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Abstract:
In recent years, comparative economics experienced a revival, with a new focus on comparing capitalist economies. The theme of the new research is that institutions exert a profound influence on economic development. We argue that, to understand capitalist institutions, one needs to understand the basic trade-off between the costs of disorder and those of dictatorship. We then apply this logic to study the structure of efficient institutions, the consequences of colonial transplantation, and the politics of institutional choice.

Comparative economics, institutions, colonial transplantations, transition

Abstract:
In recent years, comparative economics experienced a revival, with a new focus on comparing capitalist economies. The theme of the new research is that institutions exert a profound influence on economic development. We argue that, to understand capitalist institutions, one needs to understand the basic tradeoff between the costs of disorder and those of dictatorship. We then apply this logic to study the structure of efficient institutions, the consequences of colonial transplantation, and the politics of institutional choice.

Abstract:
In recent years, comparative economics experienced a revival, with a new focus on comparing capitalist economies. The theme of the new research is that institutions exert a profound influence on economic development. The authors argue that, to understand capitalist institutions, one needs to understand the basic tradeoff between the costs of disorder and those of dictatorship. They then apply this logic to study the structure of efficient institutions, the consequences of colonial transplantation, and the politics of institutional choice.

This paper - a product of the Private Sector Advisory Department, Private Sector Development Vice Presidency - is part of a larger effort to understand institutional differences in the regulation of business.

Abstract:
We survey the empirical literature analysing the process of enterprise restructuring in transition economies. The survey provides new insights into the relative effectiveness of different reform policies, and into how this effectiveness varies across regions. We study the effects of privatization, the importance of different types of owners, the effects of foreign and domestic competition, the consequences of soft budgets, and the role of managerial incentives and managerial human capital, on enterprise restructuring.

Restructuring, transition, privatization, competition, soft-budgets, managers, institutions

Abstract:
We survey the empirical literature analyzing the process of enterprise restructuring in transition economies. The survey provides new insights into the relative effectiveness of different reform policies, and into how this effectiveness varies across regions. We study the effects of privatization, the importance of different types of owners, the effects of foreign and domestic competition, the consequences of soft budgets, and the role of managerial incentives and managerial human capital, on enterprise restructuring.

restructuring, transition, privatization, competition, soft budgets, managers, institutions

Abstract:
We examine the evidence on expropriation of minority shareholders in publicly-traded companies in East Asia, by studying separately the effects of cash-flow and voting rights of the controlling shareholder on market valuation. Higher cash-flow rights are associated with higher valuation, consistent with the findings of Jensen and Meckling (1976) for the effects of concentration of management control in the United States. In contrast, concentration of control rights has a negative effect on firm value, consistent with Morck et al. (1988) and Shleifer and Vishny (1997). Separation of voting from cash-flow rights through the use of dual-class shares, pyramiding, and cross-holdings?is especially associated with lower market values. We conclude that the risk of expropriation is the major principal-agent problem for public corporations in East Asia.

Abstract:
We examine the separation of ownership and control for 2,980 corporations in nine East Asian countries. In all countries, voting rights frequently exceed cash-flow rights via pyramid structures and cross-holdings. The separation of ownership and control is most pronounced among family-controlled firms and small firms. More than two-thirds of firms are controlled by a single shareholder. Managers of closely held firms tend to be relatives of the controlling shareholder's family. Older firms are generally family-controlled, dispelling the notion that ownership becomes dispersed over time. Finally, significant corporate wealth in East Asia is concentrated among a few families.

Abstract:
Examines the government regulations associatedwith the entry of new businesses into the market. Specifically, the proceduresand associated cost and time required to adhere to these regulations areevaluated for 85 countries in 1999. Data were collected from a variety of written publications provided by theindividual governments, discussions with representatives of governmentagencies, and reports from local law firms on entry regulation. The"standard" firm was considered, with such characteristics as: performsgeneral or commercial activities, operates in the country's largest city, andisexempt from industry-specific regulation. The results indicate that the average number of days needed to complete theentry regulation across the entire sample is 47, which equates to 47 percent ofgross domestic product (GDP) per capita. When the cost is examined by quartilesof GDP per capita in 1999, the average cost-per-capita-GDP ration for"rich" countries is only 10 percentwhile it is 108 percent in thepoorest countries. Additionally, the analysis shows that countries with a greater amount ofregulation tend to experience higher corruption, but the more strenuousregulations do not lead to better quality public goods. The findings areevaluated with respect to both the public interest theory and the tollbooththeory. (SRD)

Corruption in government, Product quality, Public interest theory, Public choice theory, Tollbooth theory, Per capita income, Barriers to entry, Regulations, Legal procedures, Startups, Startup costs, Government

Abstract:
We present new data on the regulation of entry of start-up firms in 85 countries. The data covers the number of procedures, official time, and official cost that a start-up must bear before it can operate legally. The official costs of entry are extremely high in most countries. Countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have lighter regulation of entry. The evidence is inconsistent with public interest theories of regulation, but supports the public choice view that entry regulation benefits politicians and bureaucrats.

Regulation, business entry

Abstract:
New data show that countries that regulate the entry of new firms more heavily have greater corruption and larger unofficial economies, but not better quality goods. The evidence supports the view that regulating entry benefits politicians and bureaucrats.

Djankov and his coauthors present new data on the regulation of the entry of start-up firms in 85 countries. The data cover the number of procedures, official time, and official costs that a start-up firm must bear before it can operate legally. The official costs of entry are extremely high in most countries.

Countries that regulate entry more heavily have greater corruption and larger unofficial economies, but not better quality goods (public or private). Countries with more democratic and limited governments regulate entry more lightly. The evidence is inconsistent with public interest theories of regulation, but supports the public choice view that regulating entry benefits politicians and bureaucrats.

This paper - a product of the Financial Sector Strategy and Policy Department - is part of a larger effort in the department to educate policymakers on the costs of regulation. The study was funded by the Bank's Research Support Budget under the research project "The Regulation of Small Businesses."

Abstract:
We present new data on the regulation of entry of start-up firms in 75 countries. The data set contains information on the number of procedures, official time, and official cost that a start-up must bear before it can operate legally. The official costs of entry are extremely high in most countries. Countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have fewer entry regulations. The evidence is inconsistent with Pigouvian (helping hand) theories of benevolent regulation, but support the (grabbing hand) view that entry regulation benefits politicians and bureaucrats.

Abstract:
In this paper, we analyze financial and operating data (1992 to 1995) for more than 6,300 industrial firms in seven countries of the region: Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovak Republic and Slovenia. These countries have adopted different policies to encourage enterprise restructuring; thus the data can suggest which policies have been the most successful. Fast privatization is instrumental in encouraging restructuring. On average, a firm that has been privatized for four years will increase its productivity 3-5 times more than a similar firm that is still in state ownership. Less important is the method of privatization. Although case-by-case privatization might result in more foreign ownership, investment, and technical assistance, it is slower to implement and does not necessarily bring more rapid restructuring. This is fortunate because such assistance is likely to be available for only a few firms even in those countries that emphasize case-by-case privatization.

Abstract:
We examine the patterns of media ownership in 97 countries around the world. We find that almost universally the largest media firms are owned by the government or by private families. Government ownership is more pervasive in broadcasting than in the printed media. Government ownership of the media is generally associated with less press freedom, fewer political and economic rights, and, most conspicuously, inferior social outcomes in the areas of education and health. It does not appear that adverse consequences of government ownership of the media are restricted solely to the instances of government monopoly.

Abstract:
Almost universally the largest media firms are controlled by the government or by private families.

Djankov, McLiesh, Nenova, and Shleifer examine patterns of media ownership in 97 countries around the world. They find that almost universally the largest media firms are controlled by the government or by private families.

Government ownership is more pervasive in broadcasting than in the printed media. Government ownership is generally associated with less press freedom, fewer political and economic rights, inferior governance, and, most conspicuously, inferior social outcomes in education and health. The adverse effects of government ownership on political and economic freedom are stronger for newspapers than for television.

The adverse effects of government ownership of the media do not appear to be restricted solely to instances of government monopoly.

Djankov, McLiesh, Nenova, and Shleifer present a range of evidence on the adverse consequences of state ownership of the media. State ownership of the media is often argued to be justified on behalf of the social needs of the disadvantaged. But if their findings are correct, increasing private ownership of the media - through privatization or by encouraging the entry of privately owned media - can advance a variety of political and economic goals, especially those of meeting the social needs of the poor.

This paper - a product of the Office of the Senior Vice President, Development Economics - is one in a series of background papers prepared for World Development Report 2002: Institutions for Markets.

Abstract:
We present a new measure of legal protection of minority shareholders against expropriation by corporate insiders: the anti-self-dealing index. Assembled with the help of Lex Mundi law firms, the index is calculated for 72 countries based on legal rules prevailing in 2003, and focuses on private enforcement mechanisms, such as disclosure, approval, and litigation, governing a specific self-dealing transaction. This theoretically-grounded index predicts a variety of stock market outcomes, and generally works better than the commonly used index of anti-director rights.

