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The evolution over time of subjective well-being (SWB) in transition countries exhibit some peculiarities: greater variations which are more strongly correlated with the trends of GDP relative to other countries. What is the possible role of social trust in predicting such variations? We compare the capacity of the trends of GDP and of social trust to predict the trends of SWB. We find that the strength of the relationship between social trust and SWB over the medium-term is comparable to that of GDP. Our conclusion is that in the medium-term, even in countries considered as an extreme case of relevance of material concerns for well-being, social trust is a powerful predictor of the evolution over time of SWB. However, in the short run the relationship between social trust and SWB does not hold and GDP stands out as the only significant correlate of SWB.

After twenty-five years of economic transition economic performance varies considerably in transition countries, while in most cases current outcomes show that the desired effects have not been achieved. In this paper we elaborate on why industrial policy has been a key missing element in the transition and has greatly contributed to the unexpectedly small and slow pace of economic recovery. After discussing the achieved level of economic development we undertake an empirical analysis in order to define the role of several important factors of growth, as seen at the beginning of transition (reform progress, macroeconomic stabilisation, initial conditions) and those that attracted particular attention during the global crisis (industrial/manufacturing output, exports). The analysis shows that the growth model in transition economies has altered both over time and in relation to the progress of transition reforms. The most important change concerns the share of industrial output in GDP, which is found to be one of the most important factors of growth after the initial phase of reform. These results suggest that transition economies should implement industrial policy measures as an integral part of their reform strategy instead of just speeding up reforms as the key (if not the only) element of government policy. Based on these results, we explore what would be a viable and proper industrial policy in transition countries, particularly what should be done in current conditions after the damaging effects of the recurrent global recession, and make some policy suggestions.

This study investigates the link between bank lending behavior and country-level instability. Our dynamic model of bank's profit maximization predicts a non-monotonic relationship between bank lending and macroeconomic uncertainty. We test this proposition using a panel of Ukrainian banks over the 2003Q2–2008Q2 period. The estimates indicate that banks decrease their lending ratio in times of substantial economic volatility, which could be explained by higher risk aversion of bank managers. Additionally, small and least profitable banks are less likely to be affected by changes in the macroeconomic environment compared to their large and most profitable peers. This outcome is robust with respect to the different measurements of macroeconomic uncertainty.

This study deals with important issues related to the new political macroeconomics and its appliance to the economic movements in Serbia, which is a country of ?new democracy? as well as with transition economy. In political macroeconomics, it is a known fact that the economic policy instruments can be used for political purposes - simulated improvement of economic indicators to win the elections. These options assume specific features in transition economies, such as the Serbian economy. The political instability in Serbia, reflected in frequent elections, as well as in the diversity in political and economic goals of the key political parties leading to increasing political uncertainty in both the pre-election and post-election periods, weakened the economic system. Simultaneously, using the economic policy for political purposes to support the ?pro-democratic? and ?pro-European? parties proved to be paradoxically justified.

There are at least three reasons why many transition economies succeeded by pursuing policies that are very different from radical economic liberalization (shock therapy), which is normally credited for the economic success of Central European countries. First, optimal policies are context dependent, specific for each stage of development, so what worked in Slovenia cannot be expected to work in Mongolia. Second, even for countries at the same level of development, reforms needed to stimulate growth are different; they depend on the previous history and on the path chosen. The reduction of government expenditure as a share of GDP did not undermine significantly the institutional capacity of the state in China, but in Russia and other CIS states it turned out to be ruinous. It is the growth diagnostics that should reveal the missing ingredient of economic growth. Introducing this “missing ingredient” should not, however, result in the destruction of other pre-conditions for growth. The art of the policymaker is to create markets without causing government failure, like it happened in many CIS countries. Third and most importantly, there are long-term trajectories of development that are path dependent: once the country gets on a particular trajectory, it is sometimes better to stay on track because the costs of a transition to a seemingly superior trajectory may be prohibitively high.

This paper examines driving forces of economic growth in the second transition decade, by testing which determinants from the first decade remain dominant, and which new factors appear in explaining growth. To this end a panel simultaneous equation model is estimated based on a sample of 27 transition countries in the period 1999- 2009. According to the main findings of the paper initial conditions do not play a role in determining economic growth in the second decade, but macroeconomic stabilization and structural reforms still matter. However, in contrast to the first decade, the overall impact of structural reforms is not positive, indicating that difficult progress with reforms in the second decade could slow down economic growth. Moreover, EU membership seems to have the additional effect of slowing down the growth of the accessing countries, meaning that once a transition country becomes an EU member it has a similar growth path to other EU countries in terms of lower growth rates. All this indicates that only countries that undertook fast reforms in the early phase of transition experienced significant benefits from reforms, achieving higher levels of economic development and becoming closer to developed EU countries. Finally, investments and openness of the economy appear as new important determinants of growth.

