, http://www.worldbank.org/transitionnewsletter T HE NEWS L TL ER AB O UT RE F OR MING EC ONO MI ES TtN AN SITION NEWSLETTER Vol. 13, No. 1 January-February 2002 The Enron Crisis: Some Lessons for Transition Economies 23851 By Adolf Enthoven The collapse of Enron Corporation, the seventh largest corporation in the United States, is the largest bankruptcy case in U.S. history. Shareholders, employees, retirees, and others lost more than $60 billion, and Enron's shares have dropped to less than 1 percent of their recent high value. If the necessary regulations and safeguards had been in place, this could have been prevented. It will undoubtedly result in stricter economic, financial, and accounting regulations, especially for the capital markets. While the issues to be dealt with have a U.S. focus, transition economies and their professional and governmental bodies can draw their own conclusions on how to deal with such issues in their respective socioeconomic environments. All the more so because they often look to the U.S. accounting and financial regulatory frameworks as models to be emulated. T he Enron case reflects the loop- holes that the company-and pre- The Urban Inst i tute sumably its top management (in n H1 conjunction with financial institutions, its A NONPARTISAN ECONOMIC AND SOC[AL POUCY RESEARCH ORGANIZATON| outside auditors, and its legal counsel)- Welcoming Our New Partner were able to exploit and the excesses they engaged in at the expense of nu- We welcome the Urban Institute as one of our partners. This venerable, non- merous stakeholders. It is not a pretty profit, policy research organization located in Washington, D.C. has been oper- picture. Abuses of certain generally ac- ating since 1968. The institute's goals-as stated in its mission statement (http:/ cepted accounting principles and proce- /www.urban.org/)-are to sharpen thinking about society's problems and efforts dures should have been caught internally to solve them, to improve government decisions and their implementation, and to and by internal and external auditors. In- increase citizens' awareness about important public choices. Under the institute's ternal control, a critical element of ac- umbrella a group of like-minded institutions are brought together by means of the counting, was deficient. The unethical Transition Policy Network to provide technical assistance in the transition coun- conduct of many executives, members tries of Central and Eastern Europe and the CIS. Their aim is "to support and of the Board of Directors, outside ac- accelerate the regional movement toward market-oriented economies, and de- countants, financial analysts, and banks velop a regional community of public policy analysts with common perspectives involved does not reflect well on certain and approaches." Members include the Center for Policy Analysis (Yerevan, facets of American capitalism. As Pro- Armenia), the Center for Political Studies and Comparative Analysis (Bucharest, fessor Paul Krugman wrote in the New Romania), the Center for the Study of Democracy (Sofia, Bulgaria), the Institute York Times: "It takes the lid off crony for Contemporary Studies (Tirana, Albania), the Institute of Housing (Bratislava, capitalism." Slovakia), the Institute for Urban Economics (Moscow, Russia), the Krakow Real Estate Institute (Warsaw/Krakow, Poland), the Metropolitan Research Institute Transition economies, which are cur- (Budapest, Hungary), the Urban Institute (Washington, D.C., U.S.A.), and the rently developing their own financial, ac- Viitorul Foundation (Chisinau, Moldova). The Transition Newsletter is looking counting, legal, and economic regulatory forward to working with these institutions. WB Development Economics RA r SITE LGI r&BOFIT Urban Institute frameworks as an underlying element means of the SEC. The SEC, estab- O | 1 C onte nts for sound capital formation and eco- lished after the 1933/34 depression, la i | Inomic progress, might learn from has already proposed creating an ac- Hungary's CorruptAccountants 3 this case, which brought several criti- counting disciplinary body to overhaul X g, ! l Auditing Abuses and Cures 5 cal issues to the forefront. the existing system of accounting over- sight. The accounting profession, NewHopesof EU Candidates 7 Genuine Transparency Is Re- headed by the American Institute of Brussels' Proposal Under Fire 9 quired Certified Public Accountants (AICPA), The First 1 0 Transition Years clearly does not have the power or the GR'NTew World 10BTansitin Report Enron's financial statements were influence to regulate its member bod- / New World Bank Report 11 neither clear nor open, and were mis- ies. The Public Oversight Board, es- '1 *Interview with Co-author leading, or even deceptive. Both the tablished by the profession to review _Lessons_of Pradeep Mitra 15 company and its outside auditors ap- and watchdog the accounting bodies, *Lessons of Privatization 17 pear to be the culprits. By creating has done little so far. As expected, Impact of September 11 22 hundreds of so-called special pur- when reviewing other firms' audit re- World Bank/IMF Agenda 24 pose entities (limited partnerships), ports (peer reviews), accounting firms Enron kept debts off the company's have tended to give them passing SITE consolidated balance sheets and in- marks. Thus to date, self-regulation *Russia Joins WTO When? 25 come statements. It used these spe- and peer review have been ineffective. eAssessing the Value of Law 27 cial purpose entities as vehicles to LGI/OSI raise capital for Enron without add- The existing accounting model and *Public View of Local Govern- ing debt to its financial statements, prevailing accounting and auditing ments 29 which would have dragged down its standards and principles may well be *Can We Trust in Census? 31 credit rating. Enron's 2000 annual reviewed following Enron's exposure *Slovak Census 34 report lists more than 3,000 subsid- of their weaknesses. Accounting 'Data Collection and Privacy 36 iaries, including over 300 special statements should give stakeholders .Managing Multiethnic Commu- purpose entities and 900 offshore a clear picture of a firm's operations nities 37 subsidiaries and partnerships (used as well as of its financial structure. .Regulation of Public Utilities 38 in part to eliminate U.S. income tax Joseph Berardino, chief executive of liability). The company has not paid Arthur Andersen, Enron's auditing BOFIT (Articles about Russia) any U.S. federal income tax for the firm, admitted that: "Our financial re- *Economy-A Snapshot 39 last four years. Harvey Pitt, chairman porting model is broken. It is out of *Costly TransportAutarchy 40 of the Securities and Exchange dateand unresponsivetotoday'snew *Reforming Fiscal Relations 41 Commission (SEC), characterized business model, complex financial Power Sector in Russia 43 Enron's financial statements as structures, and associated business "dense and impenetrable." Enron risks." The Urban Institute also had billions of dollars of out- *Small Business-Large Ob- standing derivative contracts that Although extensive government over- stacles in Ukraine 44 were not properly disclosed. To pro- sight and basic regulations are un- *Targeting Local Assistance in tect shareholders, the antidote is to doubtedly warranted, under a proper Russia 46 keep the capital market-including structure that includes government 'Housing in Armenia 47 the stock markets-transparent. oversight, the accounting profession *Kyrgyz Condominiums 48 might well be able largely to self- Stronger Government Oversight regulate itself. Pure govemment han- Conference Diary 53 Is Necessary dling of these activities is neither New Books and Working desirable nor effective, because itwould Papers 57 As a consequence of the Enron de- result in a political process, thereby in- Bibliography of Selected bacle, government oversight of both volving people without the necessary Articles 63 the accounting profession's self- knowledge and insight. International regulation and the rules for corporate accounting bodies, such as the Inter- disclosures are likely to be greatly national Federation of Accountants strengthened, presumably mainly by and the International Accounting TRANSITION, January-February 2002 c 2002 The World Bank Standards Body, could help shape analysts recommend selling for only independence, and could therefore l -1 C the final outcome. about 1 percent of all the stocks they compromise the overall integrity of ' handle.) Thus financial analysts tend audited financial statements. Informa- Sources of Conflicts of Interest to be instrumental in pushing and tion technology consulting generated! Should Be Eliminated inflating the value of their clients' approximately half of accounting firms' I E stock. In October 2001, 16 out of 17 revenues. In 2000, then SEC Chair- Conflicts of interest may arise be- securities analysts listed Enron as man Arthur Levitt tried to ban audi- tween a company and its account- a buy or strong buy. Finally, mem- tors from providing their clients with ing firm, because the accounting firm bers of boards of directors generally information technology and consult- is often highly dependent on the have personal, financial, or consult- ing services and from conducting company's income. In addition, the ing relationships with the corpora- internal audits for their clients. KPMG, accounting firm may perform lucra- tions on whose board they sit. Deloitte and Touche, ArthurAndersen, tive management services for the and the AICPA opposed that effort, company, or also be responsible for Faced with strong pressure for de- threatening to go to court to block internal auditing, as happened at regulation from many members of theSEC.Ultimatelytheygotlawmak- Enron. Furthermore, banks and finan- Congress, the SEC loosened ac- ers to pressure Levitt to back off. cial analysts may have an interest counting standards, in particular, by However, as a consequence of the in painting a good picture of the allowing accounting firms toenterinto Enron scandal, the auditing industry company's position, because nega- consultancy relationships with the appears to be dropping its once in- tive reports may hamper their rela- companies that they audit, which tense hostility to restrictions on its tions with the company. (Financial potentially decreases the auditor's consulting business. Cooking the Books in Hungary In December 2002 Hungary's special police commando charged the accounting company with having too cozy unit arrested fugitive auditor Agnes Kalacsi, a primary a relationship with the management and with a "lax atti- suspect of helping dozens of companies manufacture tude" in evaluating the airline's 1992 financial report. fake invoices for tax evasion purposes. Her Ukrainian bodyguards did not intervene. Together with her Ukrai- On a larger scale Deloitte and Touche (auditors of the nian partners, she was running an auditing business, locally-owned Prudentia Auditing and Advisory Com- allegedly with Mafia connections. pany), are charged with being accomplices of Postabank's former management under chief execu- Since the transition process started, a series of large tive officer Gabor Prinz. Postabank's 1996 and 1997 scandals related to privatization have surfaced, espe- annual reports were falsified, shareholders-among cially in the evaluation of the assets of privatized enter- them the biggest one, the state-were misled. prises. On many occasions the auditors colluded with Postabank, the fourth largest commercial bank in Hun- the buyers to artificially underestimate the value of the gary in the 1990s, accumulated huge debt, that only company for sale. This suspicion was raised by the came to light as a result, the newly elected sale of the big hotel chains, HungarHotels and Taverna. government's large-scale investigation in 1998. The The auditors were fired, but no formal charges were responsibility of Arthur Andersen auditors, who were filed. As the police point out, catching auditors com- also reviewing Postabank's reports, has been raised mitting unlawful acts is extremely difficult and accord- as well. Gabor Prinz was forced to resign and took ing to Hungarian law, auditors are entitled to keep refuge in Vienna. The government had to consolidate information related to the finances of the audited com- Postabank with a huge capital injection. In an ongo- pany confidential. Auditors have to decide whether the ing court case the government is demanding Ft 170 company's accounting practices are endangering the billion (about $60 million) compensation from the au- public interest. As their responsibility is not clear, in ditors, Deloitte and Touche, Arthur Andersen, and most cases the maximum sanction is their dis- Prudentia. missal. This was the case in 1993, when the share- holders of Hungarian Airlines voted to cut ties with Based on Agnes Gyenis' article in the Hungarian World PriceWaterhouseCoopers' Budapest Office. They Economy Weekly. C 2002 The World Bank TRANSITION, January-February 2002 4' Many companies retain the same au- some restrictions on or oversight of disclosure of any financial ties to di- ditors indefinitely, and an additional mixing commercial banking and in- rectors. t5 X , government requirement may well be vestment banking. that each company change its audi- Overhauling Stock Options and m E tors every five years or so, while in The Enron case is not, as yet, a po- Retirement Funds the intervening years the partners are litical scandal, but essentially an rotated. accounting, financial, and ethical To encourage employees to partici- - ti scandal. However, donating sizable pate in retirement savings plans in While auditors are supposed to as- sums of money to political parties, addition to pension plans, the U.S. ,.i1 1 sure the public that a corporation's as Enron did, is a means of buying Congress freed retirement plans from L financial statements accurately re- influence. The legality of all this may many regulations. The use of com- flect its condition-and as indepen- also become more restricted. In pany stock in retirement plans has _ dent watchdogs should do their best Enron's case Kenneth Lay, the chief benefited companies and sharehold- to make sure investors can trust cor- executive, also told the head of the ers, and about 30 percent of the as- porate financial statements-such U.S. Federal Energy Relations Com- sets in retirement funds are company reporting may be compromised be- mission to push harder for deregula- stock. In the case of Enron, whose cause of external pressures and tion of the industry, an issue of stock plunged from $90 to $0.80, this pressures exerted by the company particular interest to Enron. can be disastrous for retirees. Regu- being audited. In the case of Enron lation in this regard will undoubtedly this situation applied to the special Raising Accounting Standards alsobeforthcoming,wherebynomore purpose entities, which created ve- than 10 to 15 percent of the stock hicles for getting access to more The Enron case may have a signifi- held in a retirement fund can be own- capital and increasing leverage with- cant impact on the accounting and company stock. In the case of Enron, out adding debt to the balance sheet. auditing professions in the United employees were prevented from sell- States. The Financial Accounting ing their stock, while top management Conflicts of interest can also arise Standards Board (FASB) is respon- were allowed to and made millions of on the part of banks and other finan- sible for developing accounting stan- dollars in profit selling their stock op- cial entities as, for example, in dards and the AICPA is responsible tions when the stock was high. Enron's case, where both Citigroup for auditing standards. The FASB of- and J.P. Morgan Chase provided ex- ten takes a long time to develop ex- To sum up, for transition economies, tensive financing for Enron's intricate tremely detailed standards, and most of which have a somewhat dif- and misleading financial structure. In many standards run behind events, ferent economic, financial, and ac- recent years both have earned tens as in the case of partnerships in off- counting infrastructure, the lessons of millions of dollars in fees from the balance sheet reporting and heavy of the Enron case appear to be to company for a variety of banking and debt. pay close attention to installing well- investment banking services. Now functioning financial, accounting, and each is likely to be writing off hun- Improving Auditors' Training auditing frameworks conducive to the dreds of millions of dollars in losses development of their capital and fi- from loans to Enron and related enti- As the case of Enron showed, audi- nance markets. Above all, before ties that the company cannot pay tors require knowledge beyond the they embark on full deregulation and back. field of accounting and auditing. This install free markets in a move toward raises the issue of whether the ac- a more market-oriented, capitalistic The 1933 Glass-Seagall Act legally counting training for certified public economy, they need to be sure that separated the lending business from accountants covers such fields ad- the proper financial, accounting, and investment banking services, such equately and in sufficient depth. legal infrastructure is in place. as handling the issuance of securi- Training also needs to pay more at- ties, because the financial turmoil of tention to ethics (or codes of con- The author is the directorof the Cen- 1929 was partly attributed to the fact duct). While the Audit Committee of ter for International Accounting De- that the two activities were intricately Enron's Board of Directors had plenty velopment, The University of Texas interwoven. However, Congress re- of talent, apparently it did not ad- at Dallas, 2601 N. Floyd Road, pealed this law in 1999. It could now equately review the financial and ac- Richardson, Texas 75083-0688, tel.: face new pressure to reestablish counting situation, for example, the 972-883-2320, fax.: 972-883-2192. TRANSITION, January-February 2002 © 2002 The World Bank Accounting and Auditing Abuses and Their l Remedies n December 21 the U.S. vate organization consisting of ac- much pro forma information as they Securities and Exchange countants, to establish the terms of like provided that their annual reports, x . Commission (SEC) an- GAAP. The SEC monitors and en- including official, audited financial nounced that it would review the an- forces company compliance with statements, are prepared according nual reports of all Fortune 500 these standards, as well as promul- to GAAP. According to one recent companies for accounting irregulari- gating its own accounting rules. estimate, in recent annual reports as : " ties. many as 300 Fortune 500 compa- I - In recent years, many companies nies used some form of pro forma Enron's spectacular collapse adds used accounting strategies to artifi- exclusion of categories of expenses impetus to the calls for a reexami- cially enhance their reported earn- from their operating earnings. nation of corporate accounting and ings. Although legitimate under transparency norms. Many U.S. current accounting rules, widespread Global Crossing Crossed the Line companies have adopted aggressive adoption of these accounting tech- accounting practices, at times con- niques has led to a pronounced de- In another spectacular bankruptcy cealing serious financial troubles, terioration in the quality of financial case, the telecommunications giant and have misled investors. Under the reporting. In addition, companies are Global Crossing failed after betting U.S. system for regulating account- increasingly supplying quarterly too heavily on the demand for fiber ing practices, publicly traded com- earnings news releases that resort optic telecommunications. To lure in- panies are required to prepare to pro forma accounting numbers. vestors into financing a $15 billion audited financial statements accord- These are computed as if some sig- effort that ultimately ran aground, ing to Generally Accepted Account- nificant event (usually expenses, Global Crossing relied on a mixture ing Principles (GAAP). Since 1973 which if reported would decrease of new economy hype and account- the SEC has relied on the Financial earnings) did not occur. Companies ing tricks that created the illusion of Accounting Standards Board, a pri- have been allowed to present as revenue. The firm apparently signed Investigating Enron The collapse of Enron has spurred several U.S. gov- will focus on a broad range of concerns, including the ernment investigations, namely: company's relationship to Bush administration officials and the federal agencies' oversight of the company. * The Justice Department is investigating the possi- * The Senate Commerce, Science, and Transpor- bility of fraud in the company's accounting practices tation Committee is focusing on the treatment of em- and whether the company defrauded investors by con- ployees' retirement funds and securities analysts' cealing financial information. recommendations, among other issues. * The Securities and Exchange Commission (Trea- * The House Energy and Commerce Committee sury) is investigating whether Enron broke securities will focus, among others, matter on the regulation of laws by misleading investigators about its financial con- energy and natural gas markets. dition. * The House Financial Services Committee is fo- * The Labor Department is looking into allegations cusing on the impact on commodity markets, on the that Enron improperly blocked its employees from sell- company's accounting practices, and on potential se- ing the company's stock in their retirement accounts. curities fraud, among other issues. * The House Education and Work Force Commit- Meanwhile, congressional bodies are undertaking the tee will focus on Enron's retirement plan and its compli- following actions: ance with the Employee Retirement Income Security * The Senate Governmental Affairs Committee Act, which regulates employer-sponsored pension plans. D 2002 The World Bank TRANSITION, January-February 2002 ' it1 long-term contracts with customers, lucky to outrank journalists, lawyers, education. Meanwhile, only state o t11 then booked the income stream im- or used car salesmen in the next sur- accountancy review boards can strip 4 ] mediately. Meanwhile it took the op- vey. But trust can be restored in the accountants of their licenses, but M e3 111posite approach to the equipment CPA profession. There are two ways they struggle with varying levels of E 01 needed to deliver on these contracts, to do that with minimal government standards, and problems of cronyism. that is, in contrast to the revenue, it intervention, red tape, and regulation. Prohibiting accounting firms from ' < , pushed such capital costs off into One is to make accounting firms collecting lucrative consulting fees Z FC I the future. Global Crossing also work directly for the people with the from the companies they are au- seems to have colluded with other most to lose: investors. Cotton sug- diting is only half the solution. telecommunications firms to inflate gests to set up a system whereby Andersen got $27 million in con- jj>} !: revenue by cross-selling to sulting fees from Enron in each other. If you sell me C a single year and $25 mil- - your hammer and I sell you Changin ieaching in the lion for the Enron audit. mine, we both get to report United States Taking away consulting income. 1950: A loggersells o trucklooadof lumber for $100. fees, and audit fees are still His cost of production is 4/5 of the price. Whot is enough to undermine inde- If the audit rules had been his profit? pendence and cloud audi- stricter, Global Crossing tors' judgment. Better to might have had a harder 1980:A/oggersellsotruckloadofluer rfor$100 simply sever the links be- time hyping its way to His cost of production is $80 and his profit is $20. tween companies and their stock market stardom, and Your assignment: Underline the number 20. auditors than to establish the ensuing crash, in which 1990: By cutting down beautiful forest trees, the new mechanisms to moni- many ordinary investors got logger makes $20. How do you feel about a person tor a relationship that natu- burned, might also have been who makes a living this way' How did the forest rally lends itself to abuse. avoided. Indeed, the broader birds and squirrels feel as the logger cut down the high-tech bubble, which was trees and watched their homes being destroyed' Relieved of the fear that inflated with much help from There are no wrong answers. corporations might dis- aggressive bookkeeping, miss them for being too might also have been miti- 002:Aoggersellsatruckloodoflumberfor$100. tough, auditors could fo- gated. Firms cooked their His cost of production is $120. How does Arthur cus on telling investors books to raise more capital Andersen determine that his profit margin is $60? what they need to know- than they could wisely use; Joke downloaded from the Internet and alerting accounting the resulting bust was-the and auditing standard-set- prime cause of last year's recession. the stock exchanges use a competi- ters about emerging techniques of Even today, one of the chief threats tive process to select CPA firms to dubious propriety. These mea- to the recovery is the possibility that audit the financial statements of com- sures should still be accompanied more Enron-style disasters will panieswhosestockistradedontheir by moves to prohibit accounting emerge. The nation's audit system exchanges. That would take auditors firms from performing consulting needs a thorough overhaul, not just off the payroll of the firms they are services for their audit clients. This hasty tweaking. supposed to be monitoring. should have been done long ago, except that the bigger accounting Should Auditors Be Separated Another measure would be to beef firms control the AICPA, which from Companies? up the strength of the accounting writes the Code of Professional industry's ethics review panel. Based Conduct, the profession's ethics Dave Cotton, in a recent article pub- on his personal experiences as a rules-concludes Dave Cotton lished in the Washington Post, member of the Ethics Committee of who is a partner with Cotton & Com- warns that last year a public opin- the American Institute of Certified pany LLP, an auditing firm in Alex- ion survey put certified public ac- Public Accountants (AICPA), Cotton andria, Virginia. countants (CPAs) solidly in the saw ethical lapses that resulted in middle of a short list of most trusted millions of dollars of losses, but the Partly based on reports from Oxford professionals. Thanks to Enron and punishment was minimal, often with Analytica, the U.K.-based interna- Arthur Andersen, CPAs might be as little as 16 hours of continuing tional consulting group. TRANSITION, January-February 2002 © 2002 The World Bank Hopes of EU Accession Countries in 2002 and i: 0 Beyond By Claus Schultze 'i "Wonderful experiment arguing about milk quotas instead of shooting at each other" (recent quote from a senior C C EU official). H As envisaged in the 2001 enlargement report by the European Commission, which is coordinating acces- 7 sion negotiations, up to 10 countries could join the EU simultaneously as early as 2004. The report finally brought EU accession within clear reach for most candidate countries of Central and Eastern Europe. At - their 2001 year-end meeting in Brussels, the EU heads of state named the countries that would be part of this "big bang" enlargement. The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia, and Slovakia, as well as Cyprus and Malta, could finalize their accession negotiations by the end of this year or early 2003 at the latest, leaving about one year for the necessary ratification process. Bulgaria and Romania were told that they needed some more time to attain the economic and political "maturity" required for EU membership. Estimates suggest that the two countries will not be ready before 2008. W ith the necessary eco- affairs have only been closed with a the Copenhagen European Coun- nomic, administrative, small number of countries. Recently, cil meeting in 1993-which opened and institutional reforms however, Madrid has committed it- the door to EU enlargement-to the well on track and the finishing line in self firmly to the enlargement forthcoming Copenhagen summit in sight for most candidates, what can roadmap, which foresees adherence December 2002. However, its new these countries hope for in 2002? As to a strict schedule and deadlines center-right government is some- usual, the devil is in the details, and for advancing the negotiations. Fol- what inexperienced on EU issues, plenty of pitfalls can still thwart any lowing a Commission proposal to and carries the burden of Denmark hope for a speedy conclusion of the negotiate entry on the basis of the being labeled as a notoriously negotiations. Regional policy and ag- present legal framework and budget- "eurosceptic" country that has riculture and their expensive budget- ary ceilings, agreed at the Berlin opted out of several arrangements, ary implications might still turn out Summit in 1999, Spain has practi- including the introduction of the to be stumbling blocks. (Farm spend- cally detached the remaining enlarge- euro. ing and aid for the poor together ac- ment negotiations about regional count for some 80 percent of the policy and agriculture from internal The Case for Limited Absorption EU's $87 billion budget for this year.) EU reform issues. However, Spain Capacities The hope is that Spain and Denmark, has a strong interest in securing the countries that will successively hold continuous flow of regional aid from The candidate countries were told not the EU presidency in 2002, will be Brussels to its backward regions. to expect more than the equivalent able to push forward the negotiations Backed by Greece, Italy, and Portu- of 4 percent of their GDP as finan- according to schedule and broker the gal, the other main beneficiaries of cial aid to their most backward re- necessary compromises between the current regional aid regime, Spain gions. This means that they would the current 15 member states. seems prepared to defend the south- receive only half of the financial as- ern European share of the cake to sistance in per capita terms than Milestones: Seville and the detriment of the incoming new current members. The official argu- Copenhagen members from Central and Eastern ment is that the accession countries' Europe. "absorption capacities" for EU-funded Spain initially expected delays be- structural programs are limited. Ac- cause of the unsolved issues left over Denmark aspires to be able to an- cording to the current EU funding from Belgium's EU presidency, no- nounce the ultimate success of the regime, a country receiving structural tably, chapters such as competition whole process, thereby celebrating aid from specially earmarked funds and taxation and justice and home the 10-year cycle that stretches from needs to cofinance these measures © 2002 The World Bank TRANSITION, January-February 2002 from its own budget, typically by 20 ers, and the allotment of production fully prepared-even if this affects only to 50 percent. quotas, as well as on the necessary a minor number of policy areas- transition regimes. In any case, given would seriously undermine the func- The following funds are the main fi- the many vested interests involved and tioning of the EU and of its comerstone, nancial instruments for the EU's the candidates' expectations of be- the internal market. structural policies: ing treated the same way as current EU members, the candidates are However, the indications are that not * The European Regional Devel- likely to be disappointed by the out- every country will be measured by the opment Fund helps disadvantaged come of these negotiations. same standard. Poland, for instance, regions build competitive infrastruc- even though it is lagging behind front- ture for transport, energy, telecom- With each member state having veto runner countries such as the Czech munications, the environment, power, political developments can Republic, Estonia, and Slovenia, is education and health, investment in complicate, and possibly delay, the not too worried, knowing that Ger- production, services for small busi- necessary compromise on the EU's many is on its side. If politics gets nesses, and local development, negotiating position. The outcomes the upper hand, the credibility of the * The European Social Fund pro- of two upcoming elections, one in enlargement process and of the EU motes employment by providing as- France in May and June and the other might suffer, although the political and sistance with trainingandrecruitment. in Germany in September, could com- financial costs of a phased EU en- * The European Agricultural plicate matters. A strengthened posi- largement-with countries joining at Guidance and Guarantee Fund tion of France's mighty agricultural different times-might weigh more supports national aid schemes for lobby could influence discussions than any such concerns. agriculture and rural development. about the agricultural chapter, and a * The Financial Instrument for conservative and more eurosceptic The upcoming (second) Irish refer- Fisheries Guidance supports mod- government in Germany could further endum on the Nice Treaty and the emization of the fisheries sector. complicate the negotiations, adding country's general elections to be held to the troubles recently experienced no later than June 2002 could also Whereas these funds therefore im- with the new right-wing populist gov- cause delays in the accession pro- pose an additional and possibly criti- ernment in Italy. While threatening to cess. The Nice Treaty foresees com- cal budgetary challenge to the complicate the process, domestic plex new voting procedures for the incoming new member states, agri- politics are unlikely to stop EU en- EU Council, as well as other crucial cultural aid comes for free. However, largement. On several occasions dur- institutional arrangements. Its ratifi- the Commission has proposed tran- ing the past year EU heads of state cation is a precondition for EU en- sition periods in agriculture of up to have clearly stated that the enlarge- largement. (Every multilaterally 10 years, during which direct aid to ment process is irreversible. negotiated change to the original Eu- farmers would