Regulating State Aid: Inter-jurisdictional competition, public choice, and corporate governance

Depending on the regulatory regime they are subject to, governments may or may not be allowed to hand out state aid to private firms. The economic justification for state aid can address several issues present in the competition for capital and the competition for transfers from the state. First, there are principal-agent problems involved at several stages. Self-interested politicians might enter state aid deals that are the result of extensive rent-seeking activities of organized interest groups. Thus the institutional design of political systems will have an effect on the propensity of a jurisdiction to award state aid. Secondly, fierce competition for firm locations can lead to over-spending. This effect is stronger if the politicians do not take into account the entirety of the costs created by their participation in the firm location race. Thirdly, state aid deals can be incomplete and not in the interest of the citizens. This applies if there are no sanctions if firms do not meet their obligations from receiving aid, such as creating a certain number of jobs or not relocating again for a certain amount of time. The separation of ownership and control in modern corporations leads to principal-agent problems on the side of the aid recipient as well. Managers might receive personal benefits from subsidies, the use of which is sometimes less monitored than private finance. This can eventually be to the detriment of the shareholders. Overall, it can be concluded that state aid control should also serve the purpose of regulating the contracting between governments and firms. An extended mandate for supervision by the European Commission could include requirements to disincentive the misuse of state aid. The Commission should also focus on the corporate governance regime in place in the jurisdiction that awards the aid as well as in the recipient firm.

Land Inheritance Rules: Theory and Cross-Cultural Analysis

This paper develops a general theory of land inheritance rules. We distinguish between two classes of rules: those that allow a testator discretion in disposing of his land (like a best-qualified rule), and those that constrain his choice (like primogeniture). The primary benefit of the latter is to prevent rent seeking by heirs, but the cost is that testators cannot make use of information about the relative abilities of his heirs to manage the land. We also account for the impact of scale economies in land use. We conclude by offering some empirical tests of the model using a cross-cultural sample of societies.

Post-decentralization regional economies and actors -- putting the capacity of Local governments to the test

Decentralization in Indonesia was introduced institutionally in 2001, with a democratization drive promoted by international donors and by the intention of the new government to clear away the centralistic image of Soeharto. Decentralization has had some effects on regional economies and on local government administration. Compared to the period before decentralization, the share of gross regional domestic product and local government finance has increased in Java, though investment and bank borrowing have expanded to the outer islands. In qualitative aspects, decentralization has transferred not only administrative authority but also many new vested interests from the center to regions. Local governments have become more extensive economic actors in regional economies. Regional economic actors now compete actively for such vested interests and have missed the opportunity to create market-friendly regional economies. The government sector should not be a mere rent-seeking economic actor, but should play a role as a facilitator promoting private sector activities in regional economies.

The Economics of EU Railway Reform. Bruges European Economic Policy (BEEP) Briefing 8/2004

The EU began railway reform in earnest around the turn of the century. Two ‘railway packages’ have meanwhile been adopted amounting to a series of directives and a third package has been proposed. A range of complementary initiatives has been undertaken or is underway. This BEEP Briefing inspects the main economic aspects of EU rail reform. After highlighting the dramatic loss of market share of rail since the 1960s, the case for reform is argued to rest on three arguments: the need for greater competitiveness of rail, promoting the (market driven) diversion of road haulage to rail as a step towards sustainable mobility in Europe, and an end to the disproportional claims on public budgets of Member States. The core of the paper deals respectively with market failures in rail and in the internal market for rail services; the complex economic issues underlying vertical separation (unbundling) and pricing options; and the methods, potential and problems of introducing competition in rail freight and in passenger services. Market failures in the rail sector are several (natural monopoly, economies of density, safety and asymmetries of information), exacerbated by no less than 7 technical and legal barriers precluding the practical operation of an internal rail market. The EU choice to opt for vertical unbundling (with benefits similar in nature as in other network industries e.g. preventing opaque cross-subsidisation and greater cost revelation) risks the emergence of considerable coordination costs. The adoption of marginal cost pricing is problematic on economic grounds (drawbacks include arbitrary cost allocation rules in the presence of large economies of scope and relatively large common costs; a non-optimal incentive system, holding back the growth of freight services; possibly anti-competitive effects of two-part tariffs). Without further detailed harmonisation, it may also lead to many different systems in Member States, causing even greater distortions. Insofar as freight could develop into a competitive market, a combination of Ramsey pricing (given the incentive for service providers to keep market share) and price ceilings based on stand-alone costs might be superior in terms of competition, market growth and regulatory oversight. The incipient cooperative approach for path coordination and allocation is welcome but likely to be seriously insufficient. The arguments to introduce competition, notably in freight, are valuable and many e.g. optimal cross-border services, quality differentiation as well as general quality improvement, larger scale for cost recovery and a decrease of rent seeking. Nevertheless, it is not correct to argue for the introduction of competition in rail tout court. It depends on the size of the market and on removing a host of barriers; it requires careful PSO definition and costing; also, coordination failures ought to be pre-empted. On the other hand, reform and competition cannot and should not be assessed in a static perspective. Conduct and cost structures will change with reform. Infrastructure and investment in technology are known to generate enormous potential for cost savings, especially when coupled with the EU interoperability programme. All this dynamism may well help to induce entry and further enlarge the (net) welfare gains from EU railway reform. The paper ends with a few pointers for the way forward in EU rail reform.

