Transcript Ezgi Sandal-DISCIPLINE+AND+ENCOURGEMENT

ANADOLU UNIVERSITY
ENGLISH ECONOMICS
DEPARTMENT
EZGİ SANDAL
11311144130
ÖMER AKKUŞ
41018108036
DISCIPLINE AND
ENCOURAGEMENT
DECEMBER 2009
Discipline and Encouragement
Discipline requires imposing hard budget constraints on enterprises and banks.
This entails eliminating a wide range of explicit and implicit mechanisms to
channel public resources to ;
enterprises and
banks,
including tax exemptions,
fiscal and financial subsidies,
budget and tax offsets,
directed credits,
and contingent liabilities.
Discipline and Encouragement
However, discipline also
refers to measures to
prevent the misuse or
theft of assets in both
private
and state-owned
enterprises through
asset stripping,
tunneling, and
expropriation of
minority shareholders.
Some countries, such as
Belarus, Turkmenistan, and
Uzbekistan, have managed
to maintain discipline over
managers in state
enterprises without
liberalization
or hard budget constraints,
but this has occurred largely
through administrative
methods held
over from the Soviet-style
command economy.
Discipline and Encouragement
Encouragement starts with liberalizing prices and trade to enable the entry
of new enterprises.
But it goes much further to encompass policy and structural reforms that
promote an attractive investment climate.
There are an enormous number of factors that affect the decisions of
economic actors to invest.
These can be roughly divided into two categories:
the quality of public goods
the extent of nonmarket
obstacles to competition
Discipline and Encouragement
Juxtaposing discipline and encouragement with protection and
discouragement highlights two contrasting modes of
adjustment.
In reality, country outcomes span a range of intermediate
possibilities depending on whether liberalization, hard budget
constraints, and an enabling business environment were
pursued—and in what order and how vigorously.
Though it is not possible to categorize transition economies
into a spectrum of different modes of adjustment, country
examples can be used to exemplify alternative transition paths:
Discipline and Encouragement
1
The policies of discipline and
encouragement were pursued
most consistently in Estonia,
Hungary, and Poland.
2
crisis in 1996–98.
3 Czech
Harder budget constraints
and faster restructuring can
help reorient these
economies toward the path
followed by the first group.
Within the broad category of discipline and
encouragement, softer budget constraints— and
hence less discipline—prevailed for a long time in the
Czech Republic, Lithuania, and the Slovak Republic.
Discipline and Encouragement
Bulgaria, the Kyrgyz Republic, Moldova, Romania, the
Russian Federation, and Ukraine liberalized their economies,
but for a long time failed to maintain discipline through hard
budget constraints—and they could not contain tunneling and
theft through either law or administrative control.
The competition for resources between old and new
enterprises makes it difficult to provide
encouragement if the discipline for old enterprises is
relaxed. Russia and Ukraine encouraged new entry
early in the transition.
Discipline and Encouragement
Belarus, Turkmenistan, and Uzbekistan, which neither liberalized
nor hardened budget constraints, strongly discouraged new entry.
Meeting the challenges of discipline and encouragement is
important if growth is to be restored, its quality enhanced, and its
benefits widely shared.
Industrial enterprises also face major obstacles to downsizing if
arrangements to help them divest social assets, such as housing,
sanatoriums, and kindergartens, are unavailable.
Discipline and Encouragement
If the state cannot administer the rule of law,
particularly contract enforcement and secure property
rights, rent seeking and widespread theft of erstwhile
state assets dominate economic activity. The state
cannot afford the social safety net required for restructuring or investments
in human capital if, together with enterprises, it is caught in a pervasive web
of arrears and unpaid taxes.
Effective administration of programs of social
assistance and insurance are required so that the
“reform dividend” generated by growth is used to
assist those adversely affected by transition.
New Enterprises Drive the Transition
The success of a discipline-and-encourage
strategy is predicated on the ability of new
and restructured enterprises to emerge as
engines of economic growth. Moving
assets from the public to the private sector
is thus an important element of transition.
New Enterprises Drive the Transition
In 1999 the share of the private sector in CIS
GDP was 20 percent in Belarus;
55 percent in Kazakhstan and Ukraine;
60 percent in Armenia, Georgia, and the
Kyrgyz Republic; and
70 percent in the Russian Federation
These figures compare
favorably with Central and
Eastern Europe:
55 percent in Macedonia and
Slovenia,
60 percent in Bulgaria and
Romania,
65 percent in Latvia and
Poland,
80 percent in the Czech
Republic and Hungary.