The paper demonstrates why the transition process is taking more time than predicted and why many countries are still far away from the projected goal: a developed market economy. Analyzing the causes and re-examining the endogenous character of the transition progress, the authors conclude that the majority of reforms were implemented at a pace conditional on the initial, pre-transition conditions. The results obtained show a significant impact on the economic and institutional heritage of a country, which lasts much longer than was predicted on the eve of the reform process: initial conditions strongly and significantly affect the speed of transition throughout the entire observed period (1989-2007). They also affect the performance of a country: in the first years the transition progress may affect growth in a positive way, but later it becomes insignificant. This can explain some growth peculiarities previously remarked when transition countries were analyzed by means of long-run growth models. Using Barro and Levine-Renelt models the authors show that despite somewhat better results for the second decade of transition many peculiar patterns remain, which could temporarily block poorer transition economies in their attempts to catch up and cause unnecessary losses since transition policies were not properly adjusted to the initial conditions.

Using Solow-Törnqvist residuals as well as two alternative measurements, we present the estimates of total factor productivity (TFP) growth in a sample of 30 European economies for the period 1994–2004. In most of Western Europe, we find a deceleration of TFP growth since 2000. However, the economies of ‘New Europe’ exhibit a higher level of TFP growth overall and have slowed less than those of ‘Old Europe’. In the new market economies of Central and Eastern Europe, we find both high TFP growth as well as acceleration in the second half of the sample. Regression evidence from Western Europe suggests that product market regulation may adversely affect TFP growth and may thus impair convergence.

All forecasts for transition countries - the 29 EBRD countries of operation - since mid-2008 have been repeatedly downgraded. The latest forecasts (May 2009) envisage an average income decline of 5 per cent in 2009 and only a small recovery of 1.4 per cent in 2010; performance is very diverse. In general, transition countries faced two shocks: a sudden stop and reversal of capital inflows, and an exports collapse due to the global slump. More specific factors include: 1) Home made sub-primes (domestic loans to households, enterprises and governments originally denominated in foreign currency); 2) External imbalances; 3) Worsening terms of trade for primary products exporters; 4) Fall or reversal of FDI and portfolio investment inflows; 5) Funds withdrawal by foreign banks; 6) External demand reduction; 7) Differences in initial positions and policy response. Earlier membership of the Euro by the new member states through a relaxation of Maastricht rules might have been beneficial, but the current crisis is no time for changing or bending rules. By comparison with the transition recession of the 1990s, the current recession is much smaller and shorter, it benefits from more generous assistance from the international community, and from the more enlightened fiscal and monetary policies now uncharacteristically recommended by International Financial Organizations.

This paper evaluates the usefulness of business sentiment indicators for forecasting developments in the Chinese real economy. We use data on diffusion indices collected by the People's Bank of China for forecasting industrial production, retail sales and exports. Our bivariate vector autoregressive models, each composed of one diffusion index and one real sector variable, generally outperform univariate autoregressive models in forecasting one to four quarters ahead. Similarly, principal components analysis, combining information from various diffusion indices, leads to enhanced forecasting performance. Our results indicate that Chinese business sentiment indicators convey useful information about current and future developments in the real economy. Moreover, the results could be seen as support for the reliability of the official data on the real economy, as both survey and real sector data seem to reflect the same underlying economic dynamics. … But historically, we always observed in the past that the...

This paper examines the efficiency of the large-scale manufacturing sector of Pakistan using parametric as well as non-parametric frontier techniques. Production frontiers are estimated for two periods─1995-96 and 2000-01─for 101 industries at the 5-digit PSIC. The results show that there has been some improvement in the efficiency of the large-scale manufacturing sector, though the magnitude of improvement remains small. The results are mixed at the disaggregated level: whereas a majority of industrial groups have gained in terms of technical efficiency, some industries have shown deterioration in their efficiency levels. The results from both the approaches are consistent, and in line with similar studies.

Conventional wisdom suggests that the stocks of human capital were one of the few positive legacies from communism. However, if factories under communism were so inefficient, why would the education system not have been? Using the education production function approach and new data on educational inputs and outcomes from 1960 to 1989, we find evidence suggesting that the official human capital stocks figures were 'over-estimated' during the communist period. In other words, we find that the official human capital stock numbers are significantly higher than those predicted not only in relation to countries at similar levels of development, but also on the basis of educational systems with comparable features and efficiency levels.

This paper is a reinterpretation of the work done of the authors several years ago and it underlines the political risk of the countries that are member of the EU11 (European Union segmented at 11 countries that have geographical and strategic similar positioning) zone shaped by the World Bank in the year 2013. The research paper is targeted to underline the evolution between the peak of the crisis financial output’s slope and the result of the reforms implemented at the level of the European Central Bank and at the level of external regulators like the European Commission, the International Monetary Fund and the World Bank. The authors followed this path redundant to the fact that the three of them have specific backgrounds, from ecology, corporate governance and business related, and for that the authors tried to develop a path that shows the development of general risk at country level and macro-zone level using also Business Intelligence practices.

