Introduction to Emerging Economies

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Introduction to Emerging Economies

• Week 1

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Characteristics of Transition Economies

• Have no common starting point
• Have no definable end point
• Are different culturally
• Adopt different transition methods
• Progress at different speeds

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Overall goal to develop into market economies

• What are the steps they need to take?
• How far have they got?
• Why do they need to do this?

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Principal steps in development of market economy

• Privatize
• Liberalize
• Attract Foreign Direct Investment (FDI)

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Principal steps in development of market economy

• Restructure Reform
• Learn market management techniques
• Develop market based accounting practices

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Major methods of transition

• Shock Therapy
• Gradualism
• Shock without Therapy

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Central Asia
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Who are our subjects?New EU members (Excluding
Baltics)

• Czech Republic
• Hungary
• Poland
• Slovak Republic
• Slovenia

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Who are our subjects?Baltic countries

• Estonia
• Latvia
• Lithuania

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Who are our subjects?South Eastern European
(Balkan) countries

• Albania
• Bosnia and Herzegovina
• Macedonia, FYR
• Croatia - EU accession
• Bulgaria EU accession
• Romania EU accession

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Who are our subjects?Commonwealth of Independent
States

• Armenia
• Azerbaijan
• Belarus
• Georgia
• Kazakhstan
• Kyrgyz Republic
• Moldova

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Who are our subjects?Commonwealth of Independent
States

• Mongolia
• Russia
• Tajikistan
• Turkmenistan
• Ukraine
• Uzbekistan

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The progress toward a market economy

• Has no specified end
• A market economy is not a particular point
• All economies have some degree of state
  intervention
• No economy is purely market

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What are the main differences between planned and
market economies?

• Central Planning does not have
• Well-defined property rights
• Commercial legislation regulating the entry and
  exit of private enterprises
• Financial markets
• Commercial banking system
• Market oriented system of taxation

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Therefore

• No market generated signals about scarcities of
  inputs and outputs Which means distorted
  prices
• No profit motive
• No idea of true international competitiveness

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What are the steps to take? 1

• Privatize state owned enterprises (SOEs)
• Methods
• Mass privatization (mainly free vouchers)
• Sectoral privatization (sale of whole industry)
• Auctions (small firms eg shops, etc)
• Management buyouts/Employee buyouts (MBOs/EBOs)
• Restitution/Compensation (to former owners)
• Direct sales to foreign investors or through
  Joint Venture Agreements (JVAs)

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Has privatization yielded the expected benefits?-1

• In central and eastern Europe and the Baltic
  countries, privatized firms have generally
  restructured more quickly and performed better
  than comparable firms that remained in state
  ownership
• Partly this is due to extensive involvement of
  foreign investors in the privatization process
  and a relatively sound business environment.

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Has privatization yielded the expected benefits?-2

• Privatization has often failed to boost
  restructuring and better performance of
  enterprises in most of the CIS countries
• Partly as a result of the poor corporate
  governance structures in many privatized firms
  and
• Partly because of the persistence of soft budget
  constraints, including implicit subsidies from
  the state.

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Has privatization yielded the expected benefits?-3

• Post-privatization ownership is an important
  determinant of firm-level restructuring and
  performance.
• Across the whole region, the best performers have
  been firms that were acquired by foreign
  strategic investors.
• Similarly, firms with concentrated ownership
  (insider and outsider) have generally performed
  better than firms with dispersed ownership.

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Has privatization yielded the expected benefits?-4

• The method of privatization has been important
  for the speed and perceived equity of the
  process.
• However, since many countries applied a
  combination of methods (vouchers,
  management-employee buyouts, and direct sales),
  there has not been a clear relationship between
  privatization method and post-privatization
  ownership and restructuring.

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What are the problems?-1

• If firms subsidies (soft credit and tax arrears)
  they tend to focus on rent seeking rather than
  restructuring
• Failure of corporate governance, power held by
  small groups
• Concentrated ownership, such as in firms owned by
  foreign strategic investors or in small and
  medium enterprises fully owned by managers, has
  generally yielded the best results

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What are the problems?-2

• In many transition economies the business
  environment suffers from
• Corruption
• Weak court system
• Bureaucracy
• Complex and unfair tax systems

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What are the steps to take? 1

• Liberalize prices
• Outcomes -
• Quick -
• Inflation
• Poverty
• Slow -
• Hinders market forces
• Distorts competitiveness

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What are the steps to take? 2

• Attract Foreign Direct Investment
• Joint Venture Agreements
• Greenfield Sites
• Acquisitions

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What are the steps to take? 3

• Restructure and Reform
• The institutional arrangements to allow a market
  economy to function
• This means an entire overhaul of existing
  apparatus
• Make business organisations competitive
• This means
• Corporate failures
• Unemployment
• Radical reorganisation within businesses
• If (1) doesnt happen the market cant function
• If (2) doesnt happen there will be large
  central costs to support ailing firms
• If (2) does happen there will be large central
  costs such as unemployment payments

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What are the steps to take? 4

• Learn market management skills
• What are privatized businesses facing ?
• Government officials who still control major
  resources and expect inducements
• Employees do not have up to date or relevant
  skills. They cannot justify being paid more and
  so job hop.
• All firms need security measures against internal
  theft and damage or external damage.
• Security comes from
• Police
• Private security firms
• Mafia as protection
• Senior managers traditionally will not devolve
  tasks or delegate.
• Senior managers traditionally will not take
  responsibility

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What are the steps to take? 5

• Accounting
• Introduce market accounting techniques
• In external reporting
• In management accounting

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Particular problems in Central Asia

• Kazakhstan
• Kyrgyz Republic
• Tajikistan
• Turkmenistan
• Uzbekistan

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Central Asian Republics

• Difficulties
• Enclosed within USSR
• Economy was integral part of Soviet Economy
• Not organised as republics
• Economic Structure
• Based on production of raw materials (especially
  cotton, mineral and energy products) for use on
  USSR

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Central Asian Republics

• Trade Patterns
• Constraints
• Transport
• Rail and road links almost all lead to Russia
• Pipeline infrastructure all run to Russia,
  Armenia, Georgia or Ukraine
• Air services limited commercial set up
• Products
• Limited range of major export items

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Central Asian Republics

• Trade patterns
• Opportunities
• Intra CIS trade
• Develop new external transport links
• Attract Foreign Direct Investment