Abstract:
We present a new measure of legal protection of minority shareholders against expropriation by corporate insiders: the anti-self-dealing index. Assembled with the help of Lex Mundi law firms, the index is calculated for 72 countries based on legal rules prevailing in 2003, and focuses on private enforcement mechanisms, such as disclosure, approval, and litigation, governing a specific self-dealing transaction. This theoretically-grounded index predicts a variety of stock market outcomes, and generally works better than the commonly used index of anti-director rights.

legal protection, disclosure, stock market

Abstract:
In nine East Asian countries, higher cash-flow rights are associated with a higher market valuation and higher control rights with a lower valuation, especially when cash-flow rights are low and control rights are high. This suggests the expropriation of minority shareholders by controlling shareholders. The risk of expropriation is the chief principal-agent problem for large publicly traded corporations.

As many East Asian countries plunged into economic decline, the structure of concentrated ownership and associated corporate governance, along with weak corporate performance, have been blamed for the crisis. There is little empirical evidence, however, of the nature of ownership structures in East Asia and their relationship to corporate performance in the typical East Asian environment (where inefficient judicial systems, and weak property and shareholder rights are common).

Claessens, Djankov, Fan, and Lang examine evidence of the expropriation of minority shareholders for 2,658 corporations in nine East Asian countries in 1996. They distinguish control from cash-flow rights. They also distinguish between various types of ultimate owners, including family, state, widely held corporations, and widely held financial institutions.

Higher cash-flow rights are associated with higher market values, consistent with Jensen and Meckling (1976).

In contrast, deviations of control from cash-flow rights-through the use of dual-class shares, pyramiding, and cross-holdings-are associated with lower market values. This is especially true for corporations under family control and, in Japan, under the control of widely held financial institutions.

They conclude that the risk of expropriation is the major principal-agent problem for large corporations, as suggested by La Porta and colleagues (1999).

The degree to which certain ownership structures are associated with expropriation depends on country-specific circumstances. These may include the quality of banking systems, the legal and judicial protection of individual shareholders, and the degree of financial disclosure required.

This paper - a product of the Financial Economics Unit, Financial Operations Vice Presidency - is part of a larger effort in the vice presidency to study corporate performance patterns in East Asia.

Abstract:
Stock markets in transition economies are generally underdeveloped, with low market capitalization and turnover, even when compared to most emerging markets. Poor macro-conditions, weak legal protection for minority shareholders and limited development of institutional investors have impeded their development. While stock markets can be expected to grow in most transition economies, their scale will remain small relative to world stock markets. Furthermore, many corporations from transition economies are already raising funds and listing their shares abroad. Also given global stock market consolidation, this suggests that most transition economies are best off integrating their markets with those abroad.

Abstract:
In cooperation with Lex Mundi member law firms in 109 countries, we measure and describe the exact procedures used by litigants and courts to evict a tenant for non-payment of rent and to collect a bounced check. We use these data to construct an index of procedural formalism of dispute resolution for each country. We find that such formalism is systematically greater in civil than in common law countries. Moreover, procedural formalism is associated with higher expected duration of judicial proceedings, more corruption, less consistency, less honesty, less fairness in judicial decisions, and inferior access to justice. These results suggest that legal transplantation may have led to an inefficiently high level of procedural formalism, particularly in developing countries.

Enforcement of contracts, courts, judicial efficiency

Abstract:
In cooperation with Lex Mundi member law firms in 109 countries, we measure and describe the exact procedures used by litigants and courts to evict a tenant for non-payment of rent and to collect a bounced check. We use these data to construct an index of procedural formalism of dispute resolution for each country. We find that such formalism is systematically greater in civil than in common law countries. Moreover, procedural formalism is associated with higher expected duration of judicial proceedings, more corruption, less consistency, less honesty, less fairness in judicial decisions, and inferior access to justice. These results suggest that legal transplantation may have led to an inefficiently high level of procedural formalism, particularly in developing countries.

Enforcement of contracts, courts, judicial efficiency

Abstract:
In cooperation with Lex Mundi member law firms in 109 countries, we measure and describe the exact procedures used by litigants and courts to evict a tenant for non-payment of rent and to collect a bounced check. We use these data to construct an index of procedural formalism of dispute resolution for each country. We find that such formalism is systematically greater in civil than in common law countries. Moreover, procedural formalism is associated with higher expected duration of judicial proceedings, more corruption, less consistency, less honesty, less fairness in judicial decisions, and inferior access to justice. These results suggest that legal transplantation may have led to an inefficiently high level of procedural formalism, particularly in developing countries.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
In cooperation with Lex Mundi member law firms in 109 countries, we measure and describe the exact procedures used by litigants and courts to evict a tenant for non-payment of rent and to collect a bounced check. We use these data to construct an index of procedural formalism of dispute resolution for each country. We find that such formalism is systematically greater in civil than in common law countries. Moreover, procedural formalism is associated with higher expected duration of judicial proceedings, more corruption, less consistency, less honesty, less fairness in judicial decisions, and inferior access to justice. These results suggest that legal transplantation may have led to an inefficiently high level of procedural formalism, particularly in developing countries.

Abstract:
Evidence from East Asia suggests that a firm's ownership relationship with a family or bank provides insurance against the likelihood of bankruptcy during bad times, possibly at the expense of minority shareholders. Bankruptcy is more likely in countries with strong creditor rights and a good judicial system - perhaps because creditors are more likely to force a firm to file for bankruptcy. The widespread financial crisis in East Asia caused large economic shocks, which varied by degree across the region. That crisis provides a unique opportunity for investigating the factors that determine the use of bankruptcy processes in a number of economies.

Claessens, Djankov, and Klapper study the use of bankruptcy in Hong Kong, Indonesia, Japan, the Republic of Korea, Malaysia, the Philippines, Singapore, Taiwan (China), and Thailand. These economies differ in their institutional frameworks for resolving financial distress, partly because of the different origins of their judicial systems. One difference is the strength of creditor rights, which Claessens, Djankov, and Klapper document. They expect that differences in legal enforcement and judicial efficiency should affect the resolution of financial distress.
Using a sample of 4,569 publicly traded East Asian firms, they observe a total of 106 bankruptcies in 1997 and 1998. They find that: · The likelihood of filing for bankruptcy is lower for firms with ownership links to banks and families, controlling for firm and country characteristics.

Filings are more likely in countries with better judicial systems.

Filings are more likely where there are both strong creditor rights and a good judicial system.

These results alone do not allow Claessens, Djankov, and Klapper to address whether increased use of bankruptcy is an efficient resolution mechanism.

This paper - a product of the Financial Economics Unit, Financial Sector Practice Department - is part of a larger effort in the department to study corporate financing and governance mechanisms in emerging markets.

Abstract:
We examine the efficiency of investment by diversified firms in nine East Asian countries, using a unique data of more than 10,000 firms over the 1991-96 period. We document the degree of diversification in the corporate sector, distinguish between vertical and complementary diversification, and study the differences across the nine East Asian countries. Based on the differential effect of vertical and complementary diversification on corporate performance, we test the misallocation-of-capital and learning-by-doing hypotheses. We find that the misallocation of capital is more pronounced in South Korea and possibly Malaysia than in Indonesia, Taiwan and Thailand, while the learning hypothesis is more pronounced for these three countries. Our East Asian sample provides diversity of development across countries, and enables us to further test these two hypotheses. We find evidence consistent with the learning-by-doing hypothesis that firms in more developed countries are successful in vertical diversification since they already make use of sophisticated technologies and may have peer firms to learn from. Furthermore, firms in more developed countries learn faster and improve their performance. We also find evidence consistent with the misallocation-of-capital hypothesis, as diversification by firms in less developed countries is subject to more misallocation of capital.

Abstract:
We investigate the regulation of labor markets through employment, collective relations, and social security laws in 85 countries. We find that the political power of the left is associated with more stringent labor regulations and more generous social security systems, and that socialist, French, and Scandinavian legal origin countries have sharply higher levels of labor regulation than do common law countries. However, the effects of legal origins are larger, and explain more of the variation in regulations, than those of politics. Heavier regulation of labor is associated with lower labor force participation and higher unemployment, especially of the young. These results are most naturally consistent with legal theories, according to which countries have pervasive regulatory styles inherited from the transplantation of legal systems.

Abstract:
We investigate the regulation of labor markets through employment, collective relations, and social security laws in 85 countries. We find that the political power of the left is associated with more stringent labor regulations and more generous social security systems, and that socialist, French, and Scandinavian legal origin countries have sharply higher levels of labor regulation than do common law countries. However, the effects of legal origins are larger, and explain more of the variation in regulations, than those of politics. Heavier regulation of labor is associated with lower labor force participation and higher unemployment, especially of the young. These results are most naturally consistent with legal theories, according to which countries have pervasive regulatory styles inherited from the transplantation of legal systems.

