Electronic Library of Scientific Literature
Volume 47 / No. 1 / 1999
Ladislav BORS – Jan JACOBS – Gerard H. KUPER – Vladimir KVETAN
Business cycle indicators (BCIs) convert complex economic dynamics into one-dimensional figures that are easily tractable. Although the indicators are effective in the ex post description of cycles, the main strength of indicators lies in forecasting. Constructing BCIs has become a technical industry. Over the years the methodology has not changed fundamentally though. The system of leading, coincident and lagging indicators, which we apply in the construction of our BCI, is developed at the National Bureau of Economic Research (NBER) in the US in the 1930s.
A natural question is why one would like to construct a business cycle indicator, and especially why one would like to construct a BCI for the Slovak Republic? We believe, that a home-made BCI is an indispensable tool for a macroeconometric research group, because it can rather quickly implement and react to a new information. BCI for the Slovak Republic’s economy is interesting, because of its creation in a short past and running transformation as well. We tried to build a BCI for the Slovak Republic despite the fact that the available data cover a short time span and are dominated by consequences of the economic reform the country is in.
Measuring Business Cycles
Business cycles are regular patterns in fluctuations of macroeconomic variables, such as output, consumption, investment, employment, prices and interest rates. A business cycle includes a downturn and contraction followed by an upturn and expansion in aggregate economic activity. Business cycles are defined in growth rates or in deviations from trend. Classical cycles run in growth rates: a period with first decreasing, then negative growth rates is followed by a period of rising growth rates that become positive after a while. Since classical business cycles have not been observed regularly after World War II, one usually adopts a more general definition of business cycles: deviation cycles. Under this definition cycles are regarded as fluctuations around some trend. An economy experiencing a low positive growth rate may suffer from a recession, if the growth rate is below the trend level. Of course, the use of deviation cycles has its own difficulties. One has to be able to calculate the trend in order to separate cycles from the observed series. To this purpose the majority of economists usually assumes that a series consists of four unobserved components: a trend, a cycle, a seasonal component and an irregular component. The trend component represents the long-run movement in the series, the cycle the cyclical component arising from business cycle fluctuations, the seasonal component picks up seasonal patterns that are more or less constant over the years, and the irregular component reflects non-systematic movements in the series.
In our case there is a problem: the available time series are short, we only have quarterly data for the period 1993– 1997. In normal circumstances that would be about one business cycle. In the case of the Slovak Republic it will be very difficult to recognise a cycle from the data because of the transformation process the country is in. This may have consequences for finding the trend and make removal of the irregular component difficult. So, the empirical part of this paper should be interpreted with some care.
Many macroeconomic series exhibit trends. Trends can be deterministic or stochastic. For detrending we can use: Moving average method, Phase-Average-Trend method (PAT method) or Hodrick Prescott filter (HP - filter).
Moving average detrending is taken where the length of the moving average corresponds to the average business cycle length. An obvious weak spot of moving average detrending is the choice of the average business cycle length. Once the average cycle length has been chosen, it is fixed forever after, although the actual business cycle length may change. Using this type of detrending is not so much appropriate.
The Phase-Average-Trend (PAT) method is developed at the NBER bureau in the US and adopted by e.g. the OECD. PAT is computed on the basis of a preliminary estimation of cyclical peak and trough dates to split the series into cyclical phases. By this the cycle length becomes flexible. These dates determine the level and the flexibility of the trend. The PAT method is difficult to apply if a business cycle turning point is expected in the near future.
Among supporters of real business cycle theory The Hodrick-Prescott (HP) filter. is a popular tool The HP filter does not rely on a priori information about business cycle peaks and troughs; it can be applied mechanically. The HP filter meets serious criticism. The filter has an end-point problem: if the data begin and end at different points on the cycle, the trend can be pulled upwards or downwards for the first few or the last few observations Nevertheless, we employ the HP filter for detrending in the construction of our leading indicator.
The dominant methodology in the construction business cycle indicators is still similar to the procedures established by the NBER in the 1930s and 1940s. The following steps are distinguished in the construction of a leading indicator:
1. select a reference series that represents the business cycle: usually gross domestic production or a variety thereof;
2. select macroeconomic variables that might contain information on business cycles and gather time series for these basic series;
3. smooth and filter all time series to derive cyclical patterns, i.e. the deviations from trend;
4. compare cyclical patterns in the basic series to the cyclical pattern in the reference series, either by visual inspection of graphs, or by calculating correlations or another statistical technique;
5. group the basic series into three classes: leading, coincident and lagging series;
6. equalize phase differences in leading series by taking lags; and
7. construct one composite leading indicator as a weighted average of the selected leading series.
We supplement the basic methodology with our own starting points. The Slovak CLI is based on quarterly series that are taken from ISWE97q3 database and two time series are taken from Datastream and available from the first quarter of 1993 onwards.
