The Newsletter About Reforming Economies Transition April/May/June 2003 ˇ Volume 14, No. 4-6 http://www.worldbank.org/transitionnewsletter Iraq: Construction Site of the Century I raq is a transition economy of the Middle East. The task is to nationalization of the country's main export commodity, oil; transform the economy--dominated by central planning, the extensive central planning of industry and trade; the 1982­ price controls, and extensive state ownership--into a genuine 88 war against Iran; and the invasion of Kuwait, which market economy. The process will take years and billions of precipitated the 1991 Gulf War, have devastated the economy. dollars. After security has been achieved and remnants of the GDP has shrunk by 75 percent since 1979. According to World former regime have been eradicated, a postwar economic Bank figures, the number of underweight children soared from strategy needs to be developed and implemented. about 10 percent of children in 1990 to about 20 percent in 2000, while primary school enrollment fell from nearly 95 Iraq can be seen as the newest addition to the group of percent to about 75 percent during the same period. Child and transition economies. Baathist Iraq modeled its economy on maternal mortality have also worsened significantly. According Eastern European communism, including central planning, to Yale University economist William Nordhaus, living price controls, and extensive state ownership. In the 1960s Iraq standards have fallen by 90 percent in the last 23 years. About collectivized its agriculture. Just like the transition economies of 60 percent of the population became dependent on the 1990s, Iraq faces immense economic challenges. humanitarian food aid, partly because of economic sanctions Iraq is endowed with abundant economic and human imposed after Iraq's invasion of Kuwait in 1990. resources and has the second highest proven oil reserves in the Because of the lack of investment and access to the latest world at around 112 billion barrels (after Saudi Arabia with technology and the damage resulting from years of war and 262 billion barrels). But the 35 years of Baathist rule; the continued on page 2 Will EU Money Be the Tune for New Members' Catch-Up Song? by Katinka Barysch T he new member states should not expect EU money to According to Eurostat statistics, on average, GDP per head at lead to miracles. The most important ingredients of catch- PPP in the new Eastern European members will be around 40 up growth are a stable macroeconomic framework; percent of the current EU average, and only about 33 percent at supply-side policies that help markets to adjust quickly; and a alternative PPP estimates and 20 percent if GDP is measured at well-trained, flexible workforce. EU aid will only make a positive market exchange rates. In short, the new members are generally contribution to growth in the region if it is firmly integrated into much poorer than the current EU members. such an environment. The income gap has fueled concerns in both the existing member states and the accession countries. The current On May 1, 2004, 10 new members will join the EU, 8 of them members fear that they could be swamped by imports from the relatively poor Central and Eastern European countries. low-cost accession countries and that firms will relocate to the Bulgaria and Romania may join in 2007. Even though eastward new member states, where labor is much cheaper and social and enlargement will increase the number of people in the EU by 25 environmental standards are less demanding. Countries such as percent, the new members together will add no more than 5 Austria and Germany are also concerned that an influx of percent to the EU's GDP, perhaps twice that if GDP is measured workers from the East could increase unemployment and social on the basis of purchasing power parity (PPP) exchange rates. continued on page 4 THE WORLD BANK 2 ˇ Transition­The Newsletter Abour Reforming Economies Iraq continued from page 1 What's Inside sanctions, Iraq's infrastructure disintegrated. Before the war started earlier this year, this country of 23 million people had only 675,000 fixed telephone lines. Mobile phones were TALK OF THE TOWN banned except for government officials and the army. As a Lessons Learned from China's SARS Crisis 8 result, Iraq has become one of the world's least developed economies. Estimates indicate that an investment of around $1 Curing China's Ailing Health Care System 9 billion will be required to repair and rebuild the telecommunications infrastructure alone. A country that could NEW FINDINGS have been a model of development for the Arab world turned out to be one characterized by economic decline, A Research Agenda for Development 11 mismanagement, and massive corruption. Improved Business Environment: Joint EBRD-- Estimates of Iraq's financial obligations vary widely, but the World Bank Survey 14 Center for Strategic and International Studies estimates that the Emerging Owners, Eclipsing Markets? Corporate figure could be as high as $383 billion. That includes $127 Governance in Transition 17 billion worth of debt, $57.2 billion in pending contracts, and $199 billion in actual and potential Gulf War compensation Impact of WTO Accession on the Russian Economy: claims. Reconstruction bills could top $20 billion a year for the A Review of Current Findings 18 immediate future. Compare those figures with an annual economy that could generate anywhere between $29 billion and WORLD BANK/IMF AGENDA 20 $59 billion per year, including $18 billion a year in oil sales, and it is obvious that any Iraqi government will have a hard time meeting these obligations. The United States has already has put TOPICS FOR DEBATE out feelers suggesting that some of these obligations should be Uncertain Roadmap for Postsocialist written off, others restructured. Health Care Reforms 22 Several blueprints are circulating in Washington that outline sweeping reforms of Iraq's economy based on free market Curing Sick Health Care Systems in Transition principles. The major points of these documents are as follows: Countries 22 ˇ Privatizing state-owned enterprises. Some insolvent Paying the Bills: Health Care Funding in Central Iraqi companies should be liquidated, others sold, partly by and Eastern Europe 23 means of a broadly based mass privatization program. Dealing with Four Elements of Postcommunist Ownership vouchers would be distributed to ordinary Iraqi Health Care Systems 24 citizens, similar to the program Russia used in the mid- 1990s. According to the timetable in the documents, officials Fighting Corruption in Health Care Services 26 would spend a year building consensus for industry Hungary's Medical Profession's Game with the privatization, and would then transfer assets over the Government 28 following three years. Privatization efforts in other countries World Bank Health Projects in Eastern Europe: demonstrate that privately held infrastructure, including oil An Evaluation 30 production and service companies, attract modern technology and management expertise, result in greater efficiencies, improve production standards, and generate EVENTS higher revenues than centrally planned and state-owned Educating Russians in Modern Economics: New industries. Some experts on postcommunist reform efforts Economic School Enters Second Decade 32 warn, however, that a policy of swift privatization met with mixed success across the former Soviet bloc. In many BEST PRACTICE countries the rapid privatization of state-run enterprises led Vietnam's Experiment with Block Grant Budgeting: to severe disruptions in jobs and services as well as rampant "Crossing the River by Feeling the Stones" 34 corruption. In addition, many Iraqis interpret religious teachings as entrusting people to become guardians of the land's natural endowments, including oil, and that profits NEW BOOKS AND WORKING PAPERS 36 from oil production should therefore be shared among the CONFERENCE DIARY 41 people. Some experts suggest applying the Alaska-model, BIBLIOGRAPHY OF SELECTED ARTICLES 42 whereby every resident of the state receives an annual dividend from the oil industry's profits that often amounts to 10 percent of a family's annual income. The World Bank ˇ 3 ˇ Reforming the central bank and the commercial banking new Iraqi government will decide on the creation of a new system. Banks should clean up their nonperforming loan currency. The U.S. occupying authority has already started to portfolios and jump-start the private sector by providing fresh pay salaries to 2 million civil servants. Over a period of three credits; the traditional Islamic money transfer system should be months, almost $500 million were to be pumped into the incorporated into the banking system; special credit lines economy, thereby strengthening the exchange rate of the Iraqi should be created for small and medium Iraqi businesses. The dinar against the dollar.) Economic Consolidation Under Way in Iraq by Amir Taheri All 67 of Iraq's cities and 85 percent of its smaller towns now increase in demand because of air conditioning use in have fully functioning municipalities. Several ministries, temperatures that reach 115 degrees. In other cities, for including the Ministry of Health and Education, have also example, Basra, the country's second-most populous urban managed to get parts of their operations going again. The center, more electricity is being used than at any time under petroleum industry is being revived with plans to produce up Saddam Hussein. to 2.8 million barrels of crude oil a day before the year is out. A stroll in the open-air book markets of Rashid Street in The bazaars have more food to sell than since the late 1970s, Baghdad reveals that thousands of books, blacklisted and while food prices, which jumped in the first few weeks after banned under Saddam Hussein, are now available for sale. liberation, are now lower than they were in the last years of Among the banned authors were almost all of Iraq's best Saddam's rule. Most hospitals are functioning again, with writers and poets, whom many young Iraqis are now essential medical supplies trickling in for the first time since discovering for the first time. Stalls selling videotapes and 1999. audiotapes are appearing in Baghdad and other major cities, In addition, some 85 percent of primary and secondary once again giving Iraqis access to a formerly forbidden schools and all but two of the nation's universities have cultural universe. reopened with a full turnout of pupils and teachers. The free market economy is making its first inroads into Mukahebrat (secret police) agents no longer roam the Iraq's socialistic system in a number of small ways. Hundreds campuses and sit at the backs of classrooms to ensure that of hawkers are offering a variety of imported goods and doing lecturers and students do not discuss forbidden topics, nor brisk business by selling soft drinks, often bottled in Iran, and are the students required to start each day with a solemn oath cookies and chewing gum from Turkey. Some teahouses, in of allegiance to the dictator. competition to attract clients, offer satellite television as an There has been no mass exodus from anywhere in Iraq. On additional attraction. Every evening people pack the teahouses the contrary, many Iraqis driven out of their homes by to watch and discuss what they have seen in an atmosphere of Saddam are returning to their towns and villages. Their freedom unknown under Saddam. During his rule people could return has given the building industry, moribund in the last be condemned as spies and hanged for owning a satellite dish. years of Saddam's rule, a boost. Iraqi exiles and refugees are Another symbol of newly won freedom is the multiplication of also coming home, many from Iran and Turkey. Last month cellular and satellite phones. Under Saddam, their illegal alone the Iranian Red Crescent recorded the repatriation of possession could carry the death penalty. more than 10,000 Iraqis, mostly Kurds and Shiites. Iraq no Life is creeping back to normal in Baghdad. Weddings, longer has displaced persons, uprooted communities, and always popular in the summer, are being celebrated again, long lines of war victims leaving the country in search of a often with traditional tribal ostentation. The first rock safe haven. concert since the war, offered by a boys' band, has already For the first time in almost 50 years Iraq has no political taken place, and Iraq's national soccer squad has resumed prisoners, no executions, no torture, and no limit on training under a German coach. freedom of expression. Today Iraq is the only Muslim Two Iraqs exist today: one as portrayed by those in country where all shades of opinion--from the extremist America and Europe who wish to use Iraq as a means of Islamists of the Hezbollah to Stalinists and liberals, damaging Bush and Blair, and the other as it really exists, socialists, Arab nationalists, and moderate Islamists--can home to 24 million people with many hopes and aspirations compete freely in an open market of ideas. All are now and, naturally, some anxiety about the future. "After we have represented in the newly created Governing Assembly aired our grievances we remember the essential point: (Majlis al-Hukum). Iraq is also the only Muslim country Saddam is gone," says Mohsen Saleh, a geologist in Baghdad. where more than 100 newspapers and weeklies, "A man who is cured of cancer does not complain about a representing all viewpoints, appear without having to obtain common cold." a police permit and without censorship. Amir Taheri is an Iranian journalist This is a shortened The media have made much of power cuts, especially in version of the author's article published in the New York Post. Baghdad, but this is partly due to a 30 percent seasonal He can be reached via http:www.benadorassociates.com. 4 ˇ Transition­The Newsletter Abour Reforming Economies World Bank Office Opens in Baghdad--Donor Conference to Be Held in October The World Bank will support Iraq's reconstruction and its requirements and on the possibilities of donor financing. transition to a market economy," Country Director Joseph The July discussions in Baghdad focused on the Bank's Saba told a UN-sponsored workshop held in Baghdad on July activity and experience in the transition countries. "A big 19. He announced that following recent assessment missions, challenge will be creating jobs," Saba said. "Fifty percent of the Bank is establishing an office in Baghdad and has hired a the population is under 16 years old. So the challenge is to security adviser and local staff to support work on the translate resource wealth into productive, efficient ground. The Bank will soon appoint a head of mission who employment and create proper jobs for these young people," will reside in the Iraqi capital. The Bank and UN are also he pointed out. The Office of the Special Representative of cosponsoring 11 further assessment missions that will serve the UN Secretary General for Iraq moderated the meeting. as the basis for a report to be distributed at a donors Attendees included Iraqi journalists, business people, former conference in October. Covering 14 sectors, the assessment government officials, Iraqi and international advisers to the process will focus on determining Iraq's emergency Coalition Provisional Authority, and UN staff. ˇ Revising the Tax Code and tariff system A comprehensive costs and more than $350 billion of debt and reparations far income tax system consistent with current international practice exceed what even a rehabilitated oil industry can generate in the should be drafted by the end of the year. next few years. The country needs to invest in education, health, ˇ Modernizing the Baghdad Stock Exchange. Within a year infrastructure, public administration, the police and army, a the U.S. administration envisions converting Iraq's rudimentary new legal system, a new currency, a new central bank, a new prewar stock market into a "world-class exchange" for trading constitution, the rule of law, and then democracy. However, the the shares of newly privatized companies. The plans also call for signs are encouraging. Iraqis remain relatively well educated, setting up a tough securities commission to prevent abuses. and the status of Iraqi women is better than in many Arab To date the U.S. Agency for International Development has countries. In addition to huge oil reserves and sufficient water awarded nine contracts for the reconstruction of Iraq worth resources, 4 million Iraqis living abroad can contribute $2.4 billion to American companies, including Bechtel, experience and money. Halliburton, Motorola, MCI, and the Research Triangle This article draws extensively from Ariel Cohen and Gerald Institute. Bechtel's $680 million contract gives the American P. O'Driscoll, Jr., The Road to Economic Prosperity for a Post- company the responsibility for designing, rehabilitating, Saddam Iraq, published as a Heritage Foundation upgrading, and reconstructing Iraq's infrastructure, including Backgrounder, no. 1633; available on http://www.heritage.org/ one seaport, five airports, electric power plants, road networks, Research/MiddleEast/loader.cfm?url=/commonspot/security/ rail systems, municipal water and sanitation services, schools getfile.cfm&PageID=37452. and health facilities, selected government buildings, and initial satellite communications systems. The U.S. Agency for EU Money continued from page 1 International Development has allowed these American companies to subcontract up to half the value of their contracts tensions. For their part, the East Europeans do not want their to non-U.S. firms, with an eye to benefiting from the excess expensively educated graduates and skilled workers to emigrate capacity available in the region. Furthermore, U.S. federal in search of better-paid jobs, leaving a pool of unskilled, low- regulations prohibit American companies from supplying paid workers back home. They also fear that now that trade materials if the cost is more than 6 percent higher than local barriers between the East and West have been removed and costs. transport costs are falling, the West's highly productive In a recent interview U.S. Chief Administrator Paul Bremer industries could simply supply the smaller Eastern markets highlighted the need to encourage both foreign and domestic through imports, at the cost of local production. Even if foreign investors, another key element for stimulating growth. He has direct investment keeps flowing in, they fear that it will finance formed an advisory group of Iraqi business people, economists, only low-wage, low value added industries, while high- and politicians to discuss the rebuilding of the economy, and is technology manufacturing and research and development will also being advised by large U.S. banks, including JP Morgan remain in the West. and Citigroup. With more than half the working-age population jobless, unemployment is a tremendous problem in postwar Mixed Results of Convergence Iraq. Since it was set up in 1957, the EU has declared that reducing Transforming Iraq from a military dictatorship and a secret regional differences and, in particular, the backwardness of less police state into a real market economy will take years and developed regions--referred to in Brussels as cohesion and billions of dollars. An estimated $100 billion in reconstruction convergence--is one of its main objectives. In 1975 the EU, or The World Bank ˇ 5 European Community as it was then called, set up its first EU accession in 1973 nor the receipt of EU regional aid making regional support fund. Since then it has made ever increasing much of a difference. By the mid-1980s its per capita GDP had sums available through a growing variety of programs generally crept up to around 70 percent of the EU average, but after the referred to as structural funds. Once the East European Irish government fully embraced policies based on free trade, countries join, they too will be eligible for EU regional aid. The low taxes, low public deficits, and stronger competition, growth experience with income convergence in the existing EU is, took off strongly. Now Ireland has a GDP per head that is however, mixed. Some evidence indicates that the EU's poorer nearly 20 percent higher than the EU average, although its GNP members have grown, on average, faster than the richer and living standards are lower than this figure suggests, because countries, but this does not necessarily hold true for individual foreign firms repatriate much of the profit earned from their regions within countries. The following stylized facts seem to Irish operations. hold: ˇ Greece's economy also stagnated for almost 20 years. Its ˇ Income levels in West European countries have been GDP per capita was around two-thirds of the EU average when more or less converging since the 1870s. Convergence was it joined the union in 1981, and the ratio did not change for a particularly strong in the 1960s, when trade barriers came long time. Signs of catch-up growth have appeared only down and trade between European countries increased recently, since the government started to consolidate public rapidly; however, convergence ground to a halt during the finances ahead of its entry to the euro zone. 1970s, and even went into reverse in the early 1980s. The ˇ Portugal has a mixed history of economic reform. It trend toward converging incomes resumed in the 1990s. liberalized trade in the 1960s, but returned to heavy state ˇ On the whole, the rate of catch-up has been slow, at an intervention after the 1974 revolution. It returned to more annual average of 2 percent in 1950-90. At that rate the East market-oriented policies in the 1980s. Economic growth European countries would take around 30 years to halve the followed a similar pattern: GDP per head rose from 45 percent present income gap with the existing EU member states. of the EU average in the 1960s to around 60 percent in the mid- ˇ A look at regions in Europe rather than countries gives a 1970s. It then remained around this level until the late 1980s, similar picture, but the trend toward convergence has been but since then has risen to around 70 percent of the EU average. much less pronounced. In many countries, particularly the As with the Mediterranean countries, the Central and East poorer, peripheral countries, the gap between rich and poor European candidates started to open their economies to trade regions has actually widened significantly since the 1980s. and investment from the EU well before joining the Union. By Looking beyond the aggregates, individual EU members have 2002 trade between the EU and the candidates was almost gone through very different growth trajectories (table 1). completely liberalized. In proportionate terms (or as a share of Portugal and Spain have narrowed the distance to EU average total trade), many of the candidate countries now trade with the income levels, and Ireland has overtaken the average in the past EU as much as, or more than, the EU members trade with each decade. Greece, however, has only recently begun to make other. Foreign direct investment flows from the EU into Eastern significant progress in narrowing the gap. Europe have been strong for years, amounting to 5 percent of ˇ Spain's GDP per head was around 60 percent of the EU GDP or more in the case of the best performing countries. In average in the 1960s. Catch-up growth rates followed trade theory, therefore, the candidate countries should be well liberalization and market-friendly reforms in the 1970s, but advanced in the process of catching up with the richer EU states. progress came to a halt in the early 1980s. Since the mid-1980s, Spanish GDP per capita has gradually risen to just under 85 Far to Go percent of the EU average. Spain joined the EU in 1986, and In practice, according to Eurostat figures, average per capita subsequently became the largest recipient of structural fund GDP in the 10 East European candidate countries now stands at money. around 40 percent of the EU average (table 2). Indeed, the gap ˇ Ireland started from a similar level in the 1960s; however, between the average EU income level and that of the candidate unlike Spain, it stagnated for the next two decades, with neither countries has widened considerably since 1989. The EU's real GDP grew by 30 percent between 1989 and 2002, whereas for Table 1. Convergence in the EU15, the 10 East European accession countries the increase Selected Countries and Years amounted to only 8 percent during the same period. The (GDP per head, EU15 = 100) widening of the gap is mainly attributable to the sharp fall in GDP in most of the region immediately after the shift from Country 1975 1985 1995 2001 central planning. However, the gap has not diminished appreciably even since the beginning of growth, generally in the Greece 62 64 66 65 mid-1990s, in part because of macroeconomic mismanagement Ireland 66 69 93 118 in some countries; slowing structural change in others; and the Portugal 56 57 70 69 impact of external shocks, such as the 1998 Russian financial Spain 82 74 78 84 crisis. Available evidence suggests quite strongly that the accession Source: 1975 and 1985: OECD; 1995 and 2001: Eurostat. countries have followed the pattern of the Mediterranean 6 ˇ Transition­The Newsletter Abour Reforming Economies Table 2. GDP Per Head, EU Candidate Countries, 2001 However, flows of this magnitude will clearly not be (EU average = 100) forthcoming, nor would they be easily absorbed. To begin with, the total EU budget is capped at just under1.3 percent of total EU At market At PPP based on At PPP based on GDP, with 0.46 percent of this amount allocated to the structural exchange 1993 GDP post-1996 GDP funds. In addition, the EU has capped structural fund spending in Country rates comparisons comparisons the new member states at 4 percent of the recipient country's GDP, arguing that the newcomers would simply not be able to Bulgaria 8.2 22.7 24.3 deal with any larger inflows, an issue often described as a lack of Czech Republic 26.2 47.5 58.7 absorption capacity. Estonia 18.0 26.3 36.2 The EU's 1999 Berlin summit set out how much the new Hungary 24.5 38.3 50.3 members could expect to receive after they joined the Union Latvia 15.2 21.6 28.5 (see table 3 and 4). In the current budget, which covers 2000- Lithuania 15.5 20.4 27.8 06, the EU has earmarked a total of ˇ42.6 billion ($45.96 Poland 21.7 32.4 39.0 billion ) for the new members, of which more than half will be Romania 8.5 19.5 27.7 paid out through structural funds. Poland will be by far the Slovakia 17.6 36.8 47.3 largest recipient, with more than ˇ11 billion, followed by the Slovenia 44.8 60.7 70.4 Czech Republic and Hungary, with ˇ2 billion to ˇ3 billion each. Average 18.4 30.9 38.9 However, the money will be slow to come in. Both regional aid and agricultural payments (the other major spending category Source: 1975 and 1985: OECD; 1995 and 2001: Eurostat. in the EU budget) will be phased in gradually after 2004. Moreover, structural fund projects have long lead times, and countries, in that recent economic growth has gone hand-in- even common agricultural policy payments are only reimbursed hand with a marked widening of regional income differentials. with a delay. The European Commission expects that in 2004, The fastest growth has occurred in the regions centered on the year of accession, the new members will receive transfers capital cities and in those geographically close to the EU. amounting to only 1 percent of their combined GDP, rising to Smaller towns, rural areas, and the eastern parts of the 1.5 percent by 2006. This is much lower than the 3.6 percent of accession countries have generally lagged behind, with poverty, GDP Greece received and the almost 2 percent of GDP Portugal high