until 2020

2020

2015

2010

2005

2000

Asia and Oceania Central and Eastern EuropeThe CISLatin America

North Africa and the Middle EastNorth AmericaAfricaWestern Europe

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Russia's Foreign Trade Outlook Natalya Volchkova

Russia may significantly increase its exports to some developed countries

Productivity growth in Ukrainianindustry was remarkably strong during1999-2004 but slowed in 2005-2006.Performance in manufacturing has beenparticularly impressive: output rose byroughly 10% per year during 2001-2006, while employment fell by approx-imately 15% over the period.

Intensive labor-shedding contributedsignificantly to the rise in productivity, atleast until 2003. This was undoubtedly adirect consequence of more activerestructuring of firms, at a time whenUkraine was "catching up" on reforms.During 2000-2005 the gross job turnoverratio, defined as the sum of hiring and fir-ing over total employment, rose steadily,from 45% in 2000 to 58% in 2005. Since2004, industrial employment has stabi-lized and productivity growth hasslowed, which suggests that this phase ofrelatively "easy" restructuring is over.

While there has recently been someprogress in making entry easier, impedi-ments to entry, exit and restructuringremain substantial. Empirical analysisconfirms that Ukraine has particularproblems with exit. Firm-level data forUkraine show overall firm turnover ratesin manufacturing to be rather low byOECD standards — about 10% in 2002-2005, as against 15-20% typically foundin mature market economies.

Given such low levels of entry andexit, it is no surprise that product marketsin Ukraine are highly concentrated andheavily regulated. The Herfindahl-Hirschmann indexes (HHIs) that we havecalculated are higher than the indicatorsfor Russia in every major sector. Concen-tration levels have risen in key export sec-tors recently, including metallurgy, chem-icals, machine-building and food, whilethey have declined modestly in the con-struction materials and light industries.

We find that market concentrationhas a negative and highly significantimpact on labor productivity growth: aone percentage point decline in the HHIis associated with an increase in laborproductivity growth of 0.2-0.3%.

High levels of market concentrationand weak competition are partly a prod-uct of Ukraine's inherited economic

structure, but they are also, in largemeasure, the result of misguided policies.To be sure, competition law is now muchimproved and, on paper at least, it isbroadly in line with international norms,but anti-competitive policies and prac-tices are still widespread.

Product�Market ReformCompetition-enhancing product-

market regulation (PMR) reform canhelp raise productivity growth through anumber of channels, including the directimpact of competition on both marketefficiency and technical efficiency, as wellas its indirect impact via the role of com-petition in spurring innovation. Reformsthat liberalize entry are also likely tospur fixed investment in some sectors.

The PMR review of Ukraine, under-taken in 2007 by the OECD Secretariat,has arrived at four broad conclusions:

• the level of overall product-market regulation was higher than thatof any OECD country in 2003;

• the burden of product-marketregulation is well above the OECD aver-age with respect to all three major com-ponents of the aggregate indicator: statecontrol, barriers to entrepreneurship andbarriers to trade and investment;

• overall, barriers to businessgrowth appear to be more constrainingthan barriers to entry;

• regulatory process is in somerespects as much of a problem as thesubstance of regulation.

However, it should be borne in mindthat the PMR review assesses formal reg-ulatory policy settings, which haveimproved substantially in Ukraine, whilethe implementation of these policiesremains incomplete and inconsistent.

Analysis of the specific PMR indica-tors finds that:

• recent efforts to improve condi-tions for entry have had a marked posi-tive effect; yet start-up procedures remaincostlier and more time-consuming inUkraine than in most of the region;

• the regulatory impediments togrowing businesses of any size remainextremely onerous, especially those asso-ciated with licensing and permits;

• the size of the public sectorremains too large, with about 48% of thecountry's capital stock in the hands of thestate or municipal authorities, and a fur-ther 10-11% in public-private ownership.Yet although the problems associatedwith such a large population of SOEs arewidely recognized, privatization has effec-tively been stalled for the last few years.

• Pressure to restructure or windup many inefficient firms is limited bythe widespread availability of explicit orimplicit subsidies to favored enterprises.Direct support from the state to industryis estimated at 1.7% of GDP in 2007.

Further Privatization NeededClosing the productivity gap between

Ukraine and the more advancedeconomies will require increasing effi-ciency of resource allocation and effi-ciency of production. Strengtheningcompetition can contribute a great dealto the achievement of both these ends.Our econometric analysis of the relation-ship between competition and enterpriseperformance in Ukraine finds that:

• concentration has a negativeimpact on labor productivity growth;

• import competition has a posi-tive impact on domestic firms' produc-tivity, with the stronger effect in sectorswith lower foreign penetration.

Ukraine's stalled privatization processis particularly regrettable in view ofmounting evidence that it has improvedenterprise productivity and efficiency.Further privatization could play a majorrole in stimulating greater dynamism andflexibility, particularly together with com-petition-enhancing regulatory reform: inthe case of privatization to domestic own-ers total factor productivity increases bybetween 10% and 25%, during the sevenyears following privatization.