We determine the optimal leads by computing correlation coefficients between the filtered series and the filtered references series, and by eye-balling graphs in order to match turning points. We select series that are strongly correlated with our reference series. As a lower limit for the cross-correlation coefficient we employ the value of 0.80 in absolute terms. This value is not rooted in a statistical testing framework for the correlation coefficient.
The series enter the composite leading indicator with a lag that corresponds to its optimal lead and are combined into a composite leading indicator by means of principal components. The composite leading indicator is taken to be the first principal component.
The composite leading indicator of the Slovak Republic
We followed a three-stage procedure to construct our leading indicator. In the first stage we took natural logarithms of all variables. The irregular component was removed by a one-sided 4-quarter moving average, which also removed some of the seasonal pattern, and we applied a standard seasonal filter. In the second stage we filtered the trend by means of the HP filter. Looked at the graphs of the basic series and the reference series, computed the correlation coefficients, and determined the optimal lags. After the first two stages 5 leading series came out and for each series we list the definition, whether the series is procyclical or countercyclical. The leading series can be grouped into two categories; real and financial variables, either of which can be subdivided in domestic and foreign variables. Foreign variables are very important for small open economies. The real variables are the direct foreign investment, the trade balance, and the business survey indicator. The first two variables reflect the openness of the economy of the Slovak Republic. The latter variable represents the confidence of entrepreneurs in the economic performance of the Slovak Republic. Hence, it is the only forward-looking variable.
The financial variables are the interest rate for bank loans and loans to enterprises and households in foreign currency. Loans to enterprises and households in foreign currency lead the business cycle in the Slovak Republic by four quarters. This may be explained, that direct foreign investment leads the business cycle by two quarters, whereas loans in foreign currency lead the cycle by four quarters.
We find a countercyclical effect of interest rate for bank loans. Obviously, higher interest rates makes loans more expensive reducing both the demand for money as well as investment. The lead found here is 2 quarters.
In the third stage the composite leading indicator is determined by means of principal components. The series of Figure 2 feature in the composite CCSO leading indicator. The Slovak composite leading indicator contains the loans in foreign currency, the trade balance, the interest rate for bank loans, direct foreign investment and the business survey indicator.
In this research memorandum we have described in detail the construction of a composite leading indicator of the economy of the Slovak Republic. The indicator is built in the traditional NBER methodology.
The goal of this paper is to introduce and apply a technology that is world-wide considered to be a useful method for short-term forecasting. However, it should be noted that the time series were r short so the conclusion that the Slovak Republic has passed a trough, should be taken with some care.
Verification of Results
Objective reasons moved away publication of this paper into the time, when the latest statement about trends in Slovak economy in first three quarters 1998 was reachable. Our short time forecast, that there will be an expansion in industrial production, has been confirmed. Industrial production in first three quarters increased to level 415 mld. Sk (growth rate 6,4%). Industrial production growth has been influenced mainly by boom in the means of transport production (80%)
It was confirmed that methods of composite leading indicator construction are suitable for short time forecast of trends in economy. Trends in particular components allowed us to make short time forecasts of trends in industrial production in Slovak economy. Dynamical development and changes in transitive economy make us to construct new composite leading indicators on a larger time series. It will allow us to increase accuracy of indicator results. It is an useful and world-wide used tool for short time forecasts.
This article is devoted to problems of estimation and analysis of relationships in the case of nonstationary time series. It can be divided into three parts. The first part discusses the limitation of static regressions using ordinary least squares (OLS), when both regressee and regressor(s) are nonstationary and the author suggested solution of these problems. The second part redefines exogeneity in context of Lucas’ critique and shows how to test it. The third part presents an application of defined approaches to nominal wages and consumer price index in Slovakia in the period 1991– 1996.
If the analyzed time series have cumulated from relatively independent increases, they are called “integrated”. Integrated series are nonstationary and usually their linear combinations are also nonstacionary. However, there are also stationary linear combinations, if a long run equilibrium has existed between the time series. In the first case, we often encounter meaningless regressions, i. e. regressions with a “good” match and t-tests values amongst evidently unrelated variables. Similar results are obtained, if the series are nearly integrated, i. e. highly positively autocorrelated. By differentiating the data we can rid of the problem of incorrect regressions, but in case of data which are only in a status nearly integrated, (which is usually the case) we damage also the long term information. The preferred solution is to use differenced time series and add an agent with shifted left- and right-hand variables in particular levels (an error correcting agent). The error correcting agent is interpreted as a deviation from the equilibrium and the corresponding parameter should be negative, but greater then -1. Three estimation procedures are presented in the article. The parameters of error correcting agent can be estimated in a separate degree, together with other parameters or they can be set up according to a priori information.