Abstract:
We investigate the regulation of labor markets through employment laws, collective bargaining laws, and social security laws in 85 countries. We find that richer countries regulate labor less than poorer countries do, although they have more generous social security systems. The political power of the left is associated with more stringent labor regulations and more generous social security systems. Socialist and French legal origin countries have sharply higher levels of labor regulation than do common law countries, and the inclusion of legal origin wipes out the effect of the political power of the left. Heavier regulation of labor is associated with a larger unofficial economy, lower labor force participation, and higher unemployment, especially of the young. These results are difficult to reconcile with efficiency and political power theories of institutional choice, but are broadly consistent with legal theories, according to which countries have pervasive regulatory styles inherited from the transplantation of legal systems.

Abstract:
We investigate the regulation of labor markets through employment laws, collective bargaining laws, and social security laws in 85 countries. We find that richer countries regulate labor less than poorer countries do, although they have more generous social security systems. The political power of the left is associated with more stringent labor regulations and more generous social security systems. Socialist and French legal origin countries have sharply higher levels of labor regulation than do common law countries, and the inclusion of legal origin wipes out the effect of the political power of the left. Heavier regulation of labor is associated with a larger unofficial economy, lower labor force participation, and higher unemployment, especially of the young. These results are difficult to reconcile with efficiency and political power theories of institutional choice, but are broadly consistent with legal theories, according to which countries have pervasive regulatory styles inherited from the transplantation of legal systems.

Abstract:
The Czech Republic's mass-privatization scheme improved the management of privatized firms by concentrating ownership. And contrary to expectations, banks with an (indirect) equity stake in a privatized firm have a positive influence on the firm's corporate governance.

The Czech Republic's mass-privatization scheme changed the governance of many firms in a short time. Claessens, Djankov, and Pohl show that mass privatization was effective in improving firm management because of the concentrated ownership structure that resulted.

For a cross section of 706 firms for the period 1992-95, they find that the more concentrated the firm's ownership, the higher the firm's market valuation and profitability. Large ownership through bank-sponsored investment funds and strategic investors appears to be particularly important in improving corporate governance and turning firms around.

They find no evidence that market valuation or profitability were lower for firms in which investment funds sponsored by a firm's main bank represented a large ownership stake. It is often argued that the firm's main bank having (indirect) ownership control could represent a conflict of interest. The empirical analysis here shows, quite the contrary, that such indirect ownership control has a significant positive influence.

On balance, banks that had an (indirect) equity stake in a firm have a positive influence on the firm's corporate governance.

This paper - a joint product of the Office of the Regional Vice President, East Asia and Pacific, and the Finance and Private Sector Development Division Division, Europe and Central Asia, and Middle East and North Africa Technical Department - was presented at the International Symposium on Capital Markets and Enterprise Reform in Beijing, November 8-9, 1996.

Abstract:
Resolving systemic banking and corporate distress is no easy task. This paper reviews bank and corporate restructuring efforts in the four East Asian crisis countries. Indonesia, Republic of Korea, Malaysia, Thailand, and identifies remaining priorities for reform. The analysis indicates that two years into the process, much has been done,but much remains to be accomplished. Although governments have spent substantial resources to clean up the balance sheets of financial intermediaries, restructuring is incomplete, much new capital is still needed, and for most intervened financial institutions new private owners have yet to be found. Progress on corporate restructuring is less advanced, and many corporations remain overindebted. Durable economic recovery depends on further progress in both areas. In particular, decisive improvements in the allocation of investible funds will require better-capitalized banking systems and deeper institutional reforms in financial regulation and supervision, corporate governance, and bankruptcy procedures.

Banking Crises, restructuring, emerging markets, public policy, regulation.

Abstract:
We present insolvency practitioners from 88 countries with an identical case of a hotel about to default on its debt, and ask them to describe in detail how debt enforcement against this hotel will proceed in their countries. We use the data on time, cost, and the likely disposition of the assets (preservation as a going concern versus piecemeal sale) to construct a measure of the efficiency of debt enforcement in each country. We identify several characteristics of debt enforcement procedures, such as the structure of appeals and availability of floating charge finance, that influence efficiency. Our measure of efficiency of debt enforcement is strongly correlated with per capita income and legal origin and predicts debt market development across countries. Interestingly, it is also highly correlated with measures of the quality of contract enforcement and public regulation obtained in other studies.

Abstract:
We present insolvency practitioners from 88 countries with an identical case of a hotel about to default on its debt, and ask them to describe in detail how debt enforcement against this hotel will proceed in their countries. We use the data on time, cost, and the likely disposition of the assets (preservation as a going concern versus piecemeal sale) to construct a measure of the efficiency of debt enforcement in each country. We identify several characteristics of debt enforcement procedures, such as the structure of appeals and availability of floating charge finance, that influence efficiency. Our measure of efficiency of debt enforcement is strongly correlated with per capita income and legal origin and predicts debt market development across countries. Interestingly, it is also highly correlated with measures of the quality of contract enforcement and public regulation obtained in other studies.

bankruptcy, legal origins

Abstract:
Some East Asian firms diversify to circumvent external factor markets subject to high transaction costs. Other diversify as a means of expropriation by large stockholders. There is evidence that group affiliation is used to complement firm-level diversification in the creation of internal markets.

Using data for more than 2,000 companies from nine East Asian economies, Claessens, Djankov, Fan, and Lang examine the interactions between ultimate ownership, group affiliation, and corporate diversification.
They find evidence that allocating resources within business groups is associated with higher market valuation when external markets are less developed.

They also find that group affiliation and firm-level diversification are used complementarily to exploit the relative cost-effectiveness of internal markets.

They reject the hypothesis that diversification patterns can be explained by large blockholders' incentive to reduce risk. But they find support for the hypothesis that controlling owners use diversification to expropriate other shareholders.

Group affiliation is widespread among publicly traded corporations in East Asia. Group-affiliated firms are on average associated with diversification discounts. Further analysis reveals that the discounts are attributable to diversified firms in the more developed East Asian economies. By contrast, group affiliation positively contributes to diversification performance in less developed economies.

The authors find that group-affiliated firms are more likely to diversify in developing economies but are equally likely to diversify in developed economies.

When diversifying in more developed economies, group-affiliated firms destroy more value than do independent firms. In developing economies, group-affiliated firms are more likely than independent firms to benefit from diversification in developing economies.

This paper - a product of the Financial Economics Unit, Financial Operations Vice Presidency - is part of a larger effort in the vice presidency to study corporate performance patterns in East Asia.

Abstract:
We investigate cross-country determinants of private credit, using new data on legal creditor rights and private and public credit registries in 129 countries. We find that both creditor protection through the legal system and information sharing institutions are associated with higher ratios of private credit to GDP, but that the former is relatively more important in the richer countries. An analysis of legal reforms also shows that improvements in creditor rights and in information sharing precede faster credit growth. We also find that creditor rights are extremely stable over time, contrary to the convergence hypothesis. Finally, we find that legal origins are an important determinant of both creditor rights and information sharing institutions.

Abstract:
We investigate cross-country determinants of private credit, using new data on legal creditor rights and private and public credit registries in 129 countries. We find that both creditor protection through the legal system and information sharing institutions are associated with higher ratios of private credit to GDP, but that the former is relatively more important in the richer countries. An analysis of legal reforms also shows that improvements in creditor rights and in information sharing precede faster credit growth. We also find that creditor rights are extremely stable over time, contrary to the convergence hypothesis. Finally, we find that legal origins are an important determinant of both creditor rights and information sharing institutions.

Organizations, markets

Abstract:
We examine the valuation effect of a bank's insolvency on related industrial firms. Our sample includes 31 insolvent banks in Indonesia, Korea, and Thailand that serve as main creditors for 269 publicly traded companies. Our findings suggest that a bank relationship adds value to a firm, and that investor confidence in bank-related firms depends on investors' certainty in the continuity of the banking relationship. Announcement of a bank closure, preceding liquidation and resulting in a complete loss of ties with the main creditor, leads to discounts in the market value of related firms. Announcement of nationalization, preceding recapitalization and new management, is associated with short- and long-term positive abnormal performance of related firms. Announcement of a foreign sale is associated with initial value discounts, but longer-term market premiums as investors revise their expectations of the effect of foreign capital and expertise. The announcement of a domestic merger, which may continue the banking relationship but adds neither capital nor new management, has no consistent short- or long-term effect on market value. Significant cumulative returns for fifty days following our event date suggest that bank ownership has real effects on the performance of related firms above initial expectations. We also explore but do not find support for alternative explanations of our results.