unemployment, and a lack of competitive industries and Spain received. In per capita terms, the new members will characterizing the regions along the EU's future eastern border get between ˇ200 (US$215) and ˇ600 (US$645) per head at the with Belarus, Russia, and Ukraine. most in 2004-06, compared with the ˇ1,000 to ˇ1,500 per head If current trends continue, regional differences in the East Greece, Ireland, and Spain received during the last budget European countries will continue to widen. This divergence in period. regional economic fortunes matches industrial specialization patterns. A reasonably well-developed infrastructure and a Table 3. EU Money for the New Members, 2004-06 better-educated workforce has given East European capitals a (ˇ billions in 1999 prices) head start compared with more remote regions. Foreign direct investment has done the rest, crowding into urban areas and Category 2004 2005 2006 2004-06 western regions while tending to avoid the more remote eastern regions. As a result, the region's capitals have experienced a Common agricultural veritable boom. According to official EU figures, Prague and policy 1.9 3.7 4.1 9.8 Bratislava, for example, now have per capita income levels that Regional aid 6.1 6.9 8.8 21.8 are above the EU average, whereas unemployment in eastern Structural funds 3.5 4.8 6.0 14.3 regions is still rising, further eroding local income levels. There Cohesion funds 2.6 2.2 2.8 7.6 is therefore a prima facie case for the EU to concentrate its Internal policies and regional development efforts on the poorer, eastern regions of administration 1.9 1.9 2.0 5.8 the new member states. Other 1.3 1.3 0.9 3.3 Under current EU rules, regions with a per capita GDP of less Total 11.1 13.8 15.8 40.7 than 75 percent of the EU average automatically qualify for EU Approved in Berlin 11.6 14.2 16.8 42.6 regional aid under the so-called Objective 1 facility (see the box). This means that almost the entire area of all the East European Source: European Commission. countries will be eligible for EU aid. If the EU maintained the current extent of redistribution (net payments or receipts as a Whether the new members will actually receive the allocated share of per capita income differentials) after enlargement, the amounts in full is uncertain. The East European countries tend new members would be due to receive enormous sums. Latvia, to have weak state administrations and little experience with for example, would receive transfers amounting to more than 13 either regional support policies or with handling large-scale fiscal percent of its GDP per year, and Poland would receive 8 percent. transfers. The systems for applying for and implementing EU The World Bank ˇ 7 regional support are so complex that even current member states Table 4. Cohesion and Structural Fund Allocations regularly fail to spend the full amounts they have been allocated. to the New Member States, 2004-06 This problem will be much worse in the new member states. In (1999 prices) addition, the new members will have only two years to identify projects and obtain Commission approval for their funding Cohesion fund Structural fund Total Per capita before the current budget period runs out (although they will not Country (ˇ millions ) (ˇ millions) (ˇ millions) (ˇ) actually have to spend the money until the end of the decade). Czech Republic 836 1,491 2,327 228 Absorbing the Money Estonia 276 342 618 441 The EU created a pre-accession regional aid facility, the Instrument Hungary 994 1,853 2,847 279 for Structural Policies for Pre-Accession, to help the candidates get Lithuania 543 823 1,366 569 used to handling structural funds. Of the ˇ4 billion allocated under Latvia 461 575 1,036 296 the facility, the candidates had managed to spent only ˇ200 million Poland 3,733 7,635 11,368 294 by the end of 2002. One of the problems is that the candidates Slovakia 510 1,050 1,530 289 simply cannot find enough viable projects (the value of each Slovenia 169 237 406 203 project is supposed to exceed ˇ5 million, which is a substantial Total 7,522 14,006 21,528 292 amount in small transition countries). Another is the requirement that 25 percent of each project has to be cofinanced out of national Note. Cohesion fund allocations are the author's calculations based on the or regional budgets. Cofinancing requirements under structural mid-range of the European Commission's indicative share. Malta and fund rules can be lower, 15 to 20 percent, but they will be an Cyprus are not included. Source: European Commission, "Second Progress Report on Economic additional burden on already stretched government budgets. The and Social Cohesion"; author's calculations. Commission has tried to alleviate these problems by paying out a larger share of money through the cohesion funds, which pay for 2007 to 2013. How much money the new members will straightforward infrastructure or environmental problems and do receive during that period will be decided in forthcoming not have cofinancing requirements; nevertheless, EU aid inflows budget negotiations. With the accession of the East Europeans, are likely be a trickle rather than a flood in the first couple of years average EU GDP will drop by about 10 percentage points. after accession. This means that many of the regions that currently have GDP The real impact of the structural funds is therefore likely to per head less than 75 percent of the EU average, and so qualify come during the next EU budget period, which will run from for regional support, will no longer do so. As a result, all EU Structural Funds In the 2000-06 budget, the EU budget allocates some ˇ195 central government, together with regional and local billion ($210 billion) for regional aid. Two-thirds of the authorities, identifies projects that it wants cofinanced by the funds go to the so-called Objective 1 regions, defined as EU in the following areas: (a) infrastructure, that is, those with a per capita GDP at PPP exchange rates of less transport, energy, telecommunications, and the environment; than 75 percent of the EU average. Another 10 to 13 percent (b) support for local companies; (c) training for workers; each goes to regions that are not necessary poor, but suffer and (d) research and development. from the results of structural change (Objective 2) or Regional governments are usually responsible for regional labor market problems (Objective 3). In addition, implementing the projects, but the Commission tries to the EU funds four so-called community initiatives, such as monitor that the money is spent sensibly and efficiently. The inter-regional cooperation, urban development, and rural EU pays some of the cash up front, but once the project has development. got under way, the local authorities have to present bills to The EU spends another ˇ18 billion through the cohesion Brussels for reimbursement. EU regional aid comes in the funds on transport and environmental projects in countries form of grants, not loans. To make sure that the recipients whose per capita GDP is less than 90 percent of the EU still have some incentive to spend the money wisely, the EU average. The cohesion funds are different from other requires that national or regional budgets cofinance each regional support in that they are given to countries rather project. The cofinancing requirements depend on the type of than regions, and they do not require cofinancing out of project and range from 15 to 40 percent. Nevertheless, national budgets. frequent reports cite waste, and even corruption, in the use Each EU government draws up a multiyear development of EU regional aid. The Commission has promised to step up program as a framework for regional aid. Once the monitoring, which could make the whole process of European Commission has accepted this program, the obtaining funding even more protracted than it is now. 8 ˇ Transition­The Newsletter Abour Reforming Economies Germany's new states, all but two Spanish regions, and all but would still be eligible for cohesion fund money, and the new one region in Italy will no longer qualify for Objective 1 members could expect around ˇ26 billion from this facility. funding. In addition, GDP per head in Spain will move above Uncertainty about the impact of structural funding on 90 percent of the EU average, which means that it will no longer recipients' growth rates is considerable. The sums dispensed qualify for cohesion fund money. Even though economic through the EU's structural funds budget have grown growth means that around a quarter of the regions now covered significantly over the past 20 years. EU regional aid has by Objective 1 funding would lose their entitlement even if amounted to 1 to 3 percent of Portuguese and Spanish GDP in enlargement did not take place, Italy, Spain, and other countries recent years, financing 5 to 10 percent of total investment and are still likely to fight to retain their entitlements in the EU increasing the funds available for public spending (net of budget. transfers and health and social insurance payments) by 10 to 20 Estimates by PNB Paribas, a French bank, show that if percentage points. Most of the money from the structural funds current rules were maintained, the costs of Objective 1 support is spent on physical infrastructure, such as roads or sewage (including pre-accession aid) would rise from ˇ165 billion in systems, with much of the rest financing education and training. 2000-06 to ˇ251 billion in 2007-13. The amount current EU The author is chief economist at the Center for European members received would fall from ˇ1,406 billion to ˇ936 Reform, London. This article is excepted from "Will EU Money billion, and the sums the 12 newcomers received would rise Help Eastern Europe to Catch Up?," published in the Economic from ˇ25 billion to ˇ157 billion. Only Greece and Portugal Intelligence Unit's Country Forecast, March 2003. TALK OF THE TOWN Lessons Learned from China's SARS Crisis by Chi Fulin C hina now is at a critical stage in its economic and social government to accelerate institutional reform so as to transformation, when any unexpected event, if not strengthen its ability to provide public goods and services. handled properly, could lead to a social crisis. This ˇ As social stability is a major prerequisite for sustained period of transformation of institutions and traditional economic growth, solving crucial social problems, including governance mechanisms is a precarious one. The last thing the creating more jobs and reforming social insurance and the government and public wants under these circumstances is public health care system, has become more urgent. sudden disasters, such as the Severe Acute Respiratory ˇ A crisis management mechanism should be created that Syndrome (SARS) epidemic. can mobilize financial and social resources without delay. Relevant government departments should be able to issue warnings to the public on short notice and propose responses. Reviewing Initial Shortcomings In the face of the SARS epidemic the United States launched an During the recent China-Association of Southeast Asian Nations emergency warning system and unveiled a prevention and Summit on SARS in Bangkok, Thailand, Chinese Premier Wen treatment program before China had identified a single SARS Jiabao admitted that "confronted with the sudden and case. This serves as a good example to learn from. unexpected outbreak of the SARS epidemic, [China] lacked the experience to prevent and control it." Indeed, not only was the Increasing the Role of the Media country unprepared to deal with the situation, but also, at least The government must make further efforts to regain the during its early phases, some central government departments public's confidence, including promoting better media and local authorities were not ready to make a 100 percent effort, relations in times of crisis. Providing the general public with and even tried to conceal the gravity of the situation. In addition, timely, accurate, and reliable information is the responsibility coordination between government departments and between the of the government and the media, especially in the case of government and medical institutions was weak. As a sudden disasters. As the SARS case demonstrated, information consequence, the epidemic spread quickly and reached serious about crises affects not only the health and safety of the proportions. While effective countermeasures had practically population in a particular country, but can have global eliminated the disease by June, the following lessons learned from consequences. In an open society people have access to many the SARS epidemics are nonetheless valid: channels of information, and accordingly the Chinese public's ˇ Globalization means that events in China will rapidly demand to be informed of unexpected events has become affect other countries and vice versa. stronger than ever before. To satisfy this demand the ˇ The SARS epidemics has exposed some of China's authorities should accelerate reform of the media. institutional weaknesses. Clearly the crisis should motivate the continued on page 10 The World Bank ˇ 9 Curing China's Ailing Health Care System Although SARS is finally on the retreat, it showed that China's preventable. Also the UN forecasts that the number of people with national health system needs a thorough "tune up" after 20 HIV/AIDS in China will reach 10 million by 2010. "Right now 5 years of official neglect. A cartoon in China's English language million people in China have tuberculosis, 10 percent of people newspaper, the China Daily, captured prevailing attitudes about have chronic hepatitis B," says Daniel Chin, a WHO official, who physicians' roles. A frail old lady is lying in bed and she asks her adds that because of both the lack of resources and attention, such sneering doctor, "Doctor, may I leave the hospital?" He silent epidemics are simply ignored. responds, "How much money do you still have?" An Between 1949 and 1975 life expectancy doubled and more than accompanying editorial accused hospitals and doctors of 85 percent of the population had some form of health care prescribing unnecessary drugs to generate revenues and coverage, but with the economic reforms that started in the late recommended that patients get daily hospital bills to prevent 1970s, that system deteriorated, especially in the countryside. In cheating. Graft and corruption in medical care are reported to 1981, 71 percent of Chinese had access to state health facilities; 12 be commonplace and to be particularly egregious in relation to years later the figure was 21 percent. In 1999 China ranked 144th the distribution and sale of drugs. The average stay in a hospital among 191 WHO member countries in per capita health run by the Ministry of Health in Beijing, for instance, costs expenditures. One reason for the decaying public health system almost Y11,500 ($1,400), equivalent to six months' salary for the has been that during the reform era the central government has typical city resident. There has been a colossal mismatch had a decreasing amount of control over the disposition of between the needs of many patients and the equipment found financial resources and more tasks are being pushed upon often in urban hospitals, where staff fund running expenses and impoverished local governments. supplement their meager government pay by charging patients China's patients are also concerned about the quality of medical heavily for often unnecessary high-tech procedures. care. Medical errors are widely broadcast, and stories about substandard care, counterfeit medicines, inaccurate diagnostic and At the end of 2002 Beijing, with a population of 13 million, had therapeutic equipment, inhumane treatment, and corruption are more CAT scanners than England, with a population of 49 frequent. Patients who are financially able to do so choose high- million, according to Wang Jian, a researcher at the China tech, expensive, academic medical centers instead of adequate and Academy of Health Policy at Peking University. Yet hospitals less expensive local facilities. Others feel compelled to give with state-of-the-art equipment are so short-staffed that they physicians hong bao, red envelopes stuffed with cash, in the belief often require relatives to bring patients their meals, and even to that the illegal payments will encourage better care. Apart from nurse them. The cost of delivering a baby in Beijing is three to bad outcomes, patients also suffer from poor service. They endure four times the cost in the countryside, according to Wang. The long waits, inadequate facilities, rude personnel, lost records, and a big cities, where health care costs have escalated 15 percent a lack of privacy. year, are consuming 80 percent of China's medical resources. China has many honorable, compassionate, skilled physicians, According to the World Bank, 75 percent of health spending and they too are frustrated. Overworked, they see themselves goes to hospital-based care, with 60 percent of that going to falling behind economically. Industrious taxi drivers can make pharmaceuticals. more money. Prices for health care services are set well below costs, China's total medical spending was equivalent to a respectable requiring doctors to generate income from drug sales and high- 5.3 percent of GDP in 2000, but 63 percent came straight from tech diagnostic and therapeutic interventions to keep their people's pockets, up from 53 percent in 1995, according to the hospitals solvent. World Health Organization's (WHO's) World Health Report Nevertheless, there is hope. In the last five years the government 2002. In rural areas, where 700 million of China's people live, has introduced social insurance reform and attempted to reverse most people have no insurance and medical costs have risen much the flagrant abuses in the provision of drugs. It has made medical faster than farmers' incomes. The rural health service is records more transparent for patients and introduced a comparable with that in India. In both countries, according to an malpractice system. There is also growing awareness that health influential WHO report in 2001,"the rural poor pay out of pocket sector leaders must be trained in the business of medicine, because for around 85 percent of the total health services that they receive," health care is also a competitive service industry. Beijing and local and much of that goes for "unnecessary or inappropriate drugs governments recently announced new funding of Y11 billion ($1.3 foisted on them by clinics that fund themselves through sales of billion) for the beleaguered national health system. pharmaceutical products, or to unlicensed and unqualified Based on articles in the Washington Post by Gerald Lazarus practitioners." Sixty-five percent of rural patients could not afford and in the Far Eastern Economic Review by David Murphy and to go to a hospital for necessary treatment, and of those who went David Lampton. Gerald Lazarus is a professor of dermatology at more than half left prematurely. In short, the rural population and the Johns Hopkins School of Medicine, Baltimore, Maryland, the urban poor and unemployed increasingly cannot access the and was a visiting professor at Peking Union Medical College health care system. Hospital from 1999 to 2002. David Lampton is director of The few hundred deaths from SARS are just a fraction of the China Studies at Johns Hopkins-SAIS and the Nixon Center in 130,000 Chinese who die annually from tuberculosis, which is Washington, D.C. 10 ˇ Transition­The Newsletter Abour Reforming Economies continued from page 8 events. It was sheer luck that this epidemic was centered mainly The current administration of China's media does not meet in the cities. If it had spread through the countryside, the the development needs of an open society. If something consequences would have been too terrible to contemplate. unexpected happens, the media are unable to adjust to new Thus reform of the health care system, especially its circumstances, mainly for ideological reasons, a situation that development in rural areas, should be accelerated. also needs to be reformed. During the recent Iraqi war three In addition, an early warning system and emergency coping channels of China's state television covered it through live mechanism should be reinforced. Furthermore, a public broadcasting. Why couldn't state television have designated a safeguard mechanism to control exceptionally contagious special channel to provide continuous information about the diseases should be created. The central government should offer SARS situation and provided tips on how to prevent its spread? free treatment to diagnosed and suspected SARS patients, with The general public would have been able to keep up with the hospital costs covered from the government's central budget. latest developments of the SARS situation, which in turn would Together with the health care system, the social security system have helped prevent the spread of the disease and the widespread also requires thorough changes. panic among the public. Thus some government rules for administrating the media should be relaxed, and reporting and commenting on situations such as the SARS epidemic should be Mobilizing Civil Society encouraged. The media should also be able to report on cases of Dealing successfully with unexpected events, such as reining in irregularities, including outright corruption, in managing funds the SARS epidemic, depends to a large degree on the support and that had been assigned to fight SARS. participation of the public at large. Close interactions between the government and a well-developed civil society constitute the key to success in coping with unexpected events. To move ahead Ailing Health Care System in this direction, the following steps should be undertaken: The outbreak of the SARS crisis also demonstrated the inability ˇ Urban communities should establish autonomous governance of the current health care system to deal with unanticipated in order to share responsibility for the prevention of epidemics. China's Economy in the Shadow of SARS At the end of March, China's economy was enjoying its time. In a survey of 12 financial institutions, the average GDP biggest boom in six years. Foreign investors, a key engine of growth estimate for China this year was 7.25 percent, down China's growth, pumped a record $52 billion of direct slightly from 7.6 percent before SARS. investment into the economy last year. First-quarter growth Even though China was the epicenter of the SARS was a sizzling 9.9 percent at a time when Europe and Japan outbreak, its robust economy and domestic demand should were stumbling and the United States market was shaken by act as a partial buffer for export-driven Asian nations, said war. More than $13 billion of investment poured into China the World Bank in a new report updating its regional during those three months. Industrial production grew 17.5 outlook. Across the region, reforms made after the financial percent year on year, exports rose 35 percent, and imports crisis of 1997-98, large current account surpluses, and nearly increased 40 percent. China was the place investors felt they $800 billion in foreign reserves were cited as other cushions. couldn't afford not to be. However, because of the SARS SARS could reduce regional economic growth by 0.3 crisis, in the second quarter economic growth and investment percentage point, while additional multiplier effects could slowed considerably. double that figure, causing East Asia's growth rate to slow to Nevertheless, for all the turmoil brought about by the 5 percent from the earlier expected 5.8 percent. As for Hong SARS epidemic, the most fundamental components of Kong, which has been more seriously affected by SARS and Chinese growth--low-cost manufacturing made possible by relies heavily on tourism, the predicted 2 percent growth this access to raw materials and cheap skilled labor, bolstered by year could be wiped out. investment from the government and from multinational The Bank urged economies in the region to adopt a firms--have generally been unaffected. China's economy is "frank, fully transparent information policy," saying it will be dominated by manufacturing, which accounts for about 54 crucial in building trust and minimizing the economic costs percent of GDP, while services make up 28 percent of the of SARS. Next year growth in East Asia is likely to hit about economy, and there the impact of SARS has been large. 