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Fiscal Policy and Alternative Sources of Public Capital in Transition Economies: Diaspora Bond

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State-sponsored projects in the transition economies often lack reliable finance sources as governments deal with orthodox policy limitations. At the same time reliance on relatively inconsistent natural resources export revenues, migrant remittances or conditional loans and foreign aid may not be adequate for long run development projects. One alternative is a Diaspora-sovereign bond program with a patriotic discount. Implied independent decision-making and fiscal responsibility will allow for strategic funds allocation, with an incentive for infrastructure and social initiatives investment with strong feedback into a productive economy stimulating effective demand. Ultimately these components define modern fiscal policy and are fundamental to economic growth and development. Regulated via ¡ªState.Diaspora Supervisory Board,. a Diaspora bond may also serve as the initial or renewed access to the international capital markets, especially for smaller economies and those with low sovereign ratings.
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Journal of International Business and Economy (2008) 9(2): 33-61 (29 pages)
Journal of International Business and Economy First Received: Jan. 26th 2008
Fall 2008 Final Revision Accepted: Jun. 9th 2008
Aleksandr V. Gevorkyan
FISCAL POLICY AND ALTERNATIVE SOURCES
OF PUBLIC CAPITAL IN TRANSITION
ECONOMIES: THE DIASPORA BOND
ABSTRACT
State-sponsored projects in the transition economies often lack
reliable finance sources as governments deal with orthodox policy
limitations. At the same time reliance on relatively inconsistent natural
resources export revenues, migrant remittances or conditional loans
and foreign aid may not be adequate for long run development
projects. One alternative is a Diaspora-sovereign bond program with a
patriotic discount. Implied independent decision-making and fiscal
responsibility will allow for strategic funds allocation, with an
incentive for infrastructure and social initiatives investment with
strong feedback into a productive economy stimulating effective
demand. Ultimately these components define modern fiscal policy and
are fundamental to economic growth and development. Regulated via
“State–Diaspora Supervisory Board,a Diaspora bond may also serve
as the initial or renewed access to the international capital markets,
especially for smaller economies and those with low sovereign ratings.
Key Words: fiscal policy, development, Diaspora bond, patriotic discount
Aleksandr V. Gevorkyan
New School for Social Research, New York
Correspondence: Aleksandr V. Gevorkyan
Dept. of Economics, New School for Social Research, New York, NY, 10003
E-mail: gevoa223@newschool.edu
Tel: 917-676-2210
Fax: 702-926-4344
JIBE
Journal of International Business
and Economy
JIBE
Journal of International Business
and Economy
FISCAL POLICY AND ALTERNATIVE SOURCES OF PUBLIC CAPITAL
IN TRANSITION ECONOMIES
34 Journal of International Business and Economy
INTRODUCTION
Prospects of economic development and social transformation in the countries of the
former Soviet Union (FSU) and Eastern Europe (EE) are high on today’s agenda.
Collectively these countries are referred to as transition economies. This term implies a
transition from pre-capitalist, administratively-planned-economy type, to one with a new
capitalist mode and content. In the early transition stages the government’s share in the
social processes was significantly reduced across all FSU/EE countries. Fiscal withdrawal
in the early 1990s from infrastructure, education, healthcare, and industrial policy (beyond
the legal-regulatory scope) coupled with the absence of a timely and adequate institutional
replacement caused social crises that impeded economic development (e.g., Stern and
Hicks 1996; Aghion and Schankerman 2000, and others).
More recently, to their credit, territorially smaller, natural resources and foreign
exchange constrained transition economiesmajority of all post-socialist stateshave
coped with ongoing social transformation through partial fiscal return in the non-waged
sector. For those, proactive development stimulating fiscal measures raise the question of
tough compromises in the development policy, search for alternative sources of funds,
scrutiny of government budgets, and responsible fiscal policy.
This paper presents an alternative way of raising foreign exchange via sovereign bond
mechanism. The program’s competitiveness is determined through all-inclusive analysis,
rather than through a simplified bond term structure. The discussion is in context of all
FSU economies (with exception of three Baltic states) and three EE countries (Bulgaria,
Poland and Romania). With exception of Russiaa large country well endowed with
resources and rapidly growing economyall are relatively small territorially and in terms
of market share, caught in reconciliation stage between transforming past and urgent need
for aggressive modernization. As a more recent phenomenon these countries also possess
strong and widespread Diaspora networks outside their national borders.
Elsewhere countries at different socio-economic development stages have long since
exploited various measures in mobilizing Diaspora resources for the development and
benefit of the “historically native lands.” In terms of institutional investment the two well-
known examples of sovereign finance are the State of Israel Development Bonds of 1950
and Resurgent India Bonds of 1998. A major aspect of Diaspora-targeted sovereign
financial instrument is the state’s unique opportunity to raise low-cost (via patriotic
discount) capital by the state to promote socio-economic progress, with greater decision-
ALEKSANDR V. GEVORKYAN
Fall 2008 35
making independence and investment project selection then offered by other policy
measures (as will be discussed below). The important aspects, though, are in ensuring
sustainability, timely interest payments, adherence to fiscal rules and responsible
investment in productive sectors to stimulate effective demand.
This article is organized as follows: Section II sets the general background for
understanding of Diaspora involvement in the transition economies development. Within
the general discussion of fiscal policy Section III identifies some socio-economic areas
requiring attention as core components of sustained economic growth and development.
While, each case is unique, available evidence allows us to provide some general pointers
for the group of countries. Finally, Section IV discusses the perils of floating and
regulating the Diaspora bond in transition societies. The paper ends with Conclusion,
References, and statistical Appendix.
DIASPORA AND TRANSITION ECONOMIES
In discussing “Diaspora” definitions must be set to avoid misinterpretation. The concept
of the Diaspora dates back centuries in history. While anthropologists identify three world
“classical” Diasporas: the Greek, the Jewish and the Armenian (e.g., Brubaker 2005), today
the term has been extended to include larger expatriate populations of almost any country.
Diaspora members are actively involved in activities of their adopted homelands, referred
to as host countries. Yet the same people also retain strong ties with their native lands,
home countries, and often participate in various cultural, political, business and other such
activities there.
A standard definition sees Diaspora as a group of people dispersed outside its
traditional homeland. Diaspora is a historical and a contemporary concept and in these
terms almost any nation would have recorded waves of migration back in time. For
example, the massive migrations in the early twentieth century created tightly-knit
communities of Irish and Italians in the United States. More generally there are instances
where those who left their homelands assimilated in the host countries severing ties with
the old land. Others were able to preserve some connection to their previous homes. Still
others abroad seem to have never left their homeland and live the dream of repatriation.
There are various explanations leading to each case ranging primarily from political to
economic determinants. But what seems common in most cases is that Diaspora networks
stay afloat thanks to their interactions with the constant inflows of newcomers from the
FISCAL POLICY AND ALTERNATIVE SOURCES OF PUBLIC CAPITAL
IN TRANSITION ECONOMIES
36 Journal of International Business and Economy
home country. In recent years this has been accomplished via temporary labor migration
flows producing around 200 million people moving globally, according to the latest UN
data (UN 2006). In fact the rapid spread of news, ease of travel and open borders that
have immensely simplified population flows, allows one to speak of two complementing
types within Diaspora: the “old” Diaspora and the “new” Diaspora (as identified in the
case study of labor migration between Armenia and Russia in Gevorkyan, Gevorkyan and
Mashuryan 2006). A realization of existence of both is important when discussing
Diaspora involvement in the home country. This is especially important in the case of
transition economies with histories of population shifts.