only be phased in ropean treaties, as well as all acces- gradually, starting with 25 percent of How strongly the EU will stick to its sion agreements, have to be ratified the subsidies EU farmers currently declared impartial management of the in all the member states in accor- enjoy. The new members would start accession process is still question- dance with their specific constitutional receiving full farm subsidies within a able, because negotiations will have requirements.) In June 2001 Irish vot- reformed EU agricultural policy only to be wrapped up at the end of 2002. ers rejected the Nice Treaty and in 2013 (see box on page 9). The EU has always maintained that thereby indirectly voted against EU each country will join on its own mer- enlargement, which many said had The Winding Road to Accession its, if it is ready for membership, and not been their intention. If the forth- if it has fulfilled all the strict acces- coming second Irish referendum has The Commission signaled that be- sion criteria, particularly those related the same outcome, the EU would face fore it proposes a common EU posi- to EU legislation. The new members serious political difficulties, with pos- tion to the Council of Ministers' will be entitled to participate directly sible repercussions for speedy en- Working Group on Enlargement, it in the EU's decisionmaking process. largement. Finding creative solutions would continue informal discussions The enlargement modifies the very to permit the accession of the can- with the candidate countries that would basis of the Union, the setup of its in- didate countries without Nice Treaty focus on the future allocation of the stitutions, and the nature of its poli- considerations would certainly delay structural funds, the direct aid to farm- cies. To let in countries that are not the enlargement schedule. TRANSITION, January-February 2002 © 2002 The World Bank Chores Ahead EU law is now progressing rapidly. all the countries are facing difficulties I S However, implementation is encoun- in implementing competition policy, Above all, the adoption and imple- tering considerable difficulties, partly and rules on state aid. Furthermore,: mentation of the approximately because of the countries' still lim- as the Commission's report pointsi 80,000-page body of EU legislation ited public administration and judi- out: "Securing the independence of continues to remain the prime chal- cial capacity, and partly, but to a lesser courts, greater transparency of pub- I lenge facing the accession countries degree, because of political factors. lic administration and more consis- in 2002. The legislative adoption of According to the Commission, nearly tent efforts to fight corruption and . r- The EU Commission Proposes-and Got Hit from all Sides On January 30 the European Commission published level of economic development." Prime Minister Victor two papers about how to extend the EU's regional aid Orban of Hungary departed somewhat from this posi- and agricultural policy to the new member states. The tion and raised the possibility of a compromise: "Hun- money allocated to the new member states keeps gary will do its best to see that the subsidies are within the overall ceiling on enlargement costs, which increased and that the transition period is cut to three the EU agreed on in Berlin in 1999 for the current bud- years following accession in 2004. By 2007, when the get, which runs until the end of 2006. The recommen- EU will have to pass a new budget, a reform of com- dations include the following: mon agricultural policy could be reached with new mem- ber states, making provisional discrimination against * When they join-as currently expected-in 2004, them unnecessary." new member states will be entitled to 25 percent of the direct payments given to farmers in the existing mem- While the candidates are disappointed, as the propos- ber states. Each year thereafter their entitlement will als raise the prospect of a 10-year wait until they are increase until it reaches 100 percent in 2013. (This 10- treated equally with the existing member states, cur- year transitional period will also affect the 2007-13 bud- rent members find the proposals too generous: get.) The payments will be based on farm acreage, not on production levels. In the meantime, farmers in the 0 At the EU foreign ministers' meeting on February applicant Central and East European states will re- 8, France and Germany criticized the plan and are ceive market support and rural development funds from seeking a 25 percent cut in the proposed spending of the EU as well. $35 billion in 2004-06 for farmers and poor regions in * The overall budget for agricultural support to the new the 10 candidate countries. The Netherlands, Swe- member states will be just over E40 billion ($34.8 bil- den, and the United Kingdom also said the spending lion), a figure that includes their annual contributions plan of the EU Executive Commission was too gener- of about E5.5 billion. ous at a time when Europe must restrain farm spend- * Between 2004 and 2006 the new members will also ing. They suggested that direct income support for receive regional aid for infrastructure and environmen- EU farmers be ended and that no such payments be tal improvement. By 2006 they will be receiving struc- made at all to East European farmers. They argued tural funds at a rate of E137 per capita, which is just that such subsidies would discourage East European over half the amount that the four poorest existing mem- governments from restructuring their farm sectors, ber states will receive per head in that year. Some which are more fragmented and inefficient than in the candidate countries will also receive additional funds EU. Statistics point to significant problems. In Po- for administrative reform and nuclear safety. land, for instance, 27 percent of the work force is employed in agriculture, whereas the EU average is Following their mid-February meeting in Budapest, the 5.4 percent. prime ministers of four Visegrad countries-the Czech * A two-tier system for agricultural subsidies would Republic, Hungary, Poland, and Slovakia-rejected the seriously distort the EU's internal market. Farmers of proposal, urging the EU that "structural and agricul- current member states would be receiving four times tural funding should be applied in full to the candidate the level of subsidies of their counterparts in candidate countries from the moment of accession, and the per countries, but selling on the same markets. No other capita subsidies to candidate countries should be iden- sector of the EU economy is so distorted or receives tical to those given to EU members with the same such support from the EU's budget. © 2002 The World Bank TRANSITION, January-February 2002 l crime will require additional efforts in will monitor progress on this front, cember 2001 meeting in Brussels o all candidate countries despite the and has offered assistance. The the heads of state nominated a con- 4 .>E Iij overall stable democratic condi- forthcoming 2002 progress report, stitutional convention, which in- 5 a .;tions." due in October, will be instrumental cludes delegates of the accession E in assessing the state of affairs with countries, to deliberate about EU c; A distinction should be drawn be- respect to these and other issues. reform and a future constitution. As 3 1 3: tween issues that have to be resolved On the basis of this report the Com- the convention can only make rec- js js before a country can join the Union, mission will identify those countries ommendations, it will be the EU - -~ I' such as conformity of public procure- that can finalize negotiations by the heads of state who will have to un- i|' ii ,ment and state subsidies with EU end of the year. The final decision derwrite any constitutional changes , l 8l.,rules, and issues that require more will be taken in December at the EU at a forthcoming intergovernmental -i sustained and long-term efforts, such summit meeting in Copenhagen. conference in 2004, at which up to _-__ ~ ,----,as improving the situation of the 10 additional member countries Romapopulationandrootingoutcor- Reforming the highly bureaucratic could already participate as full ruption. Another important area is to EU system and making it more effi- members and participate in deci- continue improving the candidate cient so that it can more easily di- sions on the future shape of the countries' administrative capacity gest the intake of up to 13 candidate Union. After all, EU reform and EU from the central government down countries without making the sys- enlargement are interrelated pro- to the local level so that they can tem ungovernable is certainly a dif- cesses. actually enforce the legislation that ficult task for the years to come. For is in place. The EU Commission, in the first time in the history of Euro- The authorresearches EU govemance particular, has made it clear that it pean integration, during their De- at the Free University of Brussels. Profitable Nonprofits < J**\0j jl;_- _ * .4' I~~~-- .71 I taz r rt What a nice car neighborl Financed from which nonprofit foundation? From the Hungarian Daily Nspszabadsag TRANSITION, January-February 2002 © 2002 The World Bank What Can Transition Economies Learn from the First 10 Years? x K A New World Bank Report Creating a policy environment that disciplines low-productivity, old enterprises into releasing resources K and encourages high-productivity, new enterprises to absorb those resources and to undertake new in- vestment-without tilting the playing field in favor of any particular type of enterprise while strengthening the social safety net-is central to economic growth in transition economies. This is the main lesson to be learned from the successful reformers in Central Europe and the Baltics concludes a new, 128-page World l _ _ Bank study entitled The First Ten Years-Analysis and Lessons for Eastern Europe and the Former Soviet Union (available on http://wbinOO18.worldbank.org/eca/eca.nsf). W ithout actually ranking countries need to consolidate the The countries had to confront two the transition countries, gains of the first decade of transition challenges. First, they had to impose the new World Bank re- and address second generation re- market discipline on inherited enter- port clearly divides them into lead- form issues, namely, they need to: prises so that these enterprises had ing reformers, primarily the Central an incentive to restructure and, in so European countries and the Baltics, * Secure control over quasi-fiscal doing, they would become more pro- and the rest, mainly the Southeast and contingent liabilities ductive and able to compete at the European and CIS countries. In the 0 Undertake labor and financial mar- new prices. Market discipline also first group, by 2000 only the Czech ket reforms to allow wider sharing of meant that those enterprises that Republic had not reached its 1990 the benefits of growth failed to restructure should be closed. GDP level. Hungary, Latvia, Poland, 0 Restructure social expenditures Second, they had to encourage the Slovenia, and to some extent Esto- to make them fiscally more afford- creation of new enterprises willing and nia and Lithuania have enjoyed sev- able without impairing the effective- able to compete in the marketplace eral years of uninterrupted growth. By ness of the social safety net. without seeking special favors from contrast, growth in Bulgaria and Ro- the state. mania was sharply interrupted by se- Disciplining the Old, Encouraging rious macroeconomic crises brought the New Barriers to the creation of new firms on by insufficient structural reform in are a critical obstacle to sustained the mid-1990s, and in 2000 GDP The common heritage of socialism growth in the transition countries of stood at four-fifths of its 1990 level. In implied that all countries in the re- Eastern Europe and the former So- 12 countries of the former Soviet gion began their transition with a viet Union. New firms, mostly em- Union average real GDP had only production system adapted not to ploying 50 or fewer workers, have reached62.7percentofits1990level. a competitive environment, but to rapidly become the major source of the exigencies of a command employment in the rapidly growing Continued growth is important for the economy. For example, energy in- countries of Central Europe and the leading reformers in Central Europe tensity, measured as the amount Baltics. In Poland, for example, and the Baltics: per capita incomes of energy used per unit of GDP, was where output in 2000 was nearly one- were still only 68 percent of the EU 0.95 tons of oil equivalent per and-a-half times that in 1990, more average for Slovenia, 59 percent for $1,000 of GDP in the Soviet Union than half of all workers are employed the Czech Republic, and 49 percent in 1985, compared with 0.50 tons in such firms, compared with a quar- for Hungary. And these are the of oil equivalent per $1,000 of GDP ter a decade ago. Small enterprises' wealthiest countries aspiring to EU in countries of the Organisation for share of employment in 1998 was accession. However, an exclusive fo- Economic Co-operation and Devel- also about 50 percent for other lead- cus on growth while providing basic opment. Thus many sectors and ing reformers, such as the Czech publicgoodsandprotectingthemost enterprises were not viable after Republic, Hungary, Latvia, and vulnerable is not enough. Accession price liberalization. Lithuania, roughly the same as in the c 2002 The World Bank TRANSITION, January-February 2002 EU. In contrast, in the large coun- liquidating and restructuring old and protection of state enterprises and triesof theformerSovietUnion,where inefficient firms inherited from the farm collectives through the banking output in 2000 stood at roughly two- past until such a cushion is in place? sector led to a sharp increase in bad 9 G ilthirds that in 1990, fewer than one in Not so as long as the old firms enjoy debts. These bad debts prevented I.l five workers were employed in such soft budget constraints, for example, the expansion of bank credit to new, o r Il|firms, with that share remaining al- receiving creditand foreign exchange small, and politically less connected most stagnant up to 1998. on preferential terms and not being enterprises. Eventually the situation Thus should policymakers focus on required to pay taxes, social secu- triggered banking and macroeco- lil Thus should policymakers focus on rity contributions, utility bills, and nomic crises in both countries. Simi- '1| 1 Illencouraging the creation of new firms bank debt, as new entrants will not larly, the old industrial sector in and the resulting employment oppor- face a level playing field. For ex- Belarus and Uzbekistan paid much tunities while postponing the pain of ample, in Bulgaria and Romania the less for its foreign exchange and _ U TheTransition Recession and the Great Depression, Selected Countries Consecutive years Cumulative output Real GDP, 2000 Country of output decline decline (percent) (1990 = 100) Transition countries Central Southern Europe and the Baltics 4 23 107 Albania 3 33 110 Bulgaria 4 16 81 Croatia 4 36 87 Czech Republic 3 12 99 Estonia 5 35 85 Hungary 4 15 109 Latvia 6 51 61 Lithuania 5 44 67 Poland 2 6 144 Romania 3 21 82 Slovak Republic 4 23 105 Slovenia 3 14 120 CiSa 7 51 63 Armenia 4 63 67 Azerbaijan 6 60 55 Belarus 6 35 88 Georgia 5 78 29 Kazakhstan 6 41 90 Kyrgyz Republic 6 50 66 Moldova 7 63 35 Russian Federation 7 40 64 Tajikistan 7 50 48 Ukraine 10 59 43 Uzbekistan 6 18 95 Great Depression, 1930-34 France 3 11 n.a. Germany 3 16 n.a. United Kingdom 2 6 n.a. United States 4 27 n.a. n.a. Not applicable. a. Simple average, except for the index of 1990 GDP, which shows population-weighted averages. Source:World Bank TR1ANsIrFoN, January-February 2002 t 2002 The World Bank credit needs than new, small enter- quently hampered the work and en- question about the applicability of prises, while in Georgia, the Kyrgyz forcementeffortsoftheSecuritiesand China's reform to the transition Republic, Moldova, Russia, and Exchange Commission to strengthen economies of Eastern Europe and Ukraine the old, large, and less en- the rights of small shareholders. the former Soviet Union. China ergy-efficient enterprises have been reaped spectacular gains from liber- allowed to run up significant arrears Hungary and Poland saw a sharp alizing repressed sectors such as to the utility companies, while new and early decline in employment and agriculture, which had surplus labor, and more energy-efficient enterprises a rapid demise of the old sector, and rural industries and from a mas- have received lessfavorable treatment. which initially made resources avail- sive inflow of foreign direct invest- able to the new sector cheaply. The ment. However, loss-making state Reducing barriers to entry-a strategy evidence suggests that new enter- enterprises were far less important of encouragement-musttherefore be prises must reach a threshold of in China than in most countries in accompanied by a hardening of bud- around 40 percent in their contribu- Eastern Europe and the former So- B get constraints on both old and new tion to employment before they can viet Union. For example, only 19 per- firms-a strategy of discipline-with- become an engine of growth. In Rus- cent of the Chinese labor force out tilting the playing field toward ei- sia and Ukraine, where the contribu- worked in the state sector and were ther kind of enterprise. If economic tion of the new sector to employment thus entitled to a range of social ben- reforms in support of discipline and is well below this threshold, a large efits, compared with 90 percent in encouragement are so critical for proportion of the labor force remains Russia. In addition, tight political growth, why have all countries not mired in old, unrestructured enter- control over asset stripping, together adopted them? Because the winners prises that are not generating in- with some state capacity for man- from early stages of liberalization and creases in productivity. In these aging public assets, allowed China privatization-typically those who countries the new sector has not to move its loss-making state enter- enjoyed control over state assets and emerged as a source of growth. prises more slowly to market condi- close ties with the political elite- tions at the same time the explosive may oppose reforms that will erode Learning from China? growth of new enterprises took place. their initial gains. Such reforms would include further trade liberalization, China's success in encouraging the These conditions were largely absent measures to facilitate the entry of entry of new enterprises (China's in most transition economies covered new domestic and foreign competi- GDP per capita grew 8 percent per by the report. The transition economies tors, and legislation to protect minor- year from 1978 to 1995, lifting 200 of Eastern Europe and the former So- ity shareholders and creditors. In million people out of absolute pov- viet Union did not have the resources Russia, for example, during the erty) without imposing significant dis- for a phased transition for state enter- 1990s, powerful industrialists fre- cipline on state enterprises raises a prises, but they would be well advised to draw from China's experience in Changes in Income Inequality in Selected relation to the importance of encour- Transition Economies aging new enterprises as a basis for Czech Republic wealth creation and economic growth. Hungaty Slovenja ia Elela rus_ el . ia _s Increased Inequality U kra ine - ~~Eslonin Poland _ The report admits that income in- :Cthuania equality increased throughout the rNl.,zn.O.3 _ . . . region during the last decade. The Kyrgyz Rep ubitc ________________ .Gini coefficient (the standard mea- Russian Federation sure of inequality) increased the least An-nen.ia in Hungary, the Czech Republic, and 0 0 2 0 4 0 6 0 S Slovenia, compared with other tran- Girii cneh,ciera sition countries (see the figure). The W 1987-90 _ 199E-99 countries of Europe and CentralAsia started the transition with some of Source: World Bank the lowest levels of inequality in the D 2002 The World Bank TRANSITION, January-February 2002 i world. In 1988 fewer than 1 in 25 gia, the Kyrgyz Republic, Moldova, the old sector until the cushion pro- people lived in absolute poverty (as and Russia income differences linked vided by new enterprises is in place .'measured by an income of less to educational achievement explain 0 Legal and regulatory institutions than $2.15 a day). Ten years later, less than 5 percent of inequality, com- have to be developed to oversee en- m - in 1998, one in five people in the pared with 20 percent in Slovenia and terprise management. In the mean- region could be regarded as "abso- 15 percent in Hungary and Poland. time, where direct sales of state lutely poor." Absolute poverty is as The huge rise in inequality is due to assets to strategic investors-a pre- .r .; high as 68 percent in Tajikistan, 50 the prevalence of widespread corrup- ferred method of privatization-is not percent in the Kyrgyz Republic, tion and rent-seeking; the capture of feasible, policymakers face a difficult and 40 percent in Armenia. To- the state by narrow vested interests, choice between A~ U _ L,gether with Moldova and Russia, which have modified policy to their -Privatization by sale to ineffective they now rival the world's most un- advantage, often at a high social cost; owners in a context of weak corporate -7I-S equal countries. and the resulting collapse of formal governance, with the risk of the assets wage and income opportunities. and income of minority shareholders In Central Europe and the Baltics ris- being expropriated by those who ing returns to education, decom- Conclusions gained control overtheenterprise, and pressing wages, and emerging -Continued state ownership in the returns to risk taking and entrepre- Analysis of the first 10 years of transi- face of inadequate political commit- neurship, basically positive develop- tion in Eastern Europe and the former ment to transparent privatization out- ments, signal that the market is now Soviet Union highlights the following comes and limited institutional rewarding skills and effort, and partly lessons, which could be applied in the capacity to prevent asset stripping explain the growing inequality. At the future to economies that have made by incumbent enterprise managers. same time, however, strong social limited progress with reform. * Resistance by the immediate ben- transfers and redistribution mecha- eficiaries of liberalization and nisms have dampened the rise in 0 While the initial conditions that pre- privatization (oligarchs, former education premiums and wage dis- vailed at the beginning of the transi- apparatchiks) to competition that persion, in line with the demands tion were critical for explaining the could reduce their special privileges these societies have placed on their output decline that occurred in all the should be broken. The government governments for such measures. countries, market-oriented policy re- needs to support new small and forms have played a significant role medium enterprises that would suf- The experience of the CIS is differ- in promoting subsequent economic fer as a result of an uneven playing ent. Rising education premiums and growth. field and stand to gain from further wage dispersion explain little of the 0 Policymakers cannot postpone the reform. Fiscal policy has an impor- rise in inequality. In Armenia, Geor- pain of liquidating and restructuring tant role to play in this respect. Main Recipients of Foreign Direct Investment, SelectedTransition Countries, 1992-99 1992-95 1996-99 County US$ millions Percentage of GDP US$ millions Percentage of GDP Central Southern Europe and the Baltics 21,091 0.5 50,558 3.3 Czech Republic 4,821 2.9 10,104 4.6 Estonia 647 3.9 1,050 5.2 Hungary 9,399 5.7 6,979 3.8 Poland 2,540 0.6 17,096 2.9 CIS 8,272 1.0 22,001 2.5 Azerbaijan 237 4.2 3,222 20.9 Kazakhstan 2,357 2.7 4,971 6.4 Russia 3,965 0.3 8,412 0.7 Turkmenistan 427 3.5 334 3.0 Note: Shares of GDP are period averages of medians for the group. Source: World Bank; country statistical office data. TRANSITION, January-February 2002 C) 2002 The World Bank Transitions' Early Winners Can Prevent Further Reform-Interview with Pradeep Mitra By Richard Hirschler Pradeep Mitra and Marcelo Selowsky headed the team of experts that produced the World Bank's , X report entitled The First Ten Years-Analysis and Lessons for Eastern Europe and the Former Soviet i Union. How long will initial conditions haunt these economies? Why is the struggle between the old and new sectors so decisive? What does "low-level equilibrium trap" mean? Pradeep Mitra, re- cently appointed to the position of chief economist for the Bank's ECA Region to succeed Marcelo Selowsky, who was offered a leading position in the IMF, answers these questions in the following interview with Transition editor Richard Hirschler. Q: The report claims that initial memory, geographic location, and tries. The break-up of the Soviet conditions in the transition coun- prior experience of nationhood. We Union meant the break-up of verti- tries played a significant role at found that countries with sufficient cally integrated production chains the beginning, but gradually be- market memory and long experi- and of long-established trade and came less important, and what ence of nationhood prior to the so- capital patterns, which caused se- really had a major impact was cialist period, in other words, vere dislocation. Industrialization in the market-oriented reforms. countries with strong initial institu- the Soviet Union was based on sub- However, the report also recog- sidized energy and transport. Once nizes that even if some coun- the economies of the former Soviet tries chose the right policies, Union were opened up, the result- prior "memory" of a market ing terms of trade shock was huge. economy also seems to matter. It is not that policy reform has not worked, but it is true that the out- A. Indeed, initial conditions in the come of a given level of policy re- transition economies explain much form effort-as measured, for of the wide variety in output drops example, by the World Bank liber- between the individual countries alization index or the transition in- during the period of the transition dicators of the European Bank for recession, 1990-94. These initial Reconstruction and Development- conditions include distortions in is certainly less favorable than in those countries, such as repressed tions, will perform better than coun- the Central European countries. inflation, the black market ex- tries that did not have the same change rates, and pretransition memory and experience, other Q: The report distinguishes be- trade patterns. However, the sub- things being equal. However, if tween the old enterprises inher- sequent recovery is better ex- policy reforms are strong enough, ited from the socialist era and plained by the policy reforms they can, to some extent, offset the newly created dynamic busi- implemented in these countries. the disadvantages conveyed by ini- nesses. It claims that the latter's Based on earlier research by Alan tial conditions. struggle for resources and po- Gelb, Martha de Melo, and Cevdet litical influence largely deter- Denizer we have aggregated indi- Q: Indeed, the further east we mines the outcome of reform cators of initial conditions into three travel from Central Europe, the efforts. As a consequence, you categories. In addition to distor- more economic difficulties we warn that policymakers cannot tions, we distinguish "structure," witness, especially in the coun- hope to postpone the pain of liq- including initial income level, natu- tries of the former Soviet Union. uidating and restructuring the ral resources, share of industry, and old sector. So encouraging the degree of urbanization, as well as A.Theadverseimpactofinitialcon- new and disciplining the old "institutions," which include market ditions is very strong in those coun- should go hand-in-hand. © 2002 The World Bank TRANSITION, January-February 2002 c {\ A. That's right. Encouraging the new 1990s GDP. Maybe this indicates equilibrium trap as the early winners ua l firms-ultimately the basis for wealth that the old style structure can be from partial reform become effective creation and economic growth-can- economically more effective than forces against any further reform. not be pursued effectively without at a quasi-free market economy? A the same time imposing discipline Q: How can the trapped countries on the old sector. The report actu- A. Belarus had recovered about 88 free themselves and attain further ally distinguishes three categories of percent of its pretransition GDP by development? firms: old firms; restructured firms 2000, which is indeed high com- (thosethathavespunoffassetsfrom pared with other CIS countries. A. Countries trapped in a partial re- the old enterprises and have become What we say in the report is that form equilibrium should take action viable); and new, greenfield invest- Belarus is a country that has not on three fronts: ment. In some countries, however, really substantially embarked on 3. new enterprises are run by people market reforms. Many of the insti- * Reformist governments should en- who have strong connections with the tutions of the command economy gage much more actively in public political elite and receive all kind of are still in place, so the state has education, for example, by telling the subsidies, whether through the bud- the capacity to provide some ba- public that a clear link exists between get, through the banking sector, or sic public goods. Furthermore, tax exemptions and nonpayment of through the tolerance of arrears to large transfers from Russia, mainly utility bills and bank debts on the one the utility companies. In these cases in the form of barter deals, are pro- hand, and a build-up of wage and discipline should apply to both old viding energy and other essential pension arrears and an inability to and new enterprises. products. The case of Belarus is maintain standards in schools and not inconsistent with the basic hospitalsontheotherhand.Thepub- Q: The report warns that after the framework in the report. If you have lic needs a better grasp of these links first wave of privatization, those some state capacity in place, and so that people can understand and who become owners will resist if you have functioning institutions, eventually support what the reform- further liberalization and reform the adverse impact can be cush- ers are trying to do. because they want to preserve ioned. The key challenge for their privileged positions. Belarus, once it starts reforming, 0 Some sort of collective action is will ultimately be the same as for needed by people who are now los- A. In the report we refer to this as a all other transition economies: to ers, but who would stand to gain if low-level partial reform equilibrium establish good governance and countries moved from partial to com- trap. In Russia, for example, the in- strong market-supporting institu- prehensive reform. This group in- siders who came out well from the tions. cludes the owners of small and initial wave of liberalization and medium businesses, the managers privatization fiercely opposed the Q: What were the real surprises of second-tier enterprises, and busi- Securities and Exchange Com- you came across when working nessassociations.Thesearealready mission's efforts to strengthen the on this report, that is, what find- well organized in Central Europe and rights of minority shareholders or ings proved to be contrary to your the Baltics, but less so in the CIS creditors. They felt that such mea- earlier expectations? countries. sures would have limited what they could do with their newly acquired A. With the experience of being in- *The budgetcan be used much more assets. A number of the CIS coun- volved with developments in countries actively to tax the rents that accrue tries have passed good legislation of the region it's difficult to say. I can to early winners from reform. They on improving corporate governance, say that it was surprising to find that can use this additional tax revenue and now face the challenge of imple- creating a good investment climate to fund worker retraining, severance menting it fairly and consistently. and encouraging the creation of new payments, social asset divestiture, enterprises will not be very effective and public education and health. It Q: Belarus is an interesting case, in itself without imposing strong dis- would facilitate enterprise restructur- because if you believe the official cipline on the old enterprises and ing and enhance people's ability to statistics, it was doing quite well, forcing them to restructure. Further- participate in the small and medium and together with Uzbekistan was more, we didn't fully expect that a enterprises that form the basis for the closest to reaching its pre- country could be stuck in a low-level wealth and employment creation. TRANSITION, January-February 2002 C 2002 The World Bank HI The World Bank, Privatization, and Enterprise l Reform in Transition Economies I M A Retrospective Analysis - By John Nellis Privatization in transition economies could have and should have been befter managed; opportunities I ___ were missed. However, holding privatization accountable for all the problems of transition is inaccurate | , 7 and unfair. Change of ownership was by itself insufficient to cut political-financial links between firms and l! the state, but that was not clear at the outset, and still appears to be a necessary, if not a sufficient, condition for successful reform. It is now also clear that approaching privatization less hastily and in a , - more deliberate manner might have been possible, in which case the results might have been less insider ownership and domination, less resistance to external investors, and more protection for minority share- holders. However, those countries in the former Soviet Union that tried to make the transition by means of this approach without much change in ownership have not met with a great deal of success. In Poland, the marriage of a hold spite considerable prodding and as- and rapid divestiture. Two reasons ing company idea with a give-away sistance from the World Bank, Po- account