Palgrave Dictionary of Emerging Markets and Transition Economics

The period of transition from socialism to capitalism in parts of Europe and Asia over the past 25 years has attracted considerable interest in academia and beyond, as it is inter alia reflected by the demand for books published in the Palgrave Macmillan series ‘Studies in Economic Transition’.

Starting from the early 1980s, the legal status of central banks all over the world has changed substantially in the direction of getting greater independence. The move towards greater degrees of CBI has been especially prominent in the emerging economies, including transition economies from Central and Eastern Europe. In this chapter we assess political and economic arguments for establishing independent central banks. Furthermore, we analyse and critically evaluate different indices that attempt to quantify the extent of legal and actual CBI. In addition, we provide a comprehensive overview of the evolution of CBI in former transition economies from Central and Eastern Europe. Finally, we provide a critical assessment of the empirical literature on CBI-inflation relationship.

Currency reforms have been implemented every so often in emerging-market and transition economies. A currency reform is a prearranged redenomination or alteration of the currency, sometimes with confiscatory elements. Currency reforms may be introduced as part of a disinflationary stabilization programme, when territorial or political changes warrant the introduction of a new currency, or when a country joins a currency union. A currency reform may be a useful step in obtaining or retaining macroeconomic stability, but the outcome of the reform rests on the acceptance and credibility of the new currency. The details of the implementation of a currency reform and in particular of the accompanying policy measures are of crucial importance for a successful currency reform.

This chapter reviews financial sector restructuring and development in Transition and Emerging Market Economies (EMEs) and focuses on enterprise financing. In the formerly centrally planned economies, the first step was to establish a commercial banking system, and this required privatization of both state owned banks and state owned enterprises and resolution of inherited bad debt problems. A corporate governance system for banks, including regulatory and supervisory mechanisms, had to be put in place in order to underpin financial stability and promote an efficient allocation of capital by assuring access to finance by new private small and medium sized enterprises (SMEs) and also households. Next, in common with other EMEs, attention can turn to developing capital, bond and equity, markets, and encouraging and accommodating financial innovation whilst guarding against financial instability and the development of anti-competitive economic rent seeking activities and fraud. The chapter identifies policies that can be used to promote these beneficial financial sector developments.

The exchange rate regime comprises the exchange rate arrangement and a number of complementary policies, including possible capital controls and monetary policy. The normative choice of an appropriate exchange rate regime must take into account many factors. Fixed exchange rates facilitate international trade, but may lead to more variability of output and employment. For emerging-market and transition economies, other factors such as export competitiveness, disinflation policies, maintenance of low inflation, and the credibility and administrative capacity of the authorities may be equally important. These features differ across countries and change over time. Empirical studies suggest that numerous factors are of importance for the choice of exchange rate regime, but also that the effects of the choice are difficult to pin down.

In this chapter transition countries’ monetary policy strategies in the period from the late 1980s are examined. The text covers developments in post-socialist Europe and Asia. The starting point is twofold and provides both the definition of monetary stabilization and a short description of the role of money under socialism. Then, early transition monetary events and stabilization programmes are studied. Further, monetary policy strategy developments are interpreted in the context of the so-called ‘impossible trinity’ framework. This is followed by a brief account of the main monetary strategies’ implementation problems during transition. The chapter finishes with a short discussion of current challenges facing transition countries’ central banks, and a final section provides a classification of countries by their monetary policy regimes in place as of 2015.

This chapter systematically examines the variety of regional cooperation arrangements in the developing world that range from regional payment systems over the pooling of reserves to exchange rate coordination. The main contribution of regional monetary cooperation to enhancing the shock buffering ability of its member countries is to provide short-term liquidity and to increase regional trade and financial links. The potential for shock buffering is dependent on the chosen form of regional monetary cooperation. In contrast to full monetary integration which is highly demanding in terms of policy coordination, the requirements for regional policy coordination are significantly lower, depending on the form and aim of regional monetary cooperation arrangements.