Typically, the “old” Diaspora—the second and greater generations emigrants, citizens
of the countries adopted by their great-grandfathers. Being fully integrated in those
societies they still retain the sense of belonging to a larger nation in exile, often forming
the initial Diaspora hubs. Meanwhile the “new” Diaspora is a more recent phenomenon
and consists of mainly temporary labor migrants that seem to be in search of their final
economic destination. The continuous interaction of the two entities perpetuates the
Diaspora to the point that practically equalizes population numbers between the home
country’s native population and those who by ways of ethnic, historical, cultural or other
background are in the expatriate communities.
Once in the Diaspora individuals and organizations exhibit diverse views and
incentives of their involvement of the home country affairs: ranging from business,
cultural, political and to patriotic interests of all levels and extents. These incentives are
dynamic and are responsive over time to a number of factors including experiences in
dealing with the homeland and relations between the host and home nations.
Therefore a Diaspora evolves as a unified entity as a collection of those individual
incentives. For transition economies (especially with small internal populations) existence
of established Diaspora networks and the ability to capitalize on that is often analogous to
potential “oil-rich” reserves economies. Some countries (e.g., Poland, Bulgaria, and
Armenia) have established government and joint government-Diaspora agencies, tracking
their population worldwide and establishing relations with representatives of
geographically widely spread communities.
Freinkman (2001) raises issues of Diaspora participation in the home country
development (economic recovery) in the context of transition economies. Similar ideas are
extended and applied to the case of the Armenian Diaspora in Gevorkyan and Grigorian
ALEKSANDR V. GEVORKYAN
Fall 2008 37
(2003). Later Johnson and Sedaca (2004) analyzed Diaspora to home country development
processes in several international communities, deriving general alternative policy
recommendations. Citing the apparent advantages of Diaspora networks’ global spread,
and, in many cases, instances of affluent Diaspora communities these studies offer several
approaches to institutional engagement of Diaspora groups. Those propositions range
from humanitarian assistance, volunteer programs, cultural exchanges, hometown
associations to more complex joint investment projects, infrastructure development funds,
migration development bank (as in Gevorkyan and Gevorkyan 2007), and floating of
Diaspora bonds. The latter proposition is one of the most intriguing ones. It has been
gaining growing attention from the research and policy community internationally mainly
due to the peculiarities involved in Diaspora resources institutionalization and the
entrance into volatile international capital markets by still growing economies.
While research cited above views the Diaspora bond as one of many alternatives in
raising foreign exchange for development, Chander (2001) and more recently Ketkar and
Ratha (2007) tackle the issue directly, by referring to the successful implementations of
Diaspora bond programs in Israel and India (these facts are summarized in Box 1 of the
Appendix). The crucial finding is that altruism and patriotic feelings mattered once the
home government took the first step in recognizing the potential and efforts of their
Diaspora network. For transition economies all the above mentioned methods of
engagement between the home country and its Diaspora are viable.
Today almost every transition economy possesses a Diaspora beyond the national
borders. Reliable data on this Diaspora stock (and Diaspora estimates in general) are very
difficult to collect. To our knowledge data presented in Table 1 of the Appendix on
transition economies’ potential Diaspora stock (a combined “old” and “new” Diaspora
figure) is one of the first such attempts putting a realistic number behind the
phenomenon. In deriving these estimates we relied primarily on official sources (such as
census data and government statements) as well as independent sources where possible.
The numbers, which also allude to larger shares of assimilated populations, are
approximations and must be read with caution as most are highly inflated estimates. A
conservative approach would be to consider the lower number in the given range as a
realistic Diaspora potential for various reasons. Still, the data offers a starting point to our
discussion.
FISCAL POLICY AND ALTERNATIVE SOURCES OF PUBLIC CAPITAL
IN TRANSITION ECONOMIES
38 Journal of International Business and Economy
Aside from estimates of potential Diaspora stock, Table 1 illustrates the latest net
migration rates by country. For most countries able labor force emigration is high. While,
as mentioned above, emigration helps keep a Diaspora afloat, it delivers a heavy blow to
the transition economies in terms of lacking human capital and exacerbates “brain drain”
effects. Of note is the fact that transition era migration from post-socialist economies,
especially the states of the FSU, unlike other known international cases, is skilled labor
migration (e.g., literacy rates in the FSU are around 100% and high proportions of college
graduates according to World Bank (2008), while primary education remains compulsory
in all countries) that is induced by economic factors; those leaving, remain emotionally
attached to their home countries. Also important is that the main destination for the FSU
states’ migrants is the Russian booming economy, while EE countries send their migrant
workers to other European states as indicated in Table 1.
Given the Diaspora’s incentive for taking an active role in its homeland development
the question remains should the governments be involved and how? At present the policy
space is open and proactive government actions would be a required first step. Borrowing
from Diaspora, via Diaspora bond, and channeling that money into public goods is one
of the possible approached. This paper offers a conceptual analysis of the Diaspora bond
program in the transition economies. Before delving into the perils associated with such
policy, it is important to discuss certain measure of state’s role in public investment
projects in the transition economies. Note that the key here is the sovereigns relative
independence in fiscal policy conduct and project selection.
THE FISCAL ROLE IN DEVELOPMENT: TRANSITION
PECULIARITIES
Accelerating globalization and increased openness and fragility of post-socialist
economies has led to transformational shifts in the societies exacerbated by the early
withdrawals of the state from the traditionally sponsored areas of national economies.
According to the UN National Accounts Estimates (UN 2008), these reductions were
(conservatively) between 5 and 20 percentage points particularly in the smaller economies
between 1990 and 1997. More recently the fiscal share has been somewhat increasing and
in some cases even surpassing 1990s levels (e.g., reaching up to 30 percent in 2006 in the
Kyrgyz Republic). The empirical evidence suggests that as memories of the state retreat
persist and adequate market-generated replacements are still absent, an opposite process is
ALEKSANDR V. GEVORKYAN
Fall 2008 39
gaining momentum. Attempts of fiscal sector return into the economy are becoming
frequent and engagement varies depending on locale. These efforts have been primarily
recorded via the provision of non-waged labor goods such as social benefits, childcare,
basic education and social infrastructure (Filer, Schneider, and Svejnar 1994; Juurikkala
and Lazareva 2006).
Sustainability, however, of these projects requires adequate financing. Arguments
made in favor of raising tax revenue must be taken with caution not simply for their
politically unpopular complications but in terms of realistic reasoning in the chosen locale.
As Figure 1 suggests while the initial collapses of the Gross National Income (GNI) per
capita of the early 1990s may have been regained in some transition economies, the
persistent low levels of per capita income inflict strict limits for traditional fiscal policy.
Figure 1: GNI per Capita in Current USD (in 1,000)
Notes: latest available data for Turkmenistan is as of 2000.
Sources: World Bank WDI 2008; own calculations.
The situation is complicated by the prevalent underdeveloped financial markets, high
inflation, large current account deficits, accumulated large national debts, low investment
activity, high net out migration of working age population, combined with high
unemployment, and collapses in the educational, healthcare and social services spheres
(for some of this data see Table 2 of the Appendix). Clearly the economies of FSU and
EE present a diverse palette of social and economic issues. While we refer to the specifics
of individual cases, we leave detailed discussion for later time. Here we are concerned with
FISCAL POLICY AND ALTERNATIVE SOURCES OF PUBLIC CAPITAL
IN TRANSITION ECONOMIES
40 Journal of International Business and Economy
a profile of a candidate that would potentially benefit from a less orthodox policy
approach.
Considering the data discussed thus far, it may be noted that some of the countries
that fit the profile include Armenia, Georgia, Moldova, Tajikistan, Turkmenistan,
Uzbekistan, and to a lesser degree Ukraine, Romania, Bulgaria, and Poland. It is striking
how (with few exceptions) these countries share high negative migration rates, high
accumulated debts and low income per capita as of 2006 (with relative exception of
Poland, Romania, Bulgaria, Ukraine and Armenia), high unemployment and high debt
service as a share of total exports. Armenia, Bulgaria, Moldova, Poland, Romania, and
Tajikistan receive high net transfers from their migrant workers, ranging from $1bln to up
to $7blna high proportion relative to the total Gross Domestic Product.