Abstract:
Weaknesses in corporate governance and the fragile financial structure of many corporations contributed to, and deepened Thailand's recent financial crisis. Large corporations need to reduce their vulnerability to economic shocks and improve corporate governance; smaller firms should achieve a more stable funding structure.

Alba, Claessens, and Djankov assess Thailand's policy options for reducing large corporations' vulnerability to economic shocks and improving their corporate governance - and for providing smaller firms a more stable funding structure.

Using data for firms listed on Thailand's stock exchange, they empirically assess the relative importance of various factors determining the cost of capital, the availability of financing, and policies and distortions that affect corporate governance in nonfinancial firms. The empirical findings highlight weaknesses in corporate governance and the inherent risks in Thailand's corporate financing structures.

They conclude that the most important ask in improving the structure of corporate financing and the framework for corporate governance is to change incentives. This will involve:

Accelerating legal reform, including reform of bankruptcy and foreclosure laws.

Improving bank monitoring of enterprise management and encouraging banks to develop more arm's-length relationships with firms. This will require greater transparency and disclosure of ownership relationships and stricter enforcement of insider and related lending limits, violation of which contributed poor intermediation and the recent crisis.

Improving disclosure and accounting practices. Self-regulatory agencies may need to play more of a role, possibly with more legal power to discipline violators.

Better enforcement of corporate governance rules. The formal structure for corporate governance is standard but enforcement is weak.

Facilitation of equity infusions. Investors - especially minority shareholders - may need to play a more direct role in monitoring and disciplining managers. To attract new infusions of equity, new equity owners may need more-than-proportional representation on the board of directors until other investor protection mechanisms are strengthened.

Improving the framework for corporate governance. A broad public discussion of corporate governance, similar to recent discussions in the United Kingdom and elsewhere, may be needed to clarify the distribution of control in the economy's real sector.

Strengthening institutions responsible for gathering and analyzing data on firms of all sizes and for monitoring firm performance and behavior.

This paper-a product of the Economic Policy Unit, Finance, Private Sector, and Infrastructure Network-is part of a larger effort in the network to study the performance and financing structures of East Asian corporations.

Abstract:
This paper is a study of the economic effects of the integration of the Central European Countries (CECs) into the European Union (EU). Our analysis of EU-CEC integration is based on a specially constructed version of the University of Michigan Computational General Equilibrium (CGE) Trade Model. We use this model to calculate the economic effects of EU-CEC integration on the trade, output, and employment by sector as well as the real returns to capital and labor and the economic welfare of the CECs, the EU members, and the other major trading country aggregates included in the model.

Abstract:
This paper is a study of the economic effects of the integration of the Central European Countries (CECs) into the European Union (EU). Our analysis of EU-CEC integration is based on a specially constructed version of the University of Michigan Computational General Equilibrium (CGE) Trade Model. We use this model to calculate the economic effects of EU-CEC integration on the trade, output, and employment by sector as well as the real returns to capital and labor and the economic welfare of the CECs, the EU members, and the other major trading country aggregates included in the model.

Abstract:
Enterprises in six newly independent states exhibit large differences in ownership structure, differences that seem to be determined by the method of privatization pursued. Enterprises in countries where the privatization programs favored incumbent managers ended up with heavy ownership by managers; countries that favored mass privatization had the highest proportion of ownership shares held by outside investors. Ownership by outside local investors or the state is not significantly correlated with enterprise restructuring; high foreign ownership is.

Djankov investigates the relationship between ownership structure and enterprise restructuring in six newly independent states: Georgia, Kazakstan, the Kyrgyz Republic, Moldova, Russia, and Ukraine.

He documents the changing pattern of ownership in 960 privatized manufacturing companies from 1995-97.

There are large differences in ownership structure across countries, differences that seem to be determined by the method of privatization pursued. Enterprises in countries where the privatization programs favored incumbent managers (Georgia and Ukraine) ended with heavy ownership by managers (an average 53.6 percent and 46.2 percent, respectively). Countries that used mainly the mass privatization approach (Kazakstan and the Kyrgyz Republic) had the highest proportion of ownership shares held by outside investors (37 percent and 21.2 percent, respectively).

Foreign ownership is positively associated with enterprise restructuring at high ownership levels (above 30 percent of shares).

By contrast, the relationship between management ownership and enterprise restructuring is non-monotonic, positive at low (below 10 percent) or high (above 30 percent) levels.

Finally, Djankov shows that ownership by outside local investors or the state is not significantly correlated with restructuring.

This paper - a product of the Financial Economics Unit, Financial Sector PracticeDepartment - is part of a larger effort in the department to study the transition process.

Abstract:
This study investigates the relation between ownership structure and enterprise restructuring in six Newly Independent States. We document the changing pattern of ownership in 960 privatized manufacturing companies in the 1995-97 period. There are large differences in the ownership structure across countries, and these differences seem to be determined by the type of privatization methods pursued. We show that foreign ownership is positively associated with enterprise restructuring at high ownership levels (above 30% of total shares). In contrast, the relation between manager ownership and enterprise restructuring is non-monotonic, positive at low (below 10%) or high (above 30%) stakes, but negative at intermediate levels. Finally, we show that ownership by outside local investors or the state is not significantly correlated with restructuring.

Abstract:
Empirical analysis shows that some of the vulnerabilities in corporate financial structures that helped trigger East Asia's financial crisis already existed in the early 1990s.

East Asia's financial crisis has been attributed in part to the weak performance and risky financial structures of Asian corporations. In the period before Asia's financial crisis, however, analysts were not suggesting that the financial structures of many East Asian corporations would be unable to withstand the combined shocks of increased interest rates, depreciated currencies, and large drops in domestic demand.

To document the basic record of corporate performance and financing structures for East Asian corporations, Claessens, Djankov, and Lang analyze data for 5,550 firms in nine countries for the period 1988-96. They find large differences in performance and financial structure across countries.

Profitability - as measured by real return on assets (ROA) in local currency - was relatively low in Hong Kong, Japan, the Republic of Korea, and Singapore in the decade before the crisis. Corporations in Indonesia, the Philippines, and Thailand averaged high returns - roughly double those in Germany and the United States for the same period.

In 1994-96, measured performance declined somewhat in several East Asian countries, especially Japan and Korea. Those differences in performance were not fully reflected in sales growth, as investment rates were high and continued to drive output growth in all countries.

These stylized facts suggest that the East Asian miracle was indeed based on a vibrant corporate sector.

But the combination of high investment and relatively low profitability in some countries meant that much external financing was needed. Outside equity was used sparingly-in part because stock markets were depressed (Japan) or because insiders preferred to retain control - so borrowing was heavy in most East Asian countries, and leverage increased in the years before 1996 in Korea, Malaysia, and Thailand.

Risk increased as short-term (foreign exchange) borrowing became increasingly important in the 1990s, especially in Malaysia, Taiwan (China), and Thailand.

In other words, it is now apparent that some of the vulnerabilities in corporate financial structures that were to become an important factor in East Asia's financial crisis already existed in the early 1990s, although they were not noted at the time.

This pape - a product of the Economic Policy Unit, Finance, Private Sector, and Infrastructure Network - is part of a larger effort in the network to study the performance and financing structures of East Asian corporations.

Abstract:
Foreign aid provides a windfall of resources to recipient countries and may result in the same rent seeking behavior as documented in the "curse of natural resources" literature. In this paper we discuss this effect and document its magnitude. Using data for 108 recipient countries in the period 1960 to 1999, we find that foreign aid has a negative impact on democracy. In particular, if the foreign aid over GDP that a country receives over a period of five years reaches the 75th percentile in the sample, then a 10-point index of democracy is reduced between 0.6 and one point, a large effect. For comparison, we also measure the effect of oil rents on political institutions. The fall in democracy if oil revenues reach the 75th percentile is smaller, (0.02). Aid is a bigger curse than oil.

Aid, democracy

Abstract:
Firm-level data for the Czech Republic during 1992-6 suggest that foreign investment has tended to flow to firms of above average size, initial profitability and initial labor productivity. After controlling for this selection bias, we find that foreign investment has a positive, but statistically insignificant, impact on TFP growth. This is surprising, given that there is a presumption that foreign investors should be transferring new technologies and knowledge to partner firms. Spillovers associated with a foreign investment presence in an industry are found to be negatively correlated with domestic firm performance, while imports are found to have a significant positive effect on TFP growth of such firms. We conclude that trade (imports) appears to have played an important role as a channel for improved performance of Czech enterprises.

Abstract:
Using objective measures of business regulation in 135 countries, we establish that countries with better regulations grow faster. Improving from the worst quartile of business regulations to the best implies a 2.3 percentage points increase in annual growth.

growth, regulation, Doing Business

Abstract:
A study of 2,980 corporations in nine East Asian countries finds more than half of those firms being controlled by a single shareholder. Many smaller and older firms are family-controlled. Wealth is very concentrated in some countries, and links between business and government are extensive, so the legal system has probably been influenced by the prevailing ownership structure.