Christian Gianella and William Tompsonare Senior Economists at the OECDEconomics Department. The views expressedhere are those of the authors and should not beattributed to the OECD, its Executive Board,or its management. Full text of the OECDEconomics Department Working Papers No.574 is available at www.oecd.org. BT

·24 New Findings


Closing the Productivity Gap in UkraineChristian Gianella and William Tompson

Further privatization and competition�enhancing reform will stimulate greater dynamism

· 25


Agenda

World Bank Supports Strengthening PublicFinancial Management in Ukraine

On January 8, 2008 the World Bank's Board of ExecutiveDirectors approved the Public Finance Modernization Projectfor Ukraine the amount of US$50 million. The objective of theproject is to strengthen public financial management inUkraine by improving operational efficiency and transparency.Enhancing the transparency, efficiency and effectiveness ofpublic financial management is an important element of theinstitutional modernization plan of the Government ofUkraine and has been on the agenda of successive governmentssince the beginning of the decade. Important progress has beenmade, including the establishment of a Treasury system, theabolishment of National Bank direct financing of the govern-ment, the adoption of a new Budget Code and budget classifi-cation system, the creation of an internal audit function andthe improvement of the availability of fiscal information.Despite impressive economic growth and prudent fiscal policy,there are still significant institutional challenges to address forimproving public service delivery. The development of the inte-grated public financial management system and supportingfurther reforms in budget planning and execution will havepositive effects on the timeliness and predictability of publicexpenditure, including the areas relevant to combating pover-ty. Arrangements for improving information dissemination tocivil society supported through the project will strengthen gov-ernance and accountability across the executive, and mitigategovernance risks. For more information, visit: http://go.world-bank.org/6LU90EZVZ0

Developing Countries to Cushion Rich�Country Slowdown in 2008

A World Bank report says that resilience in developingeconomies is cushioning the current slowdown in the UnitedStates, with real GDP growth for developing countries expectedto ease to 7.1% in 2008, while high-income countries are pre-dicted to grow by a modest 2.2%. "Global Economic Prospects2008," an annual Bank report, notes that world growth slowedmodestly in 2007 to 3.6% compared with 3.9% in 2006, adownturn due largely to weaker growth in high-income coun-tries. In 2008 global growth is expected to be 3.3%. A weakerUS dollar, the specter of an American recession and rising finan-cial-market volatility could cast a shadow over this soft landingscenario for the global economy, the report says.

In the first half of 2007, industrial production sped upacross the developing regions, notably in East Asia (20%, yearover year). Robust production data are also reflected in GDPresults. China, India, and Russia were instrumental in drivingup output. GDP in Europe and Central Asia is expected togrow by 6.7% in 2007, and then slow to 6.1% in 2008 and5.7% in 2009. Inflation has risen in several countries, tied tosustained strong domestic demand and rising food and fuelprices (made worse by drought in Bulgaria and Romania).Signs of overheating are evident in Bulgaria and the Balticstates. In Turkey, an easing of monetary policy is expected tostrengthen domestic demand, leading to a pickup in growth,and a continued large current account deficit. For more infor-mation, visit: http://go.worldbank.org/XV5QISSB60

World Bank Supports Scientific Excellenceand Research Commercialization inKazakhstan

On January 15, 2008, the World Bank's Board of ExecutiveDirectors approved a US$13.4 million loan for the KazakhstanTechnology Commercialization Project. This project willstrengthen Kazakhstan's science base by introducing interna-tional peer review for research funding based on scientificmerit and commercial potential and connect improvedresearch and development of scientific groups to national andinternational technology markets. In the past, Kazakhstan wasknown for its scientific excellence and substantial scientificcapacity; with 41,000 research scientists at its peak,Kazakhstan used to be an important center of research anddevelopment in the Soviet Union. However, the number ofresearch personnel declined dramatically and by 2004 only17,000 researchers continued to work in the sector. Between1993 and 2002 virtually no new scientific equipment wasacquired in Kazakhstan and very little has been since, with theremaining equipment either obsolete or worn out and in urgentneed of replacement. The project, with an overall value ofUS$75 million, is co-financed by the Government ofKazakhstan in the form of US$61.6 million. For more infor-mation, visit: http://go.worldbank.org/HQF5H3QP40

World Bank Supports Health SectorReform in Kazakhstan

On January 15, 2008, the World Bank's Board of ExecutiveDirectors approved a US$117.7 million loan for theKazakhstan Health Sector Technology Transfer andInstitutional Reform Project. The project will help introduceinternational standards and build long-term institutional capac-ity in the Ministry of Health and related healthcare institutionsin support of key health sector reforms pursued by theGovernment of Kazakhstan. For a country with rapidly increas-ing income, Kazakhstan's health indicators could be improvingmore quickly. High rates of tuberculosis and high indicators ofinfant, child and adult mortality, cancer, tobacco and alcohol-related diseases represent major challenges to Kazakhstan's cur-rent health system. Several reform programs have been attempt-ed over the last 10 years but, until recently, have moved slowly."Improving the health system in Kazakhstan is essential toachieving the objective of becoming one of the 50 most com-petitive countries in the world," said Sergei Shatalov, WorldBank Country Manager for Kazakhstan. For more information,visit: http://go.worldbank.org/GNBZ25RHK0