Exogeneity (strict) was originally defined as zero correlation of a variable with random error in regressions. This attribute resulted from estimation procedures. After Lucas’ criticism, the traditional concept of exogeneity as a consequence of estimation technique was abandoned in favor of investigating whether the parameters of interest are dependent on other (nuisance) parameters or not. The weakest form (weak exogeneity) can be often achieved by reparametrization and redefinition (restriction) of nuisance parameter set. It implies validity of static forecasts under the restrictions upon nuisance parameter set. Certain dynamic aspect of relations amongst time series are described by Granger causality. Variable X causes variable Y in the sense of Granger, if current and lagged values of X help to predict Y. Fours outcomes of the test can occur: variables are unrelated, X causes Y, Y causes X and a mutual feedback. If certain variable is weakly exogenous and it is not caused by endogenous variable in the sense of Granger, then it is strongly exogenous and the model can be used for forecasting. However, the restrictions upon the nuisance parameter set will generally be violated in attempts to simulate policy changes. This will invalidate scenario evaluations, unless compound model for both variables is used. The single model is suitable for scenario evaluation, if the corresponding nuisance parameters can change in time and parameters of interest remain constant – this property is called superexogeneity. If all right-hand variables are superexogenous with respect to the corresponding parameters, the equation is said to be autonomous. Superexogenous variables and autonomous equations solve the problem presented by Lucas’ critique. The test for superexogeneity consist of two steps. The first one builds a model of the variable, where its status is investigated and makes sure that it does not contain current value of the endogenous variable and it does not contain any error correcting agent or its error correcting agent does not contain the endogenous variable. The second step is a test of orthogonality of residuals.
The above described concepts were applied to nominal wages and consumer price index in Slovakia. Nominal wages depend on lagged labor productivity in the short run and on consumer price index in the long run. The elasticity of wages with respect to productivity is 0.3, elasticity with respect to wages is near one. Consumer price index depends in the short run, amongst other variables, on lagged unit labor costs, i. e. also on nominal wages. In the corresponding error correcting agent, however, only VAT tax rate and imports deflator. The short run elasticity of prices with respect to wages is thus at about 0.6. The model for prices has thus a structure allowing for superexogeneity of prices with respect to wages. To check for orthogonality of residuals, an important dummy from the price equation has been added to the wage equation, but it turned to be insignificant. After analyzing the form of corresponding models and checking orthogonality of residuals we can conclude, that prices are superexogenous for wages but they are not strongly exogenous. This means that in the static horizon, the causality goes in direction from prices to wages – prices rise and wages augment afterwards. The response of wages can be computed by setting price index to desired value and use wage equation only. However, in the dynamic horizon this is not true, because prices depend on lagged unit labor costs that are representing a wage function. In this case, models for both prices and wages have to be used.
The economists analyzing price movements and competitiveness of Slovak exports sometimes argue that the goods are made too expensive by too high wages. The presented analysis shows, however, that wages augment only after price have increased and this process is rather slow. Actually, in case of a inflation spiral, employees would be loosers.
A professional literature has frequently reminded that the macroeconomic imbalance occurring in the post-socialist reform countries is, except for other reasons, caused also by an excessive growth of the domestic demand. Offer structures, lacking required flexibility, cannot react appropriately as regards some components of the quickly growing domestic demand and this gives rise for dramatic expansion of further imbalances.
The objective of this article is to map this phenomenon, it attempts to describe also with quantitative measures the problem of opened scissors between the domestic demand and the economy performance development (shown on the GDP increase) or to compare the level of such imbalances within selected Central European transition countries.
A total volume of the domestic demand in the market economy is created partly from the domestic demand, which is covered by the gross domestic product for domestic use (GDP minus exports), further on by a part covered by exports, and, by a part covered by the increase in prices. The alternative composition of the domestic demand coverage describes how the domestic demand is covered with the help of GDP, with the help of excessive imports over exports (passive goods and services balance) and with increase in prices.
Let us assume the existence of a perfectly functioning ideal balanced economy (however, the transition economy will never be like that). There will be no price increase, no imports over exports surplus because exports and imports would be in harmony. In such a perfectly balanced economy the volume of domestic demand would fully correspond with the GDP volume.
However, a perfect economy is just a fiction, but this article points at the fact that in selected small scale developed economies the composition of a domestic demand is very close to the above described optimum status. As an example the countries like Austria, Holland and Switzerland were selected.
In each economy, which shows deviations from a fully balanced economy, it is reasonable to take into account that part of the domestic demand, which cannot be covered by the GDP. Within the scope of the GDP non-covered domestic demand there is a spa-ce for growing disbalancing factors. The imbalance between the domestic demand and the GDP is composed of that part of the domestic demand which is covered by the excessive imports over exports and which is covered by the price increase.
Description of the domestic demand coverage components in the Slovak economy have indicated rather different picture in comparison with the above mentioned ideal condition, or when developed economies are being compared. It is obvious, that the Slovak economy have been facing a dramatic imbalance between the domestic demand development and the economic performance, in 1996 the scope of discrepancies grew again to compare the initial decline (mainly in 1994) and during 1996 up to 1998 the discrepancy hit approximately 14– 15 per cent of the domestic demand.