Comparison of PRC and Vietnam's Responses to the Elimination of U.S. Textile and Apparel Quotas: Economic and Cultural Perspectives. ACES Working Paper No. 1, 2007

International trade in textiles and apparel has, as of January 1, 2005, been set free from the very intricate Multi-Fiber textile and apparel quota Arrangement (MFA). This event has raised many uncertainties about the new international trade climate and has placed enormous pressure on China as the expected clear cut beneficiary of this liberalization.' Other countries considered to be major contenders include Vietnam which also has a large population employed in the textile and apparel (T&A) sector. Since the old quota system had provided a certain degree of market certainty to competing T&A producers, will the new free trade environment lead to a shake out where mass producers with large economies of scale dominate the new reality? The removal of T&A quotas will create opportunities for Vietnam and China along with other developing countries, but it will also expose them to additional competition from each other. The outcome of this competition will depend on the demand in the US, the ability of the exporting countries to differentiate their exports and on their ability to transfer additional resources to expand domestic output in the direction of the new 'free market signals' and away from rent seeking objectives. Obviously, exporting countries that adjust to this new environment quickly will improve their competitiveness, and will be the new beneficiaries of a quota free international trade in textiles and apparel. This paper attempts to shed some light on the differences and similarities in the responses of Chinese and Vietnamese T&A sectors to this new environment. It first focuses on the demand side attempting to determine whether or not Chinese and Vietnamese T&A items, formally under quota control, are substitutes or compliments. On the supply side, the paper focuses on institutional differences between each country's T&A sectors, the different domestic government policies that have contributed to their growth and the unique cultural differences which will determine the future progress in each country's T&A sectors.

The Re-emergence of Russia and its Collision Course with Europe. Jean Monnet/Robert Schuman Paper Series Vol. 14 No. 4, March 2014

From the Introduction. In order to understand the historical roots of the current geopolitical confrontation between the EU and Russia, we have to go back to the end of the Cold War and to the catastrophic decade that it was followed by in Russian history. The dissolution of the USSR imposed serious economic hardship for Russia and for all the ex-communist East-European states. Russia was the hardest hit amongst them, as the center of the USSR's economic system it suffered most from the dissolution of regional economic ties. This crisis was just deepened by the IMF's privatization and reform campaign, which imposed austerity measures and state-asset privatization as a “shock-therapy” answer to the country's economic problems. This policy package did nothing to save Russia from economic collapse (which eventually happened in 1998), the only thing it achieved was an even stronger social and economic crisis and the enrichment of the rent-seeking ex-communist top bureaucrats by state-assets, which were sold out under-priced through diverse channels of corruption