for this. The first reason is scheme took root in 1991, as evi- land turned out to be a slow privatizer. that in conjunction with rapid and dence mounted about the meager The question is, does it matter? The extensive small-scale privatization, results of privatization through either reality is that Poland enjoyed, for a these policies encouraged the explo- trade sales or share offerings (this time, just about the best overall sive growth of new private firms that slow pace of sales of large firms con- growth record of all European and turned out to be the principal engine tinued to be the case for a number of Central Asian transition countries. It of recovery and growth in transition years). In 1991-92 the authorities, returned to growth more rapidly and economies. In terms of restructuring, with the Bank's approval and assis- with more vigor than most other tran- they have consistently outperformed tance, responded in two ways: first, sition economies, and in the mid- privatized firms, much less SOEs. by dividing state-owned enterprises 1990s had the highest GDP growth (SOEs) into nine sectors and seek- rate in Europe. By late 1999 Poland's The second reason is that the work- ing advice on how to deal with each GDP was estimated at 125 percent ers' councils, so worrisome to both group of firms on a sectoral basis; of its GDP at the end of 1989, an Bank staff and external advisors in and second, by implementing a mass excellent record of positive economic 1990, ultimately proved to be a posi- privatization program (MPP), which achievement. Did the Poles manage tive force in Polish SOEs. In other combined the asset management this accomplishment despite the transition economies, Bulgaria and concept with a give-away scheme. slow pace of privatization, or be- Ukraine, for example, where the old However, political squabblesand work- cause of it? centralized state structures and ers' resistance delayed the implemen- sectoral ministries crumbled; where tation of the MPP for years, and many With hindsight one can discern a firm managers took over the control large, loss-making firms escaped Polish model of transition that suc- of assets; where privatization was privatization by this or any other ceeded without mass or rapid accepted in principle, but was not method. privatization. One can see that in the extensively carried out in practice; Polish context the introduction of free and where workers' councils were Poland: The Bang Was Big, trade and of free entry for new start- weak or nonexistent, the result was Privatization Was Small up businesses, combined with a asset stripping and large-scale de- tightened budget constraint on most terioration of firm quality. Poland Official figures suggest that after six remaining SOEs and the introduc- avoided this outcome not only by years of transition, only 22 percent tion of a mechanism for spinning off means of good macroeconomic and of the starting stock of 8,400 SOEs productive assets from SOEs with- financial policies, but also because was privatized. Clearly, despite offi- out formally privatizing them, pre- workers' councils were keeping an cial statements and hopes, and de- sented a viable alternative to mass eye on managers and hindering © 2002 The World Bank TRANSITION, January-February 2002 m~ tAthem, if not totally preventing them, less in the second. Thus at the end ported by the Bank during this pe- from asset stripping and "spontane- of the voucher exchange most citi- riod, disseminating what they in- ot >~ 5ous" privatization. The combination zens held shares in an investment creasingly assumed to be the correct ' v:: | of good policy, vigorously applied; in- fund, and not in specific firms, and privatization method. firm watchdogs; and small-scale the investment funds became the privatization limited both the fall in major holders of all privatized equity. However, while Poland and Hungary output and criminal behavior in Pol- continued to enjoy growth rates of 4 ish SOEs. The initial results were tremendously and 5 percent, respectively, in the last encouraging. Privatization contrib- half of the 1990s, the Czech GDP of 0 However, while good macroeconomic uted to the rapid growth of the pri- growth rate fell by 40 percent in 1996, 0 ) policy and slow privatization worked vate sector share of Czech GDP, sank to 0.3 percent in 1997, turned well for a time, it is a strategy that which reached 74 percent by 1996, negative in 1998, and did not recover :_ ::::_:::___ has its limits, as evidenced by the highest in the region. Exports markedly until 2000. Several factors Poland's recent slowing of growth and shifted from Eastern to Western accounted for the prolonged slide, in- the continuing social and financial markets. Growth resumed, having cluding two aspects of privatization. drain caused by numerous large, spent but a brief time in low negative First, the privatization investment loss-making state firms in coal, territory, and topped 6 percent in funds were insufficiently regulated, steel, and utilities. Ownership mat- 1995. This transformation and growth which opened the door to a variety of ters, at least eventually. were accompanied by single-digit highly dubious and some overtly ille- inflation and, most surprisingly, ex- gal actions that enriched fund man- Czech Republic: The Rise of tremely low unemployment rates. agers at the expense of minority Tunneling Experts Compared with Hungary and Poland, shareholders and harmed the health with their initially high rates of unem- of the firm. Second, some of the larg- Czechoslovakia-before the split- ployment and difficult to contain infla- est funds were owned by local banks, launched its privatization program tion, the Czech Republic looked good. which themselves were only partially in 1991. From the outset it was a Compared with Russia and many or not at all privatized. Investment homegrown product. By 1995, points east, it looked miraculous. By funds owned by banks tended not to some 1,800 medium and large 1996 Prime Minister Klaus could state treat poor performance by firms ag- firms in the Czech Republic, had that the transition was more or less gressively, as pulling the plug would been privatized through two waves complete, and that henceforth the have forced the banks to write down of a voucher process. Another 350 Czech Republic should be viewed as the resources lent to these firms. Thus enterprises had been sold on a an ordinary European country under- the banks persisted in lending or roll- trade sale basis to strategic inves- going ordinary political and economic ing over loans to poorly performing tors, and substantial assets had problems. He characterized the firms privatized by vouchers. been transferred to local authorities voucher privatization program as or restored to their former owners, "rapid and efficient." The results were twofold. The expro- namely, those whose firms had priation (referred to as tunneling) of been expropriated by the commu- Most observers and World Bank staff firm assets by investment fund and nist regime. agreed. The early and apparently re- firm managers defrauded many mi- sounding success story influenced nority shareholders and led to wide- Public interest in vouchers was origi- Bank staff in their recommendations spread public dissatisfaction with nally quite weak, but picked up dra- on privatization in general and on privatization. In addition, the tunnel- matically after dozens of private voucher use in particular in a num- ing, along with deficiencies in the investment funds came into being, ber of other transition countries. In 9 capital and financial markets, re- claiming that they had access to out of 26 countries reviewed vouch- tarded needed restructuring in the specialized information, promising to ers were the primary divestiture privatized firms, leaving them over- diversify risk, and in several cases method, and in 10 they were the sec- staffed, undercapitalized, unable to guaranteeing positive returns on any ondary method. In many countries raise investment funds, and poorly investment. Citizens responded by the Bank pushed for the use of this managed. The low unemployment buying vouchers, with 70 percent method. Czech representatives fea- rate, formerly seen as a sign of suc- putting their vouchers into investment tured prominently in seminars and cess, began to be interpreted as an funds in the first round and slightly conferences sponsored and sup- indicator of lack of change in firms. TRANSITION, January-February 2002 © 2002 The World Bank Had the Czechs applied the case- those reformers who thought that powerful group would itself pressure 1! by-case sale approach more widely ownership change was not just a nec- the government for, and support the ! (as Estonia and Hungary did, for ex- essary condition of capitalism, but a creation of, the required institutional l ample), then the restructuring might sufficient one. This led to the belief framework. In addition, Bank staff I have been faster, the recession might that the required legal and institu- were strongly biased toward con- have been less severe, and the prob- tional framework would arise from crete, substantial, and near-term ac- lem of banks' bad debts might have demand by the new private property tions, as opposed to necessarily been smaller and less costly. From owners. Many reformers and their less dramatic actions. The use of the point of view of the World Bank, Bank supporters did see the urgent vouchers made meeting quantitative the general infatuation with the Czech need for legal, regulatory, and admin- conditionality targets on numbers of voucher approach reveals a number istrative mechanisms to channel and firms or percentage of assets priva- of interesting points. To begin with, guidetheacquisitivebehaviorofprop- tized relatively easy, while other here, and even more so in Russia, erty owners, but they hoped and be- methods were slower, more compli- 1E1 most Bank staff tended to agree with lieved that this increasingly large and cated, and more prone to delay. Scope of Privatization and Method Used, Selected Transition Countries, 1999 Country Scorea Primary method Secondary method Czech Republic 4.0 Voucher Direct Hungary 4.0 Direct MEBO Slovakia 4.0 Direct Voucher Estonia 4.0 Direct Voucher Poland 3.3 Direct MEBO Russia 3.3 Voucher Direct Kyrgyz Republic 3.0 Voucher MEBO Lithuania 3.0 Voucher Direct Georgia 3.3 Voucher Direct Slovenia 3.3 MEBO Voucher Bulgaria 3.0 Direct Voucher Croatia 3.0 MEBO Voucher Kazakhstan 3.0 Voucher Direct Latvia 3.0 Direct Voucher Macedonia 3.0 MEBO Direct Moldova 3.0 Voucher Direct Armenia 3.0 Voucher MEBO Romania 2.7 MEBO Voucher Uzbekistan 2.7 MEBO Direct Ukraine 2.3 MEBO Direct Azerbaijan 2.0 MEBO Voucher Albania 2.0 MEBO Voucher Tajikistan 2.0 Direct Voucher Turkmenistan 1.7 MEBO Direct Belarus 1.0 MEBO Voucher Bosnia - Voucher Direct MEBO Management-employee buyout. a. The score is the numerical ranking of the European Bank for Reconstruction and Development. Its classification system for assessing progress in large-scale privatization is as follows: 1 = minimal progress; 2 = scheme ready for implementation, some firms divested; 3 = more than 25 percent of assets are privatized; 4 = more than 50 percent of assets are privatized and substantial progress on corporate governance has been made. Source: European Bank for Reconstruction and Development, "Transition Report," Washington, D.C., 1999. c 2002 The World Bank TRANSITION, January-February 2002 Bank operations and Bank staff have These accomplishments came at a pay the loans received from the o ''I a predilection for immediate and sub- price, that is, the need to reward the banks, and the shares and owner- stantial action, as opposed to longer- key stakeholders had led to firm ship of some of the best remaining term, foundation-laying measures. managers and workers, or "insiders," Russian assets passed to the oli- Thus the reformers' arguments for the ending up with a dominant 66 per- garchs. To give some idea of the re- need for speedy and massive trans- cent of the shares in about two-thirds sults, for a loan of $170 million, fers fell on receptive ears. of all firms divested. Here and else- Uneximbank obtained 38 percent of I >,'I' where, insiderownersgenerallyfailed the shares of Norilsk Nickel, a firm In the last two years the Czech Re- to restructure the firms. In 1995 pro- that is reportedly making annual prof- 67 { public has returned to vigorous duction failed to recover; few exter- its of $2 billion. - X lilgrowth, received large amounts of nal, and even fewer foreign investors direct foreign investment, and priva- became involved in secondary trad- Russia's privatization led to a small _____iiZ, tized its problem-ridden banks. One ing in the privatized firms; and, most number of individuals, who mostly can thus interpret the troublesome important, signs indicated that the achieved initial wealth through favor- aspects of the voucher privatization second "cash" phase of privatization able deals with or outright theft from program as a relatively minor and was not proceeding rapidly or trans- the government, in control of most of transient issue that paved the way parently. Though many medium firms Russia's major firms. In response to for the country's present success, were privatized for cash in the next internal concern and external criticism, or as a set of missed opportunities few years, the methods used were over the next three years the World to divest correctly, the full costs of murky, and most of the remaining Bank scaled back on privatization ef- which have yet to be determined. large firms and valuable assets were forts and shifted its focus to building not brought to market, at least not in an acceptance of, and a capacity to Russia: Mass Privatization, Mass anything resembling an open and execute, case by case transactions Discontent competitive manner. Potential exter- within Russia. At the end of the day, nal investors, especially if foreign, however, very fewfirms were ever sold Between early 1992 and mid-1994 complained of being blocked from according to this method. Russian authorities, with the aid of participating in bids. Those few ex- the World Bank, the European Bank ternal investors who had obtained Critiques of the Russian approach for Reconstruction and Development, shares in the MPP often complained to transition, of its privatization pro- the U.S. Agency for International that their stake was being illegally gram, and of World Bank (and other Development, and other donor agen- diluted or eliminated. Citizens began donors) support of the program have cies, organized and implemented the to grumble that the shares they had burgeoned in recent years. Nobel largest and fastest privatization pro- acquired with their vouchers were Laureate Joseph Stiglitz argued that gram ever seen, then or since. In just worth little, if anything. privatizing in the absence of a suffi- two years the Russian government cient, market-supporting institu- was able to In late 1995 to early 1996 concern tional infrastructure was a serious changed to serious alarm over the mistake that led more to asset strip- * Corporatize and register more than "loans-for-shares" transfers (ostensi- ping than to wealth creation. He ar- 24,000 medium and large SOEs as bly auctions), in which significant gued that this should have been joint stock companies. stakes in 13 high-potential, natural foreseen, if not by the first genera- * Distribute vouchers to virtually the resource-based firms were handed tion of transition reformers, than at entire population in some 89 oblasts, over to Russian commercial banks, least by their Western economic territories, and autonomous repub- all apparently owned by a group of advisors, and presumably by the lics. financial oligarchs connected to the World Bank staff involved. The im- * Privatize more than 16,500 enter- presidency, in a manner that was plication was that the headlong rush prises, most of which were in the neither competitive nor transparent to privatization was a basic mistake; tradable sector. Over 41 million Rus- nor lucrative to the state. No Rus- that much of the decline and pain sian citizens became shareholders, sian banks other than those in a self- associated with transition in general either through direct ownership of designated inner circle were allowed and with privatization in particular shares in the newly privatized com- to bid (foreign banks were completely was avoidable; and that much more panies or through share ownership excluded), and the bids were totally attention should have been paid to in voucher investment funds. rigged. The government did not re- building the institutional, legal, and TRANSITION, January-February 2002 c 2002 The World Bank administrative foundation on which parallel to the MPP for case by case policies that established rules and - properly functioning capitalism is sales of some high-potential compa- surveillance, that opened the doors based. nies earlier, and denounced the to foreign investors that pushed for l loans-for-shares scheme more force- competition and freer entry and exit But Stiglitz assumes that the Rus- fully? More generally, and perhaps alongside the change of ownership, sian government was free to select most important, should it have per- proved better, both in terms of pro- an optimal policy (in terms of en- ceived sooner that the transfer of moting restructuring in the firms and hancing efficiency or welfare), and ownership to insiders and the gen- in gaining public acceptance of the also had the capacity to implement eral public would-in the absence of process. The faith in the voucher its chosen policy. However, whether enforceable contracts and capital and approach was misplaced, or at least Russia possessed either the will or financial market regulation and the heavily overemphasized. im the ability is not clear. Russians government's unwillingness and lack might have moved more slowly on of capacity to impose hard bud- The Bank might have done better to ______= privatization along the lines of the gets-result in weak corporate gov- advocate the approach used by the Polish approach, but until very re- ernance in the privatized firms and Estonians more widely, that is, limiting cently there was no indication of ei- produce suboptimal results in terms the exchange of vouchers to minority ther freer entry or hard budgets, the of both efficiency and equity? In sum, stakes in firms in which a controlling factors that made Poland a (tempo- should the Bank have pushed harder majority share had already been sold rary) success. The likely alternative for SOE control and reform and less to a core investor. This increases the to mass and rapid privatization to in- for privatization? While yes to the chancesofturningafirmovertoagood siders in Russia was rather what one questions posed seems reasonably owner that has the incentives to look sees in Ukraine: slow privatization of evident in 2002, the answer was not afteranddevelopthehealthofthefirm's larger firms; rampant and rapacious at all clear in 1991, or indeed much assets, and it also increases the bureaucraticinterferenceinfirms(this before 1996, by which time the chances that voucher holders will ob- exists in Russia as well, though per- Bank's approach to privatization in tain shares thatwill maintain or increase haps not quite so acutely); and, in Russia and other transition countries their value. Indeed, the Estonians ap- the absence of a powerful set of in- was changing, and was becoming plied this procedure to a small number sider owners, political stagnation as more cautious and longer term. of the higher-potential firms, further in- the various factions fight over the ini- creasing the prospects for the new mi- tial division of spoils. Yet despite all A unifying thread in all three cases nority shareholders. the faults of privatization, Russia is shows the importance of establish- better off having most firms in private ing control over managers, the group The author is a Senior Fellow at the hands. Ukraine has not privatized that emerged from the wreckage of Center for Global Development, nearly as much as Russia has, and central planning best placed to fur- Washington, D.C., and a former staff is in much worse shape. ther their own interests. Methods and member of the World Bank. Concluding Remarks Capital Flight-A la Russe Did the World Bank's efforts in sup- port of Russian privatization best ful- WERE A BOVE CVPRUS,. fill its mission? On the basis of their - bROP EMJ experience, their technical expertise,rs - and their perceptions as the process unfolded, should staff have advocated a different approach or a different set -- 4 40 of techniques and tactics? Specifi- S cally, should the Bank have pushed ' harder for the break-up of large firms prior to their sale? Should it have re- -_._*'_-e sisted the exclusion of the natural resource-based firms from the voucher program, advocated a track From the Moscow daily Moscow Times. C 2002 The World Bank TRANSITION, January-February 2002 j ISeptember 11 Had Little Effect on the I, a;Transition Economies The Economist Intelligence Unit's Impact Assessment FB i | Central and Eastern Europe stands out as a region that has experienced little, if any, direct economic impact from the September 11 events and the subsequent war in Afghanistan. Strong investment growth led by foreign direct investment and structural change have put the region's economies in a relatively i good position to withstand the slump in export demand. Growth in Russia has slowed because of a combination of inadequate structural reforms, continuing appreciation of the ruble, and lower oil prices, although the London-based Economist Intelligence Unit (EIU) still expects growth of 3.5 percent in 2002. Its new report, "The Impact of September 11th-An Update" (available on http:llwww.eiu.coml), contains other interesting predictions. T he events of September 11, firms, consumers, and forecasters to perform strongly, with growth accel- 2001, jolted the world confront the reality that the U.S. erating to 2.9 percent both next year economy, but did not cause economy had been deteriorating for and in 2004 (see table 1). This will a recession: the slump had started some time, and that hopes that it help to boost performance in much of months earlier as the air leaked out was about to turn the corner were the emerging world. OECD growth will of the U.S. asset bubble. The at- sadly misplaced. moderate slightly in the second half tacks on New York and Washington, of the forecast period, but continued D.C. made the recession real, how- Improving Global Prospects strong growth in the emerging world ever, and the reactions of companies will help to keep global growth above and consumers made a further wors- Prospects for the United States-and 4 percent for the remainder of the fore- ening of the economy inevitable. The hence for much of the world-are cast period (2002-06). consensus forecast compiled before now improving, but the risks of a re- September 11 for U.S. growth was lapse cannot be ignored. The accel- The U.S. economy is close to bottom- 1.6percent for 2001 and 2.7 percent eration the EIU expects to see ing out. After stagnating in the final for 2002. By November these fore- toward the end of 2002 will be main- months of 2001, weak growth is ex- casts had dropped to 1.1 and 0.7 tained into 2003, and global growth pected in early 2002, albeit driven by percent, respectively. The real rea- in that year will average 4.1 percent. a turnaround in the inventory cycle son that economic forecasts have The economies of the Organisation rather than by any improvement in fi- been cut by so much is that Sep- for Economic Co-operation and De- nal demand. The rest of the global tember 11 forced the government, velopment (OECD) are expected to economy is also weak, partly because Table 1. World Economy, 1997-2006 (percent) Region 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Real GDP growth OECDa 3.5 2.7 3.1 3.8 1.0 1.1 2.9 2.9 2.8 2.7 Non-OECDa 5.4 2.7 4.5 6.0 4.3 4.6 5.7 5.8 6.0 6.1 World a 4.2 2.7 3.6 4.7 2.2 2.5 4.1 4.1 4.2 4.2 World (market exchange rates) 3.5 2.2 3.1 3.9 1.3 1.4 3.3 3.3 3.3 3.3 Inflation (average) OECD 2.1 1.4 1.3 2.2 2.2 0.9 1.7 2.0 2.5 2.2 World 4.5 3.6 3.4 3.1 3.0 2.1 2.9 3.0 3.3 3.2 a. At purchasing power parity exchange rates. Source: Economist Intelligence Unit. TRANSITION, January-February 2002 C 2002 The World Bank of the depressing influence of the look for the United States, which lected countries). Strong investment - United States on global demand, and accounts for about 30 percent of growth and deep industrial restruc- o partly because of home-grown eco- world output. turing in recent years, however, have 'e nomic problems in other parts of the left the Central European EU aspir- ' c c world. Here too, however, there are One risk that cannot be ruled out is ants more resilient to external X E signs that a gradual recovery is in pros- another major terrorist attack in the shocks. Their exports have held up o pect. The euro zone appears to be United States. However, how signifi- remarkably well in the face of a de- u stagnating, but business surveys sug- cant the economic impact of such teriorating external environment: ex- i gest that sentiment is starting to im- an attack would be is unclear. The ports grew by around 10 percent in proveandtheindicationsarethatweak experience of September 11 sug- real terms last year in the Czech growth will resume bythe second quar- gests that the direct economic im- Republic, Hungary, and Poland. ter. In Japan, where the economy is pact would be small. Rather than still contracting sharply, the situation terrorist attacks, the most likely In 2002 accelerating domestic de-. is worse. However, a pick-up in the cause of a substantial downward re- mand will, to some extent, compen- United States and West European vision to the EIU U.S. forecast is that sate for slowing exports. Increased economies will inevitably boost Japa- continued sharp rises in unemploy- uncertainty in the aftermath of Sep- nese exports, and the Japanese ment will lead to renewed falls in tember 11 led to a temporary down- economy is expected to bottom out in consumer confidence, prompting a ward correction in Central European the second quarter of 2002. greater consumer retrenchment than currencies, but they swiftly recovered the EIU currently assumes. If the glo- to their pre-September levels. Fur- The slowdown in the developing world bal economy were to be hit hard by ther real appreciation is expected in was driven primarily by developments a double-dip U.S. recession, it would 2002, which will dampen the hoped in the OECD: falling imports in ma- benefit enormously from a faster than for export-led recovery in 2003. jor economies, high risk aversion expected U.S. recovery. cutting capital flows into emerging Russia was already in the midst of a markets, and weak demand de- Less Exposed Transition Econo- slowdown in September 2001. Growth pressing commodity prices. In 2002 mies slowed from a record 8.3 percent in many of these factors will be re- 2000 to an estimated 5 percent in versed. International capital market As Central and Eastern Europe is 2001. In the short to medium term the liquidity has improved, and many dominated by small, open econo- Russian economy will be little affected countries have been able to borrow mies-exports account for an aver- by September 11 and its aftermath, at reasonable rates since October age of 30 percent of GDP-the region but long-term benefits could accrue if 2001. Even the debt default in Argen- was effected by the global slowdown. Russia's support for the U.S.-led war tina does not seem to have upset Regional GDP is forecast to grow by on terror results in accelerated acces- sentiment toward emerging market 3.4 percent in 2002, down from 4.1 sion to the World Trade Organization borrowers The biggest risks to the percent in 2001 and more than 6 and improved access to Western mar- global forecast are related to the out- percent in 2000 (see table 2 for se- kets. In 2002-03 Russia's economic Table 2. Economic Outlook in Two Groups of Transition Economies, 1997-2006 (average, percent) Country group 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 6 CEE countries a Real GDP growth 3.0 2.6 2.4 3.7 2.6 2.7 4.0 4.4 4.1 4.0 Inflation 49.2 11.2 7.3 8.5 6.0 4.5 4.0 3.5 3.2 2.9 4 CIS countries b Real GDP growth 0.6 -4.4 4.8 8.2 5.7 3.8 4.2 4.6 4.5 4.4 Inflation 14.8 25.0 75.8 21.0 20.0 14.4 2.4 10.7 9.1 7.2 CEE Central and Eastern Europe. a. Bulgaria, the Czech Republic, Hungary, Poland, Romania, and Slovakia. b. Azerbaijan, Kazakhstan, Russia, and Ukraine. Source: Economist Intelligence Unit. c 2002 The World Bank TRANSITION, January-February 2002 prospects depend crucially on inter- The W orld Bank/IM o |national oil prices, which fell sharply T B Agenda in the last quarter of 2001. In the ab- sence of further shocks to the global U.S. Treasury Takes a Stand on York Times. He argued that the cred- economy, and helped by production the Grants Versus Loans Debate... itworthiness of emerging economies cuts initiated by the Organization of can now be tracked more effectively a~ i: |Petroleum Exporting Countries, oil U.S. Treasury Secretary Paul O'Neill than in the past, and that financial prices should stabilize at around $18 said on February 27 that the United crises are therefore less likely than per barrel this year, which would sup- States would consider helping the before to spread beyond the country (2)' J llf port growth of around 3.5 percent in World Bank replace revenues lost of origin. Taylor stated that the United !'--z 1 i 1Russia. because of a U.S. proposal to boost States and other governments should !fb 71 grants to the world's poorest coun- work to improve the flow of informa- Accession Goes Ahead tries. He told the House Financial tion between international borrowers Services Committee that "concep- and lenders. There were fears in Eastern and tually I have no problem" with the Central Europe that September 11 United States and other rich coun- MacArthur Foundation and World woulddiverttheEU'sattentionaway tries committing to replace the lost Bank Discuss Joint Research from eastward enlargement and revenue from President George W. Projects could lead to considerable delays Bush's proposal to switch up to 50 in the process. These concerns percent of World Bank assistance In January 2002 representatives of were dispelled in November 2001, from loans, which havetobe repaid, the John D. and Catherine T. when the European Commission to direct grants. O'Neill said that the MacArthur Foundation and the issued its annual assessment of the administration plans to increase its World Bank met in Washington, enlargement process, suggesting contribution to a World Bank fund D.C. to identify areas for future re- that 10 of the 12 applicants could for the poorest countries by 18 per- search collaboration, including glo- enter the EU as early as 2004. cent, but he linked the increase to balization and education and the administration's proposal. The 15 technology issues in Russia. The However, the EU's unofficial target countries that contribute to the fund meeting was a follow-up to an ear- date of 2004 is overly ambitious given have not been willing to go beyond a lier discussion between Nick Stern, the large number of contentious is- 10percentlimitongrantsforfearthis senior vice president and chief sues that still need to be tackled. In would eventually erode the Bank's economist of the World Bank, and addition, heightened concerns about capital base. O'Neill maintains his Jonathan Fanton, president of the terrorism have slightly increased the stance that grants are better for poor MacArthur Foundation. regulatory and administrative burden countries in the long run. on the East European applicants. The Bank is currently conducting two Current EU members have agreed on ... and Urges the IMF to Introduce research projects relevant to the a number of new initiatives, such as Lending Reform Foundation's interests in Russia, the common European arrest warrant, one on science and technology is- that will have to be shared by the new In testimony before Congress Paul sues and the other on the knowledge members, and extra attention will now O'Neill also called for fundamental economy. Reports on each of these be paid to reinforcing borders be- reforms of the IMF, questioning its topics will be completed later in 2002 tween the new members and so- role as lender of last resort for and will be made available to called third countries (Ukraine, the countries that have made bad eco- MacArthur staff. The Bank is also Balkans, and other EU neighbors). nomic choices. "The IMF needs to working with the Russian govern- demonstrate a greater willingness ment on the large-scale E-Russia On the whole, however, September to focus its support on countries informatics project. The MacArthur 11 will have little impact on the EU doing the most to help them- Foundation is interested in establish- expansion process, and the EIU selves," he said. John Taylor, U.S. ing technology transfer offices at still expects a "big bang" enlarge- Treasury undersecretary for inter- ment, including all East European national affairs, also spoke against applicants except Bulgaria and "large, elephant-style bailout pack- Romania, in 2004. ages" in an interview with the New Continued on page 50 TRANSITION, January-February 2002 C 2002 The World Bank Articles provided by: SITE Stockholm Institute of Transition Economics STOCKHOLM SCHOOL OF ECONOMICS Russia: WTO Member As Early As 2003? Erik Berglof and Sergei Guriev The July-August-September issue of Transition featured a summary of "Russia in the WTO: Myths and; ' Reality," a Centre of Financial and Economic Research (CEFIR)-Club 2015 report based on fresh re-,= search on a wide range of economic issues. The project's goal was to increase awareness and knowl- edge in Russia about World Trade Organization (WTO) accession in general and to dispel the most common myths about the consequences of membership. After dissemination, the report received imme- diate and lively feedback from economists, policymakers, and business strategists. It also became the subject of a high-level luncheon in Moscow hosted by the World Economic Forum. The story of the WTO report is a propitious example of how advanced research found a natural place in influencing the Russian policy debate. ast summer "Russia in the munications, heavy machinery, and cluded that Russia stands to benefit WTO: Myths and Reality" was aircraft producers; top government from accession, but that accession sent out to 2,000 top leaders officials; and key foreign investors should be accompanied by structural in Russia and created a major stir. gathered to discuss the advantages reform to maximize the accession The report was featured on the cover and disadvantages of WTO acces- dividend. The main conclusions of the' and published in its entirety by RCB sion, as well as policies Russia meeting were that the primary ben- [ Tovatny Rynok, a leading Russian should pursue to benefit fully from efits of accession would be Russia's, financial journal, and on http:// membership. greateraccesstoforeignmarketsand www.polit.ru, a major Russian the improved investment climate for Internetjournal. It was also published After discussion of the report the foreign direct investment. Commod- in the United States in Russia Busi- participants were invited to express ity exporters and other current and ness Watch, the official circular of their own judgments and expecta- potential exporters would benefit from the U.S.