The next few years will present real challenges to these governments’ dealing with
accumulating social and economic problems; and creating a policy leading to a more solid
development track. This invites a brief discussion on fiscal involvement in the
development process and presents the rationale for proactive fiscal operations.
Raising public capital (as in funds available to the fiscal authorities for internal
projects) for domestic social development needs is often studied in the general framework
of economic growth (e.g., Semmler, Greiner, Diallo, Rezai, and Rajaram 2007; Grenier,
Semmler, and Gong 2004; Aschauer 1989). The results show a strong positive correlation
between the two. While stimulating economic activity, public investment by itself receives
feedback from the ground thus ensuring more intensive state involvement in the process.
Romp and Haan (2005) note a crucial relationship between public and private capital as
substitutes in the level of economic growth determination often assumed to be
complements. In certain cases private capital steps in where public might have been
expected (e.g., undertaking adjunct transportation-links renovation). However public
capital performs best in such strategic areas as infrastructure, education, and healthcare,
providing responsible framework with public access within a domestic regulatory code.
Infrastructure development has a consequent contribution to the productive side. As a
result the production process regenerates itself with increased intensity at different levels,
relying on an existent infrastructure network. This produces strong feedback into
economic growth (e.g., see Aghion and Schankerman 2000 for discussion within transition
context). The mechanism is quite simple; for instance transportation companies make
faster deliveries utilizing state-built bridges, roads, and railways to move goods often
ALEKSANDR V. GEVORKYAN
Fall 2008 41
reaching distanced from main distribution lines regions and markets. Timely fulfilled
orders result in higher productivity and profits. Similarly in the developing world, state-
stimulated investment in telecommunications networks, establishing accepted standards in
compliance with the international requirements alleviates the extra burden otherwise
levied on private companies that would have to start building everything from scratch. In
short infrastructure is the backbone upon which real economy develops.
A cursory look at the available statistics for FSU and EE economies compared with
few other economies (see Appendix Table 3) identifies some deficiencies of transition
economies in many development aspects. Here and in the subsequent tables such
comparisons are offered as informative references rather than suggesting any specific
benchmarks for the transition economies.
Lack of sufficiently paved roads (e.g., Romania at 30 percent and Azerbaijan at 50
percent of the total) is a proxy for the country’s transportation networks. Low proportion
of paved roads raises alarm in terms of transportation networks development. Similarly,
very low numbers of computer, phone and internet users indicate countries’ disadvantages
in the telecommunications field. On the positive side is the increasing air traffic measured
in terms of total passengers carried. However, this is a subjective indicator and may reflect
travels of high-income population groups, rather than being suggestive of a general trend.
Still, there may be some positive spillover effects into real economy and job creation in
terms of airports expansion projects, fleet modernization and maintenance in some states.
As for education and research facility development, the implications of concerted
fiscal effort are positive. Education is often used as a proxy for human capital in economic
growth models. Increases in human capital, at least temporarily, have positive effects on
long run growth (e.g., Lucas 1988; Romer 1990; Grossmann and Helpman 1991; Semmler,
Greiner, Diallo, Rezai, and Rajaram 2007; Greiner, Semmler, and Gong 2004). Innovation,
a direct product of national research facilities, coupled with a skilled labor force, has
positive and consistent feedback into economic activity. This is especially evident from the
development examples of advanced capitalist economies. Economic advance in the 21st
century requires an educated labor force to conform to requirements of the industrial age
and a continuous innovation process to sustain the diversified levels of international trade.
These are also derived in Rada and Taylor (2006) and Amsden (2001) as contributors to
economic growth and development in emerging markets of the past two decades.
FISCAL POLICY AND ALTERNATIVE SOURCES OF PUBLIC CAPITAL
IN TRANSITION ECONOMIES
42 Journal of International Business and Economy
For transition economies average education expenditure has been around 2-5 percent
of the total GDP (see Table 4 of the Appendix). In percentage terms some countries
match allocations in the developed world (e.g., Belarus and Ukraine match and surpass
allocations in the U.K. and the U.S.). However, in absolute terms (due to obvious
differences in GDP levels) allocations are lower and more funding is required. Problems in
education and research spheres are reconfirmed via various proxy indicators. The period
between 1990s and 2002 recorded a decline in the average proportion of gross secondary
enrolment of (3.9%). Despite technological and scientific advances 2005 resulted in
relatively low numbers of published scientific journal and technical articles (approximately
2100 in the transition economies compared to 205,000 in the U.S., 120,000 in France,
Germany, and the U.K., and 14,600 in India at the year end 2005). On the transition map
Russia holds undisputed leadership averaging 14,500 articles in 2005 among other FSU
and EE states (World Bank (2008)). As of 2006 average of 42 percent of those
completing secondary education enrolled in colleges across the transition countries in the
sample. Without three EE economies the FSU average drops further down to 38.8
percent. Average R&D expenditure as the GDP share was around 0.46 percent in the
transition economies together, compared to at least 2.7 percent of the developed world,
where the effect of increased proportion is magnified by far greater GDP scale. Despite
modest advances, though, transition economies’ figures are low for countries striving to
integrate into the innovative economy of the new century. But the challenge is to sustain
recent upward trends. For that well-funded and serious fiscal involvement is necessary.
From the standpoint of socio-economic development and in efforts to capitalize on
the relative successes in post-socialist economies, promotion of infrastructure and
educational and innovative projects are seen as priorities in the years to come. To this a
consideration of managing migration flows must be added. As has been shown in Table 1,
it is the countries with lowest macroeconomic indicators that exhibit high outward
migration flows. In terms of policy measures a Diaspora mechanism offered by
Gevorkyan, Gevorkyan and Mashuryan (2006) and expanded in Gevorkyan and
Gevorkyan (2007) would partially address the issue. However state involvement is a
prerequisite.
In implementing these policies, the state’s pivotal role as a guarantor, regulator and (at
least partial) sponsor of these social programs must be recognized. Fiscal participation
comes as the foundation upon which, with time, actual fiscal share may recede, being
ALEKSANDR V. GEVORKYAN
Fall 2008 43
replaced by public-private cooperative projects or gaining efficiency private sector. Yet the
solid fundamental framework that shapes the continuous development in the spheres
mentioned above remains intact as a reliable support for real economy. Then if there is to
be state involvement in the development, the question is: whence comes the money?
THE DIASPORA BOND IN TRANSITION ECONOMIES
Export Revenue, Remittances, and Foreign Aid as Finance Source for
Public Investment?
While socially unpopular, yet more traditional, fiscal policy prescriptions of tax increases
or scaling back of selected state-sponsored projects in favor of others may not be the
optimal solution in transition economies, there are several unorthodox alternatives to
financing fiscal expenditure.
A resource-rich nation might rely on revenue received from natural-resource exports.
For example, countries that would fit this profile are Azerbaijan, Russia, Kazakhstan,
Turkmenistan, and Uzbekistan. In fact, oil, gas, and cotton exports help these countries
achieve current account surplus in recent years and, as estimates show in 2008 as well, as
presented in Figure 2 below.
Figure 2: Current Account Balance as % of GDP
Notes: 2008 scale is based on a year-end estimate by IMF.
Sources: International Monetary Fund, WEO (October 2007); own calculations.
FISCAL POLICY AND ALTERNATIVE SOURCES OF PUBLIC CAPITAL
IN TRANSITION ECONOMIES
44 Journal of International Business and Economy
With increased state control of natural resource exports, accumulated revenue flows
into official coffers with earmarks for further use at fiscal discretion. Yet this alternative
requires swift action by the authorities and the allocation of profits in the economically
strategic sectors until the natural resources have not been exhausted and international
market prices are high enough to support such spending. Hence there is an inherent
moment of unreliability in this funding source.