The former state socialist countries of Eastern Europe and the Soviet Union have been transformed into capitalist systems, albeit with substantial differences among them and from advanced capitalist systems elsewhere. The value of an institutional approach has gained recognition as neoclassical economics proved a poor guide to forms of economic development and performance. Defining these capitalisms has followed three broad routes. One follows Polanyi, embedding them in social and political development without showing links to economic performance. A second follows Hall and Soskice’s two varieties of capitalism, but this fits poorly with countries in the process of creating institutional forms. Adaptations include suggestions for new varieties. Countries of the former Soviet Union prove particularly difficult to fit into existing classifications. A third approach starts from forms of international integration and seeks institutional preconditions rather than determinants. Institutions then appear as one factor, albeit an important one, determining economic performance.

Economists’ conception of institutional change prior to the transition from communism was mostly treated either as an exogenously-inspired event or a slow, gradual process. However, the events of 1989–1991 proved the necessity of creating new frameworks for thinking about how institutions can be changed or reformed. This chapter examines institutional reform in Central and Eastern Europe and the former Soviet Union, with a focus on the various policies enacted as well as the timing and sequencing of institutional reforms. The key lesson of successful institutional reform is based on the need to successfully shape expectations; countries that moved fastest in both their political and economic policy reform also set the stage for successful institutional development in the long-run.

The development of property rights is the most important institutional reform in the transition from communism to capitalism but has been comparatively neglected in some countries in favour of other institutions. This chapter looks at the theoretical basis behind the determination of property rights more broadly, and how these various theories apply (or do not apply) in a transition context. We also examine closely the experience of various transition countries and how property rights protection diverged across economies. The key result of this examination is that property rights illustrate the ‘indivisibility of reforms’ in transition, but that there must be a concerted effort to continually protect these rights as other, mainly political, institutions grow around them.

The current debate on corporate governance has been ‘polarized’ between, on the one hand, the shareholding paradigm and, on the other hand, the stakeholding paradigm. However, underpinning the main theories are hidden paradox assumptions which leads to concerns over the credibility and validity of this dichotomized approach. Both camps of the debate rely on a homeostatic and entitative conception of the corporation and its governance structures. Consequently they suffer from inadequate attention to the underlying philosophical presuppositions in which the static approach is rooted. To avoid the traditional trap in theorizing, an alternative approach, referred to as the processual approach, is proposed for a better understanding of the inherent overflow and heterogeneity of corporate governance practices.

This chapter introduces the major business obstacles in Central Asian low income countries such as the Kyrgyz Republic and Tajikistan. The enterprise surveys conducted by the World Bank in partnership with EBRD indicate that the major business barriers in the countries are political instability, practices of the informal sector, tax rates and corruption. This chapter also provides strategic suggestions for future development addressing these business barriers.

Human development and economic growth are two different paradigms that imply different objectives, measurement techniques, and policies. However, a broad literature has shown that economic growth and human development are intrinsically interconnected, co-evolutionary, and mutually reinforcing each other. The key aim of this chapter is to discuss and compare these two paradigms and outline their elements of specificity as well as their potential linkages. In particular, a review of potential linkages between human development and economic growth highlights their bidirectionality, both in theory and in terms of policy implications. In addition to the main theories, some empirical evidence is also being presented. Finally, specific sections are devoted to policy implications and specificities of transition countries.

In the early phase of transition that started with the 1990s, Central and Eastern European Countries (CEEC) have pursued far-reaching vertical and individual industrial policy with the focus on privatization and restructuring of traditional industries. Also foreign investment from the West and facilitation of the development of a market economy involved massive injections of state support. With their accession to the European Union (EU), levels and forms of State aid came under critical review by the European Commission’s DG Competition. Findings suggest that once having entered the EU as full members, the new members from the East appear to have been converging into rather stringent competition cultures.

