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Introduction to Emerging Introduction to Emerging EconomiesEconomies

Week 1Week 1

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Characteristics of Transition Characteristics of Transition Economies Economies

Have no common starting pointHave no common starting point Have no definable end pointHave no definable end point Are different culturallyAre different culturally Adopt different transition methodsAdopt different transition methods Progress at different speedsProgress at different speeds

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Overall goal to develop into Overall goal to develop into “market economies” “market economies”

What are the steps they need to take?What are the steps they need to take?

How far have they got?How far have they got?

Why do they need to do this?Why do they need to do this?

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Principal steps in development Principal steps in development of market economyof market economy

PrivatizePrivatize

LiberalizeLiberalize

Attract Foreign Direct Investment (FDI)Attract Foreign Direct Investment (FDI)

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Principal steps in development Principal steps in development of market economyof market economy

Restructure & ReformRestructure & Reform

Learn market management techniquesLearn market management techniques

Develop market based accounting Develop market based accounting practicespractices

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Major methods of transitionMajor methods of transition

Shock TherapyShock Therapy

GradualismGradualism

Shock without TherapyShock without Therapy

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Central AsiaCentral Asia

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

Czech Republic Czech Republic Hungary Hungary PolandPoland Slovak Republic Slovak Republic SloveniaSlovenia

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Who are our subjects?Who are our subjects?Baltic countriesBaltic countries

Estonia Estonia

Latvia Latvia

Lithuania Lithuania

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

countriescountries AlbaniaAlbania Bosnia and Herzegovina Bosnia and Herzegovina Macedonia, FYR Macedonia, FYR Croatia - EU accessionCroatia - EU accession Bulgaria – EU accessionBulgaria – EU accession Romania – EU accessionRomania – EU accession

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Who are our subjects?Who are our subjects?Commonwealth of Independent Commonwealth of Independent

StatesStates ArmeniaArmenia Azerbaijan Azerbaijan Belarus Belarus Georgia Georgia Kazakhstan Kazakhstan Kyrgyz Republic Kyrgyz Republic Moldova Moldova

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Who are our subjects?Who are our subjects?Commonwealth of Independent Commonwealth of Independent

StatesStates Mongolia Mongolia Russia Russia Tajikistan Tajikistan Turkmenistan Turkmenistan Ukraine Ukraine Uzbekistan Uzbekistan

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The progress toward a market The progress toward a market economyeconomy

Has no specified endHas no specified end A market economy is not a particular A market economy is not a particular

pointpoint All economies have some degree of All economies have some degree of

state interventionstate intervention No economy is purely marketNo economy is purely market

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What are the main differences What are the main differences between planned and market between planned and market

economies?economies? Central Planning does Central Planning does notnot have: have: Well-defined property rightsWell-defined property rights Commercial legislation regulating the entry Commercial legislation regulating the entry

and exit of private enterprisesand exit of private enterprises Financial marketsFinancial markets Commercial banking systemCommercial banking system Market oriented system of taxationMarket oriented system of taxation

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ThereforeTherefore

No market generated signals about No market generated signals about scarcities of inputs and outputs scarcities of inputs and outputs Which means distorted pricesWhich means distorted prices

No profit motiveNo profit motive No idea of true international No idea of true international

competitivenesscompetitiveness

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What are the steps to take? 1 What are the steps to take? 1

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

Agreements (JVAs)Agreements (JVAs)

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Has privatization yielded the Has privatization yielded the expected benefits?-1expected benefits?-1

In central and eastern Europe and the In central and eastern Europe and the Baltic countries, privatized firms have Baltic countries, privatized firms have generally restructured more quickly and generally restructured more quickly and performed better than comparable firms performed better than comparable firms that remained in state ownership that remained in state ownership

Partly this is due to extensive involvement Partly this is due to extensive involvement of foreign investors in the privatization of foreign investors in the privatization process and a relatively sound business process and a relatively sound business environment.environment.

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Has privatization yielded the Has privatization yielded the expected benefits?expected benefits?-2-2

Privatization has often failed to boost Privatization has often failed to boost restructuring and better performance of restructuring and better performance of enterprises in most of the CIS countriesenterprises in most of the CIS countries

Partly as a result of the poor corporate Partly as a result of the poor corporate governance structures in many privatized firms governance structures in many privatized firms and and

Partly because of the persistence of “soft budget Partly because of the persistence of “soft budget constraints,” including implicit subsidies from the constraints,” including implicit subsidies from the state.state.

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Has privatization yielded the Has privatization yielded the expected benefits?expected benefits?-3-3

Post-privatization ownership is an important Post-privatization ownership is an important determinant of firm-level restructuring and determinant of firm-level restructuring and performance. performance.

Across the whole region, the best performers Across the whole region, the best performers have been firms that were acquired by foreign have been firms that were acquired by foreign strategic investors. strategic investors.

Similarly, firms with concentrated ownership Similarly, firms with concentrated ownership (insider and outsider) have generally (insider and outsider) have generally performed better than firms with dispersed performed better than firms with dispersed ownership.ownership.

