The government's incentives to bail out inefficient projects are determined by the trade-off between political benefits and economic costs, the latter depending on the decentralization of government. Two effects of federalism are derived: First, fiscal competition among local governments under factor mobility increases the opportunity costs of bailout and thus serves as a commitment device, (the "competition effect"). Second, monetary centralization, together with fiscal decentralization, induces a conflict of interests and thus may harden budget constraints and reduce inflation (the "checks and balance effect"). Our analysis is used to interpret China's recent experience of transition to a market economy.

Federalism and the Soft Budget Constraint

The paper evaluates the effects of privatization in the post-communist economies and China. In post-communist economies privatization to foreign owners results in a rapid improvement in performance of firms, while performance effects of privatization to domestic owners are less impressive and vary across regions, coinciding with differences in policies and institutional development. In China relatively more estimates suggest that privatization to domestic owners improves the level of performance. Concentrated private ownership has a stronger positive effect on performance than dispersed ownership in the post-communist economies, but foreign joint ventures rather than wholly owned foreign firms have a positive effect in China. Worker or collective ownership does not have a negative effect. In the post-communist economies new firms are equally or more efficient than firms privatized to domestic owners, and foreign start-ups are more efficient than domestic ones. Privatization is not associated with lower employment. When accompanied by complementary reforms, privatization has a positive effect on economic growth. Three factors appear to drive the more positive effect of privatization to foreign than domestic owners. Domestic managers have more limited skills and access to world markets, domestically privatized firms have been more subject to tunneling and in some countries new large shareholders artificially decreased performance. The important policy implication is that privatization per se does not guarantee improved performance, at least not in the short- to medium-run. Type of private ownership, corporate governance, access to know-how and markets, and the legal and institutional system matter for firm performance.

/pdf/effects-of-privatization-and-ownership-in-transition-4zcpb5izmn.pdf

Effects of Privatization and Ownership in Transition Economies

In a decade of transition, fear of a leviathan state is giving way to increased focus on oligarchs who "capture the state." In the capture economy, the policy and legal environment is shaped to the captor firm`s huge advantage, at the expense of the rest of the enterprise sector. This has major implications for policy. The main challenge of the transition has been to redefine how the state interacts with firms, but little attention has been paid to the flip side of the relationship: how firms influence the state-especially how they exert influence on and collude with public officials to extract advantages. Some firms in transition economies have been able to shape the rules of the game to their own advantage, at considerable social cost, creating what Hellman, Jones, and Kaufmann call a "capture economy" in many countries. In the capture economy, public officials and politicians privately sell underprovided public goods and a range of rent-generating advantages "a la carte" to individual firms. The authors empirically investigate the dynamics of the capture economy on the basis of new firm-level data from the 1999 Business Environment and Enterprise Performance Survey (BEEPS), which permits the unbundling of corruption into meaningful and measurable components. They contrast state capture (firms shaping and affecting formulation of the rules of the game through private payments to public officials and politicians) with influence (doing the same without recourse to payments) and with administrative corruption ("petty" forms of bribery in connection with the implementation of laws, rules, and regulations). They develop economywide measures for these phenomena, which are then subject to empirical measurement utilizing the BEEPS data. State capture, influence, and administrative corruption are all shown to have distinct causes and consequences. Large incumbent firms with formal ties to the state tend to inherit influence as a legacy of the past and tend to enjoy more secure property and contractual rights and higher growth rates. To compete against these influential incumbents, new entrants turn to state capture as a strategic choice-not as a substitute for innovation but to compensate for weaknesses in the legal and regulatory framework. When the state underprovides the public goods needed for entry and competition, "captor" firms purchase directly from the state such private benefits as secure property rights and removal of obstacles to improved performance-but only in a capture economy. Consistent with empirical findings in previous research on petty corruption, administrative corruption-unlike both capture and influence-is not associated with specific benefits for the firm. The focus of reform should be shifted toward channeling firms' strategies in the direction of more legitimate forms of influence, involving societal "voice," transparency reform, political accountability, and economic competition. Where state capture has distorted reform to create (or preserve) monopolistic structures supported by powerful political interests, the challenge is particularly daunting. This paper - a product of the Governance, Regulation, and Finance Division, World Bank Institute; the Public Sector Group, Europe and Central Asia Region; and the Office of the Chief Economist, European Bank of Reconstruction and Development - is part of an empirical project on governance in transition. For an electronic version of this paper and related research papers and governance data, visit www.worldbank/wbi/governance/. The authors may be contacted at jhellman@worldbank.org or dkaufmann@worldbank.org.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID240555_code001012560.pdf?abstractid=240555&mirid=1&type=2

"Seize the State, Seize the Day" : State Capture, Corruption, and Influence in Transition

This paper reexamines the issue of the existence of threshold effects in the relationship between inflation and growth, using new econometric techniques that provide appropriate procedures for estimation and inference. The threshold level of inflation above which inflation significantly slows growth is estimated at 1-3 percent for industrial countries and 7-11 percent for developing countries. The negative and significant relationship between inflation and growth, for inflation rates above the threshold level, is quite robust with respect to the estimation method, perturbations in the location of the threshold level, the exclusion of high-inflation observations, data frequency, and alternative specifications.

https://papers.ssrn.com/sol3/Delivery.cfm/WPIEA1102000.pdf?abstractid=879840&mirid=1&type=2

Threshold Effects in the Relationship Between Inflation and Growth

https://surface.syr.edu/cgi/viewcontent.cgi?article=1073&context=ecn

Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China

Foreign direct investment (FDI) has played a major role in China's push toward a market-oriented economy. Recent inflows account for 40 percent of combined flows of FDI to all developing countries, making China the biggest developing country FDI recipient. This record is impressive, but certain problems must be overcome if FDI is to continue to help sustain the country's record growth rate and further its economic development. For one thing, FDI in China is highly concentrated geographically, and its sector distribution is highly uneven. The authors empirically analyze the geographic determinants of FDI in China. They find that FDI's geographical distribution in China is determined mostly by GNP, infrastructure development, level of general education, and coastal location. Although the sectoral distribution of FDI is coming into line with the rest of the world, in the past, FDI has been biased toward speculative types of investment, especially in the real estate sector.