6 percent, the Bank predicted. The Bank is helping the Agriculture, which accounts for 14 percent of the economy, is Chinese government, WHO, and bilateral donors with a probably insulated from a SARS shock, because the vast response program that addresses SARS management and majority of agricultural production is sold near the place it is strengthens the capacity of the country's public health grown, and there is no nationwide network to disrupt. system. Construction makes up the remaining 5 percent, and though Based on reports by the World Bank and the Singapore- a real estate slump could occur, there is little sign of it at this based Far Eastern Economic Review. The World Bank ˇ 11 ˇ Development of the NGO sector should be strongly being fired. Many government officials feel responsibility encouraged. NGOs' role in mobilizing and organizing social toward their superiors and less responsibility for the safety forces to deal with unexpected events should be brought into of the public. full play. They also can play a useful role in maintaining social ˇ The media and civil organizations should be encouraged stability. to oversee the government and help improve its ˇ NGOs should be encouraged to cooperate more closely decisionmaking processes. If it turns out that a government with international professional and volunteer organizations as policy was faulty, it should openly admit so to the public and well as with foreign private foundations. implement the necessary corrective measures. ˇ The law should be brought to bear. Officials who are found responsible for mismanaging certain issues, causing Examining Personnel Consequences huge losses to society, as happened in the SARS case, should The attitude and behavior of officials in some departments of be brought to justice through open and fair judicial the central government and some local governments in fighting procedures. against SARS exposed some shortcomings of the norms of cadre ˇ The government can improve its image and restore its selection and appointments. To change the system, the social credibility. The government has a unique opportunity to following measures seem to be necessary: achieve this during this period when the general public is ˇ The rigid human resource management system should keeping a close eye on what the government is doing. be reformed as soon as possible. Some senior officials Chi Fulin is executive director of the Haikou-based China consider GDP growth as the most important measure of their Institute for Reform and Development, 57 Renmin Avenue, performance. As a consequence, they fail to report Haikou, Hainan, 570208, China; tel.: 86-898-625-8793, fax: detrimental events, such as the spread of SARS, afraid of 86-898-625-8777, email: cird2@public.hk.hi.cn. NEW FINDINGS A Research Agenda for Development by Nicholas Stern T o help the development community be more effective in education and health care, avenues for risk reduction and reducing poverty in developing countries, development- mitigation, and mechanisms for participating in the key oriented research should be derived from a strategy that decisions that affect them and their families. Empowerment is is based on two pillars: improving the investment climate and both an end in itself and an avenue to development. Indeed, it is empowering and investing in poor people. The research agenda key to scaling up to achieve development results because it not should rely on both empirical surveys and analytical only fosters social inclusion and participation in growth, but understanding of the dynamics of the investment climate, of also promotes growth by mobilizing poor people's assets and preferences, and of political reform. Research and action must energies (box). reinforce each other. Thus the processes embodied in the two pillars are mutually reinforcing in their effects on growth and poverty reduction. The World Bank's development strategy can be described in This two-pillar strategy suggests a program for research that terms of two basic pillars. The first pillar focuses on improving can take forward both the theoretical and the empirical the investment climate. It involves more than just the levels of investigation of public policy. investment and also includes the environment for entrepreneurship and the investment process itself. The aim is to create a good investment climate, that is, one that encourages Appropriate Data private firms to invest, create jobs, and increase productivity The two-pillar strategy suggests a need to gather and analyze through appropriate government policy and behavior. The three two new types of micro data: first, data from firms to provide important elements of a good investment climate are detail on the quality of the investment climate (including macroeconomic stability and openness to trade; good questions such as "How often are you visited by the authorities governance and institutions, including control of bureaucratic and how much management time is spent with them?" "What harassment and crime, as well as effective financial and legal fraction of your turnover do you spend on bribes?"); and institutions; and adequate transportation, power, and second, data on the functioning of various services that are key communications infrastructure. elements of empowerment, such as health, education, and social The second pillar focuses on empowering and investing in protection. For both datasets going beyond inputs and outputs poor people by ensuring that they have opportunities for and asking how processes actually work and how people are 12 ˇ Transition­The Newsletter Abour Reforming Economies involved is fundamental. In recent years, we have begun to Development Report, entitled Making Services Work for Poor accumulate data on both these important areas. As in the past, People, will analyze much of the evidence, drawing on a large we will still need our third major type of micro dataset, number of examples in areas ranging from basic services to information on households and individuals, if we want to assess economywide issues, such as community involvement in school outcomes. management in El Salvador and Nicaragua; citizen report cards These three datasets will provide powerful research tools for on services in Ukraine; legal and judicial reform and property analyzing development processes. They are far richer and deeper rights in slum areas in Ecuador, Guatemala, Peru, and Venezuela; than the cross-country macro datasets that, driven by the and corruption surveys in Albania, Georgia, and Latvia. aggregate approach to growth, have formed the basis of so many The challenge is to generate more structured data on cross-country regression analyses. For example, systematic empowerment so that we can carry out further systematic investigation of the investment climate using firm-level surveys empirical investigation. The research agenda should be based started at the World Bank and the EBRD during the 1990s has on both empirical surveys and analytical understanding of the gathered pace in the last year or two. We now have comparable dynamics of the investment climate, of preferences, and of surveys completed, under way, or planned for the next year in 30 political reform. countries that cover large, random samples of firms, including some 1,200 firms in India and 1,500 in China. These surveys collect the usual firm information on sales, Investment Climate outputs, inputs, and costs, but they also include specific Small beginnings can lead to substantial accelerations of quantitative questions about the investment climate. The results growth. Some changes can generate strong and sustained can be striking. For India we can now compare the investment increases in growth rates and large transformations in such climate at the state level, for instance, firms in Uttar Pradesh major sectors as education and health. The following are three reported twice as many visits from officials as firms in analytical examples of accelerating and self-reinforcing change Maharashtra and twice as many firms in Maharashtra than in in the investment climate: Uttar Pradesh owned power generating facilities. In Uttar ˇ Models that involve the diffusion of ideas or knowledge. Pradesh, the largest and one of the poorest states in India, the Griliches demonstrated that the adoption of new technologies electric power utility is less reliable than in Maharashtra, which like hybrid corn was not a single event, but a series of explains why--despite the higher capital intensity--the growth developments that occurred at different rates across rate is lower than in Maharashtra. These findings are strong geographical space (Zvi Griliches, Hybrid Corn: An and easily communicated and can have a powerful impact on Exploration in the Economics of Technological Change, 1957). policymakers. ˇ Models that generate multiple equilibria (Kevin Murphy, The empirical information on empowerment is no less rich, Andrei Shleifer, and Robert Vishny, Industrialization and the although to date is somewhat less structured. The 2004 World Big Push, 1989). A relatively small disturbance (institutional Scaling-Up: What, How, and Why? Scaling-up can relate to structures, programs, strategies, and ˇ Organizational scaling-up (the resource base). the resource base as follows: Community-based programs or grassroots organizations can ˇ Quantitative scaling-up (structure). A program or an increase their organizational strength so as to improve the organization expands its size by increasing its membership effectiveness and efficiency of their activities. They can do so base, its geographic area, or its budgets. This occurs when financially by diversifying their sources of support, increasing participatory organizations draw increasing numbers of the degree of self-financing, creating activities that generate people into their realm. income (cooperative enterprises, consultancies), or by ˇ Functional scaling-up (programs). A community-based assuring the enactment of public legislation earmarking program or a grassroots organization expands the number entitlements for the program within annual budgets. They can and the type of its activities. Starting in agricultural also do so institutionally by creating external links with other production, for example, participatory organizations move development actors, both public and private, and by into health, nutrition, credit, training, literacy, and so on, improving the internal management capacity of their staff when they add new activities to their operational range. through training or personnel development, which will allow ˇ Political scaling-up (strategy). Participator organizations the organization and its programs to grow, be flexible, and be move beyond service delivery and toward empowerment and sustainable. change in the structural causes of underdevelopment, that is, Abstracted from Peter Uvin and David Miller, "Scaling Up: its contextual factors and socio-political-economic Thinking through the Issues," World Hunger Program environment. This will usually involve active political Research Report 1994-1, available on: http://www.brown. involvement and the development of relationships with the edu/Departments/World_Hunger_Program/hungerweb/ government. WHP/SCALINGU_ToC.html. The World Bank ˇ 13 change) improves the investment climate, boosts investment or point is, preference change is a widespread issue in development the productivity of capital, and initiates a movement from a and one that bears much further study. lower-level to a higher-level equilibrium. Understanding changes in preferences will require new ˇ Political economy models that focus on crucial historical modeling approaches. The following three examples are turning points (as analyzed in Daron Acemoglu, Simon intimately linked with empowerment and central to the Johnson, and James A. Robinson, Reversal of Fortune: development process: Geography and Institutions in the Making of the Modern World ˇ Most aspects of empowering people involve changing Income Distribution, 2001). attitudes and behaviors. ˇ Education changes values and preferences in ways that are likely to be hard to predict, yet students and parents make Preferences decisions about education in the knowledge--or indeed the Much of economics takes preferences as given and works with a hope--that preferences are likely to be changed; simple model of an optimizing individual who understands the ˇ Values can change in response to examples set by leaders. relevant constraints on decisionmaking. This has been a fruitful Many would argue that individual behavior in Russia approach, especially for public economics, that relates social deteriorated in the 1990s in part because of the example of welfare to individual welfare. Increases in the latter can then be large-scale looting of the state by individuals and groups close associated with a bundle of commodities that the individual to the sources of political power. prefers. However, some philosophers, including Mill and Thus a move toward more systematic analysis of changing Keynes, who emphasized objectives in terms of expanded preferences is hard to avoid. freedoms, also recognized that preferences adapt through development and discussion, and as the following example illustrates, development is in large measure about fundamental Political Reform changes in behavior driven by shifts in preferences. Further research seems warranted in three related areas: the Suppose the Pakistani government recognizes the importance political economy of growth, the effective participation of poor of increasing the enrollment of girls in school. How should it go people in the growth process, and the role of building about convincing a girl's parents, particularly her father, to constituencies for change in order to advance economic and allow her to attend school? The standard economists' answer, social reforms. which would mention merit goods and externalities, would be If economic growth creates large inequalities within a to subsidize girls' attendance by eliminating school fees, or even society--as opposed to shared growth--it can undermine the by giving the family a small grant. potential for future development. Winners can use their However, we could go about expanding attendance in at least influence with the government to "remove the ladder," that is, two other ways, each supported by a different model of the to limit competition from other groups in society. In their paper world. The first of these would take preferences as given, but mentioned earlier, Acemoglu, Robinson, and Johnson compare would recognize that people making decisions do not always North and South America. Initial features of the political, have all the relevant information.The policy response to this lack economic, and physical landscape led to much greater of information would be to provide the parents with good data inequality in Latin America, while in North America an about the advantages of schooling. These data could be used to improvement in the investment climate favored the point out, for example, that more educated girls are healthier as establishment of more small and medium firms, thereby adults and that their own children will be healthier and better creating a constituency for change. educated, and the father will allow his daughter to attend school The challenge of ensuring the inclusion and empowerment of even without any change in his preferences. That is, while his poor people is, in large measure, one of assuring the availability, objective was always to ensure a good life for his daughter and and delivery of basic services as analyzed in the World for his grandchildren, he now understands more clearly that Development Report 2004. In 1513 Machiavelli already saw education will increase the chances that will happen. that "one change leaves the way open for the introduction of By contrast, a second policy approach recognizes that others." But he also warned, referring to the relationship preferences are not immutable. Part of the policy challenge is to between prospects for change and constituencies for change: persuade fathers to think differently about the kind of life they "There is nothing more difficult to plan, more doubtful of would like their daughters to lead. Note that this preference success, nor more dangerous to manage, than the creation of a transformation can happen for reasons other than direct efforts new system. For the initiator has the enmity of all who would to change preferences and can also result from either of the two profit by the preservation of the old institutions and merely policy interventions described earlier. If a subsidy or better lukewarm defenders in those who would gain by the new ones." information gets the girl into school, then her father's Events in Russia in the 1990s demonstrate Machiavelli's points. preferences may subsequently change once he sees how valuable Accordingly, research should investigate how to carry out education can be for the life of his daughter. Of course, as with reforms within some given rules of the political game and what most real-world issues, the problem of girls' education in institutions should be created to minimize political opposition Pakistan has a number of other important dimensions. The to innovation and adaptability, that is, research should find the 14 ˇ Transition­The Newsletter Abour Reforming Economies best rules of the political game at every given stage of ˇ Entrusting the media to goad policymakers to change. development. Both the World Development Report, 2002: Building Institutions for Markets, and the World Bank Institute's recent study, The Right to Tell: The Role of Mass Media in Research and Action Economic Development, include a host of examples of the Research and action must reinforce each other. Changing media's role in catalyzing change, not only of policies, but institutions and governance is at the heart of the agenda for action. also of institutions. To translate knowledge into action to promote change means Many more examples of how one can trigger institutional ˇ Collecting evidence and information and carrying out change are available. We are beginning to go beyond an rigorous analysis of programs and approaches. understanding of the importance of institutions to an analysis ˇ Establishing institutions and building capacity for taking of how to change them, but we have a long way to go. If we knowledge forward. For example, a World Bank project to researchers want to move forward on a sound basis, then we build a ring road around Shanghai also helped create local must have rigorous evidence and well-founded ideas. As institutions that were then able to apply the techniques for academics, it is our responsibility to provide them. construction, tendering, and finance across the country. The author is chief economist and senior vice president of ˇ Encouraging political action by "policy entrepreneurs." the World Bank. This article is based on his presentations at a Like markets for private goods, markets for policy and workshop on Measuring Empowerment: Cross Disciplinary institutional innovation are responding to well-chosen Perspectives in February 2003 and his keynote speech at the combinations of inputs. World Bank Economic Forum in April 2003. Improved Business Environment: Joint EBRD--World Bank Survey by Steven Fries and Saso Polanec T he business environment in the transition economies the business environment because they face relatively little improved significantly during the last three years competitive pressure from foreign and domestic rivals. The according to the findings of the business environment and survey did not cover those enterprises and entrepreneurs that enterprise performance survey (BEEPS), which the EBRD and would like to enter these markets, but are prevented from doing World Bank have conducted jointly first in 1999 and then again so by the countries' restrictive policies. The following are some last year. BEEPS investigates the extent to which government interesting findings of the surveys: policies and practices influence business development in CEE ˇ In CEE countries, firms in Croatia, the Czech Republic, countries and the CIS. Hungary, and Slovenia witnessed the most significant improvements in how they perceived the business environment, Between the time of the two BEEPS surveys, the improvements in while those in Poland saw little improvement. In the Baltic the business environment have been most noticeable in the Baltic region Estonia, which had achieved the most favorable region and in the CIS-6 countries (Armenia, Azerbaijan, Georgia, perceptions in 1999, saw less improvement by 2002 compared the Kyrgyz Republic, Moldova, and Uzbekistan, albeit from a with Latvia and Lithuania. Nevertheless, in 2002 Estonia, relatively worse base). The central CIS countries (Belarus, Hungary, Latvia, and Slovenia remained the clear front-runners, Kazakhstan, Russia, and Ukraine) showed the least improvement, with Poland lagging well behind the others. with the CEE countries (Croatia, the Czech Republic, Hungary, ˇ In southeastern Europe all the countries except Bosnia and Poland, Slovakia, and Slovenia) and southeastern Europe Herzegovina witnessed significant gains in ratings of the (Albania, Bosnia and Herzegovina, Bulgaria, FYR Macedonia, business environment between 1999 and 2002. In 2002 and Romania) falling in between. To make comparisons over Bulgaria, FYR Macedonia, and Serbia and Montenegro time consistent, the groups include only those countries for achieved the most favorable levels of perception and Albania which data were available in both 1999 and 2001 (see the table). received the least favorable, with Bosnia and Herzegovina and A consistent finding in both the 1999 and 2002 BEEPS was Romania occupying the middle ground. the unexpectedly favorable perceptions of the business ˇ In the CIS Azerbaijan, the Kyrgyz Republic, and Russia environment in Belarus and Uzbekistan given the limited extent saw business environment ratings improve the most, while of market-oriented reforms in these countries, including the Kazakhstan and Ukraine made the least improvement. The liberalization of markets and trade. One interpretation of this countries with the most favorable ratings in 2002 were the finding is that businesses are being sheltered from competitive resource-rich countries of Azerbaijan, Kazakhstan, Russia, and pressures and therefore have relatively positive perceptions of Uzbekistan, as well as Armenia. The business environment The World Bank ˇ 15 laggards were Georgia, Moldova, and Ukraine, with Belarus, ˇ Over-regulation. BEEPS asked the respondents what the Kyrgyz Republic, and Tajikistan falling in between. proportion of their senior managements' time was spent dealing The gains in perceptions of the business environment with public officials about the application and interpretation of laws between 1999 and 2002 were concentrated in five of the seven and regulations ("time tax") and how frequently firms like theirs areas: inance, infrastructure, taxation, corruption, and crime. paid bribes to deal with various aspects of business regulation, These gains were fairly uniformly distributed across the three including business licenses and permits, health and safety broad country groups except for finance and crime, where the inspections, fire and building inspections, and environmental Baltic states and the CIS-6 countries achieved relatively strong inspections. The countries with the highest time taxes were Albania, gains. Perceptions of business regulation and the judiciary saw Georgia, and FR Yugoslavia and those with the lowest time taxes less improvement. Only the Baltic states and the CIS- countries were Armenia, Azerbaijan, and the Czech Republic. saw significant improvements in business perceptions of the ˇ Crime. One measure of the cost of crime to businesses is judiciary. Perceptions of business regulation improved only the amount of losses incurred due to crime. The countries with moderately in all five subregions. Notwithstanding these the highest losses caused by theft as a percentage of total sales improvements, the aspects of the business environment that were Armenia, Azerbaijan, the Kyrgyz Republic, and continued to pose the most significant obstacles to the Uzbekistan and the lowest were Albania, Bosnia and operations and growth of firms in 2002 were finance, taxation, Herzegovina, Estonia, and Hungary. the judiciary, and corruption. Many of the persistent obstacles ˇ Infrastructure inadequacies. One indication of the in the business environment may therefore arise because states extent to which infrastructure inadequacies create business are still too weak to reign in their own officials or to enforce obstacles is the delays in connections versus the proportion their own taxes, regulations, and laws. of firms that pay bribes to be connected to services and the The business environment was "polluted" by the following number of working days lost because of an interruption in factors: infrastructure services. The number of working days lost was ˇ Overtaxation and customs delays. Firms in the particularly great in Central Asia and the Caucuses, as well institutionally less developed countries use two tax evasion as in Albania, Moldova, and Ukraine Countries with the strategies: not reporting actual sales to tax authorities and longest connection delays were Belarus, the Kyrgyz Republic, bribing tax authorities. The countries facing the most severe Tajikistan and FR Yugoslavia and the countries with problems in relation to tax avoidance were Albania, Georgia, the shortest delays were Bosnia and Herzegovina, Croatia, the Kyrgyz Republic, and Tajikistan, while the countries with Czech Republic, and Lithuania. relatively strong tax discipline were Armenia, Estonia, Lithuania, ˇ Inefficient finance One measure of the extent to which Poland, and Slovenia. For those firms that import, the duties finance represents a business obstacle is the length of time levied on imports and the customs procedures through which required to receive a bank loan after the submission of a these levies are collected are important. Countries with the successful loan application. Countries with the highest level of longest delays at customs were Russia,Tajikistan, and Uzbekistan banking efficiency were Estonia, Latvia, and Slovenia, and the and those with the shortest were Estonia, Latvia, and Romania. lowest were Armenia, Azerbaijan, and Uzbekistan. Nuts and Bolts of the BEEPS Survey The business environment is multidimensional and includes infrastructure, and financial institutions. The survey assesses key aspects of governance provided by the state, such as seven broad areas: taxation, business regulation, corruption, business regulation and taxation, law and order and the crime, the judiciary, infrastructure, and finance. Firms were judiciary, infrastructure, and financial services. Firms' asked to assess how problematic these factors were for their ability to function affectively is also affected by the extent of operations and growth on a scale of one to four. A score of corruption, both administrative corruption, which is often one indicates a minor obstacle and a score of four implies a associated with the arbitrary application of laws and major obstacle. regulations, and state capture, whereby firms seek to The first round of the survey was implemented in 1999 influence the content of specific laws and regulations to the and covered 4,104 firms in 25 countries. This latest round benefit of narrow private interests rather than broad public covered 6,667 firms in 27 countries, of which 38 percent interests. The behavior and performance of firms also have were industrial companies and 62 percent were service many dimensions. In this context BEEPS focuses on the providers. Of the firms surveyed 67 percent were small growth of firms, including their decisions to invest and to businesses (2 to 49 employees), 19 percent were of medium innovate, and the growth of firms' revenues and size (50 to 249 employees), and 14 percent were large productivity. businesses (250 to 9,999 employees). Seventy percent of the BEEPS asks firms to assess how their business operations firms in the sample were new private firms, 16 percent were are affected by the functioning of state institutions, physical privatized, and 14 percent were state-owned. 