For countries less endowed in natural resources, territory and industrial capacity but
with large current account deficits, such as Armenia, Bulgaria, Moldova, Poland, Romania,
Tajikistan and others a recent source of hard currency has been increasing inflow of
remittances reaching up to 40 percent of national GDP (e.g., Moldova and Tajikistan as
can be inferred from Table 1). However increased temporary migrant worker remittances
from abroad (and domestic consumers’ over-reliance on such transient funding source) is
by definition unsustainable in the medium-run, much less in the long-run. The debate on
the use of remittances as a viable development policy tool is ongoing with a working
model yet to be developed. Still it may be plausible that a realistic state program can be
instituted involving the Diaspora mechanism to regulate somewhat chaotic labor force
flows across countries and curtail large remittances inflows into small home economies
(e.g., Gevorkyan 2007 or Gevorkyan and Gevorkyan 2007). In the absence of such
mechanism, remittances provide a benefit to the home country as long as the recipient
remains there and does not follow the principal bread winner (as, in fact, often occurs in
the transition economies). Finally in both cases of reliance on export revenues and
remittance flows Dutch disease effects on unsustainable spending and exchange rate
pressures need to be considered. This may often prove to be difficult and politically costly
to fight as incumbent and subsequent governments have to introduce socially unpopular
restraints on the economy.
Another alternative funding source comes by way of loans and foreign aid from rich
countries and multilateral institutions. Such, for example, are assistance loans from the
OECD countries, World Bank and International Monetary Fundcontributors to the
transition countries’ non-economic sectors. Available data (Figure 3) suggests, however,
that aid flows have proven to be at medium levels in relation to the available GDP data.
More alarming are the inconsistent volumes and frequencies of transfers. The subtle
nuance of such assistance is its conditionality and strict repayment terms.
ALEKSANDR V. GEVORKYAN
Fall 2008 45
Figure 3: Total Net Official Development Assistance by Country, Year, USD mlns
Notes: constant 2000 USD millions. Not all data is available for every year for all countries. Data labels refer to the early-,
mid- 1990s and 2006 aid levels by country.
Sources: OECD Stat (2008); own calculations.
Conditionally stipulated foreign aid implies at least to some extent a donor’s ability to
control funds disbursement in the receiving economy. This substantially negates the
government’s policy independence, resulting in funding biased towards specific donor-
identified sectors (but not necessarily what domestic priorities would suggest as strategic
for country’s development). Factors such as changing political associations and
geopolitical preferences, among others, in Stiglitz (2003) render such foreign aid package
as a less reliable source of funding less attractive in terms of returns or popularity public
projects.
Costs of Sovereign Bonds, Some Empirics
With the above considerations of alternative funding in mind under certain circumstances
determined by real economic performance, borrowing from international capital markets
(via sovereign bonds) may be an optional source of adequate funding of fiscal activities, as
long as repayment terms are respected. A country’s ability to borrow abroad becomes a
particularly appealing option in the case of resource limited and low on cash economy
(the profile fitted by many transition economies).
If floating a sovereign bond does become an option, strict adherence to fiscal rules is
required (e.g., for a very recent analysis of various schemes see Serven 2007). However
FISCAL POLICY AND ALTERNATIVE SOURCES OF PUBLIC CAPITAL
IN TRANSITION ECONOMIES
46 Journal of International Business and Economy
access to the markets for public projects may become troublesome for countries with
nascent industrial bases and rudimentary financial systems due to inability to sustain high-
interest payments guaranteeing full loan repayment upon maturity.
To shed a bit more light on our discussion we looked at a range of macroeconomic
indicators over the period of 1980-2002 for twenty two emerging economies (including
ten of the larger transition economies, such as Russia, Kazakhstan, Ukraine and some EE
states) and their bond structures and recent issues. Our goal was to assess the factors
determining sovereign’s borrowing terms (combination of yield and maturity). Similar
work and more complex analyses may be found in Wesphalen (2001), Benczur (2001),
Gelos et al. (2008), and others. Here we only focus on determinations of the yield as a
very generic indicator of country’s capital market access potential and costs of borrowing.
One year lag was applied. This was based on the fact that at the time of bond issuance,
and in particular in the case of the “first-timers” (first sovereign debt issues or market
reentry with delay after earlier offerings), the only reliable information available for the
investors to assess the risk on sovereign investment is historical data. Thus the yield
determinants are found in the year prior to the actual bond issuance. For brevity we skip
the detailed formal model and report end results pertaining to the discussion.
Several indicators such as GDP, inflation, current account balance, total reserves, net
foreign assets, as well as dummy variables for USD denominated and first time bond
issues were regressed against the yield,
i
t
y
, on country (i) sovereign bond at time period t.
In most general form the operational equation for the model can be written as:
i
t
i
t
ii
t
y11
'*
(1)
where,
i
is a non-zero constant (i.e. avoiding a situation of non-zero yield and coupon
rates),
'
is a vector of coefficients common to all countries in the sample,
i
t1
is a vector
of macroeconomic indicators calculated at one lag period (t-1) and
i
t1
is the error term
specific for country (i) at time (t-1) with normal distribution and zero variance.
Regression results are consistent with the general literature on the subject and in a way
complement studies above. Almost identical results of the OLS and Maximum Likelihood
regressions, reported in Table 5 of the Appendix, show strong significance for most
lagged indicators. The difference between the first-time bond only and all (including first
and subsequent) issues samples is shown in columns 1 to 2 and 3 to 4 of Table 5.
ALEKSANDR V. GEVORKYAN
Fall 2008 47
Consumer price inflation (INF) has a positive and statistically significant effect on the
first-time issues, with a smaller coefficient for the rest. Current account (CA) correlation
to yield appears to be logically consistent. Negative strong relationship, as in the case of
the first-time issues, corresponds to markets’ high risk perception of a country’s
borrowing position as the negative (i.e., deficit) CA ratio to GDP grows.
Curiously, external debt to GDP ratio (EXTB) does not appear to be significant in the
case of first-time issues. It does recover statistical significance in the larger sample with
subsequent sovereign bond issues in determining the yield. This is likely due to the basic
nature of modern sovereign borrowing and lending practice. Sinyagina-Woodruff (2003)
confirms the finding in her analysis of Russian state borrowing. She argues that forward
looking financial capital is willing to accept higher risks with every new sovereign bond
issuance in promise of yet untapped future returns.
Given the coefficients’ magnitude, the Total Reserves and Net Foreign Assets play
greater roles in determining the risks of sovereign debt instrument the first time around,
with an added significance of the IMF loans. By extension, this applies to total debt
outstanding (EXTB) interpreted from the signs and coefficient values of the regression
results.
Notably the signs on the TR and NFAssets coefficients on first-time issues are
reversed. NFAssets coefficient and sign offer better explanation to the first-time risk
dynamics as market participants judge the risk on the new sovereign bond based on the
net position, which reflects the immediate ability of the state to repay its debts. We find
this as an important finding with strong policy implications.
Coefficient values for GDP per capita were small. However, as dictated by high t-
values, that indicator remained statistically significantly in all cases. This can be explained
by the rational choice of countries within very similar income group. Therefore, cross
country GDP variations are not likely to produce high coefficient values. On the other
hand, statistical significance confirms the importance of this variable in any extended
econometric studies a somewhat natural and logical conclusion.
Dummy variables for USD denominated bonds (DFX), political freedom (POLFR)
and new/first-time bond issuance (NEW applies in the all-issues sample only) display
relative statistical significance, despite low coefficient value. Low standard errors offer
additional support to the analysis.