Claessens, Djankov, and Lang identify the ultimate ownership structure for 2,980 corporations in nine East Asian countries. They find that:

More than half of those firms are controlled by a single shareholder.

Smaller firms and older firms are more likely to be family-controlled.

Patterns of controlling ownership stakes differ across countries. The concentration of control generally diminishes with higher economic and institutional development.

In many countries, control is enhanced through pyramid structures and deviations from one-share-one-vote rules. As a result, voting rights exceed formal cash-flow rights.

Management is rarely separated from ownership control, and management in two thirds of the firms that are not widely held is related to management of the controlling shareholder.

In some countries, wealth is very concentrated and links between government and business are extensive, so the legal system has probably been influenced by the prevailing ownership structure.

This paper-a product of the Financial Economics Unit, Financial Sector Practice Department-is part of a larger effort in the department to uncover the causes of the East Asian crisis.

Abstract:
Recently, Sachs et al. (2004) have argued in favor of a massive increase in foreign aid to Africa in order to escape from a poverty trap. They propose to increase the capital stock in one step, through a large, well-targeted infusion of foreign assistance. In this article we show that foreign aid has a negative impact on the democratic stance of developing countries, and on economic growth by reducing investment and increasing government consumption. Therefore, our empirical findings do not support the Sachs proposal.

Foreign aid, development

Abstract:
Corporate financing patterns around the world reflect countries' institutional environments.

Weaknesses in the corporate sector have increasingly been cited as important factors in financial crises in both emerging markets and industrial countries. Analysts have pointed to weak corporate performance and risky financing patterns as major causes of the East Asian financial crisis. And some have argued that company balance sheet problems may also have played a role, independent of macroeconomic or other weaknesses, including poor corporate sector performance. But little is known about the empirical importance of firm financing choices in predicting and explaining financial instability.

Firm financing patterns have long been studied by the corporate finance literature. Financing patterns have traditionally been analyzed in the Modigliani-Miller framework, expanded to incorporate taxes and bankruptcy costs. More recently, asymmetric information issues have drawn attention to agency costs and their impact on firm financing choices. There is also an important literature relating financing patterns to firm performance and governance.

Several recent studies have focused on identifying systematic cross-country differences in firm financing patterns - and the effects of these differences on financial sector development and economic growth. They have also examined the causes of different financing patterns, particularly countries' legal and institutional environments.

The literature has devoted little attention to corporate sector risk characteristics, however, aside from leverage and debt maturity considerations. Even these measures have been the subject of few empirical investigations, mainly because of a paucity of data on corporate sectors around the world.

Building on data that have recently become available, Claessens, Djankov, and Nenova try to fill this gap in the literature and shed light on the risk characteristics of corporate sectors around the world. They investigate how corporate sectors' financial and operating structures relate to the institutional environment in which they operate, using data for more than 11,000 firms in 46 countries. They show that:
- The origins of a country's laws, the strength of its equity and creditor rights, and the nature of its financial system can account for the degree of corporate risk-taking.
- In particular, corporations in common law countries and market-based financial systems have less risky financing patterns.
- Stronger protection of equity and creditor rights is also associated with less financial risk.

This paper - a product of the Financial Sector Strategy and Policy Group, Financial Sector Vice Presidency - is part of a larger effort in the Bank to study the determinants of the riskiness of countries' corporate and financial systems.

Abstract:
There is a good deal of intra-industry trade between nations in Central and Eastern Europe and the European Union. Most of it is vertical (the exchange of similar goods of different quality).

Eastern European nations and the European Union (EU) is among the highest of all the EU's bilateral trade flows.

Aturupane, Djankov, and Hoekman break down data on these trade flows into horizontal and vertical components and investigate the determinants of each.

They find that vertical intra-industry trade (the exchange of similar goods of different quality) accounts for 80 to 90 percent of total intra-industry trade. It is positively associated with product differentiation, labor intensity of production, economies of scale, and foreign direct investment.

Controlling for country effects, they find a statistically significant positive association between horizontal intra-industry trade (the exchange of close substitutes of similar quality) and foreign direct investment, product differentiation, and industry concentration. They find a significant negative relationship for economies of scale and labor intensity.

These results do not hold if they do not control for country effects, suggesting that country-specific factors are key determinants of horizontal intra-industry trade.

This paper - a product of the Development Research Group - is part of a larger effort in the group to analyze the role of trade and foreign investment in the process of transition in Eastern Europe.

Abstract:
Firms in industrial countries are more likely to benefit from vertical integration and corporate diversification-learning faster and hence improving performance. Corporate diversification in less developed countries is more likely to lead to misallocation of capital. The East Asian financial crisis has been attributed in part to the corporate diversification associated with the misallocation of capital investment toward less profitable and more risky business segments. Much anecdotal evidence to support this view has surfaced since the crisis but there was little discussion of it before the crisis. Quite the contrary: The rapid expansion of East Asian firms by entering new business segments was viewed as contributing to the East Asian miracle.

Claessens, Djankov, Fan, and Lang examine the efficiency of investment by diversified corporations in nine East Asian countries, using unique panel data from more than 10,000 corporations for the pre-crisis period, 1991-96. They:

Document the degree of diversification in the corporate sector in Hong Kong, Indonesia, Japan, the Republic of Korea, Malaysia, the Philippines, Singapore, Taiwan (China), and Thailand, countries that have achieved enviable rates of economic growth over the past three decades.

Distinguish between vertical and complementary diversification and study the differences across nine countries.

Investigate whether diversification in East Asia has hurt economic efficiency.

Their study tests the learning-by-doing and misallocation-of-capital hypotheses related to the types and degrees of diversification in East Asian countries. Firms in Indonesia, Korea, Taiwan, and Thailand appear to have suffered significant negative effects of vertical integration on short-term performance; the same countries gained significant short-term benefits from complementary expansion. The results suggest that the misallocation-of-capital hypothesis is appropriate for Korea and Malaysia; the learning-by-doinghypothesis for Indonesia, Taiwan, and Thailand.

Firms in more developed countries succeed in vertically integrating and improve both short-term profitability and market valuation. Firms in more developed countries are ultimately more likely to benefit from such diversification (learn faster, to improve their performance). And diversification by firms in less developed countries is subject to more misallocation of capital.

This paperis a product of the Economic Policy Unit, Finance, Private Sector, and Infrastructure Network.

Abstract:
We study the effect of changes in management and the use of equity incentives on firm performance and market valuation using a cross-section of 706 Czech firms over the 1993-97 period. As these firms have exogenously determined ownership structures, we avoid the simultaneity problem often present in studies for transition economies where either existing managers become owners or new owners replace existing managers. And, as there were few managers in the Czech Republic with market-economy skills, we avoid the selection problem often present in studies for market economies where new managers may be better suited than existing managers to manage the firm. Controlling also for initial conditions and sector-specific effects, we find that several measures of enterprise performance are positively related with the entry of new managers, particularly if those managers were selected by private owners (rather than by the government). Equity holdings by managers appear to have no effect on corporate performance. The results suggest that changes in human capital are more important in bringing about improvements in corporate performance than equity incentives.

Abstract:
We compare results from a pilot study on entrepreneurship in China and Russia. Compared to non-entrepreneurs, Russian and Chinese entrepreneurs have more entrepreneurs in their family and among childhood friends, value work more relative to leisure and have higher wealth ambitions. Russian entrepreneurs have a better educational background and their parents were more likely to have been members of the communist party but Chinese entrepreneurs are more risk-taking and greedy and have more entrepreneurs among their childhood friends.

Abstract:
We compare the results from a survey of 900 entrepreneurs in China and Russia. Compared to a sample of 1,000 non-entrepreneurs, Chinese and Russian entrepreneurs have more family members and childhood friends who started their own businesses. They also have higher wealth ambitions and value work more relative to leisure. Russian entrepreneurs have more education while Chinese entrepreneurs are greedier and more risk-taking.

China, Russia, entrepreneurs

Abstract:
Social scientists studying the determinants of entrepreneurship have emphasized three distinct perspectives: the role of institutions, the role of social networks and the role of personal characteristics. We conduct a survey from five large developing and transition economies to better understand entrepreneurship in view of these three perspectives. Using data from a pilot study with over 2,000 interviews in 7 cities across China, we find that controlling for institutional environment entrepreneurs in China are much more likely to have family members who are entrepreneurs as well as childhood friends who became entrepreneurs, suggesting that social environment plays an important role in entrepreneurship. Entrepreneurs also differ strongly from non-entrepreneurs in their attitudes toward risks and their work-leisure preferences, echoing Schumpeter. Finally, failed entrepreneurs score the worst on aptitude tests, but have the best self-reported performance in school and perceive the business environment as least favourable.

