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Reassessing the Role of State-Owned Enterprises in Central, Eastern and Southeastern Europe
The Central, Eastern, and South Eastern European (CESEE) region is ripe for a reassessment of the role of the state in economic activity. The rapid income convergence with Western Europe of the early 2000s was not always equally shared across society, and it has now slowed dramatically in many countries of the region.
Public Infrastructure in the Western Balkans
An assessment of public infrastructure development in the Western Balkans. The paper quantifies the large gaps across various sectors/dimensions, evaluates current infrastructure plans, and discusses funding options available to countries in the region. The paper also identifies important bottlenecks for increased infrastructure investment. Finally, the paper quantifies potential growth benefits from addressing infrastructure gaps, concluding that boosting the quantity and quality of infrastructure is vital for raising economic growth and accelerating income convergence with the EU. The paper concludes with country-specific policy recommendations.
Managing Fiscal Risks from National Airlines in Pacific Island Countries
Pacific island countries (PICs) rely on national airlines for connectivity, trade, and tourism. These airlines are being struck hard by COVID-19. Losses will weigh on public sector balance sheets and pose risks to economic recovery. With a backdrop of tight fiscal space and increasing government debt, losses in airlines are adding to fiscal risks in some PICs. This paper discusses tools to evaluate and manage the fiscal risks from national airlines in the Pacific. We present a snapshot of the current state of Public Financial Management (PFM) practices in PICs and detail the best practices. This exercise would illustrate the areas in which PICs have scope to improve their risk management with regard to national airlines. We then discuss the use of diagnostic tools and capacity development to enhance monitoring and risk management. Greater transparency and accountability in the airlines, combined with rigorous oversight, would be the first step towards improved financial management of national airlines.
Regional Disparities and Fiscal Federalism in Russia
This paper examines how regional disparities have evolved in Russia and how Russia’s system of intergovernmental fiscal relations is managing these disparities. Regional disparities have fallen over the past two decades but remain relatively high. Socioeconomic outcomes remain worse in lagging regions despite faster growth and convergence in income levels. The twin shocks of COVID-19 and lower oil prices appear to have impacted richer regions disproportionately. Compared to other large countries with federal systems of government, Russia stands out with its high reliance on direct taxes as a revenue source for its regions. Transfers from the federal budget to the regions provide some redistribution by reducing the dispersion in real per capita fiscal spending, but also tend to be associated with lower growth. The Russian fiscal system offers degrees of redistribution and risk sharing of around 26 and 18 percent, respectively—with in-kind social transfers contributing the most. Finally, federal transfers in the aggregate tend to be procyclical and are also fairly unresponsive to shocks to regions’ own revenues.
Counting the Oil Money and the Elderly: Norway's Public Sector Balance Sheet
Based on a permanent income analysis, Gagnon (2018) has prominently suggested that Norway has saved too much, thereby free-riding on the rest of the world for demand. Our public sector balance sheet analysis comes to the opposite conclusion, chiefly because it also accounts for future aging costs. Unsurprisingly, we find that Norway’s current assets exceed its liabilities by some 340 percent of mainland GDP. But its nonoil fiscal deficits have grown very large (to almost 8 percent of mainland GDP) and aging pressures are only commencing. Therefore, Norway’s intertemporal financial net worth (IFNW) is negative, at about -240 percent of mainland GDP. As IFNW represents an intertemporal budget constraint, this implies that Norway’s savings are likely insufficient to address aging costs without additional fiscal action.
Trade and Income in the Long Run: Are There Really Gains, and Are They Widely Shared?
In the cross section of countries, there is a strong positive correlation between trade and income, and a negative relationship between trade and inequality. Does this reflect a causal relationship? We adopt the Frankel and Romer (1999) identification strategy, and exploit countries' exogenous geographic characteristics to estimate the causal effect of trade on income and inequality. Our cross-country estimates for trade's impact on real income are consistently positive and significant over time. At the same time, we do not find any statistical evidence that more trade increases aggregate measures of income inequality. Heeding previous concerns in the literature (e.g. Rodriguez and Rodrik, 2001; Rodrik, Subramanian and Trebbi, 2004), we carefully analyze the validity of our geography-based instrument, and confirm that the IV estimates for the impact of trade are not driven by other direct or indirect effects of geography through non-trade channels.
Taking Down the Wall: Transition and Inequality
This paper investigates the main determinants of income inequality in transition countries during the period 1990–2018. To this end, we address a major methodological challenge that lies at the core of the cross-country literature on income inequality: the potential endogeneity of income growth, which is largely ignored by most empirical studies. We adopt a two-pronged empirical strategy by (i) using trading partners’ weighted average real GDP as an instrumental variable (IV), and (ii) estimating the model via the two-stage least squares (2SLS) approach for static models and the Generalized Method of Moments (GMM) estimator for dynamic models. Our empirical findings are consistent with the Kuznets curve that illustrates a nonlinear relationship between income inequality and the level of economic development. We also find that the redistributive impact of fiscal policy is statistically insignificant and taxation and government spending appear to have the opposing effects on income inequality in transition economies.
Turkey
This Selected Issues paper analyzes the capital flows in Turkey. The empirical analysis in this paper uses exchange market pressure index to identify the determinants of capital flows to Turkey. It is observed that exchange market pressures in Turkey seem to a degree, larger than in other emerging economies, and to be linked to risk factors, both global and country specific. In particular, there seems to be a stronger link to the interest rates in advanced economies, which given forthcoming tightening of the U.S. monetary policy, is likely to intensify pressures on lira.
Regional Economic Outlook, November 2017, Europe
The European recovery is strengthening and broadening appreciably. Real GDP growth is projected at 2.4 percent in 2017, up from 1.7 percent in 2016, before easing to 2.1 percent in 2018. These are large upward revisions—0.5 and 0.2 percentage point for 2017 and 2018, respectively—relative to the April World Economic Outlook. The European recovery is spilling over to the rest of the world, contributing significantly to global growth. In a few advanced and many emerging economies, unemployment rates have returned to precrisis levels. Most emerging market European economies are now seeing robust wage growth. In many parts of Europe, however, wage growth is sluggish despite falling unemployment.
Republic of Lithuania
This Selected Issues Paper quantifies the variability of tax elasticities in Lithuania using two alternative methods: rolling regressions and pooled mean group estimator. The analysis is motivated by the systematic variation of tax revenues observed over the economic cycle. Both methods confirm that tax elasticities moved with the cycle, which can be attributed to the procyclical tax compliance tendencies and structural composition effects across tax bases. The results of the study emphasize the importance of accounting for cyclical variation in tax elasticities when making short-term tax revenue projections.