FISCAL POLICY AND ALTERNATIVE SOURCES OF PUBLIC CAPITAL
IN TRANSITION ECONOMIES
48 Journal of International Business and Economy
Implications of the above-cited results for transition economies seeking external
sources of finance by means of sovereign bonds are quite important. Good economics
matters if a country is hoping to 1) gain access to capital markets and 2) raise low-cost (i.e.,
lower yield) capital. For smaller transition economies with characteristically high debt
shares; persistent current account deficits and low foreign exchange reserves (see Table 2);
and that are striving to reduce their high cost debt burdens, the implications are even
stronger. A more complex analysis carried out in Gelos et al. (2008) confirms that the
main participants with frequent sovereign debt market access are bigger countries, while
smallergeographically and in economic termslack that privilege.
Diaspora Bond: Patriotic Discount and Other Benefits
It is then logical to suggest that the “first movers,” as in Freinkman (2001) and expanded
in Gevorkyan and Grigorian (2003)those willing to loan to a country despite higher risk
but lower returnswould come from the Diaspora community. If such a program were
institutionalized fiscal authorities would have an opportunity to draw from consistent
funding sources while maintaining formal independency in the domestic policy making.
Furthermore the lower yield yet higher risk combination on a Diaspora bond
constitutes a more generic notion of a patriotic discount mentioned in the examples of Israel
and India (Box 1). The patriotic discount may come as a lower than prevailing market
return rate or a lower return with part of the principle amount donated to the state. In the
case of Israeli and Indian Diaspora, both have been willing to accept such terms
becoming the “lender of last resort” in trying times. This evidence solidifies the Diaspora
bond approach as a possible alternative to a distortionary tax policy, over reliance on the
exports and remittance incomes, conditional aid or even fiscal contractions in chosen
sectors.
Due to a greater risk of state defaults in the transition economies case a reverse
situation is possible. A limited amount of Diaspora bonds may be offered at a higher
premium (but still lower than for a conventional bond). In this case the investor is
guaranteed a higher return while the state implements appropriate policies that can lead to
an improved sovereign debt rating and economic development. If the program is
sustained, this then provides grounds to reintroduce bonds at a lower rate while targeting
the Diaspora investor.
ALEKSANDR V. GEVORKYAN
Fall 2008 49
In either case lower interest payments free up extra funds for additional development
projects with a high social and economic return. At the same time compliance with loan
terms and timely interest payments, because of the patriotic discount, establishes a track
record that otherwise would not have been noticed by a larger institutional investor (as
opposed to being open to speculative trades). This sets a favorable precondition for a
subsequent issuance and gradual accession to a more conventional issuance.
While these technicalities seem secondary for larger economies, for the smaller
transition economies the importance of such realization is apparent. The “first-movers”
phenomenon is magnified as the sovereign issuers tap the international capital markets.
In addition to the patriotic discount, the Diaspora bond is a noninflationary (in the
long run since the loans have to be paid out eventually) source of financing
developmental projects. Unlike a conventional bond a transition economy’s Diaspora
bond, precisely due to its nature and purpose, is most likely to be issued with longer
maturity than country’s macroeconomic indicators would suggest.
The latter observation relates not only to pure monetary cost considerations but also
to the fact that Diaspora bonds represent a socially responsible investment that requires
safeguards from short-term speculative trades while providing sufficient time for the
sovereign borrower to come up with repayment funds.
Finally the Diaspora bond provides the fiscal authorities the much-needed
independence in their public investment transactions aimed at development of
infrastructure, telecommunications, education, healthcare, and labor migration regulatory
mechanisms. Involving greater Diaspora participation in the implementation of these
projects builds up stronger links for disunited nations resulting in greater economic
returns than would otherwise come with conditional aid or private investments.
Aside from the benefits Diaspora bond programs carry certain risks that must be
considered prior a country embarks on this policy.
The True Perils of Diaspora Bonds
For such economies as Armenia, Bulgaria, Georgia, Moldova, Poland, Romania, Tajikistan,
and Ukraineperhaps the likely candidates for Diaspora bond program due to their
Diasporas’ size and historical links with homeland—the question lies not in the ability of
the government to raise the needed funds in the Diaspora. The real question is whether
the issuing government can sustain its debt program. Will it be able to repay the loans at
FISCAL POLICY AND ALTERNATIVE SOURCES OF PUBLIC CAPITAL
IN TRANSITION ECONOMIES
50 Journal of International Business and Economy
maturity in addition to keeping up with interest payments, despite even low yields? What
will be the funds absorption criteria?
The answers here lie in a rational and wise 1) sovereign bond program design and
implementation and 2) appropriate allocation of funds. Investments should be directed to
projects likely to have strong direct or indirect influences on the economy to generate
sufficient return rates. Adherence to fiscal rules (as in Serven 2007) preventing over-
borrowing and irresponsible spending. We exclude the possibility of Minskyan Ponzi
financing (as a state continuously borrows to keep up with past interest payments and
piling up debt). Clearly such policies lack prudence and undermine the core economics of
the investment project. In the unlikely event of irresponsible fiscal spending and growing
debt, chain reaction events are possible.
Unable to meet the creditors’ demands, governments may come to, at best, a standstill
if become highly dependent in their spending on the Diaspora bond funds. At minimum
the sovereign rating will be downgraded. In a worst case scenario relations with the
Diaspora may be severed. These situations might also occur if the funds raised via
Diaspora bonds are perceived as donations with the hope for an incomplete debt
redemption given Diaspora altruism and patriotic sentiments. Therefore the underlying
rationale must remain pursuant of the bond as a viable investment instrument initially. Still
the Israeli and Indian track record shows with time a Diaspora bond for some may indeed
become a symbolic donation.
So to achieve desired austerity, structural changes within a country’s economy are
needed in terms of identifying key areas for long-term growth and evolutionary
facilitation. In fact certain cases may require development from scratch. Projects in the
high-tech industry, public infrastructure (e.g., telecommunications and transport), as well
as education and healthcare, are first that come to mind in this relation. Hence this paper
calls for fiscal responsibility and allocation of Diaspora Bond funds within the long run
growth stimulating projects. This requires time, reasonable assessment of national
capabilities, determination of primary needs in fostering effective demand, and consistent
flow of funds. In short a more proactive fiscal participation is long overdue.
Good governance and establishing good working relations with the principal Diaspora
organizations are an added requirement for successful Diaspora bond engagement.
Examples of both Israel and India clearly indicate the need for fiscal discipline and
accountability to the public and investors. This achieved the dual goal of ensuring regular
ALEKSANDR V. GEVORKYAN
Fall 2008 51
foreign currency funds flows for the government and created additional incentives for the
expatriates involvement in the homeland.
It may be that a collective group of investors from the Diaspora supply a certain
proportion of their capital while entrusting the government’s prudence in times of
financial and political stability. Yet as relations with the Diaspora may become potentially
tense or as the government adopts an unpopular measure the risk of simultaneous
withdrawal could persist. For example there is the existence of often divergent attitudes
between the home country and its Diaspora where one considers more immediate matters
while the other remains largely skeptical of the political, social and economic progress in
general. Hence for a nation sustaining sound relationship with its Diaspora would be a
challenge in ensuring the success of the Diaspora bond issue. Again both India and Israel
developed sets of financial services directed primarily at their non-resident investors.
Can this be replicated in the case of transition economies, especially those that lack
resources or wide scale international financial and trade backing? This paper argues the
point in the affirmative. Yet a definite prediction on how soon and in what form the
potential issuance might come about is not easy to predict due to a variety of reasons. Still
the economic preconditions are there and the main stress should be on fiscal
responsibility and caution in such a Diaspora bond program.
Some realistically potential candidates for the Diaspora bond issue might be Armenia,
Bulgaria, Georgia, Moldova, Poland, Romania, Tajikistan, Ukraine all with large Diaspora
and with economies exhibiting lacking infrastructure development, high current account
deficits and high migration rates. However such predictions are hasty and must be
weighed within specific country’s context. It is not the purpose here to pick the actual
countries that would implement the Diaspora bond, but to suggest consideration of such
analysis within transition economies context outlining a profile of a possible candidate.