Durch Vergleich aggregierter Statistiken und ausgewahlter empirischer Studien zeigt dieser Beitrag, dass 25 Jahre nach der deutschen Einheit sich die Merkmale und Ergebnisse der Arbeitsmarkte in West- und Ostdeutschland in mancher Hinsicht weitgehend angeglichen haben, andererseits aber immer noch deutliche Unterschiede bestehen. Wahrend bei den Arbeitsnachfrageentscheidungen der Firmen und bei der Vertretung von Arbeitnehmern durch Betriebsrate und Gewerkschaften keine substanziellen Unterschiede festgestellt werden konnen, liegen die beiden Teile des Landes beim Arbeitsangebot, der Arbeitsproduktivitat, den Lohnen und der Tarifbindung weiter auseinander, und sie unterscheiden sich deutlich in der Arbeitslosenquote. Diese Unterschiede durften beobachtbare und unbeobachtbare Merkmale okonomischer Akteure wie auch Unterschiede im Verhalten, bei Normen und bei individuellen Einstellungen widerspiegeln.

We examine the role of financial development in economic growth in the former Communist countries of Central and Eastern Europe and the Commonwealth of Independent States during the first two decades since the beginning of transition. These countries, which had undeveloped financial systems under Communism, provide an interesting test of the relationship between financial development and growth. Our study is the broadest in terms of coverage and time period. We find that measures of financial market efficiency and competitiveness are more important than the size of the market in terms of promoting economic growth.

We evaluate the effect of the 1989 shock over economic development in four Eastern European countries. We apply a counterfactual approach and define the shock alternatively as the trigger for economic openness, political competition, or both. The main result is an effect of economic freedom large than the one of democratization. In Poland and Bulgaria we find a positive impact of economic freedom, while in Bulgaria there is also a smaller effect of democratization. In Albania, after an initial recession, economic freedom helps recovery. Finally, Romania does not show any robust effect.

Employing a probit and Logit model, this paper demonstrates that small firm development, conceived of in terms of structural, behavior and performance features, is correlated with regional location in Poland. Regional GDP is also shown to be polarizing. The paper uses original data that samples the small firm stratum in two contrasting regions, Gdansk and Lublin. The following variables were shown to be significantly correlated with regional location: legal structure, subcontracting, technological level of the products of the firm, average wage and intention to expand turnover. Policy implications are discussed including the desirability of a regionally differentiated small firm policy that reflects the level of small firm development in a particular region.

This paper tests whether there is a macroeconomic cost of a reform reversal during transition. A reform reversal is defined as a downgrading in the level of an average reform indicator. This is important both from an empirical and a theoretical point of view. In the standard empirical framework the current level of reform affects growth negatively, while the lagged level affects growth positively. This nonlinear effect is shown to imply a counterintuitive, short-lived, or at best an insignificant, positive effect of a reversal. From a theoretical point of view however, most models assume a reversal to be costly. The existence of reversal costs is even crucial for gradualist strategies to dominate big bang strategies in the presence of aggregate uncertainty. In a simultaneous equation system with growth and the level of reform as dependent variables we explicitly introduce a reversal parameter. Empirical results suggest that a reversal generates an immediate negative contribution to real output growth. Taking into account the level of reform a country achieved, a reversal is found to be more costly at higher levels of the reform indicator.

Although the theoretical literature has identified various sizeable benefits from foreign direct investment inflows (FDI), the empirical literature has been unable to establish a positive and significant impact of FDI on the rates of economic growth of host countries. One reason for this difficulty is that theory equates FDI to technology transferred, while in most countries and regions of the world FDI encompasses an array of arrangements that goes well beyond pure technology transfer. This paper tests for the effects of FDI on growth in a set of countries in which FDI is purer technology transferred: the 25 Central and Eastern European and former Soviet Union transition countries between 1990 and 1998. Our main finding is that, in this more appropriate setting, FDI has a positive and significant impact on economic growth as theory predicts.

After the collapse of socialism, post-Soviet republics needed new economists equipped with the intellectual requirements of a new economic order based on private property and market mechanisms. To this end, they reorganized economics curricula, published new textbooks, and trained students and academics in their home countries or in the West. In all of these efforts, unlike during the old era, the new republics cooperated closely with international organizations. This leads to the question, addressed here, of how these efforts changed the quantity and quality of international publications of post-Soviet economists.The results of this study show that in the ex-Soviet Central Asian and Caucasian (CAC) countries, the number of international publications increased gradually. Results also indicate that publications usually concern regional issues and are published in low impact journals. The preference of CAC economists for Russian language journals implies that language is still a barrier to publication in international journals. Finally, cooperation with Westerners and Western institutions is found to contribute positively to the publication performance of post-Soviet economists.