Support for Reform of Technical SafetyRegulations in Georgia

The International Finance Corporation (IFC) has teamed upwith the Government of Georgia to help improve the technicalsafety of potentially hazardous enterprises. The reform agendaincludes improving how the technical inspections of businessessuch as gas stations, mining enterprises, elevators, and hoistingmechanisms are conducted. It also introduces new risk-basedinspections and the outsourcing of some functions to private

·26


Agenda

inspection facilities. To assist the government in this reform, theIFC has drafted an action plan that will transfer on-the-spotinspection functions to private companies, making themresponsible for the safety of inspected enterprises. For moreinformation, visit: http://newsletters.worldbank.org/

"Youth Voices" Group SuggestsStrengthening Cooperation with SimilarGroups from Nine Other Countries

A World Bank's initiative — the Youth Voices Group — isgetting actively involved in the review and monitoring of theprojects implemented with the World Bank's support in theRepublic of Moldova. The group's involvement aims at the fol-lowing priorities: social inclusion of youth, strengthening ofcooperation and inclusion of young people from Transdniestriain youth activities accomplished on the left bank of theDniester river, fighting against corruption — particularly with-in the education system, environment protection and globalwarming, and participation in the Country PartnershipStrategy development. On January 22, the Youth Voices Grouphad an opportunity to talk to senior World Bank officials. Thetopics raised by the youth targeted issues of group cooperationwith other similar groups from the South-East and CentralEurope. For more information, visit:http://go.worldbank.org/A0CXI4H6L0

World Bank Offering US$4 Million inGrants for Innovations in Agriculture

The 2008 Global Development Marketplace (DM2008)competition was launched on January 22, 2008, offering US$4million in grants to social entrepreneurs with innovative ideasthat have potential for high impact in promoting sustainableagriculture. The competition this year is asking participants tofocus on solutions to agricultural challenges in developingcountries such as linking small-scale farmers to markets;improving land access for poor farmers; and promoting theenvironmental services of agriculture in addressing climatechange and biodiversity conservation. Global DM competitionsare held every 12 to 18 months. Since 1998, they have awardedmore than US$30 million to nearly 300 projects worldwide. Formore information, visit: www.developmentmarketplace.org.

Housing and Communal Services ReformInitiative Receives World Bank Support

Russian consumers in at least 10 cities will benefit from apilot program to improve housing and communal services dueto a partnership between the Russian Federation and the WorldBank, which today approved a US$200 million loan for aHousing and Communal Services Project in Russia. The projectwill test a competitive grant mechanism to cities that increasemarket mechanisms in housing and communal services (heat-ing, power, water, sewage and sanitation) and also strengthensocial protection of vulnerable consumer groups. The competi-tion to participate in the pilot program will be open to citiesranging in population from 90,000-600,000 people and thatmeet minimum criteria of financial performance by the munici-

pal administration and communal service providers. For moreinformation, visit: http://go.worldbank.org/ZCTKC2O380

OECD, World Bank to Step Up Co�Operation on Sustainable Growth, ClimateChange, Innovation and Other Topics

The Organization for Economic Co-operation andDevelopment (OECD) and the World Bank have agreed to stepup their co-operation in a number of key areas, includingefforts to promote sustainable and inclusive growth in emerg-ing economies, the economics of climate change, aid for trade,innovation and the design of comprehensive country frame-works for investment. The announcement follows a meeting ofsenior officials in Washington D.C. on 5-6 December 2007,including at a joint OECD-World Bank seminar on"Sustainable and Inclusive Development: Going for Growth"with the participation of OECD Secretary-General AngelGurria and World Bank President Robert B. Zoellick. For moreinformation, visit: http://go.worldbank.org/Y7EX5WRHJ0

International Comparison ProgramPreliminary Global Report Compares Size ofEconomies

The International Comparison Program released new datashowing the world economy produced goods and servicesworth almost US$55 trillion in 2005 and that almost 40% ofthe world's output came from developing economies. Carriedout with the World Bank and other partners, the preliminaryglobal report provides estimates of internationally comparableprice levels and the relative purchasing power of currencies for146 economies. One of the major findings of the report is that12 economies account for more than two-thirds of the world'soutput. Seven of them are high-income economies (UnitedStates, Japan, Germany, the United Kingdom, France, Italyand, Spain), and five are developing or transitional economies(China, India, Russia, Brazil, and Mexico). The five largestdeveloping economies account for more than 20% of globaloutput and over 27% of the world expenditures for invest-ment purposes. Additional details can be found atwww.worldbank.org/data/icp.