Institutions and Growth in Europe. CEPS Working Document No. 421, April 2016

This paper provides empirical evidence in support of the view that the quality of institutions is an important determinant of long-term growth of European countries. When also taking into account the initial level of GDP per capita and government debt, cross-country institutional differences can explain to a great extent the relative long-term GDP performance of European countries. It also shows that an initial government debt level above a threshold (e.g. 60-70%) coupled with institutional quality below the EU average tends to be associated with particularly poor long-term real growth performance. Interestingly, the detrimental effect of high debt levels on long-term growth seems cushioned by the presence of very sound institutions. This might be because good institutions help to alleviate the debt problem in various ways, e.g. by ensuring sufficient fiscal consolidation in the longer-run, allowing for better use of government expenditures and promoting sustainable growth, social fairness and more efficient tax administration. The quality of national institutions seems to enhance the long-term GDP performance across a large sample of countries, also including OECD countries outside Europe. The paper offers some evidence that, in the presence of good institutions, conditions for catching-up seem generally good also for euro-area and fixed exchange rate countries. Looking at sub-groupings, it seems that sound institutions may be particularly important for long-term growth in the countries where the exchange rate tool is no longer available (and where also sovereign debt is high), and less so in the countries with flexible exchange rate regimes. However, this result is preliminary and requires further research. The empirical findings on the importance of institutions are robust to various measures of output growth, different measures of institutional indicators, different sample sizes, different country groupings and to the inclusion of additional control variables. Overall, the results tend to support the call for structural reforms in general and reforms enhancing the efficiency of public administration and regulation, the rule of law and the fight against rent-seeking and corruption in particular.

Opportunism, hold-up and the (contractual) theory of the firm

This paper considers the role of opportunism in three contractual theories of the firm: rent-seeking theory, property rights theory, and agency theory. In each case I examine whether it is possible to have a functioning contractual theory of the firm without recourse to opportunism. Without opportunism firms may still exist as a result of issues arising from (incomplete) contracting. Far from posing a problem for the theory of the firm, questioning the role of opportunism and the ubiquity of the hold-up problem helps us understand more about the purpose and functions of contracts which go beyond mere incentive alignment.

Foreign direct investment and corruption

In the last few decades, the world has witnessed an enormous growth in the volume of foreign direct investment (FDI). The global stock of FDI reached US$ 7.5 trillion in 2003 and accounted for 11% of world Gross Domestic Product, up from 7% in 1990. The sales of multinational enterprises at around US$ 19 trillion were more than double the level of world exports. Substantial FDI inflows went into transition countries. Inflows into one of the region's largest recipient, the Russian Federation, almost doubled, enabling Russia to become one of the five top FDI destinations in 2005-2006. FDI inflows in Russia have increased almost threefold from 13.6% in 2003 to 35% in 2007. In 2003, these flows were twice greater than those into China; whilst in 2007 they were six times larger. Russia's FDI inflows were also about 2.5 times greater than those of Brazil. Efficient government institutions are argued by many economists to foster FDI and growth as a result. However, the magnitude of this effect has yet to be measured. This thesis takes a Political Economy approach to explore, empirically, the potential impact of malfunctioning governmental institutions, proxied by three indices of perceived corruption, on FDI stocks accumulation/distribution within Russia over the period of 2002-2004. Using a regional data-set it concentrates on three areas relating to FDI. Firstly, it considers the significance, the size and the sign of the impact of perceived corruption on accumulation of FDI stocks within Russia. Secondly, it quantifies the impact of perceived corruption on the volume of FDI stocks simultaneously estimating the impact of the investment in public capital such as telecommunications and transportation networks on FDI in the presence of corruption. In particular, it addresses the question whether more corrupt regions in Russia are also those that could have accumulated more of FDI stocks, and investigates whether those 'more corrupt' regions would have had lower level of public capital investment. Finally, it examines whether decentralisation increases or decreases corruption and whether a larger extent of decentralisation has a positive or negative impact on FDI (stocks). The results of three studies are as follows. Firstly, along with market potential, corruption is found to be one of the key factors in explaining FDI distribution within Russia between 2002 and 2004. Secondly, corruption on average is found to be related to FDI positively suggesting that it may act as speed money: to save their time foreign direct investors might be willing to bribe the regional authorities so to move in front of the bureaucratic lines. Thirdly, although when corruption is controlled for, the impact of the latter on unobservable FDI is found to be on average positive, no association between FDI and public investment is observed with the only exception of transportation infrastructure (i.e., railway). The results might suggest therefore that it is possible that not only regions with high levels of perceived corruption attract more FDI but also that expansions in public capital investments are not accompanied by an increase of the volume of FDI (stocks) in regions with high levels of corruption. This casts some doubt on the productivity of the investment in public capital in these regions as it might be that bureaucrats may prefer to use these infrastructural projects for rent extraction. Finally, we find decentralisation to have a significant and positive impact on both FDI stock accumulation and corruption, suggesting that local governments may spend more on public goods to make the area more attractive to foreign investors but at the same time they may be interested into extracting rents from foreign investors. These results support the idea that the regulation of FDI is associated with and facilitated by a larger public sector, which distorts competition and introduces opportunities for rent-seeking by particular economic and political factors.