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Has privatization yielded the Has privatization yielded the expected benefits?-4expected benefits?-4

The method of privatization has been important The method of privatization has been important for the speed and perceived equity of the for the speed and perceived equity of the process. process.

However, since many countries applied a However, since many countries applied a combination of methods (vouchers, combination of methods (vouchers, management-employee buyouts, and direct management-employee buyouts, and direct sales), there has not been a clear relationship sales), there has not been a clear relationship between privatization method and post-between privatization method and post-privatization ownership and restructuring.privatization ownership and restructuring.

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What are the problems?-1What are the problems?-1

If firms subsidies (soft credit and tax arrears) If firms subsidies (soft credit and tax arrears) they tend to focus on rent seeking rather than they tend to focus on rent seeking rather than restructuringrestructuring

Failure of corporate governance, power held by Failure of corporate governance, power held by small groupssmall groups

Concentrated ownership, such as in firms owned Concentrated ownership, such as in firms owned by foreign strategic investors or in small and by foreign strategic investors or in small and medium enterprises fully owned by managers, medium enterprises fully owned by managers, has generally yielded the best resultshas generally yielded the best results

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What are the problems?-2What are the problems?-2

In many transition economiesIn many transition economies the business the business environment suffers fromenvironment suffers from

CorruptionCorruption Weak court systemWeak court system BureaucracyBureaucracy Complex and unfair tax systemsComplex and unfair tax systems

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What are the steps to take? 1 What are the steps to take? 1

Liberalize pricesLiberalize prices Outcomes :-Outcomes :- Quick - Quick -

InflationInflation PovertyPoverty

Slow -Slow - Hinders market forcesHinders market forces Distorts competitivenessDistorts competitiveness

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What are the steps to take? 2What are the steps to take? 2

Attract Foreign Direct InvestmentAttract Foreign Direct Investment

Joint Venture AgreementsJoint Venture Agreements Greenfield SitesGreenfield Sites AcquisitionsAcquisitions

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What are the steps to take? 3What are the steps to take? 3 Restructure and ReformRestructure and Reform The institutional arrangements to allow a market economy to functionThe institutional arrangements to allow a market economy to function This means an entire overhaul of existing apparatusThis means an entire overhaul of existing apparatus Make business organisations competitiveMake business organisations competitive This meansThis means Corporate failuresCorporate failures UnemploymentUnemployment Radical reorganisation within businessesRadical reorganisation within businesses If (1) doesn’t happen – the market can’t functionIf (1) doesn’t happen – the market can’t function If (2) doesn’t happen – there will be large central costs to support If (2) doesn’t happen – there will be large central costs to support

ailing firmsailing firms If (2) does happen – there will be large central costs such as If (2) does happen – there will be large central costs such as

unemployment paymentsunemployment payments

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What are the steps to take? 4What are the steps to take? 4 Learn market management skillsLearn market management skills What are privatized businesses facing ?What are privatized businesses facing ? Government officials who still control major resources and expect Government officials who still control major resources and expect

“inducements”“inducements” Employees do not have up to date or relevant skills. They cannot Employees do not have up to date or relevant skills. They cannot

justify being paid more and so “job hop”.justify being paid more and so “job hop”. All firms need security measures against internal theft and damage or All firms need security measures against internal theft and damage or

external damage.external damage. Security comes fromSecurity comes from PolicePolice Private security firmsPrivate security firms Mafia as protectionMafia as protection Senior managers traditionally will not devolve tasks or delegate.Senior managers traditionally will not devolve tasks or delegate. Senior managers traditionally will not take responsibilitySenior managers traditionally will not take responsibility

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What are the steps to take? 5What are the steps to take? 5

AccountingAccounting Introduce market accounting techniquesIntroduce market accounting techniques

In external reportingIn external reporting In management accountingIn management accounting

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Particular problems in Central Particular problems in Central AsiaAsia

KazakhstanKazakhstan Kyrgyz RepublicKyrgyz Republic TajikistanTajikistan TurkmenistanTurkmenistan UzbekistanUzbekistan

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Central Asian RepublicsCentral Asian Republics

DifficultiesDifficulties Enclosed within USSREnclosed within USSR Economy was integral part of Soviet Economy was integral part of Soviet

EconomyEconomy Not organised as republicsNot organised as republics Economic StructureEconomic Structure Based on production of raw materials Based on production of raw materials

(especially cotton, mineral and energy (especially cotton, mineral and energy products) for use on USSRproducts) for use on USSR

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Central Asian RepublicsCentral Asian Republics Trade PatternsTrade Patterns ConstraintsConstraints TransportTransport Rail and road links – almost all lead to Rail and road links – almost all lead to

RussiaRussia Pipeline infrastructure – all run to Russia, Pipeline infrastructure – all run to Russia,

Armenia, Georgia or UkraineArmenia, Georgia or Ukraine Air services – limited commercial set upAir services – limited commercial set up ProductsProducts Limited range of major export itemsLimited range of major export items

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Central Asian RepublicsCentral Asian Republics

Trade patternsTrade patterns OpportunitiesOpportunities Intra CIS tradeIntra CIS trade Develop new external transport linksDevelop new external transport links Attract Foreign Direct InvestmentAttract Foreign Direct Investment