Abstract:
It has been increasingly recognized that entrepreneurs play a crucial role in successful economies. Yet research on entrepreneurs is rather limited. In this paper we study 414 Chinese entrepreneurs and 561 Chinese non-entrepreneurs with similar age and education characteristics. We find that entrepreneurs differ strongly from non-entrepreneurs in their attitude towards risk and their work-leisure preferences, echoing Schumpeter. Entrepreneurs are much more likely to have family members who were entrepreneurs as well as childhood friends who became entrepreneurs. Finally, failed entrepreneurs score the worst on aptitude tests yet have the best self-reported performance in school.

China, entrepreneurs

Abstract:
We determine how time delays affect international trade, using newly-collected World Bank data on the days it takes to move standard cargo from the factory gate to the ship in 126 countries. We estimate a modified gravity equation, controlling for endogeneity and remoteness. On average, each additional day that a product is delayed prior to being shipped reduces trade by at least 1 percent. Put differently, each day is equivalent to a country distancing itself from its trade partners by 70 km on average. Delays have an even greater impact on developing country exports and exports of time-sensitive goods, such as perishable agricultural products. In particular, a day's delay reduces a country's relative exports of time-sensitive to time-insensitive agricultural goods by 6 percent.

Trade facilitation

Abstract:
We present new data on effective corporate income tax rates in 85 countries in 2004. The data come from a survey, conducted jointly with PricewaterhouseCoopers, of all taxes imposed on "the same" standardized mid-size domestic firm. In a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. Corporate tax rates are correlated with investment in manufacturing but not services, as well as with the size of the informal economy. The results are robust to the inclusion of many controls.

corporate taxes, investment, entrepreneurship

Abstract:
We study the effects of trade barriers and the persistence of past linkages on trade flows in the former Soviet Union (FSU). Estimating a gravity equation on 1987-1996 trade among and between nine Russian regions and fourteen FSU republics, we find that Russian regions traded 60 percent more with each other than with republics in the pre-reform period (1987-1990). Our results suggest that the bias towards domestic trade in the reform period is primarily a result of tariffs. We also find that past linkages, such as infrastructure, production and consumption chains, and business networks, have limited the reorientation of trade.

Abstract:
Studies of the determinants of entrepreneurship have emphasized three distinct perspectives: market institutions, social networks and personal characteristics. Using data from a pilot survey with over 2,000 interviews in 7 cities across Russia, we find evidence for a particularly strong effect of social networks: individuals whose relatives and childhood friends are entrepreneurs are more than twice as likely to be entrepreneurs. Mothers' characteristics play a significant role in determining future entrepreneurs.

Abstract:
Studies of the determinants of entrepreneurship have emphasized three distinct perspectives: market institutions, social networks and personal characteristics. Using data from a pilot survey with over 2,000 interviews in 7 cities across Russia, we find evidence for a particularly strong effect of social networks: individuals whose relatives and childhood friends are entrepreneurs are more than twice as likely to be entrepreneurs. Mothers' characteristics play a significant role in determining future entrepreneurs.

Entrepreneurship, Russia

Abstract:
We follow 822 applicants through the process of obtaining a driver's license in New Delhi, India. To understand how the bureaucracy responds to individual and social needs, participants were randomly assigned to one of three groups: bonus, lesson, and comparison groups. Participants in the bonus group were offered a financial reward if they could obtain their license fast; participants in the lesson group were offered free driving lessons. To gauge driving skills, we performed a surprise driving test after participants had obtained their licenses. Several interesting facts regarding corruption emerge. First, the bureaucracy responds to individual needs. Those who want their license faster (e.g. the bonus group), get it 40% faster and at a 20% higher rate. Second, the bureaucracy is insensitive to social needs. The bonus group does not learn to drive safely in order to obtain their license: in fact, 69% of them were rated as "failures" on the independent driving test. Those in the lesson group, despite superior driving skills, are only slightly more likely to obtain a license than the comparison group and far less likely (by 29 percentage points) than the bonus group. Detailed surveys allow us to document the mechanisms of corruption. We find that bureaucrats arbitrarily fail drivers at a high rate during the driving exam, irrespective of their ability to drive. To overcome this, individuals pay informal "agents" to bribe the bureaucrat and avoid taking the exam altogether. An audit study of agents further highlights the insensitivity of agents' pricing to driving skills. Together, these results suggest that bureaucrats raise red tape to extract bribes and that this corruption undermines the very purpose of regulation.

Abstract:
We follow 822 applicants through the process of obtaining a driver's license in New Delhi, India. To understand how the bureaucracy responds to individual and social needs, participants were randomly assigned to one of three groups: bonus, lesson, and comparison groups. Participants in the bonus group were offered a financial reward if they could obtain their license fast; participants in the lesson group were offered free driving lessons. To gauge driving skills, we performed a surprise driving test after participants had obtained their licenses. Several interesting facts regarding corruption emerge. First, the bureaucracy responds to individual needs. Those who want their license faster (e.g., the bonus group), get it 40% faster and at a 20% higher rate. Second, the bureaucracy is insensitive to social needs. The bonus group does not learn to drive safely in order to obtain their license: in fact, 69% of them were rated as "failures" on the independent driving test. Those in the lesson group, despite superior driving skills, are only slightly more likely to obtain a license than the comparison group and far less likely (by 29 percentage points) than the bonus group. Detailed surveys allow us to document the mechanisms of corruption. We find that bureaucrats arbitrarily fail drivers at a high rate during the driving exam, irrespective of their ability to drive. To overcome this, individuals pay informal "agents" to bribe the bureaucrat and avoid taking the exam altogether. An audit study of agents further highlights the insensitivity of agents' pricing to driving skills. Together, these results suggest that bureaucrats raise red tape to extract bribes and that this corruption undermines the very purpose of regulation.

Corruption, regulation

Abstract:
I provide the first comprehensive analysis of isolation programs for financially distressed firms in transition economies. The study is based on empirical evidence from the Romanian program. The results indicate that the isolation program did not deliver any tangible improvements in operational performance, nor did it enhance the process of privatization or liquidation of large loss-making enterprises. I also show that firms included in the program faced softer budget constraints than their comparators outside the program. These findings question the feasibility of creating special programs for enterprise restructuring and privatization under government auspices.

Abstract:
This study of how privatization and stabilization (hard budget constraints) affect enterprise behavior shows that privatized firms consistently outperform state enterprises in productivity growth. Total factor productivity improves in privatized firms, where there is also less overemployment than in state enterprises. Claessens and Djankov test several propositions derived by Shleifer and Vishny (1994, 1996) about how privatization and stabilization (hard budget constraints) affect enterprise behavior. They document the changes in financing, employment, and operating efficiency that have occurred in more than 6,300 manufacturing enterprises in seven Central and Eastern European countries (Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovak Republic, and Slovenia). They then compare the relative performance of privatized and state-owned enterprises. Controlling for institutional differences and the endogeneity of privatization choices, they find that privatization is associated with significant improvements in total factor productivity and reductions in employment. Reductions in soft financing are associated with further productivity gains. State-owned enterprises employ more workers, have lower worker productivity, receive more financing and direct subsidies, and have higher variable costs than privatized firms, particularly firms privatized for more than three years. Privatized firms also consistently outperform state enterprises in productivity growth. Over time, the role of politicians in allocating bank financing and subsidies appears to have declined, however, and banks have played a greater role in (efficiently) allocating resources. And the institutional environment appears to have improved in most countries, suggesting that the influence of corruption has declined over time. The results - which provide significant support for the Shleifer-Vishny model - demonstrate the beneficial effects of privatization in the presence of stabilization and decreasing corruption. This paper - a product of the Financial Economics Group, Financial Sector Practice - is part of a larger effort in the network to study transition economies.

Abstract:
The dominant hypothesis in the literature that studies conflict is that poverty is the main cause of civil wars. We instead analyze the effect of institutions on civil war, controlling for income per capita. In our set up, institutions are endogenous and colonial origins affect civil wars through their legacy on institutions. Our results indicate that institutions, proxied by the protection of property rights, rule of law and the efficiency of the legal system, are a fundamental cause of civil war. In particular, an improvement in institutions from the median value in the sample to the 75th percentile is associated with a 38 percentage points' reduction in the incidence of civil wars. Moreover, once institutions are included as explaining civil wars, income does not have any effect on civil war, either directly or indirectly.

Population Policies, Peace & Peacekeeping, Children and Youth, Services & Transfers to Poor, Inequality

Abstract:
Foreign direct investment had a greater positive impact on total factor productivity in firms in the Czech Republic over a four - year period than joint ventures did, suggesting that parent firms transferred more know-how to affiliates than joint venture firms got from their partners. Firms without foreign partners experienced negative spillover effects, possibly because fewer training efforts made them less able to absorb and benefit from the diffusion of know-how.

Firm-level data for the Czech Republic (1992-96) suggest that foreign investment had a positive impact on recipient firms' total factor productivity (TFP) growth. This result is robust to corrections for the sample-selection bias that prevails because foreign investment tends to go to firms with above-average productivity performance.