Helping Smaller Businesses in Central Asia

Central Asian countries have made considerable progress intransitioning to market-based economies, yet most of them stillsuffer from high unemployment and poverty. To help, theInternational Finance Corporation (IFC) is using investmentsand advisory services to support private sector development,with an emphasis on the poorest countries and those eligible forpublic sector loans from the Bank's International DevelopmentAssociation. These include Azerbaijan, the Kyrgyz Republic,Tajikistan, and Uzbekistan. A major focus of its strategy in theregion is to support micro, small, and medium enterprises,which form the economic backbone of most of the countriesand are crucial to the region's development and economicgrowth. More information: http://www.ifc.org/ifcext/media.nsf/Content/Central_Asia_Feb08 BT

· 27


New Books and Working Papers

World Bank PublicationsInformation and orders: the World Bank, P.O. Box 960,

Herndon, VA 20172, U.S.; tel.: +1-703-661-1580, fax: 703-661-1501, http://www.worldbank.org/publications, email:[email protected], or visit the World Bank InfoShop at701 18th Street, N.W., Washington, D.C., tel.: +1-202-458-5454

Dilip Ratha , Zhimei XuMigration and Remittances Factbook 2008February 2008ISBN-13: 978-0-8213-7413-9

Nearly 200 million people, or 3% of the world population,live outside their countries of birth. Worldwide remittance flowsare estimated to have exceeded US$318 billion in 2007, ofwhich developing countries received US$240 billion. The truesize, including unrecorded flows through formal and informalchannels, is believed to be significantly larger. The publicationpresents the numbers and facts behind the stories of interna-tional migration and remittances, drawing on authoritative,publicly available data. It provides a snapshot of statistics onimmigration, emigration, skilled emigration, and remittanceflows for 194 countries, and 13 regional and income groups.

Kyrgyz Republic Poverty AssessmentPoverty Reduction and Economic Management Unit,

Europe and Central Asia RegionSeptember 2007http://go.worldbank.org/3I3G9FM4C0

This report, which has been prepared by the World Bank incooperation with the National Statistical Committee, providesan assessment of poverty in the Kyrgyz Republic using the mostrecent data available. It attempts to answer three questionsabout the Kyrgyz Republic: What is the profile of a poor per-son? How has economic growth affected the level and composi-tion of poverty? How has labor contributed to changes in pover-ty? The report finds that although income poverty fell during2000-2005 at a rapid pace from 63% to 43% of the populationdue to economic growth, further poverty reduction remains avery real challenge for the government. Any serious povertyreduction strategy will overlap significantly with a strategy forgrowth. The proposed poverty reduction strategies include:encouraging the channeling of a greater proportion of remit-tances to investment and job creation; designing a rural anti-poverty strategy, as the majority of the poor live in rural areasand work on farms; conducting regional investment climate sur-veys to better understand the differential rates of regional devel-opment; and reform of the education sector linking secondaryand post-secondary education with labor market needs.

Adam Wagstaff, Rodrigo Moreno-SerraEurope and Central Asia's Great Post-Communist Social

Health Insurance Experiment: Impacts on Health Sector andLabor Market Outcomes

WPS4371, October 2007

The post-communist transition to social health insurance inmany of the Central and Eastern European and Central Asian

countries provides an opportunity to answer some of the unre-solved issues in the debate over the relative merits of socialhealth insurance and tax-financed health systems. Using paneldata from 28 countries for the period 1990-2004 the authorsfind that, controlling for any concurrent provider paymentreforms, adoption of social health insurance increased nation-al health spending and hospital activity rates, but did not leadto better health outcomes. The authors also find that adoptionof social health insurance reduced employment in the economyas a whole and increased unemployment, although it did notapparently increase the size of the informal economy.

Caryn Bredenkamp, Michele GragnolatiSustainability of Healthcare Financing in the Western

Balkans: An Overview of Progress and ChallengesWPS4374, October 2007

This paper explores the major challenges to the sustain-ability of health sector financing in the countries of theWestern Balkans — Albania, Bosnia and Herzegovina, theFormer Yugoslav Republic of Macedonia, Montenegro, Serbiaand the province of Kosovo. It focuses on how the incentivescreated by the different elements of the healthcare financingsystem affect the behavior of healthcare providers and individ-uals, and the resulting inefficiencies in revenue collection andexpenditure containment. The paper analyzes patterns ofhealthcare expenditure, finding that there is some evidence ofcost containment, but that current expenditure levels — whilesimilar to that in EU countries as a share of GDP — are low inper capita terms and the fiscal space to increase expenditures isextremely limited. It also examines the key drivers of currenthealthcare expenditure and the most significant barriers to rev-enue generation, identifying some key health reforms thatcountries in the sub-region could consider in order to enhancethe efficiency and sustainability of their health systems. Dataare drawn from international databases, country institutions,and household surveys.

Paul R. MassonThe Growing Role of the Euro in Emerging Market

FinanceWPS4381, November 2007

More than eight years after the introduction of the euro,impacts on developing countries have been relatively modest.Overall, the euro has become much more important in debtissuance than in official foreign exchange reserve holdings. Theformer has benefited from the creation of a large set ofinvestors for which the euro is the home currency, whiledemand for euro reserves has been held back by the dominanceof the dollar as a vehicle and intervention currency, and thegreater liquidity of the market for US treasury securities. Fearsof further dollar decline may fuel some shifts out of dollarsinto euros, however, with the potential for a period of financialinstability.

Maurizio Bussolo, Rafael E. De Hoyos, Denis Medvedev,Dominique van der Mensbrugghe

Global Growth and Distribution: Are China and IndiaReshaping the World?

