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Russia and many other transition countries are now facing the challenges of opening up, restructuring, and modernizing their economies, which requires addressing numerous institutional weaknesses and supply-side distortions. The papers in this collection examine these issues both in Russia and from a regional perspective, drawing on the experience of other reforming countries. Aspects addressed include the implications of trade and capital flows, the process of labor market reform, financial market development, productivity growth, and innovation dynamics. The dynamics of the reform process are also studied in the context of new political economy models.




The early years of Russia’s economic transition were marked by a substantial and persistent decline in economic activity as many obstacles to the functioning of a market economy remained to be overcome. Russia’s cumulative decline of output in the 1990s was about 40 %, much larger than the decline that occurred in the United States during the Great Depression. Only in 1997 was a modest positive rate of growth achieved, but this was interrupted by crisis of 1998, which reflected an inconsistent configuration of domestic policies combined with significant external shocks. By the year 1999, growth had revived as the effects of the crisis had worked themselves out and as fundamental uncertainties about the course of economic policies were attenuated under President Putin. In the years 1999-2002, Russia’s GDP growth averaged close to 6 %, obviously benefiting from high oil and gas prices in world markets and a renewed confidence on the part of domestic and foreign investors.
Nina Oding, Timothy Lane, Paul J. J. Welfens

A. Capital Flows to Transition Economies: Reasons, Risks, and Policy Responses

Substantial private capital inflows have been a fact of life for many of Europe’s transition economies over the past decade (Figure A1).1 Capital flows to economies undergoing far-reaching structural change are to be expected, as they reflect investment opportunities in excess of those that can be financed by domestic savings.
Timothy Lane, Leslie Lipschitz, Alex Mourmouras

B. Long Term Structural Change and Productivity Growth in Russia

The results for 1999 turned out to be the most promising figures not only of the entire reform period, but also of the 1990s as a whole. According to the State Statistics Committee, the gross domestic product increased by 3.2 percent in 1999. Growth in GDP was due primarily to growth in industrial output (which increased by 8.1 percent according to the official data). There was also an increase in production output in agriculture (by 2.4 percent), and investments in fixed capital grew as well (by 4.5 percent). In 2000 Russian economy is going to deliver even higher growth rates with GDP probably increasing over 6 percent and investment rising somewhere around 15 percent.
Evgeny Gavrilenkov

C. Innovation, Growth and Wage Structure in Transforming Economies

Today it is commonplace to argue that technological change and innovation have a positive impact on economic growth. However, the mechanisms translating innovations into broad-based economic effects remain at least partly unknown. This holds especially for transition countries where innovations play only a very subordinated role. For these countries it is more important to achieve technological capabilities which allow them to imitate processes and products. Innovation theory, development theory and many recent success stories, e.g. the South East Asian NICs, show that these capabilities don’t fall from heaven but rather are mainly a result of own efforts. These efforts comprise not only scientific and technological inputs and outputs but also the building-up of an adequate institutional framework, as it is through institutions that innovation and imitation processes are mediated. A theoretical concept in which technical and institutional change is explicitly linked is that of systems of innovation (Lundvall, 1992): meaning the overlapping networks of R&D institutions in the business community and the public sector. We will discuss these aspects more comprehensively in section 2, where we will present some indicators describing the technological capabilities and performance of the transition countries. Furthermore we will cast a glance at the former institutional framework which can be considered as the national innovation system of the former socialistic countries.
Andre Jungmittag, Paul J. J. Welfens

D. Financial Sector and Human Capital in a Long-Term Growth Perspective: The Case of Russia

Russia has failed to adopt a transition strategy for nearly a decade, which may lead to high economic growth and a long-term catching-up process in relation to the average per capita-income of the OECD countries. The transformation from plan to market, which began in 1992 under the assumption that these reform efforts would turn around the country’s economic decline, proved to be rather costly from the beginning. Only since 1999 is there some economic recovery, partly due to the large depreciation of the Ruble after the financial crisis in 1998, and partly to the rise of the price for crude oil on the world market.
Ralf Wiegert

E. Structure and Growth of Private Consumption in Russia and East Germany

Private consumption is a main part of national accounts. Often private consumption is taken as an early or parallel indicator of economic growth. Data on private consumption is also needed in many other fields of official statistics. Data on private consumption help in forecasting effects of changed tax systems, it is essential in statistics of consumer prices for measuring weighting structures etc. Furthermore, private consumption is an indicator of social welfare and standard of living.
Cathleen Faber, Hans Gerhard Strohe

