Three essays on smooth transitional adjustments in emerging markets after liberalizing reforms

During the past several decades, lots of developing countries launched dramatic pro-market economic liberalization in an effort to attain higher growth. While as most economists agree on, these countries' growth performances should in part due to the continued structural reform, including trade and other liberalizing reforms, what emerges in these countries is not a story of immediately dramatic transformation in micro-economic structure following liberalization. This is because it is a slow process for foreign technology and capital to adjust to and interact with domestic environment and innovative activity in creating productivity improvements. Learning of the new rules and the game, and inferring the credibility and durability of new policies is a gradual process. Therefore, in this study, the traditionally used assumption of instantaneous 'big bang' shift is replaced by a more general one stating that the parameters of the model may change continuously over time.;This dissertation, for the first time applies the Time Varying Smooth Transition Regression (TV-STR) model to investigate the dynamics of market structure and productivity growth after liberalization in emerging markets. It proposes an innovative way to model slow structural changes as a smooth transition between states before and after any unexpected regime switching. In particular, instead of using a priori information to fix the date of a transition, the speed and the timing of the transition are endogenously determined by the data. Among the countries experienced liberalizing reforms, China and India, with leading growth in the world during the past decades, are chosen as the case studies. In details, we applies a Logistic Smooth Transition Regression (LSTR) approach to the estimation of a homogenous aggregate value added production function of the State Owned (SOE) and Foreign-Funded Enterprises (FFE) in China, 1980s-2007. We find high but gradually declining markups in both SOEs and FFEs during the early stages of the adjustment, with SOEs having a much larger scale and market size than the FFEs. However, over the transition process, returns to scale in industrial SOEs dropped sharply. For both FFEs and SOEs the transition is slow, with a midpoint about 7 and 14 years, respectively. We find significant increase of TFP growth rate for both FFEs and SOEs, by 0.1436 and 0.1971, respectively.;We also applies the Time Varying Panel Smooth Transition Regression (TV-PSTR) model to estimate the transition in Indian manufacturing industries associated with India's unexpected dramatic trade and financial liberalization stinting from 1991, using Indian maunfacturing firm level data. The results show that the transition after liberalization does follow a smooth process instead of the previously assumed instantaneous 'big-bang' shift just after reforms. It actually took years for the Indian industries to start to react to the reforms, and the transitional impact of reforms took approximately four to eight years to complete, with different timing across industries. 'There is strong evidence of increases in competition, which pushes down the markup. Generally, import-competing industries, which suffer heavily from the shrinking market size, experienced no significant increase in TFP growth; whereas the export-oriented industry, which benefit most from economy of scale, enjoyed a huge TFP growth in response to reforms. Furthermore, the study compares the results of India with those of China with policy suggestions proposed.;To dig deeper the effects of Indian macroeconomic reforms after the 1991 crisis on microeconomic restructuring at the firm level, this dissertation finishes by studying the adjustments of Indian manufacturing firms' investment behaviors employing Euler Equation Model. The results show that the slowdown in private investment after 1995/97 was in part due to the over-investment during the first five years after the crisis: that this over-investment was facilitated by established links between large firms and financial institutions, instead of being based on competitiveness; and that the growth resurgence after 2002/03 is based on strong micro-foundations after the profound microeconomic restructuring stimulated by the import tax cuts. The process was slow because of the gradual nature of the reforms. In this formulation, the cumulative impact of India's gradual reforms has been substantial, the rise in fiscal deficits and deterioration in debt dynamics after 1997 were the cost of the reforms; the benefit was the microeconomic restructuring; the resurgence of growth since 2002/03 is based on strengthening microfoundations in an environment of global competition.