-Russia Business Council. tions relating to WTO membership less antidumping pressure abroad, The report generated intense dis- cussion on CEFIR's web site, and RxjO the office of the chief Russian WTO Russia is expected to join the WTO in 2003-04 negotiator contacted CEFIR for a l follow-up study. ( Editor's note: The World Economic Forum polled the workshop participants on the CEFIR is a Moscow-based think- expected time of Russia's accession to the WTO. Most of the partici- tank, staffed by top, young, Rus- pants expect accession to take place in 2003-04. Although the discus- sian economists.) sion did not change the distribution of votes, it did help to raise awareness, with more participants expressing their views on the issue after the talk. The WTO report also got the atten- __ tion of the World Economic Forum, Expected and served as the basis for a lun- accession year Before discussion After discussion cheon at the World Economic Fo- 2002 1 3 rum meeting in Moscow in October. 2003-04 24 34 More than 100 business leaders rep- 2005-08 7 11 resenting commodity exporters, im- After 2008 or never 1 0 port substitution industries, banking, Total votes 33 48 information technology and telecom- C) 2002 The World Bank © 2002 SITE TRANSITION, January-February 2002 *05 the transparency and protection of 0 During the accession negotiations Savings Bank). a intellectual property rights, which Russia needs to ensure that it re- 0 To end hidden favoritism, the gov- would bring investment to the ceives market economy status and ernment must make bidding for pub- s3 a economy in general and to the infor- access to steel, food, and consumer lic procurement open and transparent m £ mation technology and telecommu- goods markets in countries of the 7o * nications sectors in particular. Organisation forEconomic Co-opera- In his concluding remarks, Deputy tion and Development. Prime Minister Alexey Kudrin con- Cl x The participants also concluded that 0 Russia needs to implement the firmed that Russia's government con- the costs of WTO accession are ex- banking reforms rapidly and irrevers- siders WTO accession a top priority aggerated for the following reasons: ibly to enable the remaining 10 to 50 and called on both Russian and for- percent of banks to compete with eign business leaders for continuing * Because most industries do not their foreign counterparts. In addition support of this cause. =--=* actually pay the existing tariffs, with to the plan already approved, the re- the exception of a few protected sec- form should upgrade the quality of Erik Berglof is the director of SITE tors such as banks, insurance firms, Central Bank staff and reduce the and Sergei Guriev is a senior re- automobile manufacturers, and long- monopoly power of Sberbank (the searcher at CEFIR. distance telecommunications, most Russian firms are already working in an open economy. Therefore in most SITE Website cases accession will not result in SIE lower effective tariffs and the costs Isi Stockholmtittl f Trunsitnis Ecenmics ande ast Rusp,s e-nomies S9TOCKHOLM SCHOOL O ECONOMICS of adjustment will therefore be low or moderate. * While 50 to 90 percent of Russian . SITes mission is to be a source of knowledge fer and about - the transition rO.eIeah economies and to participate in their economic development. We actively work banks are not competitive, their liqui- P towards this goal in several ways. such as founding new think tanks in the transition TaesF5sOc countries, engage In high sluality research, and co-produce meetings and dation is not a cost, but rather a ben- Ccnl end |ublicatins with global reach. You can read more here. efit to the Russian economy. These Up- coming seminar with Askar Akaev, President ot the Kyrgyz Republic. are not truly banks, and the banking CEFIR BtCEPS We are looking forthree new full-time staff membeis, view more intormation here. sector reform approved by the gov- Z.5e ernment will lead to their closure any- _____*1 Part-time office assistant needed. way. However, opening up to foreign Y tiew information and oroaram ramthe hint annual conference "Russia2015: A ban ks will1 provide Russian i nd ustry Anolvsls on i Long Term Strategy' that took place in December, 2001, organized by CEFIR; NES, banks will provideRussian industry - Club 2015, and FERC. with access to financial services. Ad______t__- * A short-term cost is related to the nIdae currently subsidized telecommunica- e . - tions tariffs. After the accession con- SlPEcai sumers will have to pay higher prices. bdfio E-nom1 This problem may also have an im- .edtEII portant social dimension. Accession -TcIESRT) TO-W*O" Ade--eL,ePgfWt NduhMw- .,, , , .......................... . r .T-nsti-o Yelet .. n =ec_lb. SITE 6= SM Br I -ci( W,b ,dqy 21 Nwebs . will, however, be beneficial for the Eonoic,n h eo sector's long-term development. STtEo CONTACT INFORMATION Mailing address: SITE, Stockholm School ot Economics, Nevertheless, the high accession 5sb,s,e=,lon Box6501, SE-113 83 Stockholm,Sweden dividend cannot be taken for granted SEin Street address: Sveavdgen 65, 9th tloor Tel. (+46 8) 736 9670, Fax (+46 8) 31 64 22 SITE Ubre,V * Russia will benefit most if it joins Be-,d T- T-etn General correspondence: MgiltqSL4ffkhh Is. the WTO on general terms. S_T__-_m._ * Raising awareness within Russia is overdue. Entrepreneurs need to SITE5196 2002 odh-d,00 T-.em,e 0, op. see, (SIM learn how to use WTO rules to pro- tect their markets. I'lis page is maintained by L- Lesn, last updated 2002-02-26 TRANSITION, Januasy-February 2002 © 2002 SITE © 2002 The World Bank Value of Law in Transition Economies By Peter Murell As part of its decade-long work in the area of institutions, the Center for Institutional Reform and the v E Informal Sector (IRIS), of the University of Maryland recently sponsored a conference focusing on how law affects the behavior of individual economic agents in transition economies. The conference papers, now available in a single volume, Assessing the Value of Law in Transition Economies, ask whether law can be i " c effective in the rapidly changing and often chaotic environment of transition economies, what factors determine the success of legal and institutional reform, how law adds value to economic processes, and 1'-. how use of the law varies with the characteristics of economic agents and with the nature of legal pro-. cesses. This article is an overview of the book. __ A flood of recent papers exam- individual actor, such as shopkeep- nies, and concludes that the likelihood J.& ines the role of institutions, ers, lawyers, the courts, enterprises, of a foreign business obtaining a fair I -_ Aparticularly law, in growth bureaucrats, managers, and outside outcome in the Russian court system and development. After many de- investors. The papers use diverse isgreaterthan isgenerallybelieved. The cades of simply being a sideshow, methodologies-theoretical and em- success of foreign litigants against do- law is now central in the thinking of pirical, econometric and case mestic parties may indicate that the economists and in their current re- study-and cover a broad range of Russian judiciary is becoming more in- search. However, much of the current countries, from Central European dependent. empirical work has been carried out nations to China. at the macroeconomic level within a How typical is the evidence from cross-country framework and exam- The book's themes range from deci- Russia? Young Lee and Patrick ines the inter-relationships between sions about litigation taken deep within Meagher examine business finance levelsofpercapitaincome(orgrowth), the bowels of the firm to the constitu- and commercial transactions in aggregate measures of a country's tional and politico-economic setting Kazakhstan and the Kyrgyz Repub- institutions, and determinants of in- within which legal initiatives take place. lic. They show that growth-oriented stitutional quality. The amount of At the former level, Kathryn Hendley financial transactions are consis- microeconomic empirical work on the presents case studies of the genesis tently linked with the use of formal role of legal processes in development of disputes between trading partners in legal arrangements, but that such and transition is still rather small. Russia, identifying the social and eco- transactions are not common. Minxin More than ever we are sure that law nomic factors affecting decisions on liti- Pei argues that the usual rhetoric is important, but we still lack detailed gation. Hendley's study shows that the about the absence of law in China is empirical knowledge of how law nature of an enterprise's legal exper- far removed from reality. He presents works, which features of law are the tise and the assigned role of lawyers evidence to support the proposition most important, and how to produce within the organizational structure play that China's emerging legal system effective legal change. an important role in determining which provides the basic protections re- disputes reach the courts. Hendley, quired for successful economic The aim of the recent conference and Peter Murrell, and Randi Ryterman ex- transactions. He concludes that the the publication of the related papers amine whether law and legal institutions legal system performs this role be- was to redress this imbalance. The add value to Russian transactions. In cause the country's legal reform has central analytical agenda of the book an econometric analysis of the out- solid political foundations and ben- is its focus on the microeconomic comesofasampleoftransactions, they efits from a pre-existing institutional pathways through which legal and showthattheeconomicand institutional framework that helps reduce the institutional reforms affect economic environment rewards those enterprises problems of corruption and political activity. Thus the papers eschew that invest effort in constructing con- interference. Raja Kali uses the lens broad assessments that rely only on tracts, that possess superior legal of theory to reflect on the recent the application of general legal or knowledge, and that reorient their legal empirical literature on business net- economic reasoning or on the use of work to new opportunities. Glenn works, and suggests that the exist- highly aggregate data. They exam- Hendrix examines the Russian courts ence of such networks stunts the ine the economic decisions of the from the perspective of foreign compa- effectiveness of formal institutions. D 2002 The World Bank ( 2002 SITE TRANSITION, January-February 2002 Three papers examine longer-term pro- decisions of Russian regions in choos- Many of the essays also identify cesses: investment, corporate finance, ing their legal and regulatory regimes. areas where law is not effective. If and corporate governance. Timothy With regional choices not subject to law works in transition economies, c fi Frye analyzes the investment activi- the coordinating constraints of an effi- it only works in parts of those X W ties of shops in Warsaw and Moscow. cient federal structure, the incentives economies and only under favor- Using survey results, Frye concludes of regional leaders favor control over able conditions. However, identifi- that the rule of law is stronger in War- local economies instead of the creation cation of these conditions provides saw than in Moscow. He argues that of impartial rules. The regions attempt lessons for institutional reform on the social order produced by an ef- to supplant federal legislation with their the nature of the reform process, Li;0y) ' fective police force occurs prior to a own laws and to develop "legal enclo- on the properties of the surround- concern about functioning courts in sures" that are insulated from the na- ing economic environment, on the the calculations of small business tional legal system. importance of the attitudes and people making investment decisions. knowledge of the economic actors, Katharina Pistor examines equity mar- With such a diverse set of themes and on the ways in which different ketdevelopment in the mostdeveloped and evidence presented, the overall institutions provide necessary transition countries: the complements. Czech Republic, Hungary, New SITE Publication and Poland. She argues that The essays in this book re- the regulatory framework and Westin, Peter, ed., The Wild East-Negotiating the inforce the new literature on the state's capacity to enforce Russian Financial Frontier the aggregate effects of in- this framework have been cru- stitutions, underpinning the cial. When considering the This collection of essays by leading international in- developing conventional wis- three sets of relevant rules- vestors such as Peter Halloran, Dean LeBaron, and dom that law is important. shareholder property rights, Mark Mobius features stories of large-scale investing However, we still have a long protection of potential inves- in Russia and the prickly lessons they learned from way to go in developing an tors, and trading rules- the euphoric highs and the crushing lows. The Wild empirically-based under- Pistorconcludesthatinvestor East will show investors in and observers of Russia standing of where and how protection rules have been the how they can hope to negotiate, and profit from, the law is important, and how to most important. Michael turmoil of this uncharted frontier. act on that knowledge to Heller's essay examines secure productive institu- corporate finance and gov- Order information at Reuters: http://about.reuters.com/ tional change. Assessing ernance in Russia. Heller books/forthcoming_books.htm. the Value of Law in Transi- uses property theory to ex- tion Economies is the most plain why privatization and comprehensive attempt to the new corporate law have not had conclusions the book draws are gen- date to build this understanding for the positive effects that reformers eral. Most important, the essays iden- transition economies, but a huge predicted. He argues that corporate tify many areas where the processes amount of research in the same vein governance in Russia provides an of law do affect the behavior of eco- is needed to make institutional re- unfortunate example of a tragedy of nomic actors. While Hendley, Murrell, engineering as productive a reform the anti-commons. and Ryterman's phrase "law works in tool as current research promises Russia" verges on hyperbole, the es- it might be. The last two essays in the book focus says argue that law does work in many on the interaction of the law and the spheres in the transition economies. Peter Murrell, professor of econom- activities of the state. Daniel Berkowitz This conclusion run counter to much ics and chair of the Academic Coun- examines the effects of a 1996 law on of what has been written in the past. cil of the IRIS Center, University of oil pipeline regulation in Russia. Us- Therefore the book's empirical stud- Maryland, is editor and co-author of ing econometric evidence he argues ies indicate the danger of forming Assessing the Value of Law in Tran- that the law had a significant effect on judgments from anecdotal evidence sition Economies, available from the regulator behavior, and suggests that and macroeconomic data, rather University of Michigan Press, Ann corruption in Russia is not so perva- than from undertaking assessments Arbor, 2001, 408 pp. To order go to sive -s to make the details of law irrel- of institutional quality at the detailed http://www.press.umich.edu/titlesl evant. Leonid Polishchuk analyzes the microeconomic level. 09763.html. TRANSITION, January-February 2002 © 2002 SITE D 2002 The World Bank Articles provided by: - Local Government For or and Public Service Open So tute Reform Initiative For or Against? Public Perception of Local Governments in Central Europe By Pawel Swianiewicz For or Against? Public Perception The first question was addressed by national government. Voter turnover of Local Governments in Central analyzing various indicators of citi- at local elections for mayors at the Europe is the first publication of the zens' attitudes toward local govern- two last elections could be interpreted Local Government Policy Partnership ments. Voter turnout for local as a signal of satisfaction with may- program and tries to answer the fol- elections is usually lower than for ors' performance. lowing three basic questions: parliamentary elections, but in Hun- gary, for example, seems to be During the past decade most decen- * What is the public's view of the stable or increasing, unlike turnout tralization and local government re- newly created local governments? for parliamentary elections. Trust in forms were typically implemented as local governments is generally higher top-down processes. Popular sup- * How did general public opinion in- than for other political institutions, port might speed up this process in fluence the various decentralization such as the country's parliament or the Czech Republic or Poland, but reforms of the past decade? Development of Trust in Constitutional Bodies, the Czech Republic, * What are the typical forms of com- 1993-2000 munication with the public at the lo- cal level? % of Respondents _ The book, which compiles findings by 80 - a number of investigators, tries to an- 70 o -----_0 swer these questions based on re- search findings from four countries: 60_ the Czech Republic, Hungary, Poland, 50 - and Slovakia. It uses the results of 40 previous surveys and information from 30 various sources. The availability of in- 20 - formation based on public opinion is 10 in itself an indicator of the general 10 public's involvement in the communi- 0 cation process. Time series and com- 93/1 0 94111 98/05 99105 00105 parable survey questions are widely accessible in the Czech Republic, but l less so in Slovakia. Hungary and Po- President -_--Government ---Deputies land have been involved in several in- _ Senate --*-Loc al Counc il ternational research projects that supported the comparison. Source: Author. D 2002 The World Bank © 2002 LGI/OSI TRANSITION, January-February 2002 e Table 1. Frequency and Use of Internet Communication by 23 Major Hungarian Towns, January 2001 La Category Number Qc , Cities having a web site, that offers 22 2 Descriptive information about the locality, its local government, etc. 18 Possibility of email contact with the mayor's office and/or local politicians 12 Access to council decisions 13 @ X Temporarily not operational 2 Z F Cities with no web site 1 Source: Author. :: I3lthey were mostly regarded as po- of decentralization in countries with tudes toward local governments litical battles between various highlyfragmentedlocalgovernment and on differences in approaches groups or were initiated by external structures. toward various components of munici- forces. An exception was the public pal systems. pressure to limit the salaries of However, a higher level of educa- Poland's top local government offi- tion or of income are also impor- As local governments become in- cials, which was initiated by the tant factors that are positively creasingly important in citizens' ev- media and supported by 90 percent correlated to support for local gov- eryday lives, political institutions of the public. ernments; however, affluent, edu- and public actors that can demon- cated people are more likely to strate greater sensitivity toward Communications between citizens reside in large, urban municipali- public opinion are vital for the suc- and local governments are highly de- ties. The Hungarian author's con- cess of future reforms. The under- veloped in the countries studied, ei- clusion is that the relatively poor lying message of this volume is that ther because of processes required citizens of small villages are more without regular and systematic by law, such as public council meet- dependent on public services pro- analysis of public opinion, viable lo- ings, hearings, consultations, or vided by the local government, and cal government policies will become complaints procedures, or because consequently their support for de- even more difficult to design and of "marketing" methods, for example, centralization is higher. implement. surveys and focus groups. Citizen groups, experts, and NGOs are in- This book is not a typical product To order the book, edited by Pawel volvedinthelocaldecisionmakingpro- of the Local Government Policy Swianiewicz and published in cess. Partnership program. It concen- Budapest in 2001, email Igprog trates on changes in public atti- @osi.hu. Local councils and administrations use various traditional forms of com- munication (local media, reports, bul- letin boards, and so on) and the Table 2. Citizens' Perceptions of Whether They Can Influence Local Internet (table 1). Matters, Poland, Selected Years (percentage of respondents) The authors of the country reports January 1992 June 1999 January 2000 try to explain differences in the level Size of local of acceptance of local institutions, government unit Yes No Yes No Yes No One factor is the size of local gov- ernments: responses are generally Total 15 85 25 73 31 67 more favorable in smaller municipali- Rural area 20 80 33 65 36 61 ties than in large ones (table 2). City of less than 20,000 people 16 84 25 71 32 67 The most positive views are ex- City of 20,000-100,000 people 13 87 20 79 29 70 pressed in municipalities with City of 100,000-500,000 people 12 88 18 77 26 71 populations of 2,000 to 5,000, which City of more than 500,000 people n.a. n.a. 18 81 30 70 seem to be the major beneficiaries Source: Author. TRANSITION, January-February 2002 © 2002 LGI/OSI © 2002 The World Bank In Census We Trust? Collecting Data in 0 Transition Economies By David Hayhurst 0Q O fficial statistics are indis- often ignore because such a task is cated information technology has I-'a pensable tools for policy- far too expensive to be conducted expanded enormously worldwide. The making in democratic soci- by any entity other than national gov- public is now far more aware of the eties: they serve governments, eco- ernments. power of information in the hands of nomic systems, and the general corporations or criminals, enhanced public by providing data about a In line with decentralization, in recent by powerful computer technologies. country's demographic, economic, years local governments across Eu- Despite national data protection laws and social makeup. A census tradi- rope have become increasingly re- that were enacted with the aim of tionallyprovidesthegovernmentwith sponsible for policy and sound guaranteeing strict confidentiality of basic statistics about general demo- budgetary formulation within theirju- individual identities, the public graphic trends among the population, risdictions. Thus accurate, fre- throughout Europe has become sus- as well as about major social and quently updated, and comprehensive picious, even questioning the state's economic processes. It also provides data about local populations have be- rights to collect information and jus- vital data on housing, labor activities, come extremely important. However, tify it by pointing to its need to formu- educational levels, and other demo- gathering data, especially at the lo- late sound public policy. graphic information that are key for cal level, can cause confidentiality a government's understanding of its problems. For almost all Central and Eastern constituents. This is particularly true European (CEE) nations, the current in small or remote administrative ar- In only a few decades the average round of national censuses is the first eas, which other nationwide surveys citizen's daily exposure to sophisti- since their political transition (see the - Past, Recent, and Upcoming Population Censuses, Selected European Countries Last Recentlforthcoming population population Country census census Statistical office web site Armenia 1989 2001 http://www.armstat.am Belgium 1991 2001 http://www.statbel.fgov.be/ Bulgaria 1990 2001 http://www.nsi.bg/ Croatia 1991 2001 http://www.dzs.hrl Czech Republic 1991 2001 http://www.czso.cz Estonia 1989 2000 http:llwww.stat.eel Hungary 1990 2001 http://www.ksh.hu/pis/ksh/docs/ Kazakhstan 1989 1999 http://www.kazstat.asdc.kz/ Latvia 1989 2000 http://www.csb.lv/ Lithuania 1989 2001 http://www.std.It/ Macedonia 1994 2001 http://www.stat.gov.mk/ Poland 1988 2002 http://www.stat.gov.pl/english/index.htm Romania 1992 2002 http://www.cns.ro/indexe.htm/ Russia 1989 2002 http://www.gks.ru/default.asp/ Slovakia 1990 2001 http://www.statistics.sk/ Ukraine 1989 2001 http://www.ukrstat.gov.ual United Kingdom 1991 2001 http://www.statistics.gov.uk/ Yugoslav Republic 1991 2002 http://www.szs.sv.gov.yu/homee.htm Source: Author c 2002The World Bank © 2002 LGI/OSI TRANSITION, January-February 2002 - table). Regardless of concerns about of thousands of individuals. It also increasingly questioned the legiti- a how data have or will be collected, requires the procurement and stor- macy of major data surveys such as V X the findings of many CEE statistical age of massive amounts of forms and population censuses. In addition, the offices will inevitably have profound other materials that need to be dis- need for increasingly expensive tra- E $ 'social impacts. Demographic studies tributed to all corners of a country ditional censuses, and a growing have consistently indicated relatively and then collected. As traditional sense that new information technol- negative social trends-including fall- censuses are such relatively rare ogy could make comparable data - F ing male life expectancies, declining undertakings compared with other gathering cheaper and easier via populations, huge jumps in unemploy- statistical operations, they lack the other means, has led several govern- ment levels, and intensifying brain- streamlining of repetitive procedures ments to abandon standard census ) /y drains of both skilled and semiskilled used for more routine data collection operations entirely in favor of reliance ~-- workers-for much of the region in the activities. As a result, expenditures on pre-existing data sources, such postsocialist era. Census findings will and the numbers of skilled staff re- as tax declarations, social insurance help bringing these highly unsettling quired at all the various stages of registers, and police reports. trends to the forefront of current af- census taking (enumeration, data fairs. These censuses are also litmus collection, and collation) are much Direct opposition to traditional census tests that measure the levels of pub- higher than state statistical manag- activities may have been influenced by lic trust and confidence in the states' ers are likely to be accustomed to. Western European counterculture commitment to respect the guidelines Another danger is that with societ- trends that came to the forefront in guaranteeing data confidentiality. ies becoming far more mobile and the late 1960s. Nearly 2.3 percent of Such guidelines will also apply to all complex than in the past, much of the population refused to participate EU accession candidates in CEE. the data gathered by traditional cen- in Holland's 1971 general census However, legal changes alone cannot sus methods may be outdated by following widespread public debate be effective if public suspicion about the time the results are released. about privacy rights in relation to new the motives and intentions of those computer technologies and costs. charged by the state with collecting Perhaps the biggest drawback to the Following a poor response to a 1979 sensitive data gains momentum. traditional census is its reliance on voluntary census test (nonparticipation goodwill between the questioners in the test was close to 25 percent Traditional Census Requires and those being questioned. The nationwide and nearly 50 percent in Consensus quality of information gathered de- major cities) and the absence of new pends greatly on the quality and legislation on data protection, the Traditional population censuses are motivation of the individuals deliver- government canceled the 1981 cen- still the most frequent data gathering ing census forms, conducting face- sus altogether. In the mid-1 980s the technique in southern Europe (Greece, to-face interviews, or otherwise government replaced the decennial Italy, Portugal, and Spain), the United dealing with respondents directly. If general census with a system that Kingdom, and CEE. Unfortunately, interviewees feel that the question- relies on regular inputs from munici- counting each and every member of ing process is a burden on their time pal population registers, continuous the public is an extremely complex and and an intrusion on their privacy, the labor force surveys, and surveys on costly undertaking, which is the main quality of much of the information national housing demographics con- reason censuses are generally con- collected will be tainted at best. For ducted every four years. Not only is ducted once a decade. example, most Western European this cheaper than a traditional cen- governments no longer ask direct sus, but data collection and colla- Conventional censuses tend to use census questions about personal tion are much faster. pre-existing administrative data and incomes, a sensitive question for state registers (such as tax roles and those worried about coming under In Germany various pressure groups databases on housing and employ- scrutiny by tax authorities, regard- organized a mass public campaign ment) only in support of organizing less of their financial status. before the 1983 census based on the collection and compilation of data concerns about privacy violation is- gained from the census through Civil liberties advocates and like- sues and suspicions that the data questionnaires, personal interviews, minded groups in several countries, gathered would be used for other and so on. To succeed, a census who see traditional censuses as an than strictly statistical purposes. The invariably demands the involvement intrusion on personal privacy, have Constitutional Court ruled that the TRANSITION, January-February 2002 © 2002 LGI/OSI D 2002 The World Bank a practice of using census data to up- However, most formerly communist with and found guilty of deliberately fal- 'i date population registers violated the countries face a more fundamental and sifying industrial production data and o individual's right to privacy as stipu- common challenge in conducting their selling confidential business informa- lated in the Constitution. Twenty years population censuses. Albeit to widely tion to businesses' competitors. N later the government was ordered to varying levels, statisticians gathering E substitute a micro-census for the 1991 data for official use in any CEE state While a number of CEE countries have o operations that would cover only 1 must cope with deeply entrenched made major progress toward ensuring Z w percent of the total population by di- popular perceptions of statistics be- better confidentiality of statistical rect enumeration, followed by supple- ing "political" in the most negative data-most EU accession countries mentary surveys based on even more sense of the term. "During socialism, have adopted or updated their national restrictive population samples. Ger- citizens had the attitude that statis- statistical laws to comply with EU Q many is now proposing to base popu- tics were just another political propa- confidentiality requirements-most lation estimates on local population ganda tool," explained an official from statistical agencies in the region still registers. It also wishes to rely as much Ukraine's State Committee of Statis- consider the protection of enterprise as possible on micro-censuses and tics. data more important than that of natu- other more readily available statistical ral persons. Seven Eastern European sources. Most other Western European Scandals involving statistical bureaus countries (Albania, the Czech Repub- countries have retained enumeration- and various state and private sector lic, Estonia, Latvia, Hungary, Poland, based operations, and at the same time agents in recent years have done little and Romania) and two CIS countries introduced confidentiality measures. In to bolster public confidence. In June (Tajikistan and Ukraine) allow external the United Kingdom, for example, cen- 2000 in Estonia, the interior minister institutions to access original data on sus forms do not include the names of came close to labeling the Department natural persons. Prior to the political natural persons, and census docu- of National Statistics "common crimi- transition state statistical offices in ments are sealed for 100 years and then nals" for their handling of sensitive data CEE had little need to view individual opened for historical and genealogical from the census carried out three privacy rights as a fundamental con- research. months earlier. An NGO watchdog cern, thus changing this prevalent psy- group claimed that an illegal database chological culture is a pressing Burdensome Heritage in Transi- had been compiled from the collected challenge. tion Economies information. The department countered that this was merely a back-up mecha- Another obvious major problem for sta- In CEE countries state-citizen rela- nism. Nonetheless, it received angry tistical offices is the availability of the tions have