A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Buchen, Clemens Doctoral Thesis Emerging economic systems in Central and Eastern Europe – a qualitative and quantitative assessment Suggested Citation: Buchen, Clemens (2010) : Emerging economic systems in Central and Eastern Europe – a qualitative and quantitative assessment, ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft, Kiel, Hamburg, http://nbn-resolving.de/urn:nbn:de:101:1-201008171268 This Version is available at: http://hdl.handle.net/10419/37141 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Emerging economic systems in Central and Eastern Europe – a qualitative and quantitative assessment Dissertation zur Erlangung des akademischen Grades doctor rerum politicarum eingereicht bei der EBS Universität für Wirtschaft und Recht Wiesbaden von Dipl.-Vwt. Clemens Buchen Geboren am 15.11.1977 in Düsseldorf Gutachter 1. Prof. Dominique Demougin, Ph.D. 2. Prof. Dr. Bruno Deffains Contents 1. Introduction 1 1.1. From Neoclassical economics to the New Institutional Economics 1 1.2. New Institutional Economics – three levels of analysis 6 1.3. Comparing institutions 7 1.4. Determinants of institutions 15 1.5. Contribution 17 2. Comparative Institutional Advantage as a determinant of FDI? 19 2.1. Introduction 19 2.2. Comparative institutional advantage and foreign direct investment 21 2.2.1 Type of institutions: Varieties of Capitalism 22 2.2.2 Determinants of foreign direct investment 28 2.3. Methodology 30 2.4. Data 31 2.5. Results 35 2.6. Conclusion 39 3. East European Antipodes: Varieties of Capitalism in Estonia and Slovenia 41 3.1. Introduction 41 3.2. Estonia and Slovenia as LME and CME 42 3.2.1 Industrial relations 45 3.2.2 Corporate governance 47 3.2.3 Inter-firm relations 52 3.2.4 Social security systems 53 3.2.5 Vocational training 57 3.3. Emerging comparative institutional advantages 57 3.4. Conclusion 63 4. Law, Politics and Culture: Lessons from Eastern Europe 65 4.1. Introduction 65 4.2. The determinants of institutions 67 i 4.2.1 Legal origin 67 4.2.2 Political Economy 69 4.2.3 Culture 71 4.3. Institutional diversity 73 4.4. The transition from socialism to capitalism 75 4.5. The determinants of institutions in Central and Eastern Europe 77 4.5.1 Dependent variables 77 4.5.2 Legal variables 78 4.5.3 Political variables 78 4.5.4 Cultural variables 79 4.5.5 Control variables 80 4.5.6 Cross-country dataset 80 4.5.7 Panel estimation 87 4.6. Conclusion 91 5. Conclusion 96 References 99 ii List of Figures Figure 2.1: Marginal effect on FDI 36 Figure 2.2: Marginal effect of value-added 39 Figure 3.1: Real GDP (1989 = 100) 43 Figure 3.2: Unemployment 43 Figure 3.3: Employment Protection Legislation (regular employment) 55 Figure 3.4: Contributions to the trade balance (Lafay-Index) 59 Figure 4.1: Coordination Index 74 iii List of Tables Table 2.1: Stylized institutional complementarities in CMEs and LMEs 24 Table 2.2: Coordinated, mixed and liberal market economies 25 Table 2.3: Industry specialization of Germany and the USA 26 Table 2.4: Prevalent innovation patterns per industry 31 Table 2.5: Summary statistics 33 Table 2.6: Results of OLS regressions 35 Table 2.7: Robustness Checks 38 Table 3.1: Coordinated versus Liberal Market Economies 44 Table 3.2: Corporate Governance features 51 Table 3.3: Employment protection 54 Table 3.4: Unemployment protection 56 Table 3.5: Foreign direct investment stocks per selected activities 61 Table 3.6: Foreign direct investment stocks by geographical origin 62 Table 4.1: Predominant privatization strategies 76 Table 4.2: Factor loadings of cultural values dimensions 80 Table 4.3: Estimation results - Proportionality 82 Table 4.4: Estimation results - Legal Origins 83 Table 4.5: Estimation results - Culture 85 Table 4.6: Estimation results - Law, Politics and Culture 86 Table 4.7: Results of dynamic panel estimation 89 Table 4.8: Estimation results - EU member states and non-EU members states 91 iv 1 1. Introduction Comparative institutional analysis has increasingly gained interest from economists in the recent decade. Globalization, European integration and the dual transition of a host of countries from authoritarian and socialist systems to democracy and capitalism have drawn attention to the divergent ways to organize market economic systems. Most importantly, the new institutional economics pinpointed the importance of written and unwritten institutional rules for the formation of incentives in an economy (Coase 1937; Coase 2005, North 1990). This dissertation examines the type of institutional systems that emerge in Central and Eastern European transition countries. The introduction serves to set the three separate articles of the thesis into their broader context1. To do so, it will provide a brief overview of the development of the new institutional economics out of questioning a number of assumptions in the neoclassical economic framework of a general equilibrium. A distinction of the New Institutional Economics according to several levels of analyis provides a useful backdrop to discuss a number of approaches to compare institutions and their determinants. The influential approach to compare market economies of the varieties-of-capitalism framework is then introduced as a synthesis of New Institutional Economics approaches and political science interest in comparative capitalist systems. The contribution of the three articles will be briefly sketched. 1.1 From Neoclassical economics to the New Institutional Economics The central tenet of neoclassical equilibrium theory is expressed in the First Fundamental Theorem of Welfare Economics about the existence of an equilibrium, which was proven by Kenneth Arrow and Gerard Debreu (1954). It states that under the assumption of complete markets all competitive exchange equilibria are Pareto-optimal. The market completeness assumption entails several crucial assumptions regarding actual exchange: first, the law of the single price means that both producers and consumers face the same prices. Moreover, they are price takers. This is meant when the Walrasian process is characterized as competitive. Second, no disequilibrium trading is allowed meaning that no trading at any but the equilibrium prices can happen. A different definition of competitive markets assumes large numbers of anonymous market participants with negligible entry and exit costs, in which case 1. Since the three articles are self-contained, some repetition of concepts in the introduction and the articles is unavoidable. INTRODUCTION 2 the assumptions above do not need to hold. This entails also the assumption of complete market transparency meaning that all market participants know the relevant prices. It is irrefutable that Walrasian equilibrium theory is a powerful tool to point out economically efficient allocations and the strong role of relative prices for reaching them. In this respect it was adequate for neoclassical economic theory, for one of its main focuses was the proof of Adam Smith’s famous notion of the invisible hand. The allocational power of decentralized exchange, in which no actor needs to know more than market prices, was rigorously proven. Also the way the firm is characterized gave some important insights. It stressed the role of returns to scale. Very generally, it allows to analyze how optimal production choices vary with prices. Furthermore, continuative models relaxing the assumption of perfect competition help to understand aggregate industry behaviour (Hart 1995: 16-17). However, Walrasian competitive equilibrium and the firm as a production function as sketched here have been criticized both for conceptual weaknesses and more generally for the strong assumptions accompanying the crucial market completeness assertion. The long list of implicit and explicit assumptions for the general equilibrium is aptly summarized by Blaug 1997: “… perfectly rational, omniscient, identical consumers; zero transaction costs; complete markets for all time-stated claims for all conceivable contingent events, no trading at disequilibrium prices, no radical, incalculable uncertainty; (…) only linearly homogeneous production functions; no technical progress requiring capital investment ….” The fact that further questions were raised by the Walrasian notion of competitive equilibria and its assumptions was the main reason for the further development of