1998 was around 55–65 percent of GDP in the Czech Republic, Hungary, and Lithuania,
compared with 10–20 percent in Belarus, Kazakhstan, Russia, and Ukraine. Data on small
enterprises as providers of employment divide countries into two groups: leading reformers
and countries further behind. Small enterprises’ share of employment in 1998 was about 50
percent for leading reformers such as the Czech Republic, Hungary, Latvia, Lithuania,
and Poland, roughly the same as the European Union. For countries less far along the path
to a market economy, such as Belarus, Kazakhstan, Russia, and Ukraine, the share was
between 10 and 20 percent.
New Enterprises Drive the Transition
The share of small enterprises in employment and value added differs widely across the
region.
In contrast, the share of small enterprises consistently account for a larger fraction of total
value added than of total employment. Labor productivity is indeed higher in small
enterprises compared with large enterprises. Moreover, this is true independent of progress
toward a market economy. New companies are more productive than inherited enterprises in
countries as diverse as Hungary and Ukraine.
A Small Number of High-Productivity Small
Enterprises Is Not Enough
 As the transition proceeds, labor shed by downsizing old
enterprises either finds its way into new and more productive
employment or migrates to unemployment or subsistence activities.
 when the investment climate is conducive to entry, new
enterprises compete with the old sector, rapidly increasing their
share in employment and typically attracting the most qualified
individuals.
 a threshold of about 40 percent for the shares of small
enterprises in employment and value added needs to be crossed
for new enterprises to absorb the resources released by the old
sector and contribute to sustainable growth.
 Simply having a small number of highly productive small
enterprises is not enough. Unless it is combined with rapid growth
in the share of employment, the small sector will not develop the
critical mass to lead aggregate economic growth
. The empirical investigation of new enterprises and their
interaction with old enterprises suggests the following:
 A sharp and early decline in aggregate employment precedes
the rapid growth of new enterprises. With the former as an
indicator of the fast dismantling of old industries, the rapid
demise of the old sector seems necessary but not sufficient for
the growth of new enterprises.
 Countries that reached the trough of the transition recession
sooner had faster growth in the new sector. The observations
suggest a sequence where hard budget constraints are imposed
and the old sector declines before the new sector can grow.
 While disciplining the old and encouraging the new appear to
be complementary, the old sector has generally, though not
invariably, proved unable to survive even where budget
constraints have been soft and the new sector has not emerged.
 In such cases, mainly in the CIS, agriculture and low
productivity services have served as “shock absorbers” for those
forced to leave old industries.
Can We Have It Both Ways, That Is,
Protecting Old Inherited Enterprises and
Encouraging New Enterprises?
 The economic argument seeing discipline and
encouragement as complementary goes as follows.
 Continued resource transfers for nonviable state-owned
enterprises, other things being equal, either require the
consolidated government to loosen its fiscal stance, raise
taxes elsewhere in the economy, or engage in off-budget
activity.
 A looser fiscal stance can weaken the credibility of the
government’s stabilization program and, by increasing market
perception of risk, raise domestic interest rates, thus crowding out
the new private sector.
 Intensifying taxation of the potentially more efficient emerging
private sector can start a vicious cycle that pushes enterprises into
the informal sector, thus lowering tax revenue and further increasing
tax rates.
 Off-budget activities include issuing loan guarantees,
establishing insurance schemes, and providing explicit or implicit
cover generally for politically motivated activities that tend to
benefit incumbents.
 These outcomes end up protecting state enterprises and
collective farms and discouraging new enterprises. However, the
relationship does not run simply from the costs of propping up
unviable enterprises (protection) to discouraging the new private
sector.
 Further evidence on how protection of the old sector discourages
the new sector comes from the following examples.
 The first is protection through the banking sector. Small
enterprises have grown less in such CSB countries as Bulgaria and
Romania, where the banking sector was a major conduit for loans
to the old state-owned enterprises and farm collectives.
 The second example is protection through special allocation of
inputs. In Belarus and Uzbekistan the old industrial sector has
remained protected through favorable foreign exchange regimes,
directed credit, and high trade protection. Specific large foreign
investments have also been favored. As a result new smaller
enterprises face the residual of these allocations in the market.
 The third example is protection through tax and utility arrears.
Nonpayments by enterprises to the main utilities in the energy sector
remain a major source of subsidization, particularly in Russia
and Ukraine, but also in Georgia, the Kyrgyz Republic, and Moldova.
This has delayed restructuring of energy-intensive industries and
shedding of assets that smaller new enterprises could use.
 New, more energy-efficient enterprises are charged more to
compensate for the revenue losses from the old, less energyefficient enterprises.
 The softer the budget constraint and
thus the stronger the barriers to exit, the lower
the contribution of small enterprises to employment