Slovakia during its transition period, regarding its domestic demand coverage structure, has been rather different from developed economies, but the comparison of this phenomenon is quite interesting when considering the Slovak economy and economies of other countries comparable in their transition process. For the purpose I selected Hungary, Poland and the Czech Republic.
Description of the domestic demand coverage components indicated that in many of these countries there have been a discrepancy between the domestic demand development and the economic performance (measured by the GDP). The GDP volume covers approximately 5/6 of the domestic demand and the remaining 1/6 opened a space for growing of macroeconomic imbalance. An imbalance mainly due to price increase regarding the domestic demand cover has been found in Poland and Hungary, while in Slovakia and in the Czech Republic it was mainly due to excessive imports of goods and services over their exports.
The comparison of the transition countries implies also that the discrepancies between domestic demand development and the economic performance are smaller in conditions of the Slovak Republic and the Czech Republic. The scope of imbalanced factors regarding the domestic demand coverage is quite lower in these countries to compare the conditions in Hungary and Poland.
Returning problems with the macroeconomic imbalance in transitive economies have witnessed that the concepts about one short stabilizing program which will do and recover the weak macroeconomic balance and will subsequently be naturally maintained thanks to market powers, is far from real.
This article focused only at one side of the omnisided problem of macroeconomic imbalance and of the problem of imbalanced economy growth. The comparison of the imabalanced development between the domestic demand and economic performance development in developed small and opened market economies and transitive economies indicated that in the transitive economies the scope of imbalances understood above described way was several times higher than in developed economies.
The existing discrepancy between domestic demand and economic performance development in some countries showed even a tendency towards returning increase during the transition period instead of getting closer to the situation found in developed economies. Also in more advanced transition stages it is true that the GDP development cannot adequately respond against the domestic demand development. The offer structures in the post-socialist Central European countries are still so inflexible that changes in demand must be to a high extend covered by the price increase or by a dramatic increase in imports. This also confirm assumptions about damaged market functions in transitive economies.
The existence of such phenomenon must evoke a question: to what extend can the economic policy stimulating increase in demand be justified within the particular eco-nomy.
The offer side of the economy does not catch up with the changes in the demand side, the offer structures are inflexible and thus their role is supplied by imports. The economic policy, which would be under such conditions, internal demand growth orien-ted would even worthen the imbalances. Recently, it was just the policy dumpening the domestic demand which managed to bring some improvement in this field. However, nor the policy perpetually dumpening the domestic demand is reasonable viewing it from a long term perspective, but in a short term period it can be effective. It would mean dumpening of the demand to such level where the inflexible offer and the market are still able respond to each other appropriately. Hence, considering a long term period, the policy supporting offer structures seems to be better. The support of the economic performance in such conditions calls for the offer side support within the economy and that goes hand by hand also with its restructuring.
Governments in transition economies consider foreign direct investment (FDI) as an important factor, which can improve competitiveness of their economies and bridge the wide gap between developed countries and transition countries in the fields of technolo-gy, access to world markets etc. Having in mind the broadly conceived importance of FDI, the paper aims to provide an insight into the Slovak situation.
The period covered in this study is mainly 1993– 1996 with some data collected for 1997. Nevertheless, there are some additional, mostly general, data or comments cove-ring some more recent period, but these are incomplete especially because of the fact that company data were not possible to obtain at the end of the research period.
The first section of the paper, presented in this issue, covers several aspects of FDI development as found in domestic literature and the performance of foreign investment enterprises (FIEs). Economic performance of FIEs and domestic enterprises (DEs) is compared to see their role in the Slovak economy. In this summary only performance data on FIEs and DEs is presented.
To summarize relatively large portion of data from the paper we provide here a basic overview of main figures and ratios. In the category number of companies the average number of all firms for manufacturing industry in 1993 was 1428 (FIEs/total was 8.2%), in 1994 1627 (12.3%), in 1995 1842 (14.7%) and in 1996 1750 (15.5%). Since the geginning of observation period foreign investment enterprises increased its number from initial 117 foreign investment enterprises in 1993 to 272 FIEs in 1996. Foreign direct investment in the nominal capital of FIEs reached the following values. In 1993 the whole manufacturing industry had average share of FDI to foreign investment enterprises’ total nominal capital 57.1%, in 1994 it was 60.8% and athis trend has continued with 65.0% in 1995 and 66.8% in 1996. Analysis of value added data has brought the following. For 1993 the average FIEs to total share for manufacturing was 10.1%, 13.0% one year later, 18.6% in 1995 and 19.1% in the last analysed year. As concerns employed persons, FIEs increased its “employment share” from initial 1993’ s 8.0% ratio on total to 11.7% in 1996. Thus, the total number of employees employed by FIEs reached 57 676 persons. Investment outlays on output ratio for manufacturing industry had the following values. In 1993 domestic enterpises had this ratio 8.23, whereas FIEs had 21.14. In 1994 domestic enterprises’ ratio was lower and reached only 4.72. Similar decrease was evidences ratio was 358.1. In 1995 there was an increase in both groups of firms (domestic enterprises had 7.31 and FIEs 12.40). In 1996 domestic enterprises increased their ratio to 9.03, but foreign investment enterprises decreased it to 10.53.