In Romania, the communist regime promoted an official policy of gender equality for more than 40 years, providing equal access to education and employment and restricting pay differentiation based on gender. After its fall in December 1989, the promotion of equal opportunities and treatment for men and women did not constitute a priority for any governments of the 1990s. This paper analyzes both gender and occupational wage gaps before and during the first years of the transition to a market economy and finds that the communist institutions did succeed in eliminating the gender wage differences in female- and male-dominated occupations but not in gender-integrated occupations. During both regimes, wage differences were, in general, much higher among workers of the same gender working in different occupations than between men and women working in the same occupational group, and women experienced a larger variation in occupational wage differentials than men. JEL codes: J24; J31; J71; J78; P26; P27

This study extends some predictions from a game theoretical model which evaluates the net effect of government ownership on firm performance and empirically tests these predictions using a panel data of Vietnamese firms in the period 2004-2012. The empirical results estimated from static and dynamic models confirm our propositions of a negative effect of state ownership on firm profitability and labor productivity. Furthermore, this study documents a moderating role of firm size in the relationship between state shareholding and the performance of firms with higher state ownership in larger firms enhancing profitability and labor productivity. Keywords: government ownership; firm performance; dynamic model and interaction effect

The existing literature on soft budget constraints suggests that firms may be subsidized for political reasons or because of the creditors' desire to recover a part of the sunk cost invested in an earlier period. In all these models hard budget constraints are viewed as being, in principle, capable of inducing the necessary restructuring behaviour on the level of the firm. This paper argues that the imposition of financial discipline is not sufficient to remedy ownership and governance-related deficiencies of corporate performance. Using evidence from the post-communist transition economies, the paper shows that a policy of hard budget constraints cannot induce successful revenue restructuring, which requires entrepreneurial incentives inherent in certain ownership types (most notably, outside investors). The paper also shows that the policy of hard budget constraints falters when state firms, because of inferior revenue performance and less willingness to meet payment obligations, continue to pose a higher credit risk than privatized firms. The brunt of state firms' lower creditworthiness falls on state creditors. But the ‘softness’ of these creditors, while harmful in many ways, is not necessarily irrational, if it prevents the demise of firms that are in principle capable of successful restructuring through ownership changes.

To achieve sustainable economic growth in transition countries, it is crucial that enterpriseperformance is improved. However, it is not a priori clear which factors are essential for this. ForRussia, data to investigate the potential determinants of enterprise performance is scarce.Therefore, the survey described in this paper collects data on enterprise restructuring, ownership,competition, budget constraints and, particularly, institutions in Russian industry, covering theperiod between the start of 1992 and September 1999. On their own, the survey answers show adevastating restructuring crisis, massive privatization, rather weak competition, unexpectedly hardbudget constraints, an overwhelmingly negative and relatively positive assessment of formal andinformal institutions respectively, and largely the same ruling networks as before the start of marketreforms. Ironically, tentative results based on this survey indicate that (un)important determinantsof enterprise restructuring in Russian industry are exactly those on which, according to the responseper se, least (most) reform has been accomplished. That is: stronger competition and betterinstitutions go with more restructuring, while privatization and harder budget constraints do not.The substitution, to some extent, of informal for formal institutions may have prevented even worserestructuring figures, but the results also suggest that better formal institutions in general wouldhave led to further improvements.

This paper takes a systematic look at the portfolio choice problem faced by investment banks or funds investing in transition economies. We relate the performance of projects in the transition economies to the broader macroeconomic and international environment, which affect the project through its input-output structure and its financial balance sheet. Among the macroeconomic determinants of enterprise behaviour we consider are productivity growth, real wage growth, movements in the international terms of trade, shocks to the relative price of traded and non-traded goods, domestic and foreign interest rates, currency depreciation and the rate of inflation. We evaluate the attractiveness of alternative investment strategies and provisioning rules from the perspective of portfolio theory.

In this investigation, we examined 256 cases of financial failure and fraud in Vietnam’s chaotic years from 2007 to 2013. Categorical data analyses suggest that the rent-seeking approach, or resource-based orientation, alone does not help explain the outcome of a business intention while the association between Orientation and Approach is the best-fit predictor. Rampant financial collapse not only increases the cost of funds but also erodes trust in the economy. Entrepreneurship development and creativity capacity building, in light of this, are necessary to improve socio-economic conditions and the environment. In this manuscript, we also introduce intuitive and cognitive factors to predict ex-ante outcome of a financing scheme.

