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Changes in industrial structure during transition Export orientation versus import substitution Industrial policy Directions (support of exports versus imports, support in line with comparative advantages versus support defying comparative advantages Forms (tariffs, exchange rate protectionism, subsidies, credits, government purchases) Structure of trade Commodity structure Geographic structure FDI Capital flows Balance of payments INDUSTRIAL STRUCTURE, INDUSTRIAL POLICY, EXTERNAL TRADE AND CAPITAL FLOWS

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Differences in productivity by sectors of the economy

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Industrial companies with largest sales in 2005-06 (Source: Expert 400)

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Import tariffs - impact on growth We tried to find a GDP per capita threshold for the 19th century using data from (Irwin, 2002), but failed. The best equation linking growth rates in 1870-1913 to GDP per capita and tariff rates (27 countries, two periods – 1870-90 and 1890-1913 – 54 observations overall) is: Regression for 1870-1913 GROWTH = 0.24 + 0.04*Y – 0.0004*Y 2 – 0.05*T + 0.001*T 2 + 0.0006*Y*T, Where Y – GDP per capita in 1870 or 1890 respectively, T – average tariff rates (R 2 adj. = 33%, all coefficients significant at 11% level or less).

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Data on corruption Corruption perception index (CPI) for 1980-85 – these estimates are available from Transparency International for over 50 countries CPI = 2.3 + 0,07*Ycap75us, N=45, R 2 =59%, T-statistics for Ycap75 coefficient is 9. 68. CORRres = 10 – [CPI – (2.3 + 0.07*Ycap75us)] = 12.3 – CPI + 0.07*Ycap75us

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Data on investment climate RISK84-90 – average investment risk index for 1984-90, varies from 0 to 100, the higher, the better investment climate RISK = 62.1 + 0.19Ycap75us, N= 88, R 2 =36%, T-statistics for Ycap75us coefficient is 3.95. RISKres = RISK84-90 – (62.1 + 0.19Ycap75us) +100

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Import tariffs - impact on growth. GROWTH=CONST.+CONTR.VAR.+Tincr.(0.06– 0.004Ycap75us–0.004CORRpos–0.005T ) GROWTH, is the annual average growth rate of GDP per capita in 1975-99, the control variables are population growth rates during the period and net fuel imports (to control for “resource curse”), T – average import tariff as a % of import in 1975-99, Tincr. – increase in the level of this tariff (average tariff in 1980- 99 as a % of average tariff in 1971-80), Ycap75us – PPP GDP per capita in 1975 as a % of the US level, CORR pos – positive residual corruption in 1975, calculated as explained earlier. R 2 =40%, N=39, all coefficients are significant at 5% level, except the last one (33%), but exclusion of the last variable (a multiple of T by Tincr.) does not ruin the regression and the coefficients do not change much.

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Import tariffs and accumulation of FOREX- impact on growth If import duties are included into growth regressions without the interaction terms with GDP per capita and/or a measure of institutional strength (corruption), the coefficient on import duties is not significant: But when interaction terms are included, all coefficients become statistically significant. Here is an additional equation that give similar thresholds on GDP per capita and corruption: GROWTH=CONST+CONTR.VAR+T(0.05–0.005Ycap75us– 0.007Rpol) where Rpol is the indicator of the accumulation of foreign exchange reserves computed as explained later, in the third section, N=40, R 2 =40, all coefficients significant at 8% level or less, control variables – positive residual corruption and population growth rates.

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Import tariffs and accumulation of FOREX- impact on growth GROWTH=CONST.+CONTR.VAR.+ + T(0.001RISK–0.0038Ycap75us)+ + Rpol(0.23-0.014T), where N=48, R 2 = 46, all coefficients significant at 7% or less, control variables – PPP GDP in 1975 and population growth rate. Here Rpol is the residual from the equation linking the increase in reserves to GDP ratio to (1) average trade/GDP ratio, (2) increase in trade/GDP ratio, (3) external debt/GDP ratio and (4) debt service/GDP ratio.

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Import tariffs - impact on growth GROWTH=CONST+CONTR.VAR.+ + T(0.005RISK–0.002Ycap75us–0.3) (N= 87, R 2 =42, all coefficients significant at 10% level or less, control variables are population growth rates, population density and total population). The equation implies that for a poor country (say, with the PPP GDP per capita of 20% of the US level or less) import duties stimulate growth only when investment climate is not very bad (RISK > 50%) – the expression in brackets in this case becomes positive.

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Medium term perspective – since 1949: Beijing consensus versus Washington consensus The catch-up development of China since 1949 looks extremely impressive: not only the growth rates in China were higher than elsewhere after the reforms (1979-onward), even before the reforms (1949-79), despite temporary declines during the Great Leap Forward and the Cultural Revolution, the Chinese development was quite successful.