This chapter deals with the process which brought about ten countries, former communist economies, of Central and Eastern Europe (CEEC) to join the European Union (EU) between 2004 and 2007. The recent development of the EU enlargement, the adhesion of Croatia in 2013, the future perspective of enlargement opened by the East partnership, and the situation of the current candidates to the EU will be analysed as well. As far as the New Member States (NMS) of the European Union are concerned, this chapter will analyse conditionality and compliance of the candidates. Recession was severe both in CEEC and in Former Soviet Republics (FSR) after the fall of Berlin Wall in 1989 and the dissolution of USSR in 1991. The transformation was very deep both from an economic and political perspective. However, I argue, during the transformation and the economic recovery CEEC were, to some extent, favoured by EU conditionality and membership, while FSR were not interested by this process. At the same time, the old EU member States (EU 15) benefited greatly from trade with CEEC and Foreign Direct Investments (FDI) directed to CEEC. In fact in CEEC labour cost is cheap and resources along with raw materials are abundant. Very likely, EU membership was the crucial factor, which influenced transition in CEEC, and which determined better performance of most CEEC with respect to FSR. Moreover, political transition (concerning civil rights and political liberties, democracy and traditional liberal values) was more successful in CEEC than in FSR. In this respect, the role played by the EU, where clearly these values are more advanced than in most of the rest of the world, was crucial for the New Member States of the EU.

The idea of budget ‘sustainability’ is a multi-faceted concept that often refers to the inter-temporal budget constraint that a government faces. However, this is not the only way in which sustainability may be encapsulated, as other considerations than solvency often come into play. This chapter examines the various conceptions of sustainability for public budgeting and how they influence policy choices, as well as the various ways in which public budgets may be sustained. We conclude with an examination of the challenges of sustainability in emerging market and transition economies.

The bad-asset problem of transition economies had its origin in the system change. Though moral hazard problems were a concern when credible rules and structures had yet to be established, a strong case can be made for a thorough debt cancellation and balance sheet repair in the transition. This chapter reviews different strategies of how to distribute the burden and their impact on investment activity and growth, price stability, the future tax burden, and social security, respectively. It briefly describes how the bad-asset problem has been tackled in Europe, highlighting the role of the banks. Finally, an outlook is given on the recent financial crisis which led to an excessive inter-government lending. This new European ‘bad-asset problem’ calls for shared responsibility in fiscal policy.

The chapter begins by discussing the developments in entrepreneurship as an academic subject from the economist perspective to the organizational theorist one. It then meanders along many strands within the entrepreneurship literature including women entrepreneurs in transition and emerging economies, thoughts on small business entrepreneurship, and social enterprises and links all the thoughts back to the context of entrepreneurship within transition economies. So this chapter does not limit itself to entrepreneurship within transition economies, but places it within the wider global context with numerous examples and references to the extant literature.

This chapter highlights innovation in a Schumpeterian sense. It refers particularly to new products and production processes as the most important types of innovation in economic literature. The theoretical concept of national innovation systems offers the framework for discussing the role of heterogeneous actors, their cooperation, and institutions in innovation processes. The chapter refers to the role of innovation and technology for economic development in emerging and transition economies. It concludes with a discussion of innovation in catching-up processes and the hint that economic as well as societal factors matter.

Migration is a key interdisciplinary subject in the fields of Economics, Sociology and Geography. The chapter provides an in-depth overview of the economics of migration starting with an exposition on the nature and the facts of contemporary world-wide migration. It is followed by sections covering determinants of migration; migration and development; migration and innovation; and migration, trade and foreign direct investment. The chapter addresses both theoretical and empirical literature on migration and discusses the past and present issues of the economic migration literature and how the literature may evolve in the future.

Trade liberalization is the removal of tariff and non-tariff barriers in trade, basically international. This has significant macroeconomic and distributional effects. The Heckscher-Ohlin Trade Theorem is the basic theoretical foundation of trade liberalization. The Stolper-Samuelson Theorem, Factor Price Equalization Theorem, and Rybczynski Theorem also have made contribution in the theory of trade openness.

Several studies exist in analysing distributional impacts of trade openness. These studies have cross-country comparisons, country-specific partial analysis, and general equilibrium analysis. Although it does not have any robust conclusion, general system approach is more comprehensive in studying different facets of trade integration. More recent studies reveal that trade liberalization of the developing world is growth enhancing; however, economic restructuring is deemed essential in making the impacts pro-poor.