Since the 1998 “wind of falsification and embellishment,” Chinese official GDP statistics have repeatedly come under scrutiny. This paper evaluates the quality of China’s GDP statistics in four stages. First, it reviews past and ongoing suspicions of the quality of GDP data and examines the evidence. Second, it documents the institutional framework for data compilation and concludes on the implications for data quality. Third, it asks how the National Bureau of Statistics could possibly go about credibly falsifying GDP data without being found out. Fourth, it examines if the first-and second-digit distributions of official GDP data conform to established data regularities (Benford’s Law). The findings are that the supposed evidence for GDP data falsification is not compelling, that the NBS has much institutional scope for falsifying GDP data, and that certain manipulations of nominal and real data would be virtually undetectable. Official GDP data, however, exhibit few statistical anomalies (conform to Benford’s Law) and the NBS thus either makes no significant use of its scope to falsify data, or is aware of statistical data regularities when it falsifies data.

This is the post-print version of the final paper published in Economic Systems. The published article is available from the link below. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. Copyright @ 2013 Elsevier B.V. We investigate the effects of economic crises on the subsequent economic, performance, economic reform, democratization and institutional change. Our analysis is based on a sample of post-communist countries, most of which experienced severe economic, crises during the 1990s. We find that the severity of crisis has a positive impact on the subsequent pace of economic reform, economic growth and, with a delay, on investment and institutional change. Episodes of high inflation, moreover, translate into lower subsequent inflation. Crises thus serve as catalysts of reform and institutional change and lead to better long-term economic performance.

Since reforms started in 1978, China has combined rapid growth with moderate price stability. This paper analyzes China's macroeconomic performance over the past fifteen years with special attention to factors responsible both for the pace of economic expansion and the periodic fluctuations. Regarding the former, the author identifies four sources of stimuli: administrative decentralization, high levels of fixed capital investment, the elastic supply and quality of the labor force, and the increasing volume of savings supplemented in recent years by a large inflow of foreign direct investment. Future growth with stability calls for controlling and implementing banking and fiscal reform.

In the recent financial crisis, macroeconomic stimuli produced mixed results across developed economies. In contrast, China's stimulus boosted real GDP growth from an annualized 6.2% in the first quarter of 2009 trough to 11.9% in the first quarter of 2010. Amidst this phenomenal response, land auction and house prices in major cities soared. We argue that the speed and efficacy of China's stimulus derives from state control over its banking system and corporate sector. Beijing ordered state-owned banks to lend, and they lent. Beijing ordered centrally-controlled state-owned enterprises (SOEs) to invest, and they invested. However, our data show that much of this investment was highly leveraged purchases of real estate. Residential land auction prices in eight major cities rose about 100% in 2009, controlling for quality variation. Moreover, higher price rises occur these SOEs are more active buyers. We argue that these centrally-controlled SOEs overbid substantially, fueling a real estate bubble; and that China's seemingly highly effective macroeconomic stimulus package may well have induced costly resource misallocation.

Legally binding treaties or memorandums have been used over time to regulate the issue of national borders of many European countries. As a result, relatively large groups of people have become ethnic minorities in other countries. They may conserve their ethnic identities, and therefore their children may accumulate ethnic human capital (e.g., language, culture, and religion) in addition to the general human capital of the country. Therefore, they can get access to an appropriate occupation linked by tradition or other factors to their ethnic group. This paper uses estimates from a selection model with an endogenous switch among three broad types of occupational groups to analyze the composition of the wage gap between Romanians and ethnic Hungarians in Romania before and during the transition from a planned to a market economy. The results suggest that the institutional settings of the controlled economy allowed Romanians to work in occupations that gave them the best returns, while the changes during the transition years allowed ethnic Hungarians to work in occupations that gave them the best returns.

The importance of new firm creation in the post-Communist economies of East Central Europe (ECE) has been subject to extensive research. This paper focuses on an area of entrepreneurship which has received relatively little attention in the transition economy context but which is of particular importance for the modernization of the transition economies: knowledge-based entrepreneurship (KBE), or new firm creation in industries considered to be science-based or to use research and development (R&D) intensively. We begin by sketching the situation in Poland?s small and medium-sized business sector, then proceed to outline the National Innovation System, with particular attention devoted to the question of finance and policy initiatives. We then turn to the analysis of a series of case studies in industries such as information technology, life sciences, digital navigation technology (mobile mapping systems), aviation, and other industries considered to be science-based or R&D-intensive. Among the issues treated are the resources and strategies involved in KBE in Poland, the relationships (networks) of the firms in question and how they are used for knowledge acquisition, and barriers to innovation. We find that overall Poland appears to be a relatively poor location for KBE. The knowledge resources of the firms studied here are largely in-house; there is very little evidence of distributed, or open, innovation here. These firms have also managed to achieve their successes with little or no help from the state, and have, in most cases, had to rely on networks of families or friends (including those in local industrial clusters) in order to sustain and develop their business.

