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1 Introduction to Emerging Economies Week 1. 2 Characteristics of Transition Economies Have no common starting point Have no common starting point Have.

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Presentation on theme: "1 Introduction to Emerging Economies Week 1. 2 Characteristics of Transition Economies Have no common starting point Have no common starting point Have."— Presentation transcript:

1 1 Introduction to Emerging Economies Week 1

2 2 Characteristics of Transition Economies Have no common starting point Have no common starting point Have no definable end point Have no definable end point Are different culturally Are different culturally Adopt different transition methods Adopt different transition methods Progress at different speeds Progress at different speeds

3 3 Overall goal to develop into 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?

4 4 Principal steps in development of market economy Privatize Privatize Liberalize Liberalize Attract Foreign Direct Investment (FDI) Attract Foreign Direct Investment (FDI)

5 5 Principal steps in development of market economy Restructure & Reform Restructure & Reform Learn market management techniques Learn market management techniques Develop market based accounting practices Develop market based accounting practices

6 6 Major methods of transition Shock Therapy Shock Therapy Gradualism Gradualism Shock without Therapy Shock without Therapy

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8 8 Central Asia

9 9 Who are our subjects? New EU members (Excluding Baltics) Czech Republic Czech Republic Hungary Hungary Poland Poland Slovak Republic Slovak Republic Slovenia Slovenia

10 10 Who are our subjects? Baltic countries Estonia Estonia Latvia Latvia Lithuania Lithuania

11 11 Who are our subjects? South Eastern European (Balkan) countries Albania Albania Bosnia and Herzegovina Bosnia and Herzegovina Macedonia, FYR Macedonia, FYR Croatia - EU accession Croatia - EU accession Bulgaria – EU accession Bulgaria – EU accession Romania – EU accession Romania – EU accession

12 12 Who are our subjects? Commonwealth of Independent States Armenia Armenia Azerbaijan Azerbaijan Belarus Belarus Georgia Georgia Kazakhstan Kazakhstan Kyrgyz Republic Kyrgyz Republic Moldova Moldova

13 13 Who are our subjects? Commonwealth of Independent States Mongolia Mongolia Russia Russia Tajikistan Tajikistan Turkmenistan Turkmenistan Ukraine Ukraine Uzbekistan Uzbekistan

14 14 The progress toward a market economy Has no specified end Has no specified end A market economy is not a particular point A market economy is not a particular point All economies have some degree of state intervention All economies have some degree of state intervention No economy is purely market No economy is purely market

15 15 What are the main differences between planned and market economies? Central Planning does not have: Central Planning does not have: Well-defined property rights Well-defined property rights Commercial legislation regulating the entry and exit of private enterprises Commercial legislation regulating the entry and exit of private enterprises Financial markets Financial markets Commercial banking system Commercial banking system Market oriented system of taxation Market oriented system of taxation

16 16 Therefore No market generated signals about scarcities of inputs and outputs Which means distorted prices No market generated signals about scarcities of inputs and outputs Which means distorted prices No profit motive No profit motive No idea of true international competitiveness No idea of true international competitiveness

17 17 What are the steps to take? 1 Privatize state owned enterprises (SOEs) Privatize state owned enterprises (SOEs) Methods Methods 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 Agreements (JVAs) Direct sales to foreign investors or through Joint Venture Agreements (JVAs)

18 18 Has privatization yielded the expected benefits?-1 In central and eastern Europe and the Baltic countries, privatized firms have generally restructured more quickly and performed better than comparable firms that remained in state ownership In central and eastern Europe and the Baltic countries, privatized firms have generally restructured more quickly and performed better than comparable firms that remained in state ownership Partly this is due to extensive involvement of foreign investors in the privatization process and a relatively sound business environment. Partly this is due to extensive involvement of foreign investors in the privatization process and a relatively sound business environment.

19 19 Has privatization yielded the expected benefits?-2 Privatization has often failed to boost restructuring and better performance of enterprises in most of the CIS countries Privatization has often failed to boost restructuring and better performance of enterprises in most of the CIS countries Partly as a result of the poor corporate governance structures in many privatized firms and Partly as a result of the poor corporate governance structures in many privatized firms and Partly because of the persistence of soft budget constraints, including implicit subsidies from the state. Partly because of the persistence of soft budget constraints, including implicit subsidies from the state.

20 20 Has privatization yielded the expected benefits?-3 Post-privatization ownership is an important determinant of firm-level restructuring and performance. Post-privatization ownership is an important determinant of firm-level restructuring and performance. Across the whole region, the best performers have been firms that were acquired by foreign strategic investors. Across the whole region, the best performers have been firms that were acquired by foreign strategic investors. Similarly, firms with concentrated ownership (insider and outsider) have generally performed better than firms with dispersed ownership. Similarly, firms with concentrated ownership (insider and outsider) have generally performed better than firms with dispersed ownership.