As was shown, FIEs often over-perform the average industry and economy data. Some experiences show, however, that there are poorer results of FIEs in profits and dividends. In individual firms these facts do not necessary mean that their economic performance is poorer, but rather some other explanatory variables like tax optimisation, transfer pricing and other intra-enterprise operations at international level should be assessed.
Daniela ZEMANOVIČOVÁ – Eugen JURZYCA
This article elaborates more on the previous one, which was focused on competitive barriers. It is designed to discuss regulatory barriers to economic competition and the results of the empirical survey done in four transitional economies.
In transitional economies regulatory barriers may significantly distort competitive environment. In comparison with the anti competitive methods of businesses they require different solutions, due to the fact that regulatory measures of governments could not be tackled directly by antimonopoly offices. Here, should stressed that the impacts on economic competition are in both cases similar. For example, price regulation has similar consequence as price cartel, import restrictions are comparable with discrimination or market entry prevention, exclusive rights, licenses, permits have similar impact as monopoly in a market or market division.
1. Definition of Regulatory Barriers
The main characteristics of regulatory barriers are shown in the Graph 1.
Based on the scheme one can divide the regulatory barriers to three groups.
1. The measures that are not reacting to market failures are in themselves a non-market failures with no justification (in other words, public administration intervenes where it should not).
2. However, even a reaction to market failure can be effective or ineffective, both from quality and quantity points of view. Generally, a reaction increasing efficiency is considered a good reaction. If, after the state has intervened, neither efficiency nor output improved, a non-market failure takes place (in fact, public administration fails). In such situations, public administration does intervene in the areas where a help is needed, but its steps are for no good.
3. Public administration does not act, but its intervention is needed and required. It is not actively involved in the areas of direct responsibility and this causes problems (absence of the rules, flaws in legislative framework).
Regulatory barriers to competition represent (a) measures by state administration (governments, municipalities) that (b) prevent or hamper effective competition from functioning (c) in the end lead to a decreased welfare.
2. Causes of Non-market Failures
While market failures lead to state involvement, in this case state interventions make market failures happen. It is necessary to stress that state failures are numerous. Here are the following reasons for market (state) failures:
· Separation of entities bearing the regulation costs from those benefiting from it – free rider problem.
· In addition to the above, there is, almost as a rule, no direct connection between adopted regulatory measures and responsibilities for their enforcement.
· Because winners (benefiting groups) are well and quickly formed/organized and losers (victims bearing the costs) are less organized and dispersed, frequently, an inefficient regulation is introduced to the benefit of a very narrow group.
· Separation of costs and effects leads to increased and redundant costs. If an economic policy is based upon regulation or extensive redistribution processes, in other words, if there are significant interventions to economic activities, a space is created for the increased redundant costs resulting from X-inefficiency and rent-seeking behaviour.
· Limited information – consequences of many decisions are complicated and hard to predict, while governments usually do not possess all the information needed.
· Limited control over reaction of a private sector. Government has a limited influence over real consequences of its decisions.
· Limited control over bureaucratic apparatus.
· Natural limitations of political processes, even in case government has a perfect information about potential consequences of its decisions.
· Existence of internalities – own standards and goals existing within non-market entities. These are often contradictory to publicly presented goals
· Derived externalities – government steps aimed at corrections to market failures may cause unpredictable impacts and in the end may have an unwanted effect.
· Distributional inequity – non market activities focused upon corrections to uneven income or wealth distribution – these measures frequently establish new inequities (division of power or privileges). Corruption is one of the examples of abusing powers in granting benefits to certain entities (through licenses, special contracts, government gua-rantees, etc.).
It can be concluded that the state, just like the market, can cause market imperfections or failures, or contribute to less-than-efficient results. State failures are not less dangerous than market ones. Non-market failures are significant, while not being sufficiently analysed. The choice between the state and the market is not a choice between perfection or imperfection, it is rather a decision about the type and degree of expected failures.
3. and 4. How Entrepreneurs Perceive Regulatory Barriers
The questionnaire survey was focused on the ways the administrative and regulatory interventions by state administration or municipalities are perceived by the entrepreneurs in four transitional countries (Czech Republic, Hungary, Poland, and Slovak Republic). The total number of responded subjects was 153 including associations, chambers, etc.