The importance of new firm creation in the post-Communist economies of East Central Europe (ECE) has been subject to extensive research. This paper focuses on an area of entrepreneurship which has received relatively little attention in the transition economy context but which is of particular importance for the modernization of the transition economies: knowledge-based entrepreneurship (KBE), or new firm creation in industries considered to be science-based or to use research and development (R&D) intensively. We begin by sketching the situation in Romania?s small and medium-sized business sector, then proceed to study the conditions for high-tech firm development in the country, focusing on the institutional infrastructure and policy initiatives. We then turn to the analysis of a series of case studies of firms active in the areas of information technology, pharmaceuticals, and advanced chemistry. Among the issues treated are the resources and strategies involved in KBE in Romania, the relationships (networks) of the firms in question and how they are used for knowledge acquisition. We find that overall Romania appears to be a poor location for KBE, with R&D spending as a percentage of GDP very low (and falling for much of the transition period) and a poorly educated population. Most of the firms studied here rely on foreign markets for development of their more innovative products, whereas domestic markets provide opportunities for higher volume sales of less advanced products. The nature of strategic business relationships and networks varies significantly across the firms studied, with some engaging in virtually no collaboration in the area of innovation, and others engaging quite intensively with academic partners in product development.

This paper provides the quantitative estimate of the potential growth bonus for CIS countries, and in particular EU's Easter Neighbours, that can be a result of deeper institutional harmonisation with the EU. Econometric investigation involving instrumental variable, simultaneous equation and dynamic panel techniques documents the strong positive link between growth performance and reforms, as well as between reforms and European integration. The paper derives the range of possible values of growth bonus from the deepened neighbourhood cooperation between 1 and 3.8 with the median at 1.8 percentage points. The least growth bonus is expected through basic liberalization reforms, while countries with a considerable institutional gap are likely to gain the most.

Current report aims to identify major existing gaps in the four socio-economic dimensions (economic, human, environmental, and institutional) and to reveal those gaps which could potentially hinder social and economic integration of neighbor states with the EU. To achieve this, the authors aim to assess the existing trends in the size of the gaps across countries and problem areas, taking into consideration the specific origin of the gap between EU15/EU12, on the one hand, and FSU republics, EU candidates and West Balkan countries, on the other hand. The paper is structured as follows: (1) An analysis of the historic roots and origins of the development gap, and its evolvement over time. (2) A review of literature sources, draft analysis of primary statistical data, and qualitative explanations of gaps and divergences in selected development issues across four socio-economic dimensions: • level of economic development and convergence rates based on real GDP (application of methodology testing ß and ? convergence to the set of countries analyzed); • quality of life and its components (poverty, inequality, health status and Heath care, access to fresh water and sanitation facilities, subjective perceptions of well-being); • human capital and labor market development, including level of education and public spending on education, its accessibility and quality, main differences in labor market development (employment participation rates and levels of unemployment, new jobs creation and labor protection legislation); • innovation potential, including R&D, information and communication technologies, and institutional environment; • environmental performance in terms of environmental stresses, efforts aimed at their reduction, and institutional capacity; • business climate, political institutions, and other institutional indicators (econometric analysis). (3) A test econometric analysis of development gaps across selected dimensions by using a Principal Components Method (PCM). The results are further presented in the form of ranks of countries analyzed reflecting their distances from EU15 in respective aggregate averages. Special attention is paid to gender-related development issues. Respective issues in human capital and labor market study, as well as variables included into PCM analysis were supplemented with relative gender data. Several preliminary conclusions finalize the report.

Much empirical research has highlighted the importance of institutions and initial conditions in the transition to a market economy. However, relatively little is still know about how these factors directly affect growth paths. This paper explores how institutional factors and initial conditions explicitly impact consumer and firm decisions. Simulations are run on a simple growth model modified to reflect institutional conditions during transition. The model generates a series of growth paths that lend insight into how different institutional structures affect growth dynamics. Policies that work under certain institutional circumstances, such as the “big bang,” may not work under others.

The coalition cabinet in which Solidarity played a leading role, but which also included Communists and their allies, won Parliamentary approval on September 12, 1989. This coalition inherited from the Communists an economy in deep crisis: inflation was raging, shortages of virtually all goods were rampant, and the black market was all-pervasive. The new government pledged to restore the market economy. This paper discusses the economy under Solidarity rule, focusing on stabilization and the restoration of private enterprise.

This essay appraises the scholarly findings on the level of consumption and output in the USSR, compared with that in the West. Such aggregative calculations are onerous for any country, and not very surprisingly have encountered particular difficulty where such a strange society as Soviet communism has been in question. Predictably, the results have been controversial, but properly viewed they still provide illuminating perspective on the extraordinary events that have lately transpired in the USSR.

