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This paper examines the impact of an important financial reform, namely a collateral reform extending the assets, which could qualify as collateral for bank loans to the firms’ own equipment and moveable assets, so as to increase the access to such credit by small private firms. The reform studied was undertaken in the Palestinian territories of West Bank and Gaza (WBG) in the Middle East and North Africa (MENA) region where bank credit and financial markets have been especially heavily constrained. First, we apply two different synthetic control techniques to panel data covering both pre- and postreform years from both the WBG and a sample of comparable countries that did not undertake collateral reform. The results from both synthetic control methods show that such credit increased significantly after the reform in WBG but not in the nonreformed comparator countries. Then, we use comparable firm-level data obtained from a panel of all available firms in WBG from the Enterprise Survey of the World Bank, both 3 years before and 3 years after the reform to trace the impacts of the reform on various financial and other outcomes at the firm level. Despite the other difficulties that WBG was going through over the period, we find considerable evidence at the firm level that this collateral reform has been effective in stimulating credit, investment, and employment growth, especially among small firms, underscoring its potential for use by other low- and middle-income countries.

This paper demonstrates that the largest business association of private firms in the People's Republic of China (PRC), the All-China Federation of Industry and Commerce (ACFIC), has induced its members to help achieve the goals of the PRC's extremely ambitious but risky Belt and Road Initiative (BRI) since its inauguration in 2013. Through its newspaper, the ACFIC has drawn the attention of its member firms to countries participating in the BRI, which has led to increased trade between provinces in the PRC and BRI-participating countries emphasized by the ACFIC's newspaper. The results show that the PRC's exports have been encouraged substantially more than its imports, which could be a cause for concern for the sustainability of the BRI. The results were obtained through various specially designed versions of the gravity model and have shown to be robust to the use of various methods for mitigating possible estimation biases.

Given that Turkey has recently committed itself for the first time to reducing its CO2 emissions in the interest of sustainable growth in not only Turkey but also the world as a whole, this paper examines the relationship between energy consumption, CO2 emissions, and economic growth in Turkey for the period 1960-2014. In view of the different findings concerning causality and the character of the relationships between these variables revealed in our review of past studies (in most cases using quite different methods), this paper utilizes several different but related methodological approaches for identifying causal relationships. These include both the Toda and Yamamoto (1995) approach, the Fourier Toda-Yamamoto for Cumulative Frequency approach developed by Nazlioglu et al. (2016), vector error correction model (VECM) methodology, and the asymmetric Granger causality test proposed by Hatemi-J (Empir Econ 43:447-456, Hatemi-j 2012). Our results show that, when we apply the popular Toda-Yamamoto model, causality in these relationships is not confirmed even among any of the relevant variables in Turkey. Yet, when the Fourier Toda-Yamamoto tests for cumulative frequency are employed, we find unidirectional causality running from GDP per capita to emissions of CO2 per capita. Moreover, when we utilize the VECM methodology, the results show that long-run causality exists from GDP per capita and energy to CO2 emissions. When we apply the asymmetric causality tests, the results provide even stronger evidence for a unidirectional causal relationship from GDP per capita to CO2 emissions. As a result, the latter sets of results, based on more realistic conditions, suggest very strongly that, if Turkey is to meet the objectives of its ambitious Climate Change Action Plan commitment to the United Nations to reduce its CO2 per capita emissions relative to its past trends by up to 21% over the coming 2021-2030 decade, it is going to get very serious about the best way to do this as soon as possible.

The current literature on forced migration offers only limited knowledge of how each of the different consequences of war, such as damage to property and casualties to family members, and the services provided to the refugees in the host country, affect the difficult choices that refugees subsequently must make as to when and where to migrate from their location as refugees. This paper contributes to that literature by studying the effects of armed violence in Syria on the intentions of Syrian refugees in Turkey to return to Syria, stay in Turkey or move on to Europe and elsewhere. The study is based on three waves of a survey of Syrian refugees in Turkey. Special attention is given to the impacts of war (loss of home, property damage and casualties) and the duration of stay and quality of services received as refugees in Turkey, as well the individual characteristics of the refugees (e.g., gender, age, education, and income). The results show that (1) the longer and greater the level of violence in the country of origin, and the longer the time spent outside of Syria, the lower the likelihood that the refugee will want to return to Syria; (2) the longer the time the refugee has spent in Turkey, the higher is the probability of permanent settlement in another European country; and (3) the more and higher quality of services provided to the refugees, the more likely they are to remain in Turkey. The results offer insights into the design of international policy for dealing with the violence and the handling of refugees.

