East European Transition and EU Enlargement: A Quantitative Approach

384 Pages·2002·23.203 MB·English

by  Adriana Agapie (auth.), Professor Wojciech W. Charemza, Professor Krystyna Strzała (eds.)

East European Transition
and EU Enlargement
Contributions to Economics
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continued on page 385
Wojciech W. Charemza • Krystyna Strzala
(Editors)
East European Transition
and EU Enlargement
A Quantitative Approach
With 84 Figures and 105 Tables
Springer-Verlag
Berlin Heidelberg GmbH
Series Editors
Werner A. Müller
Martina Bihn
Editors
Professor Wojciech W. Charemza Professor Krystyna Strzala
The University of Leicester University of Gdansk
Department of Economics Department of Econometrics
University Road Ul. Armii Krajowej 101
Leicester LEI 7RH 81-824 Sopot
United Kingdom Poland
weh @ leicester.ac .uk [email protected]
The camera-ready manuscript was prepared by Marcin Sochacki, University of Gdansk.
The title "European Integration: Estimation of Agricultural Supply Response of Central and East European
Countries", within chapter 3 of this book is a revised version of a paper by the author Pavel Caian submitted
in the context of the European Commission's Phare ACE Programme. Its content does not, however, express
the Commission's official views.
Original document: © European Communities, 2001.
Responsibility for the information and views set out in the book lies entirely with the editors and authors.
The research was undertaken with support from two sources: European community's Phare ACE programme
1998: "East European Transition and EU Enlargement: A Quantitative Approach" and Polish State Commit
tee for Scientific Research project 1999: "Convergence Analysis of Transition Economies with Application
of Macromodels LAM 3". The content of the book is the sole responsibility of the authors and it in no way
represents the views either of the Commission or its services or Polish State Committee for Scientific Re
search.
ISSN 1431-1933
ISBN 978-3-7908-1501-6
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East European transition and EU enlargement: a quantitative approach; with 105 tables / Wojciech W. Cha
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ISBN 978-3-7908-1501-6 ISBN 978-3-642-57497-9 (eBook)
DOI 10.1007/978-3-642-57497-9
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Preface
In March 1998 the European Union formally launched the accession process that
will lead to a significant enlargement of the Union. So far ten countries from
Central Europe: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia,
Lithuania, Poland, Romania, the Slovak Republic and Slovenia have submitted
their applications for EU membership. This unique process immediately attracted
attention of economists and policy makers. Nevertheless, it can be noticed that
amongnumerous results already published, there is adistinctive shortage ofbooks
and papers in which quantitative research methods are applied. This is to a large
extentjustified by the fact that the transition and accession processes are new to
the economicsciences,theirmethodology isnotwellresearched, statistical datafor
the Central and East European countries are scarce and not always reliable and,
generally, quantitativeapproachseemstobeariskyand uncertainbusiness.
All these all problems can also be seen as a challenge rather than an obstacle.
With this on mind, we have decided to clarify the status quo by organising a
research seminar which focused on the methodology and quantitative analysis of
the Central and East European transition and pre-accession processes. The
seminar, East European Transition and EU Enlargement: a Quantitative
Approach organised by Macroeconomic and Financial Data Centre (University of
GdanskandUniversityofLeicester) tookplace inGdanskinJune 2001.
Our edited volume contains papers developed from this seminar. It includes
papers selected from those presented in Gdansk, which survived a thorough
scrutiny by referees. Its major aim is to show that a variety ofconsiderations
both theoretical and empirical - enter into the process ofanalysis ofthe possible
accession of transition economies of Central and Eastern Europe into the
European Union.
The volume isdivided into sixmain parts. Themethodologicalpartofthe book
contains two papers. In the first one, written by Adriana Agapie, specific
estimation problems for models for East European financial markets are
discussed. A new stochastic algorithm for optimisation is adapted, with complete
proofs for its global convergence, for estimation ofparameters in a GARCH(l,1)
model, based on a very small number ofobservations. Economic implications of
these findings are analysed under the bounded rationality assumption, and are
related to the 'learning-by-doing' effect in the context ofEU enlargement. It is
worth mentioning that the paper shows that substantial benefits of this
econometric technique can be gained in a case ofvery young financial markets,
typical for East European countries. The second paper in this part of the book
written by Monica Hernandez suggests an alternative approach to the empirical
growth convergence analysis. Contrary to the traditional growth convergence
literature, the paper examines whether the more sophisticated transitional
dynamics assumptions ofthe Ramsey-Cass-Koopmans model (in relation to those
vi Preface
of the Solow model) provide additional insight. The paper highlights the
importance of both new and traditional approaches by estimation of the exact
discrete model correspondingto the theoretical continuous time model. It is clear
from the results that the estimates arising from the approximated version ofthe
RCK model are systematically different to those obtained from the exact discrete
version.