F or many years the Yugoslav economic system appeared to offer a middle way between capitalism and Soviet central planning. The Yugoslavs' brand of market socialism placed reliance on markets to guide both domestic and international production and exchange, with the socialist element coming from the "social ownership" and workers' self-management of enterprises. The system seemed successful until the late 1970s. However, in recent years, many of the problems besetting other socialist economies like Poland and Hungary-like stagnation, international debt, enterprise inefficiency and inflation-have emerged to bring the whole experiment into question. These failures raise wider questions about the compatibility of socialist ownership and control with the market mechanism. I conclude that, while Yugoslav market socialism has not been proven inherently unfeasible, it contained serious flaws concerning the organization of the firm and the operation of the capital market. Reforms paralleling those elsewhere in Central and Eastern Europe are now on the agenda, but the situation has been complicated by ethnic rivalries which bring into question the survival of the Yugoslav state. This paper will first describe how the Yugoslav economy has been distinguished from those of its socialist neighbors. The following sections will describe the economic record of Yugoslavia since the 1950s, and the lessons to be drawn from the long-standing Yugoslav experiment.

Hungary began its transition to a market economy as long ago as 1968 with the adoption of the New Economic Mechanism, when detailed central planning was abandoned and the economy was regulated by means of financial and economic levers (Hare, Radice and Swain, 1981). However, after a period of re-centralization in the 1970s and further marketoriented reforms during the 1980s, it became evident that the country was still far from achieving a successful transition. Nevertheless, Hungary's attempts at economic reform over the last 20 years are remarkably instructive, both for the present government's program of transition and for other Eastern European nations (for some general discussion of reform attempts and approaches, see Hare, 1987). Moreover, many of the measures now being implemented in Hungary were prepared and in many cases began to be implemented prior to the country's political transformation. Hence, there is much stronger continuity in the Hungarian reforms than one can find elsewhere in the region.

Building on the three-sector-hypothesis, the New Theory of Trade, and the New Economic Geography, we investigate the development of economic structures of European countries over the last three decades using employment data. We test for structural convergence which we analyze on the aggregate level as well as specifically for manufacturing and service industries. For this we implement both time series and panel data methods. Our results indicate overall structural convergence between Western European countries over time. This is mainly due to strong intersectoral convergence patterns as countries shift from industrialized to service economies. In contrast, the results regarding intrasectoral convergence are mixed: Increasing spatial concentration in production is dominant in technology-intensive manufacturing industries which are characterized by economies of scale and path-dependency, whereas convergence is found in mature, less technology-intensive industries. In most service branches country-specific differences do not change to a significant extent with the exception of transport and storage services.

In the 1990s transition from socialism to capitalism in Eastern Europe life satisfaction followed the collapse and recovery of GDP, but failed to recover commensurately. By 2005, with GDP averaging about 25 per cent above its early 1990s level, life satisfaction was typically back to its earlier level, but was arguably still below pre-transition values. Increased satisfaction with material living levels occurred at the expense of decreased satisfaction with work, health, and family life. In the decade of the 1990s, disparities in life satisfaction increased with those hardest hit being the less educated and persons over age 30; women and men suffered about equally.

In this paper we used the procedures developed in the Kumar and Russell (2002) growth-accounting study to examine cross-country growth during the 1990's. Using a data set comprising developed, newly industrialized, developing and transitional economies, we decomposed the growth of output per worker into components attributable to technological catch-up, technological change and capital accumulation. In contrast to the study by Kumar and Russell (2002), which concluded that capital deepening was the major force of growth and change in the world income per worker distribution over the 1965-1990 period, our analysis showed that, during the 1990's, the major force in the further divergence of the rich and the poor was due to technological change, whereas capital accumulation played a lesser and opposite role. In further contrast, we found that efficiency changes (insignificantly) led (on average) to regress rather than progress. Finally, although on average we found that transitional economies performed similar to the rest of the world, the procedure was able to discover some interesting patterns within the set of transitional countries.

As the experience of European transition countries shows, the opening-up of their economic systems for international competition and FDIs, deepening economic liberalization and integration, and on this basis, the realization of real convergence within the integration block lead to the increased role of New Trade Theory in explaining their international economic relations. The processes of Ukraine's economic liberalization and approximation of its level of economic development to that of the EU-members should stipulate for transition of Ukrainian economy onto the dimension which explains industrial and trade relations through the prism of the New Trade Theory postulates coupled with Traditional Trade Theory principles. This article explores the position of Ukraine in the intra-industry trade with its main trade partners and problems of measuring the homogeneity degree of Ukraine’s trade structure and the trade structures of its trade partners as well as its potential reciprocal demand within the regional EU and SEA integration blocks. The empirical analysis reveals that inasmuch as consumer preferences in Ukraine differ from those of its two SEA-partners (Russia and Kazakhstan), their disposition to intensify intra-regional trade relations with Ukraine in the future would be reduced. The SEA countries would rather prefer to expand their integrated export potential (for example, by forming big oligopolistic financial and industrial groups in the mining, metallurgy, heavy engineering, aircraft and space industries on the basis of intra-regional mergers and acquisitions, thus enjoying external economies of scale) and satisfy their individual importing wishes on the markets of third countries in compliance with the postulates of the Traditional Trade Theory. Nevertheless, it is believed that intra-industry trade of Ukraine would develop optimally under deepening of its industrial and trade relations with advanced industrial countries, which have objectively reached the highest level of international specialization and product differentiation. In view of the optimization of their reciprocal demand, advanced industrial countries would try to pull the Ukrainian economy towards European economic area in order to realize their trade and investment interests. FDIs turned Ukraine into an increasingly export-oriented economy due to homogenous products. At the same time, the influence of FDIs on Ukrainian imports of differentiated goods tends to decrease significantly. This means that there still is no effect of increasing complementarity between imports and FDIs, which – under condition of transition – is responsible for structural market changes, saturation of domestic market with differentiated products and as a result for development of intra-industry trade.