The following table shows the order of harmfullness of the regulatory measures to economic competition:
Harmfullness of the Measures for All Countries in Question
8. a) Unequal conditions for privatisation
6. a) Absence of rules
9. a) State support of restructuring
1. b) Advantages for certain business
1. e) Public procurement
3. b) Protection of inefficient companies
1.c) State financial subsidies
1. d) Exemption of the scope of legislation
2. b) System of license granting
3. a) Non-functioning bankruptcy legislation
2. a) Licenses, permits
2. c) Limits, norms, restrictions
2. d) Import restrictions
1. a) Discrimination of foreign companies
4. b) Regulation – price, wage
4. a) Business restriction
Unequal conditions in privatisation and a lack of rules were considered by the respondents to be the most harmful measures. The lowest cumulative value (not conside-red as serious restrictions of economic competition by entrepreneurs) have restrictions in undertaking/business – setting of opening hours, obligatory equipment of plants. The results show, that in transition economies specific regulatory barriers for economic competition have been born. These create unequal conditions (privatisation, lack of rules, state support of restructuralisation). On the other hand entrepreneurs were liberal towards discrimination of foreign firms, restrictions of import, which shows low readiness for globalisation processes.
The highest frequency of “3” (measures seriously restricting economic competition) was in the Slovak Republic, which shows that business environment is negatively marked by regulatory measures of the state.
5. Some Recommendations for Limitation of Regulatory Barriers
The table below shows some basic measures, which prevent the negative consequences of regulatory barriers:
Reduction of the Regulatory Barriers
Creation of Institutional Framework
Integration, Completion of Economic Transformation
· Harmonization of valid legislation with competition policy
· Finalization legislative framework for economic activities to support competition
· Ensuring that new laws are not adopted to detriment of competition
· Apply the competition rules to public authorities
· Laws enforcing equal chances
· Transparency of the rules
· Increasing the independence of antimonopoly offices
· Securing efficient supervision over the public aid, public procurement, banking sector, capital market, etc.
· Communication- influence on public opinion
· Competition culture
· Strategic alliances
· Active position of the antimonopoly agency
· Optimization (minimization) of redistribution processes
Currently, the unemployment has become one of the most serious economic problem. It affects the social development both in transforming countries and in developed economies. The unemployment in developed economies appears mainly as a social-and-psychological problem, because the economic situation of many unemployed persons often exceeds the economic level even of higher status working people in the Eastern Europe. In the Slovak Republic the unemployment is predominantly an economic problem accompanied with social-and-psychological shocks.
Big discrepancies on the labour market often appears due to a low degree of population´s adaptability and frequently also due to a high complexity of legislation regarding entrepreneurial activities, which cut down the number of people interested in businesses and increases the number of people waiting for some work benefiting the unemployment support or making their living in some other way. Their failed on labour market as the former work activities ceased to exist and the new ones require new skills and know-ledge. Due to that it is necessary to amend education, to gain new skills or to gain a new education applicable for a new work or profession. Growing demands on education cannot be solved simply by prolonging the school attendance time scale, but better by promoting adults education schemes as a part of a long-life educational process.
In the market economy the labour market performs as a basic stimulus for education and skills development because various ownership forms and market economy principles applied stimulate a competition amongst producers acting on the markets with goods and services.
The competition on the markets with goods and services logically results in the competition on the labour market. It means that the labour market becomes as objective stimulus of the permanent increase of requirements regarding work skills which subsequently decide where a particular person can join the work process. We can see an interdepent relationship between labour market and education market.
The period of scientific and technical and information explosion have placed high requirements on a human being and these are transmitted into the work career. All efforts to specify requirements which are necessary for a work position at the millennium break, led to the following areas:
· Mobility – acceptance of changing the place of work, willingness to follow the work which brings self-actualization and self-assertion;
· Flexibility – get accustomed to a changed character of work, to a new position ;
· Communication – adequate contact with people following the rule: “people act at us as we act to them”;
· Acceptance of uncertainty and multiplicity resulting from still faster changes we have to count of in the future;
· Long-life education as a necessary precondition to cope with the constantly growing requirements on the labour market.
The need for education will be felt parallels with the work performance and will become indispensable regarding new work opportunities and the need of new work skills. Currently, a thesis that the school system is not able to prepare professionals for ever is generally accepted, and that requires so that the school education’s is followed by a system of further education. The education provides a wide background of knowledge in a particular branch or in several branches and creates preconditions for better adaptability if conditions change. It also increases the mobility of a person because he will be more flexible to get accustomed to a new work position. In the field of education and solving labour market problem the issue is to understand the new needs and to create appropriate motivation and interest in increasing own skills.
Improving skills and education development of the population can be seen on increased creativity of individuals, elasticity and resistance to cope with various life situations, especially the crisis ones. The unemployment is one of them.
An improved creativity can be gained at school facilities and also gathered during the previous work experience. The range of former work colleagues can be supportive for the unemployed person to find information about existing work opportunities. In this situation an important role is played by the adult education with its objective to amend education, but also to provide support in changing profession and re-qualification. The adult education should remove the shortcomings of education which were bound by the education gained during the initial preparation before starting a work career. It promotes a change in orientation and amends, modernizes skills and knowledge in the fields where conditions for education were not appropriate in the past.