State–society relations in a dynamic framework:the case of the Far East and Sub-Saharan Africa

According to the textbook approach, the developmental states of the Far East have been considered as strong and autonomous entities. Although their bureaucratic elites have remained isolated from direct pressures stemming from society, the state capacity has also been utilised in order to allocate resources in the interest of the whole society. Yet, society – by and large –has remained weak and subordinated to the state elite. On the other hand, the general perception of Sub-Saharan Africa (SSA) has been just the opposite. The violent and permanent conflict amongst rent-seeking groups for influence and authority over resources has culminated in a situation where states have become extremely weak and fragmented, while society – depending on the capacity of competing groups for mobilising resources to organise themselves mostly on a regional or local level (resulting in local petty kingdoms) – has never had the chance to evolve as a strong player. State failure in the literature, therefore, – in the context of SSA – refers not just to a weak and captured state but also to a non-functioning, and sometimes even non-existent society, too. Recently, however, the driving forces of globalisation might have triggered serious changes in the above described status quo. Accordingly, our hypothesis is the following: globalisation, especially the dynamic changes of technology, capital and communication have made the simplistic “strong state–weak society” (in Asia) and “weak state–weak society” (in Africa) categorisation somewhat obsolete. While our comparative study has a strong emphasis on the empirical scrutiny of trying to uncover the dynamics of changes in state–society relations in the two chosen regions both qualitatively and quantitatively, it also aims at complementing the meaning and essence of the concepts and methodology of stateness, state capacity and state-society relations, the well-known building blocks of the seminal works of Evans (1995), Leftwich (1995), Migdal (1988) or Myrdal (1968).

State–society relations in a dynamic framework: The case of the Far East and Sub-Saharan Africa.

According to the textbook approach, the developmental states of the Far East have been considered as strong and autonomous entities. Although their bureaucratic elites have remained isolated from direct pressures stemming from society, the state capacity has also been utilised in order to allocate resources in the interest of the whole society. Yet, society – by and large –has remained weak and subordinated to the state elite. On the other hand, the general perception of Sub-Saharan Africa (SSA) has been just the opposite. The violent and permanent conflict amongst rent-seeking groups for influence and authority over resources has culminated in a situation where states have become extremely weak and fragmented, while society – depending on the capacity of competing groups for mobilising resources to organise themselves mostly on a regional or local level (resulting in local petty kingdoms) – has never had the chance to evolve as a strong player. State failure in the literature, therefore, – in the context of SSA – refers not just to a weak and captured state but also to a non-functioning, and sometimes even non-existent society, too. Recently, however, the driving forces of globalisation might have triggered serious changes in the above described status quo. Accordingly, our hypothesis is the following: globalisation, especially the dynamic changes of technology, capital and communication have made the simplistic “strong state–weak society” (in Asia) and “weak state–weak society” (in Africa) categorisation somewhat obsolete. While our comparative study has a strong emphasis on the empirical scrutiny of trying to uncover the dynamics of changes in state–society relations in the two chosen regions both qualitatively and quantitatively, it also aims at complementing the meaning and essence of the concepts and methodology of stateness, state capacity and state-society relations, the well-known building blocks of the seminal works of Evans (1995), Leftwich (1995), Migdal (1988) or Myrdal (1968).