Therefore our suggestions here are only cursory with further clarification to be developed
in future research. After all, local content and country specific considerations matter.
Governance and Regulation
A few words need to be mentioned regarding regulatory framework and management of a
hypothetical Diaspora program in transition economies. In light of the above described
potential issues and to ensure responsible investment on behalf of all players it may prove
reasonable to establish a State Diaspora Supervisory Board (SDSB) in countries
FISCAL POLICY AND ALTERNATIVE SOURCES OF PUBLIC CAPITAL
IN TRANSITION ECONOMIES
52 Journal of International Business and Economy
administering the Diaspora bond program. Aside from the administrative task the Board’s
role would be supervisory in incoming funds allocation, project implementation and fair
progress reporting. In many countries that have established formal ties with Diaspora
groups (e.g., Armenia, Poland, Ukraine, and others) SDSB creation may be done within
already-existing organizational and financial frameworks. Modifications are surely to
appear and to account for specific cultural, traditional, and other more general
characteristic of each locale. We leave this proposition as an opportunity for future
institutional development and case studies research.
It may be argued that some transition economies are not ready to meet high return
demands of the international finance but they may be prepared to take a step towards
compliance with competitive standards. A Diaspora bond offered at patriotic discount will
have higher chances of selling within Diaspora precisely because of its sentimental value
for the investor. It offers access to alternative financing under milder repayment
obligations to the state than in the case of a conventional sovereign debt. In the end, it is
all about Diaspora’s participation in restructuring projects and major development efforts
in the homeland by way of real investment. It is logical then for Diaspora-like structure to
be a participatory member in administering the funds.
CONCLUSION
Is there a need to replicate experience of others? No, but there is a need to study, analyze,
and apply within reasonable framework that experience. Implications for the still growing
and financially lacking transition economies of the FSU and EE are strong. For many,
especially smaller and resource constrained ones, conditional foreign aid and unreliable
remittance transfers do not provide adequate financing for developmental projects. Yet
issuing a conventional bond at shorter maturities and higher yields, given country’s overall
macroeconomy, is not that much appealing either. Low cost financing opportunities
offered by a Diaspora bond as well as access to international capital markets that comes
with it may be a viable option to consider, especially for those with large potential
worldwide Diaspora stock, active in the homeland’s affairs.
However, aside from securing the funds, individual country’s main challenge in the
Diaspora bond program would be proper allocation of foreign exchange in the productive
sectors of its own, unique, economy. This obstacle is due to the vastness and diversity of
economic problems faced by transition economies despite recent growth reports.
ALEKSANDR V. GEVORKYAN
Fall 2008 53
Sustainability of such a Diaspora Bond program requires strict fiscal discipline and the
development of real economic sectors generating sufficient returns to keep up with the
increasing interest payments as bonds become more popular among foreign investors.
While instituting such a Diaspora Bond scheme, invoking a patriotic discount will by
no means relieve the issuing state of its troubles, it may give the government an incentive
to invest more in infrastructure and other social programs. Such efforts have high returns
on human capital and strong feedback into productive activity overall. In turn this
stimulates effective demand, prompting healthy domestic investment and solid
macroeconomics. Collectively these define modern fiscal policy and go in as fundamentals
of economic growth and development. This paper ventures active Diaspora participation
in the process, integrating “first-time” issuer states within international capital markets. In
the end local content and country-specific considerations complemented by profound
macroeconomic analysis matter before a sovereign introduces a new debt instrument even
with the best intentions in mind.
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FISCAL POLICY AND ALTERNATIVE SOURCES OF PUBLIC CAPITAL
IN TRANSITION ECONOMIES
56 Journal of International Business and Economy
APPENDIX
Table 1: Potential Diaspora Stock, Geographical Spread, Migration and Other Population Data for Transition Economies
Diaspora Stock Primary Data Source
MFA; Armenia Diaspora Conference
(www.armeniadiaspora.com)
MNS; CIA Worldfactbook; Goskomstat RF
BelaPan (2005) on the 2005 Belarus-Diaspora
press club (www.portalik.biz)
MFA; State agency for Bulgarians abroad;
Bachvarov (1997); Nacheva (2002)
MFA; Georgian Diaspora website
(www.diaspora.ge); Goskomstat RF; Nichol
(2005)
Government of Kazakhstan website
(www.e.gov.kz)
Media reports (RFERL 2003;
www.akipress.org)
Rep. of Moldova official website
(www.moldova.md)
MFA Poland (2007)
Statement by the President of Romania Traian
Basescu (Jan. 26, 2006)
Heleniak (2004); Goskomstat RF
Jones et al (2007); CIA Worldfactbook
Akiner (1998); Goskomstat RF
MFA via Ukrainian Embassy to Russia
(www.mfa.gov.ua)
MFA via Uzbekistan Embassy to UK
(www.uzbekembassy.org); CIA World Factbook
Notes and Sources: Potential Diaspora stock figures include approximate estimates for the “old” (second and greater generations) and “new” Diaspora. Inclusion by most estimates of the larger
shares of assimilated populations in the “old” Diaspora explains the relatively high upper bounds. A conservative approach is to assume the lower bounds as realistic estimates (e.g., Ar menian
Diaspora being five million rather than ten million). *Net migration rate is from CIA World Factbook (2008); #excluding Iran's native Turkic population [24% of the total] that Azerbaijan
considers to be ethnic Azerbaijani (CIA Worldfactbook 2008); ##excluding Tajik population in Afghanistan, where native ethnic Tajiks account for 27% of total country's population (CIA
Worldfactbook 2008); MFA stands for Ministry of Foreign Affairs of each respective country; MNS is Ministry of National Security; Media reports refer to various publications that have
appeared in the national press of the respective country in the past three to five years; Midyear 2008 population, U.S. Census net migration rate and net migrants are from U.S. Census
International Data Base (US Census 2008); IOM net mig ration rate is from International Organization for Migration country tables (2008).
U.S.
Census: net
migrants
(in 1,000)
-15
-16
4
-25
-20
-51
-14
-5
-18
-3
39
-9
-16
-6
-37
U.S. Census: net
migration rate
(per 1000)
-5
-2
0.38
-3
-4
-3
-3
-1
-0.46
-0.13
0.28
-1
-3
-0.12
-1
Diaspora Spread by Major Countries
Russia, USA, Western Europe [France, UK],
Middle East [Iran], Ukraine, Canada, other
Russia, Ukraine, Georgia, Turkey
Ukraine, Latvia, Kazakhstan, Russia, USA,
Canada, Australia
US, Canada, Germany, Moldova, Ukraine
Russia, Turkey, Ukraine, USA, other
CIS, China
China, Kazakhstan, Russia, Tajikistan, Turkey
and Uzbekistan.
Ukraine, Russia, Kazakhstan, Baltic states
USA, Belarus, Moldova, Ukraine, Russia,
Canada, West Europe
Moldova, Ukraine, USA, Spain, France,
Germany, other
Worldwide, mainly in CIS, USA, Europe
Russia, Uzbekistan, Iran, Middle East
Russia, Iran, Iraq, Afghanistan
Russia, Canada, USA
Tajikistan, Kyrgyzstan, Kazakhstan,
Turkmenistan, Russia, Ukraine, Belarus,
Lithuania, Afghanistan, Saudi Arabia, Turkey,
Iran, China, India, Pakistan, Germany, USA,
other
Potential
Diaspora
Stock
[estimated]
5mln - 10mln
2mln - 4mln
2mln - 3.5mln
2mln - 10mln
1.5mln - 2mln
4.5mln - 5mln
0.5mln - 0.7mln
0.5mln - 0.7mln
15mln - 16mln
8mln
25mln
0.6mln - 5mln
2.5mln - 3mln
16 - 20 mln
5.5mln - 6 mln
National
Midyear
2008
Population
(in 1,000)
2,969
8,178
9,686
7,263
4,631
15,341
5,357
4,324
38,501
22,247
140,702
7,212
5,180
45,994
28,268
Country
Armenia
Azerbaijan#
Belarus*
Bulgaria
Georgia
Kazakhstan
Kyrgyz
Republic
Moldova
Poland*
Romania*
Russian
Federation*
Tajikistan##
Turkmenistan
Ukraine*
Uzbekistan
ALEKSANDR V. GEVORKYAN
Fall 2008 57
Table 2: Selected Indicators for the Set of Transition Economies
Unemployme
nt Rate, 2005,
ILO
8.1
4.95
1.5
10.4
13.8
4.95***
8.5***
4.65
17.65
7.2
7.8***
2.7****
5.75
Notes: *as of 2000; **as of 1997; ***as of 2004; ****as of 1997; 2008 values refer to year end estimates. Blank cells indicate missing data.