The development of a human being potential in the course of a long-life education will become the major source of wealth a success against the competition and it will become the precondition of survival of millions of people and thousands of businesses. A fast development of new technologies, new organization of live and work, telecommunications and computers will propel changes, which will dramatically impact the course of education and create new forms and adopt new methods in education.
Education, whatever form it has, is present at all life periods and became the most important factor of the individual development of a personality and as such it makes the person safe and prepared to tackle an unexpected peripetia the life can bring in to be enjoy a full value life.
Debt financing has become an important revenue source in public sector since fifties. The growing role of local government finance in public finance system mainly in providing public services and financing local infrastructure evokes disputes on municipal debt in theory and praxis.
Local governments borrow money for two primary reasons: to provide cash-flow for short term spendings and to finance public capital projects such as roads, water and sewer systems.
Even if using loans for current spending is considered to be inappropriate there are some occasions when it is acceptable. Predominantly, it is quite reasonable for local authorities to use short term borrowing to offset irregular flows of revenues as well as to cover current expenditures that were not foreseen.
However, borrowing is one of the most potent activities in local government capital financing. Capital development can rarely be covered by current revenues and grants. The theory of public finance suggests that current spendings should be covered by current revenues while capital expenditures should be financed through borrowings and other capital revenues.
Borrowing is considered as a natural or the best way to finance capital expenditures. The main argument for it concerns the issue of inter-generational equity suggesting to spread the burden of payment for investment project also to the future generations. In this way capital spendings benefit people for years to come and repayments and the interest on the loans will be paid for future taxes. To apply this principle ideally, the period of the loan used to finance a given project should be the same as the expected life of the capital which it is used to finance and the repayments should be made throughout the course of the period.
The increased quantity of local debt in both absolute and relative terms has increased the importance of credit analysis for both local governments and creditors. The credit analysis is primarily concerned with the credit risk assessment.
There are three main approaches to debt capacity assessment. The simplest one sets ratios of debt service to annual recurrent revenues. The basic formula of the second method is based on recurrent revenues after meeting current expenditures. The third approach includes credit evaluation indicators. A range of indicators have been proposed within this method, and the most used is the debt burden indicator comparing the total outstanding debt to the recurrent revenues.
By law the local government in most countries has been given possibility to incur debt to finance local needs. It does not mean that there is no danger of an excessive debt burden on public finance.
There are several reasons why some countries decided for limitation of local government borrowing. This may be controlled for macroeconomic reasons. If local authorities borrow more and spend more, then their extra spendings will add to the aggregate demand while their extra loans will do little to reduce it. So there may be a considerable rise in the aggregate demand. Borrowing controls may also be imposed on local authorities to ensure that they do not borrow more than they are able to repay.
In some countries the access to capital markets by local governments is free, i.e. local governments are free to borrow or issue bonds under the same conditions and control as any other entity acting in capital market. However, many countries laid down rules over such access. The scope of regulations can be different according to the applications for the loans: for example loans from the capital market can be only spent on capital investment, the powers to borrow abroad is restricted, or only loans in the national currency are permitted. Sometimes the lending institutions which should be used are strictly specified. In certain countries borrowing is subject to the conditional approval of the central body. The scope of loan is also a matter of restriction.
Experience has shown that the frequency of financial difficulties associated with debt financing can be limited by clear restrictions on the amounts local governments can borrow and well-defined procedures for borrowing, combined with market discipline.
Local government debt is primarily focused to help finance capital development. As such it is a part of the larger question of capital financing, in which several alternative sources should be examined. Because the power to borrow means binding future taxpa-yers to raise higher revenues, it must be subject of cautious treatment to ensure that it will serve the interest of the citizens.
The dramatic financial crisis which affected many important South Asian countries negatively impacted the world economy in general. Searching for reasons why these countries ended up at the edge of economic catastrophe and jeopardized fundaments of the economic prosperity represent the basic feature of the proposed article.
The author points at the fact that there were several obvious and timely signals indica-ting the threatening catastrophe, but despite that the national governments and international institutions failed to act, as did also the assumed safety abilities of both domestic and international economic anti-crisis mechanisms. In parallel, two theoretical approaches regarding the causes and impacts of the crisis are found here (P. Krugman – F. Corsett versus J. Sachs – S. Radelet) in a confrontation with the opinions of domestic experts.
While the first group of theoreticians saw the causes of the crisis in a growing value of national currencies which was reflected in a high deficit on the current account ba-lance of payment, over-loaning of countries and firms, excessive investments with a low efficiency, the other group takes this failure as a so called Asian success crisis. This happened not only due to internal problems (corruption, weak legislation, factual reign of big economic conglomerates maintaining a big political power), but mainly due to speculations of the international capital, sudden departure of investors and reactions of international institutions which applied the standard stabilizing tools ignoring to take into their account certain visible specific economic features of the Asian region.