obviously experienced an phone calls from citizens demanding information technology needed for ef- even more fundamental paradigm the return of their census forms. fective disclosure control. Regardless shift in the post-Cold War era. Al- of legal requirements, confidentiality most all CEE states have recently Russia's general population census is guarantees are difficult to offer if the completed their first postsocialist scheduled for October 2002, following technology needed to protect sensi- censuses or intend to do so in the two budget-related postponements, but tive data is simply too expensive. There near future. Budgetary constraints, there are other difficulties too. For ex- is, therefore, an obvious schism be- however, are a major challenge to ample, Russia has seen an enormous tween the reality of recent initiatives conducting accurate censuses. Po- influx of migrants and refugees from taken by CEE states to improve sta- land, Romania, Russia, Slovenia, the hinterland of the old Soviet empire tistical data confidentiality and the and Ukraine have recently cited fis- to more urbanized areas, most of public's perception that enough has cal difficulties in deciding to postpone whom have never registered with the been done in this regard. Better com- census operations. Budgetary con- relevant authorities for fear of expul- munication could probably correct straints can also negatively influence sion and have no intention of letting these misconceptions. the methodology of census taking. theauthoritiesknowoftheirexistence. Cutting corners should probably be In addition, the belief that Russia's Pan European Harmonization expected in the least affluent coun- State Statistics Office (Goskomat) can Lies Ahead tries, for example, by cutting once safeguard data confidentiality has standard data gathering tools such never been strong, and was further un- The challenges facing comprehen- as sampling, precensus surveys, dermined in June 1998, when 20 se- sive, cost-effective, technically fea- and second-round controls. nior Goskomat officials were charged sible, and popularly supported data c 2002 The World Bank C 2002 LGI/OSI TRANSITION, January-February 2002 . il gathering procedures have led to stronger incentives for solutions be- ova opulation ensus yond national boundaries. Coordina- tion in the content and conduct of 2001: The Politics of Ethnicity jl censuses and other data gathering - initiatives has increasingly gained 3 ¢ ground in Europe. g n EEthnicity was a central focus of the May 2001 Slovak population cen- sus. This was not only because the country's ethnic composition- :1As part of EU support to applicant states the Common DeclarationPon primarily changes in the proportion of the Hungarian and Roma - li states, the Common Declaration on lI Statistical minorities-had attracted political scrutiny, but also because finan- Statistical Cooperation between the -. ,' Iji . . . cial aid from the state to organizations representing minorities and -~~Statistical Office of the European Statistica Office of the European churches was to be determined by the results of the census. -~_ ~ Communities (Eurostat) and the na- tional statistical offices of Bulgaria, the Czech Republic, Hungary, Po- A Ithough initially lukewarm to- with other headings, the data sheet land, Romania, Slovakia, and ward the idea of a population did not provide any additional expla- Slovenia was signed in January v A census, the public gradually nation. According to the instructions 1994. In doing so, Eurostat made a became more interested as the date on the supplementary material pro- formal commitment to help the sig- approached. By February 2001, 84 vided with the data sheet, religious natory nations implement statistical percent of those surveyed said that status meant participation in or con- standards, classifications, and meth- they were aware of the census's sig- nection with the religious life of any odologies that are used in the EU nificance, and were ready to provide of the churches. People could and in the West generally, including information without fears that it might choose between 15 churches recog- sharing information about how best be misused. Like its predecessor in nized by the state in addition to "no to protect computer networks and 1990, the 2001 census was based denomination" and "other." People gathered data. In 1995 the EU on anonymous provision of data by who chose the latter had to indicate adopted a directive on the protection citizens. The anonymity, combined which church they belonged to. Re- of individuals with regard to process- with the -electronic processing of spondents criticized the wording for ing personal data and the free move- questionnaires, minimized concerns not delving into the intensity of their ment of such data. All EU member about data protection. religious life or into the concrete states are obliged to adapt national forms of their relationships with their legislation to comply with this direc- Politicians unanimously supported churches. They also noted that the tive, and it also forms part of the EU's the census and encouraged citizen category "no denomination" was collection of regulations, the so- participation across political bound- equivocal, and applied not only to called acquis communitaire. Hun- aries, but dissenting voices appeared atheists, but also to those who felt gary, Lithuania, and Slovenia have in the media. Newspapers ques- that their relationship with their already ratified the related conven- tioned how willingly citizens would church was not a formal one. tion and all other applicant countries provide data to the state at a time are also planning to do so. They have when disappointment was growing An earlier government directive had much to do. In 2000 Eurostat sent because of the country's deteriorat- made it clear that further state sup- questionnaires to the state statisti- ing economic and social indicators. port to individual churches would be cal offices of member states and ap- A lack of information about how the determined by the results of the cen- plicant countries asking about the government had used the results of sus, so for the churches, register- general methodology of censuses. the last census added to the sense ing as many followers as possible The responses revealed that for the of unease. Nevertheless, on the became a vital issue. Leaders of time being wide differences exist whole criticism of the census in Slo- both the Evangelical and Catholic among countries, whether in data vak newspapers was rare. churches asked all citizens who had gathering, data dissemination, or been christened, irrespective of quality control standards. Religion whether or not they were engaged in an active religious life, to fill in the The author is a freelance joumalist, Citizens were asked to indicate their census accordingly. Their campaign Budapest, Hungary, religious status/church. In contrast included letters and handouts. The TRANSITION, January-February 2002 © 2002 LGI/OSI c 2002 The World Bank letter from the Catholic bishops Parliament's Human Rights Commit- Moravian. Only 218 respondents said emphasized that belonging to a re- tee supported the Moravians'viewpoint, that their ethnicity was Jewish. TheV ligious community is "irrevocable," Pal Csaky, the vice-president respon- largest religious denomination was and hence even those who did not sible for minority matters, rejected the Roman Catholic, with 3.7 million live according to religious rules requestbasedonCzechpoliticalpres- members, or 68.9 percent of the should note on the census that they sure. The Ukrainian minority's com- population. Almost 50 percent of re- were affiliated with the Catholic plaint was specific. They asked that spondentswereeconomicallyactive, church because "the church prays the census sheet not list Ukrainian and and unemployment was estimated for its strayed children too." These Ruthenian minorities separately, argu- at around 18 percent. Compared with f kinds of confused messages in- ing that these were identical ethnic the 1990 census, the returns showed spired the youth wing of the Social groups of which two "streams" were that Slovakia's population is aging Democratic Party to campaign set against each other for political pur- and birthrates are declining. _ _ against the provision of financial sup- poses. However, both the relevant par- Lse_ port to the church. Their posters en- liamentary committee and the Council The author is a researcher at the couraged citizens who disagreed for National Minorities and Ethnic Forum Institute for Social Studies, with the financing model to check Groupsfoundthecomplainttobewith- Bratislava, Slovakia. She may be the "no denomination" option on the out merit. Based on the council's rec- contacted by email at SandElea questionnaire. ommendation, the govemment solved @mail.ncsr.sk. the dilemma by attaching its own hand- Ethnicity out to the census sheet on which it listed the 11 national minorities and Modern Fairy Tale The 1990 census did not provide any ethnic groups recognized by the gov- optional categories for noting one's ernment. ethnicity. For the 2001 census the Slovak Statistical Office listed the While 10yearsearlierthegovernment most frequent ethnic groups-Slo- had rejected requests for bilingual vak, Hungarian, Roma, Czech, questionnaires, in 2001 Slovak-Hun- Ruthenian, and Ukrainian, as well as garian, Slovak-Ukrainian, and Slovak- "other"-on the data sheet. Another Ruthenian census sheets and heading stated: "If the language of supplementary materials were dis- your parents was different, note the tributed. After the Romas complained K language that your mother used to that they were being discriminated speak with you." The data sheet did against, the government also issued not provide any further explanations a Slovak-Roma version. concerning ethnicity. The instruction leaflet did explain that people's Final Results mother tongue was not necessarily the determining indicator of their Editor's note: The May 2001 cen- ethnicity and that people's ethnic sus showed that 5,379,455 people C status was whatever they believed it live in Slovakia. Only 92,000- to be. Respondents could check only 14,000 more than in 1991-declared one ethnic group. With this approach their ethnicity as Roma, but nongov- to ethnicity, the Statistical Office ernmental Roma groups said that stirred up a hornet's nest. the actual number was far higher, Once upon a time Little Red between 220,000 and 400,000, Riding Hood took her picnic Representatives of unlisted minori- claiming that the difference was a basket full of.goodies and left ties felt discriminated against and consequence of intimidation and for the next conference of the pointed out that many people would manipulation. The proportion of Hun- industrial countries to stand up mark their original ethnic group only garians dropped from 10.8 to 9.7 against globalization. if it was indicated on the question- percent and that of Czechs from 1 naire. The Moravian minority pro- to 0.8 percent, while 2,348 respon- From the Hungarian magazine tested the most. Even though dents gave their nationality as H6cipo. ( 2002 The World Bank © 2002 LGI/OSI TRANSITION, January-February 2002 ISafeguarding Sensitive Personal Data ii By Spiros Simitis ,- lSensitive personal data about individuals should be protected by laws and regulations that are pre- cisely worded, the consequences of violating such laws should be clearly defined, and the data that *f : others can ask for should be limited to what is necessary. he, definition and delimitation Paradoxically, the longer the list of someone else might want to access. LI/ ,. of "sensitive" personal data to laws governing sensitive data, the Employment relationships are only one wb (' "'I protect individuals has a long more questions are raised regarding of many examples that demonstrate history. Norway was one of the first the precise range of sensitivity and how consent can be coerced. The --- E countries that attempted to distin- the credibility of a pointedly prohibi- chances of interfering with and influ- guish different kinds of personal data tive approach. The situation seems encing the processing depend essen- according to their sensitivity. French to be clear when requesting restric- tially on the circumstances under legislators were among the first to tions on data covered by countries' which data subjects are asked to demand prohibitions against the use constitutions, such as people's ra- agree. Hence, both national laws and of such data. While the initial dis- cial origins, political opinions, or re- international documents, such as the cussions were primarily debates on ligious beliefs, ordealt with in specific International Labour Organisation's whether sensitivity is really a valid regulations, such as the state of Code of Practice on the Protection criterion for determining processing people's health. The data protection of Workers' Personal Data, deliber- conditions, both the context and the laws simply uphold popular demand ately exclude consent whenever em- purpose of the debates were revived and, at the same time, underscore ployers intend to use data regarding in 1981, when the Council of Europe citizens' expectations that others' criminal convictions or genetic infor- adopted the Convention for the Pro- use of all such data will be prohib- mation, for example. tection of Individuals with Regard to ited. However, once the intent has to Automatic Processing of Personal be transformed into concrete direc- Probably the most critical items on Data. As a consequence, the exist- tions for the various processing op- the exception lists are clauses that ence of sensitive data as such erations, abstract references to legitimize access for public interest ceased to be contested. sensitive data quickly prove unten- reasons or to combat criminal activi- able. ties and to safeguard public secu- Currently-despite the differences rity. Terms like public interest or between, for instance, the British, the To remain credible and transparent, public security are in reality a carte Dutch, and the Spanish data protec- regulations must resist the tempta- blanche that permits bypassing all tion acts-the consensus concern- tion to declare that any processing of restrictions. The references to both ing sensitive data cannot be ignored. sensitive data is prohibited. All they are, therefore, usually followed by a All the acts give sensitive data a spe- can ask for is adequate protection. statement specifying that the condi- cial status. Thus in October 1995, Lists of what is considered sensitive tions of access have to be regulated when the EU adopted the Data Pro- must be phrased unambiguously and by law. However, all such provisions tection Directive, most member in a way that they can be added to or address merely the form, but not the states had already subjected sensi- replaced. substance, of the prospective rules. tive data to special rules, in many Therefore public interest and public cases influenced by the Council of Furthermore, current lists of excep- security remain an inexhaustible Europe. Not surprisingly, the direc- tions should be reduced to a few ex- source of interventions that adapt the tive confirmed that countries must haustively enumerated and precisely processing of sensitive data to gov- handle sensitive data in a clearly dis- defined cases. The seemingly incon- ernment policies. tinct way. Countries like Austria and testable exception heading every list, Germany, which had consistently that is, the consent of the individual Thus the crisis facing traditional so- rejected all abstract categorizations or data subject, is anything but con- cial security systems has steadily of personal data, for the first time vincing. Consent is, contrary to still intensified efforts to obtain ever more expressly recognized the existence widespread views, not a master key health data, not only to establish a of sensitive data. that opens all doors to any data that solid database for the urgently TRANSITION, January-February 2002 © 2002 LGI/OSI © 2002 The World Bank needed reduction of increasing health contradict legislators' stated intent and the data asked for are not con- care costs, but also to devise mea- to restrict the processing of sensi- fined to information that is clearly sures meant to persuade individuals tive data. The concept of sensitivity necessary and its use limited to un- to buy fewer medications and to re- is reduced to an ornamental function, mistakably defined users. duce the number of visits to doctors. whereby access can readily be broadened. While exceptions cannot The author is a professor at the Re- To sum up, provisions governing in- be avoided, however justified they search Center for Data Protection, dividuals' sensitive data that contain may appear to be, they cannot be Johann Wolfgang Goethe University, i no more than a few general terms permitted as long as their wording is Frankfurt. He can be contacted at mean a risk of access to citizens' imprecise, their purposes and con- simitis@jur.uni-frankfurt.de. personal data. Moreover, they openly sequences are not clearly defined, Training Trainers: Managing Multiethnic Communities in Bosnia By Zsuzsa Katona and Petra Kovacs eveloping stable and partici- erations are only truly effective if de- ize in training public policymakers, D patory systems of govern- signed and carried out at the local councilors, and officials, and who ment that are responsive to government level, close to those af- through their organizations would their citizens' special needs, includ- fected. Local-level implementation build up an ongoing technical assis- ing those of various minorities, is also means that policy decisions tance and consultancy relationship central to creating a stable and work- can involve stakeholders from all so- with local governments. The training ing democracy in post-Dayton Bosnia cial groups. This is why training gov- promotes inclusive, bottom-up poli- and Herzegovina. To regain the trust ernment officials on public policies cies, implemented by skilled local of the citizens of various ethnic ori- and the role of local governments in decisionmakers facing the difficult gins, governments at the state, re- a multiethnic environment is vitally task of rebuilding a multinational so- gional, and local levels should be important. Local public policies ciety while at the same time dealing guided by principles of fairness, non- aimed at multiethnic communities with the sensitive issues of equal edu- discrimination, and reconciliation. can both help prevent conflict and cational and employment opportuni- This was the main message of the assist with reconciliation and reinte- ties as well as reconstruction and Managing Multiethnic Communi- gration. Such policies will also pro- returning refugees. ties-Training of Trainers workshop mote citizens' participation in public the LGI organized in Sarajevo in No- affairs, thereby strengthening the Through the training the participants vember 2001. The workshop at- state's legitimacy in the long run. were able to learn how political, le- tracted multinational teams of gal, and administrative concepts can trainees from various training orga- In such postconflict countries as relate to multiethnic communities. nizations and municipalities from Bosnia and Herzegovina, developing The training also included various both the Federation of Bosnia and the infrastructure and strong local in- exercises aimed at improving the Herzegovina and the Srpska Repub- stitutions that will accommodate eth- participants' capacity to turn those lica. The workshop revealed that nic diversity requires new knowledge, concepts into practice through policy more training was necessary for im- skills, attitudes, and values, as well decisions. To this end, the training proving multiethnic community man- as creative policies and extensive included several case studies based agement. cooperation among the various local on concrete examples from the field. and international organizations en- Moreover, the participants also be- Local authorities are implementing gaged in various aspects of rebuild- came familiar with various participa- the bulk of the policy measures that ing and democratization. tory techniques and policymaking address the needs of multiethnic skills, such as conflict and force-field societies based on experience that The workshop's aim was to train a analysis, mediation, negotiation, and shows that services and other op- group of trainers who would special- participatory planning. © 2002 The World Bank © 2002 LGI/OSI TRANSITION, January-February 2002 The goal of the training was to create Future training activities will build of trainers program in the field of v a team of trainers and experts,who on the efforts of the various inter- local governance of multiethnic would work both individually and in national organizations, such as communities. The cooperative small teams, and who would adapt OSCE, the United Nations Devel- project started in February 2002. the training to local needs in Bosnia opment Programme, and OHR, I and Herzegovina.Anadditionalobjec- and of local NGOs that have al- Project manager: Petra Kovacs, re- tive was to equip the participants with ready engaged in training or who searcher, kovacsp@osi.hu. Contact ':a methodology whereby they could have developed relationships with person: Zsuzsa Katona, program II,: adapt what they had learned and plan municipal and local governments. coordinator, LGltraining@osi.hu. ) ,, theirown training, and the international To support such a process, the For more information about the Man- 9/(Q) 'and local trainers could then jointly LGI engaged with the United Na- aging Multiethnic Communities :1 create a specific curriculum for the tions Development Programme Project please visit http://lgi.osi.hu/ ,country. Bosnia in continuing the training ethnic/. Navigation to the Market: Regulation of and Competition among Public Utilities By Gabor Peteri and Tamas Horvath In Central and East European organizations, regie autonomes, tal investment in this area than in countries the first step toward were created as regional entities. others, because investors are wary transforming local utility sectors of the absence of strict quality stan- was the restructuring of monopolies. During this period of transformation dards. Practically, this meant preserving the primary task is not only to es- monopolies in another structure to tablish a market for state-owned, Excerpted from "Navigation to Mar- prepare them for the real changes to monopolistic sectors, but also to kets,"published in the quarterlyjour- come with the ownership and estab- develop new public functions under nal Local Govemment Brief, formerly lishment systems inherent to a mar- market conditions. Transformation the LGI Newsletter, Fall 2001 issue, ket environment. In the second stage failures consist of "left behind" state available on http://lgi.osi.hu/publica- of transformation, privatization was failures and early market failures, tions/default.asp?idx=inseries&id=4. implemented in some service areas. which cannot be resolved by impos- To order fax: 361-327-3105, or go to ing more or less liberalization. The the web site: http://lgi.osi.hul The speed and character of these pro- region can expect less foreign capi- index.html. cesses varied not only by country, but also by service. In Hungary and Poland, the extensive fragmentation 6) of previously state-owned water com- panies was followed by the creation - of several hundred service organiza- tions. In Slovakia, by contrast, "mu- nicipalization" has so far been the exception rather than the rule. Most of the countries transferred solid waste management to local owner- ship. Service privatization that makes - i_ use of external capital is more wide- spread in Poland than in other coun- "Your honor, before you go overboard we must tell you that tries of the region. In Romania, this is not bribery, but bait. You're under arrest." special semipublic forms of service From the Hungarian magazine H6cip6. TRANSITION, January-February 2002 C 2002 LGI/OSI c 2002 The World Bank Articles provided by: WBank of Finland Institute for Economies in Transition i Mixed Picture of the Russian Economy -- By Vesa Korhonen A fter growing by 20 percent lar last year. Since late summer, as banks, curtailing the bureaucracy and over the past three years, market pressures grew and produc- reducing the extent of outside bureau- Russia's GDP is higher than tion growth slowed, fiscal policy cratic interference in company affairs, _ at any time since 1993. The average shifted to maintaining a stable real and improving protection forsharehold- standard of living is probably better exchange rate, and this is the stance ers and creditors. Laws against money than at that time, because after years for 2002. The real rate is at 75 per- laundering and on investment funds of transition GDP currently contains cent of the pre-1998 crisis level were also passed. Moreover, Russia proportionately more viable goods against the currencies of Russia's implemented its first labor code, its than it did before 1994. GDP per main trading partners. Rapid growth first law on private land ownership (al- capita is still E6 to E7 a day (com- in the money supply that amounted beit excluding agricultural land), and pared with E62 in the EU countries in to 40 percent in 2001, wages that laws to reform the court and pension 2000), although the ruble's domestic rose 45 percent, increases in regu- systems. Reforms of the gas, elec- purchasing power raises the figure to lated prices, a weaker ruble, and pos- tricity, and rail monopolies and of the someE16to E25aday. In 2001 GDP sibly sticky expectations kept banking sector will still take some growth slowed to 5 percent, and the consumer price inflation at 19 per- time, and nationwide rules governing government's latest projection .for cent in 2001. Producer price infla- the ownership of agricultural land and 2002 is 3.5 percent. tion in most main sectors fell below forests may be difficult to achieve. consumer price growth. This year a Private consumption rose nearly 10 smaller external surplus should help The author is an economist at BOFIT percent in both 2000 and 2001, while Russia meet its goal of no more than This is a shorter version of the article public consumption grew slightly since 2 to 14 percent inflation. "Looking at the Russian Economy in 1997. After plunging until 1998, capi- 2001-02," published in the February tal formation continued its rebound in Last year the government took major issue of Russian Economy-The 2000-01, growing at a rate of 12 to 13 legislative steps that included relax- "Month in Review and available on percent a year. Total exports were vir- ing the taxation of companies and http://wwwbof.fit/bofit. tually stalled in 2001, industrial expan- ___ ___ sion and investment growth slowed, * and unemployment increased slightly. Discussion and Online Papers The external surplus, which was still a hefty 10 percent of GDP during the Niinimaki Juha-Pekka, Bank Pan- currencies. A bank may issue liquid e whole of 2001, dropped to 6 to 7 per- ics in Transition Economies, no. demand deposits and avoid runs cent in the final quarter of 2001 follow- 2/2002. without deposit insurance, as long ing the drop in oil prices. as it also issues less liquid time de- This paper compares recent bank posits. Self-fulfilling runs are pre- Fiscal policy continued to be the cor- runs in seven.transition economies vented by eliminating the maturity nerstone of economic policy in 2001. (Bulgaria, Estonia, Hungary, Latvia, mismatch. Monetary policy again faced relatively Lithuania, Romania, and Russia) with rapid growth in the domestic money the earlier U.S. experience. Improve- Ali M. Kutan and Niina Pautola-Mol, supply, fueled by the extemal surplus. ments in bank transparency, such Integration of the Baltic States To contain liquidity, interest rates on as new accounting rules, can reveal into the EU and Institutions of Fis- banks' deposits with the Central Bank insolvency and trigger a bank run; cal Convergence, no. 1/2002 were raised several times. After being however, bank runs in East Asia, broadlystable in nominal terms in 2000, Bulgaria, and Russia have also been the ruble fell 7 percent aqainst the dol- accompanied by runs on national Continued on page 42 © 2002 The World Bank C 2002 BOFIT TRANSITION, January-February 2002 !The Cost of Russia's Transport Independence By Juhani Laurila ransit transport is the trans- specific transport infrastructure, flects Russia's preference for direct portation of goods from one therefore any major redirection of transport outlets. Throughout the past ... - Illcountry to another through a Russian exports would require sig- decade Russia has continuously regu- ;{' V' i jthird country. Three factors seem to nificant investments. lated Baltic transit by means of tariffs influence the direction and volume of and licensing. transit transport between the EU Russia's large construction program, iL : } ,1 countries and Russia, namely: the Baltic Pipeline System, seeks to Russia seems to be prepared to opt for l * The structure of trade funnel part of its trade transport with transport autarky to assure the inde- - IE *0 The unwillingness on Russia's the EU through a number of ports lo- pendence of its foreign trade transport, part to purchase transit transport cated near St. Petersburg, and thereby even if this comes at a high cost. For services from its new border re- divert transport away from the Baltic instance, the cost estimates of the Bal- publics countries. All three Baltic countries tic Pipeline System project are $3 bil- * The geostrategic security con- earn a substantial amount of their GDP lion to $5 billion. According to Westem siderations relating to Russia's long- from transit: in 1999, 7 to 9 percent of sources, equivalent additional capac- term needs as an energy exporter GDP for Estonia, 8 to 10 percent for ity could be created by investing just and short-term efforts to exert politi- Latvia, and 4 to 6 percent for Lithuania. $0.3 billion to $0.5 billion in existing pipe- cal pressure on its neighbors. They are thus concerned about lines from Russia to the port of Russia's plans. Russia, however, Ventspils in Latvia. The heavily subsi- About 40 percent of total Russian ex- seems reluctant to pay for transport dized prices in Russia's transport sec- ports and 60 percent of oil exports are services through former Soviet repub- tor may have created an illusion about transported via the Baltic states. Vir- lics, as these services were available the profitability of investments in do- tually all trade between the EU and at no charge during the Soviet era. mestic transport in comparison with Russia is transported through one of using foreign transit transport services. the six corridors shown in the table. Russia has also had trouble agreeing More than 70 percent of Russian ex- on transport fees with Ukraine, which The author is an advisor at BOFIT ports consist of oil, gas, and other raw led to the construction of a bypass to This is a shorter version of the article materials, whereas about 90 percent the Black Sea built on Russian soil. "Developments in Transit Transport of Russian imports consist of con- The plan to transport Barents Sea gas between Russia and the EU," pub- sumption and investment goods. This directly to Germany via a pipeline laid lished in the January issue of Baltic is reflected in the unit values of transit on the bottom of the Baltic Sea instead Economies-Bimonthly Review and flows. The value of eastbound flows of via the Ukraine-Slovakia corridor or a paper (BOFIT Online No 1/2002) averaged $1,170 perton, butonly $158 the Belarus-Poland corridor also re- available at http://wwwbof.fit/bofit. per ton for westbound flows. The high- est unitvalue goods transported to Rus- Transit Transport Flows between the EU and Russia by Corridor, 1999 sia- more than $2,100 per ton, and (millions) consisting mostly of automobiles and electronics-were delivered via Fin- land. The lowest unit value transit Corridor Tons Dollars Tons Dollars flow-less than $70 per ton and con- Total 193 42,273 181.3 28,579 sisting primarily of natural gas and out of which: oil-went via Slovakia and Ukraine. Estonia 11 9 86 68 Latvia 22 25 95 70 Consumption and investment goods Lithuania-Belarus 5 9 83 47 from EU countries to Russia are deliv- Poland-Belarus 24 38 94 72 ered mostly in containers that provide Slovakia-Ukraine 37 14 98 80 flexibility in transport options. By con- Share out of trast, exports of fuels and raw materi- the total 100 100 94 68 als from Russia to the EU are tied to Source: Author. TRANSITION, January-February 2002 © 2002 BOFIT © 2002 The World Bank Russia Is Transforming Fiscal Relations between Regions and the Center By Merja Tekoniemi ecent fiscal news from Rus- ing financial resources from the fed- Value added tax and customs du- R( sia has been filled with posi- eral budgetary fund for financial sup- ties would continue to go solely to tive stories. The large sur- port-the main formal channel for the federal budget, and excise taxes pluses,however, tend to overshadow leveling financial inequities between would continue to be split as at the slow progress of fiscal reform, in the regions-were amended to en- present. The profit tax would also be particular, fiscal relations between the courage regions to pursue more ra- divided as in 2001, with 31 percent O= center and the regions. The confused tional and responsible budgetary of revenues going to federal coffers state of center-regional relations in policies. A budgetary compensation and the rest to regional budgets. As the 1990s resulted in a costly, ineffi- fund was created to finance some of now, the most important tax revenue cient, and unfair system of bilateral the federal mandates that regions stream conceded entirely to the re- agreements. President Yeltsin sought were incapable of handling. Currently gions would be personal income to keep the country united while giv- budgetary transfers account for taxes. In combination with profit tax ing regions as much autonomy as about 17 percent of consolidated re- revenues, they accounted for more possible. In recent years President gional and local budget revenues. The than 40 percent of all regional rev- Putin has aimed at re-establishing the authorities have also attempted to enues during January-November dominance of the federal state. Nev- improve budgetary planning and leg- 2001. ertheless, the practices of the 1990s islation and to introduce uniform rules are still very much in evidence. The for fiscal relations between the cen- On the expenditure side, the au- regions are overloaded with unfunded ter and regions instead of individual tonomy of regional budgets has in- federal mandates, that is, costly agreements. The decision made in creased, while joint expenditures tasks delegated to them by federal the 2001 federal budget to direct 100 with the center have been reduced laws. The most important federal percent of value added tax revenues and federal mandates have been mandates concern implementation of to the federal budget and 99 percent decreased and will eventually be the Veterans' Law and the Law on of personal income tax revenues to eliminated. Perhaps the most im- Child Allowances. How well these regional budgets is a step toward portant single change is housing laws are followed depends on the separating federal and regional reform, which will reduce a huge fi- region and on its particular financial taxes. nancial burden on regional bud- situation. More than 80 percent of gets. However, social expenditures the tax revenues of the Russian re- In August 2001 the government should increase. If the basic frame- gions come from taxes that must be approved a program for 2002-05 work of the new program is imple- divided between the center and the to reform interbudgetary relations. mented, this would be an important regions, and the tax split tends to The program seems to acknowledge contribution to structural reform in vary each year. Fiscal relations be- Russia's most pressing fiscal feder- Russia. It would also have impor- tween the center and the regions alist problems. It seeks to increase tant repercussions on regional eco- also continue to lack transparency regional authorities' freedom to con- nomic policies and could lead to and remain based on informal financ- duct independent budgetary policies the intensification of regional eco- ing channels and individual agree- in a framework of clearly defined bud- nomic growth based on clearer bud- ments. getary responsibilities and obliga- getary rules and policies. tions. As the revenue base is still The first serious reform program insufficient for regions to cope with The author is an economist at in the area of fiscal federalism was all their responsibilities, there is a BOFIT. This is a shorter version of approved in mid-1998. Many goals tendency to fix certain taxes at cer- the article, published in the Janu- were never reached, although some tain budgetary levels for a longer-term ary issue of Russian Economy- promising results were achieved. For basis. This should clarify the present The Month in Review, available on example, the principles for distribut- situation and help budgetary planning. http://www.bof.fitlbofit. C) 2002 The World Bank © 2002 BOFIT TRANSITION, January-February 2002 Discussion and -Online Papers Continued from page 39 as has much of industry; stability Vadims Sarajevs, Convergence of has been supported by generally European Transition Economies X From the Baltic perspective, the EU's responsible fiscal policies; and la- and the EU: What Do the Data o .