The Distribution of Foreign Direct Investment in China

Economists in the field of industrial organization, antitrust, and regulation have long recognized certain factors as potent determinants of opportunistic behavior, corruption, and "capture" of government officials. Only now are these relationships becoming conventional wisdom among specialists in economies in transition. Ten years into the transition, corruption is so pervasive that it could jeopardize the best-intentioned reform efforts. Broadman and Recanatini present an analytical framework for examining the role market institutions play in rent-seeking and illicit behavior. Using recently available data on the incidence of corruption and on institutional development, they provide preliminary evidence on the link between the development of market institutions and incentives for corruption. Virtually all of the indicators they examine appear to be important, but three are statistically significant: · The intensity of barriers to the entry of new business. · The effectiveness of the legal system. · The efficacy and competitiveness of services provided by infrastructure monopolies. The main lesson emerging from their analysis: a well established system of market institutions - clear and transparent rules, fully functioning checks and balances (including strong enforcement mechanisms), and a robust competitive environment - reduces opportunities for rent-seeking and hence incentives for corruption. Both the design and effective implementation of such measures are important if a market system is to be effective. It is not enough, for example, to enact first-rate laws if they are not enforced. The local political economy greatly affects whether a given policy reform will curtail corruption. Especially important are the following factors in the political economy: · The credibility of the government's commitment to carrying out announced reforms. · The degree to which government officials are captured by the entities they regulate or oversee. · The stability of the government itself. · The political power of entrenched vested interests. Economists in the field of industrial organization, antitrust, and regulation have long recognized these factors as potent determinants of opportunistic behavior, corruption, and "capture" of government officials. Only now are they becoming conventional wisdom among specialists in economies in transition. This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region - is part of a larger effort in the region to analyze the determinants of corruption and develop remedies. The authors may be contacted at hbroadman@worldbank.org or frecanatini@worldbank.org.

Seeds of Corruption: Do Market Institutions Matter?

The absence of new business in Russia is striking. Reforms to make Russia more competitive should start with eliminating regulatory and institutional barriers to the entry of new competitors. Many industrial firms in Russia have undergone changes in ownership, but relatively few have been competitively restructured. Using survey and other data, Broadman suggests that much of Russian industry is immune from robust competition because of heavy vertical integration, geographic segmentation, and the concentration of buyers and sellers in selected markets. Moreover, regulatory constraints protect incumbent firms from competition with new entrants, both domestic and foreign. Broadman sketches a reform agenda for Russia's post-privatization program, which emphasizes the restructuring of anticompetitive structures and the reduction of barriers to entry. Broadman's proposed reform agenda calls broadly for strengthening Russia's nascent rules-based framework for competition policy to reduce discretion, increase transparency, and improve accountability. This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Regional Office - is part of a larger effort in the region to assess structural reform in Russia. The author may be contacted at hbroadman@worldbank.org.

Reducing Structural Dominance and Entry Barriers in Russian Industry

Many industrial firms in Russia have undergone changes in ownership, but relatively few have been competitively restructured. Using survey and other data, the author suggests that much of Russian industry is immune from robust competition because of heavy vertical integration, geographic segmentation, and the concentration of buyers and sellers, in selected markets. Moreover, regulatory constraints protect incumbent firms from competition with new entrants, both domestic and foreign. The author sketches a reform agenda for Russia's post-privatization program, which emphasizes the restructuring of anti-competitive structures and the reduction of barriers to entry. The author's proposed reform agenda calls broadly for strengthening Russia's nascent rules-based framework for competition policy to reduce discretion, increase transparency, and improve accountability.

/pdf/reducing-structural-dominance-and-entry-barriers-in-russian-qiioddv9c2.pdf

Corruption is now recognized to be a pervasive phenomenon that can seriously jeopardize the best-intentioned reform efforts. Economists in the field of industrial organization, antitrust and regulation have long recognized certain institutional factors as potent determinants of corruption, opportunistic behavior and "capture" of government officials. Only now are these relationships becoming conventional wisdom among specialists of economies in transition. This paper presents an analytical framework for examining the role basic market institutions play in rent-seeking and illicit behavior. Using data only recently available on the incidence of corruption and institutional development across an array of transition economies, the paper provides preliminary evidence on the link between the development of market institutions and incentives for corruption. The empirical results suggest that high barriers to new business entry and soft budget constraints on incumbent firms are particularly important institutional factors engendering opportunities for corruption. The findings also support the notion that economic development and maturation of democratic processes both temper corruption, as does, to a lesser extent, openness to international trade.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID316559_code020619560.pdf?abstractid=316559&mirid=1&type=2

Harry G. Broadman

Papers

The Distribution of Foreign Direct Investment in China

Seeds of Corruption: Do Market Institutions Matter?

Reducing Structural Dominance and Entry Barriers in Russian Industry

Reducing Structural Dominance and Entry Barriers in Russian Industry

Corruption and Policy: Back to the Roots