This result is not surprising, given the presumption that foreign investors transfer new technologies and knowledge to partner firms. With some lag, this is likely to be reflected in greater TFP growth.

Foreign direct investment appears to have a greater impact on TFP growth than joint ventures, suggesting that parent firms are transferring more know-how (soft or hard) to affiliates than joint venture firms get from their partners.

Joint ventures and foreign direct investment together appear to have a negative spillover effect on firms that do not have foreign partnerships. This effect is relatively large and statistically significant. But if the focus is restricted to the impact of foreign-owned affiliates (foreign direct investment) on all other firms in an industry, the magnitude of the negative effect becomes much smaller and loses statistical significance.

This result, together with the fact that joint ventures and foreign direct investment together account for significant shares of total output in many industries, suggests that more research is needed to determine how much knowledge diffuses from firms with strong links to foreign firms to firms that do not have such links. Especially important is the extent of spillovers among joint venture firms and between foreign affiliates and firms with joint ventures.

Insofar as joint venture firms invest more in technological capacity (as suggested by their training efforts), those firms could be expected to be better able to absorb and benefit from the diffusion of know-how. The absence of such capacity may underlie the observed negative spillover effect on other firms in the industry. Longer time series and collection of data on variables that measure firms' in-house technological effort would help identify the magnitude and determinants of technological spillovers.

This paper - a product of the Financial Economics Group - is part of a larger effort in the group to understand the transition process in the Czech Republic.

Abstract:
We provide comprehensive analysis of the isolation program for financially distressed firms in Romania. The results indicate that the isolation program did not deliver any tangible improvements in operational performance, nor did it enhance the process of privatization or liquidation of large loss-making enterprises. Firms included in the program faced softer budget constraints than their comparators outside the program, and few management changes in poorly performing firms took place. These findings question the feasibility of creating successful programs for enterprise restructuring under government auspices.

Abstract:
The option of a Euro-Mediterranean Agreement gives the Mediterranean countries a unique opportunity to credibly pursue far-reaching trade liberalization gradually. Further unilateral efforts will be required to ensure that Mediterranean countries gain. Liberalization of foreign direct investment and the service sector are essential to ensure a supply response and create new job opportunities.

Many countries in the Middle East and North Africa that are considering liberalizing, privatizing, and deregulating markets face difficult policy issues. Gradual, piecemeal reform efforts have had limited success. The option of a Euro-Mediterranean Agreement (EMA) offers a new opportunity to implement structural reform. Two questions can be posed: (1) Why pursue regional integration? and (2) Is an EMA sufficient?

Justifications for regional integration include the following:
° The EMA may offer a stronger mechanism for locking in economic reform than does the World Trade Organization (WTO), while the preferential nature of an EMA might help overcome domestic resistance to liberalization.
° Harmonization of regulatory regimes and administrative requirements could facilitate trade.
° Market access could be more secure if countries agreed not to impose contingent protection, such as antidumping actions.
° Transfers from the European Union to partner countries (financial or technical assistance) would help offset lost tariff revenue and the costs of trade diversion.

The EMA signed between Tunisia and the European Union does not go significantly beyond existing multilateral (WTO) disciplines. The long 12 - year transition path may reduce incentives to initiate rapid restructuring and may create problems in implementing future tariff reductions. While the EMA option gives the Mediterranean countries a unique opportunity to pursue far-reaching trade liberalization credibly and gradually, the economic benefits will be limited if trade liberalization is restricted to manufactured products. Service markets and foreign investment must also be liberalized to ensure a supply response and create new employment opportunities.

Equally important are factors that cannot be imported through an agreement with the European Union: efficient public institutions, domestic competition, investment in education, high rates of private savings and investment, a stable economy, and openness to the world economy. The greater the extent to which the EMA-based preferential liberalization is extended to non-European countries, the greater the benefits for participating Mediterranean countries.

This paper - a product of the Private Sector and Finance Team, Technical Department, Europe and Central Asia, and Middle East and North Africa Regions - is part of a larger effort in the department to monitor trade policy developments in the region.

Abstract:
A survey of 192 Moldovan firms, most of which were privatized in 1992-94, is used to estimate the relative role of hard budget constraints, privatization, and human capital accumulation in enterprise restructuring. The data on Moldovan enterprises are particularly appropriate for this exercise due to the absence of significant contestability in the Moldovan market, and the seventy years of Soviet-style management. Restructuring is measured as employee layoffs, share of barter trade, time spent on government-related work, change in suppliers, and managers' per-ceptions of future growth opportunity of their respective firms. The analysis shows that hard-ened budget constraints and privatization provide proper incentives for managers to maximize profits, but do not fully account for subsequent enterprise restructuring. An additional condition for restructuring is that managers developed new skills in turning enterprises around.

Abstract:
Large industrial firms in Slovakia have restructured more rapidly than expected, including firms regarded as nonviable only a few years ago. Rapid privatization is an important determinant of successful restructuring. The method of privatization and the type of owner appear to play only a minor role.

Evaluating the restructuring of large enterprises in transition economies is difficult because it is only one of many economic changes. Such evaluation is nevertheless essential for designing reform policies.
Djankov and Pohl examine 21 case studies of Slovak firms based on detailed financial information for 1991-96, and interviews with top management. Much of their sample was firms initially classified as nonviable lossmakers. They found that the majority of large Slovak firms successfully restructured without the help of foreign investors or government restructuring programs.

Privatization to insiders, through management-employee buyouts, did not hamper restructuring because the new owners (old managers) invested heavily in new technology, laid off a substantial part of the workforce, sought foreign partnerships, and were prepared to sell controlling stakes to outsiders in return for fresh financial resources.

The evidence also suggests that mass privatization did not result in weak corporate governance because it was followed by a rapid consolidation of ownership.

Their findings support the view that the main objective of privatization programs should be the speedy transformation of ownership, not the selection of perfect owners.

Slovakia was an interesting choice for case-study analysis because much of the heavy industry and arms industry of former Czechoslovakia was located in Slovakia, so it inherited a relatively unattractive industrial structure. Slovakia also implemented two very different privatization programs, one of mass privatization and one of leveraged management buyouts or direct sales to (domestic) outside investors.

This paper - a product of the Finance and Private Sector Development Division, Europe and Central Asia Technical Department - is part of a larger effort in the department to study the determinants of enterprise restructuring in transition economies.

Abstract:
We collect data on the rules and practices of financial and conflict disclosure by politicians in 175 countries. Although two thirds of the countries have some disclosure laws, less than a third make disclosures available to the public. Disclosure is more extensive in richer and more democratic countries. Disclosure is correlated with lower perceived corruption when it is public, when it identifies sources of income and conflicts of interest, and when a country is a democracy.

Transparency, Corruption

Abstract:
The dominant hypothesis in the literature that studies conflict is that poverty is the main cause of civil wars. We instead analyze the effect of institutions on civil war, controlling for income per capita. In our set up, institutions are endogenous and colonial origins affect civil wars through their legacy on institutions. Our results indicate that institutions, proxied by the protection of property rights, rule of law and the efficiency of the legal system, are a fundamental cause of civil war. In particular, an improvement in institutions from the median value in the sample to the 75th percentile is associated with a 38 percentage points' reduction in the incidence of civil wars. Moreover, once institutions are included as explaining civil wars, income does not have any effect on civil war, either directly or indirectly.

Institutions, Civil wars

Abstract:
The authors use a sample of 133 countries to investigate the link between the abundance of natural resources and micro-economic reforms. Previous studies suggest that natural resource abundance gives rise to governments that are less accountable to the public and states that are oligarchic, and that it leads to the erosion of social capital. These factors are likely to hamper economic reforms. The authors test this hypothesis using data on micro-economic reforms from the World Bank's Doing Business database. The results provide a robust support for the "resource curse" view: a move from the 75th percentile to the 25th percentile on resource abundance equals 10.9 percentage points more reform. This is a large effect given that the mean probability of reform in the sample is 57.1 percent.

Economic Theory & Research, Emerging Markets, E-Business, Achieving Shared Growth, Inequality

Abstract:
We use a sample of 133 countries to investigate the link between the abundance of natural resources and micro-economic reforms. Previous studies suggest that natural resource abundance gives rise to governments that are less accountable to the public, states that are oligarchic, and that it leads to the erosion of social capital. These factors are likely to hamper economic reforms. We test this hypothesis using data on microeconomic reforms from the World Bank's Doing Business database. The results provide a robust support for the "resource curse" view: a move from the 75th percentile to the 25th percentile on resource abundance equals 10.9 percentage points more reform, a large effect given that the mean probability of reform in the sample is 57.1%.