16 ˇ Transition­The Newsletter Abour Reforming Economies Qualitative Assessments of the Business Environment (scale of 1 to 4, with 1 indicating a minor obstacle and 4 a major obstacle) Country Year Finance Infrastructure Taxation Regulation Judiciary Crime Corruption Average Albania 1999 3.27 3.01 2.86 2.03 2.99 3.35 3.30 2.97 2002 2.34 2.61 2.74 2.19 2.85 2.23 3.10 2.58 Armenia 1999 2.46 1.79 3.21 1.54 2.34 2.15 2.34 2.26 2002 2.42 1.86 2.77 1.78 1.66 1.34 1.85 1.95 Azerbaijan 1999 3.38 2.28 2.96 2.22 2.79 2.47 2.88 2.71 2002 2.19 1.66 2.29 1.57 1.25 1.15 2.07 1.74 Belarus 1999 2.85 1.55 3.35 2.17 2.30 2.34 2.91 2.50 2002 2.62 1.24 2.95 2.32 1.98 1.73 2.14 2.14 Bosnia and 1999 3.02 1.83 3.41 2.22 2.12 2.30 2.26 2.45 Herzegovina 2002 2.67 1.64 2.63 2.02 2.52 2.18 2.65 2.33 Bulgaria 1999 3.05 2.30 3.02 2.35 2.37 2.81 2.85 2.68 2002 2.83 1.51 2.41 1.78 2.23 2.23 2.53 2.22 Croatia 1999 3.56 1.87 3.27 1.94 2.77 2.40 2.79 2.66 2002 2.23 1.23 2.24 1.81 2.57 1.63 2.29 2.00 Czech Republic 1999 2.88 2.48 3.29 2.40 2.48 2.29 2.52 2.62 2002 2.49 1.43 2.58 1.86 1.91 1.85 1.95 2.01 Estonia 1999 2.84 1.62 2.70 1.79 2.10 1.99 2.04 2.15 2002 1.99 1.54 1.99 1.79 1.85 1.70 1.69 1.79 Georgia 1999 3.47 2.22 3.40 2.13 2.33 2.58 3.09 2.74 2002 2.37 1.98 3.10 1.86 1.91 2.42 2.87 2.36 Hungary 1999 2.86 1.64 3.07 2.18 1.96 2.10 2.14 2.28 2002 2.26 1.26 2.41 1.74 1.51 1.44 1.77 1.77 Kazakhstan 1999 2.04 1.32 2.33 1.63 1.67 1.73 1.99 1.82 2002 2.36 1.32 2.27 1.64 1.76 1.71 1.96 1.86 Kyrgyz Republic 1999 3.94 2.20 3.58 2.54 3.29 3.55 3.75 3.26 2002 2.30 1.59 2.58 1.71 1.98 2.06 2.36 2.08 Latvia 1999 2.84 2.10 3.27 2.19 2.61 2.37 2.64 2.57 2002 1.91 1.38 2.80 1.95 1.56 1.62 1.94 1.88 Lithuania 1999 3.24 1.87 3.36 2.66 2.71 2.90 2.88 2.80 2002 1.81 1.55 2.78 1.74 2.16 1.91 2.15 2.01 FYR Macedonia 1999 3.67 1.85 3.18 2.48 2.69 2.41 2.90 2.74 2002 2.24 1.51 2.32 2.06 2.45 2.17 2.45 2.17 Moldova 1999 3.53 2.53 3.49 2.44 2.80 3.18 3.11 3.01 2002 2.72 1.39 3.12 2.22 2.10 2.43 2.65 2.37 Poland 1999 2.86 1.70 3.15 2.17 2.35 2.43 2.52 2.46 2002 2.91 1.55 3.17 2.32 2.47 2.26 2.50 2.45 Romania 1999 3.71 2.51 3.34 2.41 2.66 2.68 3.00 2.90 2002 2.67 1.61 2.92 2.03 2.45 1.95 2.70 2.33 Russia 1999 3.32 2.10 3.47 2.29 2.38 2.70 2.83 2.73 2002 2.26 1.43 2.64 1.77 1.88 1.80 1.99 1.97 Slovakia 1999 3.37 1.90 2.96 2.08 2.26 2.59 2.59 2.54 2002 2.53 1.41 2.43 2.05 2.50 1.93 2.50 2.19 Slovenia 1999 2.73 1.74 2.87 1.92 2.29 1.64 1.71 2.13 2002 2.00 1.19 1.87 1.60 2.02 1.33 1.67 1.67 Tajikistan 2002 2.65 1.97 2.74 1.97 1.88 1.75 2.27 2.17 Ukraine 1999 2.52 1.47 2.77 2.05 2.13 2.12 2.51 2.22 2002 2.55 1.48 2.78 2.04 2.23 2.14 2.51 2.25 Uzbekistan 1999 3.04 1.90 2.76 2.07 2.28 2.18 2.76 2.43 2002 2.41 1.46 2.48 1.66 1.67 1.50 1.71 1.84 FR Yugoslavia 2002 2.60 1.74 2.78 2.02 2.13 1.79 2.02 2.15 Source: Authors The World Bank ˇ 17 Firms often pay bribes to overcome obstacles in the business and other government policies to their own advantage though environment. Countries in which more than half of firms illicit or nontransparent means. Public officials can also capture reported paying at least some bribes included Albania, the state if they abuse their authority to shape institutions to Azerbaijan, Bulgaria, FYR Macedonia, Georgia, Kazakhstan, further their private interests at the expense of the broader public the Kyrgyz Republic, Moldova, Romania, Russia, Serbia and interest. Firms that succeed in state capture can have a Montenegro, the Slovak Republic, Tajikistan, and Ukraine. significantly higher investment rate and faster productivity Among those firms in these countries that paid bribes, the growth than firms that do not engage in such behavior and average "bribe tax rate" was around 5 percent of their total believe in fair competition. This suggests that state capture is a annual sale, except in FYR Macedonia, where it was zero (or negative) sum game for the economy as a whole. significantly lower. Armenia, Croatia, Moldova, and Slovenia Steven Fries is deputy chief economist at the EBRD, One appeared to have the lowest incidence of corruption in Exchange Square, London, EC2A 2JN, U.K.; e-mail: government procurement. friess@ebrd.com. Saso Poanec is with the European University State capture refers to actions taken by individuals, groups, or Institute, Florence, Italy, and the University of Ljubljana, firms to influence the formulation of laws, regulations, decrees, Ljubljana, Slovenia; email: polanec@iue.it. Emerging Owners, Eclipsing Markets? Corporate Governance in Transition by Erik Berglöf and Anete Pajuste I n the transition economies, ownership and control will financing costs. This policy priority has its drawbacks, however, probably remain concentrated for the foreseeable future. when selling companies, because excessive protection of Regulatory intervention should focus on eliminating outright minority shareholders may discourage strategic investors and fraud while maintaining the incentives for entrepreneurship and prevent badly needed restructuring in these countries. The large shareholder monitoring. The transparency of emerging mandatory bid rule that requires new owners who acquire large control structures--and of what controlling owners do--is of the controlling stakes to buy out remaining shareholders (thereby utmost importance. providing an exit possibility for the minority stakeholders in case they are unhappy with the new owners) could induce firms New comparable data on ownership, control, and financing to withdraw from the stock market, and these de-listings could patterns show that the emerging capitalist systems in Central undermine the sustainability of the fledgling capital markets. and Eastern Europe share many features. While the extent of As controlling owners gradually distance themselves from remaining government ownership differs from one country to day-to-day management in favor of professional managers, the another, private ownership dominates everywhere. Ownership nature of the corporate governance problem changes. Managers and control are becoming increasingly concentrated, with the must be monitored, and only controlling owners have sufficient emergence of corporate groupings and significant foreign incentives to perform this task. Even in these firms, controlling owners in most countries. As firms grow, ownership and control owners and minority investors could turn against each other, are separated. Most firms in the CEE countries are, however, unless controlling owners are provided with sufficient still owner managed, but professional management is becoming incentives to monitor and protect the latter. In the medium more common. Nevertheless, even in those that employ term, the increasing involvement of lending banks may provide professional managers, controlling shareholders play a critical some monitoring. Over time, enhanced financing opportunities role. Moreover, for better or worse, large shareholders also play, can increase competition in the market for corporate control and most likely will continue to play, a role beyond their and help improve contestability. As countries' legal immediate mandate and influence the course of politics, in environments improve, especially with respect to enforcement, particular, in shaping the rules related to corporate governance litigation could also contribute to better corporate governance. and financial sector development. The regulatory response to the emerging ownership and The emerging ownership and control structures have control structures has largely been determined by the EU important implications for corporate governance. In owner- accession process. Regulators have emulated existing managed firms the fundamental trade-off is between providing institutions in current member states, and to some extent have incentives for entrepreneurship and protecting minority anticipated possible regulation at the EU level. As a result, the investors. The data and rich anecdotal evidence from the CEE CEE countries have adopted regulations that on paper have countries suggest that strengthening minority protection is of stronger minority protection than in most EU countries; paramount importance in combating fraud and bringing down however, the CEE countries are less forceful when it comes to 18 ˇ Transition­The Newsletter Abour Reforming Economies implementation. For example, the interpretation of the critical to promote transfers of controlling blocks, but given the mandatory bid rule appears to be lax in several countries, high ownership concentration, these transactions are unlikely to leaving more possibilities for a control premium and facilitating take place against the wishes of the controlling shareholders block trades. and managers. Strict enforcement of mandatory bid rules would Regulators must recognize that holders of large blocks of essentially shut down the market for corporate control and shares are an important feature of the corporate governance further entrench incumbent management and controlling system once ownership and management split. Controlling owners. shareholders are a second-best response to weak legal Erik Berglöf is the director of SITE. Anete Pajuste is a Ph.D. institutions. Efforts to get rid of large holdings would lead to candidate at the Stockholm School of Economics. This article is more managerial discretion in an environment where few other based on their paper "Emerging Owners, Eclipsing Markets? disciplining mechanisms exist and where elements of a specific Corporate Governance in Transition," to be published in the stakeholder culture may obfuscate corporate goals. Moreover, forthcoming volume Corporate Governance and Capital Flows such attempts would most likely lead to further de-listings and in a Global Economy, edited by Peter K. Cornelius and Bruce increased opaqueness. The market for corporate control is Kogut (Oxford University Press). Impact of WTO Accession on the Russian Economy: A Review of Current Findings by Ksenia Yudaeva R ecent studies on the impact of Russia's WTO accession but this requirement is not strictly enforced because of conclude that the effect of tariff changes alone will be corruption and fraud. small. The studies expect much stronger effects from In addition to tariff and nontariff barriers, Russia maintains accompanying institutional changes and the anticipated a number of trade-related distortions that might change after liberalization of the service sector, especially from the reform of WTO accession. These affect a great many important areas, the electric power utilities. such as agriculture, intellectual property, telecommunications and other services, government procurement, and markets in In 1992 Russia abolished its state monopoly of international which the state is a key or monopoly trader. trade and introduced a liberal trade regime with virtually no In the spring of 2002, the EU and the United States granted official trade barriers. Responding to the massive decline in Russia market economy status. However, because of state production, the Russian government began to re-establish both control over domestic energy prices, their rules for antidumping tariff and nontariff trade barriers in 1993. This process slowed procedures against Russian exporters still allow comparison of down in 1995 when, as part of the framework agreement with costs in third countries. Other protective measures against the IMF, Russia was required to abolish all quotas. Russian exports include quotas on Russian steel, envisaged by the Russia-EU agreement on steel, and quotas on Russian grain exports that were recently strengthened. Trade Barriers on Both Sides The last major revision to Russia's tariff schedule was in January 2001, when tariffs in four groups were unified and Accession Hurdles most tariffs were slashed to 5 to 20 percent. Since then, under Russia's WTO negotiations are currently wrestling with a increased pressure from protectionist lobbies, Russia has raised number of unresolved problems, and when and under what its import tariffs for used cars and introduced quotas on conditions Russia will become a member of the WTO is unclear. imported meat products. Some tariff exemptions exist for goods These problems include the following: produced in CIS countries. In 2002-03, however, Russia ˇ Russia initially proposed that after accession it would boosted protection against some imports from CIS countries, increase tariffs, and then during a grace period of five to seven such as Ukrainian steel. This growing protection against both years--would slowly return them to the present or a slightly CIS and non-CIS goods is expected to continue in 2003. higher level. While the tariff increase could present some Because of low administrative capacities and corruption, the problems for commodity groups, such as agricultural produce revenue from tariffs is lower than the rates would suggest. and automobiles, the tariff proposal seems to be the least Nevertheless, tariff collection has improved in recent years, and problematic compared with other issues on the table, as for a may improve further after WTO accession. The importation of developing country Russia's tariffs are fairly low. some goods, such as spirits, sugar, precious metals, and color ˇ Reaching agreement on trade in agriculture turned out to televisions, is permitted only upon obtaining import licenses, be a significant problem. Frustrated with the high level of The World Bank ˇ 19 agricultural support in neighboring Europe, Russia insists on requires immediate restructuring to make it more productive. significantly increasing its own subsidies. The lack of Other energy guzzlers, such as the food and nonferrous metal transparency in agricultural support is making the deal even industries, could also face huge losses once energy prices went more difficult, as how much regional governments have offered up. to local producers in the way of subsidies is not clear. Overall the studies conclude that eventually, Russia will gain ˇ Negotiations about unhindered access to services are or lose little from tariff changes after the accession. Whether the among the thorniest issues. In the service sector strong vested effects will be positive or negative depends on the type of interests are seeking protection using the infant industry analysis used. The results differ once institutional changes, argument, in the banking sector foreign banks are barred from productivity gains, or liberalization of the service sector are opening fully licensed local branches, and in the insurance taken into account. sector foreigners are not allowed to become involved in the life insurance business. ˇ Some of Russia's negotiating partners, particularly the EU, Weakness and Strength view state control over energy prices as a trade-distorting A number of studies believe that Russia wants to see tariffs go subsidy and are urging Russia to reform its energy sector. up by the time of accession as proposed last year (see http:// Russia, for its part, argues that its energy prices are lower than www.wto.ru). Officials of the Ministry of Economic in the world market because they reflect Russia's comparative Development and Trade revealed, however, that the Russian advantage in energy. Russia refuses to tie WTO accession to a government considers the proposed tariff rates as the top rates, reform of its energy policy. to be used only in a worst case scenario. Therefore the most probable outcome is that current tariffs will be applied right after the accession, followed by a slow decline during the grace Winners and Losers period. Most studies dealing with the possible effects of WTO accession None of the studies dealt with possible changes in were sponsored by the Russian government or lobbying groups, government subsidies and other support mechanisms. In Russia and therefore focused primarily on the expected short-term most subsidies are provided at the regional level, often via price increase in unemployment and the need to reallocate labor. Out regulation or other nonmonetary means. More information of 10 quantitative studies analyzed, 6 addressed WTO accession about the future of various subsidies could refine predictions of directly, 2 dealt with the effects of the formation of a free trade the probable effects of WTO accession. The effects of accession area between Russia and the EU, and 2 examined the on poverty and income distribution were also ignored. One consequences for domestic industry of reforming Russia's study addressed the issue, but did not provide any quantitative electric power utilities. Even those studies that concluded that assessments. None of the papers analyzed the macroeconomic Russia would gain from WTO accession or the formation of an or sectoral effects of improvements in intellectual property free trade area with the EU claimed that the gains from the rights protection, even though the consequences of trade policy changes would be fairly modest, and noted that implementing the Agreement on Trade-Related Aspects of most of the gains would originate from liberalization of the Intellectual Property Rights would be significant for such service sector or institutional improvements. One of the papers sectors as the pharmaceutical industry and information concluded that changes in tariff policy after Russia's WTO technology. accession would have an almost negligible effect on GDP. None of the macroeconomic models used in the studies Other findings of the studies include the following: considered the large differences in the economic and social ˇ WTO accession will have a particularly large effect on the structures of the regions. For a country with such regional size and composition of Russian imports from non-CIS diversity as Russia, this weakens the reliability of the forecasts. countries. As statistical information on inter-regional trade in Russia is ˇ Improvements in the quality of Russian institutions will unavailable, constructing such models requires a serious data help to further increase Russia's trade volume. collection effort. Nevertheless, the surprising similarity of the ˇ In terms of changes in industrial composition, in the long conclusions of the different papers suggests that these run metal producers would gain the most from WTO accession, methodological problems may be less important than they while domestic service providers would experience the greatest appear at first glance. losses. (This conclusion did not take the probable effects of Ksenia Yudaeva is a senior economist and director of policy energy reform, that is, the expected increase in domestic energy programs at CEFIR and a scholar in residence at the Carnegie prices, into account.) Moscow Center. This article is based on her report prepared for ˇ The light industry, machine building, and food industries the OECD Trade Directorate, which hosted an OECD experts' would be the most probable losers from the accession. At the meeting on Developing Governmental Analytical Capacities in same time, metals and chemicals would likely be the winning the Trade Policy Area in Moscow on June 3-4, 2003. For further industries. If energy prices had to be raised, the machine information you can email george.holliday@oecd.org or building industry would likely lose even more, and thus blanka.kalinova@oecd.org. 20 ˇ Transition­The Newsletter Abour Reforming Economies WORLD BANK/IMF AGENDA World Bank Doing a Better Job, But Criticisms Remain Nick Stern Takes Senior Position at U.K. Treasury, According to a recent poll, opinion leaders in developing David Dollar Appointed Director countries regard the World Bank's influence on their respective The World Bank announced on June 12 that Nicholas Stern, the countries as generally positive, and many say the Bank has Bank's chief economist and senior vice president for become more useful, relevant, transparent, responsive, visible, development economics since July 2000, is to take up the and better at communicating. Opinions are particularly position of second permanent secretary and managing director, positive in Europe, Central Asia, and East Asia, where 8 in 10 budget and public finances, at the U.K. Treasury. He will also be opinion leaders say the Bank has a "very" or "somewhat" head of the U.K.'s Government Economic Service. His new good influence. Many opinion leaders agree that the Bank's appointment will take effect on September 29. A search for his manner and approach to borrowing countries have improved successor will be initiated shortly. in recent years and that the Bank is more collaborative and As of June 16, David Dollar has been appointed director, willing to work in partnerships with civil society. Many, development policy, in the Development Economics Vice however, complain that the institution remains too Presidency. His most recent assignment was research bureaucratic and arrogant. The Bank also gets lower manager in the Development Research Group of the vice evaluations for its efforts to help developing countries reduce presidency. corruption. In addition, opinion leaders see the Bank as closely tied to the United States. On the issue of the benefits of economic reforms recommended by the Bank, opinion is Cost of Preserving State-Owned Banks in Transition mixed. Countries: New World Bank Report This new poll by Princeton Survey Research Associates was In May 2003 the World Bank released a new report, State- one of the largest and most comprehensive ever conducted on Owned Banks in the Transition: Origins, Evolution, and international development issues with opinion leaders. Between Policy Responses, by Khaled Sherif, Michael Borish, and October 2002 and March 2003 researchers polled more than Alexandra Gross, which recounts the time consuming, 2,600 individuals holding high-level positions in government, costly restructuring of state banks in European and Central the media, civil society, academia, the private sector, and labor Asian countries from the late 1980s through 2000. A key unions in 48 countries. finding is that governments are better off moving swiftly to privatize or liquidate their remaining state banks rather than rehabilitating them. On average, state banks still hold World Bank-IMF Annual Meetings 2003: nearly one-third of banking system assets in the region Dubai, United Arab Emirates (46.2 percent in the CIS, 26.4 percent in CEE, and 7.7 The World Bank and IMF annual meetings will be held on percent in the Baltics), and do so at huge costs to the September 23­24 in the Dubai World Trade Center in the financial system and the economy as a whole. The report United Arab Emirates. Topics of the preceding seminar event, includes seven case studies of selected state-owned banks in scheduled for September 20­22, include Azerbaijan, the Czech Republic, Latvia, Romania, Russia, ˇ What Future Role for the World Bank Group in Oil, Gas, and Ukraine that have been reformed or privatized over the and Mining? Findings of a Global Review. past decade (see http://lnweb18.worldbank.org/eca/eca.nsf/ ˇ Roundtable Discussion: Middle East and North Africa's Attachments/State+Banks/$File/State+banks+Final- Employment Challenge in the 21st Century. 022803.pdf). ˇ Foreign Direct Investment and Developing Country Economies: The Growing Impact of HIV/AIDS and Infectious Diseases. World Bank Supports Romania's Electricity Market . . . ˇ The Growing Dollarization of Banking Assets and A ˇ74.3 million ($82 million equivalent) loan approved on June Liabilities: A Problem or a Solution? 12 to Romania for the Electricity Market Project will support ˇ Foreign Direct Investment to Emerging Markets: Where the development of a well-functioning wholesale electricity and Why? market and improvement of the transmission system. ˇ Water: From Scarcity to Security. Transelectrica, Romania's national power grid company, ˇ Adopting a Global Standard? Developing Countries and together with the national electricity regulator and the power the New Basel Accord. market operator, will receive assistance to design and ˇ The Role of Effective Public Communications in the implement the regulatory framework for a new electricity Success of Economic and Financial Policies and Reforms. trading platform. Since Romania joined the World Bank in ˇ Is There a Role for Business in Building Peace and 1991, Bank commitments to the country have totaled more Democracy? than $3 billion for 30 operations. The World Bank ˇ 21 Serbia's Private and Financial Sector Reform..... headquartered in London and was established in 1919 to A $80 million IDA credit for Serbia and Montenegro approved facilitate trade with Russia. Russia joined IFC in 1993. Since on June 10 will support the country's regulatory, institutional, then IFC has invested more than $911 million of its own funds and structural reforms in the private and financial sectors, to finance about 70 projects in a variety of sectors. targeting a better business registration system, a new enterprise In fiscal year 2003, which ended on June 30, IFC invested law, and improved access to finance by enterprises and will $500 million in Russia. In fiscal year 2004 IFC plans to focus facilitate the exit and redeployment of nonproductive assets. on investments in the finance sector, but will also invest in the manufacturing sector, transportation, telecommunications, and technology, said IFC Executive Vice President Peter Woicke A Revenue Collection System in Bulgaria... during a recent press conference in Moscow. A ˇ31.9 million loan for the Revenue Administration Reform Project in Bulgaria approved on June 5 will help the country EBRD Sees New Opportunities in Transition develop a modern and effective revenue collection system that is Countries Even After EU Accession more transparent and efficient. It will save taxpayers both time and money. Improving and simplifying procedures will The EEBRD sees opportunities for its business in Central and drastically reduce the private sector's overhead time: current Eastern Europe after the countries become EU members, procedures require up to 30 percent of the time of an nevertheless, it does plan to downsize its operations in the accountant in a small company The project will also minimize region over time, announced EBRD First Vice President Noreen opportunities for corruption by introducing equal standards for Doyle. The fields that EBRD is looking at in the region include contributors, and will set up clear rules and procedures for leasing, mortgage loans, warehousing, and banking. With EU compliance with tax payment responsibilities. Since Bulgaria enlargement imminent, the EBRD also envisages working joined the World Bank in 1990, total commitments to the closely with central and local governments to help them obtain country have reached about $1.7 billion for 32 projects. money from the EU's structural and aid funds. The region continues to need equity investment funds. and Ukraine's Tax Service Reform Mixed Results in the War Against Poverty A $40 million loan for the First State Tax Service Modernization Project in Ukraine approved on June 5 is the The war against poverty has made definite progress, but has first of two proposed loans under an adaptable program also encountered setbacks related to the Millennium lending instrument, with an estimated total $114 million in Development Goals, which aim to halve the extent of severe Bank lending out of $202 million in total costs. The program poverty in the world by 2015. Australia's Melbourne Age will support a decade-long, comprehensive modernization of recently made the following observations: tax administration, and will lay the foundation for a sustainable ˇ Global poverty is declining. The new update of the Bank's tax system in the country. Ukraine currently has a large shadow World Development Indicators estimates that in the 1990s the economy and a relatively low rate of taxpayer compliance with number of people living in extreme poverty--an income of no the tax legislation. As a result, tax authorities take an more than $1 a day, indexed for inflation since 1990--fell from enforcement-oriented stance in relation to taxpayers, which 1.3 billion to 1. 2 billion, despite rapid population growth. The creates opportunities for administrative abuses. Since Ukraine Bank noted, however, that the fall was concentrated in China joined the World Bank in 1992, commitments to the country and India. Poverty rose--in some cases dramatically--in much have totaled more than $3.4 billion for 27 operations. of the world, above all in Africa and the former Soviet Union, where real incomes have been halved. ˇ More developing countries are enjoying real growth. Record $100 million IFC Loan to Moscow Narodny Bank Despite civil wars, AIDS, corruption, and misgovernment, since On June 9 the International Finance Corporation (IFC), the the mid-1990s average per capita incomes in Africa have risen private sector financing arm of the World Bank Group, signed by about 1 percent a year, reversing a 20-year slide. an agreement to provide a five-year, $100 million loan to ˇ Economists and global institutions are finally grasping the Moscow Narodny Bank, majority owned by Russia's central economic importance of education; health care; good, bank. This is IFC's largest loan for Russia to date. The loan will corruption-free government; and a culture that is conducive to help Russian companies access medium-term financing and will business development. The World Bank's own priorities have provide Moscow Narodny Bank with additional opportunities changed radically to reflect this understanding. It funds for doing business in Russia. The bank is already engaged in infrastructure projects, but also wants to ensure that every child talks to pass on that money to companies in the oil and gas, receives a good basic education, that safe water and health care metals, chemicals, and service sectors. Eventually the central are available to all, that childbirth is not fatal to mothers or bank will sell its 88.9 percent stake in Moscow Narodny Bank, children, and that gender equity becomes a reality. Experience whose total assets stood at $1.8 billion and equity at $440 shows that these rights not only flow from economic growth, million at the start of the year. Moscow Narodny Bank is but in a virtuous circle they also generate it. 22 ˇ Transition­The Newsletter Abour Reforming Economies TOPICS FOR DEBATE Uncertain Roadmap for Postsocialist Health Care Reforms The transition countries once had a socialist health care system that, for all its weaknesses and ideological fallacies (it was geared toward keeping workers fit and healthy), offered universal, and--at least on paper--free, outpatient and inpatient treatment. With the fall of communism the challenge became how to apply both the principles of solidarity, (that is, treating the poor for free), and efficiency. Governments are struggling to meet both requirements. The following articles rely heavily on a survey titled "Who Cares? Health Care Reform from the Bering to the Adriatic," published in the Spring 2003 issue of Local Government Brief, a quarterly publication of the LGI, Budapest, Hungary (see http://lgi.osi.hu/publications/default.asp?id=236). Curing Sick Health Care Systems in Transition Countries by George Shakarishvili A s a result of large-scale economic decline in the former hospital beds, therefore local authorities had a strong incentive communist states of Central and Eastern Europe and the to build mega-hospitals that had high flows of patients and to former Soviet Union, major indicators of the health bypass the primary care level. [Editor's note: Moreover, status of their populations and of their health care systems have hospitals were widely used as hospices.]