A gyenge hazai innovációs teljesítmény intézményi magyarázatához. Vitaírás a nemzetközi innovációs versenyben való részvétel akadályairól (Towards an institutional explanation of the country's weak innovation performance)

Miért van a magyar gazdaság hasonlóan kritikus helyzetben, mint a rendszerváltást megelőző időkben? Miért nem sikerül az eladósodást megállítani, a gazdaságot konszolidálni, és fenntartható növekedési pályára állítani? Ennek közvetlen okát a szerzők a fejlődés féloldalasságában és a duális gazdasági szerkezetben látják. A piacgazdasági intézmények bevezetése ugyanis nem járt együtt az egész gazdaságot (vagy legalábbis annak nagy részét) átfogó, a tudásvezérelt információgazdaság felé mutató, gyors fejlődéssel. Számos indikátor azt jelzi, hogy az ország lemaradt a nemzetközi innovációs versenyben. Az innovációk elégtelensége azonban nem véletlen, nem exogén adottság, hanem a formális piaci intézmények mögött meghúzódó valós intézményi berendezkedéssel, a gazdaságban ténylegesen észlelhető magatartásmintákkal magyarázható. A piacgazdasági intézmények és jogi keretek, amelyek elvileg lehetőséget adnak az erőforrásokhoz való szabad és nyílt hozzáférésre, csak részben töltődtek meg tartalommal. Az országban még mindig meglehetősen korlátozott a sikeres belépés lehetősége a piaci és a politikai arénába, azaz a magyar társadalom - a north-i terminológiával élve - "korlátozott hozzáférésre alapozott társadalomként" írható le. Az a tény, hogy a piaci szereplők esélyei az államhoz és intézményeihez fűződő kapcsolatoktól függően nagyban különböznek egymástól, és a gazdasági szereplők rendszerszerűen használják e kapcsolatokat járadékszerzésre, lefojtja az innovációt, és újra és újra megakasztja a fejlődést. / === / Why is Hungary's economy still in a critical state similar to the one before the change of system? Why is the indebtedness not being halted, the economy consolidated or vital structural reforms performed? The authors see the direct cause in lopsided development and a dual economic structure. The introduction of market economic institutions was not followed by rapid, overall development towards a knowledge-led, information economy. Several indicators show how Hungary has fallen behind in competition for international innovation. The inadequacy is not a fortuitous, exogenous attribute, but explicable in terms of a real institutional setup underlying the formal market institutions, and of actual behaviour patterns found in the economy. Only in part has substance been gained by the institutions and legal frames of a market economy that theoretically would provide free and open access to resources. The scope for successful entry into the market or political arena remains very narrow, so that in Douglass North's terms, Hungary's is still "a society based on restricted access." Innovation is stifled and development repeatedly impeded by the fact that market players' chances differ widely depending on their connections with the state and its institutions and such connections are used regularly in rent-seeking.

The corruption risks of EU funds in Hungary

In corruption, a group of players gain an economic advantage without providing any socially beneficial services in return, therefore corruption is considered to be a form of rent-seeking. Similar to other forms of rent-seeking, corruption causes losses on a societal level, due to the less efficient allocation of resources, as well as the costs of operation and prosecution. Fighting corruption is important not just because of ethical but also economic considerations. Contributions from the European Union are making possible the use of more funds than ever, and spending the full amount of this money is a priority preference of the government. The abundance of funds and the pressure on absorption increase corruption, by the managers of the funds overplanning the amount of money to be allocated to individual tender invitations, setting generous rules on eligible costs, and specifying low rates of own contribution wherever possible. As a result, the opportunities for rent-seeking are increased, as it is worth it for beneficiaries to carry out the project even after relinquishing part of the funds they have been awarded. Thus, the abundance of funds generates a sphere of corruption in which rent-seekers may appear on various levels of the system, often even without the knowledge or approval of those on higher decisionmaking levels.

Back to the failure: an analytic narrative of the De Lorean debacle

There has been a recent identification of a need for a New Business History. This discussion connects with the analytic narrative approach. By following this approach, the study of business history provides important implications for the conduct and institutional design of contemporary industrial policy. The approach also allows us to solve historical puzzles. The failure of the De Lorean Motor Company Limited (DMCL) is one specific puzzle. Journalistic accounts that focus on John De Lorean's alleged personality defects as an explanation for this failure miss the crucial institutional component. Moreover, distortions in the rewards associated with industrial policy, and the fact that the objectives of the institutions implementing the policy were not solely efficiency-based, led to increased opportunities for rent-seeking. Political economy solves the specific puzzle; by considering institutional dimensions, we can also solve the more general puzzle of why activist industrial policy was relatively unsuccessful in Northern Ireland.