We analyse how the choice of reform speed and economic growth affect one another. We estimate a system of three equations where economic growth, economic reform and FDI are jointly determined. New reforms affect economic growth negatively, whereas the level of past reform leads to higher growth and attracts FDI. This means that the immediate adjustment cost of new reforms is counterbalanced by a future increase in FDI inflows and higher future growth through a higher level of past reform. Reform reversals contribute to lower growth. We use the model to simulate the impact of big bang reform and gradualist reform on economic growth. This is only meaningful in the presence of reform reversals, which requires aggregate uncertainty about the appropriate reform path. Using the coefficients from the empirical model, we find that even relatively small ex ante reversal probabilities suffice to tilt the balance in favour of gradualism. The case for gradualism gains strength if policymakers are short-sighted, but weakens if voters are myopic.

We develop an analytical framework to investigate the impact of differences in privatisation methods, private sector and capital market on economic growth in transition economies. Using dynamic panel data methods, a growth equation is estimated. Growth is found to be positively associated with capital market development. However only mass privatisation is found to have a significant positive effect on growth. The explanations we suggest relate to the underdeveloped capital market in transition economies. If the wealth distribution inherited from communism is ‘wrong,’ the matching of owners to firms under full privatisation will be inefficient. This finding has important implications for privatisation methods in less developed countries.

Analysis into the sources of lower levels of national productivities between Central and Eastern European economies and the European Union is scarce and lacks comparability. These sources are assessed by analysing the role played by sectoral structures. After providing a brief overview of comparative levels of economy-wide labour productivity between the EU-15 average, selected EU cohesion countries and the EU accession countries of Estonia, Poland, the Czech and Slovak Republics, Hungary and Slovenia, a quantitative account of the sectoral content of the national productivity gap is calculated. The paper develops a method to calculate the explanatory power of patterns of sectoral structures for the size of the productivity gap by hypothetically applying average EU-15 sectoral patterns on Central and Eastern European economies’ sectoral productivities. Subsequently, the respective roles of individual sectors in explaining the national productivity gaps are calculated by assigning weights to sectoral productivity gaps relative to their employment shares. These results are then carefully assessed in terms of potentials and prospects for swift and complete productivity catch-up and in terms of the most efficient policies to assist productivity convergence.

In this paper we discuss the necessity for an indirect approach to assess the growth and convergence prospects of ten Central and Eastern European countries (CEEC10). The necessity for an indirect approach arises for two reasons. First, the ongoing structural changes in the transition economies imply that their growth process is not yet adequately described by the long-run growth forces as identified by (neoclassical) growth theory. Second, their upcoming European Union membership has to be taken into account in growth projections. The indirect approach proposed in this paper is to base the growth projections for the CEEC10 on growth equations estimated for the incumbent EU member states. Thus, in effect we propose a calibration approach. Our study differs from previous studies that employ an indirect approach in two ways. First, we estimate growth equations for the EU and not for a large world-wide country data set that contains many heterogeneous countries that are essentially unrelated to the CEECs. Second, we assess the uncertainty inherent in growth projections by estimating a variety of economically meaningful equations and by specifying a variety of plausible scenarios for the explanatory variables. This results in distributions of projected growth rates, which allow for an uncertainty analysis. Besides growth rate distributions also convergence times distributions are computed.

The paper deals with two issues. First, it focuses on the analysis of Armenia’s trade performance based on the utilization of standard statistical models and develops comparative estimates of this performance relative to the peer countries. The comparison is undertaken in terms of trade openness, diversification, and composition. The main finding is that Armenia has been lagging in its export development relative to most CIS countries. The recent improvements in exports helped somewhat to reduce the gap. The second part of the paper provides for re-estimation of the “costs of blockade” effect. Armenia’s trade under-performance cannot be explained in terms of distorted government policies, because Armenia is recognized as a reform leader in the CIS.