This chapter looks at key issues concerning inward foreign direct investment (FDI) in transitional countries from Europe and Central Asia. It considers the important determinants and influences for inward FDI in these economies. A number of key determinants of inward FDI such as market size, natural resource endowments, and institutional quality are considered and found to be of importance. It also examines the contribution of inward FDI to the process of economic transition. The contribution of inward FDI to economic growth is examined. Although the connection between economic growth and inward FDI is more complex than might be expected, evidence does indeed suggest a strong association between the two in transitional countries. Finally, structural change is an important part of the process of economic transition, and in this too inward FDI has at least a significant potential contribution to make.

There are certain patterns, which economists have noticed and studied, in the growth of economies globally and regionally. Economies influence each other, and at times some appear to converge, in terms of growth or other indicators, to meet others. Empirical studies are used to track this phenomenon, in which economies become more alike, and economists also build dynamic models to explore the potential causes. These may include trading patterns and influence of other countries through foreign investment, as well as through an internal change of institutions, such as when economies transition between socialist and free market economic systems. Divergence of economic systems may also occur, as well as convergence and divergence of smaller economic areas and groups of areas. This chapter examines the various kinds of convergence and divergence that are most actively being examined, both real and nominal, and how their existence has influenced policy choices, especially the European Currency Union. We conclude with an examination of the challenges facing transition economies, especially those posed by reforms undertaken for the purpose of meeting with European Currency Union guidelines and laws, and the specific issues for least developed economies.

One of the most visible outcomes of the systemic change associated with transition from planned to market economies was the rise in income inequality, mainly happening in the first stages. The extent of this change, however, varied remarkably across countries, and more than 25 years after the outset of transition, the picture remains very heterogeneous. While in the early stages of transition the approach to reforms and the macroeconomic conditions determined the pattern of income inequality, in later stages the drivers of wage and income disparities typical of modern market economies became dominant. The chapter provides an empirical and a conceptual overview of income inequality during and after transition in Central-Eastern European, Western Balkan, and Former Soviet Union countries, discussing the complex interplay of the many forces into play.

Changing the paradigm of business philosophy encourages a rethinking of the business activity of enterprises and expands their responsibilities limits. The chapter examines the key prerequisites for the formation of the corporate social responsibility concept. The essence of the concept and its multidimensional level are defined. It examines the differentiation between corporate social responsibility and corporate social sustainability. The characteristics of the main indices and standards which are used in the practice of socially responsible business are mentioned. The necessity of the creation and publication of non-financial reports is highlighted.

This chapter summarizes the theory and evidence regarding Mass Privatization programmes in the post-communist environment. It first defines Mass Privatization and compares it to other ways of privatization used during the postcommunist transition. It then summarizes the economic and political arguments for and against this method of privatization. Finally, it discusses the research on the economic and public health consequences of Mass Privatization.

This chapter focuses on the potential opportunities and challenges given to firms that implement broad-based employee financial participation (EFP) arrangements. The primary rationale for such arrangements is to improve firm performance through the aligning of employee objectives with those of the firm. Little evidence exists to support the case for a direct relationship with firm financial performance, although there is evidence of a relationship with softer outcomes associated with employee attitudes and behaviour. Research findings highlight the importance of not viewing EFP in isolation and points to the role of magnitude of returns, involvement in decision-making, and corporate culture in influencing outcomes. This chapter also discusses the development of EFP in the European context, with particular focus on its development in the transition economies of Central and Eastern Europe.

Trust is essential for the market economy: it reduces transactions costs and facilitates cooperation between economic agents. In this chapter I provide an overview of how trust has been defined and measured in the literature. I review the role of trust in the market, command, and transition economies, distinguishing between particular and extended trust. Extended trust plays a crucial role in economic development, yet it is lacking in transition economies due to the socialist legacy. I discuss how particular and extended trust were affected by communism and the turmoil of early transition, before turning to review some key debates on how extended trust is created and how it relates to particular trust and the institutional environment.

Based on economic and sociological research, this chapter examines (in)stability of behavioural patterns across developed countries and countries in transition. At first it introduces the notion of subjective well-being (SWB) and its components. Then it turns to the existing SWB gap between developed countries and countries in transition and defines the socio-demographic characteristics of the winners of transition. Further on, the focus moves to the role of economic environment and labour market conditions. Finally, we consider the role of societal and institutional characteristics, which are increasingly recognized as being more important than economic ones.