21 21 Has privatization yielded the expected benefits?-4 The method of privatization has been important for the speed and perceived equity of the process. The method of privatization has been important for the speed and perceived equity of the process. However, since many countries applied a combination of methods (vouchers, management-employee buyouts, and direct sales), there has not been a clear relationship between privatization method and post- privatization ownership and restructuring. However, since many countries applied a combination of methods (vouchers, management-employee buyouts, and direct sales), there has not been a clear relationship between privatization method and post- privatization ownership and restructuring.

22 22 What are the problems?-1 If firms subsidies (soft credit and tax arrears) they tend to focus on rent seeking rather than restructuring If firms subsidies (soft credit and tax arrears) they tend to focus on rent seeking rather than restructuring Failure of corporate governance, power held by small groups Failure of corporate governance, power held by small groups Concentrated ownership, such as in firms owned by foreign strategic investors or in small and medium enterprises fully owned by managers, has generally yielded the best results Concentrated ownership, such as in firms owned by foreign strategic investors or in small and medium enterprises fully owned by managers, has generally yielded the best results

23 23 What are the problems?-2 In many transition economies the business environment suffers from In many transition economies the business environment suffers from Corruption Corruption Weak court system Weak court system Bureaucracy Bureaucracy Complex and unfair tax systems Complex and unfair tax systems

24 24 What are the steps to take? 1 Liberalize prices Liberalize prices Outcomes :- Outcomes :- Quick - Quick - Inflation Inflation Poverty Poverty Slow - Slow - Hinders market forces Hinders market forces Distorts competitiveness Distorts competitiveness

25 25 What are the steps to take? 2 Attract Foreign Direct Investment Attract Foreign Direct Investment Joint Venture Agreements Joint Venture Agreements Greenfield Sites Greenfield Sites Acquisitions Acquisitions

26 26 What are the steps to take? 3 Restructure and Reform Restructure and Reform The institutional arrangements to allow a market economy to function The institutional arrangements to allow a market economy to function This means an entire overhaul of existing apparatus This means an entire overhaul of existing apparatus Make business organisations competitive Make business organisations competitive This means This means Corporate failures Corporate failures Unemployment Unemployment Radical reorganisation within businesses Radical reorganisation within businesses If (1) doesnt happen – the market cant function If (1) doesnt happen – the market cant function If (2) doesnt happen – there will be large central costs to support ailing firms If (2) doesnt happen – there will be large central costs to support ailing firms If (2) does happen – there will be large central costs such as unemployment payments If (2) does happen – there will be large central costs such as unemployment payments

27 27 What are the steps to take? 4 Learn market management skills Learn market management skills What are privatized businesses facing ? What are privatized businesses facing ? Government officials who still control major resources and expect inducements Government officials who still control major resources and expect inducements Employees do not have up to date or relevant skills. They cannot justify being paid more and so job hop. Employees do not have up to date or relevant skills. They cannot justify being paid more and so job hop. All firms need security measures against internal theft and damage or external damage. All firms need security measures against internal theft and damage or external damage. Security comes from Security comes from Police Police Private security firms Private security firms Mafia as protection Mafia 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 responsibility Senior managers traditionally will not take responsibility

28 28 What are the steps to take? 5 Accounting Accounting Introduce market accounting techniques Introduce market accounting techniques In external reporting In external reporting In management accounting In management accounting

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36 36 Particular problems in Central Asia Kazakhstan Kazakhstan Kyrgyz Republic Kyrgyz Republic Tajikistan Tajikistan Turkmenistan Turkmenistan Uzbekistan Uzbekistan

37 37 Central Asian Republics Difficulties Difficulties Enclosed within USSR Enclosed within USSR Economy was integral part of Soviet Economy Economy was integral part of Soviet Economy Not organised as republics Not organised as republics Economic Structure Economic Structure Based on production of raw materials (especially cotton, mineral and energy products) for use on USSR Based on production of raw materials (especially cotton, mineral and energy products) for use on USSR

38 38 Central Asian Republics Trade Patterns Trade Patterns Constraints Constraints Transport Transport Rail and road links – almost all lead to Russia Rail and road links – almost all lead to Russia Pipeline infrastructure – all run to Russia, Armenia, Georgia or Ukraine Pipeline infrastructure – all run to Russia, Armenia, Georgia or Ukraine Air services – limited commercial set up Air services – limited commercial set up Products Products Limited range of major export items Limited range of major export items

39 39 Central Asian Republics Trade patterns Trade patterns Opportunities Opportunities Intra CIS trade Intra CIS trade Develop new external transport links Develop new external transport links Attract Foreign Direct Investment Attract Foreign Direct Investment


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