> II Maastricht fiscal targets (keeping a bor markets, not discussed in this Show? no.13/2001, 40 pp. > II i |member state's budget deficit under paper, are flexible. After the small 3 percent of GDP) should be consid- boom of 1997, the Baltic stock ex- Jan Winiecki, The Role of the ered as long-term goals as opposed changes have generally been inac- New, Entrepreneurial Private to short-run objectives of fiscal policy. tive. Not only are these economies Sector in Transition and Eco- Empirical evidence indicates that extremely small, but their degree nomic Performance in Light of Iduring 1996-2000EstoniaandLatvia of monetization is low. Few assets the Successes in Poland, the were more successful in maintain- and markets for speculative capi- Czech Republic, and Hungary, ing fiscal discipline than Lithuania. tal flows are available. no.12/2001, 42 pp. The Stability and Growth Pact signed inJuly1997wouldofferenoughroom This partly reflects sound funda- Jian-Guang Shen, China's Ex- for automatic fiscal stabilizers in Es- mentals, but mostly it is an unin- change Rate System after WTO tonia and Latvia, but not necessarily tended consequence of policy Accession: Some Considerations, in Lithuania. decisions. Their experience is un- BOFIT Online no. 17/2001 likely to be easily repeated in other Pekka Sutela, Managing Capital countries. In addition, several risks China's foreign exchange system Flows in Estonia and Latvia, are involved. Maintaining a visible currently combines a virtual peg to BOFIT Discussion Papers no. 17/ trade deficit of 15 to 20 percent of the U.S. dollar with direct capital 2001, 63 pp. GDP is only feasible as long as account controls. With accession to significant transit and tourism rev- the World Trade Organization, Estonia since 1992 and Latvia and enues are forthcoming. Maintain- China's capital control regime can Lithuania since 1994 have been able ing a current account deficit of 6 be expected to lose its effectiveness to combine a fixed exchange rate, percent of GDP is only sustain- in the face of accelerating liberaliza- liberalization of the capital account able as long as foreign direct in- tion of trade and investment. before having a well-functioning and vestment flows continue. The fully supervised financial system, and bottom line is that the Baltic re- While the country may experience large current account deficits. At the gion can only avoid becoming an- an increase in nominal and real same time they have undergone deep other Mezzogiorno as long as it shocks in the medium term, the eas- structural and institutional changes, remains an interesting investment ing of capital controls is an inevi- which have been faster than in sev- target. table prerequisite for promoting the eral other transition economies. How development of China's domestic fi- have they been able to manage such Byung-Yeon Kim, Determinants of nancial markets and integration with a combination of characteristics that Inflation in Poland: A Structural the global trade system and capital would usually be regarded as incon- Cointegration Approach, no.16/ markets. sistent? 2001 Soft pegs with wide fluctuation The answer does not lie in clever Byung-Yeon Kim, Jukka Pirttila, bands or similar arrangements that management or control of financial and Jouko Rautava, Money, Bar- retain certain capital controls could markets combined with sound fun- ter, and Inflation in Russia, thus be adopted in the interim. damentals, as the Baltic countries no.15/2001, 40 pp. Then, as China's financial markets have lacked several such markets develop and enterprises and banks that might be sources of instability. Jarko Fidrmuc and likka Korhonen, begin to adhere consistently to mar- Theyhavehardlyanyinterbankmar- Similarity of Supply and De- ket principles, it could introduce a kets; public debt is absent or rela- mand Shocks between the Euro more flexible foreign exchange re- tively small; banking systems have Area and the CEECs, no.14/2001, gime, such as a managed float with been sold to credible foreign owners, 38 pp. relaxed capital controls. TRANSITION, January-February 2002 © 2002 BOFIT C 2002 The World Bank Russia to Demonopolize Its Power Sector-but How and When? - > In mid-December the Russian government set a timetable for demonopolizing its power sector. By 2005 the electricity generation, distribution, and marketing activities of RAO Unified Energy Systems (UES) ; would be pursued in separate, competing spin-off companies, announced German Gref, minister of. e9conomic development and head of the restructuring effort. The process would begin in 2001 by chang- ing legal and regulatory framework to prepare for a competitive market. Only in 2004-05 would stakes in | the power stations be sold to private investors. The state will maintain full. control of transmission lines, while competition will be encouraged in generation and sales. . . . T ~he state owns 52 percent of stations, lacks funds for investment temporary models. UES. Minority shareholders because state-set power charges are * Hydroelectric power stations. own about 30 percent and low. Gref said Russia could face an Hydroelectric power is the source of have sharply criticized the power energy crisis in the near future unless 19 percent of Russia's electricity. overhaul as a recipe for asset strip- $30 billion (E33.51 billion) is invested About 60 percent of the 256 genera- ping. Many minority shareholders in new equipment in the next 10 years. tors with a capacity of 50 megawatts say the government should free elec- The capital depreciation of UES's elec- and above at hydroelectric power sta- tricity charges and allow UES to tricity network is estimated at 40 per- tions are at least 25 years old and work profitably and grow in value be- cent. In recent years, only 8 to 9 have not undergone substantial re- fore selling pieces of the company. percent of depreciated capital has construction. Some generators date Other critics predict a chaotic break- been renewed. The outlook across the back to the late 1950s; the oldest down of the unified system that, network is varied but poor for the fol- were produced in 1940-41. while old and sometimes faulty, has lowing reasons: * Electric power substations. provided heat and light across 11 time Much of the equipment at electric zones for decades. Russian Presi- * Nuclear power. The 29 reactors power substations is also badly worn dent Vladimir Putin-in response to in operation at Russia's 9 nuclear out. Overall depreciation is estimated the criticism-has decided to form a power stations generate 13 percent at 61 percent. About 30 percent of new working group to study the over- of the country's electricity. About half transformers and 43 percent of high- haul of UES, suggesting he is unsat- of these reactors are regarded by ex- voltage switches (in the range 110 to isfied with the breakup plan. The group perts as highly unsafe. The working 500 kilowatts) have exceeded their set is to report back to Putin by April 15. It life of a reactor is set at 30 years. working life of 25 years. A sharp de- effectively postpones the govemment's Nine are between 25 and 29 years cline in the reliability of the switches original plan to approve a detailed old and due for retirement within the is expected in the next few years. timeline in February. next 5 years, and another 6 are 20 to 24 years old and due for retire- Anatoly Chubais, head of UES and The government has still to decide how ment within 10 years. chief proponent of the three-step restruc- quickly state-set power tariffs will rise * Thermal power stations. Ther- turing, called the electricity overhaul the or how minority shareholders in UES mal power supplies 64 percent of "lastfrontierofliberalizationinthiscoun- will be treated as the electricity giant Russia's electricity. Although the try." In the mid-1990s Chubais helped is broken up. Russia is hoping to at- working life of the turbo-generators oversee the widely criticized sale of tract foreign power utilities as strate- used at thermal power stations is set state oil and metals companies for rock- gic investors, but few are likely to at 25 years, generators older than 25 bottom prices, and some UES inves- become interested until the govern- years account for about half of total tors fear the electricity breakup will lead ment frees electricity charges. Rus- thermoelectric capacity. Many of the to similar insider deals. sian consumers, however, are likely smaller generators are 40 to 50 years to oppose bigger electricity bills. old, and some are even of prewar vin- Based on reports of Dow Jones tage. Of the high-voltage electrical Newswires, the Moscow-based news- UES, which controls coast-to-coast motors at the thermal power stations, paper Kommersant, and the Wall power lines and 70 regional power only 10 to 15 percent belong to con- Street Journal. C 2002 The World Bank TRANSITION, January-February 2002 c l . Articles provided by: 4 1I Th ralIrwtitLlte Ii: > l, | A NO7.IWA WI~S-AP4 B.C 4 rI 31tt0 Sc tN esC , X lSmall Businesses Face Large Obstacles 1 Findings of a Survey in Ukraine , a By Olga Kaganova - iC~E ] ]_ ~hesizeoftheunofficialorgray at least 45 percent of all employ- theyalreadyownorthatbelongstotheir economy, including informal ment. employees. employment, is enormous in Ukraine. According to Management Employment at medium and large High Taxes and Rampant Systems International, fewer than 25 enterprises in Kharkiv oblast de- Corruption percent of entrepreneurs and 40 per- creased by more than 20 percent be- cent of very small enterprises (one to tween 1995 and 1999. At the same International donors and the media, five employees) are officially regis- time, hiring at small enterprises has both local and foreign, generally agree tered. The Ukrainian government and more than compensated for this de- on the major obstacles to SME de- international donors assign a high pri- crease. In addition, new employment velopment in Ukraine. The Urban ority to the development of small en- is concentrated in the service sector, Institute's survey confirmed that in terprises. As part of their joint efforts indicating structural shifts in the oblast's Kharkiv oblast, SMEs confront the to identify the direction of further re- economy. As in the EU and the United same obstacles as they do at the form in Ukraine, they commissioned States, most SMEs in Ukraine are in- national level. They cited the follow- the Urban Institute to analyze the situ- volved in the wholesale and retail trades ing obstacles in order of importance: ation and the growth prospects of and in general contracting. However, 5 small and medium enterprises unlike their Westem counterparts they 0 The tax system. This is a hin- (SMEs) in the Kharkiv oblast. (Sup- are absent from the real estate busi- drance not only because the rates porting SMEs is part of the USAID ness and from the provision of finan- are high, but also because the sys- Regional Economic Development Pro- cial, professional, and scientific tem is complex, changes frequently, gram for Eastern Ukraine.) The services, because the oblast's govem- and facilitates corruption. study-based on a representative ment directiy provides many of these 0 Frequently changing legisla- sample of 200 SMEs in the oblast, services. As concerns real estate, the tion. with 122 returned questionnaires- local govemment has acquired a near * Lack of working capital. This is found that recent official initiatives tar- monopoly position, and so has effec- the result of burdensome taxes and geting SMEs had failed to address tively crowded out private SMEs. administrative controls. :5 the actual obstacles facing small en- 0 Administrative controls. These ~ terprises. The survey reported some other inter- are largely exercised by the tax au- esting findings, namely: (a) the SMEs thorities. After the Tax Administration, ; Scrutinizing Small Businesses in Kharkiv oblast provide many oppor- the Fire Department and the Sanitary tunities for women and part-time work- and Epidemiological Service are the In Kharkiv oblast small enterprises ers; (b)the majority of SME transactions most frequent inspectors. These two (up to 50 employees) employ at arewithothercompaniesandindividu- regulators issue more permits to least 400,000 people, accounting for als, not with the government, and are SMEs than any other regulators. Ap- f~ about 25 percent of total employ- with other enterprises within the oblast; proving more permits provides a rea- ment. Of these, at least 200,000 (c) the vast majority of transactions are son for undertaking more inspections, people work within the informal sec- in cash, not in kind or on credit; (d) the and thus provides fertile ground for tor. Other estimates suggest that up SMEs plow back their earnings into the corruption. More than 50 percent of the to 330,000 people work informally business to cover operating and capi- firms surveyed reported demands for at small enterprises. SMEs together tal funds; and (e) the SMEs avoid bor- payments above those legally re- (up to 250 employees) account for rowing or leasing by using equipment quired for permits, licensing, and in- TRANSITION, January-February 2002 © 2002 The Urban Institute D 2002 The World Bank spections either occasionally or *The programs promote government should become an explicit feature of ! more frequently. Another 10 percent activities in certain areas-such as government support to small enter- :I. reported that they were asked for brokerage services for obtaining pro- prises. Ca additional funds every time an in- duction space or equipment and the -Downsizing government agencies' l cm Cl spection took place. On average, provision of loans, information, and at all levels. these payments accounted for about market studies-where the govern- 0 Integrate informal small enter- :1 16 percent of each firm's profits. ment's efficiency is questionable, prises in the formal sector. This could based on other countries' experi- proceed along two lines as follows: X f- 116 Central government support for SMEs ence. Most important, small busi- -Inducing participants in the informal I !--- has focused on small enterprises and nesses are not expecting the economy to legalize their activities entrepreneurs, culminating in the Law government to provide such services. by providing new incentives and dis- JA on the National Program in Support * The programs underestimate the seminating information about exist- of Small Business Development in number of small businesses, and ing incentives more effectively A .--° Ukraine, enacted in December 2000. thus the real size of this sector. -Studying and using international ex- Obstacles listed in this law are in perience in reducing the informal general the same as those identified Both the national and regional programs sector, especially in other industrial by the SMEs themselves, so the fail to consider employment in the in- and urbanized transition countries. views of business and the central gov- formal economy, and thus disregard its 0 Begin changing the role of the ernment are getting closer, at least role. This prevents the development of government from provider to en- conceptually. The law's plan for imple- policies that could legalize and formal- abler. This is a long-term goal, and menting a new public regulatory policy ize jobs and activities that already ex- the first areas that may be ready for could greatly enhance the environment ist in the informal sector, which is as such a switch include for small business development, al- important as creating new jobs. -Providing information: the gov- though it is too early to evaluate the ernment should focus on improving practical results of the national pro- Main Recommendations the conditions for small enterprises gram. However, the law indicates that and leave the collection and analy- the central government still greatly un- The study has led to a number of sis of market data to the private and derestimates the significance of small recommendations as follows: nongovernmental sectors business for the economy. For in- -Reassessing its role in financ- stance, it declares that small busi- 0 Reduce the fiscal burden im- ing: the government could shift its nesses are responsible for 9 percent posed on small enterprises. At least efforts from the provision of direct fi- of total national employment, while the three areas are relevant in this context: nancial support through government Management Systems International -Introducing elements of fiscal de- loans and subsidies to developing survey estimated that small business centralization would allow local gov- public-private mechanisms and spe- employ 34 percent of the work force. ernments to effectively reduce the tax cialized financial instruments burdens of small enterprises in their -Reducing its involvement in real Efforts to assist small enterprises in jurisdictions estate and related services: the gov- Kharkiv oblast materialized through -Using the fiscal latitude already ernment should focus on liberalizing two regional assistance programs in available to them, local governments the real estate market instead of act- 1999-2000 and 2001-02. These pro- can reduce the fiscal pressure on ing as a broker of public property. grams raise several concerns, namely: small enterprises -Revising permit requirements across Olga Kaganova is a senior associate * A remarkable mismatch is appar- the board, starting with those of the at the Urban Institute. This article is ent between the obstacles identified fire and sanitary departments, and based on the report "Small and Medium by SMEs and those identified by the reviewing whether they are really Enterprises in Kharkiv Oblast: Assess- regional programs. The existing tax needed, and if so, how to simplify the ment and Recommendations"by Brien system, for example, ranked by SMEs procedures for obtaining them. Desilets and Olga Kaganova of the Ur- throughout Ukraine as their most sig- 0 Reduce administrative controls ban Institute, with participation by nificant problem, was only mentioned and government corruption. Two GrigoryArtyemenko, AlinaAlieva, Fedir in passing among other issues in the useful new directions for policy worth Demydyuk, and Olena Sergeeva. For earlier program and was not mentioned considering are more information, contact the author in the present program at all. -Eliminating corrupt practices, which at okaganov@ui.urban.org. c 2002 The World Bank © 2002 The Urban Institute TRANSITION, January-February 2002 ;tV ; Efforts for Better Targeting Social Assistance = lin Russia m E x By Jerome Gallagher hallmark of the administra- addition to the positive attitude of ordination of multiple agencies often i0 tion of social assistance un- those implementing them, was the relies on personal relationships rather der the socialist regimes in ability of program administrators to than formal responsibilities, and thus Eastern Europe and the former So- set clearly defined policy goals, build when priorities among the agencies viet Union was the universal nature of on their recent experiences of imple- are not aligned, implementation is eligibility for benefits, either to all citi- menting other targeting initiatives delayed. Also, both the bureaucratic zens or to categories of deserving citi- (particularly the national housing al- municipal environment and the local zens, for instance, the physically lowance and child allowance pro- economic environment constrain the disabled. Since the collapse of the grams), and learn from other maneuvering space of program Soviet Union, the Russian Federation implementers and technical advi- implementers. These obstacles may has taken limited steps to improve the sors. significantly undermine the integrity targeting of benefits. Such improve- and credibility of reform goals. mentfacesmajorchallenges,because Despite the successes of these most programs are administered by projects the implementation of re- Jerome Gallagher is a research as- local government agencies. The ques- forms at the local level still faces sociate at the Urban Institute. This tion thus arises as to how willing local considerable obstacles. In particu- article is drawn from the Urban Insti- program administrations are to improve lar, both municipalities failed to pro- tute report "Strengthening Local Ad- their targeting and how receptive they duce thoroughly documented and ministration of Social Assistance in are to more progressive program ad- standardized program procedures. Russia" by L. Jerome Gallagher and ministration in general. As a result of vague or absent offi- Raymond J. Struyk, Washington, cial regulations and policy documen- D.C., 2001. For copies of the full re- Assessments of two pilot programs tation, government officials in many port write to jhall@ui.urban.org. The implemented in Russian cities from cases relied excessively on upper- report can also be downloaded from 2000 to 2001 shed some light on this level administrators to solve mundane http://www.urban.org/centers/iacl question. The first program, the procedural questions. Similarly, co- russia_soc-assis.html. school lunch pilot, introduced means testing for the school lunch program EU Group Photo on a citywide basis. Eligible families received cash payments and all chil- . dren paid the same price for their /¼ lunches in cash. The second, the . - jobs pilot, is a new, local, means- - * * tested program that provides cash ' . support to families while unemployed workers search for work. Continued receipt of funds is conditional on a minimal job search effort. The results suggest that local social assistance administration is indeed open to improvement. The various program implementers, including social assistance program staff at all levels, exhibited little resistance to . _ - - the more focused targeting. Crucial ' __..".."--_ to the success of the programs, in From the Hungarian Economy, TRANSITION, January-February 2002 © 2002 The Urban Institute C 2002 The World Bank 3 C A New Housing Strategy for Armenia's 0 Earthquake Zone C E by Steven J. Anlian T ~welve thousand families re- the Armenia Earthquake Zone Re- The Urban Housing Improvement main displaced as a result of covery Program, which includes Grant Program will provide grants to the devastating 1988 earth- funds of $20 million over two years condominium associations for criti- quake in then Soviet Armenia. The to implement the redistribution com- cal repairs and upgrades to buildings zl World Bank's Armenia Municipal De- ponent, which will employ housing that sustained limited damage dur- velopment Project included a require- vouchers, and the renovation com- ing the 1988 earthquake, were not , 3 = ment for the Armenian government to ponent, which will use housing im- condemned, and have continued to commission a study to develop a new provement grants. With the help of provide shelter, although they are housing strategy for the earthquake the Lincy Foundation of California, deteriorating rapidly. The associa- zone. In 1998 the Urban Institute, the government of Armenia will fo- tions will be required to cofinance the along with its partners, the Institute cus on the reinforcement compo- repairs and/or make in-kind contri- for Urban Economics in Moscow and nent. butions, organize short-term reloca- the American University of Armenia, tion of residents where required, and conducted an in-depth analysis and The use of housing vouchers, known assure that an adequately funded developed a new approach to address as housing purchase certificates, to operational and capital budget is in the government's obligation to com- deal with the demand for housing in place to ensure that the buildings are pensate eligible families. The goal is transition countries is based on the properly maintained in the future. This to provide permanent housing to USAID's success in supporting the new model will have broad applica- those still displaced by the earth- rapid resettlement of Russian military tion throughout Armenia and the re- quake while restoring the original city officers from the Baltic states in the gion, where local governments faced centers. The strategy deals princi- mid-1 990s and a recent pilot program severe problems with occupied resi- pally with alternatives to new con- in Gyumri, Armenia. In Gyumri, more dential buildings because of years struction. New cities, started by than 300 displaced families were per- of deferred maintenance. Moscow in 1989, have remained half- manently housed in just a few months built "graveyards of good intentions." at an average cost per family of The earthquake zone strategy is to These grandiose Soviet plans are $3,300. Both programs were imple- be implemented by a balance of now being abandoned, or at least put mented by the Urban Institute. three-pronged strategy: on hold, given today's economic re- alities. The new strategy is a con- The new Housing Improvement Grant 0 The physical planning compo- sumer-oriented policy that promotes Program has both urban and rural nent introduces a phased program urban renewal while providing eligible subcomponents. The rural program in the original city districts, organized beneficiaries with significant choices focuses on grants to complete un- around a logical, sequential selec- about the types of replacement hous- finished, single family housing tion of sites to be cleared of the con- ing they will receive.- started by various former Soviet re- tainers and temporary shacks in publics and abandoned with the col- conjunction with building strengthen- The approach can be summed up lapse of the Soviet Union in 1991. ing activities and/or construction, if as a three-pronged strategy of vol- Families assigned to this housing are economically warranted and desired untary redistribution through market still living in modified shipping con- by residents. This site by site ap- mechanisms; reinforcement by tainers near their lots, but have been proach, which will start with the most means of strengthening unoccupied, unable to complete their houses be- viable sites in terms of the maximum damaged, multiunit buildings; and cause of a lack of resources. To lower number of housing units that can be renovation of private homes in both the cost per family to below the grant developed at the lowest cost, is di- urban and rural areas. The U.S. ceiling, many of these large village rectly linked to the distribution of Agency for International Develop- homes are being converted to du- benefits (housing subsidies), thereby ment (USAID) has recently initiated plexes. providing the government and donors D 2002 The World Bank © 2002 The Urban Institute TRANSITION, January-February 2002 ' XI with flexibility in managing the pro- gions will have finally recovered from More information on the Armenia *- °.gram. the 1988 earthquake during the next housing strategy and the Urban I 0 The social planning component three years. Institute's housing activities is c III recommends that households in tem- available from the author at . E ,porary accommodation must meet Steven J. Anlian is a senior as- Sanlian@aua.am or from the in- two basic conditions for eligibility: sociate at the Urban Institute. stitute at www.urban.org. they lost their homes in the earth- c IC quake and have never received com- pensation from either the government Condoniimn ums in the Kyrgyz XA'0), or a donor. 