WPS4392, November 2007

·28


New Books and Working Papers

Over the past 20 years, aggregate measures of globalinequality have changed little even if significant structuralchanges have been observed. Using the World Bank's LINK-AGE global general equilibrium model and the newly devel-oped Global Income Distribution Dynamics tool, the paperassesses the distribution and poverty effects of a scenario wherethese trends continue in the future. Even by anticipating adeceleration, growth in China and India is a key force behindthe expected convergence of per-capita incomes at the globallevel. Millions of Chinese and Indian consumers will enter intoa rapidly emerging global middle class — a group of peoplewho can afford, and demand access to, the standards of livingpreviously reserved mainly for the residents of developed coun-tries. Notwithstanding these positive developments, fastgrowth is often characterized by high urbanization and grow-ing demand for skills, both of which result in the widening ofincome distribution within countries. These opposing distribu-tional effects highlight the importance of analyzing global dis-parities by taking into account income dynamics between andwithin countries.

Marianne Fay, Donato De Rosa, Catalin PaunaProduct Market Regulation in Romania: A Comparison

with OECD CountriesWPS4402, November 2007

Less restrictive product market policies are crucial in pro-moting convergence to higher levels of GDP per capita. Thispaper benchmarks product market policies in Romania tothose of OECD countries by estimating OECD indicators ofProduct Market Regulation. These indicators allow a compre-hensive mapping of policies affecting competition in productmarkets. Comparison with OECD countries reveals thatRomania's product market policies are less restrictive of com-petition than most direct comparators from the region and notfar from the OECD average. Nonetheless, this achievementshould be interpreted in light of the fact that this approachmeasures officially adopted policies. It does not capture imple-mentation and enforcement, the area where future reformefforts should be directed if less restrictive policies are to havean effective impact on long-term growth prospects.

David TarrRussian WTO Accession: What has been Accomplished,

What can be ExpectedWPS4428, December 2007

This paper summarizes the principal reform commitmentsthat Russia has undertaken as part of its World TradeOrganization (WTO) accession negotiations, providingdetailed assessments in banking, insurance, and agriculture.The paper assesses the gains to the Russian economy fromthese commitments, based on a summary of several modelingefforts undertaken by the author and his colleagues. Theauthor compares Russian commitments with those of othercountries that have recently acceded to the WTO to assess theclaim that the demands on Russia are excessive due to politi-cal considerations. He explains why Russian WTO accessionwill result in the elimination of the Jackson-Vanik Amendmentagainst Russia. Finally, he discusses the remaining issues in the

negotiations and the time frame for Russian accession as of thefall of 2007.

Erwin R. Tiongson, Ruslan YemtsovBosnia and Herzegovina 2001-2004 : enterprise restructur-

ing, labor market transitions and povertyWPS4479, January 2008

This paper takes stock of labor market developments inBosnia and Herzegovina over the period 2001-2004, using thepanel Living Standards Measurement Study/Living in Bosniaand Herzegovina survey. The results provide strong evidencethat there are indeed significant differences in labor markettransitions by gender, age, education, and geographic location.Using the panel structure of the multi-topic survey data, theauthors find that these transitions are related to welfaredynamics, with welfare levels evolving differently for variousgroups depending on their labor market trajectories. The find-ings show that current labor market trends reflecting women'smovement out of labor markets and laid-off male workersaccepting informal sector jobs characterized by low productiv-ity will lead to adverse social outcomes. These outcomes couldbe averted if the planned enterprise reform program creates amore favorable business environment and leads to fasterrestructuring and growth of firms.

Other Publications

Peter J S Duncan"Oligarchs", Business and Russian Foreign Policy: From

Yeltsin to PutinWP 83, UCL, October 2007, http://www.ssees.ac.uk/wp

83sum.htm

The paper investigates the role of private and state-con-trolled business in the formation and implementation ofRussian foreign policy since the collapse of the Soviet Union.The extent to which the 'oligarchs' and business more general-ly followed their own interests in their external relations oracted as tools of the Russian state is a particular focus. UnderYeltsin, business had followed its own interests, which some-times conflicted with Russian foreign policy and sometimesreinforced it; but after Putin's attacks on the oligarchs, businessseemed more integrated into policy implementation, while stillfollowing its own interests where they did not conflict withthose of the state, as is suggested by a discussion of Gazprom'sforeign policy role.

Ruben Enikolopov, Maria Petrova, Ekaterina ZhuravskayaTelevision and Political Persuasion in Young Democracies:

Evidence from RussiaCEFIR/NES WP 112, December 25, 2007, www.cefir.ru

Governments control media in much of the developingworld. Does this have an effect on political choices of voters?The authors address this question using exogenous variation inthe availability of the signal of the only independent nationalTV channel in Russia during the 1999 parliamentary elections.They find that the presence of an independent source of polit-

· 29


ical news on TV significantly decreased the vote in favor of thegovernment party and increased the vote in favor of the oppo-sition parties. Moreover, the difference in TV coverage signifi-cantly changed voting behavior even controlling for voters'inclinations just one month prior to the elections. These effectsare larger than those found in established democracies.

