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Paul J.J. Welfens and Holger C. Wolf While the economies of Asia and, more recently, South as well as North America have enjoyed sustained high growth, the growth performance of western Europe and in particular continental Europe has been rather modest. Coupled with sizable improvements in labor productivity and - at best - steady capital productivity, growth proved insufficient to sustain employment levels, much less to replicate the US job creation success. Relative inflation performance has been much better: in the run-up to European Monetary Union inflation rates have dramatically converged towards the lower end of the distribution while risk premia on formerly high inflation economies have fallen. Yet, looking forward, the undoubted success in achieving price stability is mitigated by the lackluster growth -and in particular employment -performance. Indeed, the relative little attention paid to initiatives directed at raising economic growth is startling, not only in the light of the US policy record but also in light of the remarkable rebound of those European economies which have aggressively tackled the structural problems, most prominently the UK and Ireland.

Inhaltsverzeichnis

Frontmatter

Introduction

Frontmatter

Introduction

Abstract
While the economies of Asia and, more recently, South as well as North America have enjoyed sustained high growth, the growth performance of western Europe and in particular continental Europe has been rather modest. Coupled with sizable improvements in labor productivity and — at best — steady capital productivity, growth proved insufficient to sustain employment levels, much less to replicate the US job creation success.
Paul J. J. Welfens, Holger C. Wolf

Banking in Europe and Growth

Frontmatter

A. Banks, Capital Markets, R&D and Economic Growth in Europe

Abstract
Economic growth and prosperity go together, although high growth and a deteriorating environment can pose a transitory conflict of interest. The need to maintain natural wealth and human capital has become a major concern of economic policy in western Europe after 1945. While maintaining the stock of real capital via depreciations and reinvestments was considered a natural requirement of capitalism, the concern about the stock of the environment and labor market problems reflects more recent problems. Human capital of many workers in western Europe has been eroded as a consequence of high unemployment which is mainly the result of the two oil price shocks in the 1970s and strong wage pressure with a bias in favor of unskilled workers in EU countries. At the same time technological progress and the shift towards the service industry raised the marginal value product of skilled labor overproportionately — which is one reason why income differentials among workers are growing again in OECD countries (another being the global increase in the unskilled labor supply as a consequence of China’s opening up).
Paul J. J. Welfens

B. Policy Options for Prudential Supervision in Stage Three of Monetary Union

Abstract
With the beginning of Stage Three of Monetary Union, Europe will be faced with an unprecedented systemic change in monetary policy. Monetary policy will be carried out by the European System of Central Banks (ESCB), which will be composed of the European Central Bank (ECB) and the national central banks (NCBs) of the Member States. The responsibility for monetary stability will shift from national authorities to a Community institution. What are the consequences of this major systemic shift in the field of monetary policy for the area of prudential supervision? This presentation will deal with this question in the first place from an institutional angle. The discussion is focused on the interrelationship between the authorities responsible for the exercise of prudential supervision and the ESCB.
Johannes Priesemann

C. Banking, Privatization and Economic Growth in Russia

Abstract
The banking sector plays a key role in a market economy. It should provide a number of the first and foremost services, such as lending money, fast payment transactions between economic agents, etc. It should also attract and accumulate money, acting as an intermediary between savings and investments. A strong and reliable banking sector is the backbone of a national economy. Thus, the creation of a market-oriented banking system was one of the main targets of the institutional transformation in Russia.
Evgeny Gavrilenkov

D. Historical Lessons of Foreign Banking in Eastern Europe The Case of Tsarist Russia

Abstract
Before talking of any lessons that could be provided by the historical evolution of foreign banking in eastern Europe we should consider the different options open to banking as it was getting more and more involved in financial activities abroad.
Peter Hertner

E. Restructuring and Privatization of Polish Banks

Abstract
As a result of the macroeconomic changes under way since 1989 and the inability of banks and enterprises to function effectively in the new market environment, the Polish economy has been inflicted with a problem of bad debts. Polish enterprises were indebted to both their suppliers and banks. Bad loans constituted 20–30% of banks total loan portfolios.
Miroslaw Bojanczyk

F. High Public Debt: Consequences for Investment and Growth

Abstract
The development of financial markets has widened the scope for governments to finance fiscal imbalances. In some cases, including some European countries, these imbalances have accumulated to create large public debts (Figure F1) — in some instances of such a magnitude to engender talk of unsustainability (CORSETTI and ROUBINI, 1991).2 Concerns over the possible economic and financial consequences of these debts has been among the factors that have spurred governments, in Europe as elsewhere, to fiscal adjustment in recent years (LACHMAN, 1994). The possible disruptive consequences of the debts of countries in a common currency area have led to the incorporation of a maximum level of public debt as one of the Maastricht criteria for participation in Economic and Monetary Union (EMU). Financial markets have penalized high-debt countries in the form of real interest rate spreads vis-à-vis their more financially-sound neighbors (Figure F2)3. and the magnitude of the public debt is routinely blamed for the sluggish development of private financial markets in some countries: in Italy, for instance, the conventional wisdom is that equities markets are stunted because they cannot withstand the competition from government bonds.
Timothy Lane