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Since 1979 Chinese economic model is based on: Gradual democratization and the preservation of the one party rule in China allowed to avoid institutional collapse, whereas in Russia institutional capacity was adversely affected by the shock-type transition to democracy (Polterovich, Popov, 2006); Gradual market reforms – “dual track price system” (co-existence of the market economy and centrally planned economy for over a decade), “growing out of socialism” (no privatization until 1996, but creation of the private sector from scratch), non-conventional forms of ownership and control (TVEs); Industrial policy – strong import substitution policy in 1949-78 and strong export-oriented industrial policy afterwards with such tools as tariff protectionism (in the 1980s import tariffs were as high as up to 40% of the value of import) and export subsidies (Polterovich, Popov, 2005); Macroeconomic policy – not only in traditional sense (fiscal and monetary policy), but also exchange rate policy: rapid accumulation of foreign exchange reserves in China (despite positive current and capital account) led to the undervaluation of yuan, whereas Russian ruble became overvalued in 1996-98 and more recently – in 2000-07. Undervaluation of the exchange rate via accumulation of reserves became in fact the major tool of export-oriented industrial policy (Polterovich, Popov, 2004).

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Actual sophistication of exports as compared to predicted one (based on GDP per capita) is very informative for explaining variations in growth rates among countries Dani Rodrik. WHAT’S SO SPECIAL ABOUT CHINA’S EXPORTS? Harvard University, January 2006

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Vietnam – export oriented development

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Until recently Chinese import tariffs were extremely high

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Ratio of Russian domestic energy prices to world prices, %

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Domestic energy prices in $ terms

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Energy efficiency and relative fuel prices

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Trade flows and trade balances for the republics, 1988, as a percentage of GNP a (Exports+Imports): (2xGNP), at domestic prices, assuming the same GNP/NMP ratios for the republics as for the USSR as a whole. Domestic trade is trade with the rest of the Union. Foreign trade is trade with the rest of the world. b Estimates of the balance of tourist trade are shown in brackets. Source: Stabilization, Liberalization and Devolution: Assessment of the Economic Situation and Reform Process in the Soviet Union. A Report, prepared by Commission of the European Communities. December 1990, p. 173. (Data is derived from official Soviet statistics); Narodnoye Khozyaistvo SSSR v 1989 godu (National Economy of the USSR in 1989). Moscow, 1990, p. 638.

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Inward FDI flows amount to 5-30% of total domestic investment. For smaller countries this ratio is higher

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China imports capital mostly in the form of FDI (over 10% of total domestic investment, even though for smaller countries this ratio is higher)

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The inflow of FDI per capita appears to be weakly positively correlated with the share of private sector, but there are too many outliers

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Russia has attracted less FDI per capita than Belarus, not to speak about Kazakhstan and Azerbaijan (that have over $1000 of FDI per capita)

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FDI is attracted by resource abundance and government effectiveness FDI=1.8–.05Ycap75+33.3Y99_AREA+.65GovEff+ +ImDuties*(.002Ycap75–.09) +.01IDincr (N=46, Adjusted R2 = 65%, all coefficients significant at 9% level or less), where FDI – average annual inflow of FDI in 1980-99 as a % of GDP of the recipient country, Ycap75 – PPP GDP per capita in 1975 as a % of the US level, Y99_AREA – ratio to PPP GDP in 1999 in $ to the area of national territory in sq km, GovEff – government effectiveness index, WB, 2000, ranges from –2.5 to +2.5, the higher the more effective is the government, ImDuties – average import duties as a % of total import in 1980-99, IDincr - average import duties as a fraction of import in 1980-99 as a % of 1971-80 level. The level of GDP per capita Economic activity per unit of territory (GDP per 1 square km of territory) The effectiveness of the government The level of tariff protection and the increase in this level (the higher the tariff, the greater the stimuli to invest in a country instead of exporting

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Panama - high FDI, low growth; Korea and Hong Kong - high growth, low FDI

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Cross country regression of growth rates in 1975-99 on the FDI inflows works only with few the control variables: GROWTH = a 0 + a 1 POPgr + a 2 Ycap75 + a 3 FDI (N=54, Adjusted R 2 = 17, all coefficients significant at 8% level or less), where: GROWTH – annual average growth rates of GDP per capita in 1975-99, POPgr – annual average growth rates of population in 1975-99, Ycap75 – GDP per capita in the beginning of the period, 1975, FDI – annual average net inflow of FDI as a % of GDP of the recipient country in 1980-99. If the other control variables are added (investment climate index or average share of investment to GDP in 1975-99), the impact of FDI on growth becomes negative and insignificant, whereas R 2 increases to 50%.

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FDI is not always good for growth GROWTH = CONST. + CONTR. VAR. + FDI (0.02ICI –1.61), where ICI – investment climate index, FDI – average foreign direct investment inflow as a % of GDP in 1980-99. Equations with different control variables give about the same and a very high threshold of investment climate index – about 80%, which is basically the level of developed countries. Only a few developing countries (Botswana, Hong Kong, Kuwait) have such a good investment climate.

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Type of the balance of payments depends on capital flight and policies

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For some countries (EE) ODA as a % of GDP is higher than the regression line, for others (FSU) - lower

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This paper is the logical continuation of my earlier article: Shock Therapy versus Gradualism: The End of the Debate (Explaining the Magnitude of the Transformational.

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