Essays on transition economies: Economic development, taxation, and corruption

The three essays of this dissertation consider economic development issues in the countries of the former socialist block as they transition to the market system. As public policy approaches are still being formulated in these countries, answers to the questions raised here have immediate policy applications. Transition economies are often regarded as a group of nations that are distinct from the developing countries. Hence, the first essay explores whether the specific features of transition economies, such as high quality of their human capital, would allow them to escape the economic stagnation observed in the developing world. Growth potential of transition economies is assessed on the basis of their productivity performance and its components, technical and efficiency changes, vis-à-vis the corresponding figures for the developing countries. Estimation was carried out using a bootstrapped Malmquist multifactor productivity index. The results of estimation indicate that transition economies exhibited significantly higher productivity growth rates during the period of 1995-2002. Serious erosion of government revenues, essential for achieving sustainable economic growth, has accompanied market reforms in transition economies. Inducing individuals and firms to voluntarily comply with taxes has been argued to be an effective and cost-efficient method of relieving fiscal problems of ex-socialist countries. The purpose of the second essay is to empirically evaluate the determinants of tax compliance by firms in transition economies. The analysis is carried out using large-size firm-level survey data on transition economies gathered by the EBRD and the World Bank. The main result is that fighting corruption is the most critical element in improving tax compliance behavior by firms. The economic impact of corruption and its causes are investigated in the third essay using a three-stage game. The specific type of corruption considered is the sale of top government positions by the heads of independent states. Subgame perfect equilibrium levels of corruption and total economic output are found by using the backward induction technique. Policy recommendations are offered for altering agents\u27 incentives to arrive at a more favorable outcome with less corruption and greater economic output