The second part ofthe book, devoted to the main topic ofthe seminar: current
status, prospects andcountry specific problems ofaccession comprises a variety
of papers, both theoretical and empirical (country specific), describing major
problems of the EU accession. The country specific papers are these by Olegs
Baranovs and Zsuzsanna Sisak-Fekete. These two papers aim at evaluation ofthe
economic situation and main economic challenges of Hungary and Latvia. The
paper by Zsuzsanna Sisak-Fekete provides a short summary of foreign trade
developments in Hungary between 1991 and 2000 and discusses prospects of
further development of this sector. The analysis of new exchange rate regime
introduced in Hungary and its possible effects onexports and imports and balance
ofpayments outlookwith regardto EU accessionconcludes the paper. In the case
ofLatvia, a precondition for economic growth is a tendency towards increasing
exports. The paper by Olegs Baranovs concludes thatfurther reconstructionofthe
national economy is alsoessential. Levellingoutregionaland incomedifferencesis
one ofthe mostserious problemsofthe economic developmentofLatvia. Theother
three papers in this part have a clear emphasis on research in empirical economics
and the use of relevant econometric techniques of rigorous order. The paper by
Balazs Egert aims to test whether the Balassa-Samuelson productivity differential
model is at work in transition countries during the 1990s. The study covers five
advanced Central European transition countries, that is the Czech Republic,
Hungary, Poland, Slovakia and Slovenia. Its main findings could be shortly
described as follows. Firstly, strong evidence in favour of the internal
transmission mechanism ofthe Balassa-Samuelson effect for all countries except
Slovakia was found. Secondly, the productivity driven inflation would not pose a
problem for these countries to meet the Maastricht criterion on price stability. As
amatteroffact, itwasfound that inspiteofmarkedproductivitygains inHungary
and Poland, inflation due to the Balassa-Samuelson effect is strikingly low as the
weight ofnon-traded goods in the CPI basket is relatively low, ranging between
35% and 41%. The similar range ofcountries is covered in a paper by Wojciech
Charemza et.a!.. Two aspects of costs and benefits of enlargement of the
European Union by Central and East European countries are discussed in this
paper. The first one is related to similarities in business cycles between the EU
and the aspiringcountries and to apossible effectofan asymmetric shockinto the
EU economy. The second aspect concerns the potential labour mobility of the
aspiring countries. The empirical research uses a simple two-equations vector
autoregressive (VAR) model and a more complicated large structural VAR
system, the so-called LAM model for simulation experiments. The simulations
reveal that the loss (in terms ofbusiness cycle inflation correlation) ofthe Czech
Republic due to the currency crisis in 1999 was about 30%. Overall it has been
Preface vii
concludedthat the frontrunners in the ED accession rally are the CzechRepublic,
Hungary and Poland, followed by Estonia. The third paper in this part, by Pawel
Kliber and Krzysztof Malaga, refers to the widely discussed problem of
conditional ~-convergence. This workdiffers from otherresearches as the authors
are interested in the values ofsteady-states, notonly in the speed ofconvergence,
trying to estimate stable steady-states values for each version ofthe model. Then
theyperformdetailedcomparisonswiththeempiricaldatafor OECD countries for
the years 1990-1999. The authors have considered three versions ofthe Solow
Swan growth model: the standard one, the model with budget deficit and the
model augmented for the balance of payments. For each model considered the
levels of capital stock p.c. and output p.c. in stable steady-states in OECD
countrieswerecalculated andthespeedofconvergencewas evaluated.