. The predominant shown dramatic deterioration. Health care reform should focus on specialist- and subspecialist-based curative care further increase efficiency while simultaneously maintaining health reduced the use of primary care level services, thereby systems' solidarity and universality. decreasing the system's cost-efficiency even more. Funding for the heath sector in the Soviet system was derived exclusively from state revenue sources. The state owned and ran Deteriorating Health Indexes health facilities and medical personnel were considered to be The efficiency and quality of care deteriorated, and ultimately civil servants. Funding was provided to health facilities based the population's health status worsened. Life expectancy, for on fixed norms, and the management of health care institutions example, fell significantly throughout the CEE countries and had little control over activities and inputs. the CIS, with the greatest drop occurring in Hungary: 3.5 years from 1970 to 1990. During the same period age-standardized male mortality rates in Bulgaria, Czechoslovakia, Hungary, and Mixed Bag of the Past Poland increased by 2 to 13 percent, compared with a decline of Universal entitlement of the entire regional population to a full 12 to 27 percent in Western European countries. Between 1965 range of health services was an undeniable achievement of the and 1989 death rates for males increased by 7 percent in the socialist regime and its health care system. Structurally German Democratic Republic and by 13.1 percent in Hungary. integrated networks of hospitals, outpatient clinics (polyclinics), Similar negative trends occurred throughout the Soviet Union and other health facilities provided universal access to curative as well. A substantial portion of the high death rates can be health services. Outside urban centers outreach facilities, attributed to the prevalence of noninfectious diseases, such as feldsher stations (facilities employing medical practitioners who cardiovascular and respiratory illnesses, cancer, and accidents. lacked graduate qualifications and were trained to work in Highly cost-effective interventions, such as promoting healthy rural areas), ambulatory clinics, and rural hospitals provided lifestyles, launching antitobacco campaigns, implementing anti- health services. By the 1970s health sectors across the region alcohol regulations, and so on, could have prevented most of were well endowed with basic physical infrastructure, trained these diseases. This clearly indicates the erroneous approach of staff, and education programs compared with countries with a health care system that emphasized curative care and the similar per capita incomes, or even with highly industrialized prevention of infectious diseases, yet ignored the noninfectious countries. diseases to which most of the high death rate was attributable, a Over time, however, the system's long-term sustainability typical manifestation of non-needs-based planning. faltered as supply-driven development of the medical The high mortality rate, along with the economic crisis and infrastructure failed to meet demand. From 1980 to 1998 most high military spending, aggravated the sharp economic CIS countries had, on average, 850 hospital beds per 100,000 downturn that started in the CEE countries and the CIS in the people, while CEE countries maintained 700 hospital beds per early 1980s. The mortality rate burdened the region's economy 100,000 people, compared with the EU average of 550. During because of the lost investment in human capital, the increased the same period hospital admission rates varied between 20 and state medical expenditures, and the more general opportunity 22 per 100 people in the CEE countries and the CIS, compared cost of lost lives. Thus not only were health care reforms with 16 in the EU, and the average length of stay hovered essential for improving the population's deteriorating health around 14 days in the CIS, compared with 9 in the EU in 1996. status, but also for reviving the economy and maintaining Health providers were reimbursed based on the number of international competitiveness. The World Bank ˇ 23 From 1995 to 2000, total health expenditure as a percentage policy, regardless of how radical a change it is designed to bring of GDP shrank to 5.8 percent in the CEE countries and 3.8 about, is nonetheless built on a former system. Attempts to build a percent in the CIS, compared with 8.5 percent of a much higher new system without taking the ramifications of the old into account GDP in the EU. Similarly, total per capita expenditures on tend to prove ineffective. health were much lower in the CEE countries and the CIS than Different countries in the region are at different stages of in the EU. During 1995-2000 such expenditures increased from implementing health reforms. While many CEE and some CIS $85 to $167 in the CIS, from $415 to $500 in the CEE countries have switched to a system based on social insurance countries, and from $1,680 to $1,920 in the EU. principles, others, such as Azerbaijan, are still operating within an old, Soviet-type framework. Not only do the countries vary according to how much they have advanced with respect to reforms, No Universal Reform Recipe but they also vary in relation to the strategies they have chosen. Fleshing out the patterns of health care reform across the CEE While Bulgaria has privatized almost its entire provider sector, countries and the CIS is a complicated endeavor. The health Lithuania has transferred health facilities to local governments, sector cannot be reliably regulated by purely bureaucratic, while in Ukraine these facilities still remain the property of the governmental coordination or by purely market coordination, central government. Croatia, which had a fairly decentralized system but must employ a combination of the two. Governments' prior to the 1990s, has attempted to strengthen the central ability to achieve a sustainable balance between multiple health government's role and has therefore centralized certain aspects of sector objectives depends on the development of an appropriate health service provision and financing. In still other countries mix of supply-side interventions at the micro (institutional) and decentralization is one of the key components of the reforms. Thus macro (system) levels. This mix should increasingly include a talking about common policy strategies that are appropriate and carefully constrained role for certain market-oriented incentives applicable across the entire region is premature. as well as for traditional regulatory instruments. The author, a PhD candidate in social policy at Oxford Viewing the early 1990s as catastrophic for their health care University, U.K., has had an extensive career in international systems, many policymakers have attempted to make too many development assistance, focusing primarily on the impact of fundamental changes too quickly. Sometimes new policy decisions social capital on welfare and health. He can be contacted at have undermined the dependency theory, that is, that every new gshak@yahoo.com. Paying the Bills: Health Care Funding in Central and Eastern Europe by Martin McKee B y the late 1960s the Soviet model of health care clearly connections or informal payments became widespread as a could not maintain its initial successes. While health care means of obtaining better quality treatment. advanced rapidly in the West, with new pharmaceuticals Consequently, when communism collapsed, changes in and surgical practices, the Soviet Union, and to a somewhat health care financing were inevitable and health policymakers lesser extent its Central European satellites, suffered from the turned to examples from Western countries. Several factors dual challenges of isolation from Western scientific influenced their decisions. One was the priority placed on developments and a reduction in funding for the so-called transparency. Decades of the government siphoning money nonproductive sectors, including health care, largely because of from health care to transfer to sectors such as defense convinced the diversion of resources to military spending. The number of them of the need for a transparent arrangement that would deaths that could be avoided by effective and timely medical protect health care funds. Physicians, who were often politically care began to fall rapidly in Western countries, but remained influential, wanted a system that would reward them high in the Soviet Union. adequately for the work they did. However, the general public was interested in a system that maintained universal coverage By the end of the 1980s, dissatisfaction with the Soviet model of and did not support the U.S. model, which left many poor health care was widespread. The gap with the West became ever people without care. more apparent, largely as a result of glasnost, which helped Inevitably, this steered many policymakers toward a model reveal that the system was much less equitable than official based loosely on the social insurance systems of Western statements suggested. Those fortunate to work in politically Europe. In reality, these systems could not be replicated, privileged jobs or in successful enterprises that could cross- because they had evolved in different ways in each of the subsidize their facilities fared much better than those reliant on Western European countries over a period of a century or more, often very basic facilities. In many countries the use of neither could they be grafted onto existing institutional 24 ˇ Transition­The Newsletter Abour Reforming Economies structures of employers' associations and trade unions. economy and high unemployment. Indeed, through their effect Nevertheless, a variety of health insurance models did emerge. on labor costs high payroll contributions may actually be an These varied considerably, with some countries, such as the incentive for informal employment. Governments have many Czech Republic, introducing multiple, competing funds, while ways of raising funds, not only from payroll contributions, but others, such as Hungary and Romania, adopted a single fund. also from sales taxes, import tariffs, and so on. Health Similarly some countries have combined health and social insurance systems face particular problems in assessing and insurance funds while others have separated them. obtaining contributions for those not working, especially Even though aspirations to introduce health insurance have because they are likely to be especially heavy users of services. been almost universal, in reality perhaps the greatest diversity Different countries have taken different approaches. For lies in the degree of success achieved. example, in Russia municipalities are responsible for these In part this reflects countries' varied success in building contributions, but transfers are often late and insufficient. institutions and in achieving economic development. Those ˇ Western European countries have all developed systems of countries soon to join the EU have largely succeeded in collective funding based on solidarity. Those most in need of developing workable systems, with sustainable revenue collection health care are often those least likely to be able to pay for it. and increasingly sophisticated methods of purchasing health Thus for most people or health care providers to promote a care. Others, such as Albania, Russia, and Ukraine, still depend private financing system with no risk sharing makes no sense. heavily on budgetary support from central or local government Similarly, competition between insurance funds is rarely a good revenues. Meanwhile some countries, most notably those in the idea unless a country has a sophisticated system of regulation, Caucasus, which have not only suffered severe economic decline, the costs of which will almost inevitably outweigh any gains but have also been beset by war, have experienced effective resulting from competition. Funds tend to find increasingly collapse of the previous system, and their citizens must make out- sophisticated ways to exclude those who are likely to cost them of-pocket payments for most health care. money. We can learn several lessons from these varied experiences in ˇ General taxation is the most equitable system, while health relation to raising funds, pooling and allocating resources, and insurance tends to be more regressive. Out-of-pocket payments purchasing care as follows: are the most inequitable, and systems in which they are ˇ A poor country will be unable to afford a system that is widespread often create impoverishment among those who comparable to that in a wealthy one, no matter what system it develop a serious disease. uses to raise funds. Several countries in the region have suffered ˇ Health care funds are required not only for revenue, to economic declines to such an extent that they are now among keep the system going, but also for investment in people, the world's most destitute, the so-called Highly Indebted Poor facilities, and equipment. Often such investment falls to the Countries. In these countries, while not a substitute for eventual bottom of the list of priorities, leading to a steady decline in the nationwide systems of social protection, they can achieve a infrastructure needed to provide health care. good deal through small-scale community financing schemes The author is a professor of European public health at the that will at least avoid some of the risks of impoverishment in London School of Hygiene and Tropical Medicine and research the event of illness. director of the European Observatory on Health Care Systems, ˇ Health insurance based on payroll contributions is Copenhagen, Denmark. He can be reached at unlikely to succeed in countries that still have a large informal martin.mckee@lshtm.ac.uk. Dealing with Four Elements of Postcommunist Health Care Systems by Hernan Luis Fuenzalida-Puelma T o implement effective reform in postcommunist health infrastructure, a focus on inpatient care, low-quality and limited systems, the authorities must recognize that in addition to primary and preventive health care, disincentives for health care the public and private health sectors, an informal sector staff at all levels, and customer dissatisfaction. By contrast, the and a public-private mix also exist and their particular situation private sectors cater almost solely to the affluent; cooperate with requires unique solutions large, usually foreign corporations; allow patients to choose among qualified physicians; provide services and consultations After more than a decade of health care reforms in Central and promptly, obtain modern medical equipment; and, under special Eastern Europe, it is common to read about the duality of health arrangements, enjoy access to public hospitals and clinics. systems divided between underfunded public (state) sectors and In reality, however, the region's health care systems do not financially exclusive private sectors. State sectors are exhibit any duality. Even during the socialist period there was a characterized by oversupplies of hospital beds, poor "triality" that consisted of the formal public system for the The World Bank ˇ 25 population at large, the formal public system for the fragmentation in relation to resources, high administrative and apparatchiks, and the-under-the-table system within the public transaction costs, administrative duplication, and inefficiencies. system. Elsewhere the process of re-centralization has been inevitable, Today the sectors have become even more complicated, but when adopted early on, as in Estonia, it has prevented the exhibiting a "tetrality" as follows: problem of excessive enlargement. Overall, public health care ˇ A public health care sector that continues to serve most of systems remain underfunded and largely unrationalized, and the population and to do so badly provide low-quality services to most of the population. ˇ An incipient, but growing, private health care financing Despite recent accomplishments, including a reduction in the and delivery sector aimed mainly at the middle and upper number of hospital beds (many of which existed only on paper classes and not in reality), the public health care infrastructure ˇ A persisting informal public-private mix consisting of an generally remains in relatively bad shape, with low-quality care unregulated secondary market within the public health care and shortages of equipment, medications, and even basic medial system in which mostly public resources are used privately supplies, particularly in rural areas. The decentralization of ˇ A formal (through contracts) public-private mix whereby health care services has also been disappointing. Regional and the financial and delivery resources of the public and private local governments simply do not have enough resources. sectors interact in a search for efficiency and mutual benefits. Private Health Care Public Health Care Every CEE country possesses an openly operating private health The public health care sector continues to bear the care sector that is linked to some formal sources of financing, responsibility of financing and providing health care to the such as banks and insurance companies, and various packages majority of the population. This colossal task--particularly if of health care goods and services provided by insurance properly carried out--requires many adjustments carried out companies and through prepayment schemes. In Bulgaria these over several years. These adjustments must represent a visible schemes involve service packages offered by private financiers redesign of the larger health care system to incorporate fewer in association with groups of physicians for a fixed fee. Growth beds and hospitals and integrated polyclinics with larger of the private sector is generally proceeding in an unregulated outpatient services. Polyclinics need to be restructured, merged, manner. and reorganized to focus on primary and preventive care. Health care delivery in the emerging private sector is Regional and municipal-based networks should be redesigned generally good, but tends to be limited to certain specialists, to provide services locally and avoid the overuse of regional and such as gynecologists, pediatricians, dentists, pharmacists, central hospitals. The number of physicians must be reduced, cardiologists, and ophthalmologists. Such practices are evident but with due coordination between health and education to everywhere, but especially in those countries where the avoid, for example, what occurred in Georgia, where the polyclinics were broken up. The emphasis on the development Ministry of Education unilaterally approved dozens of private of primary health care has also given rise to the emergence of medical schools in a country already oversaturated with general practitioners in private practice. physicians. Primary health care training for physicians and The main constraints facing private health care delivery are nurses also needs to be improved. legal, because it is difficult for physicians to create their own The hopes for social health insurance to finance basic public practices in the form of separate legal persons, and financial, packages of health care goods and services have not panned out because of limited access to capital and operational credit. In as expected. Conceiving an employment-based social health addition, the lack of proper regulations on accreditation, licensing, insurance system in the midst of a transition that curtailed and certification contribute to the emergence of mediocre formal employment and fomented unemployment does not professionals in the private market. The absence of patient's rights, seem to have been a good or an opportune idea. Revenues have appropriate claims procedures, and malpractice laws foster the been inadequate, and the burden still rests with public uneven development of private health care delivery. treasuries, which are incapable of making the required transfers to sustain the systems financially and to subsidize those not in the formal employment sector. Voluntary health insurance, Informal Public-Private Health Care which is supposed to complement social health insurance, has Informal payments made to individuals or institutions, in kind developed slowly, mainly because of consumers' lack of interest. or in cash, outside official channels can be found in health care, Costs have increasingly been passed on to consumers in the the courts, customs, the traffic and tax police, various form of copayments and user fees, with disastrous results for inspection services, and virtually all public services. Regardless the poor. This has heightened people's distrust of public systems of the field, this important issue, which is embedded in the and consumer dissatisfaction, particularly among socially and current institutional system from the socialist period, is economically vulnerable groups. detrimental to any rational effort toward development and Instead of establishing a single social health fund most governance. In health care the problem directly affects the well- countries have created several health funds, leading to being of individuals and families, as informal payments 26 ˇ Transition­The Newsletter Abour Reforming Economies represent a significant proportion of household income. As Impact of Health Care Reforms to Date such, they affect the poor the most. Often such payments are Health care reforms that focus on financing and payment indicative of corruption and have increasingly become the usual mechanisms have produced mixed results. The reasons for this form for paying and remunerating public health care providers. include a weak macroeconomic context, low levels of formal The logic of informal payments seems to be that they ensure employment, low compliance with social contributions and a quality, priority, or a certain treatment, and constitute a regular lack of fiscal transfers, and overgenerous basic benefits under-the-table business for many health care providers. packages. Likewise, the expectation that health insurance Regrettably, they have become almost mandatory because of the would result in greater and more stable revenues and allow financial and institutional breakdown of public health care health care professionals to earn more has not been the case. systems. Providers feel entitled to receive these payments and For the most part the situation of public health care workers patients believe they are obliged to pay. has not improved. Social health funds have not been given full and adequate legal and institutional structures to ensure their financial, Formal Public-Private Mix managerial, and contractual autonomy. Meanwhile ministries The formal public-private mix is slowly developing. As public of health fight social health funds, because they feel that they no hospitals and polyclinics gain some legal and institutional longer have control over the financing of the public health care autonomy, they are able to enter into contracts with private sector and are reluctant to accept that their role needs to change financial sources. In turn, they can spend these incomes on their to one of policy and regulation and that they need to own, outside the restrictions of budgetary lines. Public concentrate on public health. Multiple social health funds have establishments therefore have a powerful incentive to enter into proven to be a bad idea. such contracts. In some cases, for example, in Lithuania, private Legal and institutional impediments to payment mechanisms, health care businesses lease space in public hospitals to operate complex contracting procedures, and a lack of enforcement of private clinics. These arrangements can include the use of some contracts have challenged the efficacy of some financial reforms. hospital facilities, such as laboratories, operating rooms, and Accumulated deficits in the public health care sector result in rehabilitation premises. Often such arrangements take place public systems not honoring contracts with suppliers, thereby between the private sector and military hospitals with spare contributing to increasing mistrust of public systems and the capacity. Meanwhile, social health insurance sometimes pays for consolidation of public health systems that are financially services rendered in private facilities, but this is typically confined unreliable. In essence, while private sectors have benefited from to important public officials. The system is becoming more the opening of markets, public health care infrastructure has not complex, and contracts stipulate details of the relationships. changed substantially even after a decade. Without renovating Financing derives mainly from private sources, namely, health the legal and institutional settings, labor markets, and medical insurance companies. Large prepayment schemes also have education systems, and without rationalizing public health care contracts with public and private providers, both individual and infrastructure and enhancing primary and preventive care, any institutional, for example, in Bulgaria. In some cases social health attempted reform is piecemeal. insurance funds purchase services in the private sector, mostly in The author is a senior international consultant to both more modern and better-equipped private health care facilities. international organizations and the private sector. He edited the Delivery appears to be of relatively good quality. Regulation is volume Health Care Reform in Central and Eastern Europe and typically accounted for in contracts, listing the types of services to the Former Soviet Union: A Literature Review, published in be delivered as well as quality standards. 