International Capital Flows and Growth

Frontmatter

G. Banking, Foreign Investment, Endogenous Growth and Systemic Transformation

Abstract
From the very first signs of the major changes afoot in the eastern part of Europe1, it has been clear that restructuring the postcommunist economies in transition (PETs) would require, among others, the identification of a new, modernizing growth path through massive purposeful resource mobilization. At the transition’s inception, many observers posited that, with proper domestic policies, the bulk of these resources would initially originate from abroad, though public funds would in some cases be needed to lubricate these transfers. Only by erecting quickly an open foreign-exchange and trading regime, it was widely argued, could the core expectations regarding the principal purposes of the transition be met: catching up in a comparatively brief period of time with levels of living, productivity, technological sophistication, and international integration through intra-industry trade and finance characteristic of the advanced countries, chiefly in western Europe. After all, society-wide structural transformation2 policies in PETs should be buttressing a more efficient mode of production and regaining a sustainable, high pace of growth, precisely to permit catching up.
Jozef M. van Brabant

H. Capital Flows in Eastern Europe: Some Lessons from the Emerging Markets in Latin America and Asia

Abstract
Given the scale of the transformation of the economies in eastern Europe, it is perhaps not surprising that the revival of capital flows into that region has occurred somewhat later than that of flows into Asia and Latin America. Although events are still unfolding at the time of writing, it may be useful to take a look at emerging capital flow trends in central Europe in the light of the experiences in Latin America and Asia. Section 1 briefly reviews recent developments in global capital flows. Section 2 looks at the size of the capital flows for the three regions under review. Section 3 juxtaposes in a highly stylized way some factors which influence the capital flow experiences in Latin America, Asia and central Europe. A more detailed analysis of the composition and nature of the capital flows in the three groups of countries is contained in Section 4. Three important policy-related issues are then addressed in Section 5: the effect of inflows on monetary policy (including the issue of sterilization); whether inflows reflect excessive domestic consumption rather than investment (including the relationship with fiscal policy); and, finally, how far foreign direct investment has been export-oriented. Some conclusions follow in Section 6.
Elmar B. Koch

I. Catching Up of Economies in Transformation

Abstract
The breakdown of the economies in eastern Europe is probably one of the most important economic events of this century. Providing an idea of the potential time path of transformation economies and the consequences of different policy strategies is a major challenge for economic theory. This is especially true since comparable events are hard to find in economic history.2 There seems to be a broad consensus among economists concerning the important elements of the transformation process. These aspects include institutional reforms, price liberalization, privatization of state-owned enterprises, the creation of financial systems and capital markets, trade liberalization, and the reorganization of labor markets.3 Another aspect is the problem of timing and sequencing of policies in the initial period of transformation.4 Given this variety of issues research about the transformation is often restricted to be partial in nature. Therefore a comprehensive as well as long run theory of transformation seems not to be at hand.
Thomas Gries, Stefan Jungblut

J.. Savings, Credit Markets and Economic Growth in Europe

Abstract
Two scenarios dominate the discussion about the future of eastern Europe. In the first, the combination of good fundamentals and proximity to the EU generates ASEAN-style tigers rapidly catching up with western Europe. In the second, the combination of inherited burdens and populist policies generates Latin-style inward looking economies turning eastern Europe into the perennial poor cousin.
Holger C. Wolf

K. US Multinationals and Europe: An Update

Abstract
Direct investment by US-based firms, once highly controversial in Europe, has become all but a non-issue. Long gone are the days of the late 1960s and early 1970s when “le défi américain” could dominate parlor talk in Europe. However, US direct investment in Europe has not gone away. Indeed, what has come to be termed the “globalization” of industry — largely the international spread of the operations of business firms into a multiplicity of nations via foreign direct investment (FDI) — has if anything accelerated since the middle 1980s. Indeed, FDI has been expanding at rates well above growth rates of either world output or world trade for about ten years now (United Nations 1991 and 1996). And, although not as dominant as a source (home) nation of FDI as thirty years earlier, a substantial portion of the world’s direct investment is still carried out by US-based firms.
Edward M. Graham

L. Multinational Investment and Economic Growth in Eastern Europe

Abstract
This paper deals with the contribution of foreign capital, especially foreign direct investment (FDI), to economic growth in the transition countries. The analysis concentrates on the situation in central eastern Europe (CEE: Hungary, Poland, the Czech Republic and Slovakia) and south eastern Europe. The situation in the former Soviet Union is treated only occasionally.
Jan Stankovsky

Panel Discussion: The Banks’ Role in Financing Economic Expansion in Eastern Europe

Frontmatter

Recent Developments in the Hungarian Financial Sector

Abstract
The developments in the international financial markets are characterized by huge and quick changes. The previously separate national markets have been integrated into a global market and are more and more international. The last decade has seen an explosion in the volume of international financial flows. The main contributing factors to this development have been the removal of exchange controls, domestic financial liberalization and rapid advances in financial technology.
Rezsö Nyers

The Present Situation of the Banking Sector in the Transition Countries

Abstract
The central European transition countries were surprisingly fast in implementing the reform of the finance sector — one of the basic conditions for a modern monetary sector. With the central banks divesting themselves of their commercial bank operations, the previous single-tier system was transformed into a two-tier banking system. The savings banks were left untouched by the process and continue to offer their services. In the wake of the separation of commercial business from the central banks, all the transition countries established the “large”, initially state-owned banks. With the aim of promoting competition within the banking system from the very beginning, the authorities also chartered private banks. Especially the admission of foreign private banks was meant to further competition and to help introduce the know-how required in this sector more rapidly. This policy gave rise to a veritable boom of new bank establishments in the central and eastern European transition countries (WYCZANSKI, 1993).
Werner Varga

Backmatter

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