This paper investigates the effects of oil supply and demand shocks on the current account balances of China and Russia for the period between the first quarter of 1993 and the third quarter of 2018 using a time-varying parameter vector autoregression (TVP-VAR) model with stochastic volatility. To facilitate comprehension of the results and to anchor them in well-known events, this analysis focuses on two countries with different oil trade characteristics-Russia as an oil exporter and China as an oil importer. We find that identifying their sources plays an important role in understanding the impact of oil price shocks on trade balances. The results indicate that oil demand shocks have a much larger effect on trade balances and are more attributable to oil price shocks than oil supply shocks. Due to their different positions in the global oil market-one an oil exporter and the other, an oil importer-China's and Russia's individual responses differ substantially. in line with findings regarding impulse responses, the time-varying forecast error decompositions demonstrate that both oil supply and demand shocks have their greatest influence during and immediately after periods of crisis. (C) 2020 Elsevier Ltd. All rights reserved., Ege University Planning and Monitoring Coordination of Organizational Development; Directorate of Library and Documentation, We are grateful to Ege University Planning and Monitoring Coordination of Organizational Development and Directorate of Library and Documentation for their support in editing and proofreading service of this study.

The resource curse is a topic studied intensively in both economics and political science. Much of the focus is now on whether oil affects democratic institutions. We further the debate on this aspect through the use of both additional measures of democracy and multiple time-series estimation strategies. We find no robust long-run effect of oil abundance on any of the following measures of democracy: Polity, Polcon, Civil Liberties, or Political Rights, over the period 1974–2012. We use different country and period samples to respond to the findings of others suggesting that the effects of oil abundance may differ between Latin America, the Middle East, mature oil producers, or that they become significantly negative only post-1980. In each case we still do not find a robust relationship. We emphasize long-run effects not only because they match the slow pace of institutional change, but also because they are consistent even in the presence of reverse causality.

Because of the potentially large and important effects of the extremely ambitious Belt and Road Initiative (BRI) launched by China in late 2013, considerable attention has been given to the motives for, and repercussions of, the BRI-driven infrastructural projects. Yet, the non-infrastructural outward foreign direct investment (FDI) from China to BRI countries, which varies quite substantially across different sectors and different countries, has not yet received much attention. In contrast to some recent studies showing that the massive initiative has increased China's total FDI outflows to fellow BRI countries, in this paper, based on our sector-level difference-in-differences models, we find that effect to be statistically insignificant. Yet, at the same time, we provide empirical evidence on the sectoral pattern of China's outward FDI before and after 2014 indicating that China's FDI outflows to BRI countries have significantly increased in sectors characterized by overcapacity and contributing to pollution in China, thereby demonstrating that China's BRI-driven outward FDI has been very selective in terms of sectors. We confirm these findings with a variety of robustness checks and show that it is BRI countries with relatively low institutional quality that have been more likely to receive these types of FDI from China. We thus speculate that Chinese firms have been motivated to place FDI investments in BRI countries for the sake of alleviating China's own overcapacity and pollution problems. Our findings lead us to suggest that, although these sectoral patterns are consistent with the different stages of economic development in which China and its fellow BRI-identified countries find themselves, Chinese investors and host country governments should be more concerned with the potential for unwanted side-effects of the FDI investments so that the mutually beneficial effects of the BRI can be sustained into the indefinite future among all countries involved.

This chapter examines the long-run effects of oil revenue and its volatility on economic growth, as well as the role of institutions in this relationship. We collect annual and monthly data on 17 major oil producers between 1961 and 2013, and use the panel autoregressive distributed lag (ARDL) approach as well as its cross-sectionally augmented version (CS-ARDL) for estimation. Therefore, in contrast to earlier literature on the resource curse, we take into account all three key features of the panel: dynamics, heterogeneity, and cross-sectional dependence. The results suggest that: (i) oil revenue volatility has a significant negative effect on output growth; (ii) a higher growth rate of oil revenue significantly raises economic growth; and (iii) better fiscal policy can offset some of the negative effects of oil revenue volatility. We therefore argue that volatility in oil revenues combined with poor governmental responses to this volatility drives the resource curse paradox.