F. Labor Market Transformation and Hidden Unemployment in Russia

The need for economic reform in Russia was dictated by the country’s low labor productivity levels and the absence of a mechanism for rational resource management. However, its actual implementation has been far from perfect and is still to be completed.
Nina Oding

G. Principles of Market-Oriented Labor Market Policies

Gradually in the western industrialized nations we have seen a movement toward active labor market policies and away from measures that simply support the individual’s job search while offering a modicum of relocation assistance. The new emphasis is on training, job subsidies, and job search policies. To be sure, there has also occurred a reduction in the generosity of income maintenance - either in unemployment benefit replacement rates and/or entitlement periods - imparted by periodic deregulatory thrusts, but such developments have been distinctly secondary in importance to the development of proactive labor market policies
John T. Addison

H. Rent-Seeking and Rent-Setting: Government Versus Competition (The Case of St. Petersburg)

The proliferation of rent-seeking practices in Russia’s post-communist economy has been explained in different ways. Most theories focus on the behavioral peculiarities of former state-owned companies, their incapacity, for a variety of reasons, to compete in a free market and provide quality that meets consumer needs (Alfandari, Fan and Freinkman, 1997; Earle, Estrin and Leschenko, 1997; Braguinsky, 1997; Kuznetsov, 1997). One other explanation links the dominance of rent-seeking practices in the Russian economy to missing markets (Polishchuk, 1997).
Andrei Zaostrovtsev

I. Powerful Groups and Corruption

The model-theoretic literature on corruption typically focuses on its consequences, e.g. on output as in Ehrlich and Lui (1999), or on government policy as in Acemoglu and Verdier (2000). By contrast, this paper offers a new approach by incorporating the political power structure in the analysis.
Frank Bohn

J. Regional Dimension of the Market Transformation in Russia

In the 1990s economic liberalization in Russia has not ensured any positive dynamics in the development of national economy, has not impelled a structural economic shift in favor of branches with the high added value and provided no growth in real income for the majority of the population.
Ruslan Grinberg, Leonid Vardomsky

K. Foreign Trade Policies in Transformational Russian and Ukrainian Economies

The majority of world countries succeeded in the restoration of their financial systems after the destructive financial crisis in 1998. Countries in transition restored their economies, but they continue to encounter serious problems that are considered the consequences of crisis. Eastern European countries are at starting positions for integrating into the global economy. For transition countries, the interaction of domestic distortions in the tradables sector and in the overall economy combined with adverse external shocks naturally make sustained economic opening up difficult. The process of economic liberalization is expected to bring about real income gains through the realization of comparative advantages - associated with structural changes -, access to a richer variety of goods and the positive impact of import competition. Rising import competition will bring about pressure on domestic firms to become more efficient; to the extent that firms are really responsive in behavior, technological choice and product assortment, as well as the phasing in of import competition is expected to bring about economic benefits. However, a high responsiveness of firms can hardly be expected if firms have not yet been privatized. Moreover, adjustment is partly in parallel with gross investment so that stable conditions for investment financing are important for east European transition countries.
Olga Nosova

L. The Role of Foreign Direct Investment in Transformation

In the theoretical literature, various channels are discussed through which FDI may contribute to growth in transforming economies:
  • FDI contributes to national capital stock and increases employment. FDI contributes both to the stock of human and physical capital increasing and modernizing physical capital and creating new working places with the rise of production (Bellak, 1998). Investments in physical capital and an increase in employment in turn create positive real income effect which raises demand for the products of domestic firms.
  • FDI is a channel of technology transfer. The most important contribution of FDI to the economic growth consists in the characteristic of FDI as an important vehicle for knowledge and technology transfer (Borenstein et al. 1995; Blomstroem and Sjoeholm, 1999).
  • FDI raises the productivity of the Foreign Investment Enterprises (FIEs). Combination of advanced managerial skills and technology with domestic labor and inputs result in higher productive efficiency of FIEs and allows them to derive products at lower costs than domestic firms. Thus FIEs are more productive than domestic firms and hence contribute to the growth more than domestic investment. But PIEs can only then be more productive in comparison to domestic firms when the countries possess over the minimum threshold stock of human capital (Bellak, 1998; Borenstein et aI., 1995).
Roland Doehrn, Natalja v. Westernhagen

M. Data Appendix

Without Abstract
Timothy Lane, Nina Oding, Paul J. J. Welfens


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