Richard PomfretUsing Energy Resources to Diversify the Economy:

Agricultural Price Distortions in KazakhstanCASE Network Studies and Analyses No. 355, December

2007, http://www.case.com.pl

The agricultural sector in Kazakhstan experienced declin-ing output throughout the 1990s, partly because relative pricesshifted from being distorted in favor of farmers to being dis-torted against them. After the end of the decade public policyshifted towards support for (or less discrimination against)agriculture, boosted by a billion-dollar Agriculture and FoodProgram for 2003-2005, which was made possible by boomingoil revenues. The paper provides estimates of producer supportfor the main agricultural products in Kazakhstan, and analyzesthe consequences of shifts in farm support policy. The authorproduces the negative estimates for export goods (wheat andcotton) in 2000-2001, which suggest substantial behind-the-border trade costs; and the shift from negative to positive sup-port for major agricultural products.

Andreja Jakliè, Joze P. Damijan and Matija RojecInnovation Cooperation and Innovation Activity of

Slovenian Enterprises LICOS Discussion Paper 201/2008, January 2008,

http://www.econ.kuleuven.be/LICOS/DP/DP2008/DP201.pdf

The authors explore the importance of innovation coopera-tion for the innovation activity of Slovenian enterprises, whatkind of innovation cooperation is the most "productive" forinnovation activities, and whether the location and foreignownership of innovation cooperation matter. Estimations con-firmed external innovation cooperation as one of the mostimportant incentives for innovation activity, after R&D spend-ing. However, a significant influence is only confirmed fordomestic innovation cooperation. The efficiency varies by typeof partners: while inter-firm innovation cooperation signifi-cantly increases the probability of innovation, this is not thecase regarding cooperation with universities and R&D insti-tutes. The impact of innovation cooperation differs by distance,with the contribution of EU partners to innovation activitybeing the highest (higher then that of domestic partners).

Book Reviews

Saul Estrin, Grzegorz W. Kolodko and Milica Uvalic (eds.)Transition and BeyondPalgrave Macmillan 2007IBN-10: 0230546978

Papers by various researchers included in the volume aregrouped into three sections: the socialist legacy; transition from

socialism to capitalism; and beyond transition. They provide anup-to-date evaluation of the transition, as well as insights anddiscussion on current phenomena such as globalization andcomplexity. Specifically, the following topics are explored: maincharacteristics of central planning; productivity in the SovietUnion and other socialist countries; division between the newEU member states and less successful former Soviet Unioncountries; the determinants of success in transition; skills andhuman capital in transition countries; financial transition inCentral and Eastern Europe; the evolving role of financial poli-cy; the optimal transition path, and globalization. Additionally,four country studies focus on transition in two differentregions: Slovenia and Serbia from the former Yugoslavia, andRussia and Belarus from the former Soviet Union.

Stephan BarisitzBanking in Central and Eastern Europe 1980-2006: From

Communism to CapitalismRoutledge 2007ISBN-10: 0415428815

The book overviews the development of the banking sys-tems in Central and Eastern Europe and the CIS over a periodof about 25 years: from the beginning of the 1980s up to late2006. Taking into account historic changes, particularly theemergence of independent states after the collapse of commu-nism, all relatively large countries (in terms of population) aredealt with: Hungary, Poland, Czech Republic, Slovakia,Bulgaria, Romania, Croatia, Russia, Ukraine, Belarus,Kazakhstan, and Uzbekistan. The study analyzes and comparesthe evolution of legal foundations, banking supervision, abank's major sources of assets, liabilities, earnings and relatedchanges, banking crises, restructuring, rehabilitation programs,the role of foreign-owned banks and FDI. Finally, the book dis-cusses perspectives and challenges of banking in Central andEastern Europe in the light of the expanding EU and furtherenlargement of the euro area.

Nina BandeljFrom Communists to Foreign CapitalistsPrinceton University Press, 2008ISBN-13: 978-0-961-12912-9

The book explores how 11 post-socialist countries addressthe very idea of foreign direct investment (FDI) as an integralpart of their market transition. The inflows of foreign capitalafter the collapse of communism resulted not from the econo-my, as is commonly expected, but rather from the activeinvolvement of postsocialist states in institutionalizing andlegitimizing FDI. Using a wide array of data sources, and com-bining a macro-level account of national variation in the lib-eralization to foreign capital with a micro-level account ofFDI transactions in the decade following the collapse ofCommunism in 1989, the book reveals how social forces notonly constrain economic transformations but also make thempossible. The author presents a sociological treatment of theprocess of FDI. She demonstrates how both investors andhosts rely on social networks, institutions, politics, and cul-tural understandings to make decisions about investment todeal with the true uncertainty that plagues the postsocialistenvironment. BT

·


30 Conference Diary

World Conference on Intellectual Capital forCommunities

May 22-23, 2008, Paris, France

Following on from previous conferences, the fourth meet-ing of the World Conference explores the challenges andopportunities stemming from today's increasingly knowledge-based economy. This year's conference examines, among othertopics: intellectual capital in a historical perspective, metricsand standards, spatial issues (city planning and knowledge,global/local tensions), societal and organizational design. Theevent is designed as a platform for the exchanges of views, topromote learning among key stakeholders from around theworld, and to consider an agenda for transnational and trans-institutional research and action for the future.