This volume aims to improve our understanding of the problems of macroeconomic management in oil-rich Arab economies. In doing so, it emphasizes the role of institutions and the political economy environment underlying them. Most importantly, it attempts to assess the effectiveness of these institutions in delivering macroeconomic stability and growth in the face of commodity price volatility, comparing actual practice in the Arab region with the budgeting procedures and countercyclical fiscal policies and rules shown to be successful in other parts of the world. The analysis here, however, goes considerably beyond that. It utilizes a political economy perspective to explain how budgeting and other fiscal policies are designed and implemented by political and administrative actors in ways that distinguish budget surpluses from deficits and pro-cyclicality from counter-cyclicality. Second, it includes monetary institutions and exchange rate regimes, and the interactions between both of these and both fiscal and political institutions.

This chapter traces the evolution of the fiscal institutions of resource-rich Arab economies (RRAEs) since pre-oil days. It then identifies challenges faced by RRAEs and variations in their severity over time. Finally, it articulates specific policy reforms aimed at dealing with these challenges. These include making budgets and budgetary processes more transparent and inclusive, minimizing expenditures which could be vulnerable to corruption or lead to relative price distortions and environmental damage, integrating short-term with medium- and long-term time horizons, and making use of appropriately designed budgetary rules and sovereign wealth funds. It also points to the need for institutional reforms going well beyond budgets and other fiscal institutions to labor laws, efficient judicial systems, greater checks and balances between government branches, and more competitive conditions for private enterprise. In some cases, however, these policy proposals may give rise to tradeoffs that will have to be evaluated on a case-by-case basis.

This paper relates four aspects of an individual’s religion (the religion itself, its importance to the individual, and their interactions with each other, whether or not that religion is the dominant one in the country and with the individual’s relative income) to six important socio-political attitudes. Two of these reflect socio-economic objectives (the responsibilities that government should assume, and adherence to the norm of not cheating on taxes), and the other four different political means of achieving these objectives (willingness to engage in political activity, to defend freedom of speech, to ‘give people more say’ and to maintain order). The primary objective is to shed light on the political economy and governance issues in countries like those of the Middle East and North Africa (MENA) where religious, economic and political differences are strongly interrelated, and already giving rise to social tension and in some cases political instability. It makes use of data on over 215,000 individu...

This article estimates the effects of rigid labour regulations, their enforcement and other conditions facing individual firms on the likelihood that a firm offers training to its workers. The estimates are based on firm-level data from the Enterprise Surveys. The findings show that the effects of labour regulations vary considerably across firms in ways that reflect interaction between labour regulations on the one hand and enforcement, institutional conditions and firm and industry characteristics on the other. The effects also vary considerably from one type of labour regulation to another and according to the perceived importance of alternative constraints on its business.

The purpose of this article is identify and explain gender differences in eight important socioeconomic attitudes and political priorities among randomized samples of both males and females in 21 countries of the broadly defined Middle East. The attitudes and political priorities examined include the low status of women, lack of democracy, absence of a competitive private sector, income inequality and reliance on the military. In each case decomposition methods are used to divide these differences into those due to differences in the underlying characteristics of males and females and those due to differences in the effect of those characteristics

This paper traces the evolution of fiscal institutions of Resource Rich Arab Economies (RRAEs) over time since their pre-oil days, through the discovery of oil to their build-up of oil exports. It then identifies challenges faced by RRAEs and variations in their severity among the different countries over time. Finally, it articulates specific policy reforms, which, if implemented successfully, could help to overcome these challenges. In some cases, however, these policy proposals may give rise to important trade-offs that will have to be evaluated carefully in individual cases.

Azerbaijan is an oil rich country facing three severe problems at the same time: economic volatility, the need to promote industrial diversification and the recent sharp fall in oil prices which many expect to continue. It is thus a highly appropriate time to conduct a study for this resource-rich country that would relate its insufficient and ineffective industrial diversification to the effectiveness of its efforts to overcome these problems, including the encouragement of FDI, the creation of its State Oil Fund and the establishment of a fiscal rule. To this end, in this study we pull together empirical evidence concerning the allocation of oil windfall gains, the quality of the country’s budgetary institutions and its State Oil Fund and their effects on Azerbaijan’s budgetary outcomes. But, more uniquely, we develop and apply some models to capture the long terms effects of oil prices and fiscal management on industrial diversification, where we find the efforts to date to have fallen far short of what is needed. Our analysis leads us to suggestions for much needed improvements in policy.