011 0 The financial/economic plan- RBo _ ning component gives each eligible I household the option of accepting a and Managing Housing Effectively housing voucher to use immediately to purchase permanent housing that By Charles Undeland already exists in the marketplace. Vouchers can be a particularly effec- oon after independence, the Code in 1996, which stated that the tive tool for quickly freeing up com- - Kyrgyz Republic embarked common areas of apartment (multi- munity facilities, such as schools and on massive privatization of family) buildings were jointly owned museums, now occupied by dis- its housing stock as a political ges- by the owners of units in the build- placed families. ture to empower citizens and as a ings. quick way to provide a substantial The objective is to use the existing sur- part of the population with some With assistance from a U.S. Agency plus housing stock. Should demand means of accessing capital. By 1994 for International Development housing put pressure on the supply of existing considerably more than 90 percent reform project, in 1997 the government units, the supply can be augmented of the Kyrgyz Republic's housing had passed the Law on Condominiums, by rehabilitating some of the vacant been privatized. Yet despite the po- which established a framework for unit stock either by repairing damaged mul- litical and economic benefits of rapid owners to set up associations (con- tiunit buildings or by renovating units privatization, the housing reform cre- dominiums) to organize or contract the through home improvemen" grants. ated a problem, in that it did not ad- maintenance of buildings' common Rehabilitating or completing units can dress the maintenance of the areas. Condominiums were to be es- be a less costly altemative than new common areas of apartment build- tablished voluntarily by unit owners. construction, and many unfinished ings: no provisions had been made buildings are available. Policymakers regarding the ownership of, or respon- Following passage of the legislation, can exert some control over the sibility for, these common areas dur- to promote the formation of condo- program's potentially negative impact ing the privatization process. miniums across the country the Ur- on the market in the short term caused ban Institute provided technical by a sudden rise in the demand for Mostly due to systemic inertia, the So- assistance and training, fostered sev- units by controlling the rate at which viet era maintenance agencies that eral NGO advocacy groups, and they issue housing vouchers. took care of common areas continued partnered with the Soros Foundation to be responsible for management. In to organize a grants competition for The USAID's new program also in- the past about 80 percent of these or- condominiums. cludes urban planning and economic ganizations' operations had been sub- development components to help sidized. They continued to collect some The idea behind the formation of con- harness capital investment. The fees from residents, but funds went to dominiums is that they should housing vouchers and grants, while support the maintenance organiza- relatively modest as individual inputs, tions' bloated work force, with actual * Lead to more effective manage- in the aggregate will result in a sig- repairs being paid for additionally on ment of multifamily housing stock as nificant infusion of capital into the re- a case by case basis by the residents. unit owners set their own mainte- gional economy. As a result of this nance priorities through elected lead- collaboration by donors, the expec- The government began to redress the ers and police themselves on making tation is that Armenia's northern re- situation when it passed the new Civil payments TRANSITION, January-February 2002 © 2002 The Urban Institute c 2002 The World Bank * Serve as a community-building noted that nonresidential owners did clients to lender banks. I mechanism wherein diverse individu- not pay any kind of fee. Unit owners 0 Second, Kyrgyz Republic law does als work together to resolve common paid roughly $8 per unit per year to not provide for a lien in favor of the d problems maintain the common areas. At the condominium as security for cases' * Act as platforms for democratic same time, condominiums were able in which owners fail to make pay- practices in voting leaders in and out, to mobilize significantly larger re- ments to cover the cost of maintain- deciding on self-taxation in the form sources for emergency repairs or if ing common areas. of fees, and adopting rules for living cofinancing was available. in the buildings. * Heating is the most problem- Most multiunit housing is still not or- atic communal service. While gen- ganized into condominiums; how- . Performance of Condominiums erally two-thirds of the respondents ever, the formation process should were satisfied with the provision of receive a boost if Parliament carries By 2001 more than 300 condomini- cold water, sewerage facilities, through with proposed changes to 1 umswere officially registered, compris- power, gas, and solid waste collec- the condominium law that would ing over 40,000 units, or roughly 20 tion, only 40 percent expressed sat- make the registration process less percent of the Kyrgyz Republic's hous- isfaction with heating provision. onerous. ing stock. The percentages are con- siderably higher outside Bishkek, the What the Future Holds This article is based on findings in capital. In May 2001 the Urban Insti- "Grassroots Democracy in Brick and tute conducted a nationwide survey of Condominiums will be crucial to im- Concrete: Survey Results on the De- members and officers from 50 condo- proving the efficiency of basic ser- velopment of Condominiums in the miniums, local government officials, vices. Payments for cold and hot KyrgyzRepublic"bySabina Gradwal, and the general public to assess how water are based on capitation, and Carol Rabenhorst, and Charles condominiums were working. Its con- district heating is based on unit area, Undeland. The authors can be clusions are as follows: which means that consumers have reached care of Carol Rabenhorst, no incentive to cut wasteful use. In- csrabenh@ui.urban.org, or Charles * Condominiums operate with stalling meters and thermostats for Undeland, cundeland_ui.kg. Further significant resident involvement heat to individual units will be ex- information about this program and and oversight. An average of 70 tremely expensive. other Urban Institute projects related percent of condominium members to condominiums or local govern- attended general meetings, 98 per- However, installation for entire apart- ments can be found at www. urban.org. cent of condominiums had audit ment blocks is more likely, provided committees, and in 83 percent of that the building has a governance Voice of the Poor cases members had received audit mechanism both to collect fees and reports. regulate heat consumption. Afew con- . * Condominiums improve man- dominiums have, at their own ex- agement. Ninety percent of unit own- pense, metered the supply of heat a ers believe that their buildings would to their buildings. Savings from the 4 i be in worse condition if a condo- reduced cost of actual consumption *1 minium had not been organized and alone-without any improvements in -e v 52 percent reported that they felt the insulation-are estimated to have i)'' |, - value of their unit had increased as a been 20 percent over the course of result of the formation of a condo- the heating season, which in three minium. About half of the expendi- years will be enough to cover the tures for maintenance were spent on $2,000 needed to install the meter. roof repair. * Financial management and Additional capital is needed to con- Now that the economy is overall financial health is poor. duct major repairs, but two conditions doing well, can we finally Only 6 percent of managers stated must be met before this is possible. loosen our belts? that condominium members paid *First,overallfinancialmanagement their fees in full and on time. Fur- andcollectionratesmustbeimproved From the Hungarian magazine thermore, 57 percent of managers to make condominiums attractive H6cipo © 2002 The World Bank © 2002 The Urban Institute TRANSITION, January-February 2002 World Bank\IMF Agenda c Continued from page 24 for private enterprises. With funds of the Central and Eastern European XE %$18 million, the first regional venture countries, which still have to man- o ~ Russian universities that could capital fund, the Mekong Enterprise age the historical shift from agricul- house science centers. The Bank is Fund, is providing domestic entrepre- tural and industry-based economies aware of the difficulties Russia's non- neurs with risk capital. to service-based economies, the ur- / profit organizations are facing be- gent task is to radically improve the cause of taxation issues and the Using Knowledge for Develop- productivityofagricultureandindus- obstacles to developing an indig- ment in EU Accession Countries try through knowledge inputs, while enous philanthropic sector, and will avoiding the potentially huge social i Investigate possibilities for develop- Knowledge and innovation are criti- problems of redundancy. This can ing philanthropy in Russia with the cal to the competitiveness of EU only be accomplished through the support of an adequate legal and tax accession countries. That was the transformation of traditional educa- framework. Jonathan Fanton, presi- central message of a conference or- tion systems and through a major dent of the MacArthur Foundation ganized in Paris on February 19-22 investment in life-long learning." See that confirmed: "This consultation by the World Bank in coordination also http://www.worldbank.org/eca/ has been the first step in what should with the European Commission and kedforum. be a continuing process of commu- the Organisation for Economic Co- nication between the two institu- operation and Development. With Johannes Linn: Spread Knowl- tions." their high literacy rates and well- edge and Put It to Work developed educational infrastruc- : Partners Developing Mekong tures, the countries of Central and Today the evidence suggests that r Delta Meet in Hanoi Eastern Europe are widely seen as knowledge is more important to poised for transformation into people's well-being than capital, la- Representatives of donor countries knowledge-based economies. They bor, and the other factors that make and institutions and the advisory are making great progress in cre- our economies grow, wrote Johannes 1t t board of the Mekong Project Devel- ating the "four-pillar" environment: Linn, World Bank vice president for opment Facility met in Hanoi, Viet- Europe and Central Asia in a recent > nam, in mid-January to review the 0 An economic and institutional issue of the International Herald Tri- results of operations in 2001 and to framework that promotes the efficient bune. With the EU set to expand to r discuss its action plan for 2002. The use of knowledge and the flourishing the East, acquiring and using knowl- facility is a multidonor initiative for of entrepreneurship edge and new information technolo- - helping small and medium enter- * An educated and skilled popula- gies are crucial to the pre-accession prises in Cambodia, the Lao People's tion to create, share, and use knowl- countries of Central Europe if they Democratic Republic, and Vietnam edge are to catch up with the living stan- managed by the International Fi- 0 A dynamic information infrastruc- dards in current EU member states. ~ nance Corporation (IFC). It is funded ture During the 1990s members' econo- by the Asian Development Bank, 0 An efficient innovation system of mies surged as new technologies 5 IFC, Australia, Canada, Finland, Ja- firms and research centers to tap into were applied. Ireland's focus on edu- pan, Norway, Sweden, Switzerland, the growing stock of global knowl- cation and information technologies and the United Kingdom. The project edge and create new responses to was key in changing its once rural :] will expand the provision of help to local needs. economy into Europe's largest ex- various aspects of local small and porter of computer software. Finland _ medium enterprises' operations, As Peter Drucker, professor of so- transformed itself in a single decade such as marketing, accounting, man- cial science and management, from a distressed exporter of wood agement information systems, tech- pointed out in his opening remarks: and paper into a knowledge-intensive ;1 nology, and quality assurance as "Transition to the knowledge economy economy. Low inflation, good fiscal well as easier access to financing. has been potentially as wrenching a and monetary policies, and regula- The latter has somewhat improved transformation as the transition from tions that encourage investment and with the more favorable environment agricultural to modern economies. For technology transfers are prerequisites TRANSITION, January-February 2002 © 2002 The World Bank for a knowledge economy. As Ireland ernment. The combined government pany, is expected to begin operations has shown, an educated and skilled and government-guaranteed external in the first half of 2002. IFC's invest- , population is vital for developing the debt of the seven countries is more ment represents a 24.5 percent di ca skills to create, share, and use than $11 billion. In a report prepared rect ownership stake in ACHL. Other knowledge to its full potential. Sig- for the conference (see http:// shareholders include a Dutch com- nificant broadening of access to the www.worldbank.org/eca/cis) the or- pany and Advantage Services Hold- || Internet, satellite networks, data stor- ganizers urged donors to provide ing, Limited based in Hong Kong, J age centers and broadcasting facili- "generous debt relief' to the most China. "In China private home own- ties is 'also essential said Linn. heavily indebted states of Georgia, ership is expanding rapidly and lend- 1 the Kyrgyz Republic, and Moldova. ers need to manage their exposures Russia, World Bank Sign Agree- Together with Armenia andajikistan, as they increase their mortgageit ments on Three New Loans the five countries' average debt to lending portfolios. This new institu- total GDP ratio is 73.5 percent. Most tion should help alleviate credit con- !_X--- On February 8 Johannes Linn, World money is owed to multilateral lend- cerns," pointed out Javed Hamid, Bank vice president, and Yuri ers such as the World Bank, with IFC's director for East Asia and the Ushakov, Russia's ambassador to much of the rest owed to Russia and Pacific. In fiscal 2001, which ended the United States, signed agree- Turkmenistan for energy imports. in June 2001, IFC committed more ments on three new loans worth a Georgia has already secured some than $100 million worldwide for total of $260 million. The largest loan, help with its debt by means of a re- projects that reinforced links between $122.5 million, will be used to up- scheduling deal agreed on last year the housing market and the financial grade water supply and sewage sys- with the Paris Club of international and capital markets. tems in 14 towns and cities across creditors. The Kyrgyz Republic has Russia. Another 9 cities will get a also asked for assistance, and the World Bank Assesses Ukraine's totalof$85milliontomodernizetheir report says that Moldova and Mining Industry heat supply networks. A $50 million Tajikistan are likely to be next. loan will be allocated to reform the Ukraine's coal industry requires ur- universal education and elementary By contrast, Azerbaijan is in a rela- gent restructuring, and the large in- vocational training system in three tively strong position because of its creases in subsidies proposed for pilot regions, the Chuvashia, Samara, growing exports of oil and gas. the sector will do little to address and Yaroslavl regions. Uzbekistan is also a commodity ex- issues of mine safety, energy se- porter-of cotton-and has stabi- curity, environmental damage, al- Debt Relief Urged for Poorest lized its foreign debt in the past two ternative employment generation, Seven Former Soviet Countries years after rapid growth in the late and transparency, said World Bank 1990s. However, forall the countries Country Director Luca Barbone. Donor countries met in London in the report advocates further eco- Around 200 mines employ 600,000 late February to consider new finan- nomic restructuring to continue the miners, most of them in the Donbass cial support, including foreign debt transformation from central planning basin in eastern Ukraine. Three- relief, for Armenia, Azerbaijan, Geor- to a market economy. quarters of the mines are ranked in gia, the Kyrgyz Republic, Moldova, the highest risk category, and of Tajikistan, and Uzbekistan, the IFC Launches Joint Venture in these 35 percent are also catego- seven poorestcountriesoftheformer China to Improve Housing rized as representing a coal dust Soviet Union. For the group as a hazard. Last year 250 miners died whole, real GDP fell by an average IFC will invest in Advantage China in mining accidents. Negotiations of almost 50 percent between 1990 Holdings, Limited in order to estab- about a $100 million loan to help and 1995, and poverty and inequal- lish joint venture companies in China Kyiv restructure the mining indus- ity increased substantially. Per capita to provide mortgage services and try were postponed indefinitely by incomes in 2000 ranged from $158 boost residential housing construc- the government. Nonetheless, in Tajikistan to $652 in Azerbaijan, tion and purchases. China plans to World Bank and Ukrainian experts which are among the poorest coun- develop 500 million to 600 million are continuing their assessment of the tries in the world. The conference, square meters of residential hous- sector, and by June will make recom- organized by the IMF and the World ing in the coming 10 years. Beijing mendations to address its economic Bank, was hosted by the U.K. gov- Advantage, the firstjoint venture com- and social problems. Between 1996 © 2002 The World Bank TRANSITION, January-February 2002 - Ij!and 2000 the World Bank already Foreign exchange reserves doubled currency government bonds were up- provided $300 million to restructure to $3 billion, despite heavy repay- graded to B2. The outlook for all rat- 11the mining industry. ments of external debt. Strong ex- ings is stable. The agency believes ports, tighter budgetary policies, and that together with improvements in IMF Delays Loan Disbursement a reduction in a variety of categories debt management, Ukraine's default of arrears contributed to a change of probabilities have lessened. In 2002 * On February 8 the IMF completed investor rating. On January 24 the country must repay $1.6 billion F -- l its latest mission to Ukraine. The Moody's upgraded Ukraine's foreign dollars of foreign debt and a further government and the IMF mission currency ceiling for bonds to B2 and $1.8 billion in 2003. Debt was 34.9 n 2- s!: failed to agree on a refund of $1.1 bil- the ceiling for bank deposits to B3, percent of GDP in 2001, down from lion of value added tax (VAT) to ex- both of them up from Caal. Local 37.2 percent in 2000. * __ Ij; porters. The IMF has repeatedly said - -=. u that failure to refund the VAT discour- ages companies from paying taxes. A Matter of Urgency It regards this government debt as a hidden budget deficit that may jeop- ardize macroeconomic stability, in- cluding currency stability. The disagreement prevented the unfreez- ing of a $2.6 billion Extended Finance Facility loan. Fund approval is impor- tant to Kyiv as a broader confidence signal to investors, as well as being crucial ahead of substantial foreign debt repayments. The IMF initially intended to disburse three install- ments this year totaling $550 million. Financing will not be resumed until the government solves the VAT repay- ment issue and satisfies the IMF that it will accelerate structural reforms. .... while Ukraine Publishes New Economic Indicators Ukraine's GDP increased by 9.1 percent in 2001, well above the 2000 rise of 5.8 percent. The economy is expected to grow 6 percent in 2002. Inflation was 6.1 percent in 2001, compared with 25.8 percent in 2000, but is fore- cast to rise to 9.8 percent in 2002. In December 2001 the unemploy- ment year-on-year index declined to 3.7 percent. Wage arrears fell B by 39 percent between January and November 2001, while average "Kovacs, don't make any excuses, I don't give a damn about the monthly nominal wages rose by 30 percent year-on-year to around $65. rocurement law, go to the nearest store and buy any toilet paper On January 1 this year minimum you findl" wages were raised from $23 to $27. From the Hungarian magazine H6cipo. TRANSITION, January-February 2002 © 2002 The World Bank Conference Diary For the Record Organizers: Ministry of Education from other countries' experiences - and Science of Ukraine; Chernivtsi and what policies they should chose | Russia 2015: A Long-Term Strategy Trade and Economics Institute; Kyiv to reduce the distance from indus- 22 December 14-15, Moscow, Russia National Trade and Economics Uni- trial countries, as well as what they versity; Ukrainian National Academy should do to minimize the danger of This first annual two-day conference of Science, Institute of Regional Re- social conflicts and economic crises. was jointly organized by the Centre search. for Economic and Financial Research; Topics: Is there room for national the New Economic School; the Eco- Topics: Regional policy of the state, monetary policy in the global nomics Education and Research Con- strategic priorities for developing the economy? EU enlargement: the ad- - sortium; and Club 2015, a group of region's economic potential, strate- mission of candidate countries to leading Russian managers and entre- gic management of the region's eco- the euro zone, how to make national preneurs. nomic development, development of labor markets more flexible, conse- domestic trade, development of in- quences for the CIS countries, la- The first day of the conference was ternational trade, formation of regional bor migration and free movement of policy oriented and defined, dis- trade infrastructure,modelsofforma- the labor force in an enlarged Eu- cussed, and prioritized government, tion of regional infrastructure, attract- rope, and financial sector develop- business, and academic activities ing investment to the region. ment in the transition countries in a crucial for Russia's longer-term de- comparative perspective. Interna- velopment and integration into the glo- Information: Prof. Ihor Shkola, Scien- tional tax competition and tax re- bal economy. The second day offered tific Office, room 328, ChTEI Kyiv Na- forms, privatization, and corporate an unparalleled opportunity for quali- tional Trade and Economic University, governance. fied economists from the CIS who Tsentralna Ploscha (Central Square), study or work abroad to learn about 7 Chernivtsy, 58002, Ukraine, tel.: Information: Center for Social and the research opportunities available (380-3722) 2-23-03, 2-21-22, email: Economic Research, Sienkiewicza 12, at some of the best academic insti- ?horShkola@chtei.cv.ua, main@ 00-944 Warsaw, Poland, tel.: (+48 22) * tutions in Russia. chtei.cv.ua, sercherl106@yahoo.com. 622 66 27, 828 61 33, fax: (+48 22) 828 60 69, email: case@case.com.pl. Keynote speakers were German Beyond Transition Development Gref, minister of economic devel- Perspectives and Dilemmas Conference on Economic Devel- opment and trade; Alexander April 12-13, 2002, Warsaw, Poland opment and Reconstruction Poli- Pochinok, deputy minister of labor cies in Southeast Europe: The and social development; and An- The conference will continue the Role of SMEs drew B. Somers, president of the discussions held at the previous April 25-27, 2002, Inter-University American Chamber of Commerce CASE conference entitled Ten Center, Dubrovnik, Croatia in Russia. Years After: Transition and Growth in Postcommunist Countries, held Sponsored by the American and Brit- The conference program can be in Warsaw in late 1999, and will fo- ish embassies in Zagreb, the British downloadedfrom http://wwwcefir.org. cus on the challenges that post- Academy, the Croatian Academy of transition countries will face in the Arts and Sciences, the Friedrich Ebert Forthcoming near future. The conference agenda Stiftung, and the Soros Foundation. will concentrate on perspectives and _ The 13th Annual International key dilemmas, such as globaliza- Topics: Include the employment ef- Scientific and Practical Confer- tion, liberalization, EU enlargement fects of entrepreneurship, European ence: Development Strategies of and the euro zone, labor market flex- integration and economic develop- the Region's Economic Poten- ibility, and international tax compe- ment in southeast Europe (discus- tial: Investment Priorities and In- tition. The conference is also sant: Xavier Richet, University frastructure intended to answer questions on how Marne-la-Vallee, France), determi- April 8-10, 2002, Chernivtsi, Ukraine the emerging markets may benefit nants of small and medium enterprise ©) 2002 The World Bank TRANSITION, January-February 2002 ,7, 1(SME) development in transition * Session Three: Education and Em- International Conference on Glo- countries and insights from the East powerment, Ravi Kanbur and Alan B. balization and Catching Up in O II | |German case school, the current Krueger Emerging Market Economies state of the SME sector in south- 0 Session Four: Investment Climate May 16-17, 2002, Warsaw, Poland e r Ieastern Europe and opportunities for and Productivity, Kenneth Rogoff and inter-regional cooperation, the role of Andrei Schleifer. Members of TIGER's scientific advi- SMEs in Kosovo's reconstruction sory board from Chile, China, India, .C | and institutional barriers, enterprise ThisyeartheABCDEwillalsoinclude Israel, Italy, Japan Hungary, Poland, - networks as a model for economic parallel afternoon sessions spon- Tanzania, Russia, and the United J$Z1 11recovery of war-damaged areas, and sored by the World Bank Econo- States will discuss prospects, con- financial structures to promote pri- mists' Forum. Day one will include ditions, and challenges for faster [ vate sector development in south- the following five afternoon sessions: economic growth of emerging mar- =__ - :_IL=eastern Europe. Intellectual property rights, the WTO, ket economies. Douglas C. North, and Developing Countries; Restruc- 1993 Nobel Laureate in Economics, Cultural Legacies of the Soviet turing and Agricultural Development will deliver the conference's special Experience in Transition Countries; Network In- lecture. More information about the April 26, 2002, Stanford University, dustry Privatization; Service Delivery conference is available on http:// U.S.A. and Quality of Life in Urban Areas: www.tiger.edu.pl. Spatial Perspectives; and Health and Sponsored by the Center for Russian Development. Day two will include the 2002 EBRD Business Forum: Shar- and East European Studies at followingfiveafternoon sessions: Has ing the Benefits of Long-Term In- Stanford University and the Institute Financial Globalization Gone too Far? vestment of Slavic, East European, and Eur- Financing Constraints to SME May 19-20, 2002, Bucharest, Romania asian Studies. Growth: Does Size really Matter? Making Public Services Work for Poor Topics: Transition and accession, Information: University of Califor- People; Subnational Governments investing in agribusiness, financing nia, Berkeley, Institute of Slavic, and National Development Strategies: infrastructure modernization, improv- East European, and Eurasian IncentivesforCoordinatedAction; and ing efficiency in energy use, enforc- Studies, 260 Stephens Hall #2304, Economic Geography of Poverty: Mi- ing contracts in Central and Eastern Berkeley, California 94720-2304, cro Perspectives. Europe, southeast European capital tel.: 510-642-3230, fax.: 510-643- markets, and business briefing on the 5045, email: iseees @uclink4. Participation by non-Bank and non- "Transition Report Update 2002." berkeley.edu, Internet: http:// IMF staff is by invitation only. socrates. berkeley. edu/-iseeesl. Country presentations will offer par- Information: For general information ticipants a comprehensive review of 14th Annual Bank Conference on see http://www.worldbank.org/re- business and investment issues for Development Economics (ABCDE) search/abcdel For ABCDE moming each of the bank's 27 countries of April 29-30, 2002, Washington, D.C., sessions contact Boris Pleskovic, operations. Government officials and U.S.A. Research Administrator, Development business people from the country Economics Vice Presidency, World being discussed will share their The sessions will be as follows: Bank, 1818 H Street, N.W, Room knowledge of the investment climate, Opening address: James D. MSC4-402, Washington, D.C. 20433, business opportunities, regulatory Wolfensohn, president, World tel.:202-473-106Z fax. 202-522-0304, framework, and recent policy deci- Bank email: bpleskovic@worldbank.org. sions. The European Bank for Re- * Keynote address: John Taylor, For aftemoon Economic Forum ses- construction and Development, the undersecretary for international af- sions contact David Rosenblatt, Se- largest single investor in the region, fairs, U.S. Treasury Department nior Economist, Development will also contribute its broad experi- * Session One: Trade and Poverty, Economics Vice Presidency, ence to the discussions. Ann Krueger and L. Alan Winters World Bank, 1818 H Street, N.WW, * Session Two: Africa's Future: In- Room MC4-363, Washington, D.C. Information: Annual Meetings Unit, tel.: dustrial orAgricultural Development? 20433, tel.: 202-473-7930, e-mail: 440-20-7338-6625, fax: 440-20-7338- Paul Collier and Adrian Wood drosenblatt@worldbank.org. 7320, email: aminvitations@ebrd.com. TRANSITION, January-February 2002 C 2002 The World Bank International Conference on Tran- demic and policy circles in Russia Organizers: Cornell University, Lon- L sition Economics about cutting-edge research in the don School of Economics, and the June 20-24, 2002, Riga, Latvia areas of multilateral trade liberaliza- World Institute for Development Eco- tion and trade negotiations. Equally nomics Research. | Organizers: the Centre for Economic important, it will give Western econo- Policy Research, the Stockholm In- mists working on trade theory and Amid growing concern about in- stitute for Transition Economics, and policy an opportunity to discuss the creasing inequality, the spatial di- the Baltic International Centre for policy implications of their most re- mensions of inequality have begun i Economic Policy Studies (BICEPS) cent research papers in the context to attract considerable policy inter- with The William Davidson Institute, of Russia's accession negotiations. est. In China, India, Mexico, Russia, University of Michigan. and South Africa, as well as in most Topics: The major themes of the con- other developing and transition Leading economists and other so- ference will be as follows: economies, there is a sense that the cial scientists working on transition spatial and regional inequality of eco- and development issues will meet to 0 Consequences of WTO accession nomic activity, incomes, and social discuss new research and to inter- for Russia's economy and for the indicators is on the rise. act with key policymakers in the re- world economy in general gion. A special feature of the event 0 Sector-specific aspects of Russia's Spatial inequality is a dimension of will be a panel exploring the similari- accession negotiations (services, overall inequality, but it has added ties and differences between issues agriculture, investment, intellectual significance when spatial and re- and approaches in transition and property) gional divisions align with political developing economics. 0 Political economy of trade reforms and ethnic tensions to undermine and reciprocal trade liberalization in the social and political stability. Also BICEPS is located in the historic art context of Russia's WTO accession important in the policy debate is a nouveau district of Riga in a com- 0 Lessons and consequences of perceived sense that increasing in- plex of buildings that also houses China's accession negotiations for ternal spatial inequality is related to the Stockholm School of Econom- Russia's accession greater openness of economies and ics in Riga and the Riga Graduate 0 The WTO legal system and the to globalization in general. School of Law. Riga, Latvia's capi- credibility of domestic reforms in tal, is a port city of just under 1 mil- Russia on the eve of accession Despite these important popular and lion inhabitants. * Institutional design and principles policy concerns, remarkably little of the General Agreement on Tariffs systematic -and coherent documen- Information: Go to http://www. and Trade and the WTO tation of what has happened to spa- biceps.org. 0 Reciprocity, nondiscrimination, tial and regional inequality over the and renegotiation in trade policy co- past 10 to 20 years is available. Cor- Negotiating Russia's WTO Acces- operation respondingly, understanding of the sion: Strategic Lessons from Mul- * Gradualism in reciprocal trade lib- determinants of internal spatial in- tilateral Trade Liberalization and eralization. equality in a globalizing world is in- Club Enlargement sufficient. June 24-25, 2002, Moscow Information: Assistant Professor Mikhail Klimenko, University of Cali- The conference seeks to attract con- The Centre for Economic and Finan- fomia, San Diego Graduate School of tributions that document and analyze cial Research is bringing together a International Relations and Pacific within-country spatial inequality and group of prominent academics and Studies, email mklimenko@ucsd.edu, its determinants, especially during policymakers to examine the theo- is coordinating the meeting. More in- the increased globalization of the last retical and policy issues pertinent to formation will be available at http:// two decades. It will take a broad view Russia's accession into the World www.cefir.org. of inequality, covering the distribution Trade Organization (WTO). The aim of such variables as economic activ- is to increase awareness of interna- Spatial Inequality and Develop- ity, economic structure, population, tional trade theory as an important ment Conference income, social indicators, infrastruc- area of economics among Russian June 27-29, 2002, London School ture, and public expenditure. While economists, while informina aca- of Economics. Londonl U.K. the main focus is on the empirical c 2002 The World Bank TRANSITION, January-February 2002 analysis of recent history, contribu- * Workers' participation and social there can be no development.We l | itions that conceptualize the mea- economy in developing countries have also learned that private prop- surement of spatial inequality or * Workers' participation, social dia- erty cannot exist without a govern- i'A analyze its evolution in a longer his- logue, and civil society. mental apparatus ready and able torical frame will also be considered. to secure not only individuals' rights .=- ,:1 Presentations in the following areas like free speech and social justice, i The papers presented at the confer- are welcome: but also people's holdings. The I ence will be collected in a volume state must lay the foundation for 1;i edited by Professor Ravi Kanbur, * Codetermination, works councils, the market if the market is to flour- Cornell University, and Professor European works councils ish. In short, institutions and the Tony Venables, London School of 0 Other forms of workers' participa- rule of law are central to the devel- Economics, and published by a lead- tion in decisionmaking opment process. Papers dealing ; ing academic press. Decisions on * Employee ownership with these topics will be particu- papers accepted for presentation will * Self-management, labor-managed larly welcome. be communicated by the end of De- firms cember 2001. 0 Cooperatives Information: Proposals for panels, * Profit sharing roundtables, or individual papers Information: Ravi Kanbur, Cornell 0 Economic and industrial democracy should be sent to Jorge P6rez-L6pez, University 309 Warren Hall, Ithaca, 0 Social enterprises in welfare ser- Chair, Program Committee, 5881 6th NY 14853, U.S.A. Fax: 607-255- vices. Street, Falls Church, VA 22041, 9984, email: sk145@cornell.edu. U.S.A. or perezlop@erols.com as Information: Daniel Vaughan-White- soon as possible, with more detailed 11th Conference of the Interna- head, Avenue du Pesage, 127, B- abstracts by March 1, 2002. People tional Association for the Econom- 1050 Bruxelles, Belgium, email: interested in serving as discussants, ics of Participation: Participation Daniel. Vaughan-Whitehead@cec. session chairs, or participants in Worldwide eu.int. roundtable discussions should also July 4-6, 2002, Catholic University contact Mr. Perez-L6pez. of Brussels, Belgium Association for the Study of the Cuban Economy, 12th Annual The Sixth Annual Conference of Conference themes: The biannual Meeting the International Society for New International Association for the Eco- August 1-3, 2002, Omni Colonnade Institutional Economics, "Institu- nomics of Participation conferences Hotel, Coral Gables, Miami, Florida, tions and Economic Performance" provide an international forum for pre- U.S.A. September 27-29, 2002, Massachu- senting and debating current re- setts Institute of Technology, Cam- search and scholarship on the The association invites papers on bridge, Massachusetts, U.S.A. economics of participation. The ma- a variety of subjects related to the jor themes of the 2002 conference Cuban economy and society, in- The society aims to bring together will be the following: cluding macroeconomics, banking scholars from all over the world who and finance, agriculture and the are unified by two propositions: in- * Development and combination of sugar industry, tourism, social and stitutions matter and institutions are forms of workers' participation around political aspects of economic de- susceptible to analysis. In addition the world velopment, education, health, en- to economics, the conference pro- * Theoretical and empirical studies vironmental policy, law and legal gram will include sessions on the on the economic and social effects institutions, civil society, gender is- application of new institutional eco- of participation sues, governance, infrastructure, nomics to political science, law, and * Workers' participation across bor- and civil-military relations. organizational behavior. ders, in a transnational and global context The main theme for this year's meet- Information: To register for the confer- * Employee participation and EU en- ing will be The State, Institutions, and ence and find out more information largement the Market Economy. As the world about the society please consult our * Employee ownership in transition enters the 21st century we have web site at ww.isnie.org or send an economies learned that where there is no state, email to isnie@wueconc.wustl.edu. TRANSITION, January-February 2002 C 2002 The World Bank New Books and Working Papers The Macroeconomics and Growth Group regrets that it is unable to provide the publications listed. World Bank Publications Basic Telecommunications: The Foreign Direct Investment Policy, - Asian Experience, WPS 2718, WPS 2737, December 2001. To receive ordenng and price informa- November 2001, 28 pp. To order: Rebecca Martin, room MC3- tion for World Bank publications con- To order: Robert Simms, room MC3- 308, tel.: 202-473-9065, fax: 202-522- tact the World Bank, P0. Box 960, 333, tel.: 202-473-7156, fax: 202-522- 1159, email: rmartinl@wor/dbank.org. ) & Hemdon, VA 20172, United States, tel.: 1159, email: rsimms@worldbank.org. 703-661-1580, fax: 703-661-1501, Dilip Ratha, Complementarity be- 1 email: books@worldbank.org, web Helo Meigas, Using Development- tween Multilateral Lending and site:http.