More information: http://go.worldbank.org/1MN9DA1JW0

Annual Bank Conference on DevelopmentEconomics

June 9-11, 2008, Cape Town, South Africa

ABCDE 2008 will for the first time unite the global and theregional ABCDE in one single event. This year the conferencewill follow a new format — except for several roundtabledebates and keynote addresses all sessions will run in parallelblocks of:

1. Comparative sessions with an African, South Asian andglobal focus, offering critical perspectives on two of the mostpopulous developing regions.

2. Specific sessions focused on various aspects of growth(globalization, human development, political economy), byexternal organizations identified through an open competition.

More information and registration at: ww.worldbank.org/abcdesouthafrica

The Challenge of Globalization25-29 June, 2008, Istanbul, Turkey

15th World Congress of the International EconomicAssociation is organized by the Turkish Economic Association.The themes of the congress, among others, will include:

• Financial globalization with imperfect financial markets• Financial globalization and emerging markets• Financial globalization and global imbalances• Business cycles in emerging markets.

More information: ttp://www.arett.ru/.files/2142/IEA%20announce.jpg

CEU Summer School: "Integrity Reform � Strategiesand Approaches"

June 30 — July 9, 2008, Central European University,Budapest, Hungary

The course will familiarize participants with the core ingre-dients of a strategic and critical approach to effective and sus-tainable corruption control and organizational integrity.

Drawing on interdisciplinary academic perspectives and les-sons learned from practice, the course represents an effort toanalyze corruption and anti-corruption, straddling law, eco-nomics, public administration, public sector ethics, as well aspolitics, statistical and ethnographic approaches. Topics cov-ered include cross-cutting issues such as definitions, measure-ments and research methodology, and also distinct areas suchas access to information, fiscal transparency, and risk assess-ment and management. The course seeks to give equal empha-sis to public sector reforms as well as to social accountabilityas actionable rights essential to democratic governance.

For further information queries can be directed to the SUNoffice by email ([email protected]), via skype (ceu-sun) or tele-phone (00-36-1-327-3811). Also see the web site:http://www.sun.ceu.hu/02-courses/course-sites/integrity/detailed.php

Patterns of Transition and New Approaches toComparative Economics

28-30 August, 2008, Moscow, Russia

The 10th bi-annual conference of the European Associationfor Comparative Economics will be held in association with theState University — Higher School of Economics, Moscow.Themes of the conference will include:

• Patterns of transition;• New approaches to comparative economics: global-

ization in comparative perspective;• Comparative economic development;• Institutions and comparative economic systems; • Comparative studies of the firm; • Education and the labor market; • Public policy and the policy process; • Innovation systems and path dependency.

More information: http://d1.hse.ru/lingua/en/conf/eaces2008/index.html

23rd Congress of the European EconomicAssociation

27-31 August, 2008, Milan, Italy

Universite Bocconi will host the next joint European meet-ing of the European Economic Association and theEconometric Society (EEA-ESEM). The European EconomicAssociation and the Econometric Society are international sci-entific organizations dedicated to the promotion and dissemi-nation of contemporary economic research, including theoreti-cal, empirical, and policy-relevant contributions. Membershipin both the EEA and the ES is open to all interested persons andincludes reduced registration fees at the EEA/ESEM meeting.Economists and professionals working in related fields, includ-ing those who currently are not members of the EuropeanEconomic Association or the Econometric Society, are invitedto submit theoretical and applied papers in all areas of eco-nomics for presentation at the congress.

More information: http://www.eea-esem2008.org/index.php BT

· 31


"Russian Migrants to Russia: Choice of Location and LaborMarket Outcomes" by Olga Lazareva

Andrienko Y. and Sergei Guriev, 2004, "Determinants ofInterregional Labor Mobility in Russia: Evidence from PanelData." Economics of Transition, 12(1), 1-27.

Borjas, George J., 2001, "Does migration grease the wheels oflabor market?" Brookings Papers on Economic Activity 1(2001):69-133.

Locher, Lilo, 2002, "Migration in the Soviet Successor States",IZA DP No. 602

Piil Damm, Anna, 2008, "Determinants of Recent Immigrants'Location Choices: Quasi-Experimental Evidence", forthcoming inJournal of Population Economics

Vitkovskaya, Galina, 1998, "Vynuzhdennye migranty iz novyhnezavisimyh gosudarstv na rossiyskom rynke truda" (Forcedmigrants from new independent states on the Russian labor mar-ket), in: Migratsiya I rynki truda v postsovetskoi Rossii (Migrationand labor markets in post-soviet Russia), eds. Vitkovskaya,Moscow

"Informal Employment and Labor Market Segmentation" inUkraine by Hartmut Lehmann, Norberto Pignatti

Fields, G.S., 1990 Labour Market Modeling and the UrbanInformal Sector: Theory and Evidence, in David Turnham, BernardSalome, and Antoine Schwarz, eds., The Informal Sector Revisited.(Paris: Development Centre of the Organisation for Economic Co-Operation and Development).

Fields G. S., 2006. Modeling Labor Market Policy inDeveloping Countries: A Selective Review of the Literature andNeeds for the Future, Ithaca, N.Y., mimeo.

Maloney, W.F., 2004. Informality Revisited. WorldDevelopment 32, 1159-1178.