2002 by the LGI. His email address is hfuenzalida@cs.com. Fighting Corruption in Health Care Services by David Hayhurst G overnments in CEE countries and the former Soviet and Lithuania shed light on problems common to some extent in Union meet with resistance on many fronts when all the post-Soviet states. While the two Baltic nations are far tackling corruption within their health care systems. from being the worst off in the region in terms of either systemic Even when state authorities possess the will and resources fraud or budgetary constraints, the reports describe how hospital needed to take on the various, and often endemic, types of cleaning staffs are routinely paid better than nurses, while factory corruption, they confront a common, major obstacle: the workers can earn more than even some senior doctors. attitudes of the public and of many politicians are as difficult to Meanwhile, throughout the CEE countries and the former Soviet change as those of health care professionals. Union poorly implemented systemic reforms, often explosive increases in operational costs, and decentralization of In-depth, OECD-funded studies carried out in 2002 that dealt accountability and decisionmaking capacities have unwittingly specifically with corruption in the health care system in Latvia helped to promulgate environments where corruption can thrive. The World Bank ˇ 27 A major challenge to governments wishing to reduce Such workaday abuses obviously stem in part from the corruption is that what international bodies invariably view as failure of alternative methods of budget financing to improper conduct is not frowned upon nearly as much by the supplement massive jumps in expenditures adequately. In public at large. The most common form of "unethical" particular, the introduction of payroll-based mandatory health conduct--the acceptance of so-called out-of-pocket payments insurance funds is, in the view of many experts, being regarded by patients to doctors and nurses--is still widely tolerated by as a panacea by governments unwilling to admit that extra the public. This is particularly true among older people, who funds have to come from somewhere if public systems are going often tend to view such informal charges both as expressions of to function even remotely in accordance with official guidelines. gratitude and as the surest way of assuring that they receive the In such environments, it is not difficult to see how senior best medicines and treatment. A 1998 World Bank survey on doctors and hospital managers can be tempted to take illicit corruption in Latvia found that despite households' direct measures to make ends meet. Most, after all, received little or experience with corruption in the health sector, they gave no training as managers before being required to run hospitals health-related organizations relatively high marks in terms of in a suddenly semi-autonomous environment. Under the Soviet honesty and integrity, on average well above what they gave the model, successful hospitals were seen as those with the most mass media or local NGOs. occupied beds. This mentality has often died hard: hospital- Indeed, it is difficult to see how governments that cannot based concerns still completely dominate health care afford to pay the meager salaries of medical professionals for policymaking rationales in the CEE countries. A 2001 study months on end can expect them even to survive by honest describing the abundance of changes still taking place in the means. Some governments have allegedly given up on trying to Hungarian hospital sector found that patients were more likely curb the practice to the point of using estimates of out-of- to be willing to pay gratuities the longer they stayed in pocket payments to determine physicians' wages. Recent hospitals, and particularly just before surgery. This has led to a estimates for Azerbaijan, Georgia, and Moldova, where public rise in the number of hospital inpatients--completely the financing for any forms of social services have all but collapsed, opposite of the expressed desires of almost all national and indicate that such payments now account for 50 to 80 percent regional politicians--with a concomitant rise in what are of total national health revenues. described as interventionist operations. ("Coping with The introduction of mainly market-based reforms in health Environmental Change: The Hospital Perspective in Hungary," care systems has been fraught with danger for governments Eurohealth, Dublin, Ireland, Vol. 7, No. 3, 2001). worldwide. This is perhaps doubly so in the former socialist Nevertheless, the anticorruption battle has had some success states, where unfettered and free access to health care was seen stories. In recent years the Czech government has managed by all as a citizen's birthright. Medical professionals in these quite successfully to circumvent some of the often well- countries have not been overly accepting of their governments' entrenched vested interests that have stymied effective reforms usually scattershot approaches toward installing such foreign in many of its regional neighbors. Most Czech hospitals are concepts as performance benchmarks and peer reviews for their now owned and governed under a public-private mix involving managerial prowess. Much of the so-called private care the national government, district and regional authorities, and increasingly being implemented to help ease the insufferable private for-profit and not-for-profit bodies. The country is burden on state budgets is currently either financed partly by almost unique in the region in that the number of physicians government or uses public infrastructure and equipment to has declined and their earnings have exceeded the national treat private patients. Clearly such policies can leave systems wage growth average in recent years. Partially as a result, out- wide open to abuse. of-pocket payments are the exception. Poland has also seen According to a comprehensive 2002 study ("Corruption as a health care professionals in general receiving higher wages than Challenge to Effective Regulation of the Health Care Systems," the national average. by Tim Ensor et al published by the Open University Press, Perversely, however, many health care workers in Poland and Buckingham, United Kingdom): "Staff in public medical elsewhere have voiced their concern that joining the EU will institutions have the opportunity to deliver private care using lead to at least an initial drop in wages, while intensifying what public resources. This includes the use of equipment, supplies has already been a dramatic brain drain of the youngest and and, perhaps most importantly, time. Sometimes known as often most gifted professionals. (CEE countries' health care creeping privatization or privatizations from within...services systems, perhaps somewhat surprisingly, are not specifically offered to patients may include simple additions to the part of the EU's accession criteria.) With the sudden heavy treatment already provided as part of the official state package inflow of capital that EU membership will in all likelihood of care. Alternatively, a doctor may provide treatment entirely bring to the health care networks overall, whether new and on a private basis during the time he should be spending on equally insidious forms of both blatant and tacit corruption will public duties and/or using public supplies and equipment. emerge within CEE countries' and the former Soviet Union's Another possibility is for a public doctor who also has a private medical networks remains to be seen. practice to spend less time than contracted for in public The author is a freelance journalist in Budapest, Hungary. facilities to extend the amount of time in private practice." His email address is dthayhurst@yahoo.com. 28 ˇ Transition­The Newsletter Abour Reforming Economies Hungary's Medical Profession's Game with the Government by Pavel Ovseiko T his articles uses game theory to conceptualize the hopes that liberalization, democratization, and decentralization challenges Hungary's health sector currently faces in policies by themselves can put things right. Such policies can relation to effective governance. The prisoner's dilemma bring about effectiveness and efficiency in the long run, and game can illustrate the structure of the interaction between the society will eventually regulate the free market through civic medical profession and the government. To optimize the health groups, political parties, trade unions, patient rights groups, sector's performance these two actors must cooperate. The and professional organizations of doctors. In the meantime, article considers two problems causing ineffectiveness, however, policymakers should focus on finding practical inefficiency, and inequality--"gratitude money" and adverse solutions for problems that reduce the effectiveness, efficiency, incentives--and suggests how cooperation between the medical and equity of existing health sector arrangements. profession and the government could address these problems. In Hungary, doctors and pharmaceutical and medical equipment Short-Term Solution manufacturers took advantage of the state's loss of control over the The phenomena of gratitude money and adverse incentives health sector and the introduction of market mechanisms in the persist because of medical professionals' low salaries. Under public health system. Patients pay doctors gratitude money in the pressure to reduce public expenditure, the government cannot hope of receiving better prescriptions, securing attention, jumping devote sufficient resources to finance the health sector. This was a line, obtaining a referral to a hospital so as not to have to pay for also true under the socialist system. The communist government prescribed drugs, taking sick leave, and being treated in a high- took gratitude money into consideration and set salaries and profile hospital or by a leading specialist. Similarly, to sell more wages in the health sector lower than it might have done in the drugs pharmaceutical companies pay doctors "in gratitude" for absence of such payments, allowing patients to top up doctors' prescribing their products with up to 10 percent of the cost of the salaries and the wages of auxiliary staff. Another consideration prescribed drugs, gifts, or invitations to "conferences" in exotic concerns the interests of the medical profession. Clearly if places. (Note that it was only in 2000 that the government gratitude money constitutes up to 90 percent of doctors' introduced a law banning doctors from accepting gifts from incomes, even a tripling or quadrupling of their official salaries pharmaceutical companies.) In addition, to boost sales the will not create a sufficient incentive for them to abstain from manufacturers of medical equipment and commercial health care accepting gratitude money. Similarly, if doctors continue to have providers offer premium deals to doctors with negotiating power. incentives to prescribe expensive drugs, they will do so. Thus an effective system of penalties and policing is needed. The problems result from interaction between the Adverse Incentives and Gratitude Money government and the medical profession. The government's In terms of adverse incentives, nonpurposeful mismanagement strategy of accusing the medical profession of corruption serves and incompetence on the part of reformers account for to manipulate public opinion. The public knows firsthand considerable efficiency losses. For example, instead of providing about corruption in the health sector, but corruption in the a definitive course of treatment, general practitioners, who government is less apparent. Meanwhile the medical receive salaries according to the number of patients they serve, profession's attempts to preserve the publicly funded health are enticed to quickly prescribe drugs and refer problematic system are not solely altruistic, and are often motivated by the patients to specialized inpatient clinics. The cost of inpatient self-serving interests of the current medical elite. care is much higher than that of outpatient care. Moreover, in Thus as concerns the "game" the medical profession and the inpatient clinics doctors' salaries are performance based. Thus government play, the current situation of gratitude money and doctors have incentives to keep patients as long as possible and adverse incentives represents equilibrium. As such, no player to prescribe expensive treatments. can gain by unilaterally switching to another strategy. The Rooting out the problems of gratitude money and adverse government's dominant strategy is to accuse the medical incentives is extremely difficult, as both result from maximizing profession of corruption and to make doctors responsible for behavior on the part of patients, doctors, and the medical the problems of the health service, thereby absolving itself from industry. Minimizing the effects of these problems requires its own responsibility for public health. As for the medical either changing the incentive system or finding ways to profession, the current situation allows senior doctors (who eliminate these problems within the context of existing health represent the medical profession in political circles) to earn high sector arrangements. Because changing these arrangements is incomes and preserve their top positions in the medical difficult and expensive, finding new options that will improve hierarchy. Obviously such an equilibrium is suboptimal. efficiency is desirable. The government can no longer control the medical In my opinion, for the time being the authorities must refrain profession, and therefore requires its cooperation to establish from pursuing costly, radical changes and from following blind and enforce a set of cost-contained and effective treatment The World Bank ˇ 29 The Prisoner's Dilemma Game Even though the word "game" suggests light situations and years. If neither confesses, they will both charged with a peaceful behavior, game theory is usually applied to rather minor offence and jailed for a year. Obviously a dominant serious situations. Investigators use game theory in strategy for each prisoner is to confess. As such, trying to politics and economics to model interactions that involve maximize their pay-offs separately and, in doing so, strong conflicts of interest and competition. To them a competing against each other, together they will produce a game is an interaction between two or more actors, where suboptimal outcome. To minimize the total punishment for players try to optimize their pay-offs and make their the system consisting of two prisoners, the prisoners should decisions separately from other players, but anticipate not pursue their dominant strategies but accept a common others' moves. strategy of rejecting the allegation. When they manage to In game theory, the problem of cooperation is usually cooperate in denying the allegation, they can both produce an analyzed by means of the prisoner's dilemma game, whereby optimal outcome. The unique equilibrium of this game--a two suspects in a crime are put into separate cells and are situation when no player can gain from unilaterally switching given the option of confessing to or denying an allegation. If to another strategy--highlights the principle of they both confess, each will be sentenced to three years. If suboptimization, when optimization of outcomes for every only one confesses, he or she will be freed and used as a subsystem does not optimize the outcome for the system as a witness against the other, who will receive a sentence of 10 whole. procedures that doctors should follow, penalties for deviation medical profession's participation in health policymaking with from these procedures, and an enforcement system. The a view to enhancing overall efficacy. To have an effective, medical profession has no reason to regulate and restrict its efficient, and equitable health system, the government needs to activities as long as such measures neither ensure high incomes introduce reform in cooperation with the medical profession, for doctors nor contribute toward the profession's but whether it can achieve this in practice remains an open development. Thus to promote cooperation, the government question. must increase official salaries in the health sector. If doctors The author is an International Policy Fellow at the Center receive high official incomes, they would be interested in for Policy Studies, Open Society Institute. This article is based excluding colleagues who are incompetent and/or violate on IPF Public Health Working Paper no. 2002-02. The full text professional norms and procedures from their profession of the paper is available at http://www.policy.hu/ovseiko. (though the possibility of negative solidarity among doctors should not be excluded). Therefore the medical profession should delegate a certain amount of control and policing functions to the state. In return the state should delegate some powers to the medical profession to participate in health policymaking in relation to doctors' salaries, costs and content of medical procedures, organizational reforms, and so on. Is Cooperation Possible? In the prisoner's dilemma game, cooperation is beneficial for players, even though it can be viewed as irrational. The expectations of players who consider taking a cooperative strategy that their counterparts will inevitably cheat them determines that both players stick to a competitive strategy. A great deal of trust between the players is needed to allow them to abandon rational strategies of competition and to "irrationally" choose a cooperative strategy. This trust can be generated between the government and the medical profession only through personal relationship building. If "You need this operation soon! It is time that your daughter-in-law leaders of the medical profession and the brought us some anesthetics and other necessities." government achieve this, then they can agree on an unbiased framework that would facilitate the From the Hungarian daily Népszabadság 30 ˇ Transition­The Newsletter Abour Reforming Economies World Bank Health Projects in Eastern Europe: An Evaluation According to the World Bank's Operations Evaluation the most advanced countries in the region in reforming both its Department (OED), most early Bank-financed health projects in economy and its health sector, while Romania has lagged on Eastern Europe underestimated the political and institutional both fronts. Hungary has progressed in terms of economic difficulties and were unduly optimistic about the pace of and reform, and is positioning itself for accession to the EU, but has prospects for reform. The outcomes of completed projects also been slow to tackle the health sector. varied, ranging from highly satisfactory in Estonia, to The outcomes of completed projects varied, ranging from moderately satisfactory in Romania, and moderately highly satisfactory in Estonia, to moderately satisfactory in unsatisfactory in Hungary. Romania, and moderately unsatisfactory in Hungary. The Bank- sponsored Estonia Health Project effectively integrated As Eastern European countries undertook the difficult investment and reform activities and served as an overall transition to a market economy they found that they needed to framework for the government's reform program. The Romania radically reform their health sectors. Most sought to Health Sector Rehabilitation Project helped rehabilitate health decentralize care, increase private sector involvement in service infrastructure and catalyze health reforms, but the outcome of delivery, rationalize or downsize hospital services, and project investment activities varied considerably. The Hungary strengthen the role of family practice physicians. Many Health Services and Management Project had low government introduced forms of national health insurance. Some took steps ownership and, even though several project components were to strengthen public health programs and regulations, for successful, most project investments had only a limited impact examples, by restricting smoking in public places and tobacco on the sector and their sustainability is uncertain. advertisements. Others sought to improve reproductive health The Bank's most successful project investments resulted from services for women. The World Bank encouraged these reforms lending and nonlending support for strengthening capacity and OED completed its reviews of six projects in six transition building consensus for reform. However, most of the early countries (Albania, Croatia, Estonia, Hungary, the Kyrgyz Bank-financed health projects in the region underestimated the Republic, and Romania ) by the end of fiscal year 2002. Five of political and institutional difficulties of health sector reforms these projects--the Albania Health Services Rehabilitation and were unduly optimistic about the pace of and prospects for Project, the Croatia Health Project, the Estonia Health Project, reform. OED found that several other major factors also the Hungary Health Services and Management Project, and the influenced the outcome of these early projects as follows: Romania Health Services Rehabilitation Project--became the ˇ Project design and sequencing needs to take the degree of basis for a broader OED review of the Bank's reform experience political consensus for reform and the capacity for in Eastern Europe. OED also conducted in-depth field implementing projects and reform programs into account. assessments of completed projects in Estonia, Hungary, and Given the regular turnover of governments and ministers, Romania. engagement with a wide range of stakeholders, including Health reform is a slow and contentious process. Reform in parliament and opposition parties, is essential. transition countries has been especially difficult, because most ˇ Structural reforms, including the introduction of have had to reform inefficient systems with excessive hospital compulsory national health insurance or the privatization of capacity. This required downsizing, which was resisted by family doctors, depend on progress in complementary reforms, health workers, consumers, and local politicians. Furthermore, as well as on training and capacity development for health many countries lacked the knowledge and capacity needed for managers and providers. health policymaking, planning, and management. A long ˇ Bank studies and analyses were often influential, as in tradition of specialist medical training contributed to resistance Albania, Hungary, and Romania, but their impact depended on to family medicine and to cost-effective treatment protocols. In the extent of local involvement and dissemination and on the addition, the economic transition itself impeded reforms when government's absorptive capacity for technical analysis. GDP and health sector budgets were stagnant or declining, as ˇ Capital investments can complement and reinforce the was the case in most transition countries, particularly in the reform process, but only if used properly. For most of the early 1990s. completed projects, capital investments were only modestly As the World Bank's financial contribution is typically small successful in bringing about reforms or in significantly relative to total health sector financing, the Bank's influence improving the quality or efficiency of the health service. depends on catalyzing wider reforms, which it tries to achieve ˇ Project investment activities were more successful when through policy dialogue, investments in training and capacity carried out in partnership with other donors, NGOs, or building, and policy conditions associated with lending. The research institutes. health projects in Estonia, Hungary, and Romania illustrate the ˇ Remarkably little evidence is available regarding the range of difficulties encountered when attempting to reform the impact of various reforms on service quality and efficiency, health sector in transition countries. Estonia has been among health behaviors, or health outcomes, despite 10 years of The World Bank ˇ 31 reform experience. The lack of priority given to monitoring and consensus for reform among stakeholders? It has supported evaluation has reduced the Bank's contribution to consensus health management institutes in Hungary and Romania, building and social learning. schools of public health in Estonia and Hungary, and a The agenda for health sector reform has been remarkably department of family medicine in Estonia. Reforming existing similar across the region. Experience with three areas-- organizations, such as ministries of health or Soviet-era sanitary implementing national health insurance, strengthening family and epidemiological agencies, has proven more difficult than medicine and privatizing general practitioners, and establishing new ones in Estonia and Hungary. strengthening health promotion and public health programs-- The Bank will need to address several important questions. illustrates some of the challenges. Do the benefits of compulsory national insurance outweigh the ˇ Implementing national health insurance: great opportunity cost of establishing new private institutions, expectations, mixed results. Most Eastern European countries particularly in low-capacity settings? Even if compulsory have established some form of compulsory national health national health insurance is not ideal, how can countries that insurance financed through a payroll tax. Outcomes have been have made a political commitment to national health insurance mixed. In advanced reformers, such as Estonia, the new best adapt to this system? Should governments introduce insurance system is well established and is beginning to yield competition among public and private insurance providers, benefits. In Hungary cost containment remains a challenge. In along with the even greater regulatory burden required by this countries whose economic and institutional context is weak, approach? Should payroll taxes continue to be the primary such as Romania, the reforms remain fragile, with continued source of revenue for national health insurance given their shortcomings in the legal framework. Insurance and payment potential to increase labor costs and tax evasion? If not, what reform alone are insufficient to significantly rationalize or mix of revenue sources might reduce negative side-effects for improve the efficiency of the hospital sector. the economy? Countries themselves will make these decisions, ˇ Strengthening family practice: the importance of but increasing their knowledge base and advising client sequencing training and reforms. To strengthen primary care, governments on such questions is an important priority for the countries throughout the region have either piloted or Bank and its partners. implemented reforms to establish family medicine as a distinct This article is excerpted from "Supporting Health Reform in specialty and to contract family doctors as independent Eastern Europe," published in the OED newsletter Précis, no. practitioners. Estonia, a leader in these reforms, established the 223, Summer 2002; available on http://lnweb18.worldbank.org/ Department of Family Medicine at its medical school in the oed/oeddoclib.nsf/DocUNIDViewForJavaSearch/ early 1990s (and expanded it with project support). By the time B2014A3F9E44C54F85256C0600719E82/$file/Precis_223.pdf. the reforms were fully implemented in 1997, a critical mass of well-qualified family doctors had been trained, increasing acceptance among the public and the medical community. In Romania, a project-sponsored pilot tested family doctor reforms in eight districts. The pilot built support and helped refine legislation, but reforms were implemented nationally before family doctors had been trained in their new roles. ˇ Strengthening health promotion programs: limited progress. Strengthening health promotion and preventing noncommunicable diseases, including reducing tobacco and alcohol consumption and improving diets, requires efforts to influence individual behavior through information, education, and communication as well as changes in policies, laws, and taxes. However, progress has been limited because most governments in the region initially assigned health promotion a low priority. Project- sponsored health promotion components were relatively successful in Croatia and Estonia, where the governments were generally supportive, but were unsatisfactory in Hungary and Romania, where support was weak. The Bank needs to give greater emphasis to building capacity for and commitment to health promotion activities in project design, supervision, and policy dialogue, particularly when government commitment is weak. "We have so many things in common: neither of us have jobs, How can the Bank use its lending and nonlending neither of us can afford to travel or go to the theater." activities to help strengthen local capacity and build From the Hungarian daily Népszabadság 32 ˇ Transition­The Newsletter Abour Reforming Economies EVENTS Educating Russians in Modern Economics: New