This paper examines the long-run effects of oil revenue and its volatility on economic growth as well as the role of institutions in this relationship. We collect annual and monthly data on a sample of 17 major oil producers over the period 1961-2013, and use the standard panel autoregressive distributed lag (ARDL) approach as well as its cross-sectionally augmented version (CS-ARDL) for estimation. Therefore, in contrast to the earlier literature on the resource curse, we take into account all three key features of the panel: dynamics, heterogeneity and cross-sectional dependence. Our results suggest that (i) there is a significant negative effect of oil revenue volatility on output growth, (ii) higher growth rate of oil revenue significantly raises economic growth, and (iii) better fiscal policy (institutions) can offset some of the negative effects of oil revenue volatility. We therefore argue that volatility in oil revenues combined with poor governmental responses to this volatility drives the resource curse paradox, not the abundance of oil revenues as such.

To help explain the common failure of oil or other natural resource exporting countries to diversify into industry, it has been common to trace this failure to real exchange rate appreciation. This has also been done in Azerbaijan. However, because Azerbaijan has devoted so much of its oil revenues to government investment, Azerbaijan provides a suitable case for examining an alternative link through government investment. This study applies the ARDL cointegration method to quarterly time series data on oil prices, government capital formation, non-oil exports and non-oil GDP to estimate the long run relationships linking oil prices to government investment expenditures and further to generation of non-oil GDP. The results show that despite the massive government investment expenditures, extremely little non-oil production of the tradable type has been generated, calling attention to the need for policy reform.

I. INTRODUCTION The popular proposition that a large natural resource endowment (especially of oil) constitutes a "curse" on growth and development, or more broadly on human welfare, has been examined rather extensively, both theoretically and empirically. Some robust empirical results were presented by Sachs and Warner (1997, 2001) and Ross (2001, 2012), among others. Indeed, Doppelhofer, Miller, and Sala-i-Martin (2000) asserted that the negative effect of oil dependence on economic growth is one of the most robust empirical relationships in the entire empirical growth literature. Yet, others (Bachmeier, Li, and Liu 2008; Mehlum, Moene, and Torvik 2006a) have come to almost the opposite conclusion showing that oil price and export movements are very poor predictors of economic activity and that the magnitude and direction of the relation between oil dependence and growth depends heavily on institutional characteristics which may differ from country to country and over time. To the extent that the effect of oil on growth depends on institutions, however, this may suggest that the growth relation is only an indirect one coming through oil's effects on these institutional channels, with different institutional channels possibly affecting growth in different directions. Among the most frequently cited institutional links are property rights, the incentives or disincentives to accumulate human and physical capital, the ability to control volatility in economic activity, quality of governance, the ability to ward off conflicts, and to manage real exchange rates (and hence international competitiveness in tradable goods) and corruption (van der Ploeg 2011). Hence, both the validity of the oil curse and understanding how it works may depend on what oil resources do to the development of different institutions. As explained in Section II, in view of the extremely slow pace of change typical of most institutions, the vast majority of studies on these links have concentrated on a single link, most commonly democratic governance, and have largely relied on international cross section analysis, relating oil or other natural resource endowments to the quality of institutions (usually a democracy index) at a point in time. (1) Some exceptions to this generalization are discussed below. Most studies comparing the effects of different types of natural resource abundance on growth have identified an abundance of oil as having the most adverse effects, and institutions as the most important factors affecting the magnitude and direction of these effects (Acemoglu, Johnson, and Robinson 2001; Acemoglu and Robinson 2006a, 2006b; Nunn 2008). Thus, our objective is to examine whether or not oil can raise or lower the institutional quality indicators of any of the types that may serve as important links between resource abundance and economic growth. Instead of examining the relationship between levels of oil resource abundance and levels of institutional quality, we examine the effects of oil on changes in institutional quality. We examine the effects of oil abundance on changes in each of 13 different institutional indicators (for which appropriate indicators exist over time), including bureaucratic quality, corruption, law and order, resistance to ethnic tension, internal conflicts, external conflicts, government stability, investment profile, and socioeconomic conditions. We also examine the effects of oil abundance on four dimensions of governance: democracy, polity, regulations on executive recruitment, and constraints on the executive. Additionally, we wish to examine the sensitivity of these institutional outcomes to alternative measures of both oil abundance and experience in the oil industry and to possible interactions between the two. These are all factors that have been suggested as being relevant either to institutional change or to the effects of oil on growth. As the various measures of oil abundance/dependence used in the literature have been subjected to criticism for concerns of endogeneity, thereby biasing the estimated effects in one direction or another, we devote considerable effort to testing for endogeneity and reducing it as much as possible. …