Sources: World Bank, WDI (2008); ILO Statistics (2008); International Monetary Fund, WEO, (October 2007); own calculations.
2006 Total
remittances,
current USD bln
and % of GDP
1.18bln / 18%
0.81bln / 4%
0.33bln / 1%
1.7bln / 5%
0.49bln / 6%
0.19bln / 0%
0.48bln / 17%
1.18bln / 35%
4.37bln / 1%
6.72bln / 6%
3.09bln / 0.313%
1.02bln / 36%
0.83bln / 1%
Total debt
service, % of
exports of goods,
services and
foreign income
7.56
1.62
3.28
12.4
8.77
33.73
5.7
12.18
24.69
18.44
13.76
5.12
22.1**
18.1
2006 External
Debt, current
USD bln
2.07
1.9
6.12
20.92
1.96
74.15
2.38
2.42
125.83
55.11
251.07
1.15
0.88
49.89
3.89
2008 EST
Current account
balance, % of
GDP
-4.2
39.9
-8.1
-19
-15.2
-1.1
-15.1
-7.3
-5.1
-13.2
3.3
-12.5
12.5
-6.2
21
2006 High-
tech, as % of
manuf.
Exports
1.06
1.59
2.69
6.05
16.27
20.84
2.85
4.73
3.81
4.41
9.38
41.8*
4.9*
3.3
2006 Annual
inflation,
CPI %
4.9
17
10
7.9
8.1
7.8
7
8.9
2.7
4.8
7.5
12.6
9
10.8
9.8
2006
GNI per
capita
1,920
1,840
3,470
3,990
1,580
3,870
500
1,080
8,210
4,830
5,770
390
650*
1,940
610
2000-2006
average
GDP
growth.
%
11.5
16.2
7.6
5.4
6.9
10.3
3.9
5.9
3.7
5.5
6.8
8.9
5.7
7.4
5.5
2006 GDP,
current
USD bln
6.39
19.85
36.95
31.48
7.74
81
2.82
3.36
338.73
121.61
986.94
2.81
10.5
106.47
17.18
Country
Armenia
Azerbaijan
Belarus
Bulgaria
Georgia
Kazakhstan
Kyrgyz
Republic
Moldova
Poland
Romania
Russian
Federation
Taji ki st an
Turkmenistan
Ukraine
Uzbekistan
FISCAL POLICY AND ALTERNATIVE SOURCES OF PUBLIC CAPITAL
IN TRANSITION ECONOMIES
58 Journal of International Business and Economy
Table 3: Selected Infrastructure Indicators, by Country
Country
Phones
(per 100
users)*
PCs
(per 100
users)**
Internet
users
(per 100
people)***
Growth in air traffic
(change of total)****
Roads,
paved
(% of
total)*****
Armenia
21.8 (30.2)
5.3
3.3 (5.7)
42.4 / (37.8) / 509.9
90.0
Azerbaijan
23.3 (39.8)
1.8
3.9 (9.8)
-18.3 / (47.3) / 1007
49.4
Belarus
41.8 (75.5)
18.6 (56.5)
-67.5 / (17) / 274.2
88.6
Bulgaria
71.2 (112.9)
5.9
12.1 (24.4)
-33.7 / (53.2) / 476.3
99.0
Czech Republic
111.2 (146.5)
21.6
20.9 (34.7)
202.7 / (24.4) / 4219.5
100.0
Estonia
101 (140.2)
47.4
38.5 (57.4)
242 / (28.8) / 509.6
22.7
France
119 (134.4)
48.7
31.1 (49.6)
12.7 / (-2.4) / 46506.8
100.0
Georgia
25.4 (39)
3.8
3 (7.5)
50.4 / (27.3) / 228.6
39.4
Germany
133.5 (162.4)
48.5
36.1 (46.7)
104.6 / (12.9) / 82099.7
100.0
Hungary
95.8 (125.7)
14.6
19.8 (34.8)
62.9 / (7.8) / 2546.2
43.9
India
6.4 (12.8)
1.2
1.9 (5.4)
78.7 / (23) / 23934.1
47.4
Ireland
126.9 (152)
49.7
26.2 (34.1)
352.6 / (20.1) / 34748.9
100.0
Israel
133 (154.4)
73.4
18.8 (24.4)
34.5 / (35.1) / 4968.9
100.0
Kazakhstan
24.9 (53.5)
2.6 (8.4)
47 / (-17.3) / 834.8
83.0
Kyrgyz Republic
10.8 (19.1)
3.4 (5.6)
-49.7 / (19.5) / 245.6
91.1
Latvia
72.3 (113.1)
21.9
22.7 (46.6)
115.1 / (74.8) / 593.7
100.0
Lithuania
82.6 (151)
15.5
16.3 (31.7)
109.3 / (36) / 447.9
78.2
Moldova
29.2 (52.1)
2.6
6.7 (17.3)
5.6 / (12) / 200.6
86.3
Norway
134.1 (148.9)
57.8
34.7 (58.5)
-3.5 / (-4.1) / 12277.2
77.5
Poland
69.2 (107.4)
19.1
18.3 (28.6)
93.4 / (7.4) / 3493.1
69.7
Romania
47.4 (82)
11.3
13.2 (23.4)
46.5 / (6.6) / 1337.8
30.2
Russian Federation
50.1 (111.8)
13.2
8.1 (18)
17.3 / (14.2) / 25948.9
67.4
Tajikistan
4.8 (8.3)
0.1 (0.3)
-16.1 / (20.8) / 498.5
82.7
Turkmenistan
8.7 (10.4)
0.5 (1.3)
208.3 / (14.2) / 1612.5
81.2
Ukraine
40 (88.5)
2.8
4.9 (12.1)
91.1 / (49.1) / 2200.1
97.4
United Kingdom
140.8 (165.3)
60.0
40.4 (56)
34 / (12.7) / 86054.8
100.0
United States
115.1 (131)
76.2
55 (69.1)
18.5 / (9.9) / 676654.6
65.3
Uzbekistan
7.8 (9.6)
2 (6.3)
1.4 / (8.3) / 1588
87.3
Notes: *fixed line and mobile phone average numbers of users 1999-2005, values for 2005 are in parenthesis; **average
number as of 2004; ***average numbers of users 1999-2006, values for 2006 are in parenthesis; data for India, Israel,
Norway and Tajikistan is through 2005; ****calculated based on total civil aviation passenger traffic; first ratio is the % total
change between 1996 and 2004; the second corresponds to % change between 2003 and 2004; third number is total
passengers carried in 2004 in '000s; *****as of 2005; Azerbaijan, Bulgaria, Czech Republic, Georgia, and Romania estimates
are as of 2004; Germany, Hungary, Ireland, and Poland as of 2003; India and Norway as of 2002; Kyrgyz Rep., Uzbekistan
and Turkmenistan as of 2000; Russia as of 1999; Tajikistan as of 1995. This comparison is offered here as an informative
reference to the current state of affairs only, rather than suggesting transition economies catching up to any benchmark
levels.