The third part: studies in transition consists offive papers covering different
macroeconomic issues ranging from modelling and forecasting GDP structure by
Joanna GorkaetaI., through an experimental versionofthe econometric model of
the Slovak economy by Jan Haluska and Michal Olexa, to an analysis ofoutput
reversal in transition economies by Bruno Merlevede. The paper by Wojciech
Maciejewski and Michal Greszta is focused mainly on characteristic features of
macroeconomic forecasts published for Poland in the second halfofthe nineties.
Forecast accuracy and efficiency have been put under scrutiny. Michal Kruszka
examines how money phenomena determine business fluctuations in the Polish
economy undertransition.
The fourth part on modelling agriculture is a homogenous one dealing with
specific problems of agriculture modelling in Central and East European
Countries. The paper by Maria CarmenFirici and Kenneth 1. Thompson concerns
estimates of major economic welfare impacts of ED agricultural accession
(adoption ofthe CAP) by Romania, calculated under different assumptions about
the situation at accession in the year 2007, whereas the paper by Pavel Ciaian
et.al. estimates the price response ofaggregate agricultural supply in ten CEECs.
It is worth noting that the relevance ofthe issue lies in the fact that prices are
generally lower in CEEC when comparing with the ED and therefore there are
concerns about increase in agricultural supply afterjoining the ED. The estimated
pricesupplyelasticity isaround 0.23.
The fifth part on wage, price, employment covers an empirical analysis ofthe
wage-price system in transition economies. The first paper by Paul Ashworth et
al. presentsnew estimates ofthe relationship betweenwages and the price level in
five ED Accession countries: Poland, Hungary, the Czech Republic, Sloveniaand
Estonia. Particular care is taken to consider the impact of administered pricing
decisions on overallprice dynamics. Consumerprices are modelled as a weighted
average ofadministered prices and market prices. The model is estimated using a
panel data set that pools quarterly observations across the five countries. The
authors impose common parametersrestrictions across countries wherejustifiable,
but allow for heterogeneity where there is evidence ofsignificant differences in
behaviour. This allows the model to reflect the different institutional structures in
each economy. The equations have been incorporated into full macro-models of
VI1l Preface
the five countries withinan existing global econometricmodel, NiGEM. The final
section ofthe paper simulates a change in administered prices in each ofthe five
countries, to illustrate the impact on total inflation and the economy as a whole.
The paper by Roberto Golinelli and Renzo Orsi analyses some empirical models
of the price adjustment dynamics in the three earliest East European transition
economies: the Czech Republic, Hungary and Poland. In particular, the authors
look at inflation within the context ofmultivariate cointegration, where domestic
and foreign price determinants are initially assessed in separate blocks (each
single-theory based) in order to obtain a number of long-term attractors. After
that, they put previous information in short-term simultaneous vector equilibrium
correcting models for each country. The other two papers in this part are more
country relevant. The first one, by Jose De Sousa and Geomina Turlea,
approaches the issue ofrelative wage distortion in Romanian industrial sectors,
defined as the discrepancy between relative wages and relative marginal
productivity. The authors assume that the main reason of the relative wage
distortion is aquasi-rentappropriation by some groups ofworkers, the process of
appropriation being accommodated by the institutional framework. However, a
further look at more disaggregated data reveals behavioural, economic and
institutional differences between industrial sectors. The clear-cut distinction
between two sections ofthe economy helps to point out some important features
ofthe impact ofrelative wage distortion in Romania. A multivariate VAR model
to perform a Johansen type of cointegration analysis to identify the long-run
determinants ofinflation is used. Theauthors find that, while in the long-runULC
and proposed measure of distortion both play an important role, there is some
evidence that weakexogeneity ofULC cannot be rejected. It is worth mentioning
that these results nuance the findings ofthe IMF (2000), which points out to the
overall nominal unit labourcost as the main determinant ofinflation in Romania,
excluding money and administered prices. Secondly, these findings contradict
some authors who explicitly argue against considering ULC as a source of
inflation. The second paper by Aleksander Welfe and Michal Majsterek
investigates the long-run relationships between wages, prices and labour
productivity in the Polish economy in the period oftransition by applying recent
developments in the field ofmultivariate cointegration analysis. In particular, it
draws heavily on the results obtained by Greenslade, Hall and Henry (1999) and
follows similar modelling strategy. The paper presents all stages ofthe analysis,
which leads to the fully economically identified system representing long-run
relationships. The investigation is based on the quarterly data from 1992.2 to
2000.2. The empirical results lead to the conclusion that costs were one of the
main forces driving inflation in Poland in this period. On the otherhand the data
confirmed that long-run price elasticity ofwages is very close to unity what is
postulatedbymanytheories.