This article argues that joining global value chains may be decisive for supplier firms in developed countries by providing incentives and opportunities to upgrade their capabilities to export and innovate. We describe an investigation conducted on a sample of Italian manufacturing firms, drawn from a database spanning 1998–2006 that compares labour productivity and total factor productivity between supplier and final firms at the same level of demonstrated ability (measured in terms of exporting and innovating). Findings indicate that ‘traditional’ supplier firms are less productive than final firms; as the ability of supplier firms increases, their productivity shortfall decreases to the extent that for those able to both export and innovate, there is no statistically significant difference in productivity between supplier and final firms.

In spite of general consensus on the importance of oil prices for objective measures of economic well-being across countries, almost no research has been carried out to analyse the effects of oil prices on subjective well-being internationally. Using the World Values Survey (2009), we help fill this gap by studying the effects of oil prices on life satisfaction for two groups of countries, oil importers and oil exporters. Although some previous studies have shown negative effects of oil prices on subjective well-being of one oil importing country the United States, since it is an outlier in terms of dependence on automobiles and in gasoline consumption per capita, these findings may not be representative of other oil importing countries. Our results show that, in fact, oil prices have quite strong negative effects on life satisfaction in a sample of over 40 oil importing countries. By contrast, for oil exporting countries for which there have been virtually no previous quantitative studies, but theoretica...

Supplier firms selling intermediate inputs/goods to other producers operate and even proliferate in both developed and developing countries, especially after the considerable decline in vertical integration occurred within most industries in the last decades. In the past, most of the studies investigating their relative performance have documented a profitability and productivity gap in which suppliers were disadvantaged relative to other producers (final firms). However, the recent globalization of intermediate goods markets has had important repercussions on suppliers of mature industrial countries like Italy, compelled to face low-cost competitors and to develop the technical and relational capabilities needed to connect themselves with the large buyers and assemblers operating in Global Value Chains (GVCs). As a result, suppliers which have best managed to adapt to changes may have obtained significant improvements in their performance. This view is supported by the theoretical framework proposed by the Global Value Chain Approach (GVCA) initiated by Gereffi (1994). According to this stream of literature, whether and how supplier firms are inserted into GVCs is crucial in determining their productivity. In particular, GVCs with advanced governance relations (relational GVCs) require suppliers to become directly involved in strategic stages of production: as a consequence of their participation in this type of chains, suppliers receive the incentives and opportunities to raise their productivity to the extent that the gap between them and final firms can be eliminated. To assess the validity of the GVCA predictions, an empirical investigation is carried out in this paper to estimate the Total Factor Productivity (TFP) of an unbalanced panel of 5137 Italian industrial firms for the period 1998-2006. Comparing the TFP of supplier and final firms, in most industries statistically significant differences are found for less capable, non-innovating and non-exporting firms; conversely when the most capable supplier and final firms (innovators and exporters) are considered, no significant differences come out between their average TFP. Very similar results are found when the same investigation is performed on labour productivity. This evidence corroborates the GVCA intuition: the “supplier discount” holds for low-capabilities suppliers involved in captive or modular GVCs (Gereffi and al., 2005). Conversely, when high-capabilities suppliers participate in relational GVCs, their productivity is stimulated up to remove the gap with final firms.?

The resource curse is a topic studied intensively in both economics and political science. Much of the focus is now on whether oil affects democratic institutions. We further the debate through the use of additional measures of democracy and multiple time-series estimation strategies. We find no robust long-run effect of oil rents per capita on Polity, Civil Liberties, or Political Rights. Many comparable studies were restricted to Polity. We also use different country and period samples to respond to the findings that the effects of oil abundance may differ in Latin America, the Middle East, in mature oil producers, or that the effects become significantly negative post-1980. In each case we do not find a significant relationship. Long-run effects are well placed to address this question because they are estimated separately from short-run fluctuations (important given the slow pace of institutional change), and are consistent even in the presence of reverse causality.