Economic School Enters Second Decade by Sergei Guriev and Gur Ofer S ince its inception in 1992, hundreds of graduates, dozens The NES offers a two-year graduate program in economics, of research projects, and several international conferences similar to programs at the top Western institutions. Through its and workshops have proven the viability of Russia's New Research Center, the NES provides training in modern research Economic School (NES). Established soon after the regime change methods and how to apply economic analysis to transition in Russia, it started to teach modern economics as distinct from the issues and the Russian economy. Through its Outreach Center, Marxist theory prevailing for 70 years. The NES also has a research the NES brings modern economics training to economists center for training students and conducting economic research, as outside Moscow. In this way, the NES is engaged in training a well as an active outreach center that disseminates information new generation of professional, academic, and research about modern economics to faculties and hundreds of researchers economists for Russia who are familiar with the concepts of a across the country. In December, in recognition of the school's market economy. The NES has already become the model for a distinguished role, leading economists from around the world similar school in Ukraine and for new institutions planned attended a conference to commemorate 10 years of the NES. elsewhere in the former Soviet Union. During the school's early years visiting professors from the The December conference, titled The State of Economics and of West, who adapted complete Western curricula, provided most Transition--Honoring 10 years of the New Economic School, of the instruction. Over time, however, an increasing number provided an excellent opportunity to showcase the NES and its of Russian teachers trained at the school and abroad have capabilities to the large community of economists and participated. The top graduating students were sent to leading policymakers in Russia. The NES was established in 1992 in Western universities for their PhD, studies in order to partnership with the Central Economic Mathematics Institute gradually build an indigenous academic base for modern of the Russian Academy of Sciences and the Hebrew University economics in Russia. At present, the NES's economics faculty in Jerusalem, plus the involvement of a group of Western is the only such faculty in Russia where most staff is Western economics professors. The aim was to replace the Marxist educated. economic paradigm and the way economics had been taught During the NES's first decade more than 140 of the 320 under the old regime with modern, Western economics. graduates have pursed PhD, studies at the best universities in The Founding of the NES by Gur Ofer After the failed coup of August 1991, the Soviet Union was thinking along similar lines. The meeting took place in falling apart. The political upheaval was only slightly more Archangelskoye, the location of the advisory group headed by severe than the state of the economy, which was suffering Yegor Gaidar, whose team was preparing the reform program from acute shortages, a breakdown of supply networks, and for the emerging independent Russia. Gaidar took me to meet emerging inflation. At that time a leading Sovietologist, a Makarov and then rushed to Moscow to accept his professor of economics and the guest of a prestigious appointment as prime minister from Boris Yeltsin. Moscow institute, visited a number of Russian economic Whatever I had in my head at the time, Makarov already institutes. During a meeting with George Soros on the had in writing. He handed me a one-page document titled Sovietologist's return to Moscow, he expressed surprise about "The CEMI Econometric School--CES," which suggested the lack of concern with teaching modern economics as a that such a school be organized by the joint efforts of CEMI, natural companion to reforms. Soros was skeptical, but an American or European university, and the Lomonosov offered to help if the Sovietologist came up with any practical Moscow State University. The document also suggested three ideas. He knew, however, that the Sovietologist was the areas of teaching: modern economic theory, econometrics, typical absent-minded, "egg-head" academic, who spent most and business. I invited Makarov for a visit to Jerusalem, of his life in his academic ivory tower and rarely had any where the idea received the blessing of the Hebrew practical solutions. University. We prepared a draft plan and a budget and sent it But just a few weeks later, through common friends, the to Soros. Soros had the idea checked out and gave NES the professor--who happened to be me--was able to meet Valery green light, backed by a dollar grant. Makarov, head of the Central Economic Mathematics The first class of 52 students started at the NES in Institute (CEMI) of the Russian Academy of Sciences. He was September 1992. The World Bank ˇ 33 the West. Many have returned to Russia to carry out research economics at various Russian universities in econometrics, and to teach at the NES. Approximately 170 NES graduates are microeconomics, and macroeconomics, and has entered pursuing professional careers in Russia and most are already into partnerships with economics faculties at Voronezh working as professional economists in the public and private State University and the Urals State University in sectors, primarily in Moscow. Together with those who Yekaterinburg. returned from Western universities, the graduates of NES and a Over the years the NES has been supported by the Soros few other schools and think tanks have begun to form the core Foundation, the Eurasia Foundation, the Ford Foundation, of an emerging, modern, high-level, policymaking community the MacArthur Foundation, the World Bank, and Citibank, in Moscow: and in Russia by the National Training Foundation, the The NES's Research Center was established in 1995 to Institute for Financial Studies, Peter Aven, the Troika Dialog, encourage modern economics research in Russia. Research the electricity giant RAO-UES, Lusine Construction, and projects include such topics as pension reform in Russia, health others. in transition, foreign direct investment in the Russian economy, NES graduates teach in other Russian universities and work financial markets, fiscal federalism, tax reform, political in government agencies and the central bank. One NES economy of economic reform, corruption, and barter in Russia. graduate, Arkady Dvorkovich, is deputy minister of economic Since 1995 the Research Center has organized more than 48 development and trade, and other graduates in the Ministry of different research projects and has hosted two research Finance provide the minister with professional advice. Another conferences each year. group established CEFIR, an independent think tank that The NES also contributes to the upgrading of economics advises the government. Others are employed by international teaching and research in the rest of Russia through an organizations in Moscow and by the private sector, including active outreach program. It runs workshops for teachers of YUKOS, Alfa Bank, Troika Dialog, and KMPG. The NES hopes Birthday Celebrations of the New Economic School The two-day international conference entitled The State of greater proportion of the workforce to enter the formal labor Economics and of Transition held in December 2002 was market. hosted by the New Economic School in cooperation with ˇ Delivering on trade and aid. The industrial countries CEFIR, SITE, and the William Davidson Institute. The NES should liberalize their agricultural trade and end the massive received a congratulatory letter from President Putin subsidies to agriculture that impair the exports of so many acknowledging its accomplishments since its inception in developing countries. The Doha development round also 1992. More than 500 people attended the conference, one of needs to succeed. At the same time, the developing countries the largest in the history of the new Russia, and 42 research could achieve major gains by opening up their trade to each papers were presented. other. However, the problems of the poorest countries are Stanley Fischer gave the keynote speech: "Globalization unlikely to be solved without significant increases in aid. and Its Challenges." In his keynote speech he enumerated ˇ Making the international financial system less prone to some of the challenges facing economic globalization. crises. The system is still disturbingly crisis-prone for the Primarily, he said, it has to make the global system deliver emerging market countries. Despite the shift to exchange rate economic growth more consistently and more equitably to flexibility, crises can erupt for other reasons, particularly further reduce global poverty and inequality. According to market fears of unstable debt dynamics. The strengthening of Fisher, the policy challenges include the following: domestic policies and institutions is essential. ˇ Implementing the right policies. The outward-oriented ˇ Dealing with migration. Labor migration and temporary policies described in the 1990 Washington Consensus remain labor flows are a potentially powerful force in the global an important component of the right approach to economic economy. If the unskilled migrate, they can be an advantage policy. That policy approach needs to be enhanced by by helping produce a convergence of income levels among ˇ Greater emphasis on social justice, to be implemented countries; however, they can be a disadvantage because of through health and education spending, social safety nets possible brain drain effects. This is an area where national adapted to the country's economic structure, and economic, social, and cultural preferences are bound to take a infrastructure spending front seat. ˇ Increased attention to developing the institutions of ˇ Improving governance. Ordinary people everywhere effective economic governance, including efficient judicial want to improve their lives, but corrupt governments do not systems, civil service, tax system, and other elements of an necessarily respond to their desires. This is why the trend enabling environment for private sector activity toward democracy is so important. While countries are ˇ More attention to crisis proofing the economy, especially primarily responsible for their own fates, outsiders from both by strengthening the financial system and macroeconomic the public and private sectors can help influence the outcome policies by promoting democracy, investing in the economy, and ˇ Increased attention to labor market reform to allow a supporting projects in the social sectors. 34 ˇ Transition­The Newsletter Abour Reforming Economies to deepen its cooperation and interaction with other Russian Sergei Guriev is vice president for strategic development at institutions and society at large through its graduates, its the NES and Gur Ofer is the NES's international advisory research and policy work, and its outreach to other board coordinator. For more information about the NES universities and institutions, as well as through the recently conference go to http://www.nes.ru/NES10/conf- established Russian Advisory Board. materials.htm. BEST PRACTICE Vietnam's Experiment with Block Grant Budgeting: "Crossing the River by Feeling the Stones" by Ann Bartholomew, Stephen Lister, Edward Mountfield, and Nguyen Van Minh H o Chi Minh City is piloting a remarkable budget between sectors and spending units. The spending units management reform. Launched in January 2000 and now themselves, however, were subject to strict control by the entering its fourth year, the experiment allows local provincial finance departments. The units were not allowed to authorities considerable discretion over budget spending. A reallocate spending from one item to another without the evaluation on behalf of the World Bank carried out in 2002 formal approval of their superiors. reported a significant increase in productivity: staffing and This control proved to be both inefficient and ineffective. It operational expenditures were reduced, while services maintained created excessive rigidity in the allocation of resources and both their quality and quantity. This local experiment is now being encouraged an approach to public service delivery that was focused extended to other parts of Vietnam. on compliance with rules and red tape rather than on responsiveness and the quality of service outputs and outcomes. Detailed line item Budget management in Vietnam was already decentralized budgeting rests on the assumption that finance department officials before the Ho Chi Minh City experiment was launched. The in provincial capitals have better information than frontline service share of local administrations in total budget expenditure providers, or at least symmetrical information, about how best to reached 43 percent in 1998, up from 26 percent in 1992. achieve operational efficiency. Line item budgeting takes away Formally, provincial finance departments are required to service providers' incentives to find savings, because savings made allocate their budgets according to normative guidelines, within items or subitems of expenditure cannot be transferred to specified by central line ministries. In practice, however, the other categories of expenditure,but must be forfeited to the treasury. budgets allocated to provinces were insufficient to finance all Above all, micromanagement and "second guessing" of this kind the tasks assigned by the central government. Thus out of blurs the lines of accountability for results between the finance necessity, the provinces used their own judgment in allocating function and the spending unit. Snapshot of Vietnam's Economy Vietnam's real GDP growth in the first quarter of 2003 Low levels of private investment are, however, likely to reached 6.9 percent, slightly below the government target of 7 limit the growth rate over the next three years. In the first to 7.5 percent for the year as a whole and the 7 percent four months of 2003 the Ministry of Planning and growth rate in 2002, reports Oxford Analytica, the U.K.- Investment approved $677 million of new foreign based international research group. Boosted by export investment, below the level achieved in 2001. Foreign growth, Vietnam's economy has been performing well given investors remain cautious for many reasons. These include the uncertain global economic climate following the war in high nonlabor costs, poor infrastructure, red tape and a Iraq. In the first four months of 2003, the value of exports lack of transparent policymaking, low purchasing power, increased by more than 35 percent, levels not achieved since nonconvertibility of the currency, lack of skilled labor, and the mid-1990s. In particular, textile and garment exports high levels of protection. Investment approvals from showed the strongest growth rate. An expansion of exports to Japan, the country's largest foreign investor, fell by 40 the U.S. market accounted for the majority of this growth. percent year-on-year in 2002. Japanese companies have Export earnings were also boosted by the higher international preferred the Chinese, Thai, Malaysian, and Indonesian oil price. markets. The World Bank ˇ 35 However, replacing line item control with a more flexible aggregate fiscal discipline is to be preserved in the absence of regime may have its own risks. Alternative checks and detailed line item controls. balances need to be in place if the move away from line item Aware of the need to move cautiously with reform in this budgeting is not simply to replace one form of inefficiency area, Vietnam chose Ho Chi Minh City as the location for with another. As external and ex ante line item controls are conducting a small-scale pilot of the block grant approach. lifted, alternative mechanisms--such as stronger internal Vietnam's largest city has a population of 5.27 million. It is controls and greater ex post accountability for the use of both the richest and the fastest growing province in Vietnam. In resources and for service performance--need to be built up. 2001 its GDP accounted for an estimated 19 percent of national Strong financial management systems are necessary if GDP, compared with less than 14 percent a decade earlier. The Interview with Vietnam's Prime Minister Phan Van Khai Recently editors of the Wall Street Journal and the Far Eastern firms. Air fares and electricity rates are also different for Economic Review in Hanoi interviewed Phan Van Khai, foreigners. Reductions have been made several times toward Vietnam's prime minister, who talked about the country's a single-price system, but our country has recently emerged prospects for enhanced trade and investment. Excerpts from from war and a centrally planned economy. Therefore we the interview follow: have to take it step by step. Otherwise, if we go too fast, it would lead to collapse. What are the key areas that you wish to target for investment in Vietnam? Have you been influenced by China's experiences in joining the WTO and attracting foreign investment? We hope to attract a lot of investment in high-tech areas, so that various industries can be more competitive with foreign In the past, the two countries had a similar economic policy. companies. We will also focus on infrastructure development. So the experience and lessons from China are useful for In the electricity sector, for example, during the last few years Vietnam, including policies to attract foreign investment, tap demand has grown annually by about 10 to 15 percent. This internal resources better, develop the private sector, and year we'll have to build a number of hydropower plants and improve the competitiveness and efficiency of state-owned thermal power plants, and gas-powered plants as well.Another enterprises. But each country has its own historical important area is the cement industry. Also important is oil and circumstances. Our lesson is that if we just copy one foreign gas sector exploration, exploitation, as well as processing model, there's a chance of failure. Therefore our policy is to activities. And we hope for better cooperation with foreign study and learn from selected cases. partners in agricultural production and food processing. Do you worry that China's rapid growth might draw What comes after the Bilateral Trade Agreement [with the potential investment away? United States]? China is a big market for Vietnamese products. Vietnam's Vietnam's next major step will be to prepare for membership exports to China have recently increased significantly. Two- in theWTO. Our target is 2005. We submitted our application way trade by value is estimated to reach $5 billion in 2005. in January 1995. We have also undergone four rounds of Vietnam needs to identify the products where we have the negotiations with the WTO working party. Negotiations on best advantage. Something I always tell Vietnamese Vietnam's trade regime have been completed. enterprises is to aim for high quality and low prices to be competitive. What are the biggest problems facing foreign investors in Vietnam? Unlike in China, private Vietnamese entrepreneurs are not welcome to join the Communist Party, but party members can do business. How do you explain this split policy? Number one, our administrative procedures are still cumbersome. You can get approval at the central level, but you still have problems at the local level with issues like land. We have different conditions from China. We do something The government would like to pursue the policy of a one-stop on the basis of our conditions. Party members in Vietnam are system, with all foreign investment projects only having to still allowed to run their own business, but I don't think up to work with the Ministry of Planning and Investment. The the same extent as capitalists. For example, in rural areas our second major complaint we receive from investors is about party members still have their own farms, they run their own unequal services [dual pricing systems]. Telephone tariffs are businesses. The successful party member/entrepreneur will be still high, with discrimination between foreign and domestic in a better position to help the poor. 36 ˇ Transition­The Newsletter Abour Reforming Economies province is unique in Vietnam in terms of its high levels of needed. In addition, the scope for corruption was reduced. As economic activity, low levels of unemployment, and high everyone stood to gain from cost savings, there was an incentive standards of living. to check that no one else was abusing the system for individual Under the pilot scheme, 10 spending units were given a block benefit. grant that is fixed for a three-year period. Within these fixed The government is confident with pressing ahead to budgets, spending units may choose to reallocate expenditure authorize 164 additional spending units in 19 more provinces between line items without having to seek special permission. to participate in similar experiments. The further wave of pilots Spending units are free to reduce staff numbers and to prioritize will be more extensive, as it involves provinces more typical of between categories of administrative expenditures (with a few Vietnam as a whole, and it also covers revenue-raising spending limited exceptions). Any savings that are made either on units, including key service delivery units such as hospitals and administrative or salary costs can be retained and used to schools, whereas the initial pilots were limited to administrative increase staff incomes through additional salary or bonuses. units. The potential for operational efficiency gains may be Thus spending units can choose how to reduce material greater at the front line of service delivery. Spending units will expenditures and can also eliminate unproductive staff, and the have also greater discretion in charging user fees. direct link between cost reductions and pay increases provides a This pilot program is illustrating an approach favored in powerful incentive to do both. However, spending units are East Asia, whereby many reforms are first experimented with required to maintain previously specified levels and standards locally, and if successful, are applied at the national level, an of service. approach characterized by Deng Xiaoping as "crossing the All the spending units reported considerable reductions in river by feeling the stones." Vietnam has embarked on a path expenditure on administrative items. Most of these arose from that could transform its public sector. savings on communication expenses, utility bills, routine repairs Ann Bartholomew and Stephen Lister are consultants with and maintenance, purchases of goods and services, and printing Mokoro, Ltd, Oxford, U.K.; URL: http://www.mokoro.co.uk. and production of documents. Nearly all spending units also Edward Mountfield and Nguyen Van Minh are economists reduced their staff numbers below the official quota, with most with the World Bank and can be reached at of the surplus staff being transferred or retiring. The resulting emountfield@world bank.org and Mnguyen2 flexibility was valuable, particularly if unexpected spending was @worldbank.org. NEW BOOKS AND WORKING PAPERS World Bank Publications closure of uneconomic mines and an extensive downsizing of the industry workforce. The authors examine the impact of mine closure on the entire To receive ordering and price information for World Bank community five years after mine closure in the three countries. publications contact the World Bank, P.O. Box 960, Herndon, VA They conclude that the social safety net for laid-off workers and 20172, United States; tel.: 703-661-1580, fax.: 703-661-1501, their families should be strengthened, including wider eligibility email: books@worldbank.org, URL: http://www.worldbank.org/ for participation in microcredit programs, and that jobs should publications or visit the World Bank InfoShop at 701 18th Street, be created in other sectors of the local economy. N.W., Washington, D.C.; tel.: 202-458-5454. Roumeen Islam Working Papers Do More Transparent Governments Govern Better? http://econ.worldbank.org/ WPS 3077, May 2003, 41 pp. The author explores the link between information flows and Michael Haney and Maria Shkaratan governance or institutional quality. Economic theory expounds Mine Closure and Its Impact on the Community: Five on the importance of information to economic outcomes either Years after Mine Closure in Romania, Russia, and Ukraine through its direct effect on prices and quantities or through its WPS 3083, June 2003, 73 pp. effect on other factors such as institutions and the quality of In recent years Romania, Russia, and Ukraine have undertaken governance. Functioning freedom of information countries with major reforms of their coal sectors, burdened by obsolete better information flows also govern better. equipment, years of inefficient investments, poor sector management, inauspicious geological conditions in many Philippe Auffret basins, excessive employment with productivity levels among Trade Reform in Vietnam: Opportunities the lowest in the world, wretched health and safety conditions, with Emerging Challenges and acute levels of accounts payable. Restructuring entails the WPS 3076, May 2003, 19 pp. The World Bank ˇ 37 In 1986 Vietnam initiated its renovation policy, that is, its Thomas Novotny, Dominic Haazen, and Olusoji Adeyi transition from a centrally planned economy to a market- HIV/AIDS in Southeastern Europe: oriented one. The transition policy generated economic growth Case Studies from Bulgaria, Croatia, and Romania and reduced poverty. To reach the targets of the 10-year Working Paper no. 4, May 2003, 48 pp. socioeconomic strategy approved by the Communist Party in The countries of Southeastern Europe (Bulgaria, Croatia, and 2001, the government indicated that it would change Vietnam's Romania) share several social conditions that have led to an trade and financial policies, liberalize the climate for private alarming increase in HIV infection, including increasing investment, increase the efficiency of public enterprises, and unemployment and poverty, rapid social changes, decreased improve governance. accessibility and quality of services and educational Vietnam would benefit greatly from rapid implementation of opportunities, psychological stress from postconflict situations, trade reform, and particularly from fast accession to the WTO, increased substance abuse, and increased trafficking in women especially after China's recent WTO accession. However, the for sexual exploitation. The study evaluates the approaches and author argues that rapid liberalization of trade may soon strategies currently being used in the three countries, and makes conflict with the slow pace of implementation of other reforms, recommendation both for government strategies and for the including the restructuring of state-owned enterprises and state- World Bank's current and potential future involvement. owned commercial banks. Elena Ianchovichina and Will Martin Other World Bank Publications Economic Impacts of China's Accession to the World Trade Organization Boris Pleskovic and Nicholas Stern, eds. WPS 3053, May 2003 The New Reform Agenda (Annual World Bank Conference WTO accession will boost the labor-intensive on Development Economics--2003) manufacturing sectors in China, especially the textiles and World Bank and Oxford University Press, 2003, 313 pp. apparel sector, which will benefit directly from the removal World Development Indicators 2003 of quotas on textile and apparel exports to North America April 2003, 416 pp. (also available on CD) and Western Europe. The wages of skilled workers and unskilled nonfarm workers should rise in real terms and This