Can EU conditionality remedy soft budget constraints in transition countries?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in September 2003Abstract Soft budget constraints (SBCs) are a persistent feature of transition economies and have been blamed for i.a. a lack of fiscal consolidation and sluggish growth. EU eastward enlargement has -among other things -been conditioned on tackling SBCs. This paper analyzes such outside conditionality theoretically and empirically. First, modelling the SBC problem as a war of attrition between the applicant countries' governments and firms we find that outside conditionality can foster SBC hardening. Yet, toughening the EU stance or reducing the number of enlargement rounds may have ambiguous effects. Second, estimating SBC hardening in a partial adjustment model by measuring the reaction of employment to output changes we find that EU conditionality did indeed help candidates to fight SBCs. Abstract Soft budget constraints (SBCs) are a persistent feature of transition economies and have been blamed for i.a. a lack of fiscal consolidation and sluggish growth. EU eastward enlargement hasamong other things -been conditioned on tackling SBCs. This paper analyzes such outside conditionality theoretically and empirically. First, modelling the SBC problem as a war of attrition between the applicant countries' governments and firms we find that outside conditionality can foster SBC hardening. Yet, toughening the EU stance or reducing the number of enlargement rounds may have ambiguous effects. Second, estimating SBC hardening in a partial adjustment model by measuring the reaction of employment to output changes we find that EU conditionality did indeed help candidates to fight SBCs.

Impact of European Integration on Institutional Development

“…Hence, in more democratic countries, the level of regulatory quality is higher if they have the option to become a member state. Brücker et al (2005) model the Soft Budget Constraint (SBC) problem in transition economies as a war of attrition between the applicant was not linked to the Commission's evaluation, so the conditionality principle was de facto removed in the areas of democracy and rule of law (Kochenov 2008).…”

“…Countries facing the jei Impact of European Integration on Institutional Development 479 prospect of late accession implement significantly less reforms than their early-accession counterparts. Brücker et al (2005) test whether accession candidate countries have a lower long-term labor to output ratio and adjust labor productivity faster to its long-run levels than other transition countries. This is an indicator for the hardening of SBCs, which EU accession can foster according to their model.…”

When does leverage hurt productivity growth? A firm-level analysis

“…If firms take advantage of SBCs, borrowed funds may be used inefficiently rather than for productive investment. Research has indeed shown that one of the detrimental impacts of SBCs on the economy is a lack of R&D (Kornai (2001) and Brücker et al (2005)). …”

EU accession and the hardening of soft budget constraints: some macro evidence

“…Recent major overviews of the theoretical and empirical literature are given in Kornai et al (2003), Maskin and Xu (2001), Kornai (2001), Dewatripont and Roland ( 2000) and Maskin (1999). We follow here Brücker et al (2005) in the discussion of the literature. some central agent or authority-say the government or a bank-not to bail out firms in financial distress.…”

“…We observe significant differences in economic behaviour both before and after the candidate status was granted within the sample of the (later) candidate countries, as well as between the candidate countries and the transition economies outside the circle of the EU applicants. In a companion paper Brücker et al (2005) have developed a theoretical approach consistent with these patterns and provided further statistical evidence.…”