This study examines off-farm labor supply in the rapidly changing conditions of Bulgaria during the 1990s. In doing so, we make use of three different waves of the Bulgarian Integrated Household Survey, each reflecting remarkably different environmental conditions. The results suggest that standard theories of off-farm labor supply provide little guidance in situations characterized by chronic excess supply in the off-farm labor market and/or rapidly changing circumstances. In particular, the results show (1) that off-farm employment throughout the transition was predominantly determined by demand rather than by supply, and (2) that the magnitude and statistical significance of the various determinants are very sensitive to changing environmental conditions. As such, the results can be extremely relevant for both theory and policy for the many countries which may still need to go through privatization and painful restructuring as a result of financial crises and globalization.

This article draws on several of the major breakthroughs in the institutions and development field to demonstrate that criticisms of work in this field as a whole based on its allegedly universal and unquestioning support for liberalizing institutions and the simplistic rationale and deficient empirical methods that have been used to buttress that support are outdated, inappropriate and misleading.

Crises beget reforms is a powerful hypothesis. But which type of crises – economic or political – are the main drivers of structural reforms? To answer this question, we construct measures of labour market and trade liberalisation and the two types of crises for a panel of about 100 developed and developing countries between 1960 and 2000. We find that political crises are more important determinants of structural reforms than economic crises. This finding is robust to the inclusion of interdependencies between crises, feedbacks between reforms, different estimators and various alternative measures of crises.

I. INTRODUCTION Firms in oppressive environments such as those of the transition economies face a variety of problems, including the high cost of complying with regulations, frequent changes in those regulations, and hence lack of knowledge about current regulations and policies; difficulties in gaining access to telephones, electricity, and infrastructure; inefficient and corrupt judicial systems; and cumbersome and non-transparent licensing, customs procedures, and rule making. As a result, it is common for firms in transition economies to make unofficial payments to officials to obtain needed services and avoid taxes and regulations (Djankov et al., 2002; Johnson, Kaufmann, and Schleifer, 1997). While there are oppressive and corrupt regimes in many parts of the world, a survey by the European Bank for Reconstruction and Development (EBRD, 1999) showed the transition economies to have the highest scores for corruption among public officials of all country groupings. As recently as 2001, only 1 of the 25 transition countries included in this study (Slovenia) had a score for control of corruption of 5.0 or more on the widely used 0-10 scale of the Corruption Perception Index (CPI) of Transparency International. 1 Even after some improvement in corruption control or freedom from corruption in the region since then, in 2007 there were still only three transition countries with scores of 5.0 or more, and half of the rest had scores of 3.0 or below (Corruption Perception Index website). These scores are based on the perceptions of a wide variety of people. Using data from the first year (2002) of the two rounds of the survey used in this study for 25 transition countries, Campos and Giovanoni (2008) assert that some 18% of the firms in the sample say that 10% or more of their revenues are spent on unofficial payments to officials. Based on a still earlier round (1999) of the same data set, Hellman, Jones, and Kaufmann (2000) find that the percentage of firms in each transition country admitting to ever having paid bribes ranged from 45% (Belarus and Slovenia) to 90% (Kyrgyzstan). With respect to the frequency of such payments, Tanzi and Tsibouris (2000) report that as much as 59.3% of firms (for Azerbaijan) admitted to making these unofficial payments "frequently or more often." Somewhat surprisingly, even with improving economic conditions in transition economies and their success in attracting foreign direct investment (FDI), firms in transition economies with FDI are reported to be even more prone than other domestic firms to make unofficial payments (Anderson, 2005). Tax evasion is another huge and endemic problem in the transition economies. Uslaner (forthcoming) cites numerous sources stating the extent of tax evasion to be extremely high in most transition countries, ranging up to 40% of gross domestic product (GDP). He also shows that "tax morale" (as measured by questions on the World Value Surveys concerning the acceptability of tax cheating) is typically much lower for people in transition countries than for those in other countries. (See also Hanousek and Palda, 2004.) When citizens deem their governments to be corrupt, implying that funds are diverted from their intended public purposes to the private ones of bureaucrats and their friends, they see nothing wrong with not paying their taxes. This makes these two distinguishing characteristics of transition countries, high corruption and tax evasion, interrelated. If judges are corrupt, firms know that the court system will not be fair. If tax officials are corrupt, tax enforcement is likely to be sporadic and inefficient. With corruption and stiflingly rigid regulations and tax rates, a common strategy for firms is to operate outside the official economy. Indeed, Johnson, Kaufmann, and Schleifer (1997) reported the shadow economies of the countries of the former Soviet Union to average 34% of their respective GDPs and corruption to be related to tax evasion. …