//www.worldbank.org/publica- Oriented Equity Investment as a Private Flows to Developing tions, or visit the World Bank InfoShop Tool for Restructuring Transition Countries: Some Empirical Re- C at 701 18th Street, N.W, Washing- Banking Sectors, WPS 2723, No- sults, WPS 2746, December 2001, ton, D.C., teL.: 202-458-5454. vember 2001, 23 pp. 23 pp. To order: Sylvia Torres, room H6-216, To order: Sara Crow, room MC2-358, ... World Bank Working Papers tel.: 202-473-9012, fax: 202-522-0005, tel.: 202-473-0763, fax: 202-522- , email: storres@worldbank.org. 2578, email: scrow@worldbank.org. m Daniel Lederman, Norman Loayza, and Rodrigo Reis Soares, Account- James R. Barth, Gerard Caprio, Jr., Patrick Honohan and Anqing Shi, t ability and Corruption: Political and Ross Levine, Bank Regulation Deposit Dollarization and the Fi- Institutions Matter, WPS 2708, and Supervision: What Works nancial Sector in Emerging November 2001, 37 pp. Best? WPS 2725, November 2001. Economies, WPS 2748, December 1 To order: Patricia Soto, room 18-018, To order: Agnes Yaptenco, room 2001, 30 pp. ___ tel.: 202-473-7892, fax. 202-522- MC3-446, tel.: 202-473-8526, fax: To order: Agnes Yaptenco, room 7528, email: psoto@worldbank.org. 202-522-1155, email: ayaptenco@ MC3-446, tel.: 202-473-8526, fax: h worldbank. org. 202-522-1155, email: ayaptenco@ ; Ritva Reinikka and Jakob Svensson, worldbank.org. Explaining Leakage of Public J. Michael Finger and Julio J. Funds, WPS 2709, November 2001, Nogues, The Unbalanced Uruguay Carolina Sanchez-Paramo, Unem- 35 PP. Round Outcome: The New Areas ployment, Skills, and Incentives: To order: Hedy Sladovich, room MC3- in Future WTO Negotiations, WPS An Overview of the Safety Net 311, tel.: 202-473-7698, fax: 202-522- 2732, December 2001, 19 pp. System in the Slovak Republic, 1154, email: hsladovich@world To order Robert Simms, mail stop MC3- WPS 2753, January 2002, 60 pp. bank.org. 303, te/.: 202-473-7156, fax: 202-522- To order: Carolina Sanchez-Paramo, . 1 1159, email: rsimms@worddbankorg room 18-105, tel.: 202-473-2583, fax: Martin Ravallion and Dominique van 202-522-0054, email: csanchez de Walle, Breaking up the Col- Bernard Hoekman, Constantine paramo@worldbank.org. J lective Farm: Welfare Outcomes Michalopoulos, Maurice Schiff, and K d of Vietnam's Massive Land David Tarr, Trade Policy Reform Hua Wang, Nlandu Mamingi, Privatization, WPS 2710, Novem- and Poverty Alleviation, WPS Benoit Laplante, and Susmita ber 2001, 42 pp. 2733, December 2001, 44 pp. Dasgupta, Incomplete Enforce- t To order: Catalina Cunanan, room To order: Rebecca Martin, room MC3- ment of Pollution Regulation: f MC3-542, tel.: 202-473-2301, fax: 308, tel.: 202-473-9065, fax: 202-522- Bargaining Power of Chinese _, 202-522-1151, email: ccunanan@ 1159, email: rmartinl@worldbankorg. Factories, WPS 2756, January worldbank.org. 2002, 21 pp. Aaditya Mattoo, Marcelo Olarreaga, To order: Hua Wang, room MC2-626, S. Carsten Fink, Aaditya Mattoo, and and Kamal Saggi, Mode of Foreign tel.: 202-473-3255, fax: 202-522-3230, 4Ž) Randeep Rathindran, Liberalizing Entry, Technology Transfer, and email: hwang1,worldbankorg. © 2002 The World Bank TRANSITION, January-February 2002 Boris Pleskovic, Anders Aslund, Wim P. M. Vijverberg and Jonathan position of foreign direct investment William Bader, and Robert Campbell, Haughton, Household Enterprises inflows. The author uses a unique '3 lCapacity Building in Economics: in Vietnam: Survival, Growth, firm-level dataset from Eastern Eu- Education and Research in Tran- and Living Standards, WPS 2773, rope and the former Soviet Union. sition Economies, WPS 2763, February 2002, 27 pp. She finds that weak protection de- January 2002, 51 pp. To order: Emily Khine, room MC3- ters foreign investors in technology- To order: Boris Pleskovic, room 347, teL.: 202-473-7471, fax: 202-522- intensive sectors that rely heavily on MC4-385, tel.: 202-473-1062, fax: 3518, email: kkhine@worldbank.org. intellectual property rights. The re- 202-522-0304, email: bpleskovic sults also indicate that a weak intel- 0Cy | @worldbank.org. The other authors Eric Edmonds and Carrie Turk, Child lectual property regime encourages may be contacted at aaslund@ Labor in Transition in Vietnam, investors to undertake projects fo- ceip.org, baderw@ndu.edu, or WPS 2774, February 2002, 57 pp. cusing on distribution rather than on campbelr@indiana.edu. Toorder:RinaBonfield, room MC3-354, local production. The latter effect is tel.: 202-473-1248, fax: 202-522-3518, present in all sectors, not just those The development of the institutional email: abonfield@worldbank.org. that rely heavily on intellectual prop- capacity to create and evaluate eco- erty protection. nomic policies remains a critical Pravin K. Trivedi, Patterns of Health need-and constraint-in most tran- Care Utilization in Vietnam: sition economies if they are to com- Analysis of 1997-98 Vietnam Liv- Zvi Lerman, Csaba Csaki, and plete the successful passage to fully ing Standards Survey Data, WPS Gershon Feder, Land Policies and functioning market economies. To 2775, February 2002, 55 pp. Evolving Farm Structures in Tran- take an active role in the transition ToorderRinaBonfield, room MC3-354, sition Countries, WPS 2794, Feb- process economic policymakers, tel.: 202-473-1248, fax: 202-522-3518, ruary 2002, 176 pp. business leaders, government offi- email: abonfleld@worldbankorg. To order: Maria Fernandez, room cials, and others need a thorough MC3-542, tel.: 202-473-3766, fax: grounding in market-based econom- Paul Glewwe, Stefanie Koch, and 202-522-1151, email: mfemandez2 ics. This requires strengthening eco- Bui Linh Nguyen, Child Nutrition, @worldbank.org. nomics education and providing Economic Growth, and the Pro- support for qualified economists to vision of Health Care Services in This study reviews the role of land teach economics at all levels and to Vietnam in the 1990s, WPS 2776, policies in the evolving farm struc- carry out high-quality research and February 2002, 50 pp. tures of the transition economies in policy analysis. Although the educa- To order: Emily Khine, room MC3- Central and Eastern Europe (CEE) tion systems in a handful of coun- 347, tel.: 202-473-7471, fax: 202-522- and the CIS. It demonstrates how tries have already risen to the 3518, email: kkhine@worldbankorg. different policies with regard to pri- challenge, in many other transition vate property rights in relation to land, countries the structure of educational Beata K. Smarzynska, The Compo- degrees of control of land rental and and research institutes remains sition of Foreign Direct Investment sale markets, and procedures for grounded in the communist model. and Protection of Intellectual restructuringformercollectiveorstate This paper presents findings from a Property Rights: Evidence from farms resulted in significantly differ- comprehensive study assessing the Transition Economies, WPS 2786, ent farm structures in CEE countries state of economics education and re- February 2002, 26 pp. compared with most of the CIS. In search in 24 countries in East-Central To order: Paulina Flewitt, room MC3- particular, more secure land rights, Europe and the former Soviet Union. 333, tel.: 202-473-2724, fax: 202-522- greater emphasis on individualization The Czech Republic, Hungary, Rus- 1159, email: pflewitt@worldbank.org. of land, and more liberal land market sia, and Ukraine were included to The author may be contacted at policies in CEE generated a farming highlight five educational centers of bsmarzynska@worldbank.org. sector with a relatively large share of excellence that they host. Building family farms (which are not neces- new indigenous capacity for teach- While existing literature has exam- sarily small) and viable corporate ing and research on market-based ined the impact of intellectual prop- farms. By contrast, limited tenure economics is particularly critical in erty protection on the volume of security, ineffective individualization of regions such as the Caucasus, Cen- foreign direct investment, little is land rights, and restrictive land mar- tral Asia, and Southeast Europe. known about its effect on the com- ket policies in most CIS countries TRANSITION, January-February 2002 c 2002 The World Bank produced a farming structure domi- Other World Bank Publications the business environment, which can nated by large and generally nonvi- then be related to specific firm char- able jointly owned farms that Building Peace in South East Eu- acteristics and firm performance. continue to function much like the rope: Macroeconomic Policies and BEEPS interactive dataset gives old inefficient collectives. Family Structural Reform since the Kosovo access to the results of the BEEPS farms are slow to emerge in transi- Conflict, a copublication of the World survey for a wide range of different tion countries with inadequate land Bank and IMF, 2002, 48 pp. users. You can download the entire policies. The agriculture sector in dataset (in EXCEL format) and the Cs countries dominated by inefficient Prior to the eruption of the Kosovo survey questionnaire, or you can fol- farm organizations is characterized conflict in 1999, Albania, Bosnia low the simple step by step instruc- by low productivity and misallocation and Herzegovina, Bulgaria, Croatia, tions to obtain data, produce charts, of resources. the former Yugoslav Republic of and do simple comparative analyses Macedonia, Romania, and the Fed- on the questions and countries that , Adam Wagstaff, Inequalities in eral Republic of Yugoslavia were al- interest you. Health in Developing Countries: ready lagging behind Central Europe Swimming against the Tide? and the Baltics in terms of their eco- BrankoMilanovic, Household Expen- WPS 2795, February 2002, 40 pp. nomic performance and institutional diture and Income Data for Transi- Toorder:HedySladovich, room MC3- development. The crisis became a tional Economies, January 2002, 311, tel.: 202-473-7698, fax: 202-522- defining moment for all the countries available at http://www.worldbank.org/ 1154, email: hsladovich@world in the region. The broad approach de- researchltransition/house.htm. bank.org. veloped by the international commu- nity in response to the crisis included The startling drop in incomes and World Bank Discussion Papers reconstruction and, as a final goal, increase in inequality accompanying economic prosperity for the region. the transition to market economies Michael S. Borish, Khaled Sherif, This paper documents the region's in Eastern Europe and the former George Clarke, and Paul Siegelbaum, progress in terms of economic Soviet Union raise critical questions: Structural Adjustment in the Tran- growth and government reforms. It Who is most likely to be poor? How sition: Case Studies from Albania, points out that bringing private invest- well are existing social assistance Azerbaijan, Kyrgyz Republic, and ment into the region depends upon programs reaching those who most Moldova, World Bank Discussion effective governance and policy de- need help? What kind of programs Paper 429, 2002, 192 pp. velopment. would be most effective in reducing poverty? As part of a project analyz- For 10 years the countries of Central Daniel Kaufmann, Business Environ- ing poverty and social assistance in and Eastern Europe and the former ment and Enterprise Performance the transition economies, a Bank Soviet Union have been transitioning Survey (BEEPS) (Datasets), Janu- research team created a database to economies based on market prin- ary 2002, available at http:// of household expenditure and in- cipals. While there has been some info.worldbank.org/governance/ come data from recent surveys-the success in this process, most of the beeps/. HEIDE database. The entire data- CIS (Armenia, Azerbaijan, Belarus, base and data descriptions are avail- Georgia, Kazakhstan, the Kyrgyz Re- BEEPS, developed jointly by the able in ZIP format (5430K). Country public, Moldova, Russia, Tajikistan, World Bank and the European Bank data and their descriptions can also Turkmenistan, Ukraine, and Uzbek- for Reconstruction and Development, be individually downloaded. istan) continues to grapple with weak is a survey of more than 4,000 firms economies, low public confidence, in 22 transition countries conducted Jeffrey Carmichael and Michael and political instability. This study in 1999-2000 that examines a wide Pomerleano, Development and reviews the transition efforts of four of range of interactions between firms Regulation of Non-Bank Financial these countries: Albania, Azerbaijan, and the state. Based on face-to-face Institutions, March 2002, 248 pp. the Kyrgyz Republic, and Moldova. interviews with firm managers and These countries have been marred by owners, BEEPS was designed to The principal role the financial sys- war, banking crises, and pyramid generate comparative measurements tem plays in any country is to pro- schemes that prevented economic in such areas as corruption, state vide the infrastructure to allow surplus growth and poverty reduction. capture, lobbying, and the quality of resources to be allocated to those c 2002 The World Bank TRANSITION, January-February 2002 c' , el I'i I,, individuals and companies with defi- enue assignments, fiscal imbal- Jorge Martinez-Vazques and o cits. The positive impact of a func- ances and transfers, access to bor- Jameson Boex, Russia's Transi- ei > If tioning financial system upon a rowing and indebtedness, and tion to a New Federalism, WBI country's economic growth is well budgeting. Learning Resources Series, Feb- IC 3e documented. In most countries the ruary 2001, 99 pp. ', financial system extends beyond tra- Bernard Funck and Lodovico Pizzati, ditional banking institutions to in- eds., Labor, Employment, and Slovak Republic: Living Stan- clude insurance companies, mutual Social Policies in the EU Enlarge- dards, Employment, and Labor - - . - lifunds, market makers, and other fi- ment Process: Changing Perspec- Market Study, World Bank Country nancial service providers. These non- tives and Policy Options, 2002, Study, 2002, 200 pp. bank financial institutions provide 428 pp. I- services that are not necessarily As a transition economy, the Slovak - i7~ ~-9suited to banks, serve as competi- Central and Eastern European coun- Republic has achieved a high ranking tion to banks, and specialize in sec- tries continue to face challenges as in terms of human development. Nev- tors or groups. Having a multifaceted they transition to a market economy ertheless, many families and individu- financial system, which includes and integration within the EU. Key alsliveinpoverty.Whilekeyvariables nonbank financial institutions, can to this transition is the implementa- contributing to poverty are readily protect economies from financial tion of suitable labor market policies. identified, the lack of education, em- shocks; however, in developing coun- In June 2001 the Bertelsmann Foun- ployment, and data make it difficult tries that lack a coherent policy dation and the World Bank spon- to accurately monitor poverty in the framework and effective regulations, sored a conference that addressed Slovak Republic. This study makes nonbank financial institutions can the challenges labor markets in these key policy recommendations to re- exacerbate the fragility of the finan- countries face. This volume contains duce poverty by reducing unemploy- cial system. the papers presented at the confer- ment while instituting measurement ence. Included in the presentations processes to evaluate the impact of This book helps build awareness of are recent labor trends, existing la- reforms. The recommendations to the potential of nonbank financial bor market policies and social pro- reduce poverty include actions in the institutions for developing countries. tection mechanisms, and alternative following three specific areas: It aims to help policymakers create strategies for employment creation. coherent policy structures and sound 0 Increasing the demand for labor regulatory and supervisory environ- Growth Challenges and Govern- by attracting more private investment ments for the development of these ment Policies in Armenia, World * Developing a better match between institutions. It assists policymakers Bank Country Study, 2002, 200 pp. skills and market demands through in learning the essential functions education and training and characteristics of nonbank finan- This study evaluates growth trends in * Encouraging citizens to rely less cial institutions with chapters on in- Armenia during 1994-2000. It details on government benefits and giving surance companies, mutual funds the major weaknesses of existing them more incentives to work. and pension schemes, securities development patterns and suggests markets, and leasing and real estate a package of policy recommenda- The World Bank Research Pro- companies. tions designed to hasten enterprise gram 2001: Abstracts of Current restructuring, attract investment, and Studies, 2001, 180 pp. Joao do Carmo Oliveira and Jorge encourage the creation of new busi- Martinez-Vazquez, Czech Republic: nesses in the medium term (three to This publication is a compilation of Intergovernmental Fiscal Rela- five years). The study identifies three reports on research projects initiated, tions in the Transition, World Bank elements that represent critical con- underway, or completed in fiscal 2001 Technical Paper 517, 2001, 112 pp. straints to sustainable economic (July 1, 2000, through June 30, growth in Armenia, namely, a poor 2001). The abstracts cover 150 World This report describes the most sig- business and investment environ- Bank research projects and are nificant elements of intergovernmen- ment, weak managerial skills, and grouped under 11 major headings, tal fiscal relations in the Czech uncertainty about the country's eco- including poverty and social devel- Republic, including the administra- nomic and political prospects in an opment, health and population, edu- tive structure, expenditure and rev- unstable region. cation, labor and employment, TRANSITION, January-February 2002 C 2002 The World Bank environment, infrastructure and ur- Dynamics of Child Poverty in In- of international financial institutions 'I ban development, and agriculture and dustrialized Countries, Cambridge, and organizations. rural development. The abstracts U.K., Cambridge University Press, detail the questions addressed, the July 2001. Adolf J. H. Enthoven and others, analytical methods used, and the Accounting, Auditing and Taxa- findings to date and their policy im- RoumianaGantchevaandAlexandre tion in the Russian Federation plications. Each abstract identifies Kolev, Children in Bulgaria: Grow- -An Update, 2001, Center for theexpectedcompletiondateofeach ing Impoverishment and Unequal lntrnational Accounting Develop- project, the research team, and re- Opportunities, Innocenti Working ment, The University of Texas at ports or publications produced. Papers no. 84, January2001, 63 pp. Dallas, St.Petersburg State Uni- versity, East-West Management CASE Publications Other Publications Institute, New York, 2001, 160 pp. To order: CASE, Center for Social and Central European Initiative (CEI)/ Russia's public and private sectors Economic Research, ul. Sienkiewicza United Nations, Investiguide 2001- should adhere more closely to inter- 12, 00-944 Warsaw, Poland, tel.: 2002-Project Opportunities and nationally accepted business prac- 4822-622-6627, fax: 4822-828-6069, Contacts for the CEI Region, 2001, tices as one means of curing the email: case@case.com.pl. 189 pp. former communist country's current To order: http://www.ceinet.org, or economic, financial and social ills. Georgy Ganev, Marek Jarocinski, http://vwww.unece.org. By implementing international ac- Rossitza Lubenova, and Przemystaw counting methods, the Russian gov- Wozniak, Credibility of the Ex- This guide serves a network of ernmentwould encourage the foreign change Rate Policy in Transition people active in business, govern- investment and domestic capital Countries, CASE Report, 2001, 68 mental, and international organiza- markets so necessary to further de- pp. tions who share the same vision of velop the country's emerging free- improved opportunities in the region market economy. There is an urgent Janusz M. Szyrmer, ed., Ukraine: or a borderless Europe with lower need to view accounting as a sepa- Monetizing a Transition Economy, crime; fewer disparities; and an ab- rate discipline and body of knowledge Harvard/CASE Ukraine Project, sence of war, terrorism, and humani- as opposed to merely bookkeeping 2001, 200 pp. tarian crises. "Business without and recording. Accounting courses frontiers" is both a political and a prof-. based on international accounting UNICEF Publications itable concept that needs to be pro- principles should be part of business moted within the context of the education programs at Russian col- To order: UNICEF Innocenti Research varying needs of countries in the re- leges and universities. Centre, Piazza SS. Annuniziata, 12, gion and in relation to the ongoing To order: Center for International 50122 Florence, Italy tel.: 39055- EU enlargement process. Accounting Development, The Uni- 20330, fax: 39055-244817, email: versity of Texas at Dallas, PO. Box ciusco@unicef.org, Internet: Project opportunities and contacts 830688, Richardson, Texas 75080, www.unicef-icdc.org. across the CEI region are presented U.S.A., fax.: 972-883-2192. in the form of a matrix system, pro- A Decade of Transition-The viding an explanatory perspective for Brigitte Granville and Peter Oppen- Monee Project CEE/CIS/Baltics, each country and project and outlin- heimer, eds., Russia's Post-Com- Regional Monitoring Report, no. 8, ing those countries, activities, and munist Economy, Oxford University 2001, 189 pp. economic sectors that benefit from Press, Oxford, U.K., August 2001, such projects. 551 pp. Richard Berthoud and Karen Robson, The Outcomes of Teenage Moth- The principal sources used for Thisvolumeoffersa multi-author sur- erhood in Europe, Innocenti Work- Investiguide's statistical data are the vey and analysis of economic devel- ing Papers no. 86, July 2001, 64 pp. UNECE database, the databases opments in the Russian Federation and web sites of selected national since the collapse of communism and Bruce Bradbury, Stephen Jenkins, statistical agencies, statistical year- the break-up of the Soviet Union in and John Micklewright, eds., The books, and the official publications 1989-91. It covers the period 1991-8 C 2002 The World Bank TRANSITION, January-February 2002 and in some areas extends to 1999- them with the required market insti- proves more important than a host 2000. tutions. Coordination problems illus- of variables that are generally con- 4 *4 |To order: Oxford University Press, trate that lock-in of transition sidered significant. It implies that Great Clarendon Street, Oxford OX2 countries inefficient equilibrium is a more stress should have been given 6DP, U.K., tel.: 01865-556-767, clear possibility. Once a certain de- to institution building in the eco- .- .c [ Internet: www.oup.com gree of macroeconomic stabilization nomic transition, certainly early on has been accomplished, the institu- in the process. Eva Kigyossy-Schmidt, Business tional environment becomes the more Related Services in Central and important determinant of growth in Helen O'Neill, Ireland's Economic' U) |Eastern Europe-A Cross Country transition countries. Transition: The Role of EU Re- OQ)4; |Approach, 2002, 262 pp. gional Funds-and Other Fac- To order: WA-Bertelsmann Distribu- The survey collects data in Russia tors, Occasional Paper no. 1, 2000, ____________ tion GmbH, Postfach 77 77, An der on restructuring ownership, compe- Institute for Economic Research, Autobahn, D-33310 Gutersloh, tel.: tition, budget constraints, and, par- Slovenia, 17 pp. 052-41-8057, fax: 052-41-46970. ticularly, institutions from January To order: IER, Kardeljeva ploscad 17, 1992 through September 1999. It 1000 Ljubljana, Slovenia, teL.: 3861- The focus of this book is on the ex- shows a devastating restructuring 4328-151, 5345-787, fax: 3861-5342- amination of specific procedures for crisis, massive privatization, rather 760, email: recnikm@ier.si, Internet: the collection and evaluation of infor- weak competition, unexpectedly http://wwwier.si mation concerning business-related hard budget constraints, an over- services in Central and Eastern Eu- whelmingly negative assessment Adam Torok, ed., Periodical of ropean economies. Experts from for- of formal and informal institutions, the Hungarian Academy of Sci- merly planned economies and, for and largely the same ruling net- ences-ACTA Oeconomica, reasonsof comparison, from Ireland, works as before the start of mar- 51(3), 2000/2001, 433 pp. analyze and assess the state of se- ket reforms. Ensuring the quality To order: ACTA Oeconomica, IE, lected business services and formu- of property rights and the growth P.O. Box 262, H-1502, Budapest, late policy recommendations to of the economy in general is the Hungary, tel.:361-309-2600, fax: 361- acceleratetherestructuringprocess. best strategy to reduce capital 319-3136, email: vanyai@econ. flight. The quality of institutions core.hu Jeni Klugman and Albert Motivans, eds., Single Parents and Child Welfare in the New Russia, U.K., Worries of Local Health Experts... Palgrave, June 2001, 264 pp. To order: Macmillan Direct Customer Services, Brunel Road, Houndmills, Basingstoke, RG21 6XS, England, tel.: 44-1256-302699, fax: 44-1256- 364733, email: mdl@macmillan. co. uk. Luc Moers, Institutions, Economic Performance, and Transition, Tinbergen Institute, Research Series l . no. 269, January 2002, 213 pp. The output collapse in the transition b E countries was much worse than ini- - _ __ __ tially expected. It seems primarily to Right now only a hospital has accidentaly been destroyed, but be an institutional supply-side phe- once the market economy prevails, all our national health nomenon. Transition has destroyed service could be at risk, just like in Hungary. the formal institutions of central plan- ning without automatically replacing From the Hungarian magazine H6cipd TRANSITION, January-February 2002 © 2002 The World Bank Bibliography of Selected Articles International Finance Institutions the Countryside, Journal of Con- MonetaryFund(International)38(3): X temporary China (Hong Kong) 10(27): 36-39, September 2001. Should the Annual IMF/World 189-217, 2001. Bank Meetings Be Restructured? Erpyleva, N., The Role of the Bank A Symposium of Views, Interna- Holz, C., Economic Reforms and of Russia in Banking Regulation tional Economy (United States) 43- State Sector Bankruptcy in China, (Legal Aspects), Journal of Inter- 46, November 2001. The China Quarterly (United King- national Banking Regulation (United dom) (166): 342-67, June2001. Kingdom) 3(1): 88-104, August Postsocialist Economies 2001. Special Report: Sustaining Asia, Far Hellmann, J., and D. Kaufmann, Eastem Economic Review(Hong Kong) Kazakhstan: Ten Years On, Banker Confronting the Challenge of 164(42): 42-58, October25, 2001. (United Kingdom) 151(907 Suppl): State Capture in Transition 139-60, September 2001. Economies, Finance and Develop- Thayumanavan, Vietnam: One Step ment, A Quarterly Publication of the Forward, Two Steps Back? Eco- Central and Eastern Europe International Monetary Fund (Inter- nomic and Political Weekly (India) national) 38(3): 31-35, September 36(37): 3518-24, September 15-21, Buch, C., and D. Piazolo, Capital 2001. 2001. and Trade Flows in Europe and the Impact of Enlargement, Eco- Keller, C., and P. S. Heller, Social Vittachi, N., Special Report- nomicSystems(Holland)25(3): 183- Sector Reform in Transition Coun- China's Elite: Major Changes are 214, 2001. tries, Finance and Development, A Looming, Far Eastern Economic Quarterly Publication of the Interna- Review (Hong Kong) 164(41): 47-51, Dudley, N., Bulgaria Fits the Eu- tional Monetary Fund (International) October 18, 2001. robond Bill, Euromoney (United _,M 38(3):2-5, September 2001. Kingdom) 389: 110-12, September C.Z Wolf, C., Capitalism, Chinese 2001. 0 _ Asia Style-China's Successful Formula forCombiningMarketReformswith Jones, C., Czech Republic: For- China: Financial Times Survey, Government Regulation, Interna- eign Banks Move In, Banker Financial Times (United Kingdom) tional Economy (United States) (United Kingdom) 151(907): 130-32, Suppl.: I-VI, October 8, 2001. 16(1):48-9, 2002. September 2001. China Focus, Far Eastern Eco- Xueqin, J., Educating China's Keane, M., and E. Prasad, Con- nomicReview(Hong Kong) 164(39): Poorest Children, Christian Sci- sumption and Income Inequality . 41-48, October 4, 2001. ence Monitor (United States), p. 16, during the Transition to a Market October 16, 2001. Economy: Poland, 1985-1992, IMF East Asian Trade and Economic Staff Papers (United States) 47: 121 - Policies, World Economy (United CIS 154, 2001. Kingdom) 24(8): 975-1090, August 2001. Aris, B., Russia: Kremlin Bites the Romania: Financial Times Sur- Bullet on Reform, Banker (United vey, Financial Times (United King- Eronen, J., Transport Issues in Kingdom) 151(907): 134-37,Septem- dom) Suppl: I-IV, October 3, 2001. Post-Soviet Central Asia, Promet- ber 2001. Traffic-Traffico (Finland) 13(2-3):153- Stanic, A., Financial Aspects of 56, 2001. Bikalova, N., Intergovernmental State Succession: The Case of Fiscal Relations in Russia. Fi- Yugoslavia. European Journal of Holz, C., China's Monetary Re- nance and Development, A Quar- International Law (United Kingdom) form: The Counterrevolution from terly Publication of the International 12(4): 751-79, 2001. c 2002 The World Bank TRANSITION, January-February 2002 Subscrie to TRNSITION We appreciate the continuing Subscribe to TRANSITION supportof TRANITIO N (ENGLISH VERSION) support of:T R N I O : Bank of Finland If you are not currently on our sub- In;,lnstituteforEconomiesinTransition Senior Editor: Richard Hirschler scription list you may receive TRAN- ' i Room MC3-374 SITION on a complimentary basis by P.O. Box 160, FIN-0010 Helsinki Telephone: 202-473-6982 writing to: tel: 3589-183-2268, fax: 3589-183- Fax: 202-522-1152 2294 Email: rhirschler@worldbank.org Jennifer Vito email: bofit@bof.fi P The World Bank Website: http://www.bof.fi/bofit I 1818 H Street, N.W. SJenniferVito Mail Stop MC3-302 Stkh W1-d,f T,,-nidt-on ,--, -d Et Er a Telephone: 202-47317466 !i | ipcon Econom/csI Fax: 202-522-11521 Washington, D.C. 20433, USA STOCKHOLM SCHOOL OF Eal vt~olbn.r telephone: 202-473-7466 fax: 202-522-1152 Box 6501, SE-113 83 Stockholm, Editor: Alice S. Faintich Sweden, Sveavagen 65, 9th floor The Word Doctor Email: jvito@worldbank.org tel: 468-736-9670, fax: 468-316-422 10509 Brevity Drive email: SITE@hhs.se ! Great Falls, VA 22066, U.S.A. Or if you would like to receive the Internet: http:llwww.hhs.selsite tel. and fax: (703) 759-6434 Transition Newsletter electronically, e and Puboclc Goervien emal:Asaiticuateor please notify Jennifer Vito at theLclGoenetOnSoemi:Afnihal.m pesr andPublicService OpenSoInsitute ihttp://hometown.aol.comlasfaintich/ above email address. v Reform Initiative i TheWordDoctor/info.htm P.O. Box 519 H-1397 Budapest, Hungary P lsamgniltualgaLsienrm?ek4 tel: (36-1) 327-3104 T .I PAHCboP lDI fax: (36-1) 327-3105 H Street,N.W. t t ~~~~~E-mail: Igprog@osilhu Washington D.C. 20433 For a free subscription to the Russian Website: http:Ilwww.osi.huligi Telephone: 202-477-1234 i__ ___ _ _ Fax: 202-477-6391 language version of TRANSITION, write The Urban Institute World Wide Web: to: E http://www.worldbank.org/ International Centre for Policy 2100 M Street, N.W. Studies210MSre,NW 8 S5,uVoioska ~ Washington, DC 20037 TRANsiTIoNis a publication oftheWorld i 8/5, Voloska St. '202' 833-7200 Bank.,andisproducedbytheDevelop- Kyiv, Ukraine 254070 ment Economics Research Advisory telephone: +380 44 4636337te:(0)8370 Staff. The opinions expressed are fax: +380 44 463 5970 Website: http:l/www.urban.org thoseoftheauthorsandshouldnotbe Email: marketing@icps.kievua We look forward to establishing similar attributedinanyrnannertotheWorld Website: http://wwwwicps.kiev.ua agreements with other sponsors-whether Bank,toitsBoariecutheDiprc- 1 individuals or companies. Please contact tors, or to the countries they repre- the editor for more details. i2002 The International Bank for _ >gwiifi For Distribution Use Only ReconstructionandDevelopment The World Bank If you would like to receive the n All rights reserved, Manufactured in I Chinese version of the Transition d the United States of America Newsletter please write to: Volume 13, Number 1-2 China Institute for Reform and I January-February2002 Development (CIRD), 57 Renmin Rd., Haikou City, Hainan, China Printed on recycled paper