publication, the World Bank's premier annual relative to farm incomes. Diminishing agricultural compilation of data about development, provides 600 protection may hurt some farmers. Possible policy changes indicators for 152 economies and 14 country groups in more being considered to offset these impacts include reducing than 87 tables. The print edition provides a current overview barriers to labor mobility and improving education in rural of the most recent data available and important regional data areas. The removal of the hukou system (which prevents and income group analysis in six thematic chapters: World those living in rural areas from moving to the cities) would View, People, Environment, Economy, States and Markets, and raise farm wages and allow 28 million workers to migrate Global Links. to nonfarm jobs. If, through increased education spending, The World Development Indicators 2003 CD-ROM contains the pool of skilled labor grows, approximately 32 million more than 550 time series indicators for 208 countries and 18 farm workers could leave their jobs for jobs in the nonfarm country groups covering 1960 to 2001, and offers mapping, sectors. charting, and data export formats. The tables function presents a number of sets of country tables covering such specialized Elena Ianchovichina, Kym Anderson, and Jikun Huang topics as social indicators, economic indicators, education, and Long-Run Impacts of China's WTO Accession on Farm- population projections. In addition, it provides the full contents Nonfarm Income Inequality and Rural Poverty of the print edition and some quick reference tables. WPS 3052, May 2003, 33 pp. Alain Mingat, Jee-Peng Tan, and Shobhana Sosale, eds. Many fear that China's accession to the WTO will Tools for Education Policy Analysis impoverish its rural people because of greater import April 2003, 320 pp. competition in its agricultural markets. According to the paper's findings, even if the producer prices of some land- Breaking the Conflict Trap: Civil War and Development intensive farm products fall, the prices of other, labor- Policy: A World Bank Policy Research Report intensive farm products could rise. Also the removal of World Bank and Oxford University Press, May 2003, 240 restrictions on exports of textiles and clothing could boost pp. town and village enterprises, and thus demand for unskilled Geeta Batra, Daniel Kaufmann, and Andrew H. W. Stone labor for nonfarm work in rural areas may grow even if Investment Climate Around the World: Voices of the demand for farm labor falls in aggregate. Farm-nonfarm and Firms from the World Business Environment Survey, Western-Eastern income inequality may well rise in China, Directions in Development but rural-urban income inequality need not. May 2003, 176 pp. 38 ˇ Transition­The Newsletter Abour Reforming Economies The World Business Environment Survey, carried out in 1998- climate and at the level of the economy, land rights are 2000, presents enterprise data from more than 10,000 firms in therefore a precondition for the emergence and operation of 80 countries. In addition to the general findings, this volume financial markets. This book looks at the historical, provides detailed explanations and the core questionnaire and conceptual, and legal contexts of property rights to land, and also presents the key findings across regions and firm size. The considers aspects of land transactions, including the key factors results suggest that country conditions with regard to taxes, affecting the functioning of rural land markets. It explores the regulations, financing, governance, and other business scope and role of governments and land policy formation and constraints matter significantly in explaining firms' discusses ways in which developing countries can establish land performance and behavior. policy frameworks that maximize social benefits. Reforming Public Institutions and Global Development Finance 2003: Striving Strengthening Governance: A World Bank for Stability in Development Finance Finance, Analysis Strategy Implementation Update and Statistical Appendix May 2003, 180 pp. 2003, 250 pp. (also available on CD) Foreign direct investment and migrant workers sending part of Bernard Funck and Lodovico Pizzati, eds. their paychecks back home have become more important European Integration, Regional Policy, and Growth sources of finance for developing countries than private May 2003, 292 pp. lending. The boom and bust in private lending was a crucial element in a series of financial crises that started with the 1997- The current enlargement of the EU to include less affluent new 98 East Asia crisis and continued in a new round of Latin members gives rise to a number of questions, namely: American debt problems in 2002. The lower volatility of ˇ How can the cohesion objective best be advanced if initial foreign direct investment and remittances is, however, fostering income disparities will now be greater? a more stable environment for those developing countries that ˇ Will the accession process help the poorer regions to have learned to live with less external debt. converge their income toward EU standards or will prevailing Global Development Finance 2003 is also available on CD, disparities be exacerbated in the process? with more than 200 historical time series from 1970 to 2001 ˇ What, if anything, can the new members do about this? and country group estimates for 2002. The CD-ROM contains What help can they expect from the EU structural funds and all the information found in both print volumes. It lets the user how should the funds be applied to maximize the cohesion? work interactively with data, display maps and graphs, and Drawing on the experience of existing EU members and on export data into many popular formats. the latest developments in growth theory and economic geography, the authors highlight several issues, including the trade-off between promoting national growth and reducing The Brookings Institution Publications relative disparities within countries and the two "growth poles" of regional income convergence: investment climate and labor market flexibility. Are EU structural funds merely income Ngaire Woods transfer mechanisms or are they key ingredients of growth- Unelected Government: Making the IMF enhancing fiscal strategies? Enlargement, and the ever deeper and the World Bank More Accountable integration of EU factor and product markets, can bring new Brookings Review, Spring 2003 challenges to EU regional policy. Accused of being secretive, unaccountable, and ineffective, both the IMF and the World Bank are seeking to become more Michael U. Klein and Bita Hadjimichael transparent, more participatory, and more accountable. Critics The Private Sector in Development: Entrepreneurship, have emphasized the following four major elements: Regulation, and Competitive Disciplines ˇ Unequal representation of member states. Originally June 2003, 232 pp. members were mutually assisting and each had a vote proportional to its stake. Now the traditional voting structure Land Policies for Growth and Poverty Reduction: looks anachronistic and inadequate as a formal mechanism of A World Bank Policy Research Report accountability. World Bank and Oxford University Press, June 2003, 250 pp. ˇ Inadequate oversight of staff and management through the Property rights to land are one of the cornerstones for the Executive Board. Executive directors are paid by and housed functioning of modern economies. Once secure in their land within each institution and have a dual role as officials of the rights, rural households invest to increase productivity. organization as well as representatives of countries. Many flit Moreover, the use of land as a primary investment vehicle from Board to staff and back again. allows households to accumulate and transfer wealth ˇ Flawed appointment process. Neither the Bank nor the between generations. The ability to use land rights as IMF has an open and transparent process by which to appoint collateral for credit helps create a stronger investment its head, to whom all staff are accountable. Rather, according to The World Bank ˇ 39 a 50-year-old political compromise, the head of the World Bank New domestic companies and foreign-owned firms are still is an American and the head of the IMF is a non-American, in rarities in Russia. Small and medium enterprises employ only practice always a Western European. about 10 percent of the workforce, compared with an average ˇ Broad conditionality, narrow accountability. Although both of 50 to 60 percent in advanced industrial countries. At the organizations now consult with civil society and a broader range regional level in particular, large formerly state-owned of stakeholders, their formal accountability remains unchanged. enterprises (incumbents) nurture close connections with Their official interlocutors, as set out in their Articles of politicians and an uneven economic playing field develops. Agreement, are the treasury, finance ministry, central bank, or Empirical results from transition economies suggest that equivalent agency of a borrowing country. high barriers to new business entry and soft budget constraints Therefore each institution needs a representation structure on incumbent firms are significant institutional factors that better reflects the stakes of all member states; a stronger, engendering corruption. The strong rule of law, democracy, and more independent role for the Executive Board in overseeing the civil society are efficient factors limiting politicians from work of the staff and management; a transparent set of operating pursuing their private benefit. Furthermore, as seen in China, rules that enables others to monitor how they do their work; and linking regional tax revenues to the success of new firms can an open and participatory process for appointing the heads of create powerful incentives for favoring such firms. Even if each organization. Powerful members of each institution must incumbents continue to lobby, the emergence of a new small restrain their urge to have the IMF and Bank engage in and medium enterprise sector as an important regional revenue conditionality across a wide range of issues. The scope of the source could greatly level the economic playing field. IMF's and Bank's activities should not exceed the scope of their accountability. Rather than impose strong external accountability on weak national systems, they should look for and strengthen CEPR Discussion Papers local kinds of accountability. In the longer term, people need to To order: http://www.cepr.org hold their own governments to account regardless of IMF and World Bank strictures. (This summary is based on an article Carl B Hamilton published in International Affairs in January 2001). Russia's European Economic Integration: Escapism and Realities Discussion Paper (DP) no. 3840, March 2003 BOFIT Publications Email: bofit@bof.fi, URL: http://www.bof.fi/bofit Marja Nissinen Absent-Minded Doctor Information Technology Industry in the Baltic States Baltic Economies--Bimonthly Review, May 2003 (available on: http://www.vtt.fi/ttr) Latvia has set the goal of becoming a leading software service exporter in Eastern Europe by 2010, Estonia is the most advanced in mobile technologies and wireless solutions, and Lithuania offers the best availability of programmers as well as some interesting software products. The contribution of the information technology sector to national economies is still relatively modest in the Baltics. In 2001 the sector's ratio of value added to GDP accounted for around 4 to 5 percent in each country, but this share is growing gradually. Some estimates suggest that the Baltic states might have 12,000 competent software developers, but a shortage of the highest-level specialists with postgraduate degrees constitutes a challenge. The main export markets are the Nordic countries, Germany, and the United States, although the Baltic countries' neighbors and Russia are also among the target regions. "I cannot find it. This time I left not only the scalpel in the patient's abdomen, but the honorarium as well." Laura Solanko Why Russia Favors Incumbent Firms From the Hungarian daily Népszabadság Russian Economy--The Month in Review, June 2003 40 ˇ Transition­The Newsletter Abour Reforming Economies Oxana Koukhartchouk and Mathilde Maurel Keith Suter Accession to the WTO and EU Enlargement: Global Order and Global Disorder: What Potential for trade Increase? Globalization and the Nation State DP no. 3944, June 2003 Praeger Publishers, May 2003, 216 pp. Frankfurter Institut fur Transformationsstudien To order: URL: http://info.greenwood.com/cgi-bin/eupdget.pl?S =EM&I=C7388. -Viadrina Publications To order: Frankfurter Institut fur Transformationsstudien, Gérard Rousselot-Pailley Europa-Universitat Viadrina, Postfach 1786, D-15207 Guide to the European Union 2002­2003: Frankfurt (Oder), Germany; URL: http://fit.euv-frankfurt- An Overview of Current Issues, new edition o.de. Roupater, Belgium, April 2003, 400 pp. Helga Schultz, Katarzyna Stoklosa, and Dagmara Jajesniak- To order: Roupater, Rue de la Mutualité, 41 B-1190 Brussels, Quast Belgium; tel. : 322-347 76 71, fax: 322- 347- 7674, email: gerard Twin Towns on the [National] Border as .rousselot@chello.be, IR :: http://www.europa-information.net. Laboratories of European Integration Arbeitsberichte Discussion Paper no. 4/02, 74 pp. Yang Zhong Local Government and Politics in China: Willfried Spohn Challenges from Below European East-West Integration, Nation M. E. Sharpe, United States, April 2003, 240 pp. Building, and National Identities: The Reconstruction of German-Polish Relations To order: M. E. Sharpe, Inc., 80 Business Park Drive, Armonk, Arbeitsberichte Discussion Paper no. 5/02, 24 pp. New York 10504, United States; tel.: 914-273-1800, fax.: 914- 273-2106,URL: http://www.mesharpe.com. Jörg Glombowski Ronald E. Seavoy Privatization in Formal Models of Transition Origins and Growth of the Global Economy: From the Arbeitsberichte Discussion Paper no. 6/02, 23 pp. Fifteenth Century Onward Praeger Publishers, May 2003, 312 pp. University of Ljubljana Publications To order: University of Ljubljana, Faculty of Social Sciences, To order: URL: http://info.greenwood.com/cgi-bin/eupdget.pl?S Kardeljeva pl. 5, S1-1000 Lubjljana, Slovenia; tel.: 386-1-5805- =EM&I=C7912. 100, fax.: 386-1-5805-101, email: fdv.faculty@uni-lj.si. Attracting Private Investment, Putting At the Gate of the European Union the Policy Frameworks in Place: Experience from Slovenia and South East Europe Investment Compact for East Europe, December 2002 Andreja Jaklič and Marjan Svetličič Enhanced Transition by Outward Interrationalization: Outward FDI by Slovene Firms Ashgate Publishing, Ltd., April 2003 Other Publications Frishberg & Partners Doing Business in Ukraine: 2003-2004 United States, March 2003 "I am fed up buying up castles and forests--now I am To order: Frishberg & Partners, 3439 NE Sandy Blvd., Suite 368, buying whole regions" Portland, Oregon 97232, United States; tel.: 503-460-9502, fax.: 503-460-9503, email: Frishbergandpartners@earthlink.net. From the Hungarian daily Népszabadság The World Bank ˇ 41 CONFERENCE DIARY For the Record Authors are invited to submit a full paper, in triplicate and electronically, by April 15, 2003, although it would be desirable if they could contact the Organizing Committee regarding their Accounting and Finance in Transition: European and Asian intention to submit a paper prior to this date. Experiences and Public Policy Considerations The conference will have a number of tracks, including July 10-12, 2003, London, United Kingdom (tentatively): the EU and its influence, Central and Eastern Europe, public finance and public policy, the future of the The University of Greenwich, in collaboration with the profession and accounting methodology, China and Asia, and Shanghai University of Finance and Economics, Beijing Renmin young scholars. One track may be organized and presented in University of China, and Jinan University, is organizing an Chinese (Mandarin). international conference devoted to current issues facing Information and registration: 2003 Conference, Department accounting and finance during periods of rapid economic and of Accounting and Finance, The Business School, University of social change. Greenwich, Old Royal Naval College, Maritime Greenwich The conference will examine issues related to the transition Campus, 30 Park Row, Greenwich, London SE10 9LS, United from a command to a market-oriented economy and its Kingdom; fax.: 44-(0)20-8331-9005, email: Acc- implications for accounting and finance, as well as all other Conf.2003@gre.ac.uk (preferred mode of communication), aspects of accounting and finance in times of rapid social and URL: http://www.gre.ac.uk/schools/business/Events/Account% economic change. Papers are welcome, especially those that 20and%20finance.html. address such issues as the failure of classical models and methodologies to grasp the nuances of emerging markets. Privatization is also a natural topic for consideration, Forthcoming particularly if the authors relate the influence of privatization to the development of the accounting and finance profession and its processes and procedures. Papers on accounting and finance Investment Climate, Growth, and Poverty issues in the EU may address the role of the EU as a major September 4-5, 2003, Berlin, Germany regulatory player, and also issues related to the EU's influence on the development of accounting frameworks throughout This workshop is organized by the World Bank in partnership Europe in both EU member countries and those countries that with the Development Policy Forum/ Organization for are current and prospective candidate for entry to the EU. International Cooperation, Advanced Training and Dialogue Papers on international business (international finance and and Germany's Ministry for Economic Cooperation and financial strategy) are also welcome, as are those dealing with Development. The workshop forms an important part of the the future of the accounting and finance professions. World Development Report 2005, to be published in September Comparative studies on the development of the accounting 2004. The participants will be European and other economists profession in emerging markets are of particular interest for one and key policymakers. They will discuss issues related to the of the conference tracks. Papers dealing with issues facing the investment climate, such as the security of property rights, accounting and finance professions in the 21st century will find business regulation and taxation, finance and labor markets, a positive response from the International Program Committee. governance and corruption, and the ways in which reforms can Masters on Local Development for the Balkans The Masters Program on Local Development for the Balkans The program includes courses on economics, law, offers 16 months of training for a postgraduate second-level sociology and political sciences, and project cycle masters degree. It has been designed for 25 young, high-level management and workshops, skills training, internships, professionals holding positions of responsibility in or in language courses, and distance learning. Courses are taught connection with Southeastern Europe. Its main objective is to at the universities of Trento and Bolzano/Bozen by Italian provide participants with the necessary knowledge and skills and international experts. Given the focus on local for introducing, supporting, and coordinating processes of development, most of the internships will take place in local change and transformation at the local level. The program organizations in Trentino Alto Adige/Südtirol and focuses on local development that involves public, private, northeastern Italy. and nongovernmental agents and that furthers social stability Information: Dr. Martina Cvajner, Coordinator, and economic prosperity according to the acquis University of Trento, Department of Economics, Masters comunautaire standards in European/European Community for Local Development in the Balkans; tel.: 39-0461- law. The general approach is interdisciplinary and 882280, email: balkans@gelso.unitn.it, URL: http:// comparative. www.didatticaonline.unitn.it/master.asp. 42 ˇ Transition­The Newsletter Abour Reforming Economies be implemented. The discussion will help integrate various new Information: http://www.change-management-toolbook. ideas and proposals into the final version of the report. com. Information: Deena Philage, Partnership Advisor, tel. : 202- The Middle East and Globalization for the Common Good-- 473-6941, email: dphilage@worldbank.org, and Boris Integrity, Spirituality, Ethics, and Accountability: Transforming Pleskovic, Research Manager, tel. 202- 473-1062, email: Business, Corporate Social Responsibility, and Globalization bpleskovic@worldbank.org. for the Common Good March 26-31, 2004, Dubai, United Arab Emirates The International Society for New Institutional Economics Papers, panels, and roundtable submissions are invited from Seventh Annual Conference observers, commentators, academics, postgraduate students, September 11-13, 2003, Budapest, Hungary and NGOs to address issues related to globalization within the identified theme of the conference. Specifically welcome would In addition to economics, the conference program will include be papers from economists, business people, philosophers, sessions on the application of institutional analysis to political theologians, historians, political scientists and those working in science, law, and organizational behavior. The theme of the the field of international relations, peace researchers, conflict conference is institutions and change, and the conference will resolution specialists, lawyers, sociologists, psychologists, and focus on examining institutional change, as well as the effects of environmentalists, as well as those engaged in interfaith action institutions on development, transitions, and growth. Douglass projects. You are invited to send a one-page abstract, which North and Vernon Smith will give keynote addresses. should include a working title and the authors' discipline and Information: http://www.isnie.org. Note that to register field, address, institutional affiliation, and email address by you must be a member of the International Society for New December 15, 2003, to either of the conference convenors. Institutional Economics. Conference participants must make Should your proposal be accepted, you will be notified by mid- their own travel and hotel arrangements. January 2004 about the conference program, registration, social and cultural activities, costs, and other particulars. Essential Consulting Skills International Training Event Information: Dr. Kamran Mofid and Dr. Raymond H. October 26-November 1, 2003, Berlin, Germany Hamden, Directors, 3 St. Martins Rd., Comprehensive Medical Centre, Coventry, United Kingdom, or P.O. Box 11806, Dubai, Topics: Consulting skills, process, customer demand, defining U.A.E., CV3 6ET; email: k.mofid@btopenworld.com and objectives, contracting and roles, thinking styles, bringing the rhhamden@hotmail.com. For frequently updated information whole system into one room--introduction to large stakeholder on the conference please visit the web site: http:// interventions, the systemic context, and creativity. commongood.info. BIBLIOGRAPHY OF SELECTED ARTICLES Postsocialist Economies Dollar, D., and A. Kraay, Institutions, Trade, and Growth, Journal of Monetary Economics (Netherlands) 50(1): 133-65, Brezis, E. S., and A. Schnytzer, Why Are the Transition Paths in January 2003. China and Eastern Europe Different? A Political Economy Perspective, Economics of Transition (United States) 11(1): 3- Ziliak, James P., Income Transfers and Assets of the Poor, 23, March 2003. Review of Economics and Statistics (United States) 85(1): 63- 76, February 2003. Claessens, S., Designing Financial Systems in Transition Economies, Economics of Transition (United States) 11(1): 197- 99, March 2003. Central and Eastern Europe Csaba, L., Transition as Development, Post-Communist Cukrowski, J., and M. M. Fischer, Seigniorage Wealth and Economies (United Kingdom) 15(1): 3-25, 2003. Redistribution in Central and Eastern European Countries, Post-Communist Economies (United Kingdom) 15(1): 27-46, 2003. Global Issues Egger, P., and R. Stehrer, International Outsourcing and the Deaton,A., Health, Inequality, and Economic Development, Journal Skill-Specific Wage Bill in Eastern Europe, World Economy of Economic Literature (United States) 41(1): 113-58, March 2003. (United Kingdom) 25(1): 61-72, January 2003. The World Bank ˇ 43 Festi, M., Inflation Targeting for Slovenia? Eastern European Leung, M. K., D. Rigby, and T. Young, Entry of Foreign Banks Economics (United States) 41(1): 79-98, January 2003, in the People's Republic of China: A Survival Analysis, Applied available on: http://ejournals.ebsco.com/direct.asp?ArticleID= Economics (United Kingdom) 35(1): 21-31, January 2003. NF3KFEYGBKDEK2D8U63U. Lu, M., and Z. Zhang, Exchange Rate Reform and Its Inflationary Jackson, J. E., J. Klich, and S. K. Poznan, Economic Transition Consequences: An Empirical Analysis for China, Applied and Elections in Poland, Economics of Transition (United Economics (United Kingdom) 35(2): 189-99, January 2003. States) 11(1): 41-66, March 2003. Newby, A., and P. Pedzinski, Asian Recovery Belies Slack Global Miller , L. R., Land Restitution in Post-Communist Bulgaria, Growth, Euromoney (United Kingdom) 34(407):106-11, Post-Communist Economies (United Kingdom) 15(1): 75-89, March 2003. 2003. Vu, Q. N., Technical Efficiency of Industrial State-Owned Reilly, B., and G. Krstic, Employees and Second-Job Holding in Enterprises in Vietnam, Asian Economic Journal (United States) the Federal Republic of Yugoslavia, Economics of Transition 17(1): 87-101, March 2003. (United States) 11(1): 93-122, March 2003. Thiessen, U., The Impact of Fiscal Policy and Deregulation on Shadow Economies in Transition Countries: The Case of EU Membership Prospects Ukraine, Public Choice (Netherlands) 114(3-4): 295-318, March 2003. Russia Duffie, D., L. H. Pedersen, and K. J. Singleton, Modeling Sovereign Yield Spreads: A Case Study of Russian Debt, Journal of Finance (United States) 58(1): 119-59, February 2003. Williams, T., Why Bankruptcy Reform Will Not Cure Russia's Ills, International Financial Law Review (United Kingdom) 22(1): 38-40, January 2003. Asia Fase, M. M. G. , and R. C. N. Abma, Financial Environment and Economic Growth in Selected Asian Countries, Journal of Asian Economics (United States) 14(1): 11-21, February 2003. Fischler, L., Gendering Women and Politics in Contemporary China, Journal of Chinese Political Science (United States) 7(1-2: 71-124, 2002. Huang, Y., and D. L. Yang, Bureaucratic Capacity and State-Society Relations in This is another ground zero. We will not receive one penny of EU support. China. Journal of Chinese Political Science (United States) 7(1-2): 19-46, 2002. From the Hungarian daily Népszabadság 44 ˇ The World Bank in Cooperation with SITE Order Form The Transition Newsletter is FREE of charge. Please fill in the order form below if youTransition would like to receive a complimentary subscription to the English version. Managing Editor: Boris Pleskovic Please print out this form and fax to (202) 522-1152 or mail to: Editor in Chief: Richard Hirschler Tel.: 202-473-6982 Jennifer Vito Fax: 202-522-1152 The World Bank Email: rhirschler@worldbank.org Mail Stop # MC3-302 1818 H Street, N.W. Production Editor: Jennifer Vito Washington, D.C. 20433 Tel.: 202-473-7466 Fax: 202-522-1152 Email: jvito@worldbank.org The World Bank Name and title: ______________________________________________ 1818 H Street, N.W. 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