World Bank, 2007. Informality: Exit and Exclusion.Washington, D.C.

"Labor Supply Behavior in the Czech Republic" by AlenaBicakova, Jiri Slacalek and Michal Slavik

Alesina, A. and A. Ichino (2007), Gender-based taxation.mimeo, Harvard University.

Bicakov?, A., J. Slacalek and M. Slavik (2008), Labor supplyafter transition: Evidence from the Czech Republic, CERGE-EIworking paper 351.

Blau, F. D. and L. M. Kahn (2007), Changes in the labor sup-ply behaviour of married women: 1980-2000, Journal of LaborEconomics (3), 393-438.

“The Gender Wage Gap in Belarus” by Francesco Pastore andAlina Verashchagina

Brainerd, E. (2000) 'Women in Transition: Change in GenderWage Differentials in Eastern Europe and FSU', Industrial andLabour Relations Review, 54(1): 139-162.

Hunt, J. (2002) 'The Transition in East-Germany. When is a

Ten Point Fall in the Gender Wage Gap Bad News?', Journal ofLabour Economics, 20(1): 148-169.

Juhn, C., Murphy, K.M. and B. Pierce (1993) 'Wage Inequalityand the Rise in Returns to Skill', The Journal of Political Economy,vol. 101, no.3, pp. 410-442.

Malysheva, M. and A. Verashchagina (2007) 'The Transitionfrom Planned to Market Economy: How are Women Faring?', inF. Bettio and A. Verashchagina (eds.) Frontiers in the Economics ofGender, Routledge Siena Studies in Political Economy: 192-220.

Pastore, F. and A. Verashchagina (2006) 'The Distribution ofWages in Belarus', Comparative Economic Studies, 48(3): 5-31.

"How Do Active Labor Market Programs Work in Romania?"by Nuria Rodriguez-Planas

Betcherman, G., K. Olivar, and A. Dar. 2004. "Impact of ActiveLabor Market Programs: New Evidence from Evaluations withParticular Attention to Developing and Transition Countries".Social Protection Discussion Paper Series, No. 0402.

Dar A., and Z. Tzannatos. 1999. "Active Labor MarketPrograms: A Review of the Evidence from Evaluations." SocialProtection Discussion Paper no. 9901. The World Bank,Washington, D.C.

Kluve, J., 2006. "The Effectiveness of European Active LaborMarket Policy." IZA Discussion Paper 2018.

"Remittances: Recent Trends and Development Implications"by Dilip Ratha

Ketkar, Suhas, and Dilip Ratha. 2007. "Development Financevia Diaspora Bonds: Track Record and Potential." Policy ResearchWorking Paper 4311, World Bank: Washington, DC. August.

Ratha, Dilip, Sanket Mohapatra, and Sonia Plaza. 2008."Beyond Aid: New Sources and Innovative Mechanisms forFinancing Development in Sub-Saharan Africa." Policy ResearchWorking Paper 4609, World Bank: Washington, DC. April; and aschapter in “Africa at a Turning Point?”, John Page and Delfin Go,eds., World Bank: Washington, DC.

Ratha, Dilip, Sanket Mohapatra, K. M. Vijayalakshmi, andZhimei Xu. 2007. "Remittance Trends 2007." Migration andDevelopment Brief 3, Development Prospects Group, World Bank:Washington, DC. November. (Available atwww.worldbank.org/prospects/migrationandremittances)

"Russia's Foreign Trade Development: An Outlook" byNatalia Volchkova

Hausmann, R. and D. Rodrik. 2003. "Economic developmentas self-discovery." Journal of Development Economics. 72: 603-633.

Hausmann, Ricardo and Bailey Klinger, 2006, "StructuralTransformation and Patterns of Comparative Advantage in theProduct Space" CID Working Paper No. 128

Hausmann, Ricardo, Jason Hwang and Dani Rodrik. 2006,"What You Export Matters", Working Paper, Harvard University

Bibliography

·32

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

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

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

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

Erik Berglof (EBRD, London)

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

Co-ordinating Editor: Andrew Austin(CERGE-EI, Prague)Layout: Ekaterina Yakovleva

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

CEFIR at NESCentre for Economic and FinancialResearch at New Economic SchoolNakhimovsky prospekt, 47, office 720117418 Moscow, RussiaTel. +7 495-105 5002http://www.cefir.ru

CERGE-EIP.O. Box 882, Politickych veznu 7111 21 Praha 1, Czech Republichttp://www.cerge-ei.cz

The Beyond Transition Newsletter is FREE of charge. Please fill in theorder form below if you would like to receive a complementary subscrip-tion to the English version. Please indicate if you would like to receive anelectronic version (a .pdf file) or a printed copy.

Please print out this form and fax or mail to:Centre for Economic and Financial Research

Nakhimovsky prospekt 47, office 720117418 Moscow, RussiaFax +7 (495) 105 5003e-mail: [email protected]

Name and Title:

Address:

City:

State:

Postal Code:

Country:

Telephone:

E-mail:

Order Form

For Distribution Use Only

Please send me a printed copy I prefer an electronic version


the newsletter about reforming economies beyond...

Documents