The local national experts – our assessments have been based on the works of one of them, namely on Nakgyoon Choia (South Korea) – had identified four global causes of crisis responsible for the eruption in the South-Eastern Asia.
· The first one was not appropriate performance of the financial sector and growing payment insufficiency of domestic firms without any coordination overlapped with the short-term loans.
· The second is a decline in competitiveness which has been worthening, except for other reasons, also because of the linkage to the Japanese yen – a long-term revalua-ting – which mirrored the chronicle passivity of trade balances of the hit countries.
· As the third factor, the question of international trust towards governments of the respective countries has been highlighted, mainly regarding their delayed and inproper conduct reacting to the first alarming symptoms of the coming crisis.
· Finally, the fourth important cause represented the weight of the psychological factors which were seen on the international financial markets reactions. Those pa-nicked which called a mass escape of foreign capital and of investors, but it also brought about inappropriate reactions on the side of domestic companies, entrepreneurs and the leaving capital.
The article offers not only a concise analysis of the economic development of the country prior to the financial crisis, different opinions on causes of the crisis which hit South Korea, but it also explains how was its position affected regarding the international trade. The author briefly analysed the Korean foreign trade development. Based on that he derived that despite a unique increase in trade to compare the GDP growth, the trade balance as well as the payment balance position remained passive almost during the whole period of time and were evolving a constant pressure on solving the cumulated payment balance. The inadequate inflow of foreign, especially long-term investments, was not able to absorb still deeper discrepancy. It was just a question of time when the crisis break and when necessary radical measures should have been to be taken.
Evaluating the exported goods structure development also documented that certain risks, due to rather high monocultural export, appeared here. The relatively high portion of the sophisticated products on exports was compensated by the production and export of heavy industry and chemistry products, which in paradox, faced less obstacles than marketing products with a high level of added value.
A dominant part of the article was devoted to the Korean industry restructuring and what requirements it placed upon domestic firms, especially upon widely diversified cebols and supermarkets (General Trading Companies – GTC). The author of the proposed study analyzed the situation in these economic conglomerates, while attention was paid not only to the current ownership structure or management, but also to their deve-lopment expansive philosophy. So far, despite of absorption of their vast economic power cebols have maintained, the ownership is not separated from the management.
According to the author, this concentration did not allow further international diversification of a company or links to other international alliances or a direct linkage to the free financial sources, but such a concentration rather dampened improvements in the internal economy and also the efficiency and rational approach within the cebols´ activities.
At the same time, South Korean conglomerates adopted the majority of standard steps which proved to have positive a effect in the external economic environment regarding diversification. This highlighted not only their company growth strategy, high tech production orientation, investments into research and development bringing a high rate of innovations, relationship with the domestic financial capital, but also an aggressive and coordinated entrance on the international markets.
As early as in seventies, the dominating exports in the South Korea economy called for the separation of production and foreign trade. So called GTC was created with the task to tackle the problem of growing protectionsism against Korean imports of goods. The author identified the role of these organizations and also their share on the growth on a total exports of the country, and also the conditions which were inevitable for their establishing. Cebols copied their relationship with the production from Japanese patterns (Keiretsu – sogo – shosha).
Although at present, the cebols are influencing the development of the whole Korean economy much more than the government policy does, it is assumed that mainly the speed and dynamism of changes in the economic results of those conglomerate and their ability to accept the position of the government on the international field can play a key positive (but also a negative) role in the Korean economy. So far, cebols made decision about the total structure of the economic life in the country, and they understood the crisis as another chance for their expansion, even if they employ only a minimum staff, a question whether they are ready and “willing to give up” some of their positions.
The final part is devoted to the influence of the International Monetary Fund (IMF) reform program and to so called Big Deals – domestic economic program as a leading element of the newly originating trade and industrial policy within the South Korean economy, and the article also brought present partial results of the economic reform.
“The healing“ program of the IMF based on a file of economizing measures and on introduction of “a packet” of financial sources, which together with loans from other international financial institutions reached approximately USD 60 bn helped to stabilize the national currency and relatively strengthen also its international image. Information available up to present proved that the core of the healing process included radical restructuring of the national economy and of cebols, cuts in public expenditures and wage freezing. However, it is not quite sure whether these conglomerated will be ready fully accept the state administration decisions, which should cut down their economic power and their expansive plans for the future. Many of the reform steps called by the implementing the analyzed programs evoked the author to ponder on similarities with the current position of the Central European countries and the future risks resulting from the expedited economic reform.
So far, the Korean economy was able to cope with the growth of inflation and of unemployment, also with a drop in the living standard and the expected pressure from the international competitors through liberated conditions on the domestic market. However, the author revealed several other risks of the revitalizing program resulting from the globalizing development on the international markets, and from deepening integration processed and growing risks due to international economic recession.