The sixthpartcovers differenttopics connectedwithmodellingandforecasting
financial andconsumption market in transition economies. Four ofthem analyse,
in more or less elaborated way, the specific issues connected with modelling and
forecasting stock markets in transition countries. The most general ofthem is the
Preface ix
paper by Thomas Linne, which examines the contagion effects ofcurrency crises
on several emerging markets in Central and Eastern Europe by analysing the
behaviour of the time series of stock returns. Contagion is understood as an
increase in stockmarket co-movements aftera shock in form ofa currency crisis.
The focus of the study, are the currency crises in the Czech Republic in May
1997, in Asia in summer 1997 and the Russian crisis in August 1998. The
methodological framework for the analysis ofthe contagion effects is a Markov
switching Model. The paper applies for the first time a vector autoregressive
concept in a Markov-switching framework to the stock returns ofthe emerging
markets in Central and Eastern Europe. The other three papers focus on Warsaw
stockexchange applyingdifferent methods. ThepaperbyPiotrFiszederandJerzy
Romanski presents theoretical models and their empirical results for the
conditional variances of returns for Polish stocks and indices quoted on the
Warsaw Stock Exchange. Regularities ofWIG - the mostdiversified index ofthe
Polish stock market, are compared with properties of other indices of the East
European and the EU stock exchanges. Several various conditional variance
specifications have been analysed. It has been found that there are a lot of
similarities butalso many differences between properties ofindices ofthe EU and
the East European stock markets. The paper by Janusz Brzeszczynski presents
autoregressive conditional heteroscedasticity (ARCH) models designed to model
the datacharacterisedbythe volatilityclustering effects. Itconsiders the approach
where the conditional variance function, as well as the mean equation of the
ARCH class model, can be expanded in parallel. The basic regression equation
incorporates causal dependencies between prices and volume as well as the
relationships with major international stock market indices. In the paper, the
hypothesis ofthe strong relationship between Polish and EU markets as well as
the US is verified. Furthermore, the paper describes the most popular direction
quality measures, which can be applied for the financial prices models. The third
paper dealing with WSE by Anna Adamczak and Ewa Majerowska presents one
ofthe models that allow identifying sources ofthe systematic risk ofassets, using
the arbitrage pricing theory. An empirical analysis ofthe prices ofthe chosen 52
companies traded on the Warsaw Stock Exchange is given. The analysis showed
that the main macroeconomic variables that influence the rates of return of
portfolios are: returns from Treasury bills, short-term interest rates, industry
production, marketreturn represented by the main market index, exchange rate of
the US dollarandthe levelofinvestment.
It is also possible to approach the contents ofthis volume in an order different
from the one suggested by the list ofparts. In particular, country-specific papers:
A. Welfe et aI., M. Kruszka and W. Maciejewski et a1. (for Poland), 1. De Soussa
et aI., M. C. Firici (for Romania), Z. Arvai et aI., Z. Sisak-Fekete (for Hungary),
O. Baranovs (for Latvia) and J. Haluska et a1. (for Slovakia) might constitute an
alternative, homogenous part ofthe volume. Papers discussingcommonalities and
differences within groups oftransition countries are: P. Ashworth et aI., P. Caian,
W. W. Charemza et aI., B. Egert, B. Merlevede, and R. Golinellii et a1.
Theoreticalpapersare grouped in partone.
x Preface
The seminarandthe bookwerefinanced bytwoprojects: PhareACE P98-2876
on"EastEuropeanTransitionand EUEnlargement: aQuantitativeApproach"and
the Polish Committee for Scientific Research (l H02B 010 16) on "Convergence
Analysis of Transition Economies with Application of Macromodels LAM 3".
The financial support ofthese two projects is gratefully acknowledged. We are
also indebtedto ProfessorSubrataGhatak, the reviewerofthebook, for his advice
and numerous constructive comments on particular parts of the book and the
entire volume. We also wish to express our thanks to the referees of particular
papers, who gave us, as well as authors of individual contributions, a lot of
valuablecommentsandsuggestions.
WojciechW. Charemza
KrystynaStrzala