Ratna Sahay

The Evolution of Output in Transition Economies; Explaining the Differences

What are the relative roles of macroeconomic variables, structural policies, and initial conditions in explaining the time path of output in transition and the large observed differences in output performance across transition economics? Using a sample of 26 countries, this paper follows a general-to-specific modeling approach that allows for differential effects of policies and initial conditions on the private and state sectors and for time-dependent effects of initial conditions. While showing some fragility to model specification, the results point to the preeminence of structural reforms over both initial conditions and macroeconomic variables in explaining cross-country differences in performance and the timing of the recovery.

From Transition to Market: Evidence and Growth Prospects

This paper presents evidence on the behavior of output and inflation in the transition economies during 1992-95. A regression analysis explores the differences in output performance across the transition economies during this period. The paper then engages in a numerical, somewhat speculative, exercise to assess the long-run growth potential ofthe transition economies. It concludes that it should take about 20 years for the faster reformers to reach current OECD per capita levels.

Financial Market Spillovers in Transition Economies

This paper examines financial market comovements across European transition economies and compares their experience to that of other regions. Correlations in monthly indices of exchange market pressures can partly be explained by direct trade linkages, but not by measures of other fundamentals. Higher-frequency data during three crisis periods reveals the presence of structural breaks in the relationship between exchange-, but not stock markets. While the reaction of markets during the Asian and Czech crises is muted, the pattern of high-frequency spillovers during the Russian crisis looks very similar to that observed in other regions during turbulent times. With greater financial market integration, the financial markets of the more advanced transition economies can be expected to behave more and more like their Asian and Latin American counterparts.

Internal Migration, Center-State Grants, and Economic Growth in the States of India

This paper examines the growth experience of 20 states of India during 1961-91, using cross-sectional estimation and the analytical framework of the Solow-Swan neoclassical growth model. We find evidence of absolute convergence--initially poor states grew faster than their initially rich counterparts. Also, the dispersion of real per capita state incomes widened over the period 1961-91. However, relatively more grants were transferred from the central government to the poor states than to their rich counterparts. Significant barriers to population flows also exist, as net migration from poor to rich states responded only weakly to cross-state income differentials.

How far is Eastern Europe from Brussels

The current destination of Central and Eastern European countries -- explicitly for some, implicitly for all -- is Brussels. One simple measure, not without theoretical justification, is physical distance. This papers focus, however, lies more in the distance in time and economic space. The paper fist compares income gaps between Central and Eastern Europe and European Union (EU) countries, then evaluates recent economic performance in Central and Eastern Europe in light of EU standards. Finally, it addresses the question of how long it will take the Central and Eastern European Countries to close the income gap with EU countries.

What Moves Capital to Transition Economies

Between 1991 and 1999, capital flows to 25 transition economies in Europe and the former Soviet Union differed widely in terms of overall levels and the share and composition of private flows. With some exceptions (notably Russia), the main form of private inflows was foreign direct investment. Portfolio investment was volatile and concentrated in a handful of countries. Regressions show that direct investment can be well explained in terms of economic fundamentals, whereas the presence of a financial market infrastructure and a property-rights indicator are the only explanatory variables that seem to have had a robust effect on portfolio investment.

Dollarization in Transition Economies: Evidence and Policy Implications

After most restrictions on foreign currency holdings were relaxed in the early 1990s, foreign currency deposits in transition economies have been increasing rapidly. This paper takes a first look at the evidence on dollarization for 15 transition economies, and then discusses some key conceptual and policy implications. Depending on the institutional constraints, foreign currency deposits as a proportion of broad money reached a peak of between 30 and 60 percent in 1992-93. Unlike what has been observed in Latin America, however, dollarization has fallen substantially in the aftermath of successful stabilization plans in Estonia, Lithuania, Mongolia, and Poland. Since foreign currency deposits reflect mainly a portfolio choice, the fall in dollarization can be primarily attributed to higher real returns on domestic-currency assets, as a result of lower inflation and more market-determined interest rates.

Do Government Wage Cuts Close Budget Deficits? Costs of Corruption

Real wage declines have been common in the public sector in many countries over substantial periods of time. In several cases, such wage reductions have coincided with declines in the efficiency of the public sector. In a simple analytical framework, it is shown that higher wage levels alter the incentive-compatible equilibrium by attracting relatively skilled human capital to the government sector, which raises the quality of public output--tax revenue collection in this paper. Increases in wages should complement appropriate monitoring and penalty rates for effective tax administration; prescriptions of raising the statutory tax rate alone, however, may not increase revenue collection.

Output Response to Currency Crises

This paper analyzes the behavior of output during currency crises using a sample of 195 crisis episodes in 91 developing countries during 1970-98. It finds that more than two-fifths of the crises in the sample were expansionary, and that output contraction was greater in large and more developed economies than in small and less developed economies. Currency crises have not been any more contractionary in the 1990s than in the previous two decades. Countries that traded less with the rest of the world, that had a relatively open capital account, and where crises were preceded by large capital inflows were more likely to be associated with contraction during crises. The contraction was more pronounced if trade competitors devalued, oil prices rose during the crisis, and postcrisis period was marked by tight monetary policy and expansionary fiscal policy.

Keynes, Cocoa, and Copper: In Search of Commodity Currencies

This paper examines whether the real exchange rates of commodity-exporting countries and the real prices of their commodity exports move together over time. Using IMF data on the world prices of 44 commodities and national commodity export shares, we construct new monthly indices of national commodity export prices for 58 countries over 1980-2002. A long-run relationship between real exchange rates and real commodity prices is found for about two-fifths of the commodity-exporting countries. Also, the behavior of the real exchange rate of commodity currencies is found to be independent of the nominal exchange rate regime. The average half-life of adjustment of real exchange rates to commodity-price-augmented purchasing power parity is found to be about eight months, which is much shorter than Rogoffs (1996) consensus estimate of three to five years, and provides an important missing piece of the PPP puzzle.