Sources: World Bank WDI (2008); UN (2008); own calculations.
ALEKSANDR V. GEVORKYAN
Fall 2008 59
Table 4: Average Fiscal Education Expenditure as Percent of Total GDP
Country
1999
2000
2001
2002
2003
2004
Armenia
3.1
3.2
3.1
3.1
Azerbaijan
4.3
4.1
3.7
3.4
3.6
3.7
Belarus
6.0
6.0
5.8
5.8
Bulgaria
3.5
Czech Republic
4.1
4.1
4.3
4.6
4.8
Estonia
7.0
5.8
6.0
France
5.8
5.7
5.6
5.6
6.0
Georgia
2.1
2.2
2.2
2.3
2.3
3.0
Germany
4.6
4.5
4.6
4.8
Hungary
5.0
5.2
5.4
5.8
6.3
India
4.1
4.1
3.3
Ireland
4.9
5.0
5.1
5.3
Israel
7.5
7.4
7.6
7.8
7.5
Kazakhstan
4.0
3.5
3.2
3.2
3.2
2.6
Kyrgyz Republic
3.7
3.1
3.2
4.6
4.6
Latvia
5.8
5.4
5.5
5.8
5.4
Lithuania
6.0
6.0
5.4
Moldova
3.9
3.8
4.0
4.5
4.2
Norway
7.2
6.7
7.1
7.6
7.6
Poland
4.8
5.0
5.6
5.7
5.9
Romania
3.6
2.9
3.3
3.6
3.7
Russian Federation
3.0
3.1
3.9
3.8
Tajikistan
2.2
2.4
2.6
2.9
2.6
2.9
Turkmenistan
Ukraine
3.7
4.3
4.8
5.5
5.7
4.6
United Kingdom
4.6
4.6
4.7
5.2
5.4
United States
5.0
5.8
5.7
5.6
5.8
Uzbekistan
Notes: Blank cells refer to missing data. This comparison is offered here as an informative reference to the current state of
affairs only, rather than suggesting transition economies catching up to any benchmark levels.
Sources: UN Statistics Division: UN (2008); World Bank, WDI (2008); own calculations.
FISCAL POLICY AND ALTERNATIVE SOURCES OF PUBLIC CAPITAL
IN TRANSITION ECONOMIES
60 Journal of International Business and Economy
Table 5: OLS and MLE Regression Results: First-Time and All Sovereign Issues
Linear regression
Maximum Likelihood
1
2
3
4
First Issues
All Issues
First Issues
All Issues
GDP per capita
small**
small
small**
small
(small)
(small)
(small)
(small)
INF
0.37**
small
0.37**
small
(0.15)
(small)
(0.15)
(small)
CA
-4.2**
0.04**
-4.2**
0.04**
(0.92)
(0.03)
(0.92)
(0.03)
EXTB
0.26
0.03**
0.26
0.03**
(0.27)
(0.02)
(0.27)
(0.02)
IMF
dropped
0.82**
dropped
0.82**
(0.14)
(0.14)
TR
0.73**
-0.3**
0.73**
-0.3**
(0.33)
(0.03)
(0.33)
(0.03)
NTFAssets
-0.62**
0.04**
-0.62**
0.04**
(0.17)
(0.03)
(0.17)
(0.03)
DFX
-0.068**
0.02**
-0.068**
0.02**
(0.03)
(0.00)
(0.03)
(0.00)
NEW
-0.005**
-0.005**
(0.01)
(0.01)
POLFR
-0.18
-0.014**
-0.18
-0.014**
(0.16)
(0.00)
(0.16)
(0.00)
ANNLD
not reported
not reported**
not reported
not reported**
No.
of observations
21***
582
21***
582
Adj. R2
0.75
0.42
Log Likelihood
100.50
1,434.30
Notes: OLS and MLE estimations are used with group effects controlled by annual dummy variables (not reported).
Standard errors are in parenthesis. ** significant observed t-values (not reported); ***regressions on first time issues only.
Sources: yield data from Bondware database by Dealogic; all macroeconomic indicators are from WDI (2008), IMF (2006);
political freedom dummy derived from Freedom House (2006).
ALEKSANDR V. GEVORKYAN
Fall 2008 61
Box 1. Diaspora Bonds in Israel and India
The case of Israel
In a series of meetings between Israel’s government representatives and the Jewish Diaspora leaders in the
early 1950s it had been determined that the program would be implemented by the Development
Corporation for Israel, created in February 1951 offering State of Israel Bonds to the American public.
This action became one of the most significant events in Israel’s independence history for it was the first
time Israel had asked for a public loan instead of a philanthropic gift. During the first year of operations
bond sales totaled $52.6 million, with current sales exceeding $25 billion of which $19 billion has been
redeemed on time and in full. The sales have been earning $1.0 billion per year for Israel since 1991. It is
estimated that in the year 2003 Israel borrowed a total of $4.6 billion abroad; $2.35 billion of it was under
the U.S. loan guarantee program and approximately $1.5 billion was through State of Israel Bonds. The
Israeli government has been successful in allocating the received funds in agriculture; industry; shipping;
energy; transportation; communications; water resources; and immigrant absorption, contributing to
robust economic development and improved handling of internal social policies.
The bonds are now quite diverse and responsive to market conditions and offer various incentives
(e.g., tax breaks, guarantees, and repayment terms) albeit at a lower rate than a market risk would
suggestpatriotic discount. The government sells the bonds in: North America, South America and
Europe through three independent organizations. Each organization is set up in accordance with the local
laws. This is often viewed as homeland’s first step towards its Diaspora by complying in full with the laws
of the Diaspora’s adopted country. Israel—that consistently has its debt rated by Moody’s, Standard &
Poor’s and Fitch—has never defaulted on the payment of principal or interest on any of its internal or
external indebtedness. Altruism and social responsibility of the Diaspora members, as well as, Israel’s
accountability for every dollar received via State of Israel Bonds have been the primary factors in shaping
the success of the program with strong positive implications for the country’s development.
The case of India
Despite some strained relations between official India and its large non-resident Indians stock (NRI) the
presence of the NRI’s in the country’s finance is significant. For example, at the end of 2003 NRIs held
60 percent of India’s sovereign debt owed to private creditors. At the time of India’s balance of payments
crisis of 1990-1991, the government was able to collect up to $2 billion with the help of NRI investment
through its India Development Bonds (IDB) program. This success led to the floating of Resurgent India
Bonds (RIB) at the time of national crisis in 1998, which raised $4.2 billion, and subsequent India
Millennium Deposits (IMD) in 2000, which raised $5.5 billion in the two months between October and
November 2000. As in Israel, India’s government asked for an investment, rather than a philanthropic
donation. The bonds were promoted in the India’s expatriate community, explicitly appealing to the
patriotic sentiments.
To avoid any prospects of U.S. litigation in case of defaults on bonds sold in the U.S. the Indian
government, unlike Israeli, did not create a U.S. SEC registered organization to lead the effort. The bonds
were floated as bank instruments representing foreign currency denominated deposits in India and sold
through the worldwide network of Indian and foreign commercial banks specializing in dealings with the
NRIs with primary distributions in the U.S., Europe and the Middle East. The bonds, maturing in five
years, were issued at low interest rates relatively to India’s country rating at the time, with the
government’s guarantee to bear any exchange rate risks. The bonds had been issued at the times when
Indian government needed additional foreign exchange resources. The State Bank of India currently runs
various financial programs allowing NRI’s greater participation in the Indian economy.
_______________________
Sources: MFI 2003 and Development Corporation for Israel. www.israelbonds.com; Karp (1998), Rekhi (1998), SBI
(1998), Indian Express (1998), Sanyal and Krishnan (2000), Gevorkyan and Grigorian (2003), Gordon and Gupta
(2004), Chander (2001), and Ketkar and Ratha (2007).
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