Natural resources, Reform, Regulation

Abstract:
We use a sample of 133 countries to investigate the link between the abundance of natural resources and micro-economic reforms. Previous studies suggest that natural resource abundance gives rise to governments that are less accountable to the public, states that are oligarchic, and that it leads to the erosion of social capital. These factors are likely to hamper economic reforms. We test this hypothesis using data on micro-economic reforms from the World Bank's Doing Business database. The results provide a robust support for the "resource curse" view: a move from the 75th percentile to the 25th percentile on resource abundance equals 10.9 percentage points more reform, a large effect given that the mean probability of reform in the sample is 57.1%.

Reform, Natural resources, Regulation

Abstract:
Growth induces foreign investment, which tends to focus on high-value-added sectors, on larger and more profitable firms, on firms with low debt, and on firms that export a large share of output.

Using data on mergers and acquisitions involving Korean firms, Freund and Djankov identify which sectors and firms attracted foreign investment after the liberalization of investment activity at the end of 1997.

They find that domestic acquisitions are similar to foreign acquisitions by sector (of both the target and the acquiring firm), but that international transactions are larger than Korean transactions. This suggests that consolidation is a two-stage process: Firms consolidate first domestically, then internationally.

The authors also find that foreign investment is focused on high-value-added sectors, on larger and more profitable firms, on firms with low debt, and on firms that export a large share of output. Their results suggest that growth induces foreign investment.

This paper - a product of the Financial Economics Unit, Financial Sector Strategy and Policy Department - is part of a larger effort in the department to study the effect of financial liberalization.

Abstract:
Instead of focusing on hard-core anticompetitive behavior, between 1991 and 1995, Bulgaria's Commission for the Protection of Competition tended to deal with unfair trade practices and contract enforcement problems. Remedies for egregious violations of the law were not dire enough to pressure firms to abide by the law. Recently proposed amendments to the law may strengthen the law's deterrent effect.

Hoekman and Djankov investigate the activities of the Bulgarian competition office, the Commission for the Protection of Competition, for the years 1991-95.

They provide descriptive statistics on the industry incidence of investigations, the types of behavior investigated, and the frequency with which violations were found and penalties imposed.

Although the Commission tried to focus on nontradable sectors and to
target both cartel and abuse-of-dominance cases, the remedies they imposed appear to have been rather ineffective.

Moreover, instead of focusing on hard-core anticompetitive behavior, much of the Commission's activity centered on unfair trade practices (such as false advertising, trademark infringement, and the behavior of ex-employees of specific enterprises). Many enforcement cases basically dealt with contract enforcement problems.

Only a small percentage of cases concerned collusive practices that restricted entry/expansion, such as bid rigging, price-fixing, and market allocation. And remedies for egregious violations of the law were not dire enough to give firms a strong incentive to abide by the law.

Recently proposed amendments to the law should go some way toward allowing the Commission to focus more narrowly on anticompetitive practices and to strengthen the law`s deterrent effect.

This paper - a product of the International Trade Division, International Economics Department - is part of a larger effort in the department to monitor the economics of transition.

Abstract:
In two former Soviet republics, restructuring was faster in privatized companies that were bought by their managers than it was in companies in which managers received significant ownership stakes for free. Managers' incentives to restructure decrease when they regard their newly acquired ownership as a windfall gain. Using enterprise survey data for 1995-97, Djankov studies and compares how different modes of privatizing to insiders affect enterprise restructuring in two former Soviet republics, Georgia and Moldova.

Restructuring in companies in which incumbent managers received significant ownership stakes for free was similar to that in companies that were still state-owned. By contrast, restructuring was faster in companies bought by their managers. Djankov interprets these results as suggesting that managers' incentives to restructure decrease when they regard their newly acquired ownership as a windfall gain.

This paper - a product of the Financial Economics Unit, Financial Sector Practice Department - is part of a larger effort in the department to study the restructuring process in transition economies.

Former Soviet Union, insider privatization

Abstract:
This paper uses nationally representative survey data from Mexico to compare households with savings accounts in formal financial institutions to their neighbors who do not have such accounts. The survey, which was conducted in 2005, contains information on nearly 5,000 households. The findings show that although neighboring banked and unbanked households have similar demographic and occupational profiles, the former are more educated and have markedly greater wealth. The median banked household spends 32 percent more per capita than the median unbanked household, and the median per capita wealth in banked households is 88 percent higher than that in unbanked households. The findings suggest that education levels, wealth, and unobserved household attributes that might be correlated with wealth and education play a major role in explaining who is banked.

Access to Finance, Banks & Banking Reform, Emerging Markets, Debt Markets

Abstract:
We use a sample of 147 countries to investigate the link between democracy and reforms. Democracy may be conducive to reform, because politicians have the incentive to embrace growth-enhancing reforms to win elections. On the other hand, authoritarian regimes do not have to worry as much about public opinion and may undertake reforms that are painful in the short run but bring future prosperity. We test these hypotheses, using data on micro-economic reforms from the World Bank's Doing Business database. These data do not suffer the endogeneity issues associated with other datasets on changes in economic institutions. The results provide a robust support for the claim that democracy is good for growth-enhancing reforms.

Democracy, Reform, Regulation

Abstract:
The authors use a sample of 147 countries to investigate the link between democracy and reforms. Democracy may be conducive to reforms, because politicians have the incentive to embrace growth-enhancing reforms to win elections. By contrast, authoritarian regimes do not have to worry as much about public opinion and may undertake reforms that are painful in the short run but bring future prosperity. This paper tests these hypotheses, using data on micro-economic reforms from the World Bank's Doing Business database. These data do not suffer the endogeneity issues associated with other datasets on changes in economic institutions. The results provide robust support for the claim that democracy is good for growth-enhancing reforms.

Parliamentary Government, Legal Products, Labor Policies, Public Sector Corruption & Anticorruption Measures, Emerging Markets

Abstract:
This study of trade flows among and between nine Russian regions and 14 republics of the former Soviet Union shows a bias toward domestic trade in the reform period that is primarily the result of tariffs. In addition, old linkages - such as infrastructure, business networks, and production and consumption chains - have limited the reorientation of trade.

Djankov and Freund study the effects of trade barriers and the persistence of past linkages on trade flows in the former Soviet Union. Estimating a gravity equation on trade among and between nine Russian regions and 14 former Soviet republics, they find that Russian regions traded 60 percent more with each other than with republics in the reform period (1994-96).

By contrast, the Russian regions did not trade significantly more with each other than with republics in the prereform period (1987-90). The results suggest that the bias toward domestic trade in the reform period is primarily the result of tariffs. In addition, past linkages - such as infrastructure, business networks, and production and consumption chains - have limited the reorientation of trade.

This paper - a product of the Financial Sector Strategy and Policy Department - is part of a larger effort in the department to promote economic liberalization.

Abstract:
Poor results from the isolation program for financially distressed firms in Romania suggest that enterprise restructuring under government auspices does not work - that transition economies should privatize rapidly, without attempting first to restructure enterprises. How should countries in transition to market economies handle the losses of large loss-making enterprises? Over the past six years several governments in transition economies have implemented isolation programs that combine features of reorganization under bankruptcy (as in industrial countries) with severance payments for employees and assistance with labor deployment.

Djankov analyzes isolation programs for financially distressed firms in transition economies based on empirical evidence from Romania, the program that had the greatest coverage. The results indicate that Romania's isolation program fulfilled none of its intentions. Despite substantial costs, it neither delivered tangible improvements in operational performance nor improved the process of privatization or liquidation of large loss-making enterprises.

Worse still, the program may have delayed restructuring by not imposing hard budget constraints. Firms included in the program faced softer budget constraints than their counterparts outside the program. Loss makers were not selected through objective criteria, and the agency in charge was not sheltered from political pressure in enforcing hard budget constraints. Djankov therefore questions the feasibility of creating special programs for enterprise restructuring under government auspices, with government agencies choosing beneficiaries and deciding on the scope of activity. His conclusion supports the insistence of international donor organizations that governments in transition economies privatize rapidly, without attempting first to restructure enterprises.

This paper - a product of the Economic Policy Unit, Finance, Private Sector, and Infrastructure Network - is part of a larger effort in the network to study transition economies. The study was funded by the Bank's Research Support Budget under the research project Enterprise Restructuring in Bulgaria and Romania (RPO 681-96).

Abstract:
We use nationally representative survey data from Mexico to compare households with savings accounts in formal financial institutions to their neighbors who do not have such accounts. The survey, which was conducted in 2005, contains information on nearly 5000 households. We find that while neighboring banked and unbanked households have similar demographic and occupational profiles, the former are more educated and have markedly greater wealth. The median banked household spends 32% more per capita than the median unbanked household, and the median per capita wealth in banked households is 88% higher than that in unbanked households. Our findings suggest that education levels, wealth and unobserved household attributes which might be correlated with wealth and education play a major role in explaining